|UK Summer Budget 2015|
George Osborne has delivered the first solely Conservative Budget since 1997.
It was expected to contain some measures in respect of Non Domiciled individuals and an extended crackdown on tax avoidance and he did not disappoint in either respect, but he did stop short of taking Labour’s position and abolishing Non Domiciled status altogether.
We have provided below an overview of the changes which we believe are most relevant to our clients.
Amendments to the non-domiciled regime
As stated above the Budget stops far short of Labour’s pre-election proposal to abolish non-dom status entirely. However, it does make significant changes to the existing regime and ends the prospect of individuals living in the UK and claiming non-dom status indefinitely. In addition the new measures will prevent individuals with a UK domicile at birth from claiming non-dom status if they acquire a “domicile of choice” elsewhere, then subsequently become UK tax resident.
New “15 year” deemed domicile rule
Once an individual has been UK resident in more than 15 out of the past 20 tax years they will be deemed to be UK domiciled for all tax purposes, despite being a foreign domiciliary under general law.
With effect from the sixteenth (out of the last twenty) tax years of UK residence, an individual will no longer be able to benefit from the remittance basis, and will instead be subject to UK tax on their personal worldwide income and gains on an arising basis. They will also be liable to UK inheritance tax on their worldwide assets, not only those situated in the UK. It is intended that the new 15 year rule will apply from 6 April 2017. This does provide sufficient time for non-doms to undertake some suitable planning before the rules are implemented, or indeed before they become deemed domiciled under the 15 year rule. However, the Government recognises that the existing rules relating to offshore trusts are complex and there will be a period of consultation between HMRC and interested parties, which will be closely monitoring, and contributing to as necessary.
UK domiciled individuals
It will no longer be possible for an individual who is born with a UK domicile to replace that domicile with another domicile of choice, in the event that they subsequently return to live in the UK. This proposal will specifically affect any UK domiciled individuals who leave the UK, acquire a domicile of choice overseas under general law and subsequently return to the UK and still claim to be non-domiciled for tax purposes. There will also be some anti-avoidance rules relating to trusts used by UK residents, which they set up while Non UK Domiciled.
Annual remittance basis charges
Under the current rules those who are “long term” UK resident are required to pay the annual remittance basis charge in order to claim the remittance basis. This currently stands at £30,000 for taxpayer’s resident for 7 of the previous 9 years, £60,000 for those resident for 12 of the last 14 years and £90,000 for those resident for 17 out of the last 20 years. The first two rates were left unchanged but the £90,000 charge is no longer relevant as the remittance basis will not be available after 15 years residence.
Restricting mortgage interest expense for buy-to-let landlords
Buy-to-let landlords are currently able to offset the interest, paid on mortgages taken out to acquire their buy to let properties, against their taxable profits. These rules provide a tax advantage to landlords over homebuyers, who cannot offset any mortgage interest against their income. Therefore with effect from April 2017, the tax relief available on mortgage interest will be restricted to the basic rate of income tax (20%) for all individuals. This should not have any impact on non-resident landlords, who pay UK income tax at 20% in any case.
Wear and tear for furnished rental properties
Currently, landlords of properties that are let to tenants fully furnished are able to deduct an amount equal to 10% of the rental income from their profit as “wear and tear”, irrespective of their actual expenditure. From April 2016, this allowance will be replaced with a new system that will only allow the landlord to deduct the actual costs of replacing furnishings.
Inheritance Tax – Enveloped Residential property
The Government have introduced anti avoidance measures to target the ownership of UK residential property held directly or indirectly by non-UK domiciled individuals or their excluded property trusts.
Under the current rules, UK residential property held via offshore companies can be treated as ‘excluded property’ for inheritance tax purposes. Excluded property, held by non-domiciled individuals or offshore trusts, is currently outside the scope of UK inheritance tax; With effect from 6 April 2017, new measures will be introduced that will prevent any offshore company, deriving its value directly or indirectly from UK residential property, from being treated as excluded property for inheritance tax purposes. In other words, the value of any company falling within this definition will be within the scope of a UK inheritance tax charge for any chargeable event. This would include the death of the individual, or the transfer of the shares to a trust, or where there is a gift of the shares to an individual where the transferor dies within 7 years of having made the gift. In addition there will be a tax charge on offshore trustees on every 10 year anniversary or if the shares are distributed by the trustees.
Diversely held vehicles used to hold UK residential property are not within the scope of these reforms. It is intended that this exemption shall closely follow that provided within the Non-Resident Capital Gains Tax regime.
General Inheritance tax changes
A new tax free “main residence” nil-rate band will be introduced for inheritance tax purposes. The new allowance will apply to estates where the deceased had an interest in a residential property, which had been their residence at some point, and it is left to one or more direct descendants (e.g. children or grandchildren) on their death. The allowance will be phased in from April 2017 and will be set at £100,000 initially. It will increase annually until it reaches £175,000 in April 2020 and will be uplifted for inflation each year thereafter. This allowance will be available to supplement the existing inheritance tax threshold of £325,000.
In a similar way to the existing nil-rate band, the main residence nil-rate band will be transferable between spouses where the second spouse dies on or after 6 April 2017. This measure will increase the inheritance tax threshold for home-owning married couples to £1 million from April 2020.
Taxation of Dividends
From April 2016, the system of applying a “10% notional credit” to dividends will be abolished and replaced with a £5,000 tax free allowance on dividends each year. It is anticipated that dividends received will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers or 38.1% for additional rate taxpayers.
Corporation Tax Changes
Corporation tax will be cut to 19pc in 2017 and then 18pc from 2020. That is down from 28pc when he took over as Chancellor in 2010.
Small firms' NI contributions will fall, with a £3,000 employment allowance. So a small firm can hire four staff on the national Living Wage and pay no national insurance.
The annual investment allowance, which was a temporary tax break for firms, will be set at £200,000 permanently from January 2016.
With effect from 8th July 2015, profits falling within the UK’s “Controlled Foreign Companies” regime will be subject to further tax restrictions. These rules will affect companies who are considered to have diverted profits away from the UK through the use of group companies.
As a political move, the government are seeking to implement additional measures aimed at tackling tax avoidance. The Chancellor has confirmed that HMRC are to be given an additional £750 million of funding in order to achieve their aims, paying particular attention to wealthy individuals and corporates. How they plan to do this is unknown, but a consultation on the subject is planned.
The consultation, will be undertaken ahead of Finance Bill 2016, and will concentrate on introducing tougher measures for individuals who ‘persistently enter into tax avoidance schemes that fail, and intends to introduce measures to “name and shame” those people. Moreover, the Government proposes a new penalty in respect of the General Anti-Abuse Rule (“GAAR”) that will be calculated as a proportion of the tax recovered. This will be implemented in the Finance Bill 2016 along with plans to strengthen the GAAR further. It is also intended to crack down on disguised employment through the use of personal service companies by improving the effectiveness of the current legislation.
Income tax changes
A new tax lock to prohibit increases in main rates of income tax, national insurance or VAT for five years will be legislated for in coming weeks
Tax-free personal allowance will be raised from £10,600 to £11,000 next year, as a step towards a target of £12,500. In addition the threshold for 40p rate rose from £42,385 in this tax year to £43,000 in 2016-17, on its way to the £50,000 target.
Services we offer
We are pleased to able to offer the following taxation based services: -
All taxation services are arranged on a fixed fee basis with the fee to be charged agreed in advance of any work being undertaken.
For all questions regarding your business in the UK and tax planning, please contact our Business Consultancy team at Law Firm Limited on +44 (0)20 7907 1460 or via email