The 2016 Chancellor’s
Budget
Anne Wilson
Senior Tax Manager
Companies
• Corporation tax rates down everything else up!
• 17% Corporation tax rate from 1 April 2020
• Loan to participators 32.5%
• Loss relief changes more flexibility but capped
• Dividend tax
Dividend Tax
• 6 April 2016
• No notional dividend tax credit
• First £5,000 @ 0%
• Basic rate band 7.5%
• Higher rate band 32.5%
• Additional rate band 38.1%
• Everyone with dividends over £5k will pay more tax
Examples
2015/16
£
Salary
Dividends (Before Tax Credit)
Tax & NIC Payable
Net Income
Reduction in Net Income
2016/17
£
11,000
11,000
11,000
11,000
11,000
11,000
28,000
80,000
125,000
28,000
80,000
125,000
433
13,371
29,126
2,078
17,978
37,553
38,567
77,629
106,874
36,922
73,022
98,447
1,645
4,607
8,427
Employer / Employees
• Employee share holder status – tax relief on gains capped at £100k
• Review of salary sacrifice measures exclude pensions and
childcare/healthcare
• Review of travel and subsistence rules
• Voluntary payrolling benefits extended
• Personal service companies
• Termination payments – employers’ NIC for payments over £30k
Property Taxation
• Restriction to interest relief
• Higher rates of SDLT
• Higher rates of CGT
• Increase to rent a room relief to £7,500
Interest Relief Restriction
• Phased in from April 2017
• Relief will be restricted to the basic rate
• Residential letting only
• Furnished holiday lettings and commercial property OK
• Impact on child benefit high income charge and personal
allowance
Example 1
Current Position
£
Rental Income
50,000
Expenses
24,000
Mortgage Interest
20,000
Accounting Profit
6,000
Tax at 40%
2,400
Example 1
Proposed New Position
2017/18
£
2018/19
£
2019/20
£
2020/21
£
11,000
16,000
21,000
26,000
4,400
6,400
8,400
10,400
(1,000)
(2,000)
(3,000)
(4,000)
3,400
4,400
5,400
6,400
Accounting Profit £6,000
Taxable Profit
Tax at 40%
Tax Relief at BR
Tax Payable
Inheritance Tax Residence Nil Rate
• Phased in 2017/18 to 2020/21
• Maximum in 2020/21 £175k
• Estate over £2m tapered away
• Qualifying residence
• Closely inherited?
• Transferable (widowed before 06/04/17 c/f allowance £100k)
• Too complicated?
Capital Gains Tax Rates
• 10% for
• Gains eligible for entrepreneurs’ relief
• Gains within the basic rate band
• Gains which qualify for Investors’ relief
• 20% for
• Gains over basic rate
• 18% for
• Residential property gains within basic rate
• 28% for
• Residential property gains over basic rate
• Report disposals of residential property within 30 days from April 2019!
Entrepreneurs’ Relief U-Turns
• Joint venture rules
• Associated disposals
• Backdated to 18 March 2015
Nadeem Hussain
Head of Tax Services
Government Tax Strategy
• Counter tax avoidance, whether marketed schemes or multi
national companies
• Property
• Dividends and deemed dividends
• Lower rates of corporation tax
• Encourage investment in UK Plc
SDLT and Residential Property
• Additional 3% of SDLT from 1/4/16
• Applies to second homes and buy to let investors
• Individuals and companies caught
• No exemption for large scale investors
• Properties under £40,000 not caught
• Lower rates for private residence and any replacement
SDLT and Residential Property
• First £125,000
3%
• Next £125,000
5%
• £250,000 - £925,000
8%
• £925,000 - £1.5m
13%
• Above £1.5m
15%
SDLT and Non Residential Property
• Slice based calculation
• 0% For first £150,000
• 2% For next £100,000
• 5% On excess above £250,000
• Generally properties worth less than £1,050,000 will see SDLT
saving
Offshore Property Developers
• UK Corporation tax on development profits
• New rules to disregard application of Double Tax Treaties or
whether a permanent establishment exists
• Further sign of UK Government breaking down some of the
international barriers to applying UK tax
Companies Owning UK Residential Properties
• Annual tax based on market value
• Higher SDLT charges
• £500k+ Properties caught from 1/4/16
• CGT Payable 28% on sales
• Property rental and development businesses exempt
• Separate CGT charge on any UK residential properties owned by a
non UK resident individual or company
Non UK Domiciled Individuals
• New rules from April 2017 attributing deemed UK domicile if
resident in the UK in 15 out of the last 20 tax years
• Remittance basis to be denied
Research and Development (“R&D”) Tax Credits
• Very successful but still heavily underutilised HMRC scheme
• R&D is as the name suggests but the definition and scope for a
claim is much broader than many realise
• Pierce have saved companies circa £3m of corporation tax with
100% record with HMRC. Tom Wilkinson and Ben Smith deal
with such claims
R&D - How Legislation Works In Numbers
• Additional 130% relief on R&D qualifying costs such as staffing
and materials consumed
• Therefore for £100,000 R&D spend, you get an additional
£130,000
• Reduction in profits chargeable to corporation tax, saving tax of
£26,000
R&D - How Legislation Works In Numbers
• Relief in the form of tax credit at a reduced rate is also available
to loss-making companies. This would be ideal for start-up
businesses to help fund development.
• You can potentially go back two years to make a claim if not
made
• Look out for R&D-developing new products, new systems,
modifications to existing products or processes
R&D Examples
• Food manufacturer
• developing new flavours/products/review of salt & sugar levels etc.
• Saved client £123k of corporation tax over 2 year period
• New start-up computer printing technology company
• Obtained £40K cash refund to aid recruitment of 2 graduates
• Local engineering company
• Testing of new products/dealing with particularly challenging customer specifications
• Saved £59k of corporation tax
• Textile group
• Testing new products/modifications to existing products & processes
• £163K corporation tax saving
Key Pension Issues
• Lifetime allowance reducing to £1m from April 2016
• Restriction of annual allowance for income (including pension)
of £150k +
• More changes ahead – tax free lump sum?
And The Answer is…… A Dividend!
• Consultation paper and draft legislation intended to take effect
from 6 April 2016
• Targets share related proceeds taxable at 10% (or 28%)
possibly to an income tax charge as deemed dividend
Deemed Dividends?
• HMRC Will look more closely at:
• Phoenix companies
• Moneybox companies
• Repayments/reductions of share capital
• Reorganisations
• Self assessment rules to be amended
Phoenix Companies
Mr Jones
100%
Company A
NET ASSETS £1m
• If company wound up, CGT at 10%
• Start up Company B with similar activities
• But what about commercial reasons for separate companies, e.g.
separate property development ventures?
Moneybox Companies
Mr Brown
100%
Company C
• Undistributed reserves £1m
• Normally pays annual dividend of £200k
• In 2015, no dividend paid, company sold in mid 2016
Reduction in Share Capital
Mr Fleming
100%
Company D
• Net Assets £2m
• Consisting of initial subscribed share
capital £800k
• Undistributed reserves £1.2m
• Mr Fleming believes no reason to retain as much share capital
• Wants to reduce it to £100k
• Cash flows permit £700k repayment
• HMRC could seek to tax £700k as deemed dividend
Reorganisations / Buyouts
Mr Harrison
100%
Company E
• Sells to MBO team when company E valued at £3m
£
Cash
900k
Loan notes
1.5m
Shares in acquiring company (20%)
600k
£3m
• Clearance obtained from HMRC
• Tax at 10%?
Where Do The Changes Leave Us?
• Buy to let investors
• Quantify impact of reduced tax relief on interest (from 2017)
• Transfer to limited company?
• Beware of CGT and SDLT
• May be scope to defer CGT?
• May be scope to avoid SDLT?
• Consider transfer to trusts?
• Sell assets to avoid taking dividends?
Alternative to Dividend?
• Mr Daniels owns 50% of Company F, his brother owns the balance
• They also own the trading premises in their own names, renting to the company
£
£
Property worth
500k
Cost
350k
Profit
150k
Sell to company
CGT (After 5/4/16)
20%
Tax
30k
Represents
6% of value
SDLT - £150,000 x 0%
SDLT - £100,000 x 2%
14,500k
2.9% of value
SDLT - £250,000 x 5%
8.9% of value
Alternative to Dividend?
• Each brother will have director’s loan account of
£250,000 – 8.9% = £227,750
• Likely tax rate if taken as a dividend, say 32.5%
Where Do The Changes Leave Us?
• Delay commercial property sales until after 5/4/16?
• Possible R&D claims
• Wills and use of nil rate bands
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