Budget Commentary 2015

Income Tax

  • Personal Allowance and Age Allowance
  • Personal Savings Allowance
  • Bad debt relief on peer to peer lending
  • Use of Foreign Assets as Collateral for a Loan
  • Increase in the Remittance Basis Charge

National Insurance and Employee Benefits

  • New Statutory Exemption from tax and National Insurance for trivial Benefits
  • Abolition of the £8,500 threshold for Benefits in Kind
  • Abolition of Class 2 National Insurance Contributions for the Self Employed
  • Abolition of Employers National Insurance for the under 21’s and Apprentices
  • Employment Allowance to be extended

Compliance

  • Abolition of Self Assessment
  • Simplifying the administration of Employee Benefits and Expenses
  • Direct recovery of debts

Capital Gains Tax

  • Capital Gains Tax for Non Residents on UK property
  • Changes to Principal Private Residence Rules
  • Restricting Entrepreneurs Relief on Associated Disposals
  • Entrepreneurs relief on Deferred Gains
  • Entrepreneurs relief on Goodwill

PERSONAL ALLOWANCE AND AGE ALLOWANCE

Finance Bill 2015 will see the income tax personal age allowance phased out and from 6 April 2016 there will be a single personal allowance regardless of an individual’s date of birth.

For the 2015/16 tax year the personal age allowance for those individuals born after 6 April 1938 but before 6 April 1948, has been frozen at £10,600 to come in line with the personal allowance to lessen the gap. The amount of the allowance for those born before 6 April 1938 remains higher and is currently £10,660.

Legislation will be introduced in Finance Bill 2015 to increase the income tax personal allowance to £10,800 for 2016/17 and to £11,000 for 2017/18 for all individuals, so that there is a single personal allowance regardless of age.

PERSONAL SAVINGS ALLOWANCE

From April 2016 basic rate and higher rate taxpayers may benefit from a personal savings allowance. This new allowance will exempt basic rate taxpayers from taxation on the first £1,000 of their savings income, and £500 for higher rate taxpayers. Additional rate taxpayers will not benefit.

BAD DEBT RELIEF ON PEER TO PEER LENDING

Many individuals now make investments in peer to peer lending companies in the hope of receiving a higher interest return than banks and other investments offer. To date, the interest received from such loans has been subject to income tax. There has been no mechanism to claim relief for the loans which are not repaid. For loans made after 6 April 2015, bad debts arising from these loans will be taken into account when calculating taxable income.

USE OF FOREIGN ASSETS AS COLLATERAL FOR A LOAN

On 4th August 2014, HMRC announced a change to how it intends to tax funds remitted to the UK where they have been secured on non UK funds or assets.

Before 4th August 2014, if a UK resident, non domiciled individual took out a commercial loan, which was secured on non UK income, gains or assets purchased from non UK income or gains, and remitted the funds from this loan to the UK, HMRC had agreed that they would not regard the effective remittance of the foreign collateral as a taxable remittance. Instead, HMRC would only seek to impose a tax charge if non UK income or gains were used to service the loan repayments.

However, HMRC allowed this concession so that non doms would not suffer tax on both the value of the lump sum brought into the UK AND the non UK income used to repay the loan. To do so could effectively tax more than twice the sum actually remitted to the UK! However, HMRC did not expect the loan to be repaid using UK taxed income or clean capital so that no taxable remittance ever arose.

HMRC have therefore, with effect from 4 August 2014, withdrawn their concession.

They have confirmed that, any loans which have been remitted to or enjoyed in the UK will now be regarded as a taxable remittance. This is to the extent that the underlying assets used to secure the loan have been derived from foreign income or gains (which would have been taxable in the UK were it not for the use of the remittance basis).

Furthermore, HMRC continue to consider that the use of non UK income or gains to service the loan is also a taxable remittance.

HMRC did not give any warning or have any consultation period on this change but they have confirmed that, for loan arrangements already in place at 4th August 2014, the taxpayer will not be treated as having made a taxable remittance of the foreign income/gains used as security, as long as the following conditions are met:

  • Full details of the arrangement are notified to HMRC by 31 December 2015, and
  • The taxpayer makes a written declaration by 31 December 2015 to replace the collateral with assets or funds which are not relevant foreign income or gains by 5 April 2016 (and actually does so), or
  • Repays the part of the loan which was remitted to the UK in full before 5 April 2016.
  • Where the above conditions are not met, HMRC has confirmed that it will issue assessments for the tax due on the income and gains used as loan collateral.

We advise anyone affected by this change to urgently consider the options available to them as soon as possible and ahead of 31 December 2015 deadline.

INCREASE IN THE REMITTANCE BASIS CHARGE

The normal basis of taxation in the UK is the Arising Basis. This means that you are taxable on worldwide income.

For Non UK Domiciled individuals who are resident in the UK, there is an alternative basis of taxation; the remittance basis.

If a taxpayer claims the remittance basis in a tax year, they are only taxable on foreign income, earnings and gains, to the extent that, they are remitted (brought in) to the UK.

The remittance basis can therefore provide extensive tax savings for individuals using it, however, there is a tax charge for every year you use the remittance basis.

Until 5 April 2015, the Remittance Basis Charge (RBC) was as follows:

  • For those who have been resident in the UK for at least 7 of the previous 9 tax years: £30,000
  • For those who have been resident in the UK for at least 12 of the previous 14 tax years: £50,000
    HMRC are currently consulting on draft legislation, which if passed will be effective from 6 April 2015, to increase the Remittance Basis Charge for those meeting the 12/14 test and to introduce a new, higher charge for those meeting a 17/20 test. The rates are proposed to be:
  • For those who have been resident in the UK for at least 7 of the previous 9 tax years: £30,000
  • For those who have been resident in the UK for at least 12 of the previous 14 tax years: £60,000
  • For those who have been resident in the UK for at least 17 of the previous 20 tax years: £90,000

Furthermore, HMRC intend to consult on proposals that the Remittance Basis Charge should become an election that can only be made once every three years. There are no further details on this proposal at the present time.

NATIONAL INSURANCE AND EMPLOYEE BENEFITS

NEW STATUTORY EXEMPTION FROM TAX AND NATIONAL INSURANCE FOR TRIVIAL BENEFITS IN KIND
From 6 April 2015, there will be a new statutory exemption from tax and National Insurance introduced so that qualifying trivial benefits in kind are exempt. HMRC have defined qualifying trivial benefits in kind to be ones costing £50 or less each year. There will therefore be no need for these to be reported on a form P11D or via Pay as You Earn Settlements Agreements (PSAs). Previously, employers were required to report such benefits in kind to HMRC regardless of the amounts.

HMRC have also announced that office holders of close companies and employees who are family members of those office holders, will only be able to receive a maximum of £300 worth of trivial benefits in kind each year which are exempt from tax and National Insurance.

ABOLITION OF THE £8,500 THRESHOLD FOR BENEFITS ON KIND

Certain benefits in kind were exempt from taxation, where the employee was paid less than £8,500 per year. From 6 April 2016 this will no longer apply, and the benefit in kind rules will be the same regardless of the individuals earnings. Dependent on the other income of the individual, the change may not affect their overall tax position as the point at which they will start to pay tax in 2016/17 is at £10,800. However, employers may have additional National Insurance Contributions to pay on the benefits in kind.

ABOLITION OF CLASS 2 NATIONAL INSURANCE CONTRIBUTIONS FOR THE SELF EMPLOYED

As part of the planned reforms to tax administration, the government will abolish Class 2 National Insurance contributions for self-employed individuals in the next Parliament. The government will consult on the detail and timing of these reforms later in 2015 after the general election has taken place. From July 2015 self-employed individuals will see their monthly contributions cease in an already planned move to collect Class 2 through self-assessment.

ABOLITION OF EMPLOYERS NATIONAL INSURANCE FOR THE UNDER 21S AND APPRENTICES

Employers who have employees who are under the age of 21, will from 6 April 2015, no longer be required to pay employers Class 1 National Insurance Contributions on earnings up to the Upper Earnings Limit (UEL) for those employees.

In addition to this, from 6 April 2016, employers of apprentices who are under the age of 25, will no longer be required to pay employers Class 1 National Insurance contributions on earnings up to the Upper Earnings Limit (UEL) for employees.

The UEL for the 2014/15 tax year is currently £805 a week.

EMPLOYMENT ALLOWANCE TO BE EXTENDED

Employers who employ staff to work in connection with their personal, family or household affairs, are currently excluded from claiming employment allowance which would reduce their National Insurance liability by up to£2,000 a year. This however will be changed from 6 April 2015.

COMPLIANCE

ABOLITION OF SELF-ASSESSMENT
The government will transform the tax system over the next Parliament by introducing digital tax accounts to remove the need for individuals and small business as to complete annual tax returns. A roadmap setting out the policy and administrative changes will be published later this year.

In addition, the government will consult on a new payment process to support the use of digital tax accounts that allow tax and National Insurance contributions to be collected outside of Pay As You Earn and Self-Assessment. This will be legislated for in the next Parliament.

SIMPLIFYING THE ADMINISTRATION OF EMPLOYEE BENEFITS AND EXPENSES

From 6 April 2016 the current dispensation scheme will be scrapped. There will be no reporting requirement for reimbursed expenses where a deduction for the expense would be given against the individuals tax, had it not been reimbursed. These expenses are therefore free of tax and National Insurance without needing to inform HMRC at all. The exemption will not apply, however, to expenses paid as part of a salary sacrifice arrangement.

DIRECT RECOVERY OF DEBTS

Legislation is currently being consulted on to enable established tax and tax credit debts (including debts under advanced payment notices) that are outstanding and due for payment to HMRC in excess of £1,000, to be removed directly from taxpayers bank accounts.

Every taxpayer owing monies to HMRC will firstly have a visit from HMRC agents before their debts are even considered to be recovered directly from their bank account. Once debtors have had this visit, they have not been identified by HMRC as being vulnerable, and they have sufficient money in their bank accounts to pay the debt, then HMRC may require banks, building societies and other deposit takers to place a hold on funds. This will apply if the taxpayer has not arranged to pay the debt by some other means. The removal of the funds from the taxpayers account will only happen if the account is in credit and safeguards will be put in place to ensure that a minimum credit balance of £5,000 remains in all of the debtors bank accounts after the debt has been held.

You will be able to appeal to the County Court if you wish to appeal against the exercise of this power on the grounds that the amount has already been paid, the conditions for issuing a hold notice were not met, the notice is causing hardship and to protect third parties in the case of joint accounts.

CAPITAL GAINS TAX

CAPITAL GAINS TAX FOR NON-RESIDENTS ON UK PROPERTY
From 6th April 2015, Non UK residents will be subject to Capital Gains Tax on the sale of UK residential property. Prior to this date any sales of UK assets by non UK residents where outside the scope of UK taxation, unless that individual was caught by the temporary non residence rules.

Under the new legislation gains made from the sale of UK property will be subject to UK taxation regardless of an individuals resident status in the year of sale. Unlike sales of property by UK residents however it is only the gain made since the introduction of this legislation (April 2015) which will be subject to tax.

Non Resident owners of UK property are therefore recommended to obtain valuations of the property, potentially from 2 to 3 sources for use in their CGT calculations on eventual sale of the property.

This April 2015 value will then be used to substitute the actual cost of the property, or alternatively the gain can be calculated on a straight line basis. Under this latter method the net gain of the property (proceeds less costs of purchase) is deemed to have accrued evenly since purchase. It is then only the gain equal to the number of months worth of ownership since April 2015 which will be subject to tax.

Principal Private Residence Reliefs (PPRR) and Letting relief still apply to reduce gains of those individuals who have at some point occupied the property as their principal private residence, and then possibly subsequently let the property. However for periods after April 2015 for which an individual wishes to claim that the property is their PPR they will need to do an occupancy test.

For the occupancy test to be met, for each year the PPRR is to be claimed, the individual will either;

  • Need to be UK resident, or
  • Have spent 90 midnights in that property (or spent 90 midnights between UK properties)

Those with UK resident spouses will not be affected by the occupancy rules, and the judgement as to whether PPRR applies is considered in the normal way.

Periods of PPR applying before April 2015 won’t be affected by the occupancy rules, and will still entitle individuals to their last 18 months of exemption. This means that where a property was a PPR before April 2015, if sold by October 2016 any gain will be exempt from CGT.

A new form needs to be completed by non-residents selling UK property (regardless of whether sold at a loss or gain) within 30 days of completion. Any tax due on the sale will also be due at this point; however any individuals in the UK self-assessment system will be able to pay the CGT due by the 31 January following the tax year of sale.

The amount of tax payable is dependent on an individual’s other UK income in the year of sale. All individuals will be entitled to an annual exemption, and then will pay tax at either 18% or 28% or a mix of the two rates.

CHANGES TO PRINCIPAL PRIVATE RESIDENCE RULES

An element of the above changes will also affect UK resident property owners. This will primarily affect UK residents who hold property outside of the UK, and wish to claim that this property is their principal private residence (PPR) in order to claim reliefs on sale.

In order for a property to qualify for PPR relief in any given tax year the individual must either be resident in the country that the house is situated or spend 90 days in that property. If an individual has multiple properties in that country they are able to spend 90 days between the properties to meet this condition.

This change sees that individuals need to spend a substantial amount of time each year in a property which is being claimed as their PPR.

RESTRICTING ENTREPRENEURS RELIEF ON ASSOCIATED DISPOSALS

Entrepreneurs Relief reduces the rate of Capital Gains Tax on the disposal of assets to 10% from the standard 18% or 28%, however the rules relating to associated disposals are changing. For disposals on or after 18 March 2015, at least a 5% stake in the business must be disposed of by an individual in order to qualify for Entrepreneurs Relief on an associated disposal. An associated disposal is where an asset privately owned by an individual is used in their business and then sold alongside an element of their business.

This means that individuals and members of partnerships will no longer be able to claim Entrepreneurs Relief on gains that accrue on personal assets used in a business, unless they are disposing of a minimum 5% shareholding in the company or 5% share in the assets of the partners carrying on the business.

Whilst this measure is not expected to have any significant economic impact, individuals who are either partners in a firm or have a shareholding in a company may be affected if they dispose of assets which they own and which are used in their firms or company’s business but do not make a meaningful withdrawal from the business.

ENTREPRENEURS RELIEF ON DEFERRED GAINS

Prior to Finance Act 2015 individuals who had disposed of assets qualifying for Entrepreneurs relief (ER) would not wish to defer the taxation of the gain by investments into an Enterprise investment scheme (EIS), as when the gain became chargeable again the beneficial rate of tax (10%) would no longer apply. However for ER qualifying gains deferred after 3 December 2014, the reduced rate of tax will now be payable when the gain crystallises.

ENTREPRENEURS RELIEF ON GOODWILL

Prior to 3 December 2014 it was common practice for individuals as sole traders or members of partnerships to sell the value of the goodwill in their business to a limited company, of which they are a director, shareholder and would use the company to trade going forward. The proceeds of sale would be a credit to the directors loan account equal to the value of the goodwill, and that individual would therefore have a loan account from which to draw down, tax efficiently. CGT would be payable on the sale of the business, however entrepreneurs relief should apply and so the tax rate would be 10%.

The other method was to claim incorporation relief so that the disposal into the business would trigger no chargeable event for CGT purposes. Clearly this is the less tax efficient method, however from 3 December 2014 this is the only option as entrepreneurs relief is no longer available on the sale of goodwill into a limited company of which the seller is connected.

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