Some of us were hoping for a more restful Budget day than in recent times due to the perceived need for George Osborne to "play it safe" ahead of the European Referendum. No such luck. Our Chancellor could not resist indulging in his favourite habit of extracting rabbits from hats. Mr Osborne warned of storm clouds gathering ahead due to slower than expected economic growth but was sure his team of builders could keep us all on the right tracks by measures designed to put "rocket boosters on the backs of enterprise" and other populist measures (including of course the mandatory freezing of beer duty).
There are a number of significant tax changes affecting property and business taxes. Principally as follows:
Taxation of UK property owners
Fundamental reform of SDLT treatment of non-residential property: SDLT on non-residential property (which will include mixed use property for these purposes) will from tomorrow be calculated using the "measuring jug" method rather than the "slab" system. This is similar to the reforms impacting SDLT on residential property in December 2014. This means that only part of the purchase price for a land transaction that falls within a given band will be taxed at that rate. Buyers of higher value commercial properties (those worth more than £1.05m) will pay more tax under the new system and lower value properties (those worth less than £1.05m) will pay less. The new rates are as follows:
Click here to view the table.
In addition, for new leasehold transactions on and after 17 March 2016 a new 2% rate for rent paid under a non-residential lease will be introduced where the Net Present Value of the rent is above £5 million. Any purchaser of land under a contract which exchanged before midnight on 16 March 2016 will be able to choose under which system of SDLT they will calculate the tax once the contract is completed.
Whilst the rise in SDLT is not as significant as the previous changes to residential property rates, it is unwelcome and we should expect to witness a spate of accelerated property exchanges for higher value property tonight.
New SDLT rate on purchase of additional properties: This policy was previously announced at the Autumn Statement in November 2015. The exact form of these rules has now been published. To recap briefly on the overall principles: higher SDLT rates will be charged on purchases of additional residential properties, such as buy to let properties and second homes, with effect from 1 April 2016. The higher rates will be 3 percentage points above the current SDLT rates. Having now considered the responses to its original consultation document the government has published legislation which incorporates a few changes to the form of the rules as originally contemplated. Most notably:
- No exemption at all for significant investors to be available, corporate or otherwise; and
- The period during which a taxpayer can buy a new main residence before selling the old and reclaim the additional SDLT charged on the new purchase has been extended to 36 months (from 18) from the purchase of the new residence. There is also a “look back” period of 36 months so if the previous main residence was sold in that period before the acquisition of the new main residence then the additional rate will not apply.
Small Business Rate Relief: From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates. Businesses with a value of between £12,000 and £15,000 will receive tapered relief.
Further Corporation Tax cut: It was already announced that the Corporation Tax rate would be cut to 18% for the finance year beginning 1 April 2020. This figure will now be replaced with 17% from 1 April 2020.
Anti Avoidance rules targeting large companies:
- Introduction of rules to prevent multinational companies avoiding tax in any of the countries they do business via hybrid mismatches. This is to come into effect from 1 January 2017. Further details will be published after a period of consultation.
- Announcement of changes to the rules on outbound royalty payments. This is in order to tackle tax avoidance by multi nationals who use intragroup royalty payments to shift profits from the UK. This measure will include a wider definition of royalty payment, a new domestic anti treaty abuse provision and an extension of withholding tax to all payments that are attributable to a UK permanent establishment, even if the payment of the royalty is not made from the UK.
- Measures introduced to ensure that profits from trading in UK land are always subject to UK tax by taxing those amounts whether or not the persons to whom they arise are UK resident. Legislation for this will be introduced in legislation after a period of consultation. This measure will have a significant impact on many offshore developers of land who had previously been relying on arguments that they did not have a taxable permanent establishment in the UK.
Tax deductibility of corporate interest expenses: The new rules will limit the tax relief that large multinational enterprises can claim for their interest expenses in line with the OECD's recommendations with effect from 1 April 2017. Broadly speaking this will take the form of a Fixed Ratio Rule whereby corporation tax deductions are limited to 30% of a group's UK earnings.
Corporation tax: reform of loss relief – The government will introduce two reforms from April 2017:
- First, the current streaming rules will be made more flexible so that 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 Gains Tax ("CGT") cut: Reduction of CGT rates from 28% for higher rate tax payers and trustees to 20% and from 18% for basic rate taxpayers down to 10%. The new rates will apply to gains accruing on or after 6 April 2016. Please note that the taxation of residential property and carried interest will remain at the current levels.
Extension of Entrepreneur's Relief: Entrepreneur's relief (at 10%) will be extended to long term investors in unlisted companies. This will apply to newly issued shares purchased on or after 17 March 2016 provided they are held for a minimum of three years and subject to a separate £10m lifetime limit on gains.
National Insurance Contributions: Class 2 NICs for self-employed people will be abolished from April 2018.
Income Tax bands: The individual Personal Allowance will increase to £11,500, the basic rate threshold to £33,500 and the higher rate threshold will to £45,000, all from April 2017.