Newsletter Budget Announcements Wednesday 8th July 2015
Our newsletter deals with how the announcements affect internationally mobile private individuals especially those with UK property interests. It is intended to be practical and helpful. If you want to discuss any aspect call us on + 44 20 3794 5959.
What the government says: - From April 2017, anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed UK domiciled for tax purposes. Furthermore, it will no longer be possible for somebody who is born in the UK to parents who are UK domiciled to claim non-domicile status if they leave but then return and take up residency in the UK.
What Sykes Anderson Perry says: - This tightens up the rule which makes you liable to UK inheritance tax on a worldwide basis if you live in the UK for 15 years. Previously it was 17 out of the past 20 years for inheritance tax. It also introduces the concept of deemed domicile for income tax. The provision relating to people born in the UK to UK domiciled parents is completely new. It will be interesting to see if there is a quid pro quo for people who have left the UK and claim to be non-domiciled. The existing exemptions under the UK’s inheritance double tax treaties in particular with France and India appear unchanged. A French or Indian domiciliary can never become deemed domiciled for inheritance tax purposes in the UK because of their tax treaties with the UK.
What the government says: - From April 2017 the government will also introduce new rules so that everybody who owns residential property in the UK and would otherwise pay inheritance tax on that property cannot avoid paying it by holding it in an offshore structure.
What Sykes Anderson Perry says: - This is completely new and alarming. It is common practice for non-domiciled individuals to purchase UK residential property using an offshore company. Because the non-domiciled individual is viewed as owning the shares in the offshore company and not the property, on his death the shares are viewed as passing and are outside the scope of UK inheritance tax. This useful exemption is now to end. You must wonder whether this will have a negative effect on the prices of high end London property. It may become attractive to build debt into the structure which is loaned from an offshore vehicle in order to reduce the equity liable to UK inheritance tax. Back to back debt or loan arrangements may be the solution. Immediate planning is sensible here.
What the government says: - Landlords can deduct interest payments on their mortgage against the rent they receive in full. The government will restrict the relief on mortgage interest that landlords of residential property can get to the basic rate of income tax. The restriction will be phased in over 4 years, starting from April 2017.
What Sykes Anderson Perry says: - This is bad news for buy-to-let investors especially wealthier people who will not be able to get a full income tax deduction for the interest they pay. It will not matter to investors who do not pay over the basic rate of income tax. Wealthier investors may consider transferring properties into limited companies to reduce their income tax charge. Wealthier investors may be better off investing in commercial property which will not have this restriction. We imagine the same rules will apply to foreign buy-to-let properties.
What the government says: - The government will also reform how landlords of residential property can account for the costs they incur in improving and maintaining rental property. Currently, landlords of furnished properties can deduct 10% of their rent from their profit to account for wear and tear, irrespective of their expenditure. This means landlords can reduce their tax liability even when they have not improved the property. From April 2016, the government will replace this allowance with a new system that enables all landlords of residential property to only deduct costs they actually incur.
What Sykes Anderson Perry says: - The best approach is to hold off doing any improvements until April 2016. There is no point doing anything before then as you will be able to get your automatic 10% for the 15/16 tax year and will need receipts thereafter.
Inheritance Tax Family Home
What the government says: - We will take the family home out of inheritance tax for all but the wealthiest with a new transferable nil-rate band, introduced from April 2017. This will apply when a main residence is passed on death to direct descendants, such as a child or grandchild. The allowance will be up to £100,000 in 2017-18, up to £125,000 in 2018-19, up to £150,000 in 2019-20, and up to £175,000 in 2020-21. This is in addition to the inheritance tax nil-rate band, which is set at £325,000 for the estates of individuals. This creates an effective £500,000 inheritance tax threshold for estates in 2020-21. As with the current nil-rate band, any unused main residence nil-rate band will be transferred to a surviving spouse or civil partner and means the effective inheritance tax threshold will rise to £1 million in 2020-21.
What Sykes Anderson Perry says: - This is to be welcomed though does not go far enough for more expensive London properties. The other major issue in practice is care home fees which often end up being a bigger cost than inheritance tax.
What the government says: - The new main residence nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to £175,000 in 2020-21, are passed on death to direct descendants. For example, an individual might choose to downsize from a home worth £200,000 to a home worth £100,000. They could still benefit from the maximum allowance of £175,000 in 2020-21 if they leave the home and £75,000 of other assets to direct descendants. They will only be liable to inheritance tax if the total estate exceeds £500,000.
What Sykes Anderson Perry says: This is helpful but is relatively small money. Anyone downsizing to release meaningful amounts of equity should consider outright gifts to children and other planning routes.
8th July 2015
Sykes Anderson Perry Limited