The Chancellor, Philip Hammond, delivered his Autumn 2018 Budget this week. Perhaps unsurprisingly with the current distractions of Brexit, it was short on significant tax changes for private clients. Instead, the Government utilised it to announce a raft of technical amendments to specific legislation and confirm some of its key ongoing initiatives.
The Finance Bill 2018/2019 will be published on 7 November 2018. We also await the publication of further consultation documents. We will keep you abreast of developments. The main points as we see them are set out below.
In the meantime, if you have any questions about how the Budget will affect you, please get in touch with your usual Penningtons Manches contact.
Budget changes to personal allowances and tax thresholds received considerable attention. From 6 April 2019, the income tax personal allowance will increase to £12,500 and the basic rate threshold to £37,500 for 2019-2020. Individuals will, typically, not pay tax at 40% until their earnings reach £50,000.
The Government heralded these announcements as reducing income tax for over 30 million income tax payers during the tax year 2019-2020. It stated that a basic rate taxpayer will have an average real gain of £66; a higher rate taxpayer will have an average real gain of £387 and an additional rate taxpayer will have an average real gain of £236. The Government had already pledged to introduce these changes in April 2020, so they were no surprise and have simply been implemented one year early.
For capital gains tax (CGT) this was a Budget with few ups and more downs. While the annual allowance was increased, additional restrictions were placed on the availability of entrepreneurs’ relief, principal private residence relief and lettings relief.
Capital gains tax: reliefs
There was an inflationary increase in the annual exempt amount for 2019-2020 (the amount on which CGT is not charged for a particular tax year). The allowance for individuals and personal representatives increased from £11,700 to £12,000 and from £5,850 to £6,000 for most trustees. A similar inflationary increase was also applied to the annual chargeable amount for the annual tax on enveloped dwellings which will rise by 2.4% for the 2019-20 chargeable period (which begins on 1 April 2019).
Entrepreneurs’ relief: extension of minimum qualifying period
The application of entrepreneurs’ relief was restricted. The Government proposes to increase the period throughout which the qualifying conditions must be met to claim the relief from one to two years. Where a business is disposed of after 6 April 2019, some of the key changes to be aware of include:
Despite this imposition, it is positive that the relief was not withdrawn altogether. Given the time period has only marginally changed, the relief remains widely available to qualifying entrepreneurs.
Entrepreneurs’ relief: changes to definition of ‘personal company'
Of greater concern, are immediate amendments to the definition of ‘personal company’ for entrepreneurs’ relief purposes. The changes apply immediately: for disposals after 29 October 2018, an individual must be beneficially entitled to at least:
These provisions are in addition to the current share capital and voting requirements. The proposed amendments could cause significant problems for companies with complex share arrangements (eg holding different classes of shares with different voting rights).
Capital gains tax on residential property: principal private residence relief
Relief from capital gains tax is available on the sale of a property that has been the person’s only or main residence throughout the period of ownership. There is a ‘final period exemption’ that means the final 18 months of ownership benefit from relief even if the property is not occupied as the person’s main residence in that period.
The ‘final period exemption’ is to be reduced from 18 months to 9 months with effect from April 2020. The exemption used to apply to the last 36 months of ownership, and this change would be the second reduction in the exempt period in six years.
Lettings relief is a potentially valuable relief for those who sell their main home, or former main home, but cannot benefit from main residence relief for the full period of ownership because it was let, for a time, to residential tenants. The amount of relief is the lowest of:
The Government has announced that, from April 2020, this relief will only be available if the owner of the property is in 'shared-occupancy' with a tenant.
The Government will consult on the detail of these proposals, but the combination of these two reforms will have a big impact on landlords.
Properties and CGT payment
The Government has confirmed legislation will be introduced relating to the payment, on account, of CGT by UK residents for residential property and the extension of this system to non-residents disposing of UK property. Payments on account and a return, must be made within 30 days of completion of the disposal.
The new deadlines are not unexpected: they were originally announced in the 2015 Autumn Statement, but deferred by a year in the autumn 2017 Budget. The delay can be explained by the complexities of the new system and the Government’s need to issue further consultations on it during 2018. The draft legislation demonstrates the implications of the new deadlines: individuals will, for example, be allowed to provide an estimation of valuations where they cannot compute the full gain before the 30 day period. Fortunately, these provisions will not apply where UK residents sell overseas property or to non-UK resident companies.
Disposals of UK land by non-UK residents
The Government also reiterated its intention to extend UK CGT so that, from 6 April 2019, CGT will be payable by non-residents who dispose of:
At present, non-residents do not pay CGT at all, unless the capital gain arises on a disposal of UK residential property. These proposals are substantial changes.
The legislation (which was published in draft in July 2018) will be published in the Finance Bill 2019-20 and is expected to affect disposals made on or after 6 April 2019. More detailed comments on these proposals can be found here and here.
The Government has made clear its intention to focus on inheritance tax (IHT) reform. In last year’s 2017 Budget HMRC published a research paper into the influence of IHT reliefs and exemptions on estate planning and inheritances. It is not clear whether this research is linked to the Office of Tax Simplification’s current initiative to explore and scope the potential for a review of aspects of IHT. The Budget did not provide any substantive updates as to the progress of these initiatives or timescales for their publication.
In addition, the Government also reiterated its commitment to a consultation on how to make the taxation of trusts simpler, fairer and more transparent. This was also announced at least year’s Budget but as with the other IHT reviews, substantive progress has yet to be made. In this respect the Budget was relatively quiet for IHT, but we can expect some upheaval during the next year.
Residential nil rate band
The Government did utilise the Budget to make two technical changes to the residential nil rate band (RNRB):
Additions to excluded property settlements
Excluded property trusts are those established by a settlor when they are non-UK domiciled (nor deemed domicile) holding non-UK assets. Such entities will not, generally, be subject to UK IHT. Where the settlor becomes UK domiciled (or deemed domiciled), however, any property added to the trust will lose its excluded status and IHT protection.
Following recent case law (which inferred a contrary position), legislation will be introduced in the Finance Bill 2018-2019 to confirm that additions of assets by UK-domiciled (or deemed domiciled) individuals to trusts made when they were non-domiciled are not excluded property.
Surcharge for non-resident buyers
There have been a series of changes to the rates of SDLT in recent years, and the Government will consult in the New Year on its proposal to impose a surcharge of 1% for 'non-residents' purchasing residential property in England and Northern Ireland. Wales and Scotland have their own land transaction taxes, equivalent to SDLT.
Theresa May had already announced this new levy at the Toryparty conference, so it had seemed likely that the additional rate would apply from midnight on Budget Day. The fact it is to be the subject of a consultation perhaps reflects the difficulty in defining a 'non-resident buyer'. Should this include a person who is originally from England, but is only temporarily non-resident because of working abroad, for instance? The Prime Minister’s original announcement, which linked 'foreign' ownership of UK residential property to an unfair increase in property prices, suggests such a person should not be the target of the surcharge, so it will be interesting to see the Government’s more concrete proposals on this.
There is as yet no indication of when the surcharge would come into force, but it may be late 2019 at the earliest.
Claiming a refund of additional rate SDLT
Purchasers of 'additional residential property' are required to pay an additional 3% rate of SDLT. This does not apply if the purchaser is replacing his or her main residence. If the purchaser has not sold the former main residence at the time of buying the new home, the purchaser must pay the additional SDLT and later claim a refund when the former home is sold. Purchasers in this position will now have 12 months (increased from three months) to claim a refund of this additional tax.