2 November 2018
The last planned budget before Brexit was a low key affair from the private tax point of view. We had confirmation that a number of previously announced changes (such as the application of capital gains tax on UK property to all non-residents) would go ahead and there was a general tightening up of tax reliefs (such as capital gains tax principal private residence relief and entrepreneurs’ relief). There was of course also the welcome announcement that the income tax personal allowance and higher rate threshold would be increased to £12,500 and £50,000 respectively a year earlier than planned. However, the message overall was “steady as she goes”.
The headline grabbing announcement from the personal tax point of view was the Chancellor’s statement that the income tax personal allowance will increase to £12,500 from 6 April and the higher rate threshold will increase to £50,000 by the same date. This is a year earlier than planned. This represents a modest but welcome increase in take home pay for most taxpayers and a reduction in the number of higher rate taxpayers.
Buried in the detail was the equally welcome announcement that rent-a-room relief will not be tightened up by requiring the taxpayer to share occupancy with the lodger.
Capital gains tax
The annual exempt amount will increase to £12,000 from 6 April, in line with inflation.
Entrepreneurs’ relief, a valuable relief which reduces the tax rate on the first £10m of gains on the sale of a trading business to 10%, will be further restricted to help ensure that it genuinely benefits entrepreneurs. Broadly, business owners must now keep their interest in the business for a minimum of two years rather than one, and the technical requirements for shares to qualify will be tightened.
Following the government’s shake up of the public sector last year, the off payroll working rules (known as IR35) are to be extended to larger private sector companies. The rules prevent individuals avoiding tax and national insurance contributions by providing their services though a company as an independent consultant when they are, in reality, employees. The new provisions put the onus on the client business to determine the employment status of their service providers and to operate PAYE and pay national insurance contributions where appropriate.
Taxes for property owners
Capital gains tax
Principal private residence relief is a very important relief which exempts homeowners from paying capital gains tax on the increase in value of their own homes. It applies during the period of occupation as “only or main residence”. The last 18 months of ownership are always treated as a period when the property was occupied as the main residence. Any additional period of ownership is taxable. “Letting relief” effectively extends principal private residence relief where the property has been an only or main residence but has also lost that status due to having been let. It exempts up to a further £40,000 of gains.
From April 2020 principal private residence relief will be restricted in two ways. First, the additional period of deemed occupation will be reduced to nine months. Second, lettings relief will only apply where the taxpayer shares occupation with the tenant. Both of these changes reduce some of the generous leeway accorded to taxpayers as part of the relief.
In addition, from 6 April 2020, taxpayers will be required to make a payment on account of capital gains tax arising on gains from residential property within 30 days of a sale. This mirrors the system for paying stamp duty land tax (except that only residential property sales are caught), and has some logic to it, but taxpayers should be alert to ensure they do not get caught out.
Stamp duty land tax
Stamp duty land tax is paid on transactions involving a purchase of land in England (equivalent taxes apply in Scotland and Wales). It is paid by purchasers and the amount paid is based on the purchase price.
At the last Budget the Chancellor announced that stamp duty land tax would apply at 0% to purchases by first time buyers of homes worth up to £300,000. This has now been retrospectively extended to purchases of “shared ownership properties” (an ownership scheme in which the buyer and developer share ownership and the buyer pays rent on the developer’s share, usually with an option to increase their share). This will be welcomed by first time buyers as shared ownership is increasingly popular.
There are increased rates of stamp duty land tax (broadly an extra three percentage points) for purchasers of second homes. A repayment can be claimed where a taxpayer purchases a second home and then quickly sells their old “main” home. From 29 October 2018, they have 12 months to do this, an extension of the previous limit.
At the moment stamp duty land tax must be paid within 30 days of purchase. This will reduce to 14 from 1 March 2019. Returns can be filed, and payment made, online. Purchasers must be careful to ensure they do not miss this deadline, as penalties apply.
Annual tax on enveloped dwellings (ATED)
This is paid annually by companies based on the value of UK residential property owned by them. The rate will increase by 2.4% in April 2019, in line with inflation.
The government continued with changes designed to ensure that non-residents pay tax on their UK immovable property.
From 6 April 2019 non-resident individuals will be subject to capital gains tax on all types of immovable property. This extends the current regime, under which they pay tax on residential property only. A payment on account of tax must be made within 30 days of disposal. This aligns commercial property with residential property as far as non-resident individuals are concerned.
In addition, non-UK residents who own shares in companies which are “property rich” (meaning that they derive 75% of their value from UK immovable property) will become subject to capital gains tax on disposals of those shares. At present they are not taxable on such disposals.
Non-resident companies will be subject to corporation tax on (rather than income tax as at present) on income from UK property. This aligns them with UK resident corporates. The government has confirmed that transitional arrangements will apply to smooth the process and prevent a capital tax charge. A special rule will prevent any tax advantage which might otherwise arise.
The government will consult on a 1% stamp duty land tax surcharge for non-residents. This would specifically penalise non-residents, who are already likely to be subject to the 3% surcharge for purchasing a second home.
The lifetime allowance (the maximum a taxpayer can save before a tax penalty is imposed) will increase to £1,055,000 from April 2019, in line with inflation.
There will be no change to the starting rate for savings, a lower rate of income tax which applies where a taxpayer receives little or no income other than from savings.
The ISA limit will remain at £20,000. This will disappoint many savers but the good news is that the government plans to increase it in line with inflation from April 2020. The junior limit will however rise to £4,368 from April 2019.
There will be technical tweaks to the residence nil rate band to deal with perceived unfairness and abuse of the exemption. The effect of the residence nil rate band is that the first £125,000 (due to rise to £175,000 by April 2020) of the value of a taxpayer’s home is tax free, provided it is passed to children or grandchildren. To the extent it is unused, the band can be passed to a spouse on death in the same way as the normal nil rate band.