The Finance (No. 2) Bill 2015 will set the annual investment allowance (AIA) cap at £200,000 with effect from 1 January 2016. The government stated that it is committed to maintaining this cap for the rest of the current Parliament.

The AIA operates by providing a 100% allowance for qualifying expenditure up to the specified annual cap. The current annual cap of £500,000 was due to expire on 31 December 2015 when it would revert to £25,000. The cap has been subject to regular changes since the introduction of the AIA in April 2008. In line with previous changes, transitional rules will operate to apportion the AIA between different chargeable periods where the taxpayer's chargeable period spans 1 January 2016. (For more information on the AIA, see Practice note, Capital allowances on property transactions: Annual investment allowance.)

(See HMRC: Annual Investment Allowance: permanent increase to £200,000: TIIN and July Budget Report, paragraphs 1.242 and 2.120.)

The government confirmed that it will extend the averaging period for self-employed farmers and market gardeners from two years to five years with effect from April 2016. It also published a consultation document to seek views on how the extension should be designed and implemented. Legislation implementing the changes is likely to be included in the Finance Bill 2016.

The consultation document proposes two options to implement this measure:

The government asks for views on whether these two options would achieve the desired result and what the advantages and disadvantages of each are. The closing date for comments is 7 September 2015.

This measure was first announced in the March 2015 Budget (see Legal update, March 2015 Budget: key business tax announcements: Farmers: averaging period to be extended to five years). For information on averaging profits, see Practice note, Income tax: calculation of income profits: Special rules for certain trades.

(See HMRC: Income tax: Extension of averaging period for farmers and July Budget Report, paragraph 2.67.)

The government will introduce legislation in the Finance Bill 2016 to clarify how the simplified expenses rules in the Income Tax (Trading and Other Income) Act 2005 apply for partnerships in respect of the use of a home and when business premises are also a home. Draft legislation was published at the time of the draft Finance Bill 2015 (see Legal update, Draft Finance Bill 2015 legislation: key business tax measures: Fixed-rate deductions for use of home for business purposes: partnerships and Tax legislation tracker: miscellaneous: Home use by partners: fixed rate deductions).

(See July Budget Report, paragraph 2.162.)

The wear and tear allowance will be replaced with a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings when calculating their income tax liability. The new relief will apply from April 2016. Legislation will be included in the Finance Bill 2016 and the government will publish a technical consultation before the summer.

Currently, the wear and tear allowance permits residential landlords to deduct 10% of their rent from their profit for income tax purposes, regardless of whether they have incurred any expenditure on improving the property.

(See July Budget Report, paragraphs 1.192 and 2.58.)

The rent-a-room relief will increase to £7,500 a year from 6 April 2016. The purpose of this increase is to recognise the rise in rents since 1997 (when the current limit was set).

The relief applies so that individuals are not subject to income tax on rent of up to £7,500 received for letting out a furnished room in their only or main residence (see Practice note, Income tax: exemptions and reliefs: Miscellaneous reliefs).

(See HMRC: Rent a room relief increase: TIIN and July Budget Report, paragraphs 1.193 and 2.60.)

The NIC employment allowance, which was introduced with effect from 6 April 2014, is to rise to £3,000 from its current level of £2,000 with effect from April 2016. The purpose of the increase is to offset the impact on small employers of increases in the National Minimum Wage (NMW) and the move towards a new National Living Wage (NLW). To quote the example given by the Chancellor in his Budget speech, this will mean that a small business that employs four full time workers and pays them £9 per hour each (the proposed new NLW) will face no employers' NIC liability. However, companies where the only employee is the director will no longer be entitled to claim the allowance.

(See July Budget Report, paragraphs 1.127, 1.241, 2.61 and 2.62 and Policy Costings, pages 18 and 30.)

The inheritance tax (IHT) nil rate band, which is currently frozen at £325,00 until April 2018, will continue to be frozen at £325,000 until April 2021.

Legislation extending the freeze on the IHT nil rate band to April 2018 was introduced in the Finance Bill 2014 (see Private client tax legislation tracker 2013-14: Lifetime planning: IHT: nil rate band).

This measure will be included in the Finance (No. 2) Bill 2015, due to be published on 15 July 2015. To follow its progress, see Private client tax legislation tracker 2014-15: IHT: nil rate band.

(See July Budget Report, paragraphs 1.221 and 2.89, and Policy Costings, page 9.)

For deaths on or after 6 April 2017, the government will introduce an additional IHT nil rate band (ANRB) when a residence is passed on death to direct descendants. The government has forecast that 63,000 estates would have an IHT liability by 2020‑21 largely due to the rise in house values. This measure is designed to reduce that figure to 37,000 estates, which is around the same level as in 2014-15.

The ANRB will be in addition to the existing £325,000 nil rate band and any unused ANRB can be transferred to a surviving spouse or civil partner where the second death is on or after 6 April 2017. Where the deceased had an interest in more than one residential property, his personal representatives will be able to nominate which residence (so long as it was occupied by the deceased at some point) should benefit from the ANRB. The ANRB for 2017-18 will be £100,000, rising in stages to £175,000 in 2020-21 and in line with the Consumer Prices Index (CPI) after that.

There will be a tapered withdrawal of the ANRB for estates worth £2 million or more.

The government plans to extend the ANRB to estates where the deceased downsized to a less valuable property or ceased to own property on or after 8 July 2015 and assets of equivalent value are passed to direct descendants on death. Additional measures to provide for this will be included in Finance Bill 2016 following a consultation to be published in September 2015.

This measure was widely publicised before the July 2015 Budget and has been cast as the Conservative government's fulfilment of a much earlier pledge to increase the nil rate band to £1 million. The inclusion of estates where the deceased has downsized appears to have been introduced after fears that the original proposal would force elderly couples to hang on to large properties to benefit from the ANRB. The ability to nominate a residence so long as it was occupied by the deceased at some point is generous but should ensure the ANRB is easy to administer.

The principal measure will be included in the Finance (No. 2) Bill 2015 due to be published on 15 July 2015. The extension to estates where the deceased had downsized will be included in the Finance Bill 2016.

To follow the progress of this measure, see Private client tax legislation tracker 2014-15: IHT: main residence allowance.

(See HMRC: Inheritance tax: main residence nil-rate band and the existing nil-rate band: TIIN, July Budget Report, paragraphs 1.114, 1.219-1.221 and Policy Costings, page 9.)

Legislation is to be introduced removing the requirement that a claim for conditional exemption must be made and relevant property be designated as eligible for the exemption, before a ten-year anniversary charge. The new measure allows trustees to make a claim for conditional exemption within two years after a ten-year anniversary charge and will apply to charges arising under section 79 of the Inheritance Tax Act 1984 on or after the date that Finance (No. 2) Bill 2015 receives Royal Assent.

The measure was included in the draft Finance Bill 2015 legislation, published on 10 December 2014. For further information on the current rule and the proposed amendment to it, see Legal update, Draft Finance Bill 2015 legislation: key private client measures: IHT: heritage property: exemption from ten-year anniversary charge.

This measure will be included in the Finance (No. 2) Bill 2015, due to be published on 15 July 2015.

To follow the progress of the measure, see Private client tax legislation tracker 2014-15: IHT: heritage property and ten-year anniversary charge.

(See HMRC: Inheritance tax: simplifying charges on trusts and new rules to target avoidance through the use of multiple trusts: TIIN and July Budget Report, paragraph 2.93.)

Amending legislation relating to late payment interest provisions for inheritance tax (IHT) will:

The measure was announced in the 2014 Autumn Statement and included in the draft Finance Bill 2015 legislation, published on 10 December 2014 (see Legal update, Draft Finance Bill 2015 legislation: key private client measures: IHT: interest changes to support HMRC's new digital service). It will complement other legislative changes to support HMRC's digitisation of IHT and ensure that the relevant interest provisions will apply correctly when the new online service becomes available from 2015-16. The amendments will come into force at an appointed day to be specified in regulations. This is expected to coincide with the new online service becoming available.

This measure will be included in the Finance (No. 2) Bill 2015, due to be published on 15 July 2015. To follow its progress, see Private client tax legislation tracker 2014-15: HMRC and tax policy: IHT: interest and other changes to support online service.

(See HMRC: Inheritance Tax: changes to interest to support the new digital service: TIIN and July Budget Report, paragraph 2.92.)

The government has announced that it will amend the IHT excluded property rules so that UK residential property owned indirectly by non-UK domiciled individuals will be subject to IHT.

For more information, see Legal update, July 2015 Budget: key private client tax announcements: IHT on UK residential property owned indirectly by non-domiciled individuals.

The July 2015 Budget confirms that the government is to consult in summer 2015 on the technical detail of introducing tougher measures to punish (and therefore deter) taxpayers who persistently enter into tax avoidance schemes that fail. The tougher measures include increased financial penalties, increased reporting obligations, "naming and shaming" and restricting access to tax reliefs. The government has previously consulted on proposals, see Legal update, Consultation on sanctions for serial tax avoiders and GAAR-specific penalties and Private client tax legislation tracker 2014-15: Deterring serial avoiders.

It is also announced that the Promoters of Tax Avoidance Schemes (POTAS) regime (as to which, see Practice note, Tax avoidance schemes: high risk promoters: conduct and monitoring notices) is to be widened to bring within that scheme promoters whose schemes are regularly defeated.

Legislation to implement these measures will be introduced in the Finance Bill 2016.

(See July Budget Report, paragraphs 1.183 and 2.174.)

The July 2015 Budget confirms that the government is to consult in summer 2015 on the detail of introducing a penalty for the GAAR (as to which, see Practice note, General anti-abuse rule (GAAR)). The government previously consulted on the proposal for a penalty for the GAAR, including whether it would be an effective deterrent, whether penalties should be tax-geared or fixed and subject to mitigation, and the appropriate trigger point for levying penalties (see Legal update, Consultation on sanctions for serial tax avoiders and GAAR-specific penalties). The government also announced that it is considering new measures to strengthen the GAAR.

Legislation to implement these measures will be introduced in the Finance Bill 2016. To track their progress to implementation, see Private client tax legislation tracker 2014-15: GAAR-related penalties.

(See July Budget Report, paragraphs 1.183 and 2.175.)

The Chancellor announced that the government would invest £800 million in HMRC over this Parliament to enable HMRC to tackle non-compliance and tax evasion. (In his speech, the amount was £750 million.) The government aims to triple the number of criminal investigations that HMRC undertakes into serious and complex tax crime. A significant focus of HMRC's efforts will be wealthy individuals, trusts, pension schemes and non-domiciled individuals, although non-compliance by small and mid-sized businesses and public bodies will also be targeted.

The government will consult on enhancing the information reported to HMRC by wealthy individuals and trustees and also on extending HMRC's Customer Relationship Manager model to individuals with net wealth between £10 million and £20 million.

It was also announced that HMRC would consult on legislation to be introduced in the Finance Bill 2016 to empower HMRC to acquire information from online intermediaries and electronic payment providers. (For HMRC's current information-gathering powers, see Practice note, HMRC information powers.)

The measures will be effective from April 2016. New HMRC officers and investigators and Crown Prosecution Staff will be engaged to resource these activities.

The government will also create a digital disclosure channel to enable taxpayers easily to disclose their unpaid tax liabilities.

(See July Budget Report, paragraphs 1.171, 1.173, 1.182, 2.171-2.173, 2.180 and 2.181 and Policy Costings, pages 36-38, 42-43 and 191.)

The government has announced that legislation to allow HMRC to directly recover tax debts from the bank and building society accounts of tax debtors (direct recovery of debts) will be included in the Finance Bill (No. 2) 2015.

The direct recovery of debts legislation was first announced in May 2014 and, following a consultation, draft legislation was published on 10 December 2014 for inclusion in the Finance Act 2015 (see Legal update, Direct recovery of debts: draft legislation). However, it was announced in the March 2015 Budget that the legislation would not be included in the Finance Act 2015 but would, depending on the outcome of the general election, be considered for inclusion in a future Finance Bill (see Legal update, March 2015 Budget: key business tax announcements: Direct recovery of debts).

(See HMRC: Direct recovery of debts due to HMRC from debtors' bank and building society accounts: TIIN and July Budget Report, paragraph 2.170.)

The government confirmed that it will publish a roadmap by the end of 2015 setting out proposals to reform tax administration for individuals and small businesses. The aim is to replace annual tax returns with digital tax accounts. HMRC will discuss the policies underpinning the measure with key stakeholders and delivery partners (including small businesses and customer representatives) over the summer.

This measure was first announced in the March 2015 Budget (see Tax legislation tracker: compliance, disputes and investigations: Digital tax accounts).

(See July Budget Report, paragraphs 1.247 and 2.166.)