SME Tax News

There are to be major changes to the way non-domiciled (non-dom) individuals that live in the UK are taxed.

This guide summarises the proposals made in the Summer Budget 2015. On 30 September 2015 HMRC launched a consultation containing more details.  See Reforms to the taxation of non-domiciles: HMRC consultation.

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Following an announcement in the March 2015 budget, a consultation was published in July 2015 inviting discussion and comment on how averaging could be extended from two years to five.

Draft legislation was published in December 2015 which proposes the following changes:

• Averaging can be claimed for a period of five consecutive years provided that the volatility condition is met.
• To meet the volatility condition, one of the following conditions must be met:
  • Either, one of the following must be less than 75% of the other:
    • The average of the first four years’ profits
    • The last year’s profit
  • Or, the profits of one or more of the five tax years to which the claim relates must be nil (or a loss).
• There will be a choice whether to use the five year or two year period.
• Marginal relief will be abolished for those using the two year period.
• When using a two year period, full averaging will be available if the difference between the two profits is at least 25% of the higher profit.

It is proposed that the new legislation will be effective for claims where the 2016/17 tax year is either the second or the fifth averaging year. 

The extension of averaging from two to five years will not be available for trades where profits are derived from creative works. 

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 The capital allowances Annual Investment Allowance (AIA) will be set at a permanent £200,000 from 1 January 2016.

The AIA is currently £500,000, it had been previously scheduled to decrease to £25,000.

Complicated calculations

The policy paper confirms that the much criticised current method of calculating and restricting the allowance where accounting periods straddle one or more change dates will continue. As the allowance will no longer be subject to fluctuations, the need for convoluted calculations (and inevitable errors) should gradually become a thing of the past.

Many unincorporated businesses have found that they have been unable to obtain tax loss relief when incurring high levels of capital expenditure due to the cap on unrestricted reliefs. This contiues to be an issue for these type of businesses.

The policy paper, including an example of an accounting period straddling the date can be found here.

Summer Budget 2015 Property taxes

At a glance

From 6 April 2016:

• Rent-a-room relief to be raised to £7,500 
• The 10% wear and tear allowance may be reformed (subject to consultation)

From 6 April 2017:

• Higher rate relief on mortgage interest will be restricted for buy-to-let landlords.
• Basic rate taxpaying landlords are not immune from the new measures: mortgage interest will no longer be an allowable deduction from property income and a new adjustment is then required in order to claim basic rate tax relief.

Subscribers, see also our Practical Tax Giude to Property profits and losses for worked examples.

Rent a room relief

The applies to private landlords, the owners of guest houses, B&Bs and similar establishments, provided that they use the property as their main or only home.

Key points:

• From April 2016, the exemption will increase to £7,500 per household (years to 2015/16 £4,250 per household).

•  As previously, there will be no requirement to declare income if it is below this threshold.

Wear and tear allowance

Subject to a new consultation, from April 2016, the ‘wear and tear allowance’, which allows landlords to deduct 10% of adjusted gross rent as a type of furnishings depreciation will also be replaced by a new system that only allows them to get tax relief when they replace furnishings. See Consultation: replacing the wear & tear allowance.

Restricting mortgage interest relief

The Chancellor proposes to restrict tax relief for mortgage interest on buy-to-let property. 

Current rules:

• Mortgage interest may be deducted from rents income to arrive at profit or loss for tax purposes.
• Income tax relief is given at a taxpayer's marginal rate of tax. E,g, it is worth 45p for every £1 for an additional rate taxpayer.

Proposed changes:

• Mortgage interest relief is restricted to the basic rate, and given as a tax reduction, not an allowable expense. This measure is to be phased in between 2017 and 2020.

• Individuals will be able to claim a basic rate tax reduction from their Income Tax liability on the portion of finance costs not deducted in calculating their rental profit. This tax relief will be calculated as 20% of the lower of the:

  • finance costs not deducted from income in the tax year (25% for 2017 to 2018, 50% for 2018 to 2019, 75% for 2019 to 2020 and 100% thereafter)
  • profits of the property business in the tax year
  • total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year

  Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.

Staggered introduction: the change will be introduced gradually from April 2017.

See Practical Tax guide: Property profits and losses for worked examples of the changes to tax relief on interest.