Budget 2018 Private Client news: at a glance
- CGT main residence relief will not be available for let property unless occupation is shared with the tenant
- CGT main residence relief “final period exemption” to be cut from eighteen to nine months
- CGT Entrepreneur’s Relief to be restricted so that qualifying conditions have to be met over a two (not one) year period
- CGT Entrepreneur’s Relief will have two extra qualifying conditions for shares so that shareholders must have 5% of distributable profits and net assets of the company
- Non-resident investors in collective investment schemes holding UK property will be within scope of the new non-resident CGT charge as from 6 April 2019
- CGT annual exemption for 2019/20 will be £12,000 for individuals and executors, and £6,000 for trustees
- Income tax personal allowance to be raised to £12,500 and the higher rate threshold to £50,000 from 6 April 2019
- A new SDLT surcharge of 1% will be introduced for non-resident purchasers of UK residential property
- SDLT relief for first-time buyers will be extended to all qualifying shared ownership
Chancellor Philip Hammond delivered his third Budget on Monday 29 October amidst speculation whether there would be major tax increases to help fund the Prime Minister’s pledge to end austerity and provide the much needed funding for the NHS and other public services. Private Clients will therefore be relieved that there were no major personal tax changes, and rather, many will benefit from the Chancellor’s flagship announcement that the income tax personal allowance and higher rate threshold will be raised to £12,500 and £50,000 respectively one year earlier than planned. However, instead of raising taxes, the Chancellor chose to tinker with capital gains tax reliefs as one of his personal tax revenue raisers, restricting relief for entrepreneurs and some home-owners.
The main announcements affecting Private Clients are explained below.
Capital Gains Tax
Main Residence Relief
Capital gains tax “main residence relief” (or “principal private residence relief”) generally exempts an individual’s only or main residence from capital gains tax when it is sold or otherwise disposed of, and is one of the reasons why capital gains tax is not a huge revenue raiser for the Treasury. It perhaps came as no surprise therefore that the Chancellor chose this relief to clawback some of the necessary funding for public services.
Currently main residence relief is still available for those who let out their main home for a period of their ownership by virtue of “Lettings Relief”, albeit the value of the relief is capped at £40,000. As from 6 April 2020, the government will restrict this so that only those who are in shared occupancy with their tenant will be able to benefit from Lettings Relief. This will likely prevent Airbnb home-owners from claiming main residence relief in full if their home is let out for a large part of the year.
Main residence relief is also currently structured so that the final eighteen months of ownership are automatically exempt from capital gains tax, regardless of whether the property is the taxpayer’s main residence during that time. This rule is designed to assist those who have difficulty in selling their old residence and have moved in to their new one in the meantime. As from 6 April 2020, this final period will be reduced to nine months. Partner and Head of the Private Client Group, Camilla Wallace, had this to say on the impact:
“With the Chancellor announcing a host of new spending measures yet also promising the end of austerity, revenue was going to have to be raised from somewhere, and this measure could take advantage of those who are finding it hard to sell their property due to Brexit uncertainty. The reduction in final period relief will effectively mean that those who complete on their new property before selling their old one, have only nine months to sell it before capital gains tax kicks in.”
Entrepreneur’s Relief
Entrepreneur’s Relief reduces the rate of capital gains tax from 20% to 10% on up to £10 million worth of lifetime capital gains. It can apply to individuals disposing of all or part of their business or of shares in their personal company as well as to trustees who dispose of trust business assets. In all cases, there are a set of qualifying conditions for the relevant business assets. In Budget 2018, the Chancellor announced two changes to the way in which Entrepreneur’s Relief will operate going forward.
The first is to extend the minimum period during which the above qualifying conditions must be met from one year to two years, with effect from 6 April 2019. In reality, given that most entrepreneurs will take at least two years to establish a business that they can sell, the measure should not have a negative impact on genuine entrepreneurs.
The second announcement affects those who hold shares in a personal company. The current qualifying conditions for those shares are that:
- the shareholder must be an employee or office holder of the company (or one in the same group);
- the company’s main activities must be trading (rather than non-trading activities like investment) or the company must be a holding company of a trading group; and
- the shareholder must own at least 5% of the shares and voting rights in the company.
With effect from 29 October 2019, two additional conditions will be added so that shareholders must also be entitled to at least 5% of the distributable profits and 5% of the net assets of the company. This is intended to ensure that the shareholder has a true material stake in the business characteristic of true entrepreneurial activity (as distinct from simple investment or employment).
Capital gains tax for non-residents
Non-resident individuals are generally not subject to capital gains tax on their UK assets but this has been amended in recent years so that non-residents disposing of UK residential property are within the UK capital gains tax regime. Budget 2017 announced that this “non-resident capital gains tax” charge would be extended to include gains on disposals of commercial property (in addition to residential) and to gains on interests in UK “property rich entities” (generally a company that derives 75% or more it its value from UK land). The changes are due to come into force on 6 April 2019 but have since been subject to consultation to resolve issues with how the rules will operate in practice.
Budget 2018 contained the announced that a number of revisions to the draft legislation have been agreed. Please contact us for further details but these include how the rules will apply to offshore collective investment schemes. An investment in such a scheme or fund will be treated as if the interest of the investor is shares in a company, so that where the fund is UK property rich, a disposal of an interest in it by a non-UK resident investor will be chargeable to UK capital gains tax under the new provisions. Although there is an exemption for investors in property rich entities who hold less than a 25% interest, this exemption will not be available for non-residents investing in UK property rich collective investment schemes. A Technical Note is expected on 7 November 2018 with further details.
Annual exemption
As from 6 April 2019, the capital gains tax annual exempt amount will increase to £12,000 for individuals and personal representatives (from £11,700) and to £6,000 for trustees (from £5,850).
Stamp Duty Land Tax
There were a few measures announced with respect to stamp duty land tax (“SDLT“).
Theresa May announced at the Conservative Party conference in September that there will be a new stamp duty land tax (“SDLT“) surcharge for non-resident individuals buying residential property in England and Northern Ireland, and this was confirmed by the Chancellor in the Budget 2018. The surcharge will be 1% and will be subject to consultation in January 2019. The new surcharge will be on top of the current 3% surcharge for purchasers of second homes (which will generally affect non–resident buyers) meaning that, following the enactment of this measure, for those purchasing a property worth over £1.5million, the SDLT could be as high as 16% (current 12% without the surcharge). The rationale behind the policy is that non-resident buyers push up house prices and lower home ownership in the UK, with statistics showing that 13% of new London homes were bought by non-residents in 2014-16. Initial reaction to May’s conference announcement focussed on concerns that such a surcharge would make the UK less attractive to foreign investors and could raise potential discrimination issues too given the current legal requirement not to discriminate between EU nationals, and this might explain why the surcharge has been proposed at the lower level of 1% instead of up to 3% as proposed at the conference.
In relation to the current 3% SDLT surcharge for second homes, legislation will be introduced in Finance Bill 2018/19, with effect from 29 October 2018, to extend the time allowed to claim back the surcharge for second homes where an individual sells their old home within three years of buying their new one. Currently if there is an overlap between buying and selling such that an individual retains two properties for a period, the surcharge must be paid upfront and reclaimed if certain conditions are fulfilled. The deadline for claiming that refund has been extended so that the taxpayer must claim it by the later of twelve months from selling the old home or a year from the filing date of the SDLT return for the new home. Previously, if the old home was sold over a year after the SDLT return for the new home was filed, the taxpayer only had three months from selling the old home to make the refund application, so this extension will be welcome.
In a separate SDLT measure, it was announced in Budget 2018 that the government will extend first-time buyers SDLT relief in England and Northern Ireland so that all qualifying shared ownership property purchasers can benefit, whether or not the purchaser elects to pay SDLT on the market value of the property. This change will apply to relevant transactions with an effective date on or after 29 October 2018, and will also be backdated to 22 November 2017 so that those eligible who have not previously claimed first-time buyers relief will be able to amend their return to claim a refund.
Income Tax
Following the Office for Budget Responsibility announcement that government borrowing is lower than forecast in the 2018 Spring Statement, the Chancellor had great pleasure in announcing that the Conservatives’ Manifesto pledge to increase the income tax personal allowance to £12,500 and the higher rate income tax threshold (40%) to £50,000 will take effect from 6 April 2019, a year earlier than planned. This is intended to deliver individuals with a Brexit boost and will ensure that middle and high earners will see some income tax savings; the government has predicted 32 million individuals will see a reduced tax bill in 2019/20 as compared with 2015/16. The current personal allowance is £11,850 and the higher rate threshold is £46,350 (£34,500 and the personal allowance of £11,850).
Trusts
The government announced in the Autumn Budget 2017 that they would publish a consultation on the taxation of trusts, to make such taxation “simpler, fairer and more transparent”. No such consultation has been published to date but Budget 2018 did contain the announcement that this is still on the agenda, although there was no indication of timing. It remains to be seen what direction that will take, and whether trusts will be adversely affected as a result, but with government energies being focussed elsewhere, it is clearly not deemed a current priority.
Budget 2018 included the announcement that legislation will be introduced in Finance Bill 2020 to confirm that where a trust has been created by a non-domiciled settlor who later becomes UK domiciled or deemed domiciled, if he or she adds further assets to the trust after becoming UK domiciled (or deemed domiciled), those assets will be subject to UK inheritance tax and will not have “excluded property” status (as they would have if added when the settlor was non-domiciled). Legislation will also be introduced to clarify the position in respect of the inheritance tax status of assets that are transferred between “excluded property” trusts when the settlor is UK domiciled or deemed domiciled.
Inheritance Tax
There were no major inheritance tax announcements despite the Office of Tax Simplification’s call for evidence in April 2018 to review the inheritance tax system. A response to that call for evidence had been promised in “Autumn 2018” and is still therefore awaited. However, there was a minor announcement in connection with the inheritance tax “residence nil-rate band” (“RNRB“) which was introduced in April 2017 to exempt up to £175,000 of certain individuals” family home from inheritance tax on death provided that home is inherited by lineal descendants. Changes will be introduced in Finance Bill 2018/19 to tweak the existing legislation to ensure it operates as intended in respect of when a downsized property can qualify for relief, and also the meaning of “inherited” in situations where the family home has been gifted during the individual’s lifetime but they have continued to live there. In the latter case, although the RNRB will continue to be available, it will be restricted to those who have gifted the home outright to lineal descendants not those who have gifted the home on trust (unless it is a trust for a disabled person or a “bare” trust). Many in the industry would like to see much wider scale reforms to the RNRB given its restrictive nature and the fact that it only benefits those with children. It remains to be seen whether the various issues are commented upon when the Office of Tax Simplification delivers its report. You can read Wedlake Bell’s response to the call for evidence here.
Annual Tax on Enveloped Dwellings
The government has announced that the annual chargeable amount for the annual tax on enveloped dwellings (ATED) will rise by 2.4%, in line with the September 2018 consumer prices index, for the 2019/20 chargeable period (which begins on 1 April 2019). “Enveloped dwellings” are those that are worth over £500,000 and owned completely or partly by a company, a partnership (where any of the partners is a company) or a collective investment scheme (for example a unit trust or an open ended investment vehicle). Relief is available for property developers and properties that are rented our commercially. The announcement means that the annual ATED charge for properties will increase to between £3,650 and £232,350 depending on the value of the property (currently, the charge ranges from £3,600 to £226,950).
Pensions
As with all recent Budgets, there was the usual speculation that the Chancellor may use pensions tax relief to raise revenue, but this was a quiet Budget on the pensions front, with the only announcement being that the lifetime allowance for pension savings will increase in line with CPI for 2019-20, rising from to £1,055,000 (from £1,030,000).
For further information on any of these Budget 2018 announcements, please contact Camilla Wallace or your usual Wedlake Bell adviser.