Many of the Summer Budget headlines focused on welfare reform and the state of the economy but there were some potentially far-reaching changes affecting business owners in the region which were far less proclaimed in the Budget address.
Rental Income
Annual ‘Rent a Room Relief’, the amount of tax free rent that an individual can receive through the letting of rooms in his own residence, has been set at £4,250 for many years so the increase to £7,500 will be welcome news to many people in the South East who take in lodgers.
Less favourable to the local private rental sector is the announcement that tax relief for finance costs on buy-to let properties is being gradually withdrawn so that by April 2020 only basic rate income tax relief will be available regardless of the marginal tax rate of the landlord.
In addition, as capital allowances have been unavailable for the equipping of furnished lettings, the ‘wear and tear’ allowance (a 10% per annum deduction based on net rents) has always been a useful relief for landlords. From April 2016 the relief is to be abolished and a deduction will only be available when assets are replaced.
Capital Allowances
Anyone reading the HMRC press release on capital allowances entitled ‘Annual Investment allowance: permanent increase to £200,000’ would be forgiven for thinking that this was a bit of a give-away from the Chancellor. Far from it, as businesses have been able between April 2014 and December 2015 to claim relief of up to £500,000 per annum on the acquisition of eligible Plant & Machinery. Apparently though, this was only a ‘temporary’ relief – if a week is a long time in politics surely 21 months ranks as fairly permanent!
As a result, all businesses in the South East, especially capital intensive ones should start to review the anticipated timing of expenditure on plant & machinery in order to maximise possible reliefs before the opportunity lapses.”
Dividend Reforms
Though apparently benign, the abolition of the national dividend tax credit from April 2016 to be replaced by a £5,000 tax free allowance raises the spectre of basic rate taxpayers having to pay a 7.5% tax on their dividend income when none was due under the old regime.
HMRC has long disliked the ability of the owners of private companies to pay themselves dividends (which are NIC free) which were taxed more favourably than salaries subject to PAYE. The changes announced in the Budget (apparently introducing more punitive dividend tax rates for higher and additional rate taxpayers) significantly reduce the tax benefit of dividend payments and many local entrepreneurs may reconsider their remuneration policy as a result. This all seems like a bit of a ‘quid pro quo’ for the further, welcome, reductions announced in the rate of corporation tax.
Mike Chapman, Senior Manager, Corporate Tax, Knill James