Budget Brainstorm

Summer Budget

As the dust settles, it is fair to say that the first Conservative budget in 20 years was not boring with a range of measures affecting a large number of individual and corporate taxpayers.  It would be interesting to run a sweepstake on the size of the Finance Bills for 2015 and 2016 that will be produced to enact these changes, some of the changes are so complex, the legislation is going to be weighty.

As ever, there were winners and losers.  We were all glad to see the capital allowances annual investment allowance retained at a realistic level of £200k a year, and the further reductions in corporation tax rates to eventually 18% is very attractive.  It does not feel that long ago that the top rate for fairly modest companies was 28%, so we have seen a big fall here.  Whether this will offset the extra costs of the increased minimum wage for businesses remains to be seen, and of course, a cut in the corporation tax rate only benefits profitable companies, however all companies will have to meet the increased wage costs.

There are two measures that I think we are only just beginning to appreciate the full significance of.  

Dividend Income

The new regime for taxing dividends has been described as a measure to deter tax motivated incorporation (what did they expect with a corporation tax rate of 20% and a personal tax rate of 45%).  It will however potentially affect anyone with dividend income in excess of £5,000 and whilst remuneration via dividends remains beneficial in most scenarios,  company owners are likely to end up paying more tax next year than in the current year.  Our concern is that now dividend tax is in place, it could very simply be ratcheted up in later years.

Dividend income is of course exempt when received by companies, so could this be a bit of a boost for family investment companies. 

Buy-to-let

The second measure that is causing some consternation is the restriction in tax relief for buy to let mortgages, which, whilst being gradually introduced from April 2017 over 4 years, will substantially increase the tax bill for individual landlords.  This is  a restriction that will only apply to personal ownership, another potential argument in favour of a family investment company?

The changes to domicile rules seem on the whole sensible and go someway towards making a very unclear and judgemental part of UK tax law a little more clear cut.

Finally we had the much heralded IHT transferable property nil rate band.  This will only start to be of benefit from April 2017 and is also being bought in over a number of years.  In principal, the concept of preserving this relief for individuals who downsize (wef 8 July) is fair, who wants their elderly parents staying in a property too large for them just to preserve an IHT relief.  How this will be legislated is another matter, and is there not a danger than those in their more mature years will be thinking about “upsizing” if properties have a more beneficial IHT treatment than other assets. Surely it would have been much more straight forward to have increased the IHT nil rate band for all assets.

Overall however, we felt it was a clever budget, raising quite a bit of revenue in some quite obscure and so (to the majority of taxpayers) invisible ways.  Our main concern is the amount of complexity which makes the potential for taxpayers getting it wrong greater and only increases the need for regular and timely professional advice.