In this year’s budget George Osborne announced a number of measures to help what he appeared to refer to as “insurgent” rather than “resurgent” businesses. Perhaps he was confusing ISAs with ISIS!
The Lifetime Allowance will be lowered from £1,250,000 to £1,000,000 from April 2016. Protection schemes will be made available as has been the case in previous years. The Annual Allowance remains at £40,000.
There have been no new announcements yet about the small print on how “pension freedom” will work. The point I made after the 2014 budget about the concept of “unauthorized payments” apparently disappearing has not been addressed, so this may still be valid. If this is the case, recycling of tax free cash and investing in a company with “taxable property” may still be possible without unfortunate tax consequences. As I stated last year, though, this would be extremely aggressive even if it does prove to be possible.
There was also no further detail on the plans to allow annuity holders to sell on an existing annuity, which was announced just before the budget. The annuity holder will not be allowed to sell it back to the provider. The provider will need to give permission for the transaction to take place, and this permission could be withheld. A secondary market will have to develop before this “annuity sale” promise can become a reality.
Taxation of inherited annuities will be reduced. If the deceased was under 75 the income will be tax free and if 75 or over it will be taxed at the recipient’s marginal rate.
The Personal Allowance and Basic Rate Limit for 2015/16 have already been announced (£10,600, and £31,786 respectively). For 2016/17 they will be £10,800 and £31,900. In 2017/18 they will be £11,000 and £32,300.
The Income Tax rates all remain unchanged, as does the £100,000 limit for Personal Allowance and the £150,000 threshold for the additional rate of 45%.
There is no change in the way the transferable tax allowance for married couples will work. As previously announced, a couple may transfer up to 10% of the Personal Allowance from one person with taxable income below the allowance, to the other person provided that person is a basic rate taxpayer. This will be worth up to £212 this year, rising to £220 in 2017/18. You should note that this is not automatic. You must apply for it, otherwise you will not receive this benefit. You can register online, and the HMRC site is already taking applications.
From April 2016 there will be a new “Personal Savings Allowance”, allowing completely tax free savings income. This will be the first £1,000 of interest on savings for basic rate taxpayers, and the first £500 of interest on savings for basic rate taxpayers. Additional rate taxpayers will not have a Personal Savings Allowance. The Personal Savings Allowance replaces the current “Starting Rate” of 10% on savings income, which is restricted to taxpayers who have little taxable income other than from savings. Banks and Building Societies will no longer deduct tax from interest payments from that date.
There is a £50 a year trivial benefits cap for ordinary employees, but this increases to £300 for “office holders”. “Office holder” is not defined in law, which has caused some problems with the interpretation of IR35 legislation. In Edwards v Clinch , the judge described an office as “a post which can be recognised as existing whether it be occupied for the time being or vacant…it need not be capable of permanent or prolonged or indefinite existence, but it cannot be limited to the tenure of one man.” It would probably be reasonable to assume the higher limit only applies to company directors.
The Chancellor announced the intention to abolish Class 2 National Insurance for the self-employed. This will be welcome news for many small businesses. The timing of this proposal will be discussed later in the year. In the meantime the rate of Class 2 NI will increase.
Digital Tax Accounts
Between early 2016 and 2020 a “digital tax account” is being introduced. This will allow individuals and small businesses to maintain their transactions online and to have an ongoing updated view of their overall tax liabilities, including Income Tax, National Insurance, and VAT. This will avoid the need to submit a tax return.
One of the aims of the new digital tax account is to reduce duplication. Once the information is online there will be no need to keep supplying it to HMRC for different purposes.
If this is managed well it should mean a reduction in workload, and therefore also in accountancy fees. It could, however, have the opposite effect if the integration with accounting software does not work as well as planned.
The aim is also to allow taxpayers to use their digital tax account to monitor the effect their National Insurance contributions are having on their ultimate state pension benefits.
At the moment tax payment can be deferred significantly through the use of the annual tax return system. A self-assessment tax liability arising, for example, on 6th April 2015 would not actually be payable until 31st January 2017. With the new system the government has indicated businesses will be able to make tax payments as they go, thus avoiding a large liability arising on 31st January. This is presented as an “option” and as a benefit to the business. It seems likely, though, that we will gradually move to a position where “pay as you go” becomes compulsory rather than optional. A big cash flow benefit for the Treasury – but a distinct cash flow disadvantage for the taxpayer.
The NISA limit from April 2005 is marginally increased (from £15,000 to £15,240) as is the Junior ISA and Child Trust Fund (from £4,000 to £4,800).
From this autumn it will be possible to take money out of a NISA and it will not be treated for tax purposes as a new investment as long as it is put back in within the same tax year.
The government is exploring the possibility of expanding the allowed NISA investments to include crowd funded loans and equities.
A new “Help to Buy ISA” has been announced. This will be available for anyone over 16 wishing to buy their first home. At the time of the house purchase, provided the price does not exceed £250,000 (or £450,000 in London), the government will add a £50 bonus to every £200 saved into the ISA. This does not appear to be the same, though, as a 25% bonus, as my reading of the announcement is that the bonus will not reflect any growth in the meantime within the ISA. The Help to Buy ISA can be set up with an initial investment of up to £1,000 and a maximum regular investment of £200 a month.
There is no change in the Nil Rate Band or the rate of Inheritance Tax.
Every year it has been suggested that the government might attack Deeds of Variation but until this year’s Budget they have been left well alone. The Chancellor has now announced the intention to review them, with a report to be issued in the autumn. It looks as though the writing is on the wall for this very helpful “loophole”.
Last year the government announced plans to stop tax avoidance through the “Rysaffe” principle. Under this principle a series of trusts can be set up on different days and each trust has its own Nil Rate Band. The proposed new rules will aggregate those trusts if they are settled on the same day, which will be the case if they are settled on death through a provision in the will. You can still take advantage of Rysaffe if you execute your will before 31st December 2015 – but you will then have to make sure you die before 6th April 2017! Alternatively, you could set up a large number of trusts each of which is intended to receive £5,000 or less, as the government has announced this as the “de minimis” limit for the new regulations. All of this, though, is to be legislated in “a future Finance Act”, rather than in the 2015 Finance Act and there is no certainty the small print will mean everything works as announced.
Capital Gains Tax
The Capital Gains Tax rates are unchanged, but from April 2015 there is a marginal increase in the tax free Annual Exemption (from £11,000 to £11,100). The Annual Exemption for trusts remains at 50% of the personal Annual Exemption.
The Entrepreneurs Relief rules have been tweaked to close a couple of avoidance loopholes. Firstly, the relief is only available to an individual who holds at least a 5% stake directly in the trading business and who disposes of at least 5%, and is not available if it is held through a partnership or joint venture. Secondly, where personal assets used in the business are disposed, this must be at the same time as disposing of at least 5% of the business. These rules came into effect for all disposals from 18th March 2015.
Private Residence Relief on a foreign property will now only be available for years where the taxpayer can show he or she spent at least 90 days in that property.
For a wasting asset to be exempt from Capital Gains Tax it must have been used by the owner in his or her own business. This change was triggered by the loan of a Sir Joshua Reynolds painting by its owner to a stately home, and the successful claim on the owner’s death that the painting, sold for over £10m, was “plant and machinery” of the home and therefore subject to the “wasting asset” exemption.
Corporation Tax will be a flat 20% from April 2016, as previously announced.
There is new anti-avoidance legislation to make it more difficult for companies to get around the “same trade” requirement when carrying forward losses. This will be applicable for accounting periods beginning on or after 18th March 2015.
Capital allowances will no longer be available on a sale and leaseback transaction. This applies where the contract was entered into on or after 26th February 2015.
Research and Development tax credits for small and medium sized enterprises will be increased from 225% to 230%. There is no change in the credits for larger companies.
Enterprise Investment Schemes (EIS) now only apply where the company is less than 12 years old, unless the new investment will lead to a substantial change in activity. The rules on EIS funding for a company which previously received Seed EIS (SEIS) funding have now been relaxed – the requirement to have spent at least 70% of the SEIS funding first has now been removed.
From April 2016 bad debt relief will be available for any peer to peer lending that goes bad, provided the bad debt arose after April 2015.
There will be a surcharge on any underpaid tax which is a result of a failed avoidance scheme used by a “serial avoider”.
Finally, we note that beer drinkers are being encouraged by the tax charges to drink weaker beer (6% less tax for low strength beer, but only 0.75% less tax for high strength beer), but wine drinkers are being encouraged to drink stronger wine (no tax change for “normal” wines, but a tax reduction where the alcohol content is over 22%).