ADVISER FACTSHEET Tech Talk July 2015 Summer Budget 2015 In this Tech Talk, we briefly review some of the key announcements made in the Summer Budget 2015. In particular, we provide an overview of: A new IHT allowance for the family home from April 2017 The personal allowance and higher rate thresholds for April 2016 Reform of taxation of dividend income from April 2016 Changes to buy-to-let taxation and rent-a-room relief Pensions tapered annual allowance from April 2016 Pension input periods Lump sum death benefits Green Paper on reform of the taxation of pension contributions and income Help to Buy ISAs an update Ending permanent non-dom status from April 2017 Corporation tax rate to be cut to 18% by 2020 The employment allowance for national insurance contributions is to increase to 3,000 from April 2016 A National Living Wage of 9 an hour by 2020 Insurance Premium Tax increase A fuller analysis of the Budget will follow in due course. For professional advisers only
IHT and the family home All UK domiciled individuals have a nil rate band of 325,000, fixed until 2020/21. In addition, from April 2017 onwards a new allowance will be available to use against the family home which is passed on to other family members on death. The rates are as follows: 2017/18 100,000 2018/19 125,000 2019/20 150,000 2020/21 175,000 This will also be transferrable to the surviving spouse or civil partner on the first death. This means that an individual will be able to transfer up to 500,000 on their death without incurring an inheritance tax charge, or up to 1 million on the second death. The new allowance will be available to individuals who leave their house to direct descendants such as their children and/or grandchildren. The new allowance will not be available to all, however. The proposal is that the allowance will taper away for those with estates worth 2 million, and the family home allowance will taper away entirely once the estate is worth 2.35 million in 2020/21. The allowance will still be available where a person downsizes on or after 8 July 2015 and assets of an equivalent value as the allowance in force at the date of death are passed on death to direct descendants. 2
EXAMPLE 1 Dave owns a home worth 200,000. He downsizes to a home worth 100,000 and dies in 2020/21. This means that, so long as Dave leaves the home and 75,000 of other assets ( 75,000 being the difference between the allowance and the value of the home) to his direct descendants, there will be no inheritance tax liability on these assets. Personal allowance and higher rate tax thresholds In 2016/17, the personal allowance will be 11,000. The higher rate threshold with be 43,000. The aim is that the personal allowance will be 12,500 and the higher rate threshold will be 50,000 by the end of the current Parliament. Dividend tax reform From April 2016, the dividend tax credit of 10% of the gross dividend will be removed and all taxpayers will be entitled to a new tax-free Dividend Allowance of 5,000. The following tax rates will apply once the Dividend Allowance has been exhausted: Basic rate 7.5% Higher rate 32.5% Additional rate 38.1% Dividend income received by pensions and ISAs will not incur a tax liability. Buy-to-let and rent-a-room relief changes Mortgage interest payments on buy-to-let properties are currently deductible when calculating rental profits. The profits are taxed at the individual s marginal rate, meaning that the mortgage interest payments can receive tax relief at a maximum of 45%. Between April 2017 and April 2020, the tax relief on mortgage interest payments will be phased out until tax relief is only available at the basic rate (20%). The wear and tear allowance covering maintenance of buy-to-let properties will be removed from April 2016 and replaced with allowable deductions for actual expenditure incurred. Rent-a-room relief, which has been frozen at 4,250 for 18 years will increase to 7,500 from April 2016. 3
Pensions tapered annual allowance This measure will restrict the tax advantages of pension savings by introducing a tapered reduction in the annual allowance for individuals with adjusted income of over 150,000. The adjusted income definition adds back any pension contributions, to stop individuals from avoiding the restriction by exchanging salary for employer contributions. For members of defined benefit or cash balance arrangements a notional contribution is calculated using the pension input amount for annual allowance purposes less the contributions made by or on behalf of the individual for the tax year. Individuals with a net income of no more than 110,000 will not normally be subject to the tapered annual allowance. Anti-avoidance measures will apply to stop the use of salary sacrifice on or after 9 July 2015 as a way of avoiding the tapered annual allowance. The rate of reduction in the annual allowance is 1 for every 2 that the adjusted income exceeds 150,000, up to a maximum reduction of 30,000. Where an individual is subject to the money purchase annual allowance the reduction applies in the same way to the alternative annual allowance. Where applicable the amount of unused annual allowance available for carry forward to future years will be based on the unused tapered annual allowance. Pension input periods In order to facilitate the introduction of the tapered annual allowance, pension input periods will be aligned with the tax year from 2016/17 with transitional measures covering 2015/16 being introduced to protect individuals who might be disadvantaged by the alignment. All pension input periods open on 8 July 2015 will be closed on that date with the next pension input period running from 9 July 2015 to 5 April 2016. All subsequent pension input periods will be aligned with tax years. Under the transitional measures, individuals will have an annual allowance of 80,000 for the period 6 April 2015 to 8 July 2015 and where this amount has not been used it will be carried forward to the period 9 July 2015 to 5 April 2016, subject to a maximum of 40,000. Any unused annual allowance from the previous three years can be added to these amounts. 4
Lump sum death benefits From 6 April 2016, any lump sum death benefits paid to an individual following the death of a member aged 75 or over will be treated as pension income and subject to PAYE. The effect will be that the lump sum will be taxed at the individual s marginal rate. Other recipients, including trusts and companies, will receive lump sum death benefits subject to a 45% tax charge. Green paper on radical pension reforms A wide-ranging consultation has been announced to review the current method of tax relief on pension contributions and the taxation of pension income during retirement. The consultation is canvassing views described as both fundamental reform[s] such as moving to a similar taxation system to the current ISA regime, to less radical changes such as altering the lifetime and annual allowances, and all options in between. Help-to-buy ISAs The first products will be available from 1 December 2015. Ending permanent non-dom status From April 2017 onwards, anyone who has been UK resident for 15 out of the past 20 years will be considered UK-domiciled for tax purposes. These individuals will be taxed on a world-wide basis, and will no longer be able to take advantage of the remittance basis rules. From April 2017, it will not be possible for nondoms to avoid paying inheritance tax on residential property in the UK by using offshore structures. Corporation tax rates The following new rates of corporation tax were announced: Corporation tax year starting Reduced rate of corporation tax April 2017 19% April 2020 18% 5
The Employment Allowance employer national insurance contributions The Employment Allowance will increase from 2,000 to 3,000 from April 2016. The new National Living Wage In April 2016, a new National Living Wage for those aged 25 or over will be introduced. The rate in 2016 will be 7.20 an hour. By 2020, the level will be set at over 9 an hour. Insurance Premium Tax increase From 1 November 2015, the Insurance Premium Tax will increase from 6 to 9.5%. Further information Neil MacGillivray Head of Technical Support Technical Support Unit Please contact the Technical Support Unit with any further queries on: 0845 600 8651 Tax and Trust Technical Support: taxtrust.techsupport@jameshay.co.uk Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay Partnership cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HM Revenue & Customs practice are subject to change. The tax treatment depends on the individual circumstances of each client. James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number 2601833); James Hay Administration Company Limited (JHAC) (registered in England number 4068398); James Hay Pension Trustees Limited (JHPT) (registered in England number 1435887); James Hay Wrap Managers Limited (JHWM) (registered in England number 4773695); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number 7259308); PAL Trustees Limited (PAL) (registered in England number 1666419); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number 1670940); Sarum Trustees Limited (SarumTL) (registered in England number 1003681); Sealgrove Trustees Limited (STL) (registered in England number 1444964); The IPS Partnership Plc (IPS Plc) (registered in England number 1458445); Union Pension Trustees Limited (UPT) (registered in England number 2634371) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number 1739546). JHIC has its registered office at 3rd Floor, 37 Esplanade, St Helier, Jersey, JE2 3QA. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL, UPT and UPTL have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(01/14) www.jameshay.co.uk JHSTT 03 JUL15 LD 6