In advance of the Budget we had the usual rumours around an increase in capital gains tax (CGT) rates, threats to Entrepreneurs’ Relief, the abolition of business property relief and further amendments to pension thresholds. Thankfully, save some tweaks to Entrepreneurs’ Relief, none of these came to pass.
Instead, we had some amendments to existing rules and an acceleration of the promised changes to the personal allowance and higher rate threshold.
Looking at this second point, the announcement was telegraphed throughout the Chancellor’s speech with multiple references to the “hard work of the British people”. Therefore, the increases of the personal allowance and higher rate threshold were presented as a reward for this hard work. The increases accelerate by 12 months the pledge in the 2015 Conservative party manifesto. As always with the personal allowance, it is worth noting that people with incomes above £100,000 begin to see the allowance abated, so those with income above £125,000 will see no benefit from this increase.
Also on income tax, the plans to make changes to the legislation on rent-a-room relief were abandoned. Although initially this may seem good news, there is still uncertainty as to when those letting properties during short-term periods of absence will qualify for the relief.
Moving on to CGT, while we saw no wholesale changes, there were amendments to Entrepreneurs’ Relief. Some entrepreneurs may benefit from the changes introduced on the dilution of shareholdings. However, others are likely to be adversely impacted by the increased holding period and the changes to what qualifies as a ‘personal company’.
Also, as has been the case in recent Budgets, landlords were further targeted. This time the private residence relief rules were used to discourage landlords through taxation. Specifically, the changes will make it less attractive for individuals to enter into a short term let on their former home by restricting the CGT reliefs available when they do ultimately sell it.
Property owners in general will also need to be mindful of the introduction of a payment on account regime for CGT realised on properties. Rather than simply paying through their self-assessment return for the year of sale, those with a chargeable gain arising on sale of their properties will now need to file a return and pay that tax within 30 days of completion.
Overall, a mixed bag for individuals. We saw no wholesale changes to any aspects of the personal tax system. However, the tweaks that were made will affect multiple taxpayers and detailed advice will be required in many circumstances to fully understand the impact.
VAT and indirect taxes
Stamp duty land tax surcharge for non-UK residents
A consultation will be launched in January 2019 on the potential implementation of a 1% stamp duty land tax (SDLT) surcharge for non-UK residents buying residential property in England and Northern Ireland.
UK resident and non-UK resident taxpayers currently pay the same rates of SDLT on purchases of residential property in England and Northern Ireland. The Government is proposing to introduce a 1% surcharge to increase the amount that would be payable by non-UK residents.
Any change will not automatically apply in Scotland or Wales. Responsibility for such taxes has been devolved to their respective governments, who have subsequently introduced a separate land and buildings transactions tax (Scotland) and a land transactions tax (Wales).
Little detail is currently available about how the proposal would work in practice. It will presumably be levied in addition to existing SDLT rates and surcharges, such as the existing 3% surcharge for purchasing a second residence. This would mean that a non-resident taxpayer purchasing a £1m property could in some circumstances pay almost twice as much SDLT as a UK-resident replacing a main residence. If the Government moves forward with this measure, it will be interesting to see if the change is replicated by the Welsh and Scottish governments, as they did following the introduction of the 3% surcharge for the purchase of additional residences.
When will it apply?
These measures are subject to consultation with no fixed date for implementation.
Increases to personal allowance and higher rate threshold
The personal allowance and higher rate threshold will increase from 6 April 2019, bringing them to the levels promised in the 2015 Conservative manifesto.
The Government has brought forward its commitment to raise the income tax personal allowance and the 40% income tax threshold from 2020/21 to 2019/20. Consequently, the personal allowance for 2019/20 will increase to £12,500 (up from £11,850 in the current tax year) and the basic rate limit will rise from £34,000 to £37,500.
These thresholds will remain at the same levels for 2020/21. For future years, the personal allowance and higher rate threshold will increase in line with consumer price index (CPI).
"The early introduction of these increases will be welcomed by many taxpayers.
The Government’s analysis states that the changes will result in 32 million individuals’ tax bills being reduced in 2019/20 compared to 2015/16, and that the effect of the increase to the personal allowance will result in a typical basic rate taxpayer paying £1,205 less tax in 2018/19 than in 2010/11.
Not all taxpayers, however, will benefit from the increase to the personal allowance. Those on low incomes will not fully benefit from the increase, where their income is less than the personal allowance, or where the increase in after tax pay results in a reduction in their means tested benefits.
In addition, those with incomes above £100,000 will continue to see their personal allowances restricted for every £2 of income above this threshold. As the £100,000 limit has not changed despite increases in inflation, it is likely more people will fall into this category."
When will it apply?
This measure will apply from 6 April 2019.
Proposed rent-a-room relief restriction withdrawn
Following a consultation on draft legislation, the Government has decided not to proceed with plans to include a shared occupancy test for rent-a-room relief.
Rent-a-room relief provides an income tax exemption for rents received by individuals who rent a room (or rooms) for residential purposes in their only or main residence. The exemption is currently £7,500.
The Government had previously announced that from 6 April 2019, it would introduce an additional ‘shared occupancy’ test for obtaining rent-a-room relief. The test would have required individuals to occupy the property at the same time as the tenant for at least some of the letting period.
The Government has decided that it will not go ahead with the introduction of this additional test in order to "maintain the simplicity of the system”.
"The shared occupancy test was largely intended to prevent those letting their homes through Airbnb and other similar sites from benefiting from rent-a-room relief when the let was of the entire property.
The withdrawal of the legislation, however, may not be the positive news it initially appears. HMRC has always taken the view that letting the whole of the property disqualifies that individual from claiming rent-a-room relief. There is nothing to suggest that this view has changed. In fact, it is stated in the Budget that the Government will “ensure the rules around the relief are clearly understood”.
This may therefore be the case of the Government deciding that the existing legislation is sufficiently robust to target rent-a-room relief at the intended users. Those letting their property through Airbnb still need to carefully consider whether or they are eligible for rent-a-room relief."
Voluntarily submitted tax returns to be given a statutory basis
HMRC's practice has always been to treat voluntary tax returns as if submitted in response to a statutory notice to file. Although saving additional administration work all round, the status of enquiry notices in such cases has been questioned, so legislating for the practice will give certainty for taxpayers and HMRC.
When a taxpayer submits a tax return without having been issued with a statutory notice to file, HMRC will nonetheless accept the return and process it as a ‘voluntary’ tax return. This effectively treats such returns as if submitted in response to a return notice.
HMRC has considered it has been able to do this under its discretionary collection and management powers.
There have been some recent legal challenges to this practice so legislation will be introduced, with retrospective effect, to put the practice onto a statutory basis. The intention is to remove any doubt for taxpayers that ‘voluntary’ tax returns have and will continue to be accepted as valid returns.
This will include returns submitted by individuals, partnerships, trusts and companies.
"The self assessment regime requires a taxpayer to submit a tax return in response to a notice to file or to notify HMRC of a liability to tax. The latter generally leads to HMRC issuing a notice to file a return.
There are some occasions where the tax liability is notified to HMRC by the submission of an unsolicited return form. Processing these as if in response to a notice to file a return saves time where the self assessment is accepted.
Problems have arisen when HMRC wants to enquire into such returns. This change will help clarify the position and avoid disputes over the validity of enquiry notices and related closure notices."
When will it apply?
It will apply retrospectively from the date Finance Bill 2018-19 receives Royal Assent to tax years 1996-97 onwards.
Changes to the definition of a ‘personal company’ for Entrepreneurs’ Relief purposes
The definition of a personal company for Entrepreneurs' Relief (ER) purposes has been amended to require the entrepreneur to have a 5% interest in both the distributable profits and the net assets of the company.
ER applies on a disposal of shares in a company where the company is the ‘personal company’ of the individual making the disposal.
Previously, a personal company was defined as one in which the shareholder:
is an office holder, director or employee of the company or group company; an
holds at least 5% of the ordinary share capital and of the voting rights of the company.
The shareholder will now also need to hold a 5% interest in the distributable profits and the net assets of the company for the relief to be available on the gain.
"ER is a valuable relief reducing the CGT rate from 20% to 10% on qualifying disposals. There were concerns in the run-up to the Budget that there would be restrictions to the availability of ER and some pressure groups had been calling for the relief to be abolished entirely. In this context, the commitment to maintaining the relief and the acknowledgement of its value in supporting the role that entrepreneurs play in the economy is heartening, albeit at the cost of a tightening of the rules. There was a perception that the relief was being accessed by those with voting rights that were disproportionate to their economic interest in the company. It is likely that this was only in limited situations and so the impact of this change is unlikely to be substantial. If the shares were acquired through exercise of an EMI option, they qualified as shares in a personal company even if the 5% interests were not met. It does not appear that this definition of personal company has been impacted by the above changes."
When will it apply?
This change will apply to disposals on or after 29 October 2018.
Restriction to availability of Entrepreneurs' Relief through a change to minimum qualifying period
The minimum period throughout which certain qualifying conditions must be met for an individual to be able to claim Entrepreneurs' Relief (ER) is to be extended from 12 to 24 months. Measures will be included to protect entrepreneurs whose businesses have already ceased by preserving the one year qualifying period for such businesses where cessation was before 29 October 2018.
ER is only available on the disposal of shares in a company where the company is the entrepreneur’s personal company. The personal company conditions previously had to be met for a period of 12 months prior to the sale of the business. A business also currently has to be owned for at least 12 months before sale. These qualifying periods will now be extended to 24 months.
ER can also be claimed where a business has ceased to trade, provided that the qualifying conditions were met during the period prior to cessation and that the disposal takes place within 3 years of the company ceasing to trade. A specific protection will be included to apply the 12-month holding to businesses that ceased (or personal companies that ceased trading) prior to 29 October 2018, to avoid retrospectively penalising entrepreneurs who are in the process of winding up a company.
"This is a further tightening of the ER rules, which will limit the availability of the relief for some entrepreneurs.
Although the protection for those whose businesses have already ceased is welcome, this does not extend to those currently negotiating the sale of their business. Where such businesses have new shareholders, it will be necessary to complete these transactions before 6 April 2019 to ensure those shareholders don't lose entitlement to this valuable relief.
We would recommend that all entrepreneurs review their position to consider the availability of ER in the event of a short-term sale and whether or not any planning steps need to be taken now in anticipation of a sale in the medium to long-term."
When will it apply?
This change will apply to disposals made on or after 6 April 2019.
Entrepreneurs' Relief where shareholding falls below the 5% qualifying threshold
An individual whose shareholding is diluted below the 5% qualifying threshold due to an issue of new shares will still be able to obtain Entrepreneurs' Relief (ER) on gains made up to the time of the dilution.
ER is only available on a sale of shares where an individual disposes of their ‘personal company’. One of the definitions of personal company is one where the individual owns 5% of the ordinary share capital, voting rights and (after today’s announcement) has a 5% interest in both the distributable profits and net assets.
Previously, entrepreneurs whose holdings fell below the 5% qualifying level because new shares were issued as part of a commercial fund raise lost the benefit of ER on their remaining shares.
The new rules will allow the entrepreneur to capture the ER on the growth in value of their shares up to the point of dilution. The relaxation will only be available where the dilution to the shareholding results from the issue of new shares to raise funds for genuine commercial reasons. This excludes, for example, the conversion of debt to equity or the exercise of employee share options.
Broadly, the entrepreneur elects to dispose of and then immediately reacquire the shares at their market value immediately prior to the dilution. ER is then available on the gain arising on this deemed disposal. Also, the entrepreneur can elect for the notional gain to be deferred until the shares are actually sold or otherwise disposed.
The time limit for making these elections will be 12 months after the 31 January following the end of the tax year in which the dilution occurs.
"The concern around the rules as they stand is that they risk the entrepreneur choosing either to cease their involvement in the business or to avoid dilution by not undertaking the necessary fund raise. As such, the changes are vital to ensure the entrepreneur community remains involved with businesses as they look to scale up.
The tight deadline for the elections, being based on the dilution event not the sale, means that entrepreneurs will need to be switched on in making the appropriate claims. Also, the fact that the elections are irrevocable means that they should consider detailed advice to ensure that the elections are appropriate."
When will it apply?
This will apply for shares held at the time of fundraising events that take place on or after 6 April 2019.
Payments on account of capital gains tax following residential property disposals
Finance Bill 2018-19 will introduce a requirement for UK resident taxpayers to make a payment on account of capital gains tax (CGT) following a residential property disposal. New legislation will also replace the existing rules for reporting and payment of tax that apply to non-UK resident taxpayers. Budget 2018 has announced some tweaks to draft legislation published in July 2018.
Currently, CGT is typically due for payment by the 31 January following the end of the tax year in which a chargeable capital gain is realised. Non-residents, however, must report disposals of UK residential property via a non-resident CGT return and in many cases pay any tax due within 30 days of completion.
Under the new legislation, the draft proposals for which were published in July 2018, all taxpayers who are subject to CGT must file a tax return and make a payment on account of the tax within 30 days of completion. The payment on account will be self-assessed and will take into consideration unused losses and the person’s annual exempt amount.
UK residents will not need to file a return or make a payment if:
the gain on the disposal is not chargeable to CGT; or
it arises from the disposal of a foreign residential property in a country covered by a CGT double taxation agreement; or
it is foreign property and the gain arises to a person taxed on the remittance basis.
Following further consultation, Budget 2018 has announced the following changes to the legislation:
a reasonable estimate of valuations will be allowed where these are not available before the reporting deadline;
sales of non-UK properties by UK residents will be exempt from the rules; and
non-UK resident companies will be exempt from the reporting requirement.
"It is hoped that HMRC fully publicise the new rules so that taxpayers are sufficiently aware of their reporting requirements.
Allowing the use of a reasonable estimate of a valuation appears to be a sensible amendment to the existing draft legislation. Taxpayers may have otherwise experienced difficulties in complying with the required 30 day deadline to report their capital gains.
It is assumed that non-UK resident companies will be exempt from the reporting requirements because gains made by non-UK resident companies will be subject to corporation tax from 6 April 2019."
When will it apply?
These changes will broadly apply from 6 April 2019 for non-UK residents (with a minor change applying from 6 April 2020) and from 6 April 2020 for UK residents.
Consultation announced to reform specific elements of the private residence relief rules
Changes are expected to reduce the final period exemption from the current 18 months to 9 months and to restrict the availability of lettings relief.
A consultation has been announced into private residence relief (PRR) for CGT. The consultation is limited to the final period exemption and lettings relief.
PRR reduces the chargeable gain that accrues on an individual’s only or main home. The relief applies during the period of ownership that the property was the main residence plus a final period exemption, even if the property is not the main residence for the owner at that time. This final period is currently 18 months but is expected to be restricted to 9 months. A longer period of 36 months exists for disabled persons and those in care homes, and this is not expected to change.
Lettings relief provides a further relief to cover a period of letting at the lowest of the following:
the PRR available;
the gain accruing during the let period; and
As such, lettings relief is only ever available on the let of a former home and the maximum tax relief is £11,200 at current CGT rates. The relief is expected to be restricted so that it only applies where the owner of the property is in ‘shared-occupancy’ with a tenant.
Both of these changes reflect the Government’s discouragement of landlords through taxation as a means of opening up the UK housing market. These new proposed changes to the CGT relief demonstrate this further by discouraging homeowners from retaining a property as they move up the housing ladder.
The final period was 36 months prior to April 2014, which shows a real reduction in the relief over this relatively short period. While this clearly fits in with the prevailing attitude to landlords, the timing is perhaps somewhat surprising given the slowdown in the UK housing market. Many homeowners are not retaining their properties deliberately but rather because they are unable to find a buyer. It will be interesting to see if the UK housing market's performance over the next couple of years influences the final decision on the grace period at all or if, in fact, the proposals impact the housing market directly with sellers reducing prices to ensure a sale prior to the change.
Arguably, lettings relief has always been somewhat generous given no equivalent exists for pure buy-to-let properties. The intention of the relief was, however, to encourage home-owners to make use of the property through letting if they were unable to sell immediately. Again, given the current housing market, we may see more vacant housing stock. Homeowners will not want to enter into a 12 month rental agreement knowing that after 9 months they risk exposure to CGT. They will instead simply keep the empty property on the market.
The statement around ‘shared-occupancy’ would appear to be somewhat unnecessary as someone with a lodger in their home should not suffer a restriction to their PRR, making the availability of lettings relief superfluous in these circumstances. We await the consultation document to ascertain the specifics of the proposed reform for some clarity as to why this statement was thought necessary.
When will it apply?
Following a period of consultation, the change will apply for disposals after April 2020.
Inheritance tax: residence nil rate band downsizing provisions to be adjusted
Amendments to the residence nil rate band (RNRB) legislation will be introduced to clarify the downsizing provisions and to provide certainty over when a person is defined as 'inheriting property'.
The RNRB was introduced from 6 April 2017 for taxpayers who wish to pass their main residence to their direct descendants on death. It applies an additional nil-rate band (NRB) on top of the standard NRB (currently £325,000), although it is tapered at £1 for every £2 that an estate exceeds £2million in value. The measure is being phased in over a number of years, bringing the combined available NRB to £500,000 from 6 April 2020.
Any unused RNRB can be transferred to a surviving spouse or civil partner so that the total NRB can be up to £1m if all conditions are satisfied. It is also available when a person downsizes or ceases to own a home on or after 8 July 2015, providing assets of an equivalent value are passed on to direct descendants.
The changes will tighten the legislation to ensure it fits with the original policy intent in two areas:
it will ensure that the value of a residence inherited by an exempt beneficiary, for example, a surviving spouse inheriting a deceased partner’s share of a property, is taken into account when calculating the relief under downsizing provisions; and
where a property is gifted and the donor continues to occupy the property, it will only be treated as ‘inherited property’ for the purpose of the relief if it became immediately comprised in the direct descendant’s estate as a result of the original gift.
"The problem of how to apply the RNRB where a deceased person had either downsized or otherwise disposed of the main residence, for example on moving into residential care, was raised when the reforms were first announced. This announcement follows previous tweaks to the legislation to ensure clarity in its application. While the concept behind the relief is straightforward, quantifying it continues to be complicated and we remain of the view that a simple uplift in the NRB available to all taxpayers would be much simpler."
When will it apply
The changes will have effect for deaths applying on or after 29 October 2018.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.