Budget July 2015 (3) – Tax

 

 

INCOME TAX

• In 2016/2017 the income tax personal allowance will see another substantial increase of £400 to £11,000. A further increase to £11,200 was announced for 2017/2018.

 

• The basic rate band increases to £32,000 for 2016/2017. Those entitled to the full standard personal allowance will pay 40% tax on income above £43,000. The threshold for higher rate income tax increases by £615 for 2016/2017.

 

• The basic rate limit will increase to £32,400 for 2017/2018. Together with the planned increases in the personal allowance, this means the higher rate threshold will be £43,600 for 2017/2018. These are the next steps in the Chancellor's stated aim of increasing the higher rate threshold to £50,000.

 

• The tax relief on mortgage interest will be restricted to basic rate for mortgages on 'buy to let' residential properties. The restriction will be phased in over 4 years from April 2017.

 

• ‘Rent a room’ relief will be increased from £4,250 to £7,500 from April 2016. The relief had been frozen since 1997.

 

CAPITAL GAINS TAX (CGT)

•  No changes were announced with individuals continuing to be entitled to an annual exempt amount of £11,100 for 2015/2016 and trustees to a maximum of £5,550.

 

• The 18% and 28% rates of capital gains tax remain, as does the interaction with the amount of the taxpayer's unused basic rate income tax band (if any) to determine at which rate tax will be paid. The potential exists to reduce the rate at which a gain is charged to CGT by extending the basic rate income tax band by making a pension contribution.

 

INHERITANCE TAX (IHT) & TRUSTS

 

• The Government aims to reduce the number of estates paying IHT by introducing an additional nil-rate band from April 2017. This will apply where the main residence passes on death to direct descendants such as children and grandchildren. This will be worth up to £100,000 in 2017/2018, £125,000 in 2018/2019, £150,000 in 2019/2020 and £175,000 in 2020/2021 with CPI indexation applying thereafter. As with the existing nil-rate band, any unused nil-rate band will be able to be claimed on the death of their surviving spouse or civil partner. Those with net estates worth more than £2 million will see the additional nil-rate band scaled back by £1 for every £2 over this threshold. Consultation will be published in September 2015 with details of how the additional nil-rate band will apply to those who have downsized or ceased to own a home on or after 8 July 2015.

 

• The IHT nil-rate band is currently frozen at £325,000 until 5 April 2018 and this will continue to apply until April 2021.

 

• The Summer Finance Bill will include new legislation targeting IHT.

 

CORPORATION TAX

 

• The corporation tax rate will be cut from 20% to 19% in 2017 and then to 18% in 2020.

 

• For accounting periods starting on or after 1 April 2017, corporation tax payment dates will be brought forward for companies with annual taxable profits of £20 million or more. This threshold will be divided by the number of companies in a group. These companies will pay corporation tax in quarterly instalments in the third, sixth, ninth and twelfth months of their accounting period.

 

• The permanent level of the Annual Investment Allowance (AIA) will increase from £25,000 to £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.

 

NATIONAL INSURANCE

• The £2,000 National Insurance employment allowance, which reduces the overall cost of employer National Insurance Contributions (NICs) for employers, will increase from £2,000 to £3,000 from April 2016. From the same date, companies where the sole employee is the director will no longer be able to claim this allowance.

 

• The Government will actively monitor the growth in salary exchange (also known as salary sacrifice) schemes used to reduce the amount of employee and employer NICs.

 

GENERAL IMPACT

 

Income Tax

• Higher rate taxpayers will welcome the further increases in the higher rate threshold, however, the rates from 2016/2017 and 2017/2018 are still a long way off the Chancellor's stated aim of a £50,000 higher rate threshold. In the meantime pension contributions benefiting from higher rate relief remain an attractive savings option.

 

• Mixed news for property lettings. Those who rent out a room will welcome the increase in the tax free allowance to £7,500. However, the loss of higher rate relief on mortgage interest may impact the property market. High earners with mortgaged property portfolios will see a substantial increase in costs over time.

IHT

 

• As widely expected, the headline measure removes the family home from the IHT net for all but the wealthiest homeowners although the maximum benefit of £1m won't be available until tax year 2020/2021 due to phasing of the allowance.

 

• Those with larger estates will still need advice on steps they can take to mitigate IHT.

 

• The specific measure affecting trusts restricts the ability to gain an advantage of multiple nil-rate bands through setting up a series of trusts. It will still be possible to place property in trust up to the nil-rate band every seven years.