A review of some of the key announcements in the 2016 Budget.
The 2016 Budget saw the government give notable prominence to a new document – the Business Tax Road Map (see below) – that sets out the government’s plans for future tax policy for the next several years. There is a full section on the government’s plans in relation to countering tax Base Erosion & Profit Shifting (BEPS) and, in particular, restricting the Tax Deductibility of Corporate InterestExpense – although the vast majority of companies will be “protected” by a £2 million de mimimis group threshold.
The main documents, etc., are listed below, although many practitioners are likely to find the Overview of Tax Legislation and Rates (OOTLAR) most useful, at least until the draft legislation is released, which will be 24 March 2016, according to the OOTLAR.
2017/18 Personal Allowance £11,500 (£11,000)
2017/18 Basic Rate Band £33,500 (£32,000)
This means that the Higher Rate Threshold will rise to £45,000 in 2017/18.
Mini-Allowances for Property and Trading Incomes
From April 2017, there will be separate £1,000 tax allowances available to set off against casual trading income and property income. Where relevant incomes are below the new Allowances, there will be no need to declare or to pay tax on that income. Where incomes exceed the new Allowances, the Allowances may either be deducted from gross income, or expenses may be claimed as normal. For more substantial sources, then, the new Allowances are unlikely to make an impact.
CGT Rates to Fall
From 6 April 2016, Capital Gains Tax rates will generally fall from 18% and 28%, to 10% and 20% respectively. These new rates will not apply to gains on residential property or to carried interest.
Note that “residential property” is intended to include land that, at any time in the taxpayer’s ownership, included a dwelling or contract for off-plan purchase thereof.
New Lifetime ISA
There is to be a new Lifetime Individual Savings Account made available from April 2017 for adults under the age of 40. Individuals will be able to contribute up to £4,000 a year and receive a 25% contribution from the government. However, the funds may be withdrawn without penalty only to buy a first home, or from age 60. The standard annual ISA limit is to be increased to £20,000 a year, from April 2017.
There are several measures to improve pension flexibility, including:
- To remove the requirement that a serious ill-health lump sum may be paid only from an arrangement that has not previously been accessed
- To replace the 45% tax charge on serious ill-health lump sums paid to over-75s with the individual’s marginal rate
- To enable money purchase schemes that are already in payment to be paid as trivial commutation lump sums
Further Tweaks to New Savings Allowance
There will be several minor changes to the new Savings “Allowance”
- Update to the definition of Additional Rate Income for the purposes specifically of the Personal Savings Allowance
- How the Personal Savings Allowance will interact with the Starting Rate for Savings
- The interaction between savings income and the rules for calculating a reduction in the residuary income of an estate
Entrepreneurs’ Relief (ER)
There are to be numerous amendments to various measures introduced last year that proved overly restrictive, so as to protect ‘genuine’ commercial transactions.:
- ER will be available to ‘associated disposals’ of personally-held assets to family members, including in some cases where the disposal does not meet the new minimum 5% requirement
- ER will also be available for goodwill on business disposals by individuals to their own close companies – but only where the individual owns 5% or less of the company’s shares, or where there is a greater holding but incorporation is merely an interim step towards disposal to a third party owner
- There will be further measures to ease the problems caused by having previously tightened the rules for partnerships and joint ventures.
These measures will have retrospective effect to counteract the problems caused by the corresponding rules’ introduction in 2015.
There will also be a new ER, available to longer-term investors who subscribe for newly-issued (on or after 17 March 2016) shares in an unlisted trading company and hold on to them for at least 3 years after 6 April 2016. This new ER will have its own separate £10million Lifetime Allowance.
Stamp Duty Land Tax (SDLT) Reform
With effect from 17 March 2016, SDLT on commercial/mixed properties will be calculated on a ‘slice’ basis rather than on a ‘slab’ basis – i.e., it will follow changes made to residential SDLT in December 2014. However, a new 5% rate will apply to the extent that the consideration exceeds £250,000.
A new 2% rate will also apply where the Net Present Value of a non-residential lease exceeds £5million (with 1% applying between £150,000 and £5,000,000).
Despite the new ‘slice’ approach, the reform is expected to net around £500milllion a year to the Treasury, because of the higher rates on higher values. Where contracts have been exchanged before 17 March 2016 but not yet completed, purchasers may choose whether to adopt the old or the new regime.
Small Business Rate Relief
Small Business Rate Relief (SBRR) will be doubled permanently to 100% from 1 April 2017. It will also apply to rateable values of up to £12,000 (and tapering up to £15,000) from 1 April 2017. Further changes are intended to allow local government greater retention and discretion in relation to business rates.
Corporation Tax Rate to Fall
The rate of Corporation Tax is intended to fall to 17% from April 2020 (i.e. Fiscal Year 2020). The rate was originally intended to fall to 18%.
CT Losses: More Flexibility – Except for the “Biggest” Companies
For losses arising on or after 1 April 2017, there will be greater flexibility in terms of how those losses may be relieved – losses may be used against profits from other income streams, and against profits arising elsewhere in a group even on carry-forwards. Likewise from April 2017, however, companies with profits in excess of £5million will be able to offset only half of their profits with losses brought forwards.
Loans to Participators: S455 Tax Rate to Rise to 32.5%
The tax rate for loans to participators will increase from 25% to 32.5%, apparently to keep it in line with the new upper rate applicable to dividends. As the rate appears to be applicable to the net amount received, perhaps the Chancellor is unaware that the dividend rate is traditionally supposed to be applied to the “grossed-up” amount of the loan. The new higher rate will apply to loans advanced from 6 April 2016. Note that the order in which loans advanced at different times are repaid is not necessarily on a “FIFO” basis, in accordance with what is commonly referred to as Clayton’s Case. (See for instance HMRC’s Company Taxation Manual at CTM61600).
It is intended that, from April 2018, NICs will in future be due on termination payments to the extent that they exceed the £30,000 threshold. Legislation is to be introduced in Finance Act 2017 and future NICs legislation.
Repeal of Renewals Basis
While there will now be a “Replacement Furniture Relief” to cover the cost of like-for-like replacements of furnishings, etc., for residential landlords, the renewals basis more generally will be repealed. The government asserts that businesses have recently started to make substantial claims under the renewals basis, and that the relief was never intended for such purposes. Many practitioners will disagree with this position. The Annual Investment Allowance is set to remain at £200,000 annually, at least for the life of the current parliament.
Tweaks to Landlords’ Interest Relief Restriction
Numerous small changes are to be implemented in relation to the impending restriction to finance costs for residential property landlords, including:
- Individual beneficiaries of a deceased person’s estate will benefit from the Basic Rate tax credit
- To ensure that unutilised Basic Rate tax credits may be carried forward beyond the expiry of any corresponding loans, provided property income continues to be received.
HMRC is to introduce tougher rules to require overseas businesses to appoint a UK representative, with joint and several liability. HMRC intends also to make those online marketplaces that allow overseas vendors to sell goods into the UK, to be jointly and severally liable to any UK VAT not accounted for by the overseas vendor.