The second UK Budget of 2015 contained some rather unexpected announcements which should not be ignored, writes Adam Thompson. Many will not directly affect expats but they certainly need to be noted by those returning to the UK
Free from the shackles of coalition, on 8 July 2015 George Osborne delivered the first Conservative Budget for 18 years.
Prior to the Budget, expectation was that we would see reforms to inheritance tax, reforms to non-domicile status and cuts to welfare spending.
What has been delivered has not disappointed on those areas, but Mr Osborne has excelled himself with vast swathes of additional measures also introduced. There are some key points for expats.
Taxation of Dividends
- The government will abolish the 10% dividend tax credit from April 2016.
- This means that for basic rate taxpayers, dividends are no longer tax free.
- However, the Chancellor will introduce a new dividend tax allowance of £5,000 per year. This means that an individual can receive up to this amount in dividends without a charge to tax.
- Dividends in excess of the £5,000 allowance will be subject to income tax. The rates of tax depend on the overall level of income. For basic rate taxpayers the dividend rate is 7.5%, this increases to 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
- From 6 April 2016 an allowance will be introduced to remove tax on up to £1,000 of savings income for basic rate taxpayers and on up to £500 for higher rate taxpayers.
- Also from April 2016, all UK banks and building societies will cease automatic deduction of 20% income tax. This could well remove the requirement for many to submit tax returns simply to reclaim tax deducted on interest.
Income from Rental Property
For the second time in as many years there has been a monumental change announced to the relief available for the repair and replacement of fittings and furnishings in residential properties.
To re-cap, prior to 6 April 2013, the landlord of a furnished residential property had a choice when they came to replace items in the property. They could either claim the renewals basis (deduct the cost of the replacement item from rental income) or claim a wear and tear allowance (calculated as 10% of gross rental income less council tax etc.).
For part or unfurnished properties, the wear and tear allowance was not available and so only the renewals basis applied.
From 6 April 2013 the renewals basis was abolished. This meant that only the wear and tear allowance was available and therefore only landlords of furnished properties could get any relief.
The one exception to this rule is that relief can be claimed for any item that qualifies as a fixture. Primarily this means that relief can be claimed where fitted appliances are replaced as they are deemed to be part of the entirety of the property.
From April 2016:
- The 10% wear and tear allowance for furnished properties will be abolished.
- Instead, residential landlords will be able to deduct the actual costs of replacing furnishings – in other words a reinstatement of the old renewals basis.
- It is important to note that both the old and new relief only apply to fully furnished properties. No allowances will be available for part-furnished or unfurnished properties, besides for the fitted appliances as outlined above.
- Capital allowances will continue to apply for landlords of furnished holiday lets.
Perhaps the biggest change to the taxation of rental income is that the amount of relief for mortgage interest that individual landlords of residential property can claim will be restricted to the basic rate of tax. This will be phased in over a four year period.
- The lifetime allowance will be reduced from £1,250,000 to £1,000,000 from April 2016. Transitional protection for pension rights already over £1,000,000 will be introduced at the same time.
- The lifetime allowance will be indexed annually in line with the consumer prices index from April 2018.
- The annual allowance will be tapered from £40,000 to a minimum of £10,000 from April 2016 for those with incomes, including pension contributions, above £150,000.
As expected the Chancellor announced various changes to the inheritance tax regime. The major expectation pre-Budget was that we would see an increase in the nil rate band to £1 million for married couples – in other words an increase from £325,000 to £500,000 each.
What was actually given was a somewhat watered down version of this. The key points are:
- An additional nil rate band will be introduced when a residence is passed on death to direct descendants. This will be £100,000 in 2017/18, £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21.
- The additional nil rate band will also be available when a person downsizes after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil rate band, are passed on death to direct descendants.
- There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million.
- The nil rate band will continue to be frozen at £325,000 until April 2021.
- An individual who is classed as non-domiciled will now become deemed domiciled for inheritance tax purposes if they have been resident for 15 or more of the last 20 years.
Adam Thompson is Tax Manager, The Fry Group