On Wednesday 16 March 2016, George Osborne delivered his eighth Budget. I will be the first to admit that I was expecting this to be a spending- rather than tax-focussed budget. In fact, I was wondering how much there would be for me to write a blog about, particularly as we have the “tax lock” where the Government have promised not to raise the rates of the major taxes! It seems though (it happens occasionally) that I was wrong! There were some surprising giveaways for both individuals and companies alike; of course balanced by a couple of sneaky rises for some. Our full, official (and slightly less cynical) Budget Summary is available on our website, but the key tax developments are summarised below.
The Government’s plan is to get the Personal Allowance (the tax free amount most individuals get to use against income) to £12,500 over the course of this Parliament, with the higher rate threshold at £50,000 – this took a major step forward in the Budget. We already knew that from 6 April 2016 there will be a personal allowance of £11,000 and the higher rate limit will be £43,000, however the limits from 6 April 2017 increase to £11,500 and £45,000, respectively – we are definitely heading in the right direction here.
Changes have already been made to Class 2 National Insurance payable by self employed individuals, in that from 2015/16 it will be collected via Self Assessment, rather than direct debit. This was a welcome simplification, and George has simplified it further by scrapping it altogether from April 2018. The issue is that Class 2 NI gives self employed people entitlement to state benefits, such as state pension, and therefore Class 4 NI (the other form of NI paid by the self employed) will need to be updated to ensure the self employed continue to be entitled to those benefits. I wouldn’t rule out a rise in the rate of Class 4 NI to compensate for the lack of Class 2 NI in the future, though – watch this space!
A new ISA has been introduced (yes, another one!) being the Lifetime ISA. Operating in a similar way to the Help to Buy ISA, individuals between 18 and 40 can open one of these accounts from April 2017, put in up to £4,000 per year and receive a 25% bonus from the Government, plus tax-free interest. The savings can be used towards purchasing a first home, or drawn out tax-free after turning 60. Early withdrawals will forfeit the 25% bonus (and any interest/growth on this) and be subject to a 5% charge. It’s free money though, and I like free money!
Over the course of this Parliament, slowly but surely, George Osborne has taken small amounts of various types of income out of tax completely, examples being the Personal Savings Allowance and Dividend Allowance which both come into effect 6 April 2016. Well he’s come up with another one! From April 2017 there are two new £1,000 allowances for property and trading income. Individuals with income below the level of the allowance will no longer need to declare or pay tax on that income. Those with income over £1,000 can simply deduct the allowance rather than calculating their exact expenses (the choice, as they say, is yours!). Some people that will benefit from this include those selling small amounts of handmade goods at a craft fair or goods on eBay, those renting their houses for small amounts of time via Airbnb, and those with expenditure of less than £1,000.
The Chancellor announced last year that the corporation tax rate would be cut over the course of this parliament. When the Conservatives came to power in 2010, the rates of corporation tax were 21% and 28% for small and large companies, respectively. By 2020, the current flat rate of 20% for all companies will be down to 17%, giving the UK the lowest corporate tax rate in the G20 (in comparison, in the US they pay 40%, so we get off pretty lightly here!)
Following the dividend tax revolution in last year’s Summer Budget, George has increased the tax due on “loans to participators” from 25% to 32.5% – this isn’t a surprise, as the tax is designed to mirror the effective rate of tax on dividends for higher rate taxpayers in order to make loans from close companies less attractive. What this broadly means is that director/shareholders borrowing money from their companies either in the form of a loan, or as an overdrawn director’s current account, will have to pay 32.5% as a withholding tax if the loan is not repaid to the company within 9 months of the year end – ouch!
An unexpected giveaway is that corporation tax losses incurred after 1 April 2017 will be able to be offset against different types of income streams (for example trading loss against rental profit) – this so called “sideways loss relief” is only currently available for current year, rather than brought forward losses. This is only applicable in a small number of situations, but nevertheless will be useful for some.
Capital Gains Tax
George Osborne hiked Capital Gains Tax after coming into office in 2010, introducing a two-tier system for basic and higher rate taxpayers, where previously there had been a flat rate. While basic rate taxpayers with small gains that kept them in basic rates were not affected, higher rate taxpayers suffered an extra 10% tax on their gains. In this Budget, George has retained the two-rate system, but dropped both of the rates by 8% to 10% and 20%, respectively. There is however, a big but! It’s become pretty clear over the past year that landlords of residential property aren’t at the top of George’s Christmas card list, and this measure is a continuation of his assault on the buy-to-let industry because the lower rates will not apply to gains on residential property – the current rates of 18% and 28% will apply. It isn’t yet clear how this will work in practice if there are multiple gains in the year, taxable at different rates, however I am hopeful (sometimes I can be positive) that we will be able to utilise the annual exemption against the gains that are taxable at the highest rate first, reducing the overall tax due. The measure (along with the extension to Entrepreneurs’ Relief coming next) is designed to provide an incentive for individuals to invest in companies, rather than residential property.
Introduced back in 2008 by the then Chancellor, Gordon Brown, Entrepreneurs’ Relief made capital gains on “entrepreneurial assets” e.g. goodwill in unincorporated businesses and shares in personal companies, subject to a preferential rate of tax, effectively 10%. The amount of gain that can benefit from this reduced rate has increased from £1m when introduced by Labour to £10m under the Conservatives (they do stress that they have a wider policy of supporting enterprise and entrepreneurship). The 2016 Budget extends this 10% rate to long-term investors in unlisted companies (not just those who are directors/employees and 5% shareholders in those companies, as is the current rule). The relief only applies to new shares issued after 17 March 2016 that have been held for at least 3 years after 6 April 2016.
Back in 2014, the Chancellor changed the calculation of Stamp Duty Land Tax (SDLT) on residential property from the slightly bizarre “slab” system (paying at one rate on the total price of the property) to one where buyers pay tax on the amount between bands. This was a welcome change, as it removed the cliff-edge effect which skewed property sales around each limit, but it was always a bit odd that the change only applied to residential property. Don’t get me wrong, SDLT rates are different between residential and non-residential purchases, but wouldn’t it at least make sense to calculate them on the same basis? My wish was George’s command! While the rates have increased from 17 March 2016, they are only payable on the amount of the purchase price that falls within the band, so that buyers of commercial property worth up to £1.05m will pay less SDLT.
It was announced in the Autumn Statement that a 3% supplement would be payable on purchases of “additional residential property” – while I am focussing this blog on the changes announced yesterday, this warrants a comment on the basis that we actually have a bit more information now! The additional 3% will apply to both individuals that, at the end of the day of a transaction, will own more than one residential property, and also companies. The unintended (I would hope) consequence of this is when there is a gap between purchasing your new home and selling your old one – if this is the case, you will have to stump up the extra 3%, but the good news is that if you sell the old property within 36 months, you can have a refund (isn’t George kind?!). For companies, the concept of “additional residential property” doesn’t apply, and the purchase of the first residential property by a company will be subject to the charge. The Government are going to consult on possible relief for large-scale investors.
I’m pretty sure I’ve mentioned this previously, but the Government consistently say they want to encourage use of Ultra Low Emissions Vehicles and general energy efficient machinery. When people go out and buy these ULEVs and get the generous tax rates associated with them, the Government don’t like it as it’s costing them money! They constantly move the goal posts of what is deemed to be low emission, making it harder each year to benefit from the low tax rates.
For example, a car with CO2 emissions of 75g/km would give rise to the following benefit in kind charges (on list price) over the coming years:
- 2015/16 – 9%
- 2016/17 – 11%
- 2017/18 – 13%
- 2018/19 – 16%
- 2019/20 – 19%
So over the course of 5 years, the company car tax will double on the same car! A car that previously gave a very low income tax charge suddenly becomes a lot more expensive.
The same is the case with Capital Allowances when a business purchases a car – at the moment a “dirty car” is one that has emissions of over 130g/km (not too long ago this was 160g/km), but from April 2018 this will be reduce to 110g/km – the implication is that cars over this attract just an 8% rather than 18% allowance each year, and it takes a very long time to write off the cost of a car at 8% a year, on a reducing balance basis. The 100% First Year Allowance for new cars that is currently available for cars with less than 75g/km will drop to 50g/km from April 2018, so get your order for that new car in way before then!
The problem with a lot of the measures that were announced is that they are long-term, relating to events happening way in the future. With the amount of tinkering that George is doing each Budget, who is to say that the measures outlined above won’t be repealed in one of his future Budgets, or for the very long-term items (such as the Lifetime ISA) who will even be in Government when you are planning for the measure to benefit you! We don’t have any stability in tax at the moment, which makes it very difficult to do meaningful long term planning. Perhaps that’s the intention – the Government currently seems to be against tax planning, likening it to tax avoidance (which is completely legal) and even tax evasion (definitely not legal!).
It’s not all doom and gloom though… the duty on beer, cider and Scottish whisky was frozen….. I’ll drink to that! Cheers!
If you want to discuss any of this further then please get in touch.
Katie Kettle, Technical Manager