George Osborne has just sat down after his Budget speech, which made at least three references to his intention to 'act now so we don't have to pay later', possibly in response to the rather less rosy outlook now compared to that presented in the December Autumn Statement. In that light, perhaps the surprise is the number of tax relieving measures. As usual we shall be releasing more information as we digest the press releases, but here’s a brief selection of the matters we think are most likely to affect our clients:
From April 2017 the income tax threshold will rise to £11,500 and the higher rate threshold moves up to £45,000.
Two new personal allowances of £1,000 each will be introduced from April 2017 to exempt small income sums derived from the 'sharing economy'. This will mean that people who make up to £1,000 from occasional jobs – such as sharing power tools, providing a lift share or selling goods they have made – will no longer need to pay tax on that income.
Capital gains tax rates will be cut from 6 April 2016; the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%. However, the new lower rates don't apply to residential property or carried interest for asset managers.
Lifetime ISA - a new saving regime aimed at those aged 18-40 will allow qualifying savers to save up to £4,000 per year and the government will add a 25% bonus to any savings put in before age 50. The new regime will be more flexible than existing ISAs allowing withdrawals and return of monies to the account. The funds can be used to acquire a property or save for retirement. Available April 2017.
Entrepreneurs' relief - currently only available to proprietors of trading businesses or companies - will be extended to external investors in unlisted trading companies. This new investors’ relief will apply a 10% rate of Capital Gains Tax to gains on the disposal of ordinary shares in an unlisted trading company held by individuals. It's clear that, much like the existing entrepreneurs' relief, terms and conditions will apply. In particular, the relief will operate only for shares acquired on or after 17 March 2016, so cannot be used to reduce tax on existing holdings.
Pensions - the tax free lump sum is safe, for now at least.
Legislation will be introduced to reduce the main rate of Corporation Tax 17% for 2020/21. This comes on top of the rate reduction to 18% which was announced last year.
Restrictions on availability of entrepreneurs' relief for companies in partnerships and joint ventures were introduced last year. It appears that the government has bowed to pressure to back track on this and it now seems that corporate partners and joint venturers are to be treated as owning a fractional share of the underlying business, making it feasible to claim entrepreneurs' relief.
Similarly there appears to have been a U-turn on the rules which were introduced in 2014 to deny entrepreneurs' relief on the sale of goodwill to a limited company. On the other hand, the government is to review the present definition of 'trading company' for entrepreneurs' relief purposes, which may mean that certain 'excluded activities' will no longer qualify, possibly mirroring EIS relief.
The corporation tax rules on losses will be modernised, with the aim of making the system more flexible for businesses. For losses incurred on or after 1 April 2017, businesses will be able to use carried forward losses against profits from other income streams or from other companies within a group.
At the same time, the current rules which enable companies to offset all of their eligible taxable profits
through losses carried forward are to be restricted for the largest companies. The Budget introduces a restriction of the amount of profit that can be offset through losses carried forward to 50% of profits (25% for banks).
Class II National Insurance is to be abolished, being replaced with a 'modernised' class IV.
Following the restructuring of Stamp Duty Land Tax for residential property in 2015, the government is to make similar changes to SDLT for commercial property. The new structure is effective immediately (for transactions taking place from midnight of 16 March). The new rates and thresholds for freehold purchases and leases premiums are:
|Transaction Value Band
|£0 - £150,000
|£150,001 - £250,000
The government is introducing new measures to ensure that non-resident developers of UK property will always pay UK tax on the profits from that development. The stated aim is to ensure a level playing field between UK developers and those based in offshore jurisdictions so property developers already paying full UK tax should not be affected.
Anti avoidance measures
Royalty payments - the payer will be obliged to deduct income tax at source from royalties paid to non-residents where royalty payments are being used to reduce UK tax liabilities in ways that HMRC regard as exploitative, for example by using the UK’s double taxation agreements in order to ensure that little or no tax is paid on royalties either in the UK or anywhere in the world.
Loans to participators - new rate of tax charge. Close companies which make loans to their shareholders to enable them to extract value are subject to a tax charge, currently 25% of the loan, if the loan remains outstanding 9 months after the company's year end. The rate of charge is to be increased to 32.5% with effect from 6 April 2016, in line with the new dividend upper rate.
Use of 'hybrid entities' by multinational groups - where a group with UK parent or subsidiary companies is involved in cross-border or domestic transactions which give a mismatch in the tax treatment within the UK or between the UK and another jurisdiction, the new measures will neutralise the mismatch by altering the tax treatment of either the payment or receipt.
We have also published a more detailed 2016 Budget Report, which can be downloaded by clicking here.
For further information about how these issues could affect your own tax affairs, please contact one of our tax partners: Clare Munro or Phil Moss, or your usual Lubbock Fine contact.