Budget 2021: Capital taxes

The Government has announced that the capital gains tax (CGT) annual exempt amount (AEA) will remain at its current rate up to and including the 2025/26 tax year.

The AEA is the annual amount below which capital gains realised by an individual or by trustees in a particular tax year are not subject to CGT.

The AEA for the 2020/21 tax year is £12,300 for individuals and a maximum of £6,150 for trustees. It has now been announced that the AEA will remain at these levels up to and including the 2025/26 tax year.

Our comment

Although there had been little advance warning of ‘freezing’ the AEA, in light of the widely anticipated decision to freeze the personal allowance and basic rate income tax bands, the announcement in relation to the AEA came as no surprise.

The implications of the decision will be far less wide-reaching than the possible CGT tax rate increases that had been speculated by some before the Budget. Freezing the AEA could be seen as a ‘stealth’ increase in CGT; however, it is likely to impact a much smaller number of taxpayers than the corresponding freezing of income tax thresholds.

When will it apply?

The AEA will be frozen at current levels until 5 April 2026.

Existing legislation denies capital gains tax (CGT) holdover relief where a qualifying asset is gifted to a company controlled by non-UK resident persons, who are connected with the person making the disposal. The new measure clarifies that holdover relief is also denied if the person making the disposal is the non-UK resident person controlling the recipient company.

CGT holdover relief allows for capital gains, realised on transfers at under-value of qualifying business assets and certain unquoted shares, to be held over. The held over gain is deducted from the recipient’s base cost, with the effect that CGT is charged on the recipient when they subsequently sell the asset.

Generally, holdover relief cannot be claimed if the recipient is non-UK resident. Existing legislation also prevents holdover relief if a UK resident company is controlled by a non-UK resident person who is connected to the person making the disposal. The new measure clarifies that the relief is also denied where the non-UK resident person controlling the company is the person making the gift.

Our comment

The current legislation does not work as HMRC intends where the transferor is non-UK resident, as confirmed in an Upper Tribunal decision, which seems to be an oversight. It assumes that a non-UK resident person would have no incentive to holdover a capital gain as they are generally outside the scope of UK CGT. However, there could be a potential CGT exposure if the capital gain was realised on a disposal of assets connected to a UK branch or agency.

When will it apply?

The change will have effect from 6 April 2021.

The social investment tax relief (SITR) scheme will be extended to 6 April 2023, continuing the availability of specific tax reliefs for investors in qualifying social enterprises.

The SITR scheme, originally introduced in 2014, and due to end on 6 April 2021, will continue until 6 April 2023.

The scheme is designed to support social enterprises in raising funds to be used in the trading activity of their community interest company, community benefit society or charity.

Individuals investing in such entities by way of shares or specific loans can receive income tax relief and capital gains tax deferral following their initial investment, with a potential exemption from capital gains tax on any gain realised on disposal.

There are several qualifying conditions that both the social enterprise entity and the investor need to satisfy, and a number of trades are excluded.

Our comment

This is expected to be a welcome announcement for social enterprises, charities and community businesses, many of which have seen their trading activities and cash reserves significantly impacted by the pandemic.

The announcement may also help draw attention to a relief of which people are perhaps less widely aware than other venture capital schemes.

When will it apply?

Extension of current regime from 6 April 2021 until 6 April 2023.

The inheritance tax nil rate band and the residence nil rate band will remain at their current level up to and including the 2025/26 tax year.

The nil-rate band (NRB) threshold, above which inheritance tax becomes payable, will remain at £325,000 until April 2026. The residence nil-rate band (RNRB), which applies when taxpayers pass their main residence to their direct descendants on death, will also be kept at £175,000 for this period. The RNRB is reduced by £1 for every £2 that an estate exceeds £2 million in value and this £2 million threshold will also remain fixed until April 2026.

The combined effect of the NRB and RNRB means that, in some circumstances, an estate worth up to £1 million can be passed on, without any charge to inheritance tax, on the death of a surviving spouse or civil partner.

Our comment

The decision to maintain the NRB and RNRB at their current levels could see more estates exceeding these thresholds if asset values continue to rise. This would result in more estates becoming liable to inheritance tax or ceasing to qualify for the RNRB.

The NRB has been set at £325,000 since 6 April 2009 and so it is not a surprise that there are no plans for this to rise in the coming five years. The RNRB was introduced in April 2017 and, though it offers welcome relief from inheritance tax for smaller estates, it is a poorly understood and an unnecessarily complicated relief.

It is disappointing that the Chancellor did not take this opportunity to merge the two bands together. Broader changes to the inheritance tax system may still be on the cards, with further HMRC consultation documents expected on 23 March.

When will it apply?

From 6 April 2021, the thresholds will remain frozen at their existing levels until 5 April 2026.

The annual tax on enveloped dwellings (ATED) rates will increase in line with inflation from 1 April 2021.

The rates for ATED, which is an annual tax applied to residential properties held by ‘non-natural’ persons, such as companies, increase each year based on the consumer prices index (CPI). The chargeable period for ATED begins on 1 April each year and the increase in rates is based on the CPI for the previous September. For the 2021/22 chargeable period, the rates will increase by 0.5%, although there will be no increase for properties with a taxable value up to £2 million.

Our comment

This is an annual increase, so was to be expected. Further details of the ATED rates and thresholds are set out in the tax rate card published alongside this Budget report.

When will it apply?

From 1 April 2021.

A new relief from annual tax on enveloped dwellings (ATED) and the 15% stamp duty land tax (SDLT) rate for properties acquired by non-natural persons has been introduced, where the holder or acquirer is a qualifying housing co-operative.

A 15% flat rate of SDLT applies to residential properties acquired for more than £500,000 by ‘non-natural’ persons, such as companies and other corporate bodies. ATED is an annual tax charge applying to residential properties held by such entities.

Both regimes are subject to a number of reliefs and exemptions. An additional relief has now been introduced for properties acquired or held by qualifying housing co-operatives. For ATED, the relief applies retrospectively from 1 April 2020, whereas for SDLT the relief will apply for acquisitions with an effective date on or after 3 March 2021.

Our comment

While this relief is relatively narrowly focused and is subject to some restrictions, it prevents the application of ATED and the 15% rate of SDLT to circumstances to which they were never intended. As such its introduction is to be welcomed.

When will it apply?

For ATED from 1 April 2020, for SDLT from 3 March 2021.