Budget 2016 - Our Summary of the Tax Highlights

Personal allowance and basic tax rate increases
In a move that will be welcomed by many, personal allowances and the level at which higher rate tax applies were both increased

The personal allowance will be increased as follows:

£11,000 for 2016/17
£11,500 for 2017/18

The basic rate threshold is also set to increase as follows:

£32,000 for 2016/17
£33,500 for 2017/18

This means that the level at which individuals will start to pay the higher rate of tax (40%) will be:

£43,000 for 2016/17
£45,000 for 2017/18

Class 2 National Insurance contributions (currently £2.80 per week) are also set to be abolished from 2018.

Capital Gains Tax (CGT) reduced and a new relief  ‘Investors Relief’
From 6 April 2016, the main rate of CGT will be cut from 28% to 20%, with a similar reduction from 18% to 10% for basic rate taxpayers. Excluded from this are capital gains arising on the disposal of residential property and carried interest, for which the old rates of 18% and 28% still apply.

The government have also introduced a new relief, known as ‘Investors’ relief’ which reduces the capital gains tax rate to 10% for gains made on external investment in unlisted trading companies. The rules are similar to EIS (Enterprise Initiative Scheme) in that the shares must be newly subscribed and held for at least three years, plus there is a lifetime investment cap of £10m. Officers and employees of the company will not qualify. This relief is in addition to Entrepreneurs’ Relief and seems to mean that an individual could qualify for 10% CGT on gains of up to £20m during their lifetime (i.e. £10m of Entrepreneurs’ Relief gains and £10m of Investor Relief gains).

The new investors’ relief with a 10% capital gains tax rate offers a similar relief to Entrepreneurs’ Relief for people who wish to invest in companies but do not work within them.

Corporation Tax Main Rate to fall to 17% by 2020/Future changes to loss relief rules
There was yet another reduction in corporation tax rates. This follows the announcement in the last Budget that the main rate (currently 20%) would fall to 19% from 1 April 2017 and 18% from 1 April 2020. The second reduction will now be to 17%.

There will also be new legislation to reform the loss relief rules for companies. At present  losses carried forward can only be used against profits of the same company, and generally the same trade. In future the rules will be relaxed so that companies can offset their historic losses against profits from other income streams, or to other group companies.

Loss reliefs will be restricted for large companies which make profits over £5 million so that only 50% of the profit can be sheltered by brought forward losses.

Companies with annual profits over £20 million will have to  further advance their instalment payments for accounting periods starting after 1 April 2019

Benefits of Employee Shareholder Status reduced
Having belatedly started to gain some traction the benefits of Employee Shareholder Status (ESS) have been curtailed. Gains on ESS shares are now only exempt for the first £100,000 of gains enjoyed by each shareholder. (Previously ESS shareholders enjoyed an unlimited exemption from Capital Gains Tax) .The new rules apply to any ESS shares which are issued after budget day.

It’s fair to say that other than private equity organisations who had begun to use ESS shares that this chimes with the original objective which was to provide the prospect of modest tax-free gains to the day to day workers of a company.

Loans to Participators
The rate of tax charged on loans by closely controlled companies to participators and other arrangements through which participators extract value will be increased from 25% to 32.5% with effect from 6 April 2016, to bring the rate in line with the higher rate dividend tax rate.

Stamp Duty Land Tax on Residential property – increases were confirmed
Continuing with his mission of waging war on the buy-to-let sector (remember the changes to mortgage interest relief and wear and tear allowance which have already been announced), the increase in SDLT rates for second homes, and residential property investors was confirmed and extended to companies.  The residential property market is in the sights of this government and is an easy target to generate cash for the Exchequer, the acquisition and disposal of property being very easy to police. The SDLT increases that were announced in November are confirmed, and also extended to companies.

Threshold

Existing rates

New rates

£0 - £125k

0%

3%

£125k - £250k

2%

5%

£250k - £925k

5%

8%

£925k - £1.5m

10%

13%

£1.5m +

12%

15%

One bit of good news is that incorporation relief for a property investment business remains feasible; we have been working with several clients on this.

New system of SDLT for commercial properties
The Chancellor did away with the old ‘slab’ system where the same percentage tax rate applied to the whole of the purchase consideration depending on which price band it fell into, replacing it with a progressive system. The new rates will be 0% on the price between £0 and £150,000; 2% between £150,001 and £250,000; and 5% above £250,000.  There will also be a new 2% rate for high-value leases with net present value above £5m.

Overall these changes will mean that purchases of commercial property for less than about £1 million will pay less SDLT and purchases above this price level will pay more.

Entrepreneurs’ Relief (ER) rapid U-Turn
The government has reversed rules brought in last March restricting ER which had unintended effects. These apply to ‘joint venture’ companies where it has been clarified that as long as an individual holds an effective 5% interest in the trading company (directly or indirectly) and the investor company is substantially trading, that ER will apply.  

Business rates reduced for small businesses
The business rates system was in need of a good shake-up and overhaul and the Chancellor delivered some welcome changes for small businesses. From April 2017 new measures will be brought in which mean that the smallest businesses will pay no rates at all and reduced rates will apply for higher value properties.

Small Business Rate Relief (‘SBRR’) will be permanently doubled from 50% to 100% meaning that small businesses occupying property with a rateable value of £12,000 or less will pay no business rates

Tapered relief will be given on properties with a rateable value between £12,000 and £15,000

The threshold for the standard business rates multiplier will increase to a rateable value of £51,000

Also from 2020, Business rates will be cut for all businesses because of a switch in the annual indexation of business rates from RPI, to the lower measure of inflation CPI.

VAT registration threshold increased
The VAT registration threshold is to increase to £83,000 from 1 April 2016

Tax Avoidance - Tax noose tightens on EBTs and EFRBS
The Budget contained details of significant changes for “disguised remuneration” tax avoidance schemes. It is now pretty clear that HMRC will not rest until they have eliminated this kind of planning going forwards.

These typically involved an employer paying into an EBT (Employee Benefit Trust, often offshore) or EFRBS (Employer Financed Retirement Benefit Scheme) which would then provide benefits (almost always loans to employees)

New legislation was introduced in 2011 which stopped most of these schemes in their tracks but the legislation did not apply to any loans previously made to employees.

The Budget announced that HMRC will be given additional powers to tackle disguised remuneration schemes. Specific provisions will apply to new schemes brought in after 2011 that are currently being used.

More importantly, the Budget document says that HMRC will be able to tax any historic loans from an EBT that are not repaid or have not otherwise been taxed by 5 April 2019 as if the loans are employment income. If this is the case, individuals may have to pay tax on money they received up to 20 years earlier that they may have spent long ago

Termination payments – rules to be tightened
For termination payments which exceed the £30,000 threshold for income tax, the employer will have to pay national insurance on the excess amount above the £30,000 threshold. 

Legislation will be introduced to ensure that all PILONs ( Payments in Lieu of Notice) will be taxable and NICable as earnings.

Reform of tax treatment of Personal Services Companies – The ‘Paxman’ loophole
The Chancellor confirmed that Finance Act 2017 will bring in changes that make it the responsibility of the end client, rather than the intermediary or personal service company, to assess and operate PAYE – but strangely this only seems to apply to the public sector. 

No change on pensions
After many prediction to the contrary, Mr Osborne confirmed that he will not introduce further changes to pensions rules in this Budget. It had been expected by many that there might be changes to the tax-free lump sum or to reduce the relief on contributions. Please remember however that the previously announced changes to lifetime allowance and annual allowance both come in on 6 April, so please contact us if you think you could be affected.

New Lifetime ISA introduced
A new ‘lifetime ISA’ will be introduced from April 2017, which offers significant incentives to encourage young people to save. Available to individuals aged 18-40; savings of £4,000 each year can be made up to age 50 and will receive a government bonus of 25%, so up to £1000 per year.

The £4,000 will sit within the overall ISA limits which are set to rise from £15,000 to £20,000.

The money saved can be used to buy a first home or to save for retirement, if it is not then the Government bonus does not apply. Unlike pension schemes where there is a 25% tax-free lump sum, all the savings from a Lifetime ISA can be drawn out tax-free after age 60, although there is no direct tax relief on the way in.

Individuals can transfer a Help to Buy ISA into a Lifetime ISA or continue to save into both, continuing to receive the government bonus on both accounts. The Lifetime ISA has the flexibility of withdrawals before the age of 60, (subject to the loss of the government bonus plus any interest on any growth and will be subject to a 5% charge).