Autumn Statement 2016 - summary of Private Client measures
23 November 2016
The Autumn Statement, delivered shortly after 12.30 on Wednesday 23 November, contained rather fewer significant changes than many commentators had expected. However, as ever there were a number of announcements which may affect private clients and their finances.
Personal savings and income
Income tax changes
The income tax personal allowance will rise to £11,500 and the higher rate threshold will rise to £45,000 from April 2017. The Government has also committed to raising the personal allowance to £12,500 and the higher rate to £50,000 by the end of this Parliament before increasing them in line with inflation.
The Government also announced changes to the taxation of remuneration of employers, in particular, the removal of salary sacrifice schemes. These schemes allow employees to forgo part of their salary in exchange for non-work related benefits, resulting in a lower income tax and national insurance liability. Exceptions will remain for the use of ultra-low emission cars, pensions, childcare and Cycle to Work schemes but the changes are likely to remove the incentives for larger firms to offer non-work related benefits such as gym membership and mobile phones to employees. Arrangements in place prior to April 2017 are to be protected until April 2018 whilst arrangements for cars, accommodation and school fees are protected until April 2021.
Life insurance policies
Following the closure of its consultation on the tax rules applicable to part surrenders and part assignments of life insurance investment products earlier this year, the Government has confirmed that it will legislate in the Finance Bill 2017 to amend the tax rules surrounding these products to prevent the unfair results that can arise in some cases. At present, when value is extracted from these types of product, tax is charged on the full consideration (subject to a 5% annual cumulative allowance) rather than just the element representing economic gain in the investment. This can result in disproportionate tax charges where policyholders partly withdraw substantial sums early on in the life of the policy. The injustice of the system has been recognised in case after case by the tax tribunals but they have been powerless to do anything about it without a change in the tax legislation.
Individual Savings Accounts (ISAs) Junior ISAs and Child Trust Fund Limits
The annual subscription limit for Junior ISAs and Child Trust Funds will be updated in line with the Consumer Prices Index (CPI) to £4,128 alongside the ISA subscription limit increase from £15,240 to £20,000 announced at Budget 2016. The limit will be effective from 6 April 2017.
New National Savings Bond
NS&I have announced a new saving bond with an interest rate of around 2.2% for terms of up to three years. Up to £3,000 can be invested in it. 2.2% on £3,000 over three years will earn £198 in interest.
Clarification of tax treatment for partnerships
HMRC continue to consider changes to the tax treatment of partnerships. In 2014 they introduced rules requiring appropriate allocation of income profits between individual and corporate partners, given that corporation tax rates are so much lower than income tax. A wide consultation on partnership taxation was commenced in 2013 under the auspices of tax simplification, following which various changes have been made. The latest announcement indicates that they intend to go further “to ensure that profit allocations to partners are fairly calculated for tax purposes” - which probably means we can expect more complicated rules rather than any simplification.
Rural rate relief
With effect from 1 April 2017, "rural rate relief" will be doubled to an automatic 100% to bring it into line with small business rate relief.
Currently, the following retail outlets and similar services in rural settlements with a population of less than 3,000 are entitled to 50% mandatory rate relief in their business rates:
- the only food shop, general store or post office with a rateable value of less than £8,500; and
- the only public house or petrol station with a rateable value of up to £12,500.
At the moment Councils can give discretionary relief for all or part of the other 50%, to top up the mandatory relief. Councils also have discretion to increase the relief of up to 100% for a property in a rural area with a rateable value of £16,500 or less, if they are satisfied that:
the property is used for purposes which are of benefit to the local community; and
it would be reasonable for the council to award relief, having regard to the interest of the Council Tax payers in the district.
It is hoped that the mandatory 100% relief will benefit small businesses in rural communities and the communities they support.
The taxation of non-domiciled individuals
There were no further surprises regarding the changes to be introduced from April 2017 to the tax regime applicable to non-UK domiciled individuals. The Government confirmed that these will be introduced as previously outlined.
By way of reminder these changes are:
- an end to the permanency of non-domiciled status for tax purposes via the introduction of 'deemed domiciled' rules for long-term residents;
- those born in the UK and originally UK domiciled will be considered to be UK-domiciled for all tax purposes during any periods of UK residence. Any trusts established by them whilst non-domiciled will lose their beneficial "excluded property status" whilst they are UK tax resident; and
- UK residential property held through offshore structures will be subject to the UK inheritance tax regime
but for more details please visit our website to see our briefing note 'Changes to the tax treatment of non-domiciled individuals and UK residential property'.
There will also be changes to Business Investment Relief to make it easier for remittance basis taxpayers to bring funds onshore to invest in UK business without triggering UK tax charges.
A number of changes were announced relating to the taxation of foreign pension schemes held by UK residents. Broadly, the announcement appears to be aimed at ensuring that sums paid under foreign pensions are taxed in the same way as domestic pensions, but the detailed rules have yet to be announced. It will be interesting to see the full effect of these changes once the legislation is released.
Currently, a non-UK resident company only falls within the UK corporation tax regime in certain limited circumstances. However, in March this year HMRC published a briefing suggesting that the law should be reviewed and updated in light of the change in the way many businesses now operate, including the ability to sell online. In the Budget 2016, the Government announced that non-UK resident companies which carry on a "property trade" in respect of UK land would be subject to UK corporation tax on their trading and development profits irrespective of whether that non-resident has a UK permanent establishment.
The Government has now announced that it is considering bringing all non-resident companies receiving "taxable income from the UK" into the UK corporation tax regime. There will be a formal consultation at the Budget 2017 on the case and options for implementing this change.
Going forward, the source of a company's income may therefore be a key issue in determining its liability to UK tax. It is clear that the Government's intention is to target larger companies that have been the subject of headlines on this point over the last couple of years but, in so doing, smaller businesses with any sort of UK connection could also be caught.
We will review the position carefully once the proposed consultation has been published.
Capital gains tax – offshore reporting funds
This is a measure with a limited application intended to harmonise the tax treatment of funds in the offshore reporting regime and onshore funds. A gain on disposal of an interest in an offshore reporting fund is taxed as capital gain, while a gain on a disposal of an interest in an offshore non-reporting fund is taxed as income. Performance fees which have to date been deducted from reportable income from an offshore reporting fund will from April 2017 reduce tax payable on capital gains instead.
Tax law, administration and anti-avoidance measures
Future Budgets and Autumn Statements
The Government has announced plans to hold a single Autumn budget from Autumn 2017. From 2018, the Office for Budget Responsibility will produce a Spring forecast each year and the government will then issue a Spring Statement in response. The Government intends, so far as possible, to limit the Spring Statement to commentary rather than introducing any new tax laws. It is to be hoped that having just a single fiscal event each autumn will allow more time for proposed changes to be scrutinised in advance of the start of the new financial year in the following April.
Disguised remuneration schemes
In March the Government said it would tackle disguised remuneration schemes by which employers use loans which are not subject to income tax or national insurance contributions to pay staff on the basis that the loan is highly unlikely to ever be repaid which allows the employee to spend the money freely. It was going to tackle those schemes by taxing the loans as earnings if not taxed or repaid by 5 April 2019. This is now going to be extended to the self-employed. The government will also tackle employers use of such schemes by denying tax relief for employer's contributions to such schemes.
Offshore tax evasion
There will be a requirement to correct a past failure to pay UK tax on offshore interests within a defined period of time, with sanctions for those who fail to do so. There will also be a requirement for intermediaries to notify HMRC of any complex offshore structures they arrange.
The Annual Tax on Enveloped Dwellings ("ATED")
As previously announced, the annual charges under the ATED regime (a regime introduced in 2015 which imposes tax charges where UYK residential properties are held through companies or similar structures) will continue to rise in line with inflation.
Tucked away in the section about departmental spending was the announcement that £7.6 million will be provided for urgent repairs at Wentworth Woodhouse near Rotherham, conditional on approval of a sustainable business case for the Grade 1 listed country house.
This follows an announcement by SAVE Britain's Heritage, in February 2016, that agreement had been reached with the Newbold family on the purchase of the property by the Wentworth Woodhouse Preservation Trust. The National Trust will be supporting the opening of the house to the public for the first five years.