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Summer Budget 2015: Corporate life is the good life?

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

The good life

I doubt very much whether Felicity Kendal and Richard Briers operated their agricultural activities through a corporate wrapper. However, if they chose to do so now, they would see this as an increasingly attractive vehicle going forwards.

Down, down down: corporation tax rates

As you will probably be aware corporation tax rate is 20% and this will continue for any financial year beginning 1 April 2016. However, the historical downward trend for this rate is to be restarted by the announcement that:

  • The rate will be reduced to 19% for the Financial Year beginning 1 April 2017, 1 April 2018 and 1 April 2019.
  • It be reduced by a further 1% to 18% for the Financial Year beginning 1 April 2020.

Of course, one should bear in mind that for many Companies, the personal cost of extracting cash from the Company via dividends under those relevant announcements will be come more expensive.

But what about dividends?

One surprising, and significant move, was the announcement of the abolition of the rather bizarre notional tax credit available for dividends from 6 April 2016. This will also result in a reframing of the personal taxation of dividends which will have an impact on all types of individuals whether contractors working through companies, family businesses or investors (including pensioners).

Each individual will have another allowance, specifically relating to dividends. of £5k. Any dividends within this allowance will be free of tax. Any excess will be added as a ‘top slice’ of income and will depend on which band it falls within:

  • to the extent it falls within the basic rate band: 7.5%
  • to the extent it falls within the higher rate band: 32.5%
  • to the extent it falls within the additional rate band: 38.1%

Of course, dividends do not suffer National Insurance Contributions. However, they are also paid out of after tax profits so no corporation tax deduction.

The result of the changes is that the (tax) advantage of operating through a limited company for many will be eroded and potentially lost. Advice should be sought

Capital allowances

The Chancellor also announced that the permanent Annual Investment Allowance (AIA) would be increased from the meagre £25k to £200k from 1 January 2016.

It should be pointed out that this is, in fact, a reduction in the prevailing temporary AIA which currently stands at £500k. This was scheduled to revert to the £25k from 1st January 2016.

Deduction of interest costs for rental property

A slightly surprising development was the announcement that interest relief would be restricted for individuals.

Individuals are currently entitled to offset interest costs and other fees paid relating to loans used to acquire residential property for rental purposes.

However, from 6 April 2017 individual landlords who are higher rate / additional rate taxpayers will no longer be entitled to deduct the full amount of such interest and fees. Instead, only a proportion will be fully deductible with the balance only deductible at the basic rate of tax (20%). From April 2020 the whole deduction will be at the basic rate of tax only.

What has this got to do with Companies you may ask? The point is that there is no restriction on the deductibility of finance costs for companies holding residential property as an investment. Bearing in mind the announced reduction in the main corporation tax rate from April 2020 holding such property through companies may become increasingly attractive to clients.

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