There continues to be a wide range of taxation reforms impacting individuals. A summary of these measures is set out below. Recent reforms have focused on residential property and real estate, pensions, income tax, domicile and residence, and anti-avoidance.
Because the United Kingdom (UK) legislative process can lag behind the announcement of proposals, certain changes are already law, others are very likely, or practically certain, to become law, whilst others are issues have been announced for wider consultation and future enactment into law.
Most of the reforms to tax rules are typically announced in November/December and March each year before becoming law in the Finance Act, usually in the following July. This pattern is disrupted in years of a general election. So, a truncated Finance Act 2017 became law in April 2017 ahead of the June 2017 general election. A second, and more extensive, Finance Act is expected to become law later in 2017. This will likely include enactment of a range of reforms previously announced, possibly together with other measures, but possibly with amendments to the original proposals. Several of those reforms are intended to be effective from 6 April 2017. Any reforms of significance, and proposals for important reforms, included in those processes, are discussed below.
In a referendum on 23 June 2016, voters in the United Kingdom chose to leave the European Union (EU) (so-called ‘Brexit’). The United Kingdom invoked Article 50 of the Treaty on the Functioning of the European Union (TFEU) in March 2017, and this triggered a two year exit procedure. The implications will depend to a substantial extent on the terms on which exit is agreed and, therefore, remain unclear at this stage. The information included below assumes, for now, the continuance of the UK’s membership in the European Union. Comments on the impact of leaving the European Union would be entirely speculative.
The rules around the taxation of non-UK domiciled individuals ('non-doms') were due to change from 6 April 2017; however, the relevant clauses were excluded from the truncated 2017 Finance Bill. As stated above, these measures are likely to be included in a post-election summer Finance Bill. If these measures are re-introduced in a summer 2017 post-election Finance Bill without amendment, the non-dom status will not be abolished, but will now be limited to 15 years. Where an individual has been resident in the United Kingdom for more than 15 of the last 20 years, they will be deemed domiciled in the United Kingdom for all taxes. This means they will no longer be able to claim the remittance basis from this point onwards. Individuals who have previously claimed non-dom status will, therefore, pay tax on their worldwide income and gains, as well as be subject to inheritance tax on their worldwide assets, in the same way as UK domiciled individuals. It also means a child who lived with non-domiciled parents in the United Kingdom would be deemed domiciled by adulthood.
The rules will also change for individuals who were domiciled in the United Kingdom at birth, but have subsequently left the United Kingdom and acquired a domicile of choice overseas. Currently, it is possible for that individual to return to live in the United Kingdom whilst retaining one's overseas domicile, and therefore access the remittance basis. If the relevant clauses are included in a post-election Finance Bill, it is likely that, from April 2017, anybody who was domiciled in the United Kingdom from birth will be taxed as if they were still UK domiciled when they resume their UK residence, even if they remain domiciled in the overseas territory under general law.
UK residential property owned by non-resident companies and other non-UK resident structures
Currently, non-doms, or excluded property trusts, that own UK residential property through companies, partnerships, or other opaque vehicles, do not pay inheritance tax (IHT) on the value of the property, as the relevant asset for IHT purposes is non-UK situs. Again, if the relevant clauses are included in a post-election Finance Bill, it is likely that, from 6 April 2017, IHT will be chargeable as if the individual or trust owned the property directly. This means that IHT will be chargeable in a number of additional circumstances, for example, where the individual dies whilst owning such a company's shares, where such a company's shares are gifted into trust, and on the ten-year anniversary of the trust if the trustees own shares in a non-UK resident company that in turn owns a UK property.
Inheritance tax (IHT) on family homes
Measures designed to remove the majority of family homes from the IHT net, where the residence is left to children or grandchildren on death, have been introduced. An additional 'main residence' nil rate band (NRB) has been introduced, effective from April 2017, that can only be used on death in connection with a property that has been the main residence. This additional NRB will initially be at a maximum rate of 100,000 pound sterling (GBP) per person in 2017/18, increasing by GBP 25,000 each year to a maximum GBP 175,000 from 2020/21, at which point spouses/civil partners will each have a total NRB of GBP 500,000, when this new amount is combined with the existing IHT NRB of GBP 325,000. Post 2020/21, the amount will be increased in line with the consumer price index (CPI). This additional element of the NRB starts to be reduced where the net value of the estate is over GBP 2 million and is reduced to nil for estates worth more than GBP 2.35 million.
The current NRB of GBP 325,000 is frozen until 2020/21.
Any part of the NRB, including the main residence NRB, that is not used on the death of the first spouse/civil partner can be carried forward (if a claim is made) and used on the second death, provided the second death occurs post 6 April 2017. This is the case even if the first spouse/civil partner has died.
The main residence NRB will also be available if the deceased has downsized to a smaller property, or ceases to own a home, after 8 July 2015, provided the new property (if applicable) and other assets of equivalent value to the old property are left to direct descendants.
Buy-to-let investment properties
Previously, landlords who were individuals could deduct certain expenses from their rental profits in order to calculate their taxable profit. This means that higher rate taxpayers received tax relief at 40%, or 45%, on their expenses. This restriction in tax relief, which includes mortgage interest, is being phased in over four years starting 6 April 2017. The relief will be restricted to 20% for all individuals by April 2020.
Anti-avoidance regarding trading in and developing UK land
Since 5 July 2016, gains arising on the sale of land is now much more likely to be treated as trading income than as capital gains.
Here is an abbreviated list of some of the groups that could be affected:
- Profits realised by property investors following a change of intention. For example, getting planning permission on land may mean that clients fall into trading rather than investment tax treatment on disposal in respect of part of the profit.
- Sales of shares in UK or offshore companies holding property for trading or investment may be taxed as trading rather than capital where the main purpose was to realise a gain on the sale.
- Many UK tax resident companies fund the development of land with loans affiliates. Interest on these loans may now be disallowed. UK resident Joint Venture (JV) companies will often be affected.
- Overseas companies trading in or developing UK land did not always previously have taxable UK permanent establishments (PEs). These companies will now be taxed when they make disposals. Group relief will not be allowed to reduce this charge.
The sale of property or property rich shares is more likely to be treated as investment rather than trading. Where capital gains treatment does not apply indexation allowance, substantial shareholder exemption and entrepreneurs' relief will not be available.
These rules are very wide and complex. Professional advice should be sought if there is a possibility these rules could apply.
Taxation of different forms of remuneration
At the 2016 Autumn Statement, the government announced that it will consider how benefits in kind are valued for tax purposes. A consultation on employer-provided living accommodation and a call for evidence was published in December 2015, and we are still waiting for the outcome of this consultation at the end of May 2017.
Since April 2017, the tax and employer National Insurance advantages of salary sacrifice arrangements have been removed so that the salary sacrificed is subject to the same tax as cash income. There are exemptions, including arrangements relating to pensions, childcare, Cycle to Work, and ultra-low emission cars. Arrangements in place before April 2017 are protected until April 2018, and arrangements for cars, accommodation, and school fees are protected until April 2021.
Tax on dividends
Dividend tax credits have been abolished and replaced by a GBP 5,000 tax-free dividend tax allowance, effective from 6 April 2016. Tax rates on dividend income in excess of the GBP 5,000 allowance are 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.
The dividend allowance is not a tax-free allowance like the main personal allowance; it is, in fact, a nil rate band. The dividend allowance will not reduce total income for tax purposes. Dividend income that is within the ‘allowance’ will still count towards an individual’s basic and higher rate limits.
From April 2018, the dividend allowance will fall from GBP 5,000 to GBP 2,000.
Higher rate threshold
The 40% higher rate threshold is GBP 45,000 in 2017/18.
The personal allowance is GBP 11,500 in 2017/18.
Since 6 April 2015, the starting rate for savings income is 0% (previously 10%), and the maximum amount of savings income that can qualify for this rate is GBP 5,000.
Since April 2016, those earning more than GBP 150,000 have a reduced annual pension contribution allowance, effectively restricting their tax relief on pension contributions. The size of the annual allowance is being gradually reduced from GBP 40,000 to GBP 10,000 for those earning GBP 150,000 a year or more. Since 5 April 2016, the lifetime allowance is GBP 1 million.
Tax avoidance and evasion
The Treasury has committed to increased spending across Her Majesty’s Revenue and Customs (HMRC), allowing it to focus on tackling tax evasion, avoidance, and non-compliance. In particular, spending will allow HMRC to create specialist personal tax units to target serious non-compliance by trusts, pension schemes, and non-doms, as well as a more general extension of the customer relationship model for individuals with wealth between GBP 10 million and GBP 20 million.
National insurance contributions (NICs) for under 21s
The NICs upper earning limit is aligned with the higher rate threshold.
The employer (secondary) NIC threshold and the employee (primary) NIC threshold has been aligned from April 2017. Both employees and employers start paying NICs on weekly earnings above GBP 157. Class 2 NICs will be abolished from April 2018.
Since 6 April 2015, employers are no longer required to pay Class 1 secondary NIC on earnings paid up to the upper earnings limit to any employee under the age of 21.