The Chancellor, Rishi Sunak, delivered both his own and the Government’s first Budget this week. It was a “coronavirus” budget with the Government announcing significant measures to address its fiscal impact.
The key announcement for private clients related to Entrepreneurs’ Relief (ER). The lifetime limit for an ER claim is reduced from £10 million to £1 million for disposals on or after 11 March 2020. Although it is good news that ER has not been abolished entirely, the reduction of the lifetime limit reduces its value to business owners by 90% and takes it back to the same amount available when first introduced in 2008.
Otherwise, it was a relatively quiet Budget for private clients but of particular note are the following announcements:
- The Government reiterated its commitment to introduce a 2% stamp duty land tax (SDLT) surcharge for non–UK residents purchasing residential property in England and Northern Ireland from 1 April 2021 but did not publish any draft legislation.
- There was also relief for some pension savers in the form of an increase to the level at which the Annual Allowance taper will apply. The taper will now apply where an individual’s annual income exceeds £200,000 and their adjusted income exceeds £240,000. However, the amount that a high earner who exceeds these limits can put into a pension has been reduced from £10,000 to £4,000.
Further details on some of these key proposals are discussed below.
Changes to Entrepreneurs’ Relief (ER)
The Government has announced a substantial restriction on the availability of ER. If the conditions (which themselves remain unchanged) are met, ER reduces the rate of capital gains tax (CGT) to 10% when certain business assets are sold. Without this relief, business owners face a 20% CGT liability on a business disposal if they are higher rate taxpayers. ER was, until 10 March 2020, subject to a lifetime limit on claims of £10 million.
The Budget has now confirmed that this lifetime allowance is reduced from £10 million to £1 million for qualifying disposals on or after 11 March 2020. As a result, its usefulness for many business owners will be substantially diminished. In addition, as many entrepreneurs will have already used their £1 million limit, they will be immediately affected by these changes.
The Budget also announced that this new £1 million allowance will apply to certain arrangements and elections that took place prior to 11 March 2020. These are:
- forestalling arrangements involving uncompleted contracts
- certain company reconstructions and elections made in connection with share exchanges.
The new rules are intended to counter certain arrangements that were put in place before 11 March 2020 and which would otherwise mean the taxpayer benefits from the pre-Budget day lifetime limit of £10 million.
Such arrangements might include those where a taxpayer has entered into a contract to sell business assets to a connected entity but that contract has not been completed. Ordinarily, the tax rules (including rates and allowances) at the date of the exchange of contracts would apply to that contract.
The new rules will mean that the disposal date is the date of exchange of contracts but the new, lower lifetime limit may apply. That is unless the parties are connected and they can demonstrate the contract was entered into for wholly commercial purposes and not to obtain a tax advantage.
As well as the usual claim for ER, an additional claim must be made where it is believed an arrangement should be subject to the pre-11 March 2020 lifetime limits and is not caught by the forestalling arrangements. This will likely mean that the commercial purpose of the arrangements will need to be proven to HMRC’s satisfaction.
Company reconstructions and elections
If shares are disposed of in exchange for shares in another company, it is possible to elect for ER to apply to the disposal of the shares even if ordinarily the exchange would not be a disposal for CGT purposes.
It has been announced that if shares have been exchanged for those in another company on or after 6 April 2019 and before 11 March 2020, the new lifetime limit of £1 million will apply in certain circumstances. Such circumstances include, for example, where both companies are owned or controlled by substantially the same persons.
Stamp duty land tax: non-resident buyers
The Government has reiterated its commitment to introduce a new 2% SDLT surcharge for non-UK residents who purchase residential property in England and Northern Ireland from 1 April 2021. The idea of this surcharge was first raised in the 2018 Budget and a consultation document “Stamp Duty Land Tax: non-UK resident surcharge” was subsequently published in February 2019. The original proposal was for a 1%, rather than a 2%, surcharge.
At the time of writing, no draft legislation or further information has been published. It is unclear, for example, whether the surcharge will apply in addition to the supplemental 3% SDLT rate already charged on purchases of additional residential properties such as buy-to-let properties, second homes and holiday homes – but this does appear likely. A year’s notice of its introduction is likely to be deliberate to encourage buyers to purchase properties over the coming year.
Additional taxation issues of interest
Three other issues of interest are:
- CGT annual exemption: this will increase from £12,000 to £12,300 for individuals and personal representatives, and from £6,000 to £6,150 for trustees of settlements from 6 April 2020.
- Policy papers: the Government published a policy paper on “Changes to Corporation Tax for non-UK resident companies with UK property income”. The paper details how a smooth transition of the taxation of UK property profits of non-UK resident companies from income tax to corporation tax from 6 April 2020 should take place.
- The threshold at which employees and self-employed people will start paying national insurance contributions will increase by 10% to £9,500 from April 2020.
The Finance Bill 2020 is expected to be published on Thursday 19 March.
Interestingly, the Budget did not contain any proposals to reform inheritance tax or substantive measures on tax transparency. However, these issues remain subject to discussion and review both by the Government and other legislative bodies.
This is the first Budget since the Office of Tax Simplification published its July 2019 proposals for inheritance tax reform. The All-Party Parliamentary Group on Inheritance and Intergenerational Fairness also published ideas for inheritance tax reform in January 2020. The latter’s report was not authorised or supported by the Government but it did contain radical plans for IHT reform that may be picked up in the future.