The 2016 Budget

The latest Conservative Budget took place on 16th March 2016 and was in line with previous Budgets of this and the Coalition Government, focussing on the following policies:

  • Improve the ability for individuals to own their homes by making it less appealing to invest in rental properties.
  • Encourage investments into small and medium sized businesses.
  • Crack down on anti-avoidance.
  • Improve the ability to successfully carry on in business in the UK.
  • Simplify tax legislation.

The following changes are those that we consider are most relevant to our clients.

Reduction in the rate of Capital Gains Tax

From 6 April 2016, the rate of CGT will reduce from 18% to 10% to the extent that the gain falls within the basic rate band and from 28% to 20% thereafter. This will apply to all disposals except for gains arising on residential properties that don’t qualify for principal private residence relief.

The clear policy is to encourage investment into companies rather than properties.

Entrepreneurs’ Relief for investors

For new issues of shares in unquoted trading companies, entrepreneurs’ relief will apply on a disposal, thereby reducing the CGT rate on a sale to 10%, provided that the shares have been owned continually for at least three years.

The policy here is to encourage individuals to invest in small businesses. Note, in such circumstances the Enterprise Investment Scheme (EIS) could apply instead, which is preferable.  This change allows for entrepreneurs to benefit even where EIS is not applicable.

Within the Budget, there are various other improvements to the availability of entrepreneurs’ relief.

Loans to participators

Where an individual takes a loan from a company that they are the effective owner of, if it is not repaid within 9 months of the end of the accounting period, corporation tax is payable. The aim here is to treat the loan as a dividend until it is repaid or written off, otherwise owners of companies could extract amounts from their companies in the guise of a loan without ever intending to repay it, thereby avoiding tax.  From 6 April 2016, the rate of corporation tax here will increase from 25% to 32.5% to reflect the highest rate at which dividends are paid.  This is to ensure that it remains unappealing when compared to taking dividends or a salary.

Corporation tax rates, losses and payments

From 1 April 2020, the rate of corporation tax will reduce to 17%. It was originally intended that this would reduce to 18%; the Government have decided to reduce the rate even further.  Note, from 2017, the main rate of corporation tax will reduce to 19%, as previously legislated.

The policy is to continue to increase the appeal of running a business in the UK.

From 1 April 2017, any loss made and carried forward, will be able to be set against other income streams rather than profits of the same trade. This does not apply to losses that arose prior to 1 April 2017.

Quarterly corporation tax payments will now come in from April 2019 rather than April 2017, as previously reported.

Income tax rates and allowances

For 2017/18, the personal allowance will be £11,500 and the basic rate band £33,500, so the higher rate of tax will not apply until an individual’s income is over £45,000. The aim is to increase the personal allowance to £12,500 and for the higher rate to not become payable until an individual receives over £50,000 by the end of this Parliament.

From April 2017, a new £1,000 allowance will be introduced for property and trading income so there is no need to declare the income and therefore, no need to prepare a self-assessment tax return if this income stream was the reason to prepare a return. If this income is just over £1,000, individuals can just deduct the £1,000 allowance rather than calculate the actual expenses for the year.

ISAs

The normal annual ISA allowance will increase to £20,000 in April 2017, but on top of this adults under 40 will be able to put another £4,000 a year into a new Lifetime ISA. The Government will then give savers a 25% bonus for every pound put in: an extra £1,000 a year for those paying in the maximum.

Contributors can take the money out from the age of 50 to purchase a first home (that has a value of up to £450,000), or from the age of 60 for use in retirement.

With no pension policies or changes introduced in this Budget, is this going to be the route that this Government are going to go when it comes to planning our retirement? And how will this effect a workers decision to opt out of an auto-enrolment work pension?

Stamp Duty Land Tax

For purchases of additional residences, this new SDLT policy was announced last year and is now to be enacted: for completions made from 1 April 2016 onwards, if by close of play on the date of a purchase of a residential property the purchaser is an individual that owns two properties and one is not intended to replace the other, or is a company or other non-natural person, the rate of SDLT will be an additional 3% to that which would otherwise apply. If the new residence is to replace an old residence, the latter must be sold within 36 months for the 3% additional SDLT to become repayable.

The policy is clearly aimed to dissuade people from investing in rental properties.

There was also a change for SDLT on business property, i.e. non-residential freehold and leasehold property. From 17 March 2016, SDLT will be payable at the rate applicable to each portion of the consideration as it falls into each band, rather than applying one rate to the whole purchase price. The bands and rates have also been amended.

Although this sounds like a cut in tax, the amendments of the bands means that the Government are actually hoping it will increase revenues!

National Insurance Contributions

From April 2018 NIC Class 2, a self-employment payment, will be abolished. NIC Class 4 will therefore be reformed so as to entitle payers to a State Pension. We shall await the announcement on how!

The Government will begin charging employer’s NIC Class 1 on termination payments above £30,000 from April 2018.

VAT

The Government cannot change much with regard to VAT due to European legislation but they have raised the thresholds and provided HMRC with powers to go after VAT on online sales.

Tax Avoidance

This Budget continues to clamp down on tax avoidance with policies covering:

  • a cap on relief for interest on loans – aimed at large companies owned offshore;
  • withholding tax on intangibles (royalties);
  • extension of the hybrid mismatch rules for permanent establishments in the UK;
  • offshore structures being used in property development in the UK.

If you would like any further details on any of these, please email us.

Other small items of note

The small business rate relief has been permanently increased and the thresholds increased, taking lots of business out of having to pay rates.

The Employer Supported Childcare Scheme will remain open until 1 April 2018, when the new tax-free childcare scheme that will come into play in April 2017, will take over.

The Government announced they will be looking into the salary sacrifice policy.

First Year Capital Allowances of 100% have been extended for another three years to 2021 on low emission cars.

Conclusion

The changes in the latest Budget are in line with recent changes and policies. As far as tax planning is concerned, it continues to be the same as it has since 2010: if your activities are adding to the economy, then there are plenty of tax planning opportunities available, unless you are investing into property; if you are looking into avoiding tax in any way that is not intended by the Government, it will be a costly and ultimately ineffective exercise.

At Gander Tax Services, we will continue to assist you in mitigating your tax without giving you further problems down the line.