Lee Sharpe outlines 6 Key Points for Advisers
Links to Budget Documents
- Chancellor’s Speech
- Red Book
- Overview Of Tax Legislation And Rates (OOTLAR) – includes TIINs
- Draft Legislation, Explanatory Notes and Technical Notes
- HMRC Consultations
1 Stamp Duty Land Tax
The reduction in SDLT for first-time buyers grabbed the headlines: they stand to save as much as £5,000 on consideration anywhere up to £500,000 (although any saving is forfeit if the purchase price exceeds £500,000):
|Portion of consideration||Current standard rates||Rate for first-time buyers|
|Up to £125,000||0%||0%|
|Over £125,000 and up to £250,000||2%||0%|
|Over £250,000 and up to £300,000||5%||0%|
|Over £300,000 and up to £500,000||5%||5%|
Note that, in determining whether or not someone really is a first-time buyer, a person’s dwellings anywhere in the world may be considered, and not just those in England, Wales and Northern Ireland.
Changes to the 3% SDLT Charge on Additional Dwellings
It seems to me that the 3% extra tax on additional dwellings applies more often than first time buyers will get a discount, and there were also some new measures in the Budget to refine when the charge applies; usefully, the charge will no longer apply when, broadly:
- A spouse or civil partner acquires property from their spouse/civil partner
- The charge would otherwise have applied only because someone has had to retain an interest in the former main residence thanks to a property adjustment order, commonly on divorce.
- Where someone adds to their pre-existing interest in their main residence – such as by extending their lease
- Where a deputy buys property for a child subject to the Court of Protection
These modest changes are likely to prove welcome, and all will apply from 22 November 2017.
Anti-avoidance on the 3% Charge
There is also a new measure that stops people from avoiding the additional charge by (simply) disposing of their former residence to their spouse, and then buying a new home. From now on, in order to get relief from the 3% charge for a replacement main residence, the claimant will have to have disposed of their former main residence completely – and not to their spouse or civil partner. The legislation behind the 3% charge is quite tortuous, and this change proves it did not work how the government thought it did.
I think it is fair to say that solicitors have traditionally dealt with Stamp Duty and SDLT but clients are often now turning to their accountants or tax advisers because solicitors are either unsure as to how the additional 3% charge works, or the client disagrees with their advice. Care is recommended, to ensure that any guidance properly reflects the legislation itself.
2 Freezing Indexation Allowance for Companies
The Chancellor announced that Indexation Allowance (TCGA 1992 ss 52A – 57) would be frozen for companies from December 2017. Companies making chargeable disposals will still be able to claim Indexation Allowance, but it will not increase beyond December 2017. Indexation Allowance may seem like a fairly modest adjustment but the Budget Red Book says that the Treasury expects to save £525million a year by 2022/23, thanks to this measure alone – making it the biggest single tax revenue-raising device in the Budget.
Indexation Allowance was introduced to negate inflationary gains, i.e., broadly that part of a capital gain arising as a reflection of movement in the Retail Price Index, rather than the ‘real’ gain. Indexation Allowance was frozen for individuals in April 1998 and abolished in 2008 (will it remain ‘frozen’ for that long for companies?) but it could be argued that the non-business version of Taper Relief went some way towards recompense. And we now have much better rates of CGT than for Income Tax which, again, could be justified in terms of the amount of personal capital “gains” that are really just due to inflation. The Retail Price Index has risen by 70% since April 1998, when it was frozen for individuals; it is more than three times the value it was in 1982, when it was originally introduced. It has even increased by 30% in the last decade.
Advisers with client companies holding assets (typically property) will need to consider what will be the long term effect of losing any further enhancement of Indexation Allowance – and when it is abolished altogether, no doubt in the name of “simplification”.
3 Disincorporation Relief
This is not a new budget measure per se but It was confirmed in the Budget that Disincorporation Relief (FA 2013 ss 58 – 60) would be withdrawn from 31 March 2018. The relief works to postpone the gain arising on disincorporation into the company’s assets, until the (former) shareholder subsequently disposes of them. One of the difficulties with the relief was that the total market value in relation to chargeable assets – not just the net gain – could not exceed £100,000. The practical effect of this was to prevent broadly any company that held property from being able to claim the relief.
We have previously raised the point that many smaller companies will have good cause to evaluate the benefits of incorporation and whether or not disincorporation might be better, once the 31 January 2018 Self Assessment payment imposes a 150% uplift on the extra tax following reform of the dividend regime since 6 April 2016. Advisers will have only 2 months from the 2016/17 SA filing deadline to help their clients decide if they want to (or can) benefit from the relief before it expires.
4 VAT Registration Threshold
I think we used to refer to keeping thresholds steady for several years as “fiscal drag”, since more taxpayers would be dragged into a tax band, etc., thanks to inflation (that word again). One of the best recent examples is the IHT Nil Rate Band, which has rested at £325,000 for many years. As announced in the Budget, it’s happened again, this time to the VAT threshold, which will remain at £85,000 for another 2 tax years. But most of us are so busy being grateful that the government didn’t effectively re-introduce Making Tax Digital for all businesses by abolishing the VAT registration threshold altogether, (or reducing it to a token amount of turnover), that it seems almost churlish to observe that, by the Treasury’s reckoning, the Chancellor’s “munificence” will have cost businesses just short of half a billion pounds, by 2022/23.
VAT is a European tax and, once the UK has left the European Union, how the regime develops may prove interesting.
5 Partnership Taxation Reform – Reformed?
The government has been trying to modernise the rules for taxing partnerships for some time. Readers may recall that following consultation, a TIIN and draft legislation were published on 13 September, covering:
- A new tribunal process for dealing with disputes over the allocation of profits between partners (as distinct from the amount of profits or losses made by the partnership overall)
- How to deal with partners who are nominees/bare trustees for persons who are not themselves partners in the partnership (those beneficiaries, etc., will effectively be treated as if they were partners)
- Partnerships whose partners are themselves partnerships will either have to include the share of the first partnership’s income or loss as calculated on all four possible bases, unless details for all its partners and indirect partners are included on the partnership statement
- Where a partnership is a partner in one or more partnerships that carry on a trade, business or profession, then the profits or losses from each partnership must be shown separately on the first partnership’s return
Any adviser who has had to deal with serious partnership disputes will welcome a process that aims to achieve clarity on the individual partners’ respective allocations for tax purposes. But the third point, developing a requirement to report all four possible bases of calculation for partnerships as partners, looks like it has the potential to turn into a logistical nightmare.
The 13 September TIIN also made claim that “it will be made clear that partnership profits for tax purposes must be allocated between partners in the same ratio as the commercial profits” and the legislation published alongside put “ratio” in terms of percentages. There can of course be many different profit allocation methods, with prior calls, notional salaries, etc., with which a fixed percentage would not easily be compatible. The OOTLAR then said:
“Following consultation, the legislation has been revised to be more compatible with commercial arrangements for allocating shares of profit and to avoid additional administrative burdens for customers. The changes will have effect for the tax year 2018 to 2019 and subsequent tax years.”
It seems that the reform is still being …reformed. If the measures are indeed to take effect for 2018/19, then they may be relevant now, depending on a partnership’s accounting period. Advisers with partnership clients will need to keep an eye on how these rules develop, over the coming months.
6 Extending Non-Resident Capital Gains on UK Property
Non-residents largely became chargeable to UK Capital Gains Tax on UK residential property disposals from April 2015. (The NRCGT regime). While it was clearly the government’s intention to limit the NRCGT regime only to residential property gains, the government now wants to take the opportunity to tax commercial property disposals, and indirect disposals as well. This will apply to individuals and to companies. While parties already within the scope of the existing NRCGT regime will continue to have a rebasing date from April 2015, April 2019 will be the rebasing date for all other non-resident UK property disposals.
The rules for non-residents are not straight forward, and how they interact with the capital gains regime for “enveloped dwellings” (ATED) is even more complex. Agents will now have to deal with
- ATED gains
- NRCGT from April 2015
- Non-resident capital gains from April 2019 for the wider regime
This all looks like it could easily turn into an awful mess. For those agents who do not look after non-resident property investors, it seems that taxing offshore investors as well as UK-resident investors will level the playing field for the benefit of UK-based property businesses.