Budget 2016 – An Overview

Posted on March 17, 2016 by Henry Cooper

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The Budget 2016

George Osborne presented the first Spring Budget of this Parliament on Wednesday 16 March 2016.

In his speech the Chancellor reported on ‘an economy set to grow faster than any other major advanced economy in the world’.

Towards the end of last year the government issued the majority of the clauses, in draft, of Finance Bill 2016 together with updates on consultations. Publication of draft Finance Bill clauses is now an established way in which tax policy is developed, communicated and legislated.

The Budget updates some of these previous announcements and also proposes further measures. Some of these changes apply immediately, others in April 2016 and some take effect at a later date.

Our summary focuses on the issues likely to affect you, your family and your business. To help you decipher what was said we have included our own comments. If you have any questions please do not hesitate to contact us for advice.

Main Budget tax proposals

Our summary concentrates on the tax measures which include:

reductions in the rates of capital gains tax
introduction of a Lifetime ISA for under 40s
changes to Entrepreneurs’ Relief
abolition of Class 2 NIC
reduction in the corporation tax rate
reforms to corporate tax losses.

The Budget proposals may be subject to amendment in a Finance Act. You should contact us before taking any action as a result of the contents of this summary.

This summary is published for the information of clients. It provides only an overview of the main proposals announced by the Chancellor of the Exchequer in his Budget Statement, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.

Personal Tax

The personal allowance

For those born after 5 April 1938 the personal allowance is currently £10,600. Those born before 6 April 1938 have a slightly higher allowance. Legislation has already been enacted to increase the personal allowance to £11,000 in 2016/17. From 2016/17 onwards one personal allowance will apply regardless of age.

Comment

Not everyone has the benefit of the full personal allowance. There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 which is £1 for every £2 of income above £100,000. So for 2015/16 there is no personal allowance where adjusted net income exceeds £121,200 (£122,000 for 2016/17).

Tax bands and rates

The basic rate of tax is currently 20%. The band of income taxable at this rate is £31,785 so that the threshold at which the 40% band applies is £42,385 for those who are entitled to the full basic personal allowance.

Legislation has already been enacted to increase the basic rate limit to £32,000 for 2016/17. The higher rate threshold will therefore rise to £43,000 in 2016/17 for those entitled to the full personal allowance.

The additional rate of tax of 45% remains payable on taxable income above £150,000.

Tax bands and personal allowance for 2017/18

The Chancellor has announced that the personal allowance will be increased to £11,500 and the basic rate limit increased to £33,500 for 2017/18. The higher rate threshold will therefore rise to £45,000 for those entitled to the full personal allowance.

Tax bands and rates – dividends

Currently, when a dividend is paid to an individual, it is subject to different tax rates compared to other income due to a 10% notional tax credit being added to the dividend. So for an individual who has dividend income which falls into the basic rate band the effective tax rate is nil as the 10% tax credit covers the 10% tax liability. For higher rate and additional rate taxpayers, the effective tax rates on a dividend receipt are 25% and 30.6% respectively.

To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.

From 6 April 2016:

the 10% dividend tax credit is abolished with the result that the cash dividend received will be the gross amount potentially subject to tax
a new Dividend Tax Allowance charges the first £5,000 of dividends received in a tax year at 0%
for dividends above £5,000, new rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Comment

Many individuals do not have £5,000 of dividend income so are potential winners in the new regime. The removal of any tax on dividends up to £5,000 increases the attractiveness of holding some investments which provide dividend returns rather than interest receipts. Use can then also be made of the CGT annual exemption by selective selling of investments.

Basic rate taxpayers in particular need to appreciate that all dividends received still form part of the total income of an individual. If dividends above £5,000 are received, the first £5,000 will use up some or all of any basic rate band available. The element of dividends above £5,000 which are taxable may well therefore be taxed at 32.5%.

Tax on savings income

Savings income is income such as bank and building society interest. In 2015/16 some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.

The starting rate limit remains at £5,000 for 2016/17.

In addition, from 2016/17 the Savings Allowance (SA) will apply to savings income. Income within the SA will be taxed at a new 0% rate (the ‘savings nil rate’). However, the available SA in a tax year will depend on the individual’s marginal rate of income tax. Individuals taxed at up to the basic rate of tax will have an SA of £1,000.

For higher rate taxpayers, the SA will be £500 whilst no SA is due to additional rate taxpayers.

Alongside the introduction of the SA, banks and building societies will cease to deduct tax from account interest they pay to customers.

Comment

The new SA will exempt from tax interest receipts for many taxpayers. The government anticipates that around 95% of taxpayers will not have any tax to pay on their savings income. However, the allowance works in a complex way. For example, a taxpayer whose total non-savings income is near to £43,000 in 2016/17 (the point from which higher rate taxes are payable) needs to be aware that savings income is still added to other income to determine whether the SA is £1,000 or £500.

Individual Savings Accounts (ISAs)

The overall ISA savings limit is £15,240 for 2015/16 and will remain at this figure for 2016/17.

Two changes are proposed with effect from 6 April 2016. The following changes will be made to the existing ISA Regulations:

Savers will be allowed to replace cash they have withdrawn from their account earlier in a tax year, without this replacement counting towards the annual ISA limit for that year. This flexibility will be available in relation to both current year and earlier years’ ISA savings where provided for in the terms and conditions of a ‘flexible ISA’.
A third ISA, the Innovative Finance ISA, is being introduced for loans arranged via a peer to peer (P2P) platform.

The total an individual can save each year into all ISAs will be increased from £15,240 to £20,000 from April 2017.

Lifetime ISA

A new Lifetime ISA will be available from April 2017 for adults under the age of 40. Individuals will be able to contribute up to £4,000 per year and receive a 25% bonus from the government. Funds, including the government bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax-free.

Further details of the new account, which will be available from 2017, are as follows:

Any savings an individual puts into the account before their 50th birthday will receive an added 25% bonus from the government.
There is no maximum monthly contribution and up to £4,000 a year can be saved into a Lifetime ISA.
The savings and bonus can be used towards a deposit on a first home worth up to £450,000 across the country.
Accounts are limited to one per person rather than one per home, so two first time buyers can both receive a bonus when buying together.
Where an individual already has a Help to Buy ISA they will be able to transfer those savings into the Lifetime ISA in 2017, or continue saving into both. However only the bonus from one account can be used to buy a house.
Where the funds are withdrawn at any time before the account holder is aged 60 they will lose the government bonus (and any interest or growth on this) and will also have to pay a 5% charge.
After the account holder’s 60th birthday they will be able to take all the savings tax-free.

Comment

The new Lifetime ISA is designed to allow flexible saving for first time buyers and those wishing to save for their retirement. The Chancellor said in his speech:

‘My pension reforms have always been about giving people more freedom and more choice.

So faced with the truth that young people aren’t saving enough, I am today providing a different answer to the same problem.’

Help to Save

The government has announced the introduction of a new type of savings account aimed at low income working households.

Individuals in low income working households will be able to save up to £50 a month into a Help to Save account and receive a 50% government bonus after two years. Account holders can then choose to continue saving under the scheme for a further two years. The scheme will be open to all adults in receipt of Universal Credit with minimum weekly household earnings equivalent to 16 hours at the National Living Wage or those in receipt of Working Tax Credits.

Accounts will be available no later than April 2018.

Pensions consultation and reform

The government consultation ‘Strengthening the incentive to save’ looked at the way pensions are taxed. The consultation found that while the current system gives everyone an incentive to save into a pension, and people like the 25% tax free lump sum, it is also inflexible and poorly understood. Young people in particular are not saving enough, often because they feel they have to choose between saving for their first home and saving for retirement.

Comment

The Chancellor said in his speech:

‘Over the past year we’ve consulted widely on whether we should make compulsory changes to the pension tax system. But it was clear there is no consensus.’

The Chancellor is introducing the Lifetime ISA as a vehicle for younger people to save.

Pensions advice

The Financial Advice Market Review (FAMR) aims to support the provision of affordable and accessible advice. FAMR was a joint review between the Financial Conduct Authority and Her Majesty’s Treasury, and its recommendations were published on 14 March 2016.

The government commits to implement all of the recommendations for which it is responsible, and will:

Consult on introducing a single clear definition of financial advice to remove regulatory uncertainty and ensure that firms can offer consumers the help they need.
Increase the existing £150 Income Tax and National Insurance relief for employer arranged pension advice to £500. The new exemption will ensure that the first £500 of any advice received is eligible for the relief. It will be available from April 2017.
Consult on introducing a Pensions Advice Allowance. This will allow people before the age of 55 to withdraw up to £500 tax free from their defined contribution pension to redeem against the cost of financial advice. The exact age at which people can do this will be determined through consultation. This means that a basic rate taxpayer could save £100 on the cost of financial advice.

The government will also restructure the delivery of public financial guidance to make it more effective.

Phased rollout of Tax-Free Childcare

The government has announced it will introduce Tax-Free Childcare in early 2017. Tax-Free Childcare will be gradually rolled out to children under 12 with the parents of the youngest children being able to enter the scheme first. The scheme will be open to all eligible parents by the end of 2017.

The existing scheme, Employer-Supported Childcare, will remain open to new entrants until April 2018 to support the transition between the schemes.

Business Tax

Corporation tax rates

The main rate of corporation tax is currently 20% and this rate will continue for the Financial Year beginning on 1 April 2016. The main rate of corporation tax will then be reduced as follows:

19% for the Financial Years beginning on 1 April 2017, 1 April 2018 and 1 April 2019
17% for the Financial Year beginning on 1 April 2020.

Corporate tax loss relief

The government will introduce two reforms to corporate tax losses from April 2017. First, losses arising on or after 1 April 2017 will be useable, when carried forward, against profits from other income streams or other companies within a group. Second, from 1 April 2017, companies will only be able to use losses carried forward against up to 50% of their profits above £5 million. For groups, the £5 million allowance will apply to the group.

Capital allowances on business cars

The current 100% first year allowance (FYA) on businesses purchasing low emission cars will be extended to April 2021. A low emission car is one where the CO₂ emissions do not exceed 75 gm/km and this threshold will fall to 50 gm/km from April 2018. In addition, the CO₂ emission threshold for the main rate of capital allowances for business cars will reduce from 130 gm/km to 110 gm/km from April 2018.

Corporation tax payment dates

At the Summer Budget 2015, the government announced it would bring forward corporation tax payment dates for companies with taxable profits over £20 million. This measure has been deferred by two years and will now apply to accounting periods starting on or after 1 April 2019.

Loans to participators

The 25% rate of tax charged on loans to participators and other arrangements by close companies will increase to 32.5%. This applies to loans made and benefits conferred on or after 6 April 2016. This increased rate mirrors the dividend upper rate. The government has noted that this will prevent individuals gaining a tax advantage by taking loans or making other arrangements to extract value from their company rather than remuneration or dividends.

Enterprise Zones – enhanced capital allowances

This measure extends the period in which businesses investing in new plant and machinery in ECA sites in Enterprise Zones can qualify for 100% capital allowances to eight years.

Removal of statutory renewals allowance

The government will withdraw the statutory renewals allowance, which provides businesses with tax relief for the cost of replacing tools. The changes ensure that tax relief for expenditure incurred on the replacement of tools will be obtained under the same rules as those which apply to other capital equipment. Businesses will be able to claim tax relief under the normal capital allowance regime or, in the case of residential landlords, for the cost of replacing domestic items such as furnishings and appliances. The withdrawal will come into effect for expenditure on or after 6 April 2016 for income tax purposes and from 1 April 2016 for corporation tax.

Company distributions

Legislation will be introduced with effect from 6 April 2016 to:

amend the Transactions in Securities legislation, which is designed to prevent tax advantages in certain circumstances. The amendments, for example, include liquidations as potentially coming within the scope of the legislation
introduce a new Targeted Anti-Avoidance Rule, which would prevent some distributions in a liquidation being taxed as capital, where certain conditions are met and there is an intention to gain a tax advantage.

Comment

In some situations shareholders of close companies can receive a payment from the company which is taxed as a capital gain instead of as dividend income. If Entrepreneurs’ Relief is available the gain will be subject to only 10% tax. The government is concerned that the new dividend tax rates introduced from 6 April 2016 will encourage shareholders to convert to capital what might otherwise be taxed as income.

Abolition of Class 2 National Insurance Contributions (NIC)

The government will abolish Class 2 NIC from April 2018. The government will publish its response to the recent consultation on state benefit entitlement for the self-employed in due course. This will set out details of how the self-employed will access contributory benefits after Class 2 is abolished.

Property and trading income allowances

From April 2017, the government will introduce a new £1,000 allowance for property and trading income. Individuals with property or trading income below £1,000 will no longer need to declare or pay tax on that income. Those with income above the allowance will be able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance.

Making tax digital

From 2018 businesses, self-employed people and landlords who are keeping records digitally and providing regular digital updates to HMRC will be able to adopt pay-as-you-go tax payments. This will enable them to choose payment patterns that suit them and better manage their cash flow.

Reform of Substantial Shareholding Exemption (SSE)

SSE means that capital gains on corporate share disposals are not subject to UK corporation tax where certain conditions are satisfied. It was introduced in 2002 and was designed to ensure that tax does not act as a disincentive to commercially desirable business sales or group restructuring. There have been significant developments in the UK and international corporate tax landscape since the SSE was first introduced. The government will therefore consult on the extent to which the SSE is still delivering on its original policy objective and whether there could be changes to its detailed design in order to increase its simplicity, coherence and international competitiveness.

Petroleum Revenue Tax (PRT)

The rate of PRT will be permanently reduced to zero for all chargeable periods ending after 31 December 2015.

Anti-avoidance

The government will change the deduction of tax at source regime to bring all international royalty payments arising in the UK within the charge to income tax, unless those taxing rights have been given up under a double taxation agreement or the EU Interest and Royalties Directive.

Employment Taxes

NIC for apprentices under 25

From 6 April 2016 employer NICs are 0% for apprentices under 25 who earn less than the upper secondary threshold (UST) which is £827 per week (£43,000 per annum). Employers are liable to 13.8% NIC on pay above the UST. Employee NICs are payable as normal.

An apprentice needs to:

be working towards a government recognised apprenticeship in the UK which follows a government approved framework/standard
have a written agreement, giving the government recognised apprentice framework or standard, with a start and expected completion date.

Employers need to identify relevant apprentices and generally assign them NIC category letter H to ensure the correct NICs are collected.

Comment

The proposals exclude apprenticeships which do not follow government approved frameworks, also known as common law apprenticeships. A similar 0% rate of employer NIC already applies for employees under the age of 21.

Employee benefits and expenses changes from 6 April 2016

From 6 April 2016 a number of changes are introduced relating to the tax treatment of employee benefits in kind and expenses:

There will be a statutory exemption for certain expenses, such as travelling and subsistence expenses, reimbursed to an employee. This will replace the current system where employers have to apply for a dispensation to avoid having to report non-taxable expenses (on forms P11D).
Employers will be able to include taxable benefits in pay and thus account for PAYE on the benefits. However, in order to payroll benefits for 2016/17, employers will have to register with HMRC for the service before the start of the new tax year. Employers will then not have to include these payrolled benefits on forms P11D.
The £8,500 threshold below which employees do not pay income tax on certain benefits in kind will be removed. There will be new exemptions for carers and ministers of religion.

Comment

The statutory exemption for reimbursed expenses will mean that all employees will automatically get the tax relief they are due on qualifying expenses payments.

Another option is introduced which allows amounts based on scale rates to be paid or reimbursed, instead of the employee’s actual costs. The rates that can be used are either HMRC approved figures or figures specifically agreed with HMRC in writing.

The approved figures only cover meals purchased by an employee in the course of business travel.

Simplification of the administration of tax on employee benefits and expenses

The government will introduce a package of measures to further simplify the tax administration of employee benefits and expenses by:

extending the voluntary payrolling framework to allow employers to account for tax on non-cash vouchers and credit tokens in real time from April 2017
consulting on proposals to simplify the process for applying for and agreeing PAYE Settlement Agreements
consulting on proposals to align the dates by which an employee has to make a payment to their employer in return for a benefit-in-kind they receive to ‘make good’
legislating to ensure that if there is a specific statutory provision for calculating the tax charge on a benefit in kind, this must be used.

Employer provided cars

From 6 April 2016 there will be a 2% increase in the percentage applied by each band with similar increases in 2017/18 and 2018/19. For 2019/20 the rate will increase by a further 3%.

From 6 April 2017 the appropriate percentage for cars which have neither a CO₂ emissions figure nor an engine cylinder capacity, and which cannot produce CO₂ emissions in any circumstances by being driven, will be set at 9%. From 6 April 2018 this will be increased to 13%, and from 6 April 2019 to 16%.

Van benefit charge for zero emissions vans

The van benefit charge for 2015/16 is £3,150 increasing to £3,170 in 2016/17.

The government will extend van benefit charge support for zero-emission vans so that from 6 April 2016 the charge will be 20% of the main rate in 2016/17 and 2017/18, and will then increase on a tapered basis to 5 April 2022. The government will review the impact of this incentive at Budget 2018 together with enhanced capital allowances for zero-emission vans.

Taxation of termination payments

From April 2018 the government will tighten the scope of the income tax exemption for termination payments to prevent manipulation.

Termination payments over £30,000 which are subject to income tax will also be subject to employer NIC. The government will undertake a technical consultation on tightening

the scope of the exemption.

Travel and subsistence expenses rules

In September 2015 the government published a discussion document aimed at modernising the tax rules for travel and subsistence (T&S). The government has analysed responses and concluded that, although complex in parts, the current T&S rules are generally well understood and work effectively for the majority of employees and has decided not to make further changes to the T&S rules at this time.

Employment intermediaries and relief for travel and subsistence

As announced at March Budget 2015, the government will introduce legislation in Finance Bill 2016 to restrict tax relief for home to work travel and subsistence expenses for workers engaged through an employment intermediary. This will bring the rules into line with those that apply to employees.

Simplifying the NIC rules

The government will commission the Office of Tax Simplification to review the impact of moving employee NIC to an annual, cumulative and aggregated basis and moving employer NIC to a payroll basis.

Disguised remuneration schemes

The government will introduce a package of measures to tackle the current and historic use of disguised remuneration schemes, which are used to avoid income tax and NIC. Legislation will be included in Finance Bill 2016 which will prevent a relief in the existing legislation from applying where it is used as part of a tax avoidance scheme from Budget Day.

The government will hold a technical consultation on further changes to the legislation which will be included in a future Finance Bill. This will include a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5 April 2019.

Employee share schemes: simplification of the rules

The government will make a number of technical changes to simplify the tax-advantaged and non-tax-advantaged employee share scheme rules.

Employment Allowance

The NIC Employment Allowance was introduced from 6 April 2014. It is an annual allowance which is available to many employers and can be offset against their employer NIC liability.

From April 2016, the government will increase the NIC Employment Allowance from £2,000 to £3,000 a year. The increase will mean that businesses will be able to employ four workers full time on the new National Living Wage without paying any NIC.

To ensure that the NIC Employment Allowance is focussed on businesses and charities that support employment, from April 2016 companies where the director is the sole employee will no longer be able to claim the Employment Allowance.

Employers who hire an illegal worker face civil penalties from the Home Office. The government will build on this deterrent by removing a year’s Employment Allowance from those receiving civil penalties, starting in 2018.

Salary sacrifice

The government is considering limiting the range of benefits that attract income tax and NIC advantages when provided as part of salary sacrifice schemes. However, the government’s intention is that pension saving, childcare, and health-related benefits such as Cycle to Work should continue to benefit from income tax and NIC relief when provided through salary sacrifice arrangements.

Off-payroll working in the public sector

From April 2017 the government will make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll working through limited companies in the public sector. The rules will remain unchanged for those working in the private sector. Liability to pay the correct employment taxes will move from the worker’s own company to the public sector body or agency/third party paying the company.

The government will consult on a clearer and simpler set of tests and online tools.

Capital Taxes

Capital gains tax (CGT) rates

The current rates of CGT are 18% to the extent that any income tax basic rate band is available and 28% thereafter. The government is to reduce the higher rate of CGT from 28% to 20% and the basic rate from 18% to 10%. The trust CGT rate will also reduce from 28% to 20%. The 28% and 18% rates will continue to apply for carried interest and for chargeable gains on residential property that do not qualify for private residence relief. In addition, the 28% rate still applies for ATED related chargeable gains accruing to any person (principally companies). These changes will take effect for disposals made on or after 6 April 2016.

The rate for disposals qualifying for Entrepreneurs’ Relief (ER) remains at 10% with a lifetime limit of £10 million for each individual.

Example 2016/17

Annie, a higher rate taxpayer, has the following chargeable gains after the annual exemption:

• Gains eligible for ER £100,000

• A residential property gain £30,000

• Other gains £10,000

The ER gain is taxable at 10%. The residential property gain will be taxed at 28% and other gains at 20%.

Goodwill on Incorporation and ER

New rules were introduced from 3 December 2014 which prevent individuals from claiming ER on disposals of goodwill when they transfer their business to a related company in which they, or a member of their family, held any shares whatsoever. This means that CGT became payable on the gain at the normal rates of 18% or 28% rather than 10%.

Revised legislation will be introduced in Finance Bill 2016 to allow ER to be claimed in respect of gains on goodwill where the individual holds less than 5% of the shares, and less than 5% of the voting power, in the acquiring company.

Relief will also be due where an individual holds 5% or more of the shares or voting power if the transfer of the business to the company is part of arrangements for the company to be sold to a new, independent owner.

This measure will have backdated effect and will therefore apply to disposals on or after 3 December 2014.

Associated disposals and ER

New rules were introduced in 2015 which were aimed at combatting abuse of ER. Whilst preventing the abuse, those rules also resulted in relief not being due on ‘associated disposals’ when a business was sold to members of the claimant’s family under normal succession arrangements.

Certain revisions are to be made so that ER will be allowed on a disposal of a privately-held asset when the accompanying disposal of business assets is to a family member.

In addition, under the 2015 rules an associated disposal can only qualify for ER if there is also a material disposal of 5% or more of the claimant’s share in a partnership or holding in a company. Under the proposals this is not to apply where the claimant disposes of the whole of his interest and has previously held a larger stake.

These changes will have a backdated effect for associated disposals made on or after 18 March 2015.

Joint ventures, partnerships and ER

Changes introduced in 2015 to combat abuse of ER also resulted in relief not being due to investors in some types of genuine commercial structures where tax avoidance was not a main motive. Those affected were companies with shares in joint venture companies and corporate partners with shares in trading companies because their investments were reclassified as non-trading activities. ER is only available to companies or partnerships which are predominantly trading so ER status was lost in a number of cases.

To enable genuine commercial structures to qualify for ER, this measure changes the definitions of a ‘trading company’ and a ‘trading group’ which apply for ER. Where the new definitions apply, a company which holds shares in a joint venture company will be treated as carrying on a proportion of the activities of that company corresponding to the investing company’s fractional shareholding in it. Also, the activities of a corporate partner in a firm will be treated as having their true nature (trading or non-trading) when determining whether the company is a trading company.

It will also be a requirement that the person making the disposal on which relief is claimed has at least a 5% interest in the shares of the joint venture company, and effectively controls at least 5% of the voting rights in that company. Where a partnership with a corporate partner is concerned, the person making the disposal must be entitled to at least 5% of the partnership’s assets and profits, and control at least 5% of the voting rights in the corporate partner.

The new definitions mean that, in some cases, whether a company is a trading company or the holding company of a trading group will depend on the size of the claimant’s shareholding in the company.

External investors and ER

ER will be extended to external investors (other than employees or officers of the company) in unlisted trading companies. To qualify for the 10% CGT rate under ‘investors’ relief’ the following conditions will apply:

shares must be newly issued and subscribed for by the individual for new consideration
be in an unlisted trading company, or an unlisted holding company of a trading group
have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
have been held continuously for a period of three years before disposal.

An individual’s qualifying gains for investors’ relief will be subject to a lifetime cap of £10 million.

Capital gains and employee shareholder agreements

The ‘employee shareholder’ was a new employment status made available from 1 September 2013. Employee shareholders who agreed to give up certain statutory employment rights received in exchange at least £2,000 of shares in their employer or parent company free of income tax and national insurance. Qualifying conditions do apply.

Any eventual gains on shares received with an original value of up to £50,000 are CGT free. However, a lifetime limit of £100,000 on the CGT exempt gains is introduced on disposals under Employee Shareholder Agreements entered into after 16 March 2016.

Other Matters

Stamp Duty Land Tax (SDLT) and Land and Buildings Transaction Tax (LBTT)

The Chancellor announced in the Autumn Statement that new rates of SDLT on purchases of additional residential properties would apply from 1 April 2016. Similar legislation was introduced in the Scottish Parliament for LBTT which applies to property transactions in Scotland. The LBTT legislation has now been enacted.

The new rates will be three percentage points above the current SDLT and LBTT rates. The higher rates will potentially apply if, at the end of the day of the purchase transaction, the individual owns two or more residential properties.

The SDLT proposals were subject to a consultation. The government has now announced:

purchasers will have 36 months rather than 18 months to claim a refund of the higher rates if they buy a new main residence before disposing of their previous main residence
purchasers will also have 36 months between selling a main residence and replacing it with another main residence without having to pay the higher rates
a small share in a property which has been inherited within the 36 months prior to a transaction will not be considered as an additional property when applying the higher rates
there will be no exemption from the higher rates for significant investors.

Comment

The main target of the higher rates is purchases of buy to let properties or second homes. However, there will be some purchasers who will have to pay the additional charge even though the property purchased will not be a buy to let or a second home. The proposed 36 month rules above will help to remove some transactions from the additional rates (or allow a refund). Care will be needed if an individual already owns, or partly owns, a property and transacts to purchase another property without having disposed of the first property.

LBTT has been enacted with the 18 month periods rather than 36 months.

SDLT on non-residential property

The government will change the calculation of SDLT on freehold and leasehold premium non-residential transactions, on and after 17 March 2016, so the rates apply to the portion of the purchase price within each band. The SDLT rates and thresholds for non-residential freehold and leasehold premiums will also change from the same date.

For new leasehold transactions, SDLT is already charged at each rate on the portion of the net present value (NPV) of the rent which falls within each band. On and after 17 March 2016 a new 2% rate for rent paid under a non-residential lease will be introduced where the NPV of the rent is above £5 million.

Comment

The LBTT on non-residential properties in Scotland is already based on a similar system to that proposed for SDLT.

VAT: overseas businesses and online marketplaces

Changes will be made to the existing rules which allow HMRC to direct an overseas business to appoint a VAT representative with joint and several liability. A new provision will then enable HMRC to hold an online marketplace jointly and severally liable for the unpaid VAT of an overseas business that sells goods in the UK via that online marketplace.

The measure will have effect from Royal Assent to Finance Bill 2016.

Comment

The objective of this measure is to give HMRC strengthened operational powers to tackle the non-compliance from some overseas businesses that avoid paying UK VAT on sales of goods made to UK consumers via online marketplaces. It is directed at getting overseas businesses, that are or should be VAT registered in the UK, paying VAT due either directly or through a VAT representative.

Business rates

Business rates have been devolved to Scotland, Northern Ireland and Wales. The Chancellor has announced cuts on business rates for half of all properties in England from 1 April 2017. In particular the government proposes to:

Permanently double Small Business Rate Relief (SBRR) from 50% to 100% and increase the thresholds to benefit a greater number of businesses. Businesses with a property with a rateable value of £12,000 and below will receive 100% relief.
Increase the threshold for the standard business rates multiplier to a rateable value of £51,000, taking 250,000 smaller properties out of the higher rate.

Insurance Premium Tax

The standard rate of IPT will be increased from 9.5% to 10% with effect from 1 October 2016.

General Anti-Abuse Rule (GAAR)

The government will legislate to introduce a new penalty of 60% of tax due to be charged in all cases successfully tackled by the GAAR. Small changes to the GAAR procedure will be made to improve its ability to tackle marketed avoidance schemes.

New soft drinks industry levy

The government will introduce a new soft drinks industry levy to be paid by producers and importers of soft drinks that contain added sugar. The levy will be charged on volumes according to total sugar content, with a main rate charge for drink above 5 grams of sugar per 100 millilitres and a higher rate for drinks with more than 8 grams of sugar per 100 millilitres. There will be an exclusion for small operators.

It is proposed to introduce the measure from April 2018.

The Chancellor’s 2014 Autumn Statement

Posted on December 4, 2014 by Henry Cooper

Autumn Statement 2014

On Wednesday 3 December the Office for Budget Responsibility published its updated forecast for the UK economy. Chancellor George Osborne responded to that forecast in a statement to the House of Commons later on that day.

In the period since the Budget in March a number of consultation papers and discussion documents have been published by HMRC and some of these proposals are summarised here. Draft legislation relating to many of these areas will be published on 10 December and some of the details in this summary may change as a result.

Our summary also provides a reminder of other significant developments which are to take place from April 2015.

The Chancellor’s statement

His speech and the subsequent documentation announced tax measures in addition to the normal economic measures.

Our summary concentrates on the tax measures which include:

improvements to the starting rate of tax for savings income
new rules for accessing pension funds
removal of corporation tax relief for goodwill on incorporation
changes to the Construction Industry Scheme
the introduction of new CGT rules for non-residents and UK residential property
changes to the remittance basis charge for resident non-domiciles
changes to the tax treatment of pensions on death
changes to the IHT treatment of trusts
changes to Stamp Duty Land Tax for residential property.

Personal Tax

The personal allowance for 2015/16

For those born after 5 April 1948 the personal allowance will be increased from £10,000 to £10,600.

Comment

The reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 will continue. The reduction is £1 for every £2 of income above £100,000. So for 2014/15 there is no allowance when adjusted net income exceeds £120,000. In 2015/16 the allowance ceases when adjusted net income exceeds £121,200.

Tax bands and rates for 2015/16

The basic rate of tax is currently 20%. The band of income taxable at this rate is being decreased from £31,865 to £31,785 so that the threshold at which the 40% band applies will rise from £41,865 to £42,385 for those who are entitled to the full basic personal allowance.

The additional rate of tax of 45% is payable on taxable income above £150,000.

Dividend income is taxed at 10% where it falls within the basic rate band and 32.5% where liable at the higher rate of tax. Where income exceeds £150,000, dividends are taxed at 37.5%.

Starting rate of tax for savings income

From 6 April 2015, the maximum amount of an eligible individual’s savings income that can qualify for the starting rate of tax for savings will be increased to £5,000 from £2,880, and this starting rate will be reduced from 10% to nil. These rates are not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.

Comment

This will increase the number of savers who are not required to pay tax on savings income, such as bank or building society interest. If a saver’s taxable non-savings income will be below the total of their personal allowance plus the £5,000 starting rate limit then they can register to receive their interest gross using a form R85.The increase will also provide a useful tax break for director/shareholders who extract their share of profits from a company by taking a low salary and the balance in dividends. This is because dividends are taxed after savings income and thus are not included in the individual’s ‘taxable non-savings income’.

Example

Type of income	Amount	Tax rate	Comment on tax rate
Salary	£10,600	Nil	(as covered by personal allowance)
Bank interest	£3,000	Nil	(as salary plus interest is less than £15,600)

Dividend income is then taxed at the appropriate dividend tax rates.

Transferable Tax Allowance for some

From 6 April 2015 married couples and civil partners may be eligible for a new Transferable Tax Allowance.

The Transferable Tax Allowance will enable spouses and civil partners to transfer a fixed amount of their personal allowance to their spouse. The option to transfer is not available to unmarried couples.

The option to transfer will be available to couples where neither pays tax at the higher or additional rate. If eligible, one partner will be able to transfer 10% of their personal allowance to the other partner which means £1,060 for the 2015/16 tax year.

Comment

For those couples where one person does not use all of their personal allowance the benefit will be up to £212 (20% of £1,060).HMRC will, no doubt, be publicising the availability of the Transferable Tax Allowance in the next few months and details of how couples can opt to transfer allowances.

New Individual Savings Accounts (NISAs)

On 1 July 2014 ISAs were reformed into a simpler product, the NISA, and the overall annual subscription limit for these accounts was increased to £15,000 for 2014/15. From 6 April 2015 the overall NISA savings limit will be increased to £15,240.

The Chancellor has now announced an additional ISA allowance for spouses or civil partners when an ISA saver dies. From 6 April 2015, surviving spouses will be able to invest the inherited funds into their own ISA, on top of their usual allowance. This measure applies for deaths from 3 December 2014.

At Budget 2014, the Chancellor announced that peer-to-peer loans would be eligible for inclusion within NISAs. The government is consulting on the options for changes to the NISA rules to allow peer-to-peer loans to be held within them.

No start date has been announced.

Comment

Peer-to-peer lending is a small but rapidly growing alternative source of finance for individuals and businesses. The inclusion of such loans in NISAs will increase choice for investors and encourage the growth of the peer-to-peer sector.

Junior ISA and Child Trust Fund (CTF)

The annual subscription limit for Junior ISA and Child Trust Fund accounts will increase from £4,000 to £4,080.

The government has previously decided that a transfer of savings from a CTF to a Junior ISA should be permitted at the request of the registered contact for the CTF. The government has confirmed the measure will have effect from 6 April 2015.

Bad debt relief on investments made on peer-to-peer lending

The government will introduce a new relief to allow individuals lending through peer-to-peer platforms to offset any losses from loans which go bad against other peer-to-peer income. It will be effective from 6 April 2016 and, through self assessment, will allow individuals to make a claim for relief on losses incurred from 6 April 2015.

Pensions – changes to access of pension funds

In Budget 2014, George Osborne announced ‘pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want’. Some of changes have already taken effect but the big changes will come into effect on 6 April 2015 for individuals who have money purchase pension funds.

The tax consequences of the changes are contained in the Taxation of Pensions Bill which is currently going through Parliament.

Under the current system, there is some flexibility in accessing a pension fund from the age of 55:

tax free lump sum of 25% of fund value
purchase of an annuity with the remaining fund, or
income drawdown.

For income drawdown there are limits, in most cases, on how much people can draw each year.

An annuity is taxable income in the year of receipt. Similarly any monies received from the income drawdown fund are taxable income in the year of receipt.

From 6 April 2015, the ability to take a tax free lump sum and a lifetime annuity remain but some of the current restrictions on a lifetime annuity will be removed to allow more choice on the type of annuity taken out.

The rules involving drawdown will change. There will be total freedom to access a pension fund from the age of 55.

It is proposed that access to the fund will be achieved in one of two ways:

allocation of a pension fund (or part of a pension fund) into a ‘flexi-access drawdown account’ from which any amount can be taken over whatever period the person decides
taking a single or series of lump sums from a pension fund (known as an ‘uncrystallised funds pension lump sum’).

When an allocation of funds into a flexi-access account is made the member typically will take the opportunity of taking a tax free lump sum from the fund (as under current rules).

The person will then decide how much or how little to take from the flexi-access account. Any amounts that are taken will count as taxable income in the year of receipt.

Access to some or all of a pension fund without first allocating to a flexi-access account can be achieved by taking an uncrystallised funds pension lump sum.

The tax effect will be:

25% is tax free
the remainder is taxable as income.

Comment

The fundamental tax planning point arising from the changes is self-evident. A person should decide when to access funds depending upon their other income in each tax year.

Pensions – changes to tax relief for pension contributions

The government is alive to the possibility of people taking advantage of the new flexibilities by ‘recycling’ their earned income into pensions and then immediately taking out amounts from their pension funds. Without further controls being put into place an individual would obtain tax relief on the pension contributions but only be taxed on 75% of the funds immediately withdrawn.

Currently an ‘annual allowance’ sets the maximum amount of tax efficient contributions. The annual allowance is £40,000 (but there may be more allowance available if the maximum allowance has not been utilised in the previous years).

Under the proposed rules from 6 April 2015, the annual allowance for contributions to money purchase schemes will be reduced to £10,000 in certain scenarios. There will be no carry forward of any of the £10,000 to a later year if it is not used in the year.

The main scenarios in which the reduced annual allowance is triggered is if:

any income is taken from a flexi-access drawdown account, or
an uncrystallised funds pension lump sum is received.

However just taking a tax-free lump sum when funds are transferred into a flexi-access account will not trigger the £10,000 rule.

Taxation of resident non-domiciles

The Chancellor has announced an increase in the annual charge paid by non-domiciled individuals resident in the UK who wish to retain access to the remittance basis of taxation.

The charge paid by people who have been UK resident for seven out of the last nine years will remain at £30,000. The charge paid by people who have been UK resident for 12 out of the last 14 years will increase from £50,000 to £60,000. A new charge of £90,000 will be introduced for people who have been UK resident for 17 of the last 20 years. The government will also consult on making the election apply for a minimum of three years.

Business Tax

Corporation tax rates

From 1 April 2015 the main rate of corporation tax, currently 21%, will be reduced to 20%.

As the small profits rate is already 20%, the need for this separate code of taxation disappears. The small profits rate will therefore be unified with the main rate.

Research and Development (R&D) tax credits

The government will increase the rate of the ‘above the line’ credit from 10% to 11% and will increase the rate of the SME scheme from 225% to 230% from 1 April 2015.

It is proposed to restrict qualifying expenditure for R&D tax credits from 1 April 2015 so that the costs of materials incorporated in products that are sold are not eligible. There will be a package of measures to streamline the application process for smaller companies investing in R&D.

Construction Industry Scheme (CIS) improvements

In Budget 2014 the government announced that it would consult on options to improve the operation of the scheme for smaller businesses and to introduce mandatory online CIS filing for contractors. The consultation has now taken place.

A key reform concerns changes to the requirements for subcontractors to achieve and retain gross payment status. There are proposals for simplifying and improving the compliance and turnover tests which will enable more subcontractors to access gross payment status. There is no intention to change the £30,000 turnover test for sole traders, but the government proposes lowering the threshold for the upper limit of the turnover test to help more established businesses with multiple partners or directors qualify for gross payment status. The current upper threshold of £200,000 could fall to as little as £100,000.

Some compliance tests would be relaxed so that it would be easier for subcontractors to retain their gross payment status.

For contractors the government is proposing mandatory online filing of monthly CIS returns. Improvements will be made to the IT systems to provide a better CIS online service. These will include the online system for verification of subcontractors by contractors.

Comment

About two thirds of CIS contractors are also employers who therefore file Real Time Information PAYE returns online. It is no surprise that the government wants to extend the scope of mandatory online filing. The improvements to the online verification process would be welcome but the government is also proposing to remove the option of verifying subcontractors by telephone.

Class 2 National Insurance contributions (NIC)

From 6 April 2015 liability to pay Class 2 NIC will arise at the end of each year. Currently a liability to Class 2 NIC arises on a weekly basis.

The amount of Class 2 NIC due will still be calculated based on the number of weeks of self-employment in the year, but will be determined when the individual completes their self assessment return. It will therefore be paid alongside their income tax and Class 4 NIC. For those that wish to spread the cost of their Class 2 NIC, HMRC will retain a facility for them to make regular payments throughout the year. The current six monthly billing system will cease from 6 April 2015.

Those with profits below a threshold will no longer have to apply in advance for an exception from paying Class 2 NIC. Instead they will have the option to pay Class 2 NIC voluntarily at the end of the year so that they may protect their benefit rights.

Corporation tax relief for goodwill on incorporation

Corporation tax relief is given to companies when goodwill and intangible assets are recognised in the financial accounts. Relief is normally given on the cost of the asset as the expenditure is written off in accordance with Generally Accepted Accounting Practice or at a fixed 4% rate, following an election.

An anti-avoidance measure has been announced to restrict corporation tax relief where a company acquires internally-generated goodwill and certain other intangible assets from related individuals on the incorporation of a business.

In addition, individuals will be prevented from claiming Entrepreneurs’ Relief on disposals of goodwill when they transfer the business to a related company. Capital gains tax will be payable on the gain at the normal rates of 18% or 28% rather than 10%.

These measures will apply to all transfers on or after 3 December 2014 unless made pursuant to an unconditional obligation entered into before that date.

Comment

Prior to this announcement it was possible, for example, on incorporation of a sole trader’s business to a company which is owned by the sole trader, for the company to obtain corporation tax relief on the market value of goodwill at the time of incorporation. The disposal by the sole trader would qualify for a low rate of capital gains tax.The government considers this is unfair to a business that has always operated as a company.

Corporation tax reliefs – creative sector

Two new reliefs and a change to an existing relief are proposed:

Children’s television tax relief – the government will introduce a new tax relief for the production of children’s television programmes from 1 April 2015. The relief will be available at a rate of 25% on qualifying production expenditure.
Orchestra tax relief – The government will consult on the introduction of an orchestra tax relief from 1 April 2016.
High-end television tax relief – the government will explore with the industry whether to reduce the minimum UK expenditure for high-end TV relief from 25% to 10% and modernise the cultural test, to bring the relief in line with film tax relief.

Overarching contracts of employment and temporary workers

The government will review the increasing use of overarching contracts of employment by employment intermediaries such as ‘umbrella companies’. These arrangements enable workers to obtain tax relief for home to work travel that would not ordinarily be available. The government will publish a discussion paper shortly which may result in new measures at Budget 2015.

Banks – loss relief restriction

The government will restrict the amount of a bank’s annual profit that can be offset by the carry forward of losses to 50% from 1 April 2015. The restriction will apply to losses accruing up to 1 April 2015 and will include an exemption for losses incurred in the first five years of a bank’s authorisation.

Diverted profits tax

A new tax to counter the use of aggressive tax planning techniques by multinational enterprises to divert profits from the UK will be introduced. The Diverted Profits Tax will be applied using a rate of 25% from 1 April 2015.

Employment Taxes

Employer provided cars

The scale of charges for working out the taxable benefit for an employee who has use of an employer provided car are now announced well in advance. Most cars are taxed by reference to bands of CO2 emissions. The percentage applied to each band has typically gone up by 1% each year with an overriding maximum charge of 35% of the list price of the car. From 6 April 2015, the percentage applied by each band goes up by 2% and the maximum charge is increased to 37%.

Comment

These increases have the perverse effect of discouraging retention of the same car. New cars will often have lower CO2 emissions than the equivalent model purchased by the employer, say three years ago.

Employer National Insurance contributions (NIC) for the under 21s

From 6 April 2015 employer NIC for those under the age of 21 will be reduced from the normal rate of 13.8% to 0%. For the 0% rate to apply the employee will need to be under 21 when the earnings are paid.

This exemption will not apply to earnings above the Upper Secondary Threshold (UST) in a pay period. The weekly UST is £815 for 2015/16 which is equivalent to £42,385 per annum. Employers will be liable to 13.8% NIC beyond this limit.

Comment

The UST is a new term for this new NIC exemption. It is set at the same amount as the Upper Earnings Limit, which is the amount at which employees’ NIC fall from 12% to 2%.

NIC for apprentices under 25

The government will abolish employer NIC up to the upper earnings limit for apprentices aged under 25. This will come into effect from 6 April 2016.

NIC Employment Allowance

The Employment Allowance was introduced from 6 April 2014. It is an annual allowance of up to £2,000 which is available to many employers and can be offset against their employer NIC liability.

The government will extend the annual £2,000 Employment Allowance for employer NIC to care and support workers. This will come into effect from 6 April 2015.

Review of employee benefits

The Office of Tax Simplification has published a number of detailed recommendations on the tax treatment of employee benefits in kind and expenses. In response the government launched:

a package of four related consultations on employee benefits in kind and expenses
a longer term review of the tax treatment of travel and subsistence expenses
a call for evidence on modern remuneration practices.

The government has now announced:

From 6 April 2015 there will be a statutory exemption for trivial benefits in kind costing less than £50.
From 6 April 2016, the £8,500 threshold below which employees do not pay income tax on certain benefits in kind will be removed. This threshold adds unnecessary complexity to the tax system. There will be new exemptions for carers and ministers of religion.
There will be an exemption for certain reimbursed expenses which will replace the current system where employers apply for a dispensation to avoid having to report non-taxable expenses. The new exemption for reimbursed expenses will not be available if used in conjunction with salary sacrifice.
The introduction of a statutory framework for voluntary payrolling benefits in kind. Payrolling benefits instead of submitting forms P11D can offer substantial administrative savings for some employers.

Capital Taxes

Capital gains tax (CGT) rates

The current rates of CGT are 18% to the extent that any income tax basic rate band is available and 28% thereafter. The rate for disposals qualifying for Entrepreneurs’ Relief is 10% with a lifetime limit of £10 million for each individual.

CGT – Entrepreneurs’ Relief (ER)

The government will allow gains which are eligible for ER, but which are instead deferred into investments which qualify for the Enterprise Investment Scheme or Social Investment Tax Relief to remain eligible for ER when the gain is realised. This will benefit qualifying gains on disposals that would be eligible for ER but are deferred into either scheme on or after 3 December 2014.

CGT – non-residents and UK residential property

At present a non-resident individual or company is not liable to CGT on residential property even though it is located in the UK. This is in marked contrast to many other countries that charge a capital gains tax on the basis of the location of a property rather than on the location of the vendor.

Therefore from 6 April 2015 a CGT charge will be introduced on gains made by non-residents disposing of UK residential property. The rate of tax for non-resident individuals will be the same as the CGT rates for UK individuals. Non-resident individuals will have access to the CGT annual exemption.

The rate of tax for companies will mirror the UK corporation tax rate.

The charge will not apply to the amount of the gain relating to periods prior to 6 April 2015. The government will allow either rebasing to a 5 April 2015 value or a time-apportionment of the whole gain, in most cases.

The government has decided that some changes are required to the rules determining the circumstances when a property can benefit from Private Residence Relief (PRR). The changes will apply to both a UK resident disposing of a residence in another country and a non-resident disposing of a UK residence.

From 6 April 2015 a person’s residence will not be eligible for PRR for a tax year unless either:

the person making the disposal was resident in the same country as the property for that tax year, or
the person spent at least 90 midnights in that property.

Comment

The main point of the changes to the PRR rules is to remove the ability of an individual who is resident in, say, France with a property in the UK as well as France to nominate the UK property as having the benefit of PRR. Any gain on the French property is not subject to UK tax anyway and, without changes to the PRR rules, the gain on the UK property could be removed by making a PRR election.The good news is that the latest proposals retain the ability of a UK resident with two UK residences to nominate which of those properties have the benefit of PRR.

Changes to the tax treatment of pensions on death

IHT and pension funds

If an individual has not bought an annuity, a defined contribution pension fund remains available to pass on to selected beneficiaries. Inheritance tax (IHT) can be avoided by making a ‘letter of wishes’ to the pension provider suggesting to whom the funds should be paid. If an individual’s intention has not been expressed the funds may be paid to the individual’s estate resulting in a potential IHT liability.

Other tax charges on pension funds – current law

There are other tax charges to reflect the principle that income tax relief would have been given on contributions into the pension fund and therefore some tax should be payable when the fund is paid out. For example:

if the fund is paid as a lump sum to a beneficiary, tax at 55% of the fund value is payable
if the fund is placed in a drawdown account to provide income to a ‘dependant’ (for example a spouse), the income drawn down is taxed at the dependant’s marginal rate of income tax.

There are some exceptions from the 55% charge. It is possible to pass on a pension fund as a tax free lump sum where the individual has not taken any tax free cash or income from the fund and they die under the age of 75.

Other tax charges on pension funds – changes

The government has decided to introduce significant exceptions from the tax charges.

Under the new system, anyone who dies under the age of 75 will be able to give their remaining defined contribution pension fund to anyone completely tax free, whether it is in a drawdown account or untouched.

The fund can be paid out as a lump sum to a beneficiary or taken out by the beneficiary through a ‘flexi access drawdown account’ (see the personal tax section of this summary for an explanation of this term).

Those aged 75 or over when they die will be able to pass their defined contribution pension fund to any beneficiary who will then be able to draw down on it as income at their marginal rate of income tax. Beneficiaries will also have the option of receiving the pension as a lump sum payment, subject to a tax charge of 45%.

The proposed changes take effect for payments made from 6 April 2015.

Tax treatment of inherited annuities

The Chancellor has announced further changes to the pension tax regime. From 6 April 2015 beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from such policies tax free. The tax rules will also be changed to allow joint life annuities to be passed on to any beneficiary.

Comment

Without this change in tax treatment of inherited annuities, individuals had a potential prospective tax advantage in choosing not to purchase an annuity. If an individual died relatively early, their fund would pass tax free to beneficiaries. If the individual would prefer the financial comfort of a guaranteed payment of income, beneficiaries would be taxed on the income at their marginal rate of income tax under current rules. From 6 April 2015, the beneficiaries will be able to receive any future payments from such policies tax free.

Changes to the trust IHT regime

Certain trusts, known as ‘relevant property trusts’, provide a mechanism to allow assets to be held outside of an individual’s estate thus avoiding a 40% IHT liability on the death of an individual. The downside is that there are three potential points of IHT charge on relevant property trusts:

a transfer of assets into the trust is a chargeable transfer in both lifetime and on death
a charge has to be calculated on the value of the assets in the trust on each ten-year anniversary of the creation of the trust
an exit charge arises when assets are effectively transferred out of the trust.

The calculation of the latter two charges is currently a complex process which can take a significant amount of time to compute for very little tax yield.

A third consultation on proposed changes was issued in June 2014. It proposed that an individual would have a ‘settlement nil rate band’ which would be unconnected to their personal nil rate band.

The government has now announced that a single settlement nil rate band will not be introduced. The government will introduce new rules to target avoidance through the use of multiple trusts. It will also simplify the calculation of trust rules.

IHT – exemption for emergency services personnel and humanitarian aid workers

Following consultation since Budget 2014, the government will extend the existing IHT exemption for members of the armed forces whose death is caused or hastened by injury while on active service to members of the emergency services and humanitarian aid workers responding to emergency circumstances. It will have effect for deaths on or after 19 March 2014.

Stamp Duty Land Tax (SDLT)

The Chancellor has announced a major reform to SDLT on residential property transactions. SDLT is charged at a single percentage of the price paid for the property, depending on the rate band within which the purchase price falls. From 4 December 2014 each new SDLT rate will only be payable on the portion of the property value which falls within each band. This will remove the distortion created by the existing system, where the amount of tax due jumps at the thresholds.

Where contracts have been exchanged but not completed on or before 3 December 2014, purchasers will have a choice of whether the old or new structure and rates apply. This measure will apply in Scotland until 1 April 2015 when SDLT is devolved to the Scottish Parliament.

The new rates and thresholds are:

Purchase price of property	New rates paid on the part of the property price within each tax band
£0 – £125,000	0%
£125,001 – £250,000	2%
£250,001 – £925,000	5%
£925,001 – £1,500,000	10%
£1,500,001 and above	12%

Comment

Purchasers of residential property valued at £937,500 or less will pay the same or in most cases less tax than they would have paid under the old rules.

Annual Tax on Enveloped Dwellings (ATED)

The ATED is payable by those purchasing and holding their homes through corporate envelopes, such as companies. The government introduced a package of measures in 2012 and 2013 to tackle this tax avoidance. One of the measures was the ATED.

The government has now announced an increase in the rates of ATED by 50% above inflation. From 1 April 2015, the charge on residential properties owned through a company and worth:

more than £2 million but less than £5 million will be £23,350
more than £5 million but less than £10 million will be £54,450
more than £10 million but less than £20 million will be £109,050
more than £20 million will be £218,200.

Other Matters

Devolved tax powers to Scottish Parliament

Following the referendum on Scottish independence, the main political parties in Scotland have agreed on new devolved powers. The UK government will publish draft clauses in January 2015 for the implementation of these powers.

For income tax:

the Scottish Parliament will have the power to set income tax rates and the thresholds at which these are paid for the non-savings and non-dividend income of Scottish taxpayers
all other aspects of income tax will remain reserved to the UK Parliament, including the imposition of the annual charge to income tax, the personal allowance, the taxation of savings and dividend income, the ability to introduce and amend tax reliefs and the definition of income
HMRC will continue to collect and administer income tax across the UK.

For other taxes:

VAT – Receipts raised in Scotland by the first 10 percentage points of the standard rate of VAT will be assigned to the Scottish government’s budget. All other aspects of VAT will remain reserved to the UK Parliament.
Air passenger duty – The power to charge tax on air passengers leaving Scottish airports will be devolved to the Scottish Parliament, with freedom to make arrangements with regard to the design and collection of any replacement tax.
Aggregates levy – The power to charge tax on the commercial exploitation of aggregate in Scotland will be devolved to the Scottish Parliament, once the current European legal challenges are resolved.

Devolution to Northern Ireland

The government recognises the strongly held arguments for devolving corporation tax rate-setting powers to Northern Ireland. HMRC and HM Treasury have concluded that this proposal could be implemented provided that the Northern Ireland Executive is able to manage the financial implications.

The parties in the Northern Ireland Executive are currently taking part in talks aimed at resolving a number of issues. The government will introduce legislation in this Parliament subject to satisfactory progress on these issues in the cross-party talks.

Devolution of non-domestic rates to Wales

Agreement has been reached with the Welsh government on full devolution of non-domestic (business) rates policy. The fully devolved regime will be operational by April 2015.

Offshore tax evasion

In 2014, the government announced its intention to introduce a new strict liability criminal offence of failing to declare taxable offshore income and gains. This means that HMRC would need only demonstrate that a person failed to correctly declare the income or gains, and not that they did so with the intention of defrauding the Exchequer. This will complement existing offences, such as the common law offence of cheating the public revenue, with less serious sanctions than existing criminal offences.

The government is consulting on the design of the new offence.

The government considers the majority of cases are still likely to be investigated and settled through civil means. Another consultation is seeking views on strengthening the existing civil penalty regime on offshore evasion.

The offshore penalties regime has applied to liabilities arising from 6 April 2011. The level of penalty is based on the type of behaviour that leads to the understatement of tax, and is linked to the tax transparency of the territory in which the income or gain arises. The underlying premise is that where it is harder for HMRC to get information from another territory, the more difficult it is to detect and remedy non-compliance and therefore the penalties for failing to declare income and gains arising in that territory will be higher.

Direct Recovery of Debts (DRD)

At Budget 2014, the Chancellor announced HMRC would be given the power to recover tax and tax credit debts directly from the bank and building society accounts (including NISAs) of debtors. A consultation on DRD set out the process and safeguards but many commentators considered the safeguards were not robust enough. In response to concerns about the risk of DRD being used in error and the potential impact on vulnerable individuals, the government will introduce further safeguards.

It is now proposed the main features of the DRD process will be:

only debts of £1,000 or more will be eligible for recovery through DRD
HMRC will always leave £5,000 across a debtor’s accounts, as a minimum, once the debt has been held
guaranteeing every debtor will receive a face-to-face visit from HMRC agents, before their debts are considered for recovery through DRD
extending the window to 30 calendar days, from the start of the DRD being initiated to the earliest point at which funds could be transferred to HMRC
an option for debtors to appeal against HMRC’s decision to a County Court on specified grounds, including hardship and third party right.

Scotland will be removed from the scope of DRD as HMRC already has summary warrant powers in Scotland to recover debts in a similar, though not identical, manner to DRD.

In order to allow for an extended period of scrutiny, the government intends to legislate in 2015, during the next Parliament.

Comment

HMRC state that the vast majority of people pay their taxes in full and on time and DRD will only affect individuals and businesses who are making an active decision not to pay. HMRC also state they will use the power in a very small minority of cases.Last year, HMRC collected £505.8 billion from about 35 million taxpayers. About 90% was paid on time but around £50 billion was not, and became a debt. They made around 16 million contacts with debtors by letter, phone, text message or other means to collect the debt. This included making more than 900,000 visits to follow up on around 400,000 debt cases. HMRC estimate they will use DRD 17,000 times a year.

Air Passenger Duty (APD)

The Chancellor announced an exemption from reduced rate APD from 1 May 2015 for children under 12 and from 1 March 2016 for children under 16. The government has reviewed how to improve tax transparency in ticket prices and will consult on whether the APD needs to be displayed on airline tickets.

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