The Budget contained very little which should worry non-UK doms. Despite some initial predictions of capital gains tax (CGT) rate changes or reform to inheritance tax (IHT), few changes were announced in the Budget that will specifically impact non-UK domiciled or non-UK resident taxpayers.
One significant change for international taxpayers will be the introduction of a 2% stamp duty land tax (SDLT) surcharge applying to UK residential property acquisitions by non-UK residents from 1 April 2021. Although this change was originally announced in Budget 2018, so has been expected for some time, the fact that the additional 2% charge comes on top of all existing rates can result in eye-catching rates of SDLT of up to 17% in some cases. The definition of ‘residence’ for the purposes of these rules also differs to that for other UK taxes, which could result in some anomalies.
Focus will now move to whether or not any changes will be announced in the next Budget, expected in Autumn 2021 at the earliest. There are expectations of future CGT rate rises and there remains the possibility of reform to IHT, property taxes more generally, or some form of wealth tax. Indications are that for the short term at least, the UK tax position of non-UK domiciled individuals will not change significantly. In the meantime, those with international aspects to their tax affairs may wish to review existing arrangements as the Chancellor continues to tackle tax avoidance in relation to overseas matters.
Overall, this period of relative legislative calm will be welcome after so many changes over recent years and means that the UK does still retain an attractive tax regime for those wishing to move to the UK from abroad.
Non-UK resident stamp duty land tax
As announced in Budget 2020, a 2% surcharge above existing residential stamp duty land tax (SDLT) rates will be introduced for acquisitions of residential property by non-UK residents from 1 April 2021.
The Government has confirmed that a proposed 2% SDLT surcharge will apply to purchases of residential property in England and Northern Ireland with an effective date from 1 April 2021. The surcharge will apply in addition to the existing rates, including the 3% surcharge that applies to acquisitions of second properties.
Draft legislation providing for the changes, which will apply to purchases by both individuals and ‘non-natural persons' such as companies, trusts and partnerships, was published in 2020. The draft legislation includes details on those treated as non-UK resident for the purposes of the charge, with definitions that differ from those for the purposes of other UK taxes.
The surcharge only applies to transactions involving residential property in England and Northern Ireland, as Scotland and Wales have separate land transaction taxes.
This change was first proposed in Budget 2018 and consulted on in 2019, so has been expected for some time. The rate of the surcharge was initially proposed at 1%, but in Budget 2020 it was announced that it would be increased to 2%.
The policy aim of the charge is to improve affordability of residential property for UK resident purchasers. Whether or not this will have the desired effect on residential property demand remains to be seen, but the fact that the surcharge applies on top of existing charges such as the additional 3% charge for acquisitions of second properties and the increased rates for acquisitions by ‘non-natural persons’ means that the top rate of SDLT for non-UK residents will now be 17%.
When will it apply?
The change will apply from 1 April 2021
Stamp duty land tax nil rate band for residential properties temporarily extended
The stamp duty land tax (SDLT) nil rate band for residential properties will remain at £500,000 until 30 June 2021. It will then reduce to £250,000 until 30 September 2021 before returning to its previous level of £125,000 from 1 October 2021.
On 8 July 2020, the Chancellor announced that the SDLT nil rate band, being the first slice of consideration on which the SDLT rate is 0%, would increase from £125,000 to £500,000. This was a temporary measure and was planned to end on 31 March 2021.
The Government has now confirmed that the nil rate band will remain at £500,000 until 30 June 2021. It will then reduce to £250,000 from 1 July 2021 before returning to £125,000 from 1 October 2021.
When compared to the pre-8 July 2020 SDLT rates, this measure represents a tax saving of up to £15,000 for a property purchase in excess of £500,000. From 1 July 2021 until 30 September 2021, the potential saving will reduce to £2,500.
Our commentThis measure will be welcome news for those looking to purchase a property and should also continue to provide stimulation to the housing market, which particularly suffered during the Spring 2020 lockdown when transactions were largely put on hold.
When will it apply?
This is a continuation of an existing measure, to be adjusted from 1 July 2021 and to end on 30 September 2021.
Personal allowance, income tax and national insurance rates and thresholds
The personal allowance and basic rate tax band will increase in line with inflation from 6 April 2021 but thereafter remain frozen at these levels until 5 April 2026. Income tax rates remain unchanged.
As previously announced, the income tax personal allowance and basic rate band will increase, in line with inflation, to £12,570 and £37,700 respectively from 6 April 2021. These thresholds will be fixed at these levels for the following four tax years.
The respective upper earnings limit and upper profits limit for Class 1 and Class 4 national insurance contributions will also increase in line with inflation and will remain aligned with the higher rate threshold of £50,270 until April 2026.
Income tax rates remain unchanged.
The increase in the personal allowance and basic rate band in line with inflation is expected and is in line with previous announcements and will result in taxpayers experiencing a reduction in their income tax liabilities from 6 April 2021.
The level of individuals’ taxable income may well increase over the coming years, potentially significantly if the country experiences a period of high inflation. The fact that these bands are frozen will mean that more taxpayers may start exceeding their personal allowance, and others will start to become higher rate taxpayers.
When will it apply?
From 6 April 2021
Capital gains tax annual exempt amount
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.
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.
Clarification on holdover relief rules for gifts by non-UK resident individuals to a company
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.
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.
Inheritance tax nil rate band and residence nil rate band frozen
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.
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.
Rates for annual tax on enveloped dwellings
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.
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.