What’s new for the 2018/19 tax year?
We are now embarking on a new tax year and although the spectre looms over us of a change in government and the shift in attitude to tax a Corbyn government would bring, the current Chancellor seems keen not to rock the boat.
The new tax year heralds far fewer changes than in recent years. You can still be able to take advantage of most of the usual allowances at the same (or in some case slightly higher) levels. Nonetheless there are still some changes, most leading to increased tax but also some opportunities, especially for ‘non doms’.
Non doms – only a year left to ‘cleanse’
If you are UK resident but originally from overseas and have not been resident here for at least 15 years then you are what is often referred to as a ‘non dom’. Non doms, despite being UK tax resident, can elect not to pay tax in the UK on their worldwide assets and instead only pay tax on income or gains made in the UK or made offshore and then remitted to the UK. There is no UK tax on capital that existed prior to the non-dom becoming UK resident. There are, however, complex rules which can deem a ‘remittance’ because that original capital has been mixed with potentially taxable funds offshore.
There is a window open until 5 April 2019 whereby such ‘mixed’ funds can be ‘cleansed’. In other words they can be split out so the non taxable original capital can be brought to the UK free of tax. The steps to be taken and the calculations required are complex so action is required now.
From 6 April 2018 a new regime applies to the taxation of offshore trusts or more importantly the tax implications of them for UK beneficiaries. Complicated rules have always existed to ensure that UK beneficiaries in receipt of distributions or benefits from offshore trusts are subject to tax. Until now these taxes could be minimised if there were non-UK resident beneficiaries who were also receiving distributions. The majority of these opportunities will no longer exist from 6 April 2018 and anyone who is a beneficiary of such a trust would be wise to take advice or ensure the trustees have taken advice in advance of any future receipts.
Buy to let changes
In 2015 George Osborne announced plans to restrict the income tax relief on finance costs for individual and trustee buy to let landlords. Finance costs includes mortgage interest, arrangement fees and overdraft interest and charges. The restriction is being phased in from the tax year 2016/17 and will be fully in place by 2020/21.
In 2018/19 only 50% of the finance costs will be deductible in calculating the taxable rental profits. Relief for the remaining 50% will be by way of a reduction in the taxpayer’s tax liability, however relief is then restricted to 20% of the unrelieved finance costs.
However, the impact of the new rules does not stop there and can increase a taxpayer’s total tax liability in a number of other ways. Anyone owning mortgaged rental properties should seek further advice.
Residence Nil Rate Band (‘RNRB’)
More a silver lining than an opportunity, the RNRB first came into effect on 6 April 2017 and provides an extension, by reference to a deceased’s residence, to the usual nil rate band for inheritance tax (currently £325,000). Our last e-bulletin covered the requirements in detail but in essence the RNRB is available if a deceased owned a residence at any time since 8 July 2015, they leave it (or its proceeds) to direct descendants and they own less than £2 million of assets at the date of death.
From 6 April 2018 the maximum available RNRB goes up to £125,000 from £100,000 leading to a potential combined nil rate band of £450,000. This could be doubled to as much as £900,000 if the deceased was a widower who inherited everything on their spouse’s earlier death. To make sure your heirs can benefit from this increased tax relief your Wills should be reviewed. Even if an estate is likely to exceed £2 million steps can be taken to make use of the RNRB.
Dividend allowance reduced
Since 6 April 2016 individuals have had a specific tax free allowance for dividends. From 6 April 2018 this allowance falls from £5,000 to just £2,000. It is worth noting that the tax free Personal Savings Allowance (i.e. bank interest) remains the same at £1,000 for basic rate tax payers and £500 for higher rate tax payers.
Paul Fairbairn joined the private client team as a partner in March 2018 from an international private client firm. He has particular expertise advising non doms and those with offshore assets and structures as well as domestic clients. If you would like to discuss anything raised in this article, please contact Paul on 01892 506350 or at firstname.lastname@example.org in the first instance.