In perhaps the most febrile political environment in recent memory, Philip Hammond delivered his 'end of austerity' Budget. What transpired is that although austerity might be coming to an end, 'discipline' remains and in spending terms discipline looks quite similar to austerity.
Among the spending promises and bad jokes, there was a good deal for individuals to note. Key in this was Philip Hammond's statement that 'I didn't come into politics to put up taxes'.
1. SDLT surcharge for non-residents
As Theresa May announced at the Conservative Party conference, there is a desire to introduce a 1% surcharge to the standard SDLT rates for purchases by non-residents in order to raise funds to tackle homelessness. A Consultation will be published in January 2019. It is unlikely this will lead to an introduction of the surcharge while the UK is still in the EU, however, given that it would be unlawful to discriminate against EU nationals at least until Brexit happens.
2. 3% surcharge for second residential properties
Minor amendments to this regime will be effective from 29 October 2018. Under current rules, where the old home is sold before or within the 3 year period after the new home is purchased, the additional SDLT can be claimed back. The intention is to allow more time for that refund, extending the deadline from 3 months from the sale of the old home to 12 months. There will also be a clarification of the legislation to make it clear that "undivided shares" in a dwelling are caught.
3. Taxing non-UK residents on UK property disposals
Building on the non-resident capital gains tax regime introduced in 2015 for residential property, as announced last year, from 6 April 2019 all non-UK resident persons will be taxable on gains on disposals of interests in any type of land. Indirect disposals will also be brought into tax under provisions taxing a person who disposes of an entity that derives 75% or more of its gross asset value from UK land. A disposal of such a property-rich entity will only be caught if the 25% ownership test is satisfied, requiring the person to hold at the time of, or within the two year period prior to, the disposal of a 25% or greater interest in the entity either directly or through one or more entities. In an effort to help collection of the tax, any UK companies in the same group as a non-resident company subject to the charge will be charged if the non-resident company fails to pay tax due. There will be an option to calculate the gain using the acquisition cost or the value of the property at 6 April 2019. ATED-related CGT provisions will be abolished.
4. Corporation tax on UK property income of non-UK resident companies
From 6 April 2020, non-UK companies that carry on UK property business will be brought into the scope of corporation tax rather than income tax, as currently. This will increase the compliance burden for these companies who will have to file a copy of accounts and computations online under the corporation tax filing regime. It will be possible to carry forward existing income tax losses and offset them against future profits chargeable to corporation tax. Careful consideration will need to be given to the debt levels in such companies because the switch to corporation tax will subject them to the rules limiting the deductibility of interest from corporate profits introduced on 1 April 2017 for UK companies.
5. Principal private residence relief
There is to be a consultation on proposals to reduce the final exemption period from 18 months to 9 months from April 2020 – although the 36 month period will remain for those who are disabled or going into a care home. Unless the housing market picks up, the reduction is likely to see more families denied full principal private residence relief on the sale of the family home. The reduction may be counteracted in some cases by an ability to claim a longer initial exemption period following the recent case of McHugh v HMRC, in which a judge ruled that the taxpayer was entitled to claim the 24 month period after the purchase of the property as a period of occupation for PPR purposes even though, due to renovation work, he did not move in until after this period.
6. First-time buyers' relief extended
It will come as welcome news that first-time buyers purchasing through approved share ownership schemes can now benefit from the relief. Those who qualify can claim a refund for SDLT paid on transactions on or after 22 November 2017.
Tax thresholds and exempt amounts
The Chancellor delivered on the Conservatives' Manifesto commitment to increase the income tax basic rate threshold to £12,500 and the higher rate threshold £50,000. The threshold for the 45% tax rate remains at £150,000. The capital gains tax exempt amount is also increased to £12,000.
There had been some speculation the Entrepreneur's Relief,
which provides for a 10% rate of capital gains tax on £10
million of gains on the sale of private trading businesses would be
restricted or withdrawn entirely. These fears proved to be
unfounded, for now at least.
However, some changes were announced to tighten the qualification requirements. Firstly, the requirement on a shareholder to hold 5% of the ordinary share capital of a company to qualify for Entrepreneur's Relief is expanded so that shareholders will also need to be entitled to 5% of the distributable profits and 5% of the capital on winding up. Secondly, the period for which the qualification requirements need to be met is extended from 1 year to 2 years.
Digital services tax
The Digital Services Tax was an unexpected announcement, with the Chancellor choosing to break from the OECD and introduce a new tax designed to raise money from social media platforms, internet marketplaces and search engines, whose current lack of contribution to the Exchequer has been widely reported. The details of the tax are subject to consultation and it may be abandoned entirely if the OECD is able to reach a consensus on an international approach. It is intended that the new tax will only apply to businesses with a turnover of more than £500m in annual global revenue and will be levied at a rate of 2% on UK sales.
Extension of IR35 to the private sector
As anticipated, the off-payroll working rules (otherwise known as IR35) will be extended to the private sector, having previously only applied to the public sector. This is not a change in the tax rules, but does shift the burden for compliance from an individual contractor/employee to the employer. This is expected to raise considerable revenue. The rules will be extended to medium and large businesses from April 2020. The existing rules will continue to apply to small businesses.
Inheritance tax was scarcely mentioned by the Chancellor, or in the Budget papers. The nil rate band threshold of £325,000 continues to be frozen at that level.
Non-domicilaries and the remittance basis
Non-UK domiciliaries, who have seen extensive changes to the remittance basis of taxation over the past 3 years will be relieved to see that there were no changes announced.
The government will shortly publish its consultation on the taxation of trusts, which was announced last year. The purpose of the consultation is 'to make the taxation of trusts simpler, fairer and more transparent', but is not expected to result in any significant changes to the taxation of trusts.
Despite the dire predictions, pensions barely featured in the Budget. Pensions higher rate tax relief remains intact and the Annual Allowance looks set to remain at £40,000 for 2019/20. As before, therefore, we suggest using UK earnings to maximise this allowance (including carry forward of any unused annual allowance from the past 3 tax years) whilst pensions tax relief remains generous.
Philip Hammond did however confirm (as expected) that the Lifetime Allowance will rise in line with increases in CPI and will therefore be £1,055,000 for tax year 2019/20.
Other pensions measures announced included a financial boost and consultation paper to drive forward the industry-led 'Pensions Dashboard' initiative (a one-stop shop which will record an individual's pension pots, and state pension, on a single platform) and an FCA discussion paper on promoting pooled investment of UK DC pension fund assets in 'patient capital', essentially finance for innovative UK high-growth firms. The DWP will also consult on possible changes to the charge cap (of 0.75%) on default funds in companies' auto-enrolment schemes to address perceived restrictions on the use of performance fees.
Finally, pensions cold-calling is due to be outlawed and the
DWP will be publishing a paper to promote
pension saving for the self-employed.
It was therefore a quiet Budget for pensions, but that may not be the case the next time.
Overall, Philip Hammond delivered a Budget of which could easily have been delivered by either George Osborne and Gordon Brown and reflects the desire of the Conservative party to occupy the centre ground previously occupied by New Labour and vacated by Jeremy Corbyn. Notwithstanding that continuity, there remains considerable political uncertainty in tax policy with the outcome of the Brexit negotiations and a potential for a change in Prime Minister or government both capable of delivering significant change in the near future.