Budget 2017 - the detail for private clients
- Income and capital gains tax rates and allowances
- Inheritance tax reliefs
- Taxation of Trusts
- Charitable giving – Gift Aid donor benefit rules
- Non-UK domiciliaries and non-UK trusts
- Avoidance and evasion
- Enterprise Investment Scheme and Venture Capital Trusts
- Taxing trust benefits as employment income - disguised remuneration – close companies gateway
- Employed or self-employed?
- Capital Gains Tax indexation allowance for companies
- Stamp Duty Land Tax
- Extension of Capital Gains Tax to non-residents holding UK real estate
- Changes to the taxation of non-UK resident companies’ UK property income and gains
- Annual Tax on Enveloped Dwellings (ATED)
The Chancellor announced that the income tax personal allowance will rise from £11,500 in the current tax year to £11,850 in the 2018/19 tax year, and the higher rate threshold will also rise to £46,350 (up from £45,000 in the 2017/18 tax year). However, the tax-free allowance for dividend income will drop from £5,000 to £2,000.
The capital gains tax annual exempt amount will increase in line with the Consumer Prices Index to £11,700 for individuals and personal representatives and £5,850 for most trustees in the 2018/19 tax year.
Income and capital gains tax rates are unchanged.
HMRC has published research that was carried out independently on its behalf looking at the awareness of, and use made of, Agricultural and Business Property Relief (APR and BPR) for inheritance tax (IHT). It seems likely that this is a precursor to reviewing APR and BPR (which together cost the Treasury £3.816bn in the last year for which figures are available), bearing in mind that the IHT receipts for that same tax year (2014/15) only totalled £3.659bn.
The research showed that, amongst people who own or also have inherited assets qualifying for APR and BPR, their decisions were primarily influenced by wanting to keep estates or businesses intact and pass them on to their family. The reliefs allowed that to happen. Hardly any taxpayers acquired assets specifically to take advantage of the reliefs.
The fact that the reliefs are being used for their intended purpose will hopefully mean that any review will look at ways of tightening up the rules surrounding the reliefs, rather than abolishing or substantially restricting them.
In a welcome move, the Government has announced that it will launch a consultation next year in relation to the taxation of trusts and, in particular, how the taxation of trusts might be made simpler, fairer and more transparent.
Since the changes to the inheritance tax treatment of trusts in 2006, there have been penal tax charges which have meant that there are very few situations in which it will make sense for a UK individual to establish a lifetime trust, even though there are many good estate and succession planning reasons why it might make sense to do so (such as the protection of vulnerable beneficiaries, ensuring continuity for family businesses, ring-fencing assets for different branches of a family, ensuring a fair distribution of assets following a divorce, etc).
With any luck, the review will identify a regime which removes the current penal elements so that trusts can once again be used for legitimate estate and succession planning without giving rise to opportunities for tax avoidance.
It will also be interesting to see whether the review extends to the tax treatment of offshore trusts. Following the changes to the taxation of non-domiciliaries introduced in Finance (No. 2) Act 2017 and the proposed further changes which will be included in Finance Bill 2018, there is now a multiplicity of regimes and what were already extraordinarily complex rules have become even harder to navigate to the extent that it is becoming difficult, even for most advisers, to have a detailed grasp of the rules, never mind individual clients.
This is of course very worrying when considered in the context of new sanctions which have recently been introduced in relation to offshore "non-compliance" (higher penalties, penalties for "enablers" and extended assessment periods, etc). Introducing a new regime, which is both simpler and fairer, would be a welcome development. However, this would be a very large undertaking and it may be something which the Government feels that it does not have the resources to undertake at the present time given the need to focus its attention on other matters such as Brexit.
Gift Aid tax relief enables charities to claim back the basic rate of tax of gifts made to them by UK tax payers. Higher or additional rate tax payers are additionally able to claim back the difference between the rate of tax they pay and the basic rate of tax on their donation. Gift Aid is, therefore, a valuable and useful relief for charities and donors alike.
In order to benefit from Gift Aid tax relief, however, a donor may only receive benefits within small permitted limits which, until this autumn's Budget, have been a mixture of monetary and percentage thresholds. From 6 April 2019, these thresholds will be simplified so that:
- the permitted level of benefit for a donation of up to £100, is 25 per cent of the donation (this is unchanged); and
- for larger donations, donors will be permitted to receive an additional benefit of up to 5 per cent of the donation that exceeds £100.
Although the total value of the benefit that a donor will be able to receive remains at £2,500, these changes are welcome and should simplify Gift Aid for both donors and charities. They should also enable Gift Aid to continue to be claimed where the value of a donation and the benefits span a threshold. Under the current regime, this is sometimes a problem and leads charities not to claim Gift Aid at all.
No new measures affecting the taxation of non-domiciled UK residents were announced.
Most of the changes to the taxation of non-domiciliaries which were first announced in July 2015 have been implemented with effect from 6 April 2017 in the Finance (No. 2) Act 2017 which received Royal Assent on 16 November.
There is however some further tightening up of the anti-avoidance provisions in relation to non-UK trusts which had previously been announced. These changes will take effect from 6 April 2018 and so some individuals and their trustees may need to consider whether any action needs to be taken before the changes become law.
We have produced a separate note on these changes which can be found here.
Given the recent furore over the so-called "Paradise Papers", tax avoidance by wealthy individuals and multinational corporations remains a hot topic, especially where offshore financial centres are involved. Rather than announcing any dramatic changes to the way the UK will interact with these jurisdictions, the Chancellor took the opportunity to emphasise how much progress the Government has already made on the issue of tax avoidance. He published with the Budget papers a summary of all the initiatives and policies introduced between Summer Budget 2010 and Spring Budget 2017 to tackle tax avoidance, evasion, other forms of non-compliance and aggressive tax planning which contained no fewer than 169 separate measures.
In addition, there were some new developments announced last week aimed at tackling offshore tax non-compliance, all of which are designed to make it easier for HMRC to take advantage of, and seek to enforce, the raft of anti-avoidance and anti-evasion legislation of the past few years.
These resources will be necessary to enable HMRC to process the vast amount of information which will be made available annually as a result of automatic exchange of information under the Common Reporting Standard (CRS).
First, HMRC will be given access to £155m of additional funding to invest in staff and new technology.
Second, the time limit for HMRC to assess instances of offshore non-compliance will be extended to at least 12 years in all cases, including where any omission or error by the taxpayer was not deliberate, following a consultation in spring 2018. Currently, HMRC has only four years to assess any additional tax where there has been a non-deliberate error or omission. Again, this is in recognition of the scale of the challenge facing HMRC to process the available information and conduct its investigations. HMRC will still have 20 years to assess tax not declared where there has been a deliberate error or omission by the taxpayer.
Lastly, the government is introducing a requirement for creators or promoters of certain offshore structures, which could be used to evade tax, to notify HMRC of the structures and the clients using them. HMRC has consulted on this issue, the response to which should be published on 1 December 2017, and it is expected to apply to arrangements which have been in place since the start of the CRS reporting window at the end of 2016.
All of this means that taxpayers should take the opportunity to regularise their tax affairs now if there are any lingering doubts over past compliance. The currently available Worldwide Disclosure Facility (which offers no amnesty, penalty reduction or guarantee of non-prosecution) is much less generous than the now closed Liechtenstein Disclosure Facility but will still be preferable to being caught within the new "super penalty" regime which will apply after the expiration of the new "requirement to correct" window on 20 September 2018.
Enterprise Investment Scheme (EIS) relief and Venture Capital Trust (VCT) relief are both generous tax reliefs for investment in small, privately owned trading companies. EIS relief applies to direct investment in individual qualifying companies, and VCT relief applies to investment in approved collective investment schemes which themselves invest in qualifying companies.
Under VCT relief, an investor can claim 30 per cent income tax relief on any investment into a VCT up to £200,000 per tax year and dividends and capital gains realised on any stake that qualified for income tax relief on investment are fully exempt.
Under EIS relief, equivalent tax reliefs apply but the annual allowance is £1m.
The changes announced form part of the Chancellor’s response to the findings of the Patient Capital Review, launched in November 2016 in order to consider how to encourage the long term financing of growing innovative firms based in the UK.
The first change is the announcement of an additional £1m EIS allowance for investments into "knowledge intensive" companies. Such companies are already defined in legislation as companies that meet certain minimum spending requirements on research and development or innovation, and at least 20 per cent of whose full time employees are carrying out R&D or innovative work that requires them to hold a Masters degree or higher.
This change means that an individual who has already made £1m of investment into one or more qualifying companies can effectively double their allowance provided the additional £1m of EIS qualifying investment is into a knowledge intensive company. This works out as a total of up to £600,000 of income tax relief per year.
For knowledge intensive companies themselves, there is an increase in the annual investment limit for EIS or VCT qualifying investments that can be made into the company from £5m to £10m.
With the combined effect of EIS relief, business property relief for inheritance tax purposes (in most cases a 100 per cent relief from inheritance tax on shares held for at least two years) and business investment relief for remittance basis users (which enables untaxed foreign source income and gains of a non-UK domiciliary to be remitted for the purposes of investing in private trading companies without triggering a taxable remittance) it is clear that the Government is taking steps to encourage inward investment into UK businesses.
However, another aspect of the changes announced on 22 November is the desire to ensure that EIS and VCT reliefs are not abused (and it is possible that similar concerns may feature in any review of APR and BPR). One of the conclusions of the Patient Capital Review was that there were too many EIS funds / VCTs being marketed as targeting "capital preservation" (read: low risk) rather than "capital growth" (read: risk capital).
The key change is to introduce a new principles-based test for EIS / VCT relief to apply in the future. This test aims to determine whether, at the time of the investment, a company is a "genuine entrepreneurial" company. The test will be designed to assess whether the company has objectives to grow and develop (other than simply by means of organic growth in turnover) and whether there is significant risk of loss of capital, where the amount of the loss could be greater than the net return to the investor.
Another change is designed to ensure that amounts subscribed into VCTs are invested sooner, and to a greater extent, into qualifying businesses and to preclude the use of capital-protected lending within VCTs.
These changes demonstrate that the Government is keen to continue to use tax incentives to encourage private investment in UK businesses, but investors should expect that abuse of any tax relief is likely to result in a tightening of rules.
Wide anti-avoidance rules were introduced in 2011 to try to prevent companies and individuals side-stepping tax on what was essentially employment income. Where these rules apply, certain payments or benefits are taxed as employment income.
These rules will be extended from 6 April 2018 so that they apply in a wider range of circumstances to arrangements involving privately owned companies.
We will know more when the draft legislation is published on 1 December, but there is a concern based on the draft legislation issued in September that the new rules will be wider than necessary to catch the sort of avoidance the Government is concerned with and will also catch innocent situations (where there is no attempt to avoid employment income taxes), especially in circumstances where privately owned companies are owned by family trusts and benefits are provided by the trustees to individuals who are working in the business or who are related to such individuals.
Although a motive test has been introduced in order to narrow the scope of the provisions, the test is based on whether there is any income tax advantage rather than on whether the arrangements are designed to avoid employment income taxes. There is therefore still scope for the proposed new rules to apply to innocent transactions with the result that benefits received by trust beneficiaries could be taxed as employment income.
This may well be a trap for family owned businesses once the new rules come into force on 6 April 2018 and ownership structures will potentially need to be reviewed before then.
There is an increased political focus on the status of people operating in the "gig economy" and whether they should be treated as employees. The distinction between self-employment and employment was a complex area prone to abuse even before the growth of more flexible and less traditional working arrangements.
The government is therefore going to consult on reforming the tests which determine a person's status for employment tax purposes. It is not clear what changes this consultation will produce. Given the political commentary in this area at the moment it may well be that companies, particularly in the "gig economy", will find themselves as employers with all the accompanying requirements of operating payroll and paying employer's national insurance contributions.
The consultation on self-employed people complements HMRC's focus on individuals who claim to be contractors operating through person service companies.
This is a recurring concern. However, there is a sense that despite anti-avoidance provisions targeting the use of personal service companies this continues to be an area of considerable non-compliance. One reason highlighted for this continuing non-compliance is that the determination of employment status is primarily a matter for the individual concerned rather than the person contracting with their personal service company.
To target this planning more effectively the government has been focusing on the person receiving the services. New complex anti-avoidance provisions were introduced in April this year to the public sector. In essence the person receiving the services is required to make a determination as to whether the service provider should properly be treated as an employee. The government notes that this has increased compliance in the public sector.
The government are now consulting on applying these rules in the private sector. Given that the public sector rules are perceived as having increased compliance the working assumption must be that these rules, in some form, will be applied to the private sector. If this does occur it is likely to further increase the compliance obligations for employers as they will need to determine the status of the person providing the services and will be liable for deducting income tax and national insurance contributions.
In 1982, Margaret Thatcher’s government decided that gains due to inflation should not be taxed. The indexation allowance was introduced to give effect to this.
The indexation allowance was removed for individuals in 1998 but has continued to be available to reduce the gains of companies (both UK companies and overseas companies).
The present government has decided that there is no longer any reason why capital gains tax (CGT) should not be paid on the entire gain, with no allowance for inflation and so the indexation allowance will be removed for companies with effect from 1 January 2018. The benefit of indexation up to 31 December 2017 will, however, still be taken into account in calculating any gains, even if the disposal takes place after that date.
In recent years, it has become popular for surplus family wealth to be invested through a family investment company. This is partly as a result of lower corporation tax rates compared to personal income tax rates but also as it provides a succession planning vehicle where economic interests can be held by the next generation whilst parents retain control over the company.
One of the other tax benefits of investing through a company is that, in calculating capital gains, companies qualify for the "indexation allowance", which effectively means that the company only pays tax on any profits which exceed inflation.
It is unlikely that this change will make a great deal of difference to the decision as to whether or not a family investment company makes sense but, in a borderline case, it could tip the balance.
Amendments to supplemental three per cent charge
Since 2011, the top rate of Stamp Duty Land Tax (SDLT) payable on the purchase of residential property has gone up from four per cent to 12 per cent, with an additional three per cent surcharge being payable where the purchase results in the purchaser owning two or more residential properties.
In April 2016, when the 3 per cent surcharge was first introduced, the monthly receipts of SDLT were their largest ever since SDLT replaced stamp duty in 2003.
In his Autumn Budget, the Chancellor introduced some minor changes to the three per cent surcharge rule.
One of the changes was in order to close down a perceived loophole, whereby a married individual could take advantage of the relief from the three per cent surcharge available on replacement of a main residence in circumstances where his / her spouse or civil partner retained an interest in the disposed of residence. Following the change, the relief applies only where neither the purchaser nor his / her spouse or civil partner retains a "major interest" in the sold property (being any freehold or leasehold interest in the property, whether legal or equitable).
The second change was in order to ensure that the higher rate surcharge does not apply unfairly in circumstances where either:
- the sale is between spouses;
- where an individual retains an interest in a property that is not his or her main home solely as a result of a "property adjustment order" on a divorce. In this situation, the first property is ignored for the purposes of determining whether any purchase of another residential property is subject to the higher rate charge;
- where property is held on trust for a child whose affairs are subject to an order of the Court of Protection or similar, it is ignored for the purposes of determining whether a residential property purchase by the parents of the child is subject to the higher rate charge; or
- finally, where the purchase adds to an existing interest in an individual’s existing main residence (for example, extending a lease or acquiring a freehold interest). This relief will only apply where the individual in question has a 25 per cent or greater interest in the underlying property.
Relief for first-time buyers
A more headline-grabbing change to SDLT introduced in this autumn’s Budget is the introduction of a relief from SDLT for first time buyers. Or more precisely its re-introduction because, in fact, such a relief applied for a one year period from 25 March 2010.
The new relief applies with immediate effect from budget day (i.e. 22 November 2017) to residential property purchases where the purchase price paid for the property is no more than £500,000, with a complete exemption from SDLT on all amounts paid up to £300,000, and amounts between £300,000 and £500,000 being chargeable at a rate of five per cent. Purchases for more than £500,000 are chargeable at normal rates.
A "first time buyer" is defined as an individual who has never previously owned a "major interest" in residential property anywhere in the world (not including a leasehold interest with less than 21 years to run at the time of acquisition).
However it is important to note that this relief will not apply to any purchase which would be within the three per cent higher rate surcharge. This would include:
- any purchase by or on behalf of a child one or more of whose parents already own one or more residential properties, or trustees of a trust for such a child;
- any purchase by joint purchasers where any one or more of the purchasers already has a major interest in one or more other residential properties; and
- any purchase by an individual whose spouse or civil partner already has a major interest in one or more other residential properties.
This is likely to be a relief that is welcomed by parents wanting to help their adult children get on the housing ladder for the first time.
In a major change to the taxation of UK real estate, from April 2019 non-UK residents holding UK real estate will be subject to UK tax on their gains.
UK CGT has already been extended to certain non-UK residents holding residential property in recent years; however, this new extension will bring almost all non-UK resident owners of UK land within the scope of UK tax on their gains, and will remove a key tax benefit currently enjoyed by non-UK investors in real estate.
Key points from the announcement are as follows:
- The new regime is subject to consultation and so much of the scope and detail is as yet uncertain. However the Government has said that the core aspects are fixed, including the date from which the new rules will apply, i.e. April 2019.
- Only increases in value arising after this date will be subject to tax, so historic gains will be protected and investors that have held assets since before this date will only be subject to tax on a disposal to the extent their asset has increased in value since April 2019. Non-UK resident companies and unit trusts will be taxed at the corporation tax rate (currently 19 per cent) while individuals and other entities will be taxed at capital gains tax rates (currently 20 per cent for higher and additional rate taxpayers).
- Non-UK entities that are currently outside the scope of UK CGT on residential property gains, by virtue of being widely held (for example certain funds), will be subject to tax on all gains realised on their UK property assets under the new regime.
- The new rules will apply to certain sales of interests in "property rich" vehicles, as well as to sales of real estate assets themselves. A property rich vehicle is one that ultimately derives at least 75 per cent of its gross asset value from UK real estate, and gains on a disposal will be chargeable where the person making the disposal holds (or has held in the last five years) a 25 per cent or greater interest in the vehicle.
- Even with this extension of CGT investors may still prefer to structure their exit as the sale of the vehicle holding the asset, as this will offer the buyer a SDLT saving. It is also worth noting that the recent widening of the Substantial Shareholding Exemption, a relief from UK corporation tax on gains for the disposal of shares in certain companies, may also benefit certain non-UK institutional investors holding UK land through companies. Overseas pension schemes will continue to be exempt from UK CGT on disposals of real estate and interests in property rich vehicles.
- Certain of the UK’s tax treaties preclude the UK from taxing gains realised by non-UK residents on sales of interests in vehicles holding UK land, subject in some cases to certain conditions being met. The treaties will "trump" domestic legislation so investors based in these jurisdictions may escape the new regime. However, the new regime will include anti-avoidance measures designed to counteract attempts to restructure property holdings after last week’s announcement, in a way that takes advantage of favourable tax treaties.
- The new rules only apply to investors in UK real estate, and the existing regime for developers and traders (including the Transactions in UK Land rules introduced in 2016) should not be affected. The Government is proposing to "harmonise" the new rules with the existing regimes for non-resident CGT and Annual Tax on Enveloped Dwellings-related CGT on disposals by non-UK residents of residential properties. As both of these regimes are complex, any streamlining of the rules will be welcome.
After the extension of UK CGT to most non-UK resident owners of residential property in 2015, many feared that the obvious next step for the Government would be to extend CGT to all non-UK owners of commercial property. This will bring the UK in line with many other jurisdictions’ property tax regimes; however, it will also remove one of the most attractive features of UK real estate for non-UK investors, and with around 28 per cent of the UK’s investment grade commercial property held by non-UK residents this will inevitably have an impact on the market.
It is proposed that, with effect from April 2020, non-UK resident companies will be chargeable to UK corporation tax on income and gains arising on UK land interests, rather than, as now, being subject to UK income tax and capital gains tax. There has been ongoing consultation on this issue, and the government's response to that consultation is due to be published shortly.
The driver behind this proposal is to ensure that new corporation tax rules which restrict interest deductions and loss relief apply to non-UK resident companies which are currently not subject to corporation tax. This means that, whilst the rate of corporation tax (expected to be as low as 17 per cent by April 2020) is lower than income tax and capital gains tax rates, the impact of the proposal is likely, in many circumstances, to result in a higher overall tax bill.
ATED is an annual tax payable by "non-natural" persons (e.g. companies) that own UK residential property valued at more than £500,000. As part of the Autumn Budget, the government announced that the ATED would rise in line with the September 2017 Consumer Prices Index. This means that the annual chargeable amounts will increase for the 2018/19 period by three per cent.
In addition, from 1 April 2018, properties have to be revalued to 1 April 2017 (ATED has previously been charged based on the value of the property on 1 April 2012), which may well bring more properties into the ATED net or increase the ATED liability due to the property moving into a higher tax band.