The Chancellor of the Exchequer, George Osborne, delivered the first Conservative Budget since 1996 today.
The message delivered was one of a stronger UK economy, with 3% growth in 2014 and 2 million jobs created during the 5 years of coalition government.
The Chancellor promised the Budget would deliver higher wages, lower taxes and welfare reforms which will secure the growth and stability of the UK economy.
The devil is in the detail and the Finance Bill and supporting legislation will need to be fully reviewed, however, these are the initial headlines to be aware of:
Non-Domiciled (“Non-Dom”) Taxpayers
Major changes have been announced to the non-dom tax regime.
The most far-reaching of these is that, from 6 April 2017, long-term residents who have been UK tax resident for 15 of the last 20 years will no longer qualify for non-dom status. This means that if they remain UK tax resident they will be subject to tax on their worldwide income and gains and potentially subject to inheritance tax on their worldwide estate.
It is our understanding that protection from capital gains and inheritance tax (and potentially income tax) will be available where certain trust structures are in place prior to becoming deemed domiciled here under the 15 year rule. A consultation process will follow, however, and further detail may not be available for some time.
From April 2017, individuals who are born in the UK to parents who are domiciled here, will no longer be able to claim non-domicile status whilst they are resident in the UK. This is unlikely to have a significant impact as the vast majority of individuals born to UK domiciled parents would find it difficult to lose their ‘domicile of origin’ in the UK in any case.
A change in law was also announced which will mean non-doms (and indeed non-UK residents) will no longer be able to benefit from inheritance tax protection by owning UK property via offshore structures. Again, this will take effect from 6 April 2017, but in this context there will be no grandfathering of existing structures.
If you are likely to be affected by these sweeping changes to the non-dom tax regime please contact us to discuss further.
Inheritance Tax (“IHT”)
A new main residence allowance will be available from 6 April 2017. Specifically this will only be available to reduce IHT that is payable in respect of the family home. There will be a restriction applied to this new relief for estates with a value exceeding £2,000,000.
This allowance will be phased in at £100,000 from 2017/18, increasing to £175,000 from 2020/21.
The current £325,000 nil rate band will remain frozen but both this and the new IHT exemption will be available for transfer between married couples and civil partners.
This means that from 6 April 2020 a family with an estate with total value of up to £1,000,000 or less should now be free of IHT, providing the estate includes a residential property. This will be a welcome relief to many families concerned with exposure to IHT.
It has been widely speculated that reforms to claiming mortgage interest tax relief would be announced in this budget. It has been confirmed that tax relief for mortgage interest linked to a buy-to-let property will be restricted to 20% income tax relief. The restriction will be phased in over 4 years, starting from April 2017.
In addition, it was announced that homeowners who take in a lodger will now be able to receive rent of up to £7,500 per annum tax-free under the rent-a-room scheme; the relief was previously restricted to £4,250 and had been at that rate for many years.
The annual allowance for pension contributions will be reduced from 6 April 2016 for individuals with income in excess of £150,000 per annum. The current annual allowance of £40,000 will remain, but will be tapered away for those with income over £150,000, subject to a minimum of £10,000 for those with income over £210,000.
We anticipate that most taxpayers will now look to optimise the relief available to them this year, including using any unused reliefs from the previous three tax years.
It was also announced that a consultation would begin with reference to wide reforms being introduced to pensions and how tax reliefs are provided to savers.
Dividends Tax Rates
The taxation of dividends has been ‘simplified’ and, as a result, clients who receive a large proportion of their income from dividends may pay more tax from 6 April 2016.
From 6 April 2016, UK taxpayers will be able to receive dividends of up to £5,000 per annum tax-free, regardless of their income bracket.
Dividends received in excess of this amount will then be taxed at 7.5% if they fall in the basic rate tax band, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
If these rules impact you, we would recommend advice is taken to consider the most appropriate remuneration structure for you from 6 April 2016.
The UK currently has the joint lowest corporation tax rate in the G20 at 20%. From 2017 this will be reduced to 19% and from 2020 it will be reduced further to 18%.
The Chancellor suggested that these changes would compensate UK companies for the additional costs of the National Living Wage, referred to below.
National Living Wage
An announcement which will be welcomed by all who appreciate the prosperity of the UK and its residents is the introduction of a National Living Wage. This will be £7.20 per hour from 6 April 2016, increasing to £9 per hour from 2020.
The employment allowance, which can reduce an employer’s annual National Insurance liability, will increase from £2,000 to £3,000 from 6 April 2016. However, companies where the director(s) is the sole employee will no longer be able to benefit from this relief.
Tax Free Personal Allowance and Basic Rate Tax Band
For those entitled to receive it, the tax-free personal allowance will increase to £11,000 from 6 April 2016 and the basic rate tax band will be increased to £32,000, taking the higher rate tax threshold to £43,000.
The above is a synopsis of the announcements relevant to private clients. For those who want a more detailed summary we recommend you review HMRC’s overview which covers all announcements made by the Chancellor, which can be found here:
If you would like advice on how any of today’s announcements affect you, please contact us.