Now that the draft Finance Bill 2016 has been introduced, we have taken the opportunity to recap on the key tax changes that have been proposed:
Savings and Dividends
- New ‘Personal Savings Allowance’ - This will apply a 0% tax rate for savings up to £1,000 , such as interest, paid to an individual (or £500 for individuals with any higher rate income). The PSA will not be available to individuals with any additional rate income.
- Dividend Taxation – The dividend tax credit will be repealed and replaced by a new ‘dividend allowance’, similar to a personal allowance but specific to dividend income, of £5,000. The dividend tax rates thereon will be 7.5% at the basic rate, 32.5% at the higher rate and 38.1% at the additional rate.
Benefits in Kind
- Benefits worth £50 or less, paid for by an employer, will no longer trigger a tax and national insurance bill for staff.
- Tax relief for mortgage interest – the amount of mortgage interest that buy-to-let landlords can deduct in calculating their taxable rental income will be restricted to the basic rate band. Currently, landlords can deduct the full amount of interest paid when calculating their taxable profits. However, the higher rate relief will be phased out gradually over a period of 5 years, until 2021 when relief will only be given at basic rate (20%).
- The lifetime allowance (the amount of pension savings that can attract tax relief in an individual’s lifetime) will be reduced to £1 million from the 2016-2017 tax year. The limit will then increase in line with the Consumer Price Index.
- Enterprise Zones – The Autumn Statement confirmed that legislation will be introduced to establish 26 new Zones, ten of which will provide for enhanced capital allowances for qualifying expenditure. The enhanced capital allowances will be available for expenditure incurred on or after 25 November 2015.
- Wear and Tear Allowance - The Wear and Tear Allowance will be replaced by a new provision for a deduction for the replacement of furnishings. Instead of W & T (which allowed for a flat 10% deduction from rental income), a deduction will be available in calculating the profits of a property business for expenditure on furniture, furnishings, appliances (including white goods) and kitchenware, where the expenditure is on a replacement item provided for use in the dwelling. The deduction will be available for expenditure incurred on or after 1 April 2016 for corporation tax payers and 6 April 2016 for income tax payers. This deduction will not be available for furnished holiday lettings because capital allowances will continue to be available for them.
- Domicile - The existing deemed domicile provisions for inheritance tax will be brought in line with the proposed new deeming rules for non-domiciled individuals who are long term resident in the UK. This means that an individual will be deemed UK domicile if they are resident in the UK for 17 out of the previous 20 tax years. The legislation will also ensure that anyone born in the UK with a UK domicile at birth and who later acquires a domicile of choice elsewhere, will be deemed to be UK domiciled for tax purposes if they are resident in the UK in at least one of the previous two tax years.
- Residence Nil Rate Band - A residence nil-rate band will be available when a person downsizes or ceases to own their main residence. In addition to the £325,000 nil rate band already available (the amount an individual can receive tax free) there will be an additional nil-rate band where a family home is passed on to the surviving children.
- As announced at Autumn Statement, the government will introduce higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties, including buy to let properties and second homes, from 1 April 2016. The higher rates will be 3 percentage points above the current SDLT rates.