username

password

Harcourt ChambersCafcass advertGarden CourtCoram Chambersimage of 4 Paper Buildings logo1 Garden CourtHind CourtDNA Legalsite by Zehuti

Home > Articles > 2015 archive

Family Law Week’s Budget Briefing, July 2015

Richard Holme, Chartered Accountant of Creaseys, a firm which specialises in advising family lawyers on tax related family law issues, explains the Budget changes of most relevance to family lawyers.

Richard Holme, Chartered Accountant, Creaseys














Richard Holme, Partner, Creaseys Chartered Accountants

This is the second Budget for 2015 and has been described as an "Emergency Budget".  Much of it is carried forward from the March 2015 Budget which, being before the Election, could not all be enacted at that time. 


Income Tax

The Chancellor announced a further increase in the tax-free Personal Allowance which will rise from £10,600 to £11,000 next year. This is a further step towards the Government's target of £12,500. The abatement of the Personal Allowance will continue at £1 for every £2 of an individual's income above £100,000 and taxpayers will then begin to suffer an effective marginal income tax rate of 60%.

Whilst the rates of income tax remain unchanged (with the exception of dividend income: see below), the point at which individuals will begin paying income tax at the higher rate (40%) will rise next year from £42,385 to £43,000. Around 130,000 people will no longer be taxed at the higher rate as a result of this increase.

The Chancellor also confirmed that the pre-election promise to "lock" the main rates of income tax, national insurance and VAT for the next five years will be legislated in due course.


Inheritance Tax . . . relaxations . . . for some

As anticipated, George Osborne has announced today that for deaths from April 2017, there will sometimes be less inheritance tax to pay on the family home provided this is left to a close relative (defined as children or grandchildren).  This will be phased in fully by 2020.  Up to £1m may be left tax free by a married couple in certain circumstances rather than the existing £650,000 nil rate bands.  There is potentially therefore a tax saving of £140,000 or so for certain married couples.  However, this increased nil rate band is tapered if an individual's total estate is more than £2m (this means a marginal 60% inheritance tax rate on certain estates!).

There is some provision for those who "downsize" their house on or after 8 July 2015.

No increase in the nil rate band of £325,000 (per individual) has been announced, meaning that there is no rise for the eighth year running . . . and we are told, until at least April 2021.

As ever, careful planning is needed to mitigate inheritance tax for families and with continuing consultation on the tax effective use of deeds of variation (which vary wills after death) it is vital that individuals take steps to ensure that their wills are not only in line with their wishes but are tax effective.  There are a plethora of reliefs from inheritance tax for business and agricultural property, for example, but the conditions are tightly worded and enforced and merit the taking of accountancy advice.

A spouse separating will need to look to consider changing their will at an early stage, to reflect future priorities.  It is only when they divorce that provision in a will for a past spouse becomes invalid.


Property income

Finance costs
With effect from April 2017, relief will gradually be withdrawn for interest paid on borrowings related to property letting by individuals. This will be implemented as follows:

For these years, the balance of finance costs incurred will obtain relief at basic rate only, and from 5 April 2020, relief will be available only at basic rate for all finance costs.  Full interest relief will remain available for the letting of property which qualifies as furnished holiday accommodation.

This change provides a further incentive for property letting to be carried out through companies in future, where full relief is given for the interest, and tax is payable at 20% on net income, reducing in line with the rate changes also announced today, rather than at personal tax rates of up to 45%.  We have advised a number of clients on this possibility already. The detailed rules will result in some complicated calculations where losses/interest are carried forward.


Rent-a-Room
For many years, an individual who receives income from the letting of one or more rooms in their only or main residence, has been able to receive up to £4,250 of such income free of tax.  This limit was today increased substantially to £7,500 with effect from 6 April 2016.  There are detailed rules where more than one person is entitled to the income, or where the income is in excess of the exempt amount.

This is a generous increase, and provides an alternative for those who might otherwise be thinking of down-sizing to release capital for investment.

Wear & Tear Allowance
Landlords who have let their accommodation furnished are able to claim an allowance to cover the cost of providing furnishings.  The allowance is 10% of rent received less expenses suffered by the landlord which would normally be paid by the tenant.  This is a very convenient and easy to operate method of obtaining relief for these costs, although one could consider it somewhat arbitrary.  The relief will not be available from 6 April 2016, and will be replaced by a relief which relates more directly to the replacement of furnishings.

Whilst this proposal should result in a fairer relief, in that deductions will only be available where expenditure is incurred, and will be proportionate to that expenditure, it will result in more detailed calculations being required.


Non-domiciles

The Government has announced that from April 2017, anyone who has been resident in the UK for more than 15 of the last 20 years will be deemed to be domiciled in the UK for all UK tax purposes (income tax, capital gains tax and inheritance tax).  This will mean UK resident non-doms will be subject to UK income tax on their worldwide income and gains from their 16th year of residence and to UK inheritance tax from the same point on their worldwide assets (one year earlier than under the current rules).


Capital Gains Tax . . . no changes

Despite rumours of a mooted increase in the rate of capital gains tax, no changes were announced by the Chancellor. Rates therefore remain at 18% for gains made by basic-rate taxpayers, 28% for higher/additional rate taxpayers and 10% for those claiming Entrepreneurs' Relief.

Spouses and civil partners are treated as separate individuals for capital gains tax purposes; however any transfer of an asset between the two is treated as a no gain/no loss disposal. For couples separating, any disposals made in the year of separation are treated as a no gain/no loss transaction. Disposal made in subsequent years following separation are deemed as made at market value.

No changes were announced in respect of relief on the sale of an individual's main residence. Remember, spouses and civil partners are only allowed one tax-free main residence between them. Individuals and couples who own two or more residences still have the right to elect which of these is to be regarded as their 'only' or 'main' residence for capital gains tax purposes.


Introduction of a National Living Wage

Those aged 25 and over will be pleased to hear that they will now be entitled to a minimum wage of £7.20 per hour from April 2016 following the introduction of a new National Living Wage. This is set to reach £9 per hour by 2020, this compares with the current National Minimum Wage of £6.50 for those aged 21 and over.


Companies

In a move which will please businesses, the Chancellor announced further decreases in the Corporation Tax rate for company profits. Since 1 April 2015, companies pay Corporation Tax at a flat rate of 20% and this will fall to 19% in 2017 and 18% in 2020.

Companies can reduce the amount of Class 1 National Insurance contributions they pay for their employees through what is called the 'Employment Allowance'. George Osborne announced that from April 2016, employers will now be able to claim up to £3,000 (a 50% increase). A small number of employers are not eligible for the allowance and this includes employing someone for personal, household or domestic work e.g. a gardener.


Dividends

Many individuals have chosen to divert consultancy or other activities through a single purpose company which will enjoy low corporate tax rates which, as the Budget announced, will reduce to 19% and then 18% over the next 10 years from the present benign 20%.  In addition, dividends might be paid to a number of family members (eg spouses, adult children) who benefit from a zero rate of tax on dividend income of up to £36,000 (assuming they have no other income).  Mindful of this, the Chancellor has announced that from April 2016, individuals will be able to receive only £5,000 of dividend income free of tax and that beyond this, higher rates of up to 38.1% will arise!  In addition he has announced a review of the IR35 system of taxation designed to tighten up the current rules for personal service companies.

The use of companies to shelter income continues to be a good idea but the payment of dividends and the spread of shares around the family in closely held companies will need to be reconsidered with dividend payments being possibly advanced before April 2016.  Rather than impose National Insurance on dividends as has been suggested, this is a way of increasing the tax take on profits distributed as dividend.  The single purpose company continues to be highly tax effective where profits are entirely retained within it.

The Chancellor confirmed that dividends held in ISAs and pensions will continue to be tax free.


Changes for students

Lower income students planning on going to University will no longer receive maintenance grants from September 2016. Currently students from families with annual incomes of £25,000 or less receive a grant of £3,387 a year.

This will be replaced by a maintenance loan, specifically for lower income students, which will only be repayable once the individual begins earning more than £21,000 a year. Whilst the maintenance grant will be scrapped, students will be able to claim as much as £8,200 through the new maintenance loan.


Child tax credits

Those starting a family after April 2017 will now only be entitled to child tax credits for their first two children. Furthermore, the income threshold for tax credits will also be reduced from £6,420 to £3,850. Multiple births, for example triplets, will be excluded from this change.

Better news was announced for working families however who can now claim up to 30 hours of free childcare for three and four year olds, up from 15 hours.


Welfare

As anticipated, widespread reform of the welfare system was announced in a move to save around £12bn. Some of the measures announced in the Budget statement include:


Pensions

As previously proposed in the Conservative manifesto, the Chancellor announced that the £40,000 Annual Allowance for pension contributions will be reduced for those with incomes of over £150,000 including personal and employer's pension contributions and over £110,000 excluding pension contributions.  For every £2 of income over £150,000 the Annual Allowance will be tapered by £1 to just £10,000 for those with incomes of £210,000 or more.

The tapering of the annual allowance will have effect from 6 April 2016 but legislation to align all pension input periods with the tax year and other transitional rules that may affect all taxpayers making pension contributions will be effective from today and thankfully it has been confirmed that unused Annual Allowance from the previous three years can be carried forward in the normal way.
It is important for separating couples to nominate the correct beneficiaries to receive any death benefits on pension or life policies.

With acknowledgement to Matt Boggis, Creaseys.

8/7/15