How UK summer budget announcements affect high income investors

Our UK director of Private Client services examines the key personal tax announcements made by Chancellor George Osborne in this week’s summer budget.

Dividends tax credit replaced
 
This was very much the big surprise announcement for tax professionals, and it will have a significant impact on high-income investors from entrepreneurs to those with large equity portfolios, and people who pay themselves dividends via a company.

The current dividend 10% tax credit system will be replaced with an annual tax-free allowance of £5,000 across the board. There will then be higher taxes on dividend income above this amount:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers

The move will be a big moneymaker for the Conservative government right from its implementation in April 2016, raising over £2bn in the first 12 months and £6.8bn over the next five years.

So what about the pre-election promise of a five-year tax lock? This dividends tax change is, in essence, an increase in personal income tax for those with high incomes and it may very well be the start of a not-very-welcome trend.

Let Residential Property

With the buy to let residential property market booming and first time buyers struggling to acquire properties, the Chancellor announced a plan to restrict the deduction of mortgage interest from residential property rents for income tax purposes to the basic rate (20%).

Currently, it is possible to obtain relief at up to 45%. The restriction is due to be phased in from 6 April 2017. Whilst not trialled by the government, many professional commentators have been calling for such restrictions for some time and investors may be relieved that basic rate relief is being retained.

Pension tax relief cut

High earners knew this one was coming at least, the amount they can pay annually, tax-free into their pension has been cut. The £40,000 ceiling is being tapered to £10,000 for those making £150,000 or more per year including pension contributions.

Those who earn (excluding pension contributions) under the £110,000 threshold will not be subject to the tapered annual allowance.

£1m Inheritance Tax allowance

Another one that we knew was on the way, married couples and civil partners will be able to pass on their property wealth, tax-free.

From April 2017 the family home allowance will be offered to each individual, added to the existing £325,000 Inheritance Tax threshold and taking the total tax-free allowance to up to £1m by 2020-21. Estates worth more than £2m will have the allowance gradually withdrawn.

Non-domiciliaries: permanent status abolished

We will see the end of permanent non-dom status as of April 2017.

Anyone residing in the UK for 15 of the past 20 years will instead be required to pay the same level of tax as other UK citizens, and so taxed on their worldwide income and gains. This measure is set to raise an estimated £1.5bn for the government.

From the government’s technical paper: “These reforms mean that the £90,000 remittance basis charge payable by those who have been resident for 17 out of 20 years will be redundant as such persons will be taxable on an arising basis after 15 years.

“The £30,000 and £60,000 remittance basis charges remain unchanged. The government will consult on the need to retain a de minimis exemption beyond 15 years where total unremitted foreign income and gains are less than £2,000 pa (ITA 2007 s809D(2)).”

There is also a change for UK-born taxpayers with UK-domiciled parents: they will no longer be able to claim non-dom status elsewhere in the world if they move away and then later become UK residents once again.

New rules around UK residential property will also come into force and see owners unable to avoid paying inheritance tax by holding it in an offshore company. This measure the government says, is to stop the rule being abused by some non-doms.

As for why the non-dom tax status has not just been scrapped completely, George Osborne believes it would cost money. And we do need to consider the great, positive impact of many individuals in the UK who claim this status.

The Summer Budget included more measures than anticipated and the increases in dividend taxation, despite the Tory manifesto promise not to increase income tax, will have a significant impact.

Many of the measures announced are particularly complex and tax advice should be sought before action is taken to mitigate the effects of the Budget announcements.

Click here to get in touch with our experts in the UK.

Receive more updates like this straight to your inbox by signing up to TMF Group eAlerts.

Keeping up to date

You can now receive our insights and regulatory updates direct to your inbox by choosing the topics and jurisdictions that most interest you. 

Subscribe to our e-Alerts.