1.1 A Budget for entrepreneurs
The focus of the 2016 Budget was very much on entrepreneurs, savings and tax. Measures designed to boost the enterprise economy sat alongside a flexible lifetime ISAs and changes to capital gains tax. While small and medium-sized enterprises fared relatively well, the Chancellor continues to clampdown on larger businesses, for example, with interest relief due to change for large multinationals, although overall the changes for them were quite reasonable.
The Government confirmed that the pension tax will not change for now, although what's really needed is a longer-term pensions tax plan to allow people to plan their retirement with more certainty.
The following were among the key Budget announcements:
- Entrepreneurs' relief – the reintroduction of the availability of capital gains tax (CGT) entrepreneurs' relief on goodwill when a business is transferred to a company is welcome news. The tax relief has been backdated, so anyone who has incorporated on or after 3 December 2014 should check to see if they are entitled to take advantage of this pragmatic change. Two other welcome backdated relaxations were also announced.
- Tax relief on historic company losses – on the plus side for many businesses, there will be welcome changes for the relief of losses from April 2017, bringing the UK system more in line with its G7 neighbours. It means far fewer SMEs will end up with trapped unusable losses in the future. For companies with profits over £5m there will be some restrictions, but the Government expects this to affect only about 1% of UK companies.
- ISAs – changes to the ISA rules are an interesting compromise between encouraging spending in the economy and encouraging younger people to save for retirement. Increasing the ISA allowance to £20,000 will mean more people's savings will stay outside the tax net. The new flexible lifetime ISAs – if they allow for withdrawals and replacement of savings – will help younger people save for a home and then top-up again as they get older.
- Capital gains tax – the Chancellor's plan to reduce CGT rates (from 28% to 20% and 18% to 10% for higher rate and basic rate taxpayers, respectively) is welcome for entrepreneurs and others investing in businesses, as well those with large share portfolios who may be hit from April 2016 by the higher taxes on dividends. It's yet another disappointment, however, for owners of buy-to-lets and second homes who fail to benefit from this latest initiative.
2. Personal and trust taxes
2.1 Personal allowance and higher rate threshold increase
Planned increases to the personal allowance and higher-rate threshold for 2016/17 were confirmed with announcements made for 2017/18.
The personal allowance will increase to £11,000 for 2016/17 and to £11,500 for 2017/18. Following the phasing out of age-related personal allowances, there is only one level of personal allowance, regardless of the taxpayer's age.
Higher rate taxpayers also receive a boost and many taxpayers will be taken out of higher rate tax, following confirmation of an increase in the higher rate threshold to £43,000 for 2016/17 and £45,000 for 2017/18. A corresponding increase will apply to the NIC upper earnings limit to ensure that the thresholds remain aligned.
Comment
The higher than previously trailed increase to the personal allowance and higher rate threshold from April 2017 is welcome news and reflects the Government's pledge to increase the personal allowance to £12,500 and higher rate threshold to £50,000 by the end of the current parliament.
However, as previously highlighted, not all taxpayers benefit from the increases to the personal allowance. Those earning above £100,000 will generally continue to see the personal allowance restricted by £1 for every £2 earned above this threshold, leading to an effective 60% tax rate, subsequently dropping back to 40%.
2.2 Abolition of Class 2 national insurance contributions
The Government has confirmed that from April 2018, Class 2 national insurance contributions (NICs) will be abolished for the self-employed.
Class 2 NICs are the contributions payable by self-employed individuals including partners in partnerships.
Since April 2015 these contributions have been paid through self assessment at a flat rate of £2.80 per week (2015/16 tax year). From April 2018 Class 2 NICs will be abolished completely.
A consultation on benefit entitlement for the self-employed has been carried out and the Government will announce its responses to this in due course. The results are expected to outline how the self-employed will access contributory benefits after class 2 NIC has been abolished.
Comment
Given the low level of Class 2 NIC, the added complexity and inefficiency did seem unnecessary, so the confirmation of its abolition is welcomed.
We shall have to wait for the Government's responses to the consultation to ascertain how the self-employed will continue to obtain contributory benefits and to ensure there is no erosion of an individual's benefits.
2.3 Introduction of a personal savings allowance
A new allowance is to be introduced for basic rate and higher rate taxpayers to apply a 0% rate of income tax to a slice of their savings income.
As announced at the 2015 Budget, a new personal savings allowance will be introduced from 6 April 2016.
The allowance will mean that basic rate (20%) taxpayers will not pay tax on the first £1,000 of savings income and higher rate (40%) taxpayers will not pay tax on the first £500. However, additional rate (45%) taxpayers will not qualify for an allowance.
Comment
This is another well trailed announcement, which is expected to result in 95% of taxpayers, around 17 million people, no longer required to pay tax on their savings income.
This is however not an exemption, so the savings income covered by the allowance will count towards total income for other purposes such as the high income child benefit charge, the withdrawal of the personal allowance and restrictions in the pension annual allowance for additional rate taxpayers.
As a consequence of this, the Government will also remove the obligation on banks and building societies to deduct basic rate tax on interest paid.
2.4 Changes to the taxation of dividends to be introduced from 6 April 2016
As announced in the 2015 Summer Budget, from 6 April 2016, the way in which individuals are taxed on dividends will change.
Currently, a 10% notional tax credit attaches to a dividend paid by UK and some non-UK companies. This reduces the effective rate of income tax on the net dividend to 0% at the basic rate, 25% at the higher rate and 30.56% at the additional rate. From 6 April 2016, this method of taxation will change with the notional credit being abolished.
A dividend tax allowance will be introduced, which will not tax the first £5,000 of dividend income of UK resident individuals in each year.
Dividend income in excess of this will be taxed at 7.5% where it falls in the basic rate band, 32.5% for the higher rate and 38.1% for the additional rate. The income within the allowance will count towards total income for other purposes, in a similar way to the new savings allowance.
Comment
The overriding aim behind these changes was to discourage sole traders from incorporating for tax-motivated reasons. However, the regime applies to all dividends not simply those paid by owner-managed businesses.
The introduction of the £5,000 allowance, coupled with the increase in the dividend tax rates, means that there will be winners and losers after 6 April 2016.
As these changes were announced in the 2015 Summer Budget, people have had some months to consider the impact that they may have. For those that have not yet given due consideration, time is running out to take action before the end of the tax year and they should consider doing so now.
2.5 Taxation of sporting testimonials for employed sportspersons
Changes first proposed at the 2015 Autumn Statement will be introduced to subject income from testimonials announced after 25 November 2015 and taking place after 6 April 2017 to income tax and NICs. An exemption will apply to the first £100,000 of income where the testimonial is not contractual or customary.
Before these changes, an extra statutory concession allowed the proceeds of a non-contractual sporting testimonial not to be taxed as earnings. HMRC has for some time been gathering feedback on the proposal to withdraw this concession and bring the treatment in line with that applying to other voluntary payments made by the public, such as tips to waiters and taxi drivers.
Independent testimonial committees will now need to operate PAYE where the total proceeds from a non-contractual sporting testimonial or benefit match (or a number of events forming a testimonial year) exceed £100,000.
The changes will not apply where the testimonial was granted or awarded before 25 November 2015.
Comment
Although the Government ultimately pressed ahead with these changes, it is pleasing to see that changes were delayed in order to allow proper consultation.
Furthermore, following consultation, the decision to double the one-off exemption from £50,000 to £100,000 should be applauded, as it will smooth the transition for retiring sportspeople to move into other employment while they retrain to do something else.
2.6 Update on changes to taxation of non-doms
The Government has announced transitional provisions for those non-UK domiciled individuals (non-doms) affected by planned reforms whereby those who have been UK resident in 15 of the past 20 years will be treated as deemed UK domiciled from 6 April 2017. The legislative timetable for the reforms has also been amended.
Proposals were announced in Summer Budget 2015 to reform the taxation of non-UK domiciled individuals (non-doms) with effect from 6 April 2017:
- those who have been resident in the UK for 15 of the past 20 years will be deemed to be UK domiciled for all tax purposes;
- those who were born in the UK with a UK domicile of origin but who have subsequently acquired a non-UK domicile of choice will be deemed to be UK domiciled for all tax purposes whenever they are resident in the UK; and
- all UK residential property held directly or indirectly by non-doms will be within the charge to UK IHT.
The first two of these reforms were due to be legislated via Finance Bill 2016 and the third in Finance Bill 2017. It has now been announced that all the reforms will be contained in Finance Bill 2017.
Two transitional provisions have now been announced for those becoming deemed UK domiciled from 6 April 2017:
- the ability to treat the base cost of non-UK assets for CGT purposes as being the market value of those assets at 6 April 2017; and
- what sounds like a review of the composition of funds offshore 'to provide certainty on how amounts remitted to the UK will be taxed'.
Comment
Professional advisers, including Smith & Williamson, made representations advocating sensible transitional provisions of some kind as part of the consultation process on the deemed domicile proposals in autumn 2015. While a formal response to the consultation has not yet been published, the fact that representations appear to have been heeded is welcome.
The opportunity to opt for a 'rebasing' of assets could reduce both the tax and administrative burden for those becoming deemed UK domiciled.
Turning to remittances of offshore funds, there are a number of possible approaches and it remains to be seen what form the proposals will take. We await further details with interest.
Regarding the legislative timetable, it is helpful that all the proposed reforms will now be contained in a single Finance Bill in 2017 as some of the provisions depend on each other, rather than being split between two Finance Bills. It will be important to ensure there is no slippage in the timetable for publishing draft legislation; that would add to the uncertainty facing those potentially affected. Given that the reforms are due to come into force from 6 April 2017, non-doms should not be put in the position of having to begin planning, while unsure of the final details.
It should not be forgotten that a further consultation document concerning the changes to indirectly-held UK residential property was promised, which ought to happen before the draft Finance Bill 2017 is published.
2.7 Tax administrative changes: further devolution of powers to Scotland
Legislation will be introduced to distinguish between the tax rates applying to 'savings income' and those applying to 'non-savings, non-dividend income', for which the Scottish parliament will have independent rate-setting power for Scottish rates from April 2017.
Following the extension of powers from 6 April 2017 to give the Scottish Parliament full control over setting the rates and thresholds of income tax applying to 'non-savings, non-dividend income' of Scottish taxpayers, measures will be introduced to ensure that English, Welsh and Northern Irish MPs retain a decisive say on the main rates of income tax applying in the remainder of the United Kingdom.
A 'savings rate' will apply to all UK-wide (including Scottish) savings income and will be distinct from the 'main rate' applying to 'non-savings, non-dividend income' of UK-residents not subject to the Scottish rate of income tax.
A third, 'default rate' will also apply to a limited category of taxpayers including, primarily, trustees and non-UK resident individuals.
The measure will have effect from 6 April 2017 to coincide with the further devolution of income tax powers to the Scottish government.
Comment
This administrative change is part of the Government's pledge to implement 'English votes for English laws' and is motivated by concerns about Scottish MPs retaining the right to take part in the decision-making process on setting the main rates of income tax for the Rest of the UK, rates which the UK Parliament can no longer influence in Scotland.
2.8 Compensation and ex-gratia payments made to victims of persecution
The Government will legislate to ensure that compensation or ex-gratia payments from certain schemes will not be subject to IHT.
The legislation will replace a current extra statutory concession that provided an IHT exemption for compensation and ex-gratia payments made by the Government to those persecuted during the World War II era.
The legislation will be extended beyond the current concession to include one-off payments received under the 'child survivor fund', and allow the Treasury to exempt further schemes in the future.
The IHT exemption will apply whether the payment was made before or after the claimant's death and will apply to deaths on or after 1 January 2015.
Comment
While these changes are limited to narrow circumstances and will only apply to a limited number of taxpayers, the aim of the exemptions should be applauded.
2.9 Bad debt relief measures to support peer-to-peer (P2P) lending
Proposals first announced at Autumn Statement 2014 to allow relief for bad debts in respect of P2P loans against other P2P income will take effect from 6 April 2016.
A new relief will be introduced to enable individuals who invest in certain P2P loans to deduct losses realised on defaulted loans against income received from other P2P loans of the same platform.
Any surplus bad debts can be used to offset interest received on loans made through other platforms or carried forward against interest received in the next four tax years from other eligible P2P loans.
The relief will apply automatically for bad debts arising on eligible P2P loans from 6 April 2016. Individuals will also be able to make claims to set losses realised in 2015/16 against interest received from other loans in the same year.
Comment
These changes will be well received by individuals involved in P2P lending and are an indication of the Government's desire to increase competition in the finance sector.
It is good to see that individuals will be able to claim relief for losses arising in the tax year to 5 April 2016 and, from 6 April 2016, basic and higher rate taxpayers should also note that the newly-introduced savings allowance will apply to limit exposure to tax on any surplus interest after the bad debt relief.
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