Written by Roger Harding
Individual Tax – Dividends
Quite a significant change to the taxation of income from share dividends has been announced with the abolition of the 10% notional tax credit with effect from 6 April 2016. In its place there will be an annual exemption for the first £5,000 of dividends with a tax charge of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Clients are advised to undertake a review of their investment portfolio to make best use of the investment allowances, as people with savings and dividend income in excess of £16,000 are likely to pay more in tax.
Landlords & Property Investors
Landlords who are liable at the higher rate of income tax face a tax increase following the restriction to relief for their finance costs/mortgage interest. From April 2017 the claim for interest on financing the property portfolio will be limited to the basic rate of income tax (20%).
For landlords with significant borrowings this could prove a substantial tax increase, as it means a loss of at least 50% of the tax relief on interest payments. Landlords are advised to review their property portfolio and the loss of tax relief to check if a reduction in borrowing would be a better investment strategy.
A review of the “non- dom” tax status was promised in the election manifesto. However the news that the status will be abolished altogether from April 2017 will come as an unwelcome surprise for many. Non- doms who have been resident for 15 of the previous 20 tax years will become “deemed domiciled” in the UK subject to tax on their worldwide income. The remittance basis charge (RBC) of £90,000 for those resident for 17 of the last 20 years becomes redundant but the £30,000 and £60,000 charges remain. The plan to make individuals elect for the RBC over three years has also been dropped.
This may provide favourable political headlines but could be economically damaging. Many non-doms bring vast inward investment and pay substantial income tax in any event. This could drive them overseas and actually cost the Treasury money rather than increase the tax take. Non-doms will now need to review their tax status and plan effectively for the change before it is implemented.
Companies will welcome the planned reduction in Corporation Tax rate to 18% by 2020. Larger companies (Profit £20m+) will, however, not be as happy about the acceleration in their tax payments by bringing forward their instalment payments so that all projected Corporation Tax is paid by the end of the accounting period.
With a projected Corporation Tax rate below the basic income tax rate many sole traders, partnerships and LLP’s will seriously consider incorporation for their business medium. This should not be the sole driver for such a decision, as there are many other factors to consider before taking such a step. It’s not as easy to unwind a company as it is to set it up.
The current £500,000 allowance for investment in plant and machinery was due to be reduced to just £25,000. It was announced the amount will now be permanently fixed at £200,000 from 1 January 2016.
A welcome clarification now means businesses can plan effectively for equipment purchases. However, it would have simplified matters if the change took effect in April rather than January, as the timing presents an unnecessary complication to the calculation of the allowances.
The March 2015 Budget brought to an end the ability for individuals to claim Capital Gains Tax Entrepreneur’s Relief on sale of the business to a limited company. With immediate effect the ability for companies to amortise goodwill purchased and claim relief against Corporation tax has also now been abolished. Existing arrangements prior to 8 July 2015 will be unaffected.
This was a surprise announcement but is intended to create a level playing field for business acquisitions when considering asset versus share acquisitions.
Further announcements are likely in the coming days if previous Budgets are anything to go by, which is also when more of the “bad news” gets released. As ever the devil is in the detail and we will closely scrutinize the new legislation and provide analysis and comment as appropriate.
Contact the Author
After starting my tax career with HMRC, I qualified with ATT (Association of Tax Technicians), working in the accountancy practice of Deloitte. Having gained experience in personal and business tax, property taxation, corporate tax structuring and compliance, I brought my expertise to Gordon Dadds in 2013. I am a fan of all sports, but avidly follow football, rugby and golf.