Changes for UK property and EIS relief amongst changes that will affect individuals plus future consultation on trusts and entrepreneurs’ relief.
There were no major surprise tax changes for UK-resident individuals contained in the Budget, which is welcomed. Whilst we would still like to see the publication of a Personal Tax Roadmap, it is good to see that the general direction of travel is away from U-turns and unexpected changes and towards prior announcement of future changes allowing time for review and preparation. Such a trend will in our view help to ensure that the UK remains an attractive and stable fiscal environment for business owners as well as the businesses themselves.
Rates and Allowances
No changes were announced to the rates of income tax, capital gains tax (CGT) or inheritance tax (IHT), even though the so called ‘5 year tax lock’, a promise not to increase rates, no longer applies following the summer’s general election.
The Chancellor is pressing ahead towards honouring the Conservative’s manifesto commitment to raise the personal income tax allowance to £12,500 and 40% threshold to £50,000 by 2020. For 2018/19 the income tax personal allowance will increase to £11,850 and the higher rate threshold to £46,350. The zero % starting rate for savings income will continue to apply to the first £5,000 of such income, not increasing in line with inflation as we might usually expect.
Similarly the ISA annual subscription limit will remain unchanged at £20,000.The CGT annual exempt amount will be increased for 2018/19 to £11,700 for individuals and personal representatives and to £5,850 for most trustees.
These rates and bands apply across the UK except in Scotland where the Scottish Parliament has some power to set the rates and bands for ‘Scottish Taxpayers’.
Currently, UK residential property held by non-residents is within the scope of a narrowly-focused charge to CGT. From April 2019 the scope of this tax charge will be expanded to include all UK immoveable property, including commercial property and other UK land. The change will affect all non-resident property investors (whether individuals, companies or other entities), with only limited proposed exemptions. This is a significant expansion of the current CGT rules for the property sector, where a significant portion of investment comes from outside the UK. Changes will also be introduced to levy the charge to CGT on disposals of entities which derive their value from UK property, along with targeted anti-forestalling rules which will come into effect from 22 November 2017. Further detail can be found here.
With immediate effect from 22 November 2017, first time buyers purchasing a residential property for £300,000 or less will pay no Stamp Duty Land Tax (SDLT). First time buyers paying between £300,000 and £500,000 will pay SDLT at 5% only on the amount of the purchase price exceeding £300,000. For further information, see here. This change will be welcomed by those buying properties in this price range and is some evidence of the Government seeking to address the growing ‘intergenerational issue’.
Plans announced in Autumn Statement 2015 to require CGT to be paid within 30 days of completion of any disposal of UK residential property from April 2019 have been deferred until 2020.
The above measures represent further significant but targeted changes to the general regime taxing UK property holdings. We have long held the view that a wide ranging overhaul of this regime is required, rather than regular changes of this nature which contribute to a general apprehension amongst both domestic and international investors about long term stability.
Tax advantaged venture capital incentives
On the back of the Patient Capital Review, the Chancellor has announced a number of changes to boost investment in knowledge-based start-ups, including doubling the allowance these companies can raise to £20m and doubling the amount investors can invest to £2m. However, the changes also include a new condition to all tax advantaged venture capital schemes which targets investments perceived to provide ‘capital preservation’.
As a package, the changes provide a clearer direction of travel on what the Government believes these schemes should be used for. For further detail, see here.
Calculation of gains in companies
To bring the taxation of gains in companies more in line with their taxation in the hands of individuals, the capital gains indexation allowance will be frozen in the calculation of chargeable gains subject to corporation tax from 1 January 2018 - see here for further detail. This will affect capital gains made by family investment companies from that date as well as gains made in offshore close companies that are attributed to certain shareholders.
For individuals Making Tax Digital (MTD) includes Digital Tax Accounts which will remove the need to file annual tax returns. The self-employed and rental businesses will be required to keep digital records or report quarterly to HMRC. The trend to digitisation is very wide in scope and includes, for example, using the Government’s new gateway of online facilities for the Trust Register (TRS) (which includes details of beneficial ownership) and broadening the potential scope for electronic communications. Our current experience with the TRS reinforces the need for proper testing of any new systems and realistic deadlines.
It is welcome that the Government is continuing to consult, the MTD pilot for income tax which has been running since April 2017 continues, and it has been confirmed that the scope of MTD will not be widened before the system has been shown to work well, and not before April 2020 at the earliest. Moving forward with advancing technology is the right direction of travel for future tax administration, but it is fundamentally important that the major transformation to MTD is given enough time to be properly developed and trialled before implementation.
Extending assessment time limits for offshore non-compliance
HMRC will consult in 2018 on extending the assessing time limits for offshore tax non-compliance, such that they will always be able to assess at least 12 years of back taxes. The 4, 6 and 20 year time limits (for mistake, careless or deliberate behavior respectively) will continue for onshore non-compliance so for the first time there will be divergence on periods taxable between onshore and offshore. This measure together with the recently legislated Requirement to Correct continue to target offshore non-compliance. For further detail, see here.
Non - UK domiciled (non-dom) individuals and offshore trusts
The recent reforms to the rules for non doms and IHT on UK residential property held through offshore structures, effective from 6 April 2017, became law on 16 November 2017. Perhaps unsurprisingly therefore, there was no mention of these rules in the Budget. We await publication of the promised HMRC guidance on the application of certain aspects of these new rules. For further information see kpmg.com/uk/nondoms and kpmg.com/uk/ukresidentialproperty
The more complex provisions for changes to the taxation of offshore trusts, which are to be included in FB 2018 and due to come into effect from April 2018, were confirmed, subject to minor changes to be made to the draft legislation following consultation. Again, we will need to see the revised legislation before we can comment further.
Partnership taxation: proposals to clarify tax treatment
Following the publication of the draft legislation in September 2017 (see DFB 2018: Partnership taxation - proposals to clarify tax treatment for our previous comment on this) and consultation with KPMG and other professionals, the Government has announced that this legislation has been revised so that it is more compatible with commercial arrangements when allocating taxable profits and to avoid additional administrative burdens. Whilst we welcome this news, we will need to see the revised legislation (to be published 1 December 2017) before we can comment further on the impact of these revisions.
Indications of future change
Several reviews were announced in the Budget which are indicative of areas where change may be forthcoming in due course. These included:
In addition, HMRC published research they have undertaken into the influence of Inheritance Tax reliefs, in particular Business Property and Agricultural Property reliefs, on estate planning. Whilst there is no indication of any changes the Government might seek to make as a result of the research, it is possible that the research is a precursor to potential proposals for change.
Other relevant measures:
A permanent SDLT relief has been introduced for first time buyers, effectively increasing the nil-rate threshold to £300,000, for purchases up to £500,000.
The Government will publish a discussion paper as part of its response to the Taylor Review, exploring options for reform to employment status tests.
From April 2019 non-residents will be subject to capital gains tax on the disposal of all UK real estate.
Government increases investment allowance and incentives for knowledge-based start-ups but narrows relief for low-risk investments
HMRC plan to extend the assessing time limits for offshore tax non-compliance to 12 years, which is as much as tripling the current limit
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