Summer Budget 2015: Osborne’s Tax Tinkering

Despite being light on surprises, the first truly Conservative Budget for almost 20 years was far from the right wing statement many expected as Mr Osborne endeavoured to close the door on a low-wage, high-welfare, high tax economy. Although perhaps not as headline-grabbing as the introduction of a ‘National Living Wage’ or the commitment to spend 2 per cent of national income on defence, we consider the reforms to both the dividend tax system and the inheritance tax rules to be of commensurate interest.

From April 2016, the ‘aging’ tax credits mechanism on dividends will be replaced by an annual tax-free dividend income allowance of £5,000. Though this may at first sound generous, a £130,000 portfolio yielding 4% would exceed this allowance, with the excess then subject to tax at either 7.5% for basic rate tax payers, 32.5% for higher-rate tax payers or 38.1% for additional rate taxpayers. Smaller investors with portfolios generating a dividend income of below £5,000 will be relatively unaffected and may well find completing their tax returns easier, whilst larger investors will suffer a heftier tax bill; with top-rate taxpayer liabilities rising by at least 25%. Furthermore, the self-employed receiving dividends as salaries from company profits will find themselves on the wrong side of a 20% rise in rates. The Exchequer expects the new system to raise more than £2bn a year. These rule changes can only help to highlight the importance of utilising tax efficient wrappers, such as ISAs, pensions and Investment Bonds.

There has also been a well flagged, if slightly complicated change to the inheritance tax rules. The £325,000 nil-rate band has already been frozen until 2020. However, from 2017 an additional increase in the allowance is provided through a ‘family home allowance’ which will be made available to everyone who leaves their house to children or grandchildren. This will be initiated with an additional £100,000, allowance, and will then increase in £25,000 increments over the following three years, eventually adding a further £175,000 (per individual) by 2020 to the nil rate band. This will effectively allow a couple to potentially bequeath up to £1m of assets free of the 40% (current rate) inheritance tax charge.

For the middle classes whose wealth has grown as property prices have risen, this is clearly excellent news, particularly as individuals downsizing will not lose their allowance (to be clarified). However for the wealthiest estates, many of which include properties in London and the southeast, this could have little impact, as they will not qualify for the additional relief, as this will be tapered away for estates worth between £2M and £2.35M.

At Cave & Sons we are well qualified to help those who are likely to be affected by these changes so please feel free to contact one of our highly qualified advisers. Please email or contact our Head Office on (01604) 621421
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