Summer Budget 2015 – highlights for the private client practitioner
The Summer Budget 2015 was presented to the House of Commons on 8 July and the detailed Bill will be published on 15 July so what follows is merely the highlights.
Income tax for individuals
Personal allowances and thresholds are increasing from April 2016 as follows:
Tax free allowance – £11,000, up from £10,600
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Higher rate threshold – £43,000 up from £42,385
Dividend tax credit will be abolished – replaced by a new Dividend Tax Allowance of £5,000 per annum with new tax rates for dividend income above that threshold – 7.5% for basic rate taxpayers; 32.5% for higher rate taxpayer and 38.1% for additional rate taxpayers. It is not clear how this will affect PRs and Trustees.
There are a number of changes affecting landlords. Mortgage interest relief against let income will be reduced to 20% (rather than the taxpayer’s marginal rate) over four years from April 2017. The ‘wear & tear’ allowance will only be available from April 2016 if the landlord has actually expended money on repairs and replacements. There will be a technical consultation on this.
Rent-a-room relief, which allows a resident landlord to receive some tax-free income from letting out a room, is to increase from £4,250 per annum to £7,500 from April 2016.
A Pensions tax relief consultation document was issued with the Summer Budget to consider ways in which people can be incentivised to save to provide for retirement.
From April 2017 non-domicile status for tax is changing. Individuals 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 (presumably to stop Stuart Gulliver, Chief Executive of HSBC and others like him claiming non-domicile status).
Permanent non-domicile status will also be abolished for long term residents so that from April 2017 anyone who has been resident in the UK for 15 of the past 20 years will be considered UK domiciled for tax purposes. IHT deemed domicile status will be brought into alignment.
A technical consultation on these issues will be published later this year.
The basic nil rate band is not going to alter and remains at £325,000 up to April 2021. Rising house prices are contributing to nearly double the number of estates facing an IHT bill by 2020/21. Whilst the levels will not be pegged back completely the aim is to ensure the percentage of estates paying IHT will be no greater than 2014/15 – about 37,000.
The much heralded main residence nil rate band will not be £175,000 as trailed but in fact start at the more modest £100,000 in 2017/18. It will then rise gradually to £175,000 in 2020/21 (i.e. £125,000 in 2018/19 and £150,000 in 2019/20).
The additional main residence NRB (MRNRB) is going to have conditions attached and will be subject to a technical consultation. It appears that to obtain the MRNRB a person has to pass on their main residence or the proceeds of sale to ‘direct descendants’. Downsizing will not therefore be prevented but no doubt record keeping will prove interesting.
Despite the MRNRB only coming in from April 2017 it can apply to the proceeds of sale of properties on or after 8 July 2015.
The full MRNRB will only be relevant for estates below a £2 million threshold as the benefits of it will be tapered away to zero by £1 reduction for every £2 of net estate over the £2 million threshold.
The MRNRB will be transferable between spouses and civil partners so achieving the Government’s previously stated aim of giving a potential NRB of £1 million to a couple.
The example is given in the Treasury statement at the Budget of an individual choosing to downsize from a £200,000 house to a £100,000 property. They could still benefit from the £175,000 MRNRB as long as they leave their home and a further £75,000 of additional assets to their descendants. They would only be liable to IHT if their estate exceeded £500,000.
Also from April 2017 non-domiciles (whether or not resident here) will be subject to IHT on their UK residential property, including property held indirectly through an offshore structure. Again, there will be a detailed consultation on this later this year.
PRs and trustees liable to IHT will see amendments to the law relating to late payment interest which together with other secondary legislation is aimed at supporting the digitalisation of IHT as part of the government’s digital strategy. There will be a number of draft regulations issued in 2015 to support the online service.
For almost three years HMRC have been consulting on simplifying the relevant property regime calculations for IHT in trusts. From Royal Assent of this Finance Bill same day additions will be taxed on trusts created on or after 10 December 2014 and where there are additions made on the same day to more than one relevant property trust created before 10 December 2014. This rule will not apply to additions made to protected settlements i.e. where the same day addition is made by a Will executed before 10 December 2014 and where the testator dies before 6 April 2017.
The new rules will ignore non-relevant property in the calculation of the rate of charge on a 10 year anniversary arising on or after Royal Assent in any trust whenever created.
The tidying up provisions for s.80 and s.144 IHTA 1984 contained in the draft Finance Bill published on 10 December 2014 will apply – for s.80 from Royal Assent; for s.144 appointments, for deaths on or after 10 December 2014.
Tax advisers and other financial intermediaries will have to notify clients about the Common Reporting Standard (something which will effectively replace FATCA and UK FATCA), the penalties for evasion and the opportunities to disclose. Legislation will follow on this.
There will also be legislation permitting HMRC to recover tax and tax credit debts directly from tax payer’s bank accounts. Despite a great deal of concern expressed over such a power flouting the rule of law we are told that the measure will have robust safeguards and will only be permissible after a face-to-face visit to the debtor.
There will be more money for HMRC to step up its criminal investigations against serious and complex tax crime by wealthy individuals and corporations. HMRC will be encouraged by increased resources to tackle non-compliance by trusts, pension schemes and non-domiciled individuals.
The government intends to publish a consultation to consider the detail of introducing a GAAR penalty as well as considering new measures to strengthen GAAR further. This feels premature when we have not even seen GAAR being invoked by HMRC.
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