On 8 July, George Osborne delivered the first Conservative Government Budget for 19 years. Many headlines had already been flagged-up in advance so there were no immediate surprises. As usual ‘the devil is in the detail’ however, in this article we look behind the headlines and provide further detail about those Budget measures of particular interest to you.
Further consultation will be issued, and the draft second finance bill of 2015 is expected on the 15 July 2015.
The tax-free personal allowance is being increased to £11,000 in 2016-17, and £11,200 in 2017-18.
For higher rate taxpayers, the government will also increase the threshold above which higher earners start paying 40% tax. It will increase to £43,000 in 2016-17, and to £43,600 in 2017-18.
From April 2016 Dividend Tax Credit will be abolished. To replace this, a new Dividend Tax Allowance of £5,000 per tax year will be introduced.
The new rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate tax payers.
Individual Savings Accounts
In the March 2015 Budget the Government announced a change in the ISA rules, to allow individuals to withdraw and replace money from their cash ISA in a year without it counting towards their annual ISA subscription limit. The Government have announced that this will also apply to cash held in stocks and shares ISAs.
Both changes take effect from 6 April 2016.
The UK corporation tax rate will reduce from 20% to 19% in 2017. It will reduce to 18% on 2020.
Inheritance tax – Main residence nil-rate band and existing nil-rate band
An additional nil-rate band will apply when a residence is passed on death to a direct descendant (children (step-children, adopted child or foster child or grandchildren). This will be £100,000 in 2017-18; £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21. This will then increase in line with Consumer Prices Index (CPI) from 2021-22 onwards. Any unused additional nil-rate band will be transferrable to a surviving spouse or civil partner.
The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
There will be a tapered withdrawal of the additional nil-rate band for estates, including the main residence, with a value of more than £2million (after deduction of any liabilities, but before reliefs and exemptions). This will be at a withdrawal rate of £1 for every £2 over this threshold.
This measure will take effect for relevant transfers on death on or after 6 April 2017. It will apply to reduce the tax payable by an estate on death (similar to the transferable nil-rate band) and it will not apply to reduce the tax payable on lifetime transfers that become chargeable as a result of death.
The main residence nil-rate band will be transferable where a surviving spouse or civil partner in a couple dies on or after 6 April 2017, irrespective of when the first of them died.
The qualifying residence will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let, will not qualify.
The detail is subject to consultation, which will be published in September 2015 ahead of the draft Finance Bill 2016.
Nil-rate Band frozen until the end of 2020-21
The existing nil-rate band will remain at £325,000 until the end of 2020-21. It was previously frozen until the end of 2018-19.
Simplifying charges on trusts
Legislation will be introduced to remove the requirement to include non-relevant property in the calculation of 10-year periodic charges and exit charges. In addition, new rules will ensure that where property is added to two or more relevant property settlements on the same day after commencement of the settlements, the values added along with the values added at commencement will be bought into account when calculating the rate of tax for the purposes of 10- year periodic charges and exit charges.
Other legislation covering trust property settled by a Will, allows for an appointment to be made in favour of the surviving spouse or civil partner being entitled to the spousal IHT exemption. The exemption will be available as long as the appointment is done within three months of the death.
Immediate change to the annual allowance for 2015/16
From 2016/17 pension input periods will be aligned with tax years. In order to make this happen, the Government are making changes to the annual allowance for 2015/16 with effect from 8 July 2015. The Government have issued guidance, and you may be glad to hear that the rules that apply to pension savings for 2015/16 are at least as complicated as the special annual allowance introduced in 2009. In effect it means that individuals will be able to benefit from an additional year’s worth of annual allowance.
Everyone will have a total annual allowance of £80,000 for 2015/16, plus available carry forward for the three previous tax years. All pension input periods that are open on the 8th July 2015 will end on that date with the next period running from the 9th July 2015 to the 6th April 2016. Pension savings for pension input periods ending in 2015/16 will be split into two ‘mini’ tax years, depending on whether they ended before the 9th July 2015 or in a post-budget pension input period which will run from 9th July 2015 and end on 5th April 2016.
For all pension input periods ending on or after 6 April 2015 and on or before 8th July 2015, individuals will have an annual allowance of £80,000, plus available carry forward. Pension savings from 9th July 2015 to the 5th April 2016 will have a nil annual allowance, but up to £40,000 of any unused annual allowance for the period up to 8th July 2015 is added to this, in addition to any remaining carry forward from the previous three tax years.
Annual allowance changes for April 2016/17
The Government is pushing ahead with its manifesto pledge to reduce the tax relief for people earning more than £150,000. Their annual allowance will reduce by 50p for every £1 of income in a range between £150,000 and £210,000, so that someone with an income of £210,000 or more will have an annual allowance of £10,000.
The Government consults on the future of pension tax relief
Pension tax relief rules are complex. Complexity acts as a disincentive if people cannot understand the benefit of saving for their later life. The 12-week consultation does not put forward a specific proposal for reform, instead it is seeking suggestions about whether and how the current system of pension tax relief should be reformed. It is not proposing incentives for pension savings are scrapped altogether, quite the opposite, instead it wants to ensure that the incentives to save for retirement are “clear, simple and transparent”, ensuring that individuals make sufficient savings for later life.
Any change will not occur overnight, and the government is clear that it will proceed gradually.
Taxation of lump sum death benefits
From April 2015, pension savings can be paid out tax-free if a member died before age 75 and the lump sum was paid within two years of the member’s death.
But a 45% tax charge applies if the lump sum is paid after two years, or in respect of a member who died after age 75. From April 2016 the tax payable on lump sums paid after two years or post age 75 will be based on the marginal rate of the recipient, with the exception of lump sums paid to non-individuals like Trusts or Companies, for which the rate will remain at 45%.
Barriers to accessing ‘pension freedoms’
The Government will consult imminently on options to improve the pension transfer process, aiming to make it quicker and smoother. They confirm that if there is evidence of exit penalties hindering the process, they will act by legislating a cap on early exit penalties for those aged 55 or over.
Pension Wise access for age 50 upwards
The Government is extending access to Pension Wise, the free and impartial guidance service, to those aged 50 and above. Having received criticism that Pension Wise is not widely known, a nationwide marketing campaign will be launched to raise awareness.
Secondary annuity market delayed until 2017
The Government confirmed the secondary annuity market enabling consumers to sell their annuities for a lump sum will be delayed until 2017. This is to ensure sufficient time to create a market and support service to ensure consumers are making the right decision. Plans for the secondary annuity market will be set out in the Autumn.
Changes to domicile rules
Permanent non-domicile status to be abolished
The Chancellor has today announced changes to the deemed domicile rules, which are due to apply from April 2017. A detailed consultation document will be published after the summer recess on the best way to deliver these reforms. Further consultation will follow on the draft legislation which is intended to form part of the 2016 Finance Bill.
From 6 April 2017, irrespective of when someone arrived in the UK, those who have been resident in the UK for 15 out of the past 20 (the 15 year rule) tax years will be treated as deemed UK domiciled for all tax purposes. This means that they will no longer be able to use the remittance basis of taxation and will be deemed domicile for IHT purposes.
Therefore someone who has already been in the UK for 15 years, and remains in the UK from the 6 April 2017, will be caught by the new regime and be unable to access the remittance basis. The government will consult on whether split years of UK residence will count towards the ‘15 year rule’.
Once a non-domicile has become deemed domicile under the ’15 year rule’ and spends more than 5 years outside the UK, at that point they will lose their deemed domicile status (the ‘five year rule’). This is likely only to be relevant for IHT purposes; however there is an increase in the ‘inheritance tax tail’ from the 6 April 2017, as currently this would only be relevant for four years.
Those who had a domicile in the UK at the date of their birth will revert to having a UK domicile for tax purposes whenever they are resident in the UK, even if under general law they acquired a domicile in another country.
Domicile of choice changes
In order to align the treatment of UK domiciles and non-domiciles, UK domiciles who leave after 5 April 2017, having been in the UK for more than 15 years, will also be subject to the ‘five year rule’ even if they intend to emigrate permanently and settle in a particular place on the day of departure. The government will consult on the interactions between the new five year rule and existing three and four year rules.
Excluded property trusts and non-domiciles
The technical note issued as part of the Summer Budget documents ‘technical briefing on Non Dom changes announced at Summer Budget 2015’ confirmed that the use of excluded property trusts will have the same IHT treatment as at present (except for the 15 out of 20 rule), other than the announcement made in relation to UK residential property, (see below). However, such long-term residents will, from April 2017, be taxed on any benefits, capital or income received from any trusts on a worldwide basis. The government recognises that this is a significant change to the current rules and that changes to trust taxation are complex and will therefore consult on the necessary details. We await the detail of these proposals.
Non dom/UK dom consultation
The government intends to consult further on the interaction of the various deemed domicile rules for both UK domiciles and non-domiciles and also in relation to the tax treatment of trusts. No date has been indicated for when these consultations will be issued. However, it is proposed that the measures are to be introduced from 6 April 2017and legislated in the Finance Bill 2016.
Non dom/IHT residential property changes
From April 2017, non-UK domiciled individuals will be liable to UK IHT on UK residential property which is held in an offshore company/partnership or offshore trust. This applies to all UK residential property, whether it is occupied or let and whatever its value.
This change applies to UK residential property only. The change will not apply to any other UK assets and neither does it change the rules regarding non-UK assets.
Tax avoidance and tax evasion
Tackling offshore evasion
This is relevant for financial institutions, tax advisers and other professionals that may be aware of, or may have given advice in respect of, an offshore account.
The government will legislate in the Summer Finance Bill 2015 to amend Section 222 of the Finance Act 2013. The amendment will allow HM Treasury to oblige financial intermediaries, tax advisers and other professionals to notify their customers/clients that:
The UK will begin to receive information on offshore accounts in 2017 and at the same time will begin to share information with other tax authorities on accounts held in the UK. This will allow HMRC and other tax authorities to check that the right amount of tax is being paid on money held abroad.
HMRC will open a time-limited disclosure facility in early 2016 to allow non-compliant taxpayers to correct their tax affairs under certain terms, before HMRC start to receive data under the Common Reporting Standard. This new facility will be on tougher terms than the previous offshore disclosure facilities HHMRC have operated.
If non-compliant taxpayers continue to conceal their tax affairs, HMRC will enforce tough penalties for offshore evasion through the existing offshore penalty regime, new civil penalties for tax evaders, and the new simple criminal offence of failing to declare taxable offshore income and gains.
HMRC will informally consult financial institutions and tax advisers to develop targeted and cost-effective communications including the points above, and to ensure the right people are involved in delivering the messages.
Regulations will be made after the date of Royal Assent to Summer Finance Bill 2015.
Direct recovery of debts
Legislation will be introduced allowing HMRC to recover tax and tax credit debts directly from debtors’ bank and building society accounts. Additional safeguards have been included but HMRC will be able to take action against debtors who owe over £1,000, though they will always leave a minimum aggregate of £5,000 across debtors’ accounts. The measure will introduce the power to recover debt directly from cash held in bank and building society accounts and includes cash in ISAs.
Marketed avoidance schemes
The government will publish consultations with the intention of introducing legislation in Finance Bill 2016 with regards to:
serial avoiders who persistently enter into tax avoidance schemes that are defeated.
general Anti-Abuse Rule (GAAR) penalty – to consider introducing a GAAR penalty and new measures to strengthen the GAAR further.