Philip Hammond has resisted any urge he may have had in today's UK Budget to tinker with the taxation system too greatly. Instead, he has presented a Budget which we are told is designed to boost productivity by building an economy fit for the future and which backs the innovators who deliver growth, helps businesses to create better, higher paid jobs and builds the homes that the country needs.
Brexit (or the UK forging a new relationship with the EU) was clearly a backdrop to much, if not all, of what was announced, with minimal references to either it or the EU. The one obvious nod to the new relationship to be forged was that the Chancellor confirmed that there would be no reintroduction of Stamp Duty or Stamp Duty Reserve Tax on share transfers into clearance services in the EU.
The Government states that it remains committed to a low tax economy whilst at the same time, and no surprises here given the recent Paradise Papers leak, remaining committed to ensuring that everyone pays their fair share, especially those who seek to evade or avoid tax using offshore structures. Reassuringly, we are further told that the “government's aim is to provide greater tax certainty for households and businesses by consulting with taxpayers further in advance of changes and changing taxes less frequently”. If this is the case, and we have certainly heard words to this effect before, then all will be relieved as the pace of change in the taxation environment over the last 10 years or so has been something to behold.
Property Tax – SDLT and ATED
Millennials are a group targeted in this Budget. The Chancellor looked to address concerns that the Government was not doing enough to address the issues they face, particularly in terms of the “broken housing market” and stated the Government's determination to “restore the dream of home ownership for a new generation”.
Perhaps most eye-catching, and certainly the measure which will be felt most keenly by millennials, is the announcement that with immediate effect there will be no SDLT for first time buyers on properties up to £300,000 or, in more expensive regions, the first £300,000 of the purchase price (where the property is bought for up to £500,000) will be free of SDLT. The balance will be taxed at 5%, making for a saving of £5,000. This attempt to boost the accessibility of the housing market, along with the focus in the Budget on innovation and supporting and encouraging start-ups and other innovative firms, will certainly play well with the next generations coming through.
A few other minor changes to property taxation were also included. There are some minor amendments to the 3% SDLT surcharge so as to tidy up the rules, whilst the ATED annual charges will rise by 3% from 1 April 2018, so that the lowest ATED charge is £3,600 (up from £3,500) and the highest is £226,950 (up from £220,350).
From April 2020 income that non-UK resident companies receive from UK property will be chargeable to corporation tax rather than income tax, and gains realised on the disposal of UK property will be subject to corporation tax rather than CGT. Finally, the Government will defer the requirement that all CGT on the sale of a property is paid within 30 days until April 2020.
Extension of Non-Resident CGT
Also announced was a consultation designed to ensure that from April 2019 all future gains on UK land and buildings are subject to tax (either corporation tax or capital gains tax) regardless of the owner's tax residence status. This is effectively an extension of the existing residential property rules for non-residents to commercial property and an extension of the existing rules to cover all interests in residential property and much indirectly held UK land and buildings.
The proposed implementation of the new rules will be from 1 April 2019 for corporates and 5 April 2019 for individuals and trusts. There will be a corresponding rebasing, so that gains will only be calculated on the values from those respective dates. For directly, but not indirectly, held property the taxpayer will have the alternative of electing the actual acquisition cost as their base cost.
UK collective investments schemes and REITS are to get special consideration as part of the consultation but the proposal is that the entities themselves will be exempt on direct disposal (as is the case already) but that the disposal of interests in them will be caught by the rules on indirect disposals.
Personal Tax, Trusts and Pensions
From a personal tax perspective, the changes introduced by this Budget are minimal. The personal allowance for income tax is increased to £11,850 and the higher rate threshold is increased to £46,350, while the annual exemption for capital gains tax increases to £11,700 for individuals and personal representatives and £5,850 for most trustees.
Trusts may well be under the microscope again, however, as we are promised a consultation paper in 2018 on how to make the taxation of trusts simpler, fairer and more transparent. This will surely be awaited with bated breath!
Fortunately, and somewhat to our surprise, the Chancellor resisted the temptation to make any changes to the taxation of pensions, providing a welcome opportunity for individuals and their advisers to enjoy a period of stability. The Budget documents, however, announce a change from April 2019 to the tax relief for “employer premiums paid to certain overseas pension schemes” to cover situations where an employee nominates an individual or registered charity to be his beneficiary. The changes that this statement will entail have yet to be revealed. In the meantime, we can look forward to the CPI-linked increase to the Lifetime Allowance, which the Chancellor announced today will be set at £1,030,000 from 6 April 2018.
There are some changes to corporation tax introduced, though not the long heralded reduction in the corporation tax rate to 17% by 2020. One revenue raising policy announced was that the corporation tax indexation allowance will be frozen from January 2018, bringing it into line with CGT. However, the centrepiece of the Budget from a corporation tax perspective was the publication of a position paper setting out the challenges of the digital economy and its interaction with the international corporate tax framework, together with the proposed approach for dealing with these challenges. Amazon, Facebook and the like are all in the Chancellor's sights as there will be a charge to income tax on royalty payments made by digital firms to low-tax jurisdictions to the extent that such royalty payments relate to UK sales.
Venture Capital Schemes
Further to the so-called “Patient Capital Review”, from 6 April 2018 there will be a shift in focus for Venture Capital Schemes, meaning that the tax incentives associated with such schemes will be limited to investments in companies where there is a real risk to the capital being invested. Investments which are effectively made for “capital preservation” purposes will be excluded from the potential benefits.
In addition, there will be an increase in the limits on investments made through EIS and VCT schemes where investments are made in “knowledge-intensive” companies. In particular, the limit of £1million per year will rise to £2million, provided that the additional amount over £1million is invested in such companies, and such companies will be able to receive up to £10million of investment from EIS and VCT schemes.
The changes are intended to attract more investment in smaller, innovative companies carrying out research and development and other activities to develop intellectual property, by encouraging individuals to invest directly or indirectly in small, high growth-potential trading companies that would otherwise struggle to access the funding they need to grow and develop.
Tackling tax-avoidance – evasion and non-compliance
In an interesting publication today HM Treasury detailed the many and varied anti-avoidance measures introduced since June 2010 and the Summer 2016 Budget, which have resulted in an additional £160bn of tax being collected.
While this makes dense reading, it is fair to say that a restricted and apparently targeted new series of measures were introduced today (hopefully not adding too much extra weight to the tax statutes).
Probably the headline indirect anti-avoidance measure is the provision of an additional £155m resource to HMRC to help it focus on tackling marketed tax avoidance and enablers and facilitators of tax fraud. There is little further detail given on this, but it appears to include staff for additional teams and is intended to focus on non-compliance by wealthy individuals, public bodies and midsized businesses. Overall it is estimated this will raise an additional £2.3bn of tax revenues. Other areas of focus will include tackling marketed tax avoidance.
As part of the general anti-avoidance measures announced, assessment limits for non-deliberate offshore non-compliance will be extended so that HMRC can assess back 12 years instead of the present 4-6 year limits. The 20 year time limit for deliberate offshore non-compliance continues to apply. The measure is to be introduced following a consultation next year.
We can also expect a consultation response on the requirement to notify HMRC of offshore structures, the notification to be made by those who design the structures where the structures could be misused to evade taxes.
These measures can be seen to go hand in hand with the requirement to correct, which gives taxpayers with outstanding offshore tax non-compliance arising before 6 April 2017 a window until 30 September 2018 to correct and disclose, or face very harsh penalties.
Finally, much ink has been spilt over the recent changes to the non-dom rules over the past few years and in many ways it would not be a Budget without at least some reference to them. The legislation in respect of most of the elements of these changes was brought into force on 16 November 2017. However, there were still a few important elements which were notably absent from the legislation as enacted. It has been confirmed in the Budget that these missing elements will be enacted to take effect from 6 April 2018 and so there is still to review existing structures.
These points relate to new anti-avoidance rules regarding the taxation of income and gains accruing to offshore trusts. The new rules will ensure that payments from an offshore trust intended for a UK resident individual do not escape tax when they are made via an overseas beneficiary or a remittance basis user.
The rules will also catch benefits provided to a “close family member” of a UK resident settlor, such that those benefits will be taxable as if they were received by the settlor directly.
Importantly, the so-called “washing out” of gains on payments to non-UK resident beneficiaries will also no longer be possible. After 6 April 2018, capital payments to a non-resident will not be matched against trust gains, so that those gains will remain available to be matched against future payments.
Hopefully this will now complete the recent raft of changes impacting non-UK domiciliaries and their structures, allowing the Government to sit back and enjoy the benefits of raiding this potential cash-cow and the envisaged public support it garnered – or, as some have feared, potentially to watch the exodus of wealth from the UK and UK businesses…
With all the political uncertainty in the UK at the moment, the Chancellor has provided a Budget designed to promote as much stability as possible. While it may lack the excitement of recent years, many, if not all, would consider this to be a blessing.
For more on the UK budget and to see previous insight on the subject please see here.