No major surprises for personal tax but changes have been made to Entrepreneurs Relief and Principal Private Residence Relief.
There were no major surprise tax changes for UK-resident individuals in the 2018 Autumn Budget, which is welcomed and perhaps to be expected given the inevitable focus on the forthcoming Brexit deadline and the uncertainty as to the nature of the final Brexit agreement that is reached.
The announcements in relation to public spending will inevitably lead to consideration of the future level of personal tax rates, allowances and reliefs. We would welcome the publication of a Personal Tax Roadmap to give individuals and business owners more clarity in relation to any future personal tax changes and to give an opportunity to participate in a debate.
It is good to see that the general direction of travel continues to be towards prior announcement of future changes, allowing time for review and preparation. Such a trend will, in our view, help to ensure that the UK remains an attractive and stable fiscal environment for business owners as well as the businesses themselves.
Rates and Allowances
No changes were announced to the rates of income tax, capital gains tax (CGT) or inheritance tax (IHT).
The Chancellor has honoured the Conservative’s manifesto commitment one year earlier than planned to raise the personal income tax allowance to £12,500 and the 40 percent threshold to £50,000 from April 2019, with the basic rate band increasing to £37,500 for 2019/20. The personal allowance and these thresholds will then be frozen for 2020/21 after which they will then be indexed with the consumer price index (CPI).
The zero percent starting rate for savings income will continue to apply to the first £5,000 of such income, not increasing in line with inflation as we might usually expect. Similarly the ISA annual subscription limit will remain unchanged at £20,000.
Whilst the Personal Allowance is available to all qualifying UK taxpayers, Scottish taxpayers will be subject to tax on non-savings and non-dividend income from April 2019 based on rates and bands that will be set by the Scottish Parliament early next year. Similarly, from April 2019 Welsh taxpayers will be subject to tax on non-savings and non-dividend income at rates that will be set by the National Assembly for Wales. Currently, these are expected to be the same as for other UK taxpayers outside Scotland.
The CGT annual exempt amount will be increased for 2019/20 to £12,000 for individuals and personal representatives and to £6,000 for most trustees.
The Budget introduced changes to CGT Entrepreneurs’ Relief (ER) that will impact shareholders and business owners. This is likely to particularly affect management teams in private equity backed businesses who often hold small shareholdings and currently expect to qualify for ER. This change will also impact many employee shareholders, particularly in a private equity context, who may no longer qualify for ER.
With effect from 29 October 2018, a shareholder will only qualify for ER where they have a shareholding with the characteristics of true entrepreneurial activity. In practice, this means that shares that have limited economic rights to dividends or entitlement to capital on a sale or winding up are unlikely to qualify. This is in addition to the extension of the minimum qualifying period for which an asset has to be held to qualify for relief from 12 to 24 months which will take effect for disposals on or after 6 April 2019. For further information see Budget 2018 changes to CGT Entrepreneurs’ Relief.
As previously announced, the Government has confirmed that legislation will be introduced from 6 April 2019 which allows individuals who are diluted below 5 percent following a fund raising after 6 April 2019 to elect for their ER to be crystallised at the time of share issue. There will also be an election allowing the individual to defer any tax due until a future liquidity event.
The government will extend first-time buyers relief in England and Northern Ireland so that purchasers of shared ownership property who are first-time buyers can benefit from the relief on qualifying purchases. This change will apply to relevant transactions with an effective date of on or after 29 October 2018, and will also be backdated to 22 November 2017, the date first-time buyer’s relief was originally introduced.
Private Residence Relief
Effective from April 2020, the Government plans to restrict two ancillary parts to Private Residence Relief (PRR). The first part is to reduce the final period exemption from 18 to nine months. This allows the final period of ownership to be covered by PRR even if the property is not the only or main residence during this period.
The second restriction is to lettings relief, which reduces the gain on a property qualifying for PRR by up to £40,000 per owner, where the property was let to residential tenants for part of their period of ownership. Going forward, this relief will only apply where the owner is in shared occupancy with a tenant.
Property owned by UK residents
For UK-residents there were no new announcements but confirmation that from April 2020 UK-residents disposing of residential property (wherever located) will have a new 30 day window in which to both make a return and a payment on account of the tax due. This will significantly reduce the time for payments (currently 31 January following the end of the tax year in which the disposal is made) as well as creating further compliance requirements. The new reporting and payment requirements will not apply if the gain is not chargeable to CGT (e.g. Principal Private Residence Relief is available), is a gain on non-UK property covered by a relevant Double Tax Treaty or is taxable on the remittance basis.
Land and property owned by non-UK residents
Currently, UK residential property held by non-UK residents is within the scope of a narrowly-focused charge to CGT. The Government has confirmed it will introduce plans, originally announced in Autumn Budget 2017, to extend from April 2019 the scope of this tax charge to include all UK immoveable property, including commercial property and other UK land. A return and payment on account will be required within 30 days following the completion. The change will affect all non-UK resident property investors (whether individuals, companies or other entities), with only limited proposed exemptions. Changes will also be introduced to levy the charge to CGT on disposals of entities which derive their value from UK property, along with targeted anti-forestalling rules which came into effect from 22 November 2017. These changes are a significant expansion of the current CGT rules for the property sector, where a significant portion of investment comes from outside the UK.
In addition the Government confirmed that as previously announced, from April 2020, new rules will be introduced to move non-resident corporate landlords from income tax to corporation tax. See Changes for non-resident investors in UK property.
For non-UK residents acquiring UK residential property the Government is to consult on the introduction of a surcharge of one percent in addition to existing Stamp Duty Land Tax (SDLT). Most foreign investors will probably be buying ‘second homes’ and this surcharge will be on top of the existing three percent additional SDLT rate.
The above measures represent further significant but targeted changes to the general regime taxing UK land and property holdings. We have long held the view that a wide ranging overhaul of this regime is required, rather than regular changes of this nature which contribute to a general apprehension amongst both domestic and international investors about long term stability.
Tax avoidance involving profit fragmentation
As previously announced the Government is introducing targeted anti-avoidance legislation which aims to prevent UK businesses from avoiding UK tax by arranging for their UK-taxable business profits to accrue to entities without sufficient substance and resident in territories where significantly lower tax is paid than in the UK. Included in the Budget following consultation, changes have been made to the draft legislation to remove the duty to notify HMRC of relevant arrangements meeting certain criteria. The rules will commence with effect from April 2019 and will apply to an individual or a company carrying on a business within the charge to UK taxation, including in partnership. See New Profit Fragmentation Rules impact Individuals and Partnerships.
Indications of future change
Several reviews were announced in the Budget which are indicative of areas where change may be forthcoming in due course. These include:
The Chancellor announced Entrepreneurs’ Relief changes which shareholders need to consider now – the key changes are discussed here.
While PRR will remain for an individual’s main residence, changes will be made to two ancillary reliefs.
For other measures of interest to individuals, please read Other measures for individuals