Summer Budget 2015

The Chancellor of the Exchequer delivered his 2015 Summer Budget on 8 July 2015. 

This is a summary of the announcements on tax and related matters.  The Budget documents include details of changes which have been announced previously.  This summary focuses on new announcements. 

The Budget announcements and publications can be found on GOV.UK on the Summer Budget 2015 home page.  There is also a page with links to all the HMRC tax-related documents and announcements. 

The Summer Finance Bill (FB) will be published on 15 July 2015. 

Rates and allowances 

The government proposes to increase the personal allowance to £12,500 by the end of the current parliament.   The personal allowance in 2015/2016 is £10,600.  This will increase to £11,000 for 2016/2017 and £11,200 for 2017/2018. 

The age allowance for those born before 6 April 1938 will be removed from 2016/2017 onwards as announced in March 2015.

The income tax basic rate band for 2015/2016 is £31,785 with a 0% starting rate band of £5,000 for certain types of savings income.

Year                                                      2015/16           2016/17            2017/18 

                                                                        £                          £                         £

Standard personal allowance                       10,600                  11,000                  11,200

Basic rate band of 20% of income                 31,785                 32,000                  32,400

Higher rate 40% threshold                            42,385                 43,000                  43,600

Additional rate of 45% on income over        150,000               150,000                 150,000

A new tax-free dividend allowance of £5,000 is to be introduced from 2016 as part of the reform of the taxation of dividends. 

The inheritance tax (IHT) nil rate band is frozen at £325,000 until April 2021. 

The rate of corporation tax is currently 20%.  It will be reduced to 19% in 2017 and to 18% in 2020. 

End of permanent non-domicile status 

From April 2017, anyone who has been resident in the UK for 15 out of the last 20 years will be deemed to be UK-domiciled for all UK tax purposes, including inheritance tax (IHT). 

Also from April 2017, individuals who were born in the UK to parents who were domiciled here, and so at their date of birth had a domicile of origin in the UK, will no longer be able to claim non-domicile status for tax purposes when they are resident in the UK, even if under general law they have acquired a domicile in another country. 

Individuals affected will be liable to tax on an arising basis on worldwide income and IHT on worldwide personal assets, and they will no longer be able to use the remittance basis. 

These proposals will affect the taxation of foreign-domiciled individuals whether UK-resident or non-UK-resident and trustees and beneficiaries of excluded property trusts.  It will not affect their domicile status under general law.

Non-domiciled individuals who have set up an offshore trust before they become deemed domiciled under the new 15-year rule will not be taxed on trust income and gains retained in the trust.  Excluded property trusts will have the same IHT treatment as at present (subject to changes to the tax treatment of UK residential property held through offshore companies and similar vehicles announced in the March 2015 Budget). 

However, such long-term residents will from April 2017 be taxed on benefits, capital or income received from such trusts on a worldwide basis. 

Individuals who had a UK domicile of origin and left the UK, obtained a non-UK domicile of choice under general law, and, having lost both their UK domicile of origin and deemed domicile for UK IHT purposes, set up excluded property trusts, and later return to the UK and become UK-resident but maintain their non-UK domicile of choice, will become deemed domiciled for UK tax purposes once they become UK tax-resident.  At this point they will no longer benefit from favourable tax treatment in respect of trusts set up while not domiciled in the UK.

The government has undertaken to consult later in the year on the best way to deliver these reforms and, subsequently, on draft legislation for Finance Bill 2016.  The consultations will cover inter alia interactions with the employment-related securities legislation and trust taxation rules including the 2008 rebasing provisions relating to trusts.

Buy-to-let landlords: restriction of interest relief 

New rules will be phased in which will restrict tax relief for finance costs for higher rate taxpayers who use loans to finance buy-to-let properties.  Relief will be restricted to basic rate (20%) only by April 2020.  Finance costs include loan interest. 

This restriction will be phased in over four years, starting from April 2017, and will be legislated in the Summer Finance Bill 2015. 

In the transitional period landlords will be able to obtain relief as follows: 

  • in 2017/2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction; 
  • in 2018/2019, 50% finance costs deduction and 50% given as a basic rate tax reduction; 
  • in 2019/2020, 25% finance costs deduction and 75% given as a basic rate tax reduction. 

From 2020/2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction.  This rule will not apply where the property meets the criteria of a furnished holiday letting, nor does it appear to apply to corporate landlords, only individuals.

Wear and tear allowance 

In April 2016, landlords who let out furnished property will lose the 10% wear and tear allowance, which will instead be replaced by a new system that only allows them to get tax relief when they replace furnishings.

Capital allowances will continue to apply for landlords of furnished holiday lets. 

Rent-a-room relief 

Rent-a-room relief for those who rent out a room in their own home will go up to £7,500 from £4,250 from April 2016.

Pension lifetime allowance 

The lifetime allowance is to be reduced from £1.25m to £1.0m from 6 April 2016.  Transitional protection for pension rights already over £1m will be introduced alongside this reduction to ensure the change is not retrospective.

Tapering of annual allowance 

The annual allowance remains at £40,000, but it is now subject to a tapered reduction from 6 April 2016 for taxpayers with ‘adjusted income’ in excess of £150,000. 

Adjusted income is a new concept and it reflects recent moves by many employers to use salary sacrifice as part of their pension scheme arrangements.  The adjusted income includes any pension contributions funded by a salary sacrifice. If an employee’s ‘unadjusted’ income is less than £110,000 they will not have to carry out the ‘adjusted income’ calculation to work out whether the adjusted income exceeds £150,000 with a resultant clawback. 

Where an individual is subject to the taper, their annual allowance will be reduced by £1 for every £2 by which their income exceeds £150,000, subject to a maximum reduction of £30,000.  The annual allowance of £10,000 will, therefore, apply to taxpayers with adjusted income of £210,000 or more. 

The carry forward of unused annual allowance will continue to be available, but the amount available will be based on the unused tapered annual allowance.

Pension input periods 

The pension input periods which are currently based on 12-month periods from the start date of each individual pension policy will all be aligned to the tax year.  This realignment will affect the utilisation of the annual allowance for savings in 2015/2016.  As some contributions before the Budget were intended to utilise the untapered relief in the existing input period there are special rules for what contributions are allowable in 2015/2016. 

In broad terms savings made before the Budget will be protected if they would not have breached the allowance that would have been available had the old rules continued.

Taxation of pensions at death 

As announced at Autumn Statement 2014, the government will reduce the 45% tax rate that applies on lump sums paid from the pension of someone who dies aged 75 and over to the marginal rate of the recipient from 2016/2017.

Taxation of pensions at death 

As announced at Autumn Statement 2014, the government will reduce the 45% tax rate that applies on lump sums paid from the pension of someone who dies aged 75 and over to the marginal rate of the recipient from 2016/2017. 

Dividend taxation 

The Chancellor has announced that from April 2016 there will be a significant change to the dividend income tax regime.  The proposal is that: 

  • there will be a new annual dividend allowance of £5,000; 
  • the 1/9 tax credit will disappear; 
  • the new tax rates on dividend income will be 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers respectively. 

These new rates will replace the 0%, 25% and 30.56% for basic, higher and additional rate taxpayers. 

The £5,000 dividend allowance is separate to the £1,000 allowance for savings (which excludes dividends) income, which was announced previously and is also due to start in April 2016.

Changes to venture capital scheme rules 

Further to the consultation published in March 2015 the government will implement changes to the venture capital scheme rules.  This applies to venture capital trusts (VCT), the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS). The changes are subject to state aid approval and are intended to take effect from Royal Assent to the Summer Finance Bill 2015. 

The changes are: 

  • All investments must be made with the intention of growing and developing a business. 
  • All investors must be ‘independent’ of the company at the time of the first share issue. 
  • Companies must raise their first investment under EIS, VCT or other risk finance investment within seven years of making their first commercial sale or 10 years if the company is a knowledge-intensive company. However, no age limit will apply to companies raising an investment where the amount of the investment is at least 50% of the company's annual turnover, averaged over the previous five years. The age limit will apply also to any business that has been owned previously by another company. 
  • There will be a new lifetime cap on the total investment a company can receive through the EIS and VCTs of £20m for knowledge intensive companies and £12m for other qualifying companies. 
  • The employee limit for knowledge intensive companies is increased from less than 250 to less than 500 employees. 
  • New rules will prevent EIS and VCT funds being used to acquire existing businesses, including extending the prohibition on management buyouts and share acquisitions to VCT non-qualifying holdings and VCT funds raised pre-2012, and preventing money raised through EIS and VCT from being used to make acquisitions of existing business regardless of whether it is through share purchase or asset purchase. 

The requirement that 70% of SEIS money must be spent before EIS or VCT funding can be raised will be removed for qualifying investments made on or after 6 April 2015. 

A policy document accompanies the Budget notes. 

Peer-to-peer loans 

As announced in the Autumn Statement 2014, from April 2015 the government will allow tax relief for bad debts incurred on peer-to-peer (P2P) loans to be used against other P2P income. A technical note was published with the March Budget 2015.  Draft legislation will be published later this year for inclusion in Finance Bill 2016.

Salary sacrifice 

The government is concerned that salary sacrifice arrangements can allow some employees and employers to reduce the income tax and NIC that they pay on remuneration, that they are becoming increasingly popular and the cost to the taxpayer is rising.  The government will actively monitor the growth of these schemes and their effect on tax receipts. 

Termination payments 

The government is going to consult on the tax and NIC treatment of termination payments. 

Self-employed NIC 

The government will consult in autumn 2015 on abolishing Class 2 NIC and reforming Class 4 NIC for the self-employed.  This follows changes to how Class 2 NIC is paid so that it is now (from 2015/2016) collected as part of the self assessment balancing payment rather than billed separately. 

Employment allowance: increase 

The employment allowance (EA) will be increased from £2,000 to £3,000 from April 2016.  

Employment allowance: one-man companies 

Companies where the director is the sole employee will no longer be able to claim EA from April 2016.

Corporation tax rate 

The corporation tax rate is to reduce from 20% to 19% from April 2017, and to 18% in 2020. 

New inheritance tax exemption for passing on the family home 

The government had already announced that it would introduce an extra IHT relief of up to £175,000 where parents leave the family home to children or grandchildren.  

Currently the IHT nil rate band is £325,000 per person.  Tax is payable at 40% above that.  There is no IHT on transfers of assets from one spouse or civil partner to the other. 

If the first spouse or civil partner to die does not use their full nil rate band, it can be used when the surviving spouse/partner dies – in effect, it is transferable.  The maximum available on the second death is currently £650,000. 

The new relief is described in the Budget documents as the ‘main residence nil rate band’. 

It will be an additional relief available where the value of the estate is above the IHT threshold and contains a main residence which is being passed on to ‘lineal descendants’.  The existing nil rate band will be unaffected and will remain fixed at £325,000 to 2020/2021 inclusive. 

There will be a consultation in September 2015, with the legislation in Finance Bill 2016.  Based on the July Budget announcements, the key features are: 

  • The relief will be introduced in April 2017, for deaths on or after that date. 
  • It will be phased in, starting at £100,000 in 2017/2018, rising to £125,000 in 2018/2019, £150,000 in 2019/2020 and £175,000 in 2020/2021.  For a couple, the £175,000 plus the existing £325,000, each, makes the £1m maximum relief quoted by the government. 
  • The relief will then increase in line with CPI from 2021/2022 onwards. 
  • The relief applies only on death, not on lifetime transfers. 
  • The amount available will be the lower of the net value of the property and the maximum amount of the main residence nil rate band.  The net value of the property is after deducting liabilities such as a mortgage. 
  • The property will qualify if it has been the deceased’s residence at some point. 
  • The property must be left to lineal descendants: children, grandchildren, great-grandchildren, etc.  Children include stepchildren and adopted children. 
  • The relief is transferable, so the estate of the second spouse to die can benefit from the main residence nil rate band of their deceased spouse, regardless of when that spouse died. 
  • The relief will be tapered away for estates with a net value over £2m, at the rate of £1 for every £2 over that limit, so will be reduced to zero on an estate of £2.35m. 
  • The relief will be available where a person has sold a main residence in order to downsize or to realise a capital sum, for example to pay of care home fees.  The main residence nil rate band can be used against assets in the estate of an equivalent value to the home which was sold. 

UK residential property held by non-domiciliaries

The government intends from April 2017 to bring all UK residential property held directly or indirectly by foreign-domiciled persons, whether an individual or a trust, into the charge to IHT, even when the property is owned through an indirect structure such as an offshore company or partnership.  The intention is that IHT will be levied in the same way as for UK-domiciled individuals.

The design of the charge will be based on the annual tax on enveloped dwellings (ATED) rules but will go further; for example, the ATED threshold and reliefs (e.g. for let properties) will not apply. 

A detailed technical briefing has been published.  The government has undertaken to consult with a view to including legislation in Finance Bill 2017. 

IHT changes for trusts 

It is confirmed that changes to the trust IHT regime, which have been under consultation for some time, will be included in the Summer Finance Bill. 

Simplification of trust charges 

Legislation will be introduced to remove the requirement to include non-relevant property when calculating 10-year anniversary charges and exit charges. 

New rules to target IHT avoidance 

Where property is added to two or more relevant property settlements on the same day and after the commencement of those settlements, the value added to the settlement together with the value of property settled at the date of commencement (that is not already in a related settlement) will be brought into account in calculating the rate of tax for the purposes of 10-year charges and for exit charges. 

This will mean that individuals will no longer have the advantage of multiple nil rate bands by creating multiple trusts, but they will be able to settle property up to the value of the nil rate band into trust every seven years. 

Successive life interests 

Where one party to a couple succeeds to a life interest to which their spouse or civil partner was previously entitled during the latter’s lifetime, and that interest is not a transitional serial interest, the settled property will be treated as being comprised in a settlement and therefore subject to the relevant property charges. 

Appointments for the benefit of the deceased’s surviving partner 

The law will be changed so that where an appointment out of property settled by a will is made within three months of the date of death in favour of the deceased’s surviving spouse or civil partner, it can be read back into the will and the spouse exemption can apply.

 ©Lindsey Sherman and Associates Ltd.  2010: Registered Office Copthorne Farmhouse, Main Street, Great Ouseburn, York. YO26 9RE