Budget 2016 – summary of Private Client measures
16 March 2016
Personal allowances and thresholds
It has been announced that the personal allowance for Income Tax will increase again in April 2017. The personal allowance is already set to increase from £10,600 to £11,000 in April 2016 and it will then rise a further £500 in April 2017 to £11,500.
The Chancellor is also increasing the threshold for the higher rate of Income Tax. In April 2017 it will increase to £45,000. It is already set to increase from its current level of £42,385 to £43,000 in April 2016.
Stamp Duty Land Tax
New rates of stamp duty land tax apply to non-residential and mixed use property
With effect from 17 March 2016 Stamp Duty Land Tax (SDLT) will be charged at each rate on the portion of the purchase price which falls within that band.
The rates are:
Transaction Value Band Rate
£0 - £150,000 0%
£150,001 - £250,000 2%
£250,000 + 5%
The previously-announced additional 3% rate on residential properties which are not their owner's main residence has been confirmed. This means that the new rates for such properties will be:
Threshold Current rate New rate
£0 - £125,000 0% 3%
£125,001 - £250,000 2% 5%
£250,001 - £925,000 5% 8%
£925,001 - £1.5m 10% 13%
£1.5m+ 12% 15%
Properties purchased for under £40,000, caravans, mobile homes and houseboats will be excluded from the higher rates. Small shares in recently inherited properties will also not be considered when determining if higher rates apply. In response to the consultation process, the Government have proposed that, to qualify for relief from the additional 3% charge, the time limit for an individual to replace their main residence will be extended to 36 months (rather than 18 months as outlined in the consultation). Married couples will no longer be treated as a single unit where the separation is permanent.
Following the Government's "help to buy" ISA introduced in the 2015 budget for individuals saving for their first home, the Chancellor has created a new "Lifetime ISA" available from April 2017. This allows anyone between the ages of 18 to 40 to open a Lifetime ISA account and save up to £4,000 a year to be used either towards buying your first home or saving for retirement. At the end of each year, the Government will then top up your Lifetime ISA by 25% of that year's contribution (i.e. you will receive a £1,000 bonus if you save the full £4,000).
You may use the Lifetime ISA to save for a deposit on a first home up to £450,000 and can transfer any savings from the "help to buy" ISA to your Lifetime ISA in April 2017. Alternatively, you can continue to save in both although the Government will only allow you to use the bonus from one account to buy a house.
If you wish to use the Lifetime ISA for your retirement, you may withdraw your savings tax-free after your birthday. You may withdraw your savings at any time before reaching sixty but you will lose the Government bonus and will have to pay a 5% charge.
The Chancellor has increased the total amount that you can save each year into all ISAs from £15,240 to £20,000. This will also take effect from April 2017.
Capital Gains Tax
Changes to Capital Gains Tax Rates
From 6 April 2016 the higher rate of capital gains tax will be reduced from 28% to 20% and the basic rate will be reduced from 18% to 10%.
These reduced rates will not be available on gains made on residential properties (that do not qualify for principal private residence relief). There will be rules as to how to calculate gains on properties that have a mixed residential and other use.
The rate on ATED gains on residential property (broadly, properties that are owned by companies and that are valued over, currently, £1 million - to be reduced to £500,000 on 1 April 2016) remains at 28%. The 20% rate where non-UK residents own UK residential property remain unchanged.
Entrepreneurs Relief (ER) still reduces the rate of CGT to 10%. As the headline rates of CGT have been reduced it is perhaps less significant than it was, but it remains an important relief on the sale of a business or business assets.
Until now, ER has only been available to those actively involved in a business. The Chancellor has now extended it to long-term investors. He has also undone some of the more draconian changes introduced last year, particularly where they had unintended consequences.
Long term investors
ER is to be available to long-term investors in unlisted trading companies where they subscribe for new shares on or after 17 March 2016. They must be individuals, and not employees or officers of the company. The shares must be held for at least three years. There is no need to hold more than 5% of the shares, so it seems that small percentage holdings will qualify.
Artificial schemes to include employees with less than a 5% shareholding
Originally ER was only available to an officer or employee holding 5% or more of a company's shares. Structures were devised to obtain ER for those with smaller shareholdings. These involved the use of one or more intermediate companies which would hold shares or interests in the underlying business. The individual would hold more than a 5% shareholding in his intermediate company, instead a much smaller share of the underlying business.
Last year the Chancellor removed ER from these structures, but in the process excluded ER for other perfectly legitimate partnership or joint venture arrangements.
Now, more targeted provisions are introduced, which look through a structure to determine the true percentage interest held.
Companies operating through a partnership
Another "hammer to crack a nut" introduced last year was to treat a company that operated through a partnership as non-trading for ER purposes (so that ER would not be available on its shares). This was unfair and anomalous. In future, a corporate partner will be treated as trading or non-trading depending on the true nature of the partnership activities.
Other corrections to ER - sales to the family and succession provision
There was a technical anomaly which prevented ER on an "associated disposal" where an asset was sold to a family member. This is being removed.
Yet another example of the law of unintended consequences was the set of amendments introduced last year to prohibit ER on an "associated disposal" where, in a partnership or a company, there was any existing arrangement to purchase an individual's interest in the business.
Many businesses have option or transfer arrangements in place to provide a mechanism for succession. These were not the intended target of the anti-avoidance rules, but had the effect of excluding ER. It seems that these are also being revisited.
Inheritance Tax and Estate Duty
Three measures affecting Estate Duty and IHT in relation to conditionally exempt chattels have been announced in today's Budget:-
With effect from the Finance Bill receiving Royal Assent (which is expected towards the end of June) a charge to Estate Duty (ED) will arise on objects, previously exempted under the ED regime, which have been lost. The definition of loss will include theft and destruction by fire. We understand that HMRC will have discretion not to make a charge where such a loss is not attributable to the negligence of the owner. As any losses which have already been notified to HMRC or are notified before Royal Assent will not be subject to the amended provisions, there is still time to report any lost objects ahead of the change.
Estate Duty followed by IHT on death
If an object that was previously granted conditional exemption from ED is eligible for re-exemption and the conditional exemption is renewed following a death occurring on or after 16 March 2016, then on a subsequent chargeable event HMRC will have the choice of raising either the ED or IHT charge. It will therefore no longer be possible to replace the, often higher, rate of ED with the 40% IHT rate by re-exempting an object on death.
Private treaty sales to local museums and galleries
Some former local authority museum and gallery collections no longer qualify as bodies to which private treaty sales or gifts can be made because they now operate outside local authority control, as charitable trusts. As from Royal Assent, collections which have in the past been maintained by local authorities will again benefit from tax-free private treaty sales under the douceur arrangements and estates will be able to benefit from making IHT-free gifts to such bodies.
If you have any questions about how these changes might affect you please contact Belinda Watson or Torsten White.
Non-residents dealing in or developing UK land
Non-residents dealing in or developing UK land will be subject to UK corporation tax or income tax on their profits with effect from the report stage of the Finance Bill, expected to be in June. Anti-forestalling provisions take effect immediately. Developers have been able to limit their exposure to UK tax by using non–resident companies without a permanent establishment in the UK and by siting those companies in jurisdictions where the double tax agreements do not affirm the UK's taxing rights over profits from UK land. In future the whole of the profits from dealing in or developing UK land will be charged to UK tax, even if the developer is non-resident and has no permanent establishment in the UK. The legislation will also include targeted anti-avoidance measures to discourage the use of complex structures.
The message is clearly that non-residents cannot expect to be outside the scope of UK tax where UK land is concerned. 2015 saw capital gains tax on residential property and 2016 is introducing taxes on developers. Capital gains on commercial property have, so far escaped the net.