Tax proposals 2016 – draft legislation published

The Government has published draft legislation in relation to a number of very important tax proposals that will be introduced in 2016.

These are some of the highlights (although summarised).

Corporation Tax

Wear and Tear Allowance abolition

This is a tax relief which allows a tax deduction of up to 10% of the gross rent if a residential furnished property is let out. It was announced in the Summer Budget that wear and tear relief was going to be abolished from April 2016.

A new relief is being introduced which will be known as “Replacement Furniture Relief”. This will be introduced from April 2016. Tax relief will be allowed on capital expenditure to replace old goods such as furniture and white goods.

Patent Box

This is a tax relief introduced in 2013 which allows profits derived from certain intellectual property to benefit from a reduced rate of corporation tax of 10% (although the rate was being phased in).

The Patent Box has been changed to comply with the new international framework.

Business Income Tax

Employment intermediaries and relief for travel and subsistence

Legislation will be introduced from April 2016 to restrict tax relief for home to work travel and subsistence where a worker:

  • personally provides services
  • is employed through an employment intermediary
  • is under (the right of) the supervision, direction or control of any person, in the manner in which they undertake their work

Employment intermediary will be defined as a person, other than the worker or the client, who carries on a business of supplying labour.

Where the worker is within the charge of the intermediaries legislation (such the IR35 legislation) this measure will only apply to those contracts where a deemed employment payment is made, or would be made if all the individual’s remuneration was not being taken as employment income. In these circumstances the supervision, direction or control test will not be used.

Farmers Averaging

Farmers are able to benefit from the ability to calculate the taxable trade profits for a tax year based on the average profits over two consecutive years. From April 2016, farmers will be able to average their profits over a 5 consecutive year period.

Employment Taxes

3% Diesel Surcharge

It was announced in Budget 2015 that the 3% diesel supplement for diesel cars would be removed from April 2016. This would have meant that petrol and diesel cars would be treated as the same in terms of calculating the private car and fuel taxable benefit charge. However the 3% supplement will continue beyond April 2016.

Trivial Benefits in Kind (“BIK”) Exemption

From 6 April 2016, employees receiving trivial BIKs up to a value of £50 will no longer be liable to income tax or National Insurance. Office holders of close companies (broadly companies controlled by 5 or fewer shareholders) will have a limit of £300.

The benefit cannot be cash or a cash voucher. It cannot be part of a salary sacrifice arrangement or a contractual obligation. The BIK must be given for non-work reasons such as a birthday or social event.

Share Scheme Simplification

There is a number of minor technical changes to EMI schemes.

Where a company has failed to make a notification by the required deadline to HMRC for a SIP, SAYE or CSOP scheme that meets the legal requirements, it will no longer lose the tax advantages of the scheme where it satisfies HMRC that it has a reasonable excuse for this failure to notify. HMRC will be able to accept a reasonable excuse for notifications made on or after 6 April 2016.

Personal Income Tax and Taxation of Investment Income

Savings Allowances

From April 2016, a new 0% savings rate will be introduced. For basic rate tax payers the savings allowance will be £1,000, and for higher rate taxpayers it will be £500.

As a result banks, building societies and other deposit takers will no longer be required to withhold income tax at source.

Changes to dividend taxation

This proposal was announced in the Summer Budget and will come into force from April 2016.

A new 0% dividend rate will be introduced which applies to the first £5,000 dividend income.

The rates of income tax for dividends received above the allowance will be:

  • 5% for dividend income within the basic rate band
  • 5% for dividend income within the higher rate band
  • 1% for dividend income within the additional rate band

The notional 10% tax credit on dividends will also be abolished.

Pensions Allowances

The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge. The lifetime allowance will be reduced to £1 million from 6 April 2016.

Inheritance Tax (“IHT”)

IHT – Domicile

Domicile is a common law concept which is a fundamental to IHT. If you are domiciled in the UK, your entire estate will be liable to UK IHT. There is a number of “harmonisation” measures.

Non-UK domiciled individuals who have been UK resident for at least 15 of the previous 20 years will be treated as UK domiciled for tax purposes. This will not only mean that they will be liable to IHT on their entire estate (subject to certain treaty provisions), but also that they will no longer be able to access the remittance basis of taxation for income tax and capital gains tax purposes.

Individuals born in the UK with a UK domicile of origin who subsequently acquire a non-UK domicile of choice will be deemed to be UK domiciled whilst they are resident in the UK, provided they were resident in at least one of the previous two tax years.

These proposal will come into effect from 6 April 2017.

Main Residence Nil Rate Band

These are new proposals that will come into force from 6 April 2017 which introduce an additional IHT nil-rate band when a residence is passed on death to a direct descendant. The additional nil rate band will initially be £100,000 and will increase by £25,000 for the following 3 years. This measure is targeted at estates with a value of less than £2m.

Details of the downsizing provisions have also been published.

Anti-Avoidance

Liquidations and Capital Reductions – End of tax efficient profit extraction?

Legislation will be introduced to treat a distribution from a winding-up (such as during a liquidation) as if it were an income distribution rather than capital where the following conditions are met.

These conditions are:

  • an individual (S) who is a shareholder in a close company (C) receives from C a distribution in respect of shares in a winding-up
  • within a period of two years after the distribution, S continues to be involved in a similar trade or activity
  • the circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage

The above proposal is rather specific but the main concern are the proposals in relation to the little known anti-avoidance legislation called transaction in securities.  The legislation will be modified to treat distributions from liquidations and repayments of share capital or premium as a transaction in securities. This will potentially treat such distributions as dividends rather than capital which can benefit from the entrepreneurs relief, capital losses brought forward and the capital gains tax annual exemption if certain conditions are met.

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