How Does the Summer Budget (July 2015) Affect My UK Taxes?
The Chancellor of the Exchequer gave his Budget to Parliament on Wednesday 8th July and introduced a number of tax changes that could potentially have a big impact on many UK taxpayers.
We have summarised below what we believe to be the key tax changes in this July 2015 budget:
Change to Permanent Non-Dom Status
- From April 2017, individuals who have lived in the UK (considered resident) for 15 out of the past 20 tax years will lose their ability to claim the Remittance Basis of taxation.
- The Remittance Basis of taxation currently allows individuals to be resident in the UK but excludes their non-UK income and capital gains form UK taxation if they are considered non-domiciled and they do not remit their offshore funds to the UK.
- Generally, after a certain amount of years claiming the Remittance Basis, individuals have an option to tax their worldwide income in the UK (Arising Basis) or to pay a flat charge to HMRC to remain on the Remittance Basis and exclude their overseas income and gains from UK taxation.
- This charge increases even further after a certain amount of years but the new changes mean that, once individuals have been UK resident for 15 out of the past 20 tax years, they will no longer be able to claim the Remittance Basis.
- From April 2017, individuals who were born in the UK to UK-domiciled parents will no longer be able to claim the non-domiciled status if they left the UK but then returned and became UK resident again.
The Chancellor claimed that these changes to the non-dom rules would bring an additional £1.5 billion in annual tax revenue.
Increase in Tax Rate on Dividends paid to Directors
- From April next year, the Chancellor confirmed that the system of dividend tax credits will be replaced by a much simpler method of new dividend tax rates and an annual dividend tax-free allowance of £5,000.
- Currently, dividends are grossed up by 100/90 and that amount is then either taxed at 10% (for basic rate taxpayers), 32.5% (for higher rate taxpayers) or 37.5% (additional rate taxpayers). The grossed up portion of the dividend is then taken as a tax credit (please note that this credit cannot be taken as a credit for US tax purposes).
- Under the new system there will be no grossing up of dividends and any dividend income exceeding £5,000 will be subject to a charge of 7.5% for basic rate taxpayers and 32.5% for higher rate taxpayers.
- This change will have the largest effect on directors of companies and individuals who have substantial amounts of investment income.
- Dividends from most UK companies are normally qualified dividends from a US tax perspective (subject to NIIT) and thus have a lower tax rate.
Increase in Tax-Free Personal Allowance & Higher Rate Tax Threshold
- From next year, Chancellor Osborne promised to increase the higher rate of income tax threshold from £42,385 to £43,000.
- The tax-free personal allowance for individuals is set to increase from 10,800 to £11,000 April next year
- The personal allowance is expected to continue to increase to £12,500 by 2020/2021.
Inheritance Tax Threshold Increase
- From April 2017, the inheritance tax threshold is set to increase from £325,000 per person to £500,000. This amount will also be transferable to a surviving spouse or civil partner.
- This means that married couples and civil partners will be able to pass on assets worth up to £1 million, including a family home, without paying Inheritance Tax.
- This is a welcome change as many have been concerned due to the increase of property prices in London that their estate will be subject to the 40% inheritance tax upon their death.
Restriction on Mortgage Interest Payments for Landlords
- From April 2017, buy-to-let landlords will no longer be able to claim the higher rate of tax relief on their monthly interest payments, only the basic rate.
- Currently, landlords can offset all of their mortgage interest payments against their rental income. However, the new system proposes to cut the relief to the basic rate of tax and will be gradually faded in from April 2017.
- There is concern that landlords will just increase their rents to compensate for the loss in interest relief and that there will be no benefit for home buyers in the market.
Corporate Tax Rate Decrease
- Currently, the UK corporate tax rate is 20% but the Chancellor announced that this would be decreased to 19% in 2017 and 18% by 2020.
Taxation of Carried Interest
- Effective from 8th July 2015, amounts which arise due to investment fund managers by way of carried interest will be charged at the full rate of UK capital gains tax (i.e. 28%), with only limited deductions allowed.
- Previously managers were only taxed at 18% or less on their carried interest.
If you need advice with your UK tax returns, please contact us.