14/07/2015 by David Gibbens, Director, Poole Waterfield
The Summer Budget 2015 will surely go down as one of the most radical and surprising in living memory. Few, if any budgets that I can recall have included as many far-reaching measures impacting so heavily on businesses, shareholders, landlords, property owners and the general public alike. This was genuinely a “sea change” moment for us all and making the best of these changes is the challenge that lies ahead, particularly for business people and their advisers.
Those hoping for a business friendly budget will have been disappointed by what emerged on 8th July - it was very far from being that. The best you can say is that it was a mixed bag but with some very clear general themes emerging:
- A move away from state funding with the burden instead being placed on others such as employers.
- A tightening on tax efficient profit extraction and something of an attack on one- person companies.
- Reforms to welfare payments.
- Further changes to pensions and the possibility of even more fundamental changes to come.
- Significant changes for landlords.
Who will be affected and how?
This was a big and busy budget with all sorts of changes impacting on just about everyone in the country. As always our focus is on business and here the headlines were stolen by the Living Wage, requiring all employees over the age of 24 to be paid at least £7.20 per hour from April 2016, rising to £9 by 2020. Whatever the rights and wrongs of this change, it will be a real concern for some employers.
A measure to help some employers came in the form of an increase in the Employment Allowance from the current level of £2,000 to £3,000 from April 2016. This allowance will no-longer be available to one-person companies and combined with the changes to dividends (discussed later) will dent the tax efficiency they previously enjoyed.
For companies there was a welcome reduction of the Corporation Tax rate to 19% but only starting in April 2017, followed by a further reduction to 18% from April 2020. There was however the removal of the deduction made against taxable profits when amortising goodwill. This will only affect goodwill acquired after the budget date.
For businesses generally, the hope that the Annual Investment Allowance (which gives full tax relief on plant acquired up to the annual limit) would be at a fixed level was realised. Unfortunately this was in the form of a significant reduction from the current level of £500,000 to £200,000 from January 2016. This lead in period may present an opportunity for those considering major equipment acquisitions to think about the timing of those if they are likely to exceed the new level of £200,000 – but get advice first as the rules are complicated when the AIA levels change.
The rules governing how dividends are taxed will change markedly from April 2016. There will be a new £5,000 dividend tax allowance and banded rates of tax for dividend earnings above that threshold, these are to be set at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for those on additional rates. The impact of these changes will depend on individual circumstances but overall this will make dividends less attractive in future, so careful thought will be needed when planning dividend payments for the rest of this tax year before the new changes come into force.
Pensions is another area the Chancellor seems to relish reforming and it is clear that he is keen to restrict the tax benefits from making pension contributions for those on high incomes or with large pension pots. Among the changes from the budget is a tapered reduction in the annual allowance for tax relieved contributions for those with adjusted incomes above £150,000, with the normal £40,000 allowance reduced by £1 for every £2 of excess income (subject to a minimum allowance of £10,000). The lifetime allowance for tax advantaged pension rights will reduce from £1.25million to £1million from April 2016 but with transitional protection in place for those with a pension pot already above the £1million figure.
The Chancellor has indicated that further radical reforms could be on their way and that using pension contributions as a tax planning tool may not be with us for long.
Landlords also have a few changes to contend with including the restriction of tax relief on interest paid to finance their letting business. For tax year 2017/18 the amount of interest that will be eligible for relief at the marginal rate will be restricted to 75%, reducing to 50% and 25% in the succeeding years and from April 2020 only basic rate tax relief will be available for interest. The balance of the interest will be eligible for 20% tax relief. Another potential blow is the abolition from April 2016 of the 10% wear and tear allowance on net rents received for furnished lettings, however relief will instead come in the form of the ability to claim the actual cost of replacing furnishings. You may wish to think about delaying any qualifying expenditure until after the new rules come in.
Those renting out a room, or even some bed and breakfast businesses, may benefit from the extension of the rent a room relief from the current £4,250 limit to £7,500 from April 2016.
Whilst on the subject of property this budget saw the expected introduction of the additional Inheritance Tax nil rate band to be applied to the value of a home left on death. As feared, this is quite a complex change but to summarise, when the measure is fully in place in four years time, a couple will be able to pass on a family home of up to £1million without IHT, however there will be restriction on applying this to estates worth in excess of £2million. Welcome as this is several commentators are saying that a simple increase in the general IHT nil rate band would surely have produced a better outcome all round.
One change that perhaps hasn’t had the coverage it deserves is the huge increase to Insurance Premium Tax from 6 to 9.5% from November 2015. This may be something to discuss with your broker and explore whether there is scope or benefit in extending insurance periods beyond the norm to take advantage of the current rate of IPT.
Some final thoughts
This was the first fully Conservative budget in almost twenty years and it managed to take many by surprise. The far reaching implications of the measures introduced by George Osborne will be felt across the country and taken together represent a major shift in fiscal policy. Despite some useful changes it was not a "good news" budget for business.
Where Mr Osborne has been helpful is to give plenty of notice for many of the changes he has introduced. This provides welcome breathing space to accommodate the changes but also scope to plan to take best advantage of the current situation while it is still available.
Category: David Gibbens Blog Author: David Gibbens, Director, Poole Waterfield