The Finance Bill 2020
Capital gains tax: restrictions to entrepreneurs’ relief
Non-domiciliaries – inheritance tax implications of additions to and transfers between trusts
Changes to the taxation of UK property from April 2020
Employment and pensions
Taxation of life policy gains – top slicing relief
Tax relief for losses extended to investment in non-UK companies
Changes to the official HMRC interest rate and benefits in kind
This note covers the content of these and the implications for private clients, rather than focusing on the help for employers and the self-employed and other measures announced after 19 March. The most significant announcement for private clients was the change to entrepreneurs' relief, which we cover in detail below, but there were several other points of note, including some measures not mentioned in the Budget.
The government continues to make unprecedented open-ended financial commitments aimed at supporting most areas of the economy and it is hard to see how these can ultimately be funded through borrowing alone. Private clients would be prudent to assume that tax rises will follow once the immediate crisis period has passed.
There was much speculation prior to the Budget about scaling back (or entirely abolishing) entrepreneurs' relief. By way of reminder, entrepreneurs' relief applies (broadly speaking) to disposals of business assets. The definition of business assets for this purpose extends beyond assets used directly for the purposes of a trade. It includes shares in a trading company where the person disposing of them is a director or employee and has at least 5% of the ordinary shares (carrying at least 5% of the voting rights). Where the relief applies, gains falling within the disponor’s lifetime allowance (which has since 2011 been set at £10m) are taxed at 10%.
The relief had already been tightened up to prevent perceived abuses and has been the subject of much criticism on the basis that it does not in fact encourage people to be entrepreneurial. With the Chancellor’s flexibility to raise taxes somewhat restricted, it seemed like an obvious target for reform.
In the event, the Chancellor decided to retain the relief but to reduce the lifetime cap down to £1m (its pre-2011 level – a move which he stated would not affect 80% of potential claimants).
The new reduced lifetime allowance applies to disposals made on or after 11 March.
There will however be some anti-avoidance measures aimed at certain disposals taking place before 11 March which might otherwise have attracted the higher level of relief.
The first is aimed at so-called unconditional or uncompleted contract planning. The general rule for capital gains tax (CGT) purposes is that where an asset is disposed of under an unconditional contract, the date of disposal is the date of the contract and not the date of its completion.
Where market disposals of assets prior to earlier anticipated changes to CGT rates or reliefs have been impractical, some taxpayers have entered into unconditional contracts with trusts or companies associated with them. The idea was to secure the pre-Budget rate of CGT on a future disposal by first completing the contract with the associated party and then selling on to a third party purchaser.
Where completion occurs on or after 11 March of a pre-11 March contract, the taxpayer will have to demonstrate to HMRC that the contract was not entered into with the purposes of securing a tax advantage if the higher pre-11 March lifetime allowance is to apply. This is unlikely to be possible where an unconditional contract with a connected party has been put in place solely to secure entrepreneurs' relief in its pre-11 March form.
The second set of anti-avoidance rules apply where there has been a re-organisation or share exchange before 11 March. Normally any gain can be deferred but it is possible to make an election to disapply these rules so that entrepreneurs’ relief can be claimed in respect of the gain which would otherwise arise. However, where the transaction involves no real change to the ownership or control of the company, only the new reduced level of relief will be available.
One odd change is that the relief is to be re-named “business asset disposal relief”, implying that it is no longer aimed at entrepreneurs. This is perhaps a reaction to the criticisms aimed at the purpose of the relief. The requirement to be a director or employee has not however been removed.
In this context it is worth remembering the existence of a separate relief known as investors’ relief. This is available on a disposal of shares in an unquoted trading company by an individual who is otherwise unconnected with the company (although the investor may become an unpaid director as a result of acquiring the shares). The shares must have been acquired by subscription and must have been held for three years before disposal. As with entrepreneurs’ relief, if the conditions are met, the rate of CGT is reduced to 10%. The maximum amount of gains qualifying for relief during an individual’s lifetime remains £10m despite the reduction in the lifetime limit for entrepreneurs’ relief.
This is a potentially valuable relief for investors where an investment does not qualify for other reliefs such as under the Enterprise Investment Scheme and is often overlooked.
None of this helps entrepreneurs. What is really needed is a simple relief which gives entrepreneurs tax relief for investing in their own business and the ability to reduce their taxable gains by re-investing all or part of any proceeds into a new business venture.
The Finance Bill includes legislation announced in last year’s Budget and which may affect the inheritance tax treatment of trusts where assets are added to a trust or funds are transferred between trusts established by a non-domiciliary at a time when the settlor has become domiciled or deemed domiciled in the UK.
Generally speaking, non-UK assets held in a trust established by a non-domiciliary qualify as “excluded property” which means they are outside the scope of UK inheritance tax, even if the settlor subsequently becomes domiciled in the UK or is deemed to be domiciled in the UK (as a result of having lived here for more than 15 years).
After the Finance Bill becomes law (which will probably be at the end of June or in early July 2020), this will however no longer be the case in the following circumstances.
- Property added to an excluded property trust after the settlor has become domiciled or deemed domiciled in the UK will not be excluded property. This will be the case whether the addition was made before or after the new rules come into force.
- Property which moves between excluded property trusts at a time when the settlor of the transferor settlement is domiciled or deemed domiciled in the UK will cease to be excluded property. For the most part, this change only affects transfers made after the legislation comes into force. If the transfer was made before then, the property will normally remain excluded property. However, there is a trap. If the settlor is a beneficiary of the transferee trust, the assets transferred will be included in their estate on death and will no longer qualify as excluded property.
It is unlikely that a settlor who has become domiciled or deemed domiciled in the UK will have added property to an existing excluded property trust as the general view was, in any event, that such property would not qualify as excluded property. However, if additions have been made, it may be worth considering whether the property which was added to the trust can be distributed out of the trust in order to avoid ongoing inheritance tax liabilities. Consideration will need to be given as to whether any distribution might trigger income or CGT liabilities if the recipient of the distribution is UK resident.
There remains an opportunity to move funds between trusts before the legislation takes effect in the summer. There are likely to be relatively few situations where this is appropriate as an addition to a trust established by an individual who is now deemed domiciled in the UK will lose any income tax and capital gains protections which apply. It might however be appropriate for example where the recipient trust holds an illiquid asset (such as a house) which is not going to be disposed of but where funding is required to meet ongoing expenses as long as the settlor is not a beneficiary of that trust.
As ever, the taxation of overseas trusts is a complicated area and so all of the potential implications would need to be considered carefully.
Corporation tax on UK source rental profits
As announced in 2018, non-resident corporate landlords will start paying corporation tax on UK rental profits rather than income tax from 6 April 2020. HMRC is planning to register non-resident landlords for corporation tax automatically, but landlords will need to make sure they are aware of the different compliance requirements for corporation tax and how finance costs, in particular, may be treated differently. Don’t forget that non-residents are already subject to tax on gains realised on their UK real estate, whether directly held or indirectly through a “property rich vehicle”, following changes on 6 April 2019 which we explored in a previous article.
Changes to principal private residence relief
There will be various changes to principal private residence (PPR) relief from 6 April: under current rules, provided that a property has at some point been the owner's only or main home, the last 18 months of ownership always qualifies for PPR relief, whether or not the owner remains living in the property during this period (in order to allow for practicalities of selling and moving). From 6 April 2020, this 18 month exemption will be reduced to nine months. PPR lettings relief will also be reformed, so that it only applies where the owner is in shared occupation with the tenant (including for periods of lettings before 6 April 2020). A few further technical changes round off the PPR reform, which we have explored in more detail previously.
Payment deadlines for CGT due on residential property disposals after 6 April 2020
Under rules introduced in the Finance Act 2019, from 6 April 2020, UK residents (including trustees of UK resident trusts) disposing of UK residential property must report any chargeable gain and pay an estimate of the CGT due within 30 days of the disposal. They cannot wait until they submit their normal self-assessment tax return.
This brings UK residents into line with non-UK residents who became subject to the new payment timescales for CGT on UK residential property from 6 April 2019.
In February, HMRC announced that a new online payment and reporting facility will be made available from April for both UK residents and non-UK residents making disposals of residential property from 6 April 2020. As at the time of writing this is yet to be launched.
These rules are likely to catch out many taxpayers who are unaware of the changes. Taxpayers who fail to meet the new payment and reporting timescales will incur a penalty and interest charges on unpaid CGT although it is to be hoped that, to start with at least, HMRC will be sympathetic with penalties where there have been innocent oversights.
The new SDLT surcharge for non-UK residents
In recent years, the government has introduced a number of measures to raise additional tax revenue from non-UK residents who have interests in UK residential property.
This trend continued in the Budget, with the Chancellor announcing that a new 2% Stamp Duty Land Tax (SDLT) surcharge will be introduced for non-UK residents buying residential property in England and Northern Ireland, taking effect from 1 April 2021.
The surcharge will apply in addition to existing SDLT rates and surcharges, including the 3% surcharge introduced in 2016 for individuals buying second homes, taking the top rate of SDLT for residential property to 17%.
Legislation providing details of the surcharge has yet to be published, but it seems likely that the surcharge will apply to both companies and individuals.
Refunds will be available for those who become UK resident after acquiring the property in question.
There is limited detail so far on how this will work in practice - for example, it is not yet clear whether any minimum period of UK residence will be required. A proposal by the previous Conservative government suggested the refund would only be available to those spending 183 days or more in the UK in the 12 months following the acquisition date (and would not be available at all for companies), but it remains to be seen whether this will be adopted by the current government.
With the proposed commencement date of 1 April 2021, we may have to wait some time until the full details are available and the true scope of the surcharge is known. In the meantime, any non-residents who are considering buying a house in the UK may want to do so before next April.
Changes to the annual pension allowance
The maximum amount which can be contributed to a pension with the benefit of tax relief is £40,000 a year.
This £40,000 annual allowance is reduced for individuals who earn more than £110,000 a year (after deducting any pension contributions) although the annual allowance is never reduced below £10,000.
Following the publicity around NHS consultants and GPs retiring early or refusing to work extra shifts as a result of unexpected tax bills on pension contributions, the government has increased the threshold from which the ability to make tax-free contributions to a pension will be reduced from £110,000 to £200,000.
This removes the problem for almost all doctors other than a handful of very high earners. However the changes will also benefit all other employees whose tax free pension contributions are restricted as long as they do not earn more than £300,000 (including any pension contributions).
On the flipside, for those individuals who earn more than this amount, the annual allowance can reduce to as little as £4,000 rather than £10,000. Contributions in excess of this amount may still be made but no tax relief will be available for the contribution.
The changes take effect from 6 April 2020 and are good news for anybody whose earnings are in the range of £110,000-£300,000. The system however remains complicated and so it is worth talking to a financial adviser before making any decisions.
Loan charges and the implementation of the Sir Amyas Morse review
At the Budget, the government confirmed that it would legislate changes to the loan charge following the Sir Amyas Morse independent review of the policy. The recommendations focused on the design of the loan charge and its impact on the people affected by the measure. In addition, the Chancellor announced that additional funding for HMRC would be made available to help with their operation to collect the tax due and to strengthen their information collection powers.
The Finance Bill implements the following changes which will apply retrospectively from 5 April 2019:
- the loan charge will only apply to loans made on or after 9 December 2010;
- where the taxpayer has made a disclosure to HMRC regarding a loan on a tax return in the years preceding 6 April 2016, the loan charge will not apply;
- an option to spread the outstanding loan balance over three years has been introduced for outstanding loan balances as at 5 April 2019; and
- HMRC will refund any payments made under voluntary restitution for the periods where the loan charge will no longer apply i.e. in respect of loans made before 9 December 2010.
It is expected that some 30,000 individuals will benefit from these measures by either removing them from the scope or reducing the amount that is owed. Individuals will need to make a claim for a refund before 1 October 2021 either via HMRC or their employer, and it is understood that HMRC will write to those individuals directly to invite them to claim the refund. If individuals who think they might be entitled to a refund have not heard from HMRC by 30 November 2020, then they should contact HMRC directly.
Postponement of changes to the IR35 reforms
In a U-turn following the Budget, the Chief Secretary to the Treasury announced that the long awaited Off-Payroll Worker (IR35) tax reforms would be delayed by one year. The move was part of a wider package of measures to protect the economy from the impact of the coronavirus outbreak.
New legislation was due to come into force from 6 April 2020, requiring "medium and large" businesses to determine whether contractors engaged through personal service companies were effectively operating as employees. Where this was determined to be the case, the business would be required to operate PAYE and National Insurance withholding.
While it had only been a week since the Chancellor confirmed that the reforms would be going ahead as planned, the government concluded that pressing on with the changes in the current unprecedented circumstances would have put further unwelcome pressure on businesses across the UK. The delay will be welcomed by both businesses and contractors, who had been preparing for the increased administrative burden and potential National Insurance costs.
Though the delay does provide some respite, it is worth highlighting that the announcement was for a delay, not a cancellation. Where "deemed employment" status determinations had been made in anticipation of the reform, contractors would be advised to ensure they are operating the current IR35 rules correctly.
The Chancellor had previously said that HMRC would apply a soft-touch approach in 2020/21 and not levy any penalties. The government may not be so generous a year from now, so businesses should ensure they use the additional time wisely and that they know how the rules will apply to any new engagements with contractors that are expected to go on beyond 6 April 2021.
When a life policy (other than one which just pays out on death) is cashed in, any profit is subject to income tax. As the policy holder is receiving a large lump sum, a significant part of this could be subject to higher rates of tax, even if the policy holder has very little other income.
Top slicing relief mitigates this by allowing the rate of tax to be calculated by only adding to the policy holder’s income a proportion of the profit based on the number of years the policy has been in existence. So, for example, if the profit is £100,000 and the policy has been in existence for 10 years, only £10,000 is added to the policy holder’s income in order to work out the rate of tax. This may mean that the tax rate is still the basic rate of tax in which case no tax at all is due as, if the policy is a UK policy, the proceeds come with a basic rate tax credit. This is therefore an important relief for policy holders.
Following uncertainty highlighted by a recent case, the Finance Bill makes it clear that, in calculating the rate of tax, the policy holder’s annual allowance can be taken into account even if the total profit on the policy is sufficiently large that no annual allowance would normally be available (if an individual has income in excess of £100,000, the annual allowance is gradually reduced to zero).
This will only benefit people whose income is below the basic rate threshold when the policy matures but, for them, it is a surprisingly generous concession.
The Finance Bill contains good news for investors in overseas companies. These amendments are being made to comply with EU law.
Where a loan is made to a trading company and the loan becomes irrecoverable, a CGT loss can be claimed. Previously, this was only the case if the borrowing company was UK resident. The Finance Bill contains legislation which extends the relief for loans made on or after 24 January 2019 to any company, wherever resident.
There is also an income tax relief which applies where a loss is incurred on the disposal of shares in a trading company which carries on business in the UK. The loss is available as a deduction against income of the current or previous tax year. For disposals on or after 24 January 2019, the relief will also be available where to company’s business is carried on outside the UK.
These are valuable reliefs which should always be considered where investments in a trading company go sour.
On 27 February, it was announced that the “official” rate of interest will be reduced from 2.5% to 2.25% with effect from 6 April. This rate is used to measure the taxable benefit of certain loans (particularly employment-related loans) and benefits in kind, including loans and other benefits provided by trustees of offshore trusts to UK-resident beneficiaries.
The official rate tends to follow the Bank of England base rate, albeit with a time lag and so we may see a further cut in the coming months.
On the morning of the Budget, the Bank of England announced an emergency cut to the base rate from 0.75% to 0.25%. As it became clear the UK was moving towards a lockdown, the Bank of England swiftly acted again, cutting the base rate further to a historic low of 0.1% on 19 March. No doubt this is a welcome move for businesses but not such good news for those with savings.
Call for evidence: raising standards in the tax advice market
The government has called for evidence to inform future policy decisions designed to raise the standard of tax advice available to taxpayers. Although this initiative stems from the recent independent review into the loan charge, the ultimate aim is to enhance tax compliance (and so raise revenue) and continues the trend of targeting advisers as well as taxpayers.
The call for evidence recognises that good advisers add value not only for their clients but also for society. They do so by ensuring that the tax system operates efficiently and taxpayers satisfy their legal obligations. Instead, the government is exploring ways of combatting incompetent, unprofessional and corrupt tax advisers. Possible action ranges from using existing legislation better to setting up a more formal regulatory framework for tax advisers such as currently applies to charities and financial advisers.
One point which is repeatedly emphasised in the call for evidence is that ultimate responsibility for tax compliance must remain with the taxpayer. Raising standards of tax advice is not therefore going to allow taxpayers to avoid penalties if the advice turns out to be wrong.
If the government is focused on improving the efficiency of the tax system, it should also take this opportunity to explore ways of simplifying our exceptionally complex tax code. Ensuring that the tax code can be readily understood by specialists and non-specialists alike might do as much to increase compliance as clamping down on less scrupulous tax advisers.
Notification of uncertain tax treatment by large businesses
The Budget included a paper on the proposal to require businesses (including partnerships and LLPs) with either an annual turnover of more than £200m or a balance sheet of more than £2bn to notify HMRC when they take a position that relies on an uncertain legal interpretation that HMRC is likely to challenge. This includes differences in interpreting legislation, case law and HMRC guidance.
HMRC has estimated that approximately 18% of the UK’s tax gap (or £6.2bn annually) can be traced to these differences. This proposal is designed to improve HMRC’s ability to target resources at the highest value cases.
Currently, the proposal will only apply to certain taxes, including corporation tax, income tax, VAT and SDLT but not, for example, capital gains tax and inheritance tax.
Consultation is open on the scope of the requirement and penalties for non-compliance. However, the paper suggests that this will be another example of legislation that is very broadly worded and then more precisely targeted by subsequent guidance (an approach that leaves much to be desired).
Although not currently targeted at individuals or small businesses, it would not be surprising if similar measures are, in the future, introduced for other categories of taxpayer.
Final legislation will apply to returns filed after April 2021.
Mass marketed tax schemes
In tandem with the Finance Bill, the government released a policy paper entitled “Tackling promoters of mass-marketed tax avoidance schemes”.
This is part of the government’s response to the independent loan charge review, with the anti-avoidance measures outlined in the paper largely focused on promoters who target individuals on middle incomes, often through promises of income tax savings under disguised remuneration schemes.
Many of the proposed measures are operational and look to ways in which HMRC can operate more effectively within its existing powers, such as:
- increasing the amount of collaboration with other agencies and overseas tax authorities when investigating individuals and businesses behind tax avoidance schemes; and
- expanding the scope of checks into the tax affairs of promoters of avoidance schemes.
A number of the proposed measures go even further, taking the form of amendments to existing anti-avoidance legislation in order to boost HMRC’s investigative powers.
The Finance Bill contains, as an early example of such measures, a number of procedural changes to the General Anti-Abuse Rule (GAAR), which was introduced in 2013 to enable HMRC to counteract a wider range of abusive tax avoidance arrangements than would otherwise be caught under targeted anti-avoidance rules. As a result of these procedural changes, HMRC will be able to take counteraction measures against taxpayers even before the GAAR’s procedural requirements have been met (albeit on a suspended basis), in order to meet statutory time limits. A new “protective GAAR notice” will also replace the existing procedure of HMRC issuing provisional counteraction notices against taxpayers during investigations and is designed to give HMRC more time to pursue their enquiries into taxpayers’ affairs.
Details are awaited of the other legislative measures contained in the policy paper, including enhanced information powers against enablers of tax avoidance (building upon the existing rules targeting enablers, introduced in 2017) and technical amendments to the Promoters of Tax Avoidance Schemes (POTAS) legislation, in particular to ensure that HMRC’s enquiry process is not disrupted by legal challenges.
Although this package of new measures is framed in terms of the Independent Loan Charge Review and disguised remuneration schemes, it is likely to have a broader impact for taxpayers, amounting to a general tightening of a number of existing anti-avoidance regimes. The full scope of the measures will need to be considered carefully as and when further details are published.
The clear message however is that artificial schemes and those who promote them should be avoided.