Non-Dom Rule Changes

The government announced a number of reforms to the taxation of foreign domiciled taxpayers (‘non-doms’) who are resident in the UK for longer periods.

It is proposed that there will be a new ‘15-year’ deemed domicile rule for long term residents.  Non-dom taxpayers who have been resident in the UK for 15 of the previous 20 tax years, will in their 16th year of UK residence be unable to benefit from the remittance basis of taxation and will become deemed UK domiciled for all heads of taxation (including Inheritance Tax (‘IHT’))

They will therefore suffer tax on their worldwide income and gains, and will be exposed to IHT on their worldwide assets.  These individuals would have to leave the UK for 5 tax years to lose this deemed domicile status.  It is important to note that those who have previously relied on treaty exemptions relating to domicile for IHT purposes may be affected, though the position is unclear.

It was also proposed that all UK residential property will be subject to UK inheritance tax even when held via an offshore structure.  This could have repercussions for clients who have used offshore structuring in the past, perhaps using offshore companies and/or excluded property trusts.

These changes are intended to be introduced from 6 April 2017.

There will be no change to the remittance basis charge of £30,000 and £60,000 for non-domiciled taxpayers who are UK resident for 7 out of 9 tax years and 12 out of 14 tax years respectively.  The proposed £90,000 remittance basis charge for non-domiciled taxpayers who are resident for 17 out of 20 tax years will not proceed as it will now be replaced by the new 15-year rule.

Inheritance Tax

There will be a new main residence allowance on family homes left to children or grandchildren.  The main residence allowance will be added to the existing £325,000 IHT nil-rate band per individual, meaning that for a married couple, the effective tax-free allowance for the surviving spouse will be up to £1 million by 2020/21.

The allowance (per individual) will be £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21. This allowance should also be available even if an individual downsizes their home.

The new allowance, however, will have a tapered withdrawal for estates worth more than £2 million, down to zero for estates worth more than £2.35 million, so many high net-worth clients may not benefit from these changes.

Pension Relief

From April 2016 the annual allowance for pension contributions attracting tax relief will be tapered down for those with adjusted net annual incomes of over £150,000 (which includes their own and their employer’s pension contributions).  The current annual allowance is £40,000.  It is intended that this will be reduced down to £10,000 as a minimum for individuals with adjusted net annual incomes of £210,000 or more.

Taxation of Dividends

It was announced that there would be a major overhaul of the way dividends are taxed in the UK.  Dividend tax credits will be abolished from April 2016 and replaced with a ‘dividend tax allowance’ of £5,000 a year.  The proposed dividend tax rate will now be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Those individuals who have larger portfolios and receive significant dividend income are likely to end up paying more tax.  This may also reduce the incentive for owner managers to remunerate themselves by way of dividend rather than salary and bonus.

Personal Allowances

The personal allowance threshold will increase to £11,000.  The higher rate threshold (i.e. the amount of income before an individual begins to pay tax at 40%) will rise from £42,385 to £43,000 in 2016/17 and up to £43,600 in 2017/18.

Anti-Avoidance Measures

It was announced that the government would continue to crackdown on tax avoidance and evasion and would increase HMRC’s resources with a view to this, investing £800 million through the course of this parliament.

The measures would include increasing the number of criminal investigations into tax crime, and a growing focus on wealthy individuals, companies and trusts, and further increasing HMRC’s access to data from online intermediaries and electronic payment providers.  The government will also look at introducing a General Anti-Abuse Rule (‘GAAR’) penalty and bringing in new measures for serial users of marketed tax avoidance schemes including ‘naming and shaming’.

Changes for Residential Property Landlords

The government has announced that they will restrict the tax relief on mortgage interest to the basic rate of income tax. This restriction will be phased in over 4 years and will start from April 2017.  This will affect higher and additional rate taxpayers who let UK property.

There will also be a removal of the 10% wear and tear allowance for furnished rental properties from April 2016.  Landlords will now only be able to deduct the actual costs they incur.

As discussed under the non-dom heading there may also be exposure to inheritance tax for UK property held in offshore structures.

Corporation Tax

There will be a reduction in the corporation tax rates from 20% to 19% in 2017 and 18% in 2020.

Other Announcements

Significant changes were announced regarding the welfare system (including tax credits), and an unexpected increase in the minimum wage.

If you require further information about this topic please contact any member of our Tax team.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

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