Tax changes you need to know about
16 November 2015
Reform of dividend taxation from April 2016
With effect from next April, the 10% dividend tax credit is abolished and instead, individuals will be entitled to a £5,000 dividend tax allowance. Dividends are taxed as before by adding them to the other income to see whether they fall into the basic rate, higher rate or additional rate bands. The first £5,000 is then covered by the dividend allowance and the excess becomes liable to tax at the following rates:
- 7.5% in the basic rate band (currently 0%)
- 32.5% in the higher rate band (currently 25%)
- 38.1% in the additional rate band (currently 30.6%)
This change is expected to raise around £2bn a year, primarily from owner managed businesses adopting a low salary high dividend extraction policy or from taxpayers with significant shareholdings.
For example an individual with a £8,000 salary and £40,000 of dividends will pay tax of £2,263 in 2015/16 increasing by £1,387 to £3,650 in 2016/17.
Advice on planning in the run up to the change will be essential.
Landlords – Plan ahead for changes in 2017
Tax changes announced in the last budget are likely to have a significant impact on returns from residential buy-to-let properties. The new rules do not apply to companies or to commercial property landlords.
Individuals can currently deduct the interest on borrowings used to purchase, renovate or provide working capital for their buy-to-let property when working out the profit for the year. Relief is applied at the appropriate rates ranging from 20% to 45% of the interest paid. These changes will see tax-relief for higher rate taxpayers reduce by a quarter each year until 2020 when tax relief will be limited to 20%. The new rules effectively restrict this relief to the basic rate of tax. It is important to note that there may be severe consequences for basic rate taxpayers too.
For example: A landlord has properties generating a profit before mortgage interest of £120,000. He pays mortgage interest of £85,000. Under the current rules, assuming he has no other taxable income, his tax liability would be approximately £4,880. Using the new rules he will have a tax liability of £24,403.
Main Residence Nil Rate Band for IHT
Since 2009/10 the nil rate band has been £325,000 and is frozen at this level until April 2021. There will be a new additional nil rate band when an estate includes a residential property that is passed on death to a direct descendant e.g. a child or grandchild. The new allowance commences on 6 April 2017 set initially at £100,000 rising by £25,000 each tax year to £175,000 in 2020/21.
The additional band can only be used in respect of one residential property which has, at some point, been a residence of the deceased. Any unused nil rate band may be transferred to a surviving spouse or civil partner. There is a tapered reduction for properties where the overall estate is valued at more than £2million.
To find out more about any of the above please speak with your usual French Duncan contact or email us.