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#SummerBudget: Change to taxation of dividends labelled ‘attack on entrepreneurship’

ADVISERS up and down the country will still be feeling somewhat groggy after yesterday’s Emergency Budget left many in the tax profession in a spin.

Perhaps the change affecting the most practitioners and their clients is the change to the taxation of dividends, something Wilkins Kennedy head of tax Matt Hall warned would be perceived as an “attack on entrepreneurship”.

Many, including small business owners and users of personal service companies, have paid themselves national minimum wage and made up the difference in a dividend. Under the new regime from April 2016, the tax advantage in taking payment as a dividend is to be wiped out for as the tax credit applied to dividends is to be replaced with a £5,000 allowance before a 7.5% tax kicks in.

While not technically troublesome for practitioners, it has been the default route for a huge swathe of clients, and as such practitioners will likely be faced with significant numbers of clients in need of restructuring.

Although it will hit a much smaller number of people, the changes to the non-domicile regime have made a lot of noise.

The chancellor abolished permanent non-domicile status, meaning anyone who has been resident in the UK for more than 15 of the last 20 years will be treated as UK-domiciles for tax purposes and will be taxed on their worldwide income and gains.

Previously, if a non-domiciled individual owned an offshore company which in turn owned UK property, the UK property did not form part of their UK estate for inheritance tax purposes. Under new plans, it will be impossible to avoid UK tax through this mechanism, and the asset would be liable for UK inheritance tax irrespective.

While the changes have made the anachronistic regime have made it less contentious, Aparna Nathan, chair of the CIoT’s capital gains tax & investment income sub-committee called for the changes to be coherent with other tax incentives.

She added the proposals will “need to be implemented with great care to ensure that changes are effected appropriately across the tax system”.

“It is vital that there is adequate consultation on the statutory wording at as early a stage as possible, and not merely on the proposals in principle,” she said.

There were further, well-trailed changes in inheritance tax which will likely create work for advisers as a £1m threshold for estates including homes was brought in for married couples.

The prospect of no IHT on family homes will only be true as of 2020/21, the CIoT warns, and even then will depend on a couple’s estate including a main residence worth at least £350,000.

More valuable properties in estates worth over £2m will have the private residence relief reduced by £1 for every £2 of excess over the £2m threshold.

The allowance will not begin to apply until 2017/18 and at the same time as introducing the additional allowance, the government will now freeze the basic allowance at £325,000: the previously announced increases in the standard nil-rate band will not now take place, the institute said.

It all means advisers can expect plenty of visits from excited clients, who will then have to disentangle the various intricacies of the regime and see how it applies to them.

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