The main tax changes in Wednesday’s Budget are as follows:
This was the first shock announcement in the Budget:
Landlords who are higher-rate taxpayers or additional rate taxpayers will no longer be able to deduct all of their interest costs from their property income. Instead interest relief on residential properties will be restricted to the basic rate of income tax. It is expected that 1 in 5 landlords will receive less relief as a result.
The change will be introduced gradually from 6 April 2017.
Interest deductions from property income will be restricted to:
- 75% for 2017/18
- 50% for 2018/19
- 25% for 2019/20
- 0% for 2020/21 and beyond
Individuals will then generally be able to claim a reduction in their income tax bill at the 20% basic rate for the interest costs not allowed as a deduction.
Other changes affecting landlords:
- From April 2016, the 10% wear and tear allowance will be replaced with a new relief that allows all residential landlords to only deduct the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets.
- Rent-a-room relief will be increased from £4,250 to £7,500 a year from April 2016.
Income Tax Rates
In 2016/17 the personal allowance will increase by £400 to £11,000.
In 2016/17 the higher rate threshold will be increased from £42,385 to £43,000 and the national insurance upper earnings limit will also increase to remain aligned with the higher rate threshold.
The corporation tax rate will be cut to 19% in 2017 and 18% in 2020.
From April 2016, the national insurance employment allowance will be increased from £2,000 to £3,000 a year.
From April 2016, companies where the director is the sole employee will no longer be able to claim the employment allowance.
The permanent level of the annual investment allowance will be increased to £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.
This was the second shock announcement in the Budget and is bad news for small company owners.
From April 2016 the government will abolish the dividend tax credit and replace it with a new £5,000 tax-free dividend allowance of £5,000 per year.
The tax rates for dividends will then be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
This is on top of the 20% tax paid by the company.
These changes will reduce the attraction of setting up a company and paying yourself dividends.
From April 2017, anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed UK-domiciled for tax purposes.
From April 2017 the government will also introduce new rules so that everybody who owns residential property in the UK and would otherwise pay inheritance tax on that property cannot avoid paying it by holding it in an offshore structure.
From April 2017 a new transferable nil-rate band will be introduced for family homes. This will apply when a main residence is given to direct descendants, e.g. children or grandchildren. The allowance will be up to £100,000 in 2017/18, rising to up to £175,000 in 2020/21.
This is in addition to the £325,000 inheritance tax nil-rate band, creating an effective £500,000 inheritance tax threshold in 2020/21.
As with the regular nil-rate band, any unused main residence nil-rate band can be transferred to your spouse, producing an effective inheritance tax threshold of £1 million by 2020/21.
The new main residence exemption will also be available when a person downsizes. For example, someone who downsizes to a home worth £100,000 could eventually leave the home and an additional £75,000 of tax-free assets to their children.
The main residence nil‑rate band will be reduced for estates with a net value of more than £2 million.
The Government is restricting the annual allowance (normally £40,000) for those with income over £150,000. This change will take effect from April 2016.
Help to Buy ISAs
Help to Buy ISAs will be available for first time buyers to start saving into from 1 December 2015.
From 6 April 2016 the ISA rules are being changed to allow individuals to withdraw and replace money from their cash ISA in-year without this replacement counting towards their annual ISA subscription limit. This policy will also cover cash held in stocks and shares ISAs.
Taxcafe – www.taxcafe.co.uk
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