Summary: Today’s Budget, billed as one for the “next generation”, focussed on encouraging small businesses, and those that invest in them. Broadly good news for individuals – with the substantial reduction in CGT to 20% (mostly) - but we have ongoing anti-avoidance targeted mainly at big business, and another swipe at residential property. Still no news on the post April 2017 rules for offshore trusts – expect them late Autumn.
Reduction in rate of capital gains tax (CGT)
Consider delaying sales, or distributions to beneficiaries of offshore trusts where a charge to CGT will arise.
From 6 April 2016, CGT will be charged at the following rates on most gains:
- 10% for basic rate tax payers
- 20% for higher rate taxpayers
- 20% for trustees and personal representatives.
However, gains on:
- residential property; and
- carried interest
will still be subject to CGT at 28% (or 18% for basic rate taxpayers).
This means that the difference between the highest rate of income tax and CGT increases from 17% to 25%. This will no doubt encourage investment for capital returns, as against income, so it is unsurprising that the Government continues to introduce a range of anti-avoidance measures to counter this.
Distributions from offshore trusts
Trustees of offshore trusts should consider whether (in all the circumstances) to delay distributions to UK resident beneficiaries. This is because if a distribution is made post 5 April 2016, the rate of CGT (if it is payable by the beneficiary) could drop from 28% to 20% (for a higher rate taxpayer).
Entrepreneurs’ relief will be extended to gains realised on unlisted shares in a trading company (or the holding company of a trading group) which are issued on or after 17 March 2016 and have been held for at least three years from 6 April 2016. Anti-avoidance rules will ensure that only shares subscribed for for genuine commercial reasons will attract entrepreneurs’ relief.
Currently, gains realised on shares in a trading company (or the holding company of a trading group) only qualify for entrepreneurs’ relief if the person making the disposal, owns at least 5% of the ordinary share capital of the company and has been an officer or employee of the company (or a company in the same group) for at least one-year before the disposal.
Entrepreneurs’ relief on goodwill when a business is transferred to a company has also be reintroduced.
Entrepreneurs’ relief reduces the amount of CGT that a person pays when he sells (or gives away) certain business assets. The effect of the relief is that the first £10m of gains realised on the sale (or gift) is taxed at 10%. Gains in excess of the £10m limit are taxed at the person’s normal rate of CGT (falling to 10% or 20% on most gains from 6 April 2017). The relief can also apply to sales by trustees. The £10m entrepreneurs’ relief limit is a lifetime cap so the relief can apply to more than one disposal.
The 10% rate of CGT on gains eligible for entrepreneurs’ relief is significantly lower than the 28% rate payable on gains on residential property investments. Extending the range of assets that qualify for entrepreneurs’ relief is a clear indication of the Government’s wish to encourage investment in trading companies over the long term. On the other hand, dropping the main rate of CGT to 20% means that the value of entrepreneurs’ relief drops from £1.8m to £1m.
Significant changes to the taxation of non-doms: April 2017 re-basing for non-UK assets
We still do not have substantive details of the significant changes to the taxation of UK resident non-UK domiciled individuals (‘non-doms’), which will take effect from 6 April 2017. However, the Government has confirmed that non-doms who become deemed-domiciled in April 2017, under the new rules, can treat the cost base of their non-UK assets as being the market value of that asset on 6 April 2017. It is likely that this will provide a practical benefit, rather than a tax one. They have also said that transitional provisions will be introduced in relation to offshore funds to provide certainty on how amounts remitted to the UK will be taxed.
Details of what we know so far about the proposed changes can be found in our article Consultation paper on the non-dom changes published in September 2015.
Stamp duty land tax (SDLT)
From April 2016, higher rates of SDLT will be charged on purchases of additional residential properties, such as buy to let properties and second homes. The higher rates will be 3% above the current SDLT rates.
The higher rates will apply to all purchasers: there will be no exemption for large or institutional investors. The government had previously indicated that the higher SDLT rates would not apply to corporates or funds making significant investments in residential property, but has decided against any exemption following consultation.
The higher rates of SDLT will apply where the purchaser (or any of the purchasers where there are joint purchasers) owns another residential property anywhere in the world. So, if a parent, who already owns a residential property, buys a property for their child, or buys a property jointly with their child, the higher rates of SDLT will apply. However, if the parent merely acts as a guarantor on the mortgage the higher rates will not apply.
Replacing a main residence - where an individual is replacing a main residence (that they sold within the previous 36 months) the higher rates of SDLT will not apply, even if they already own another property. It will not be possible to elect which of your residences is your main residence for these purposes; it will be a question of fact.
Married couples and civil partners - will be treated as a one unit, meaning that if one of them already owns a residential property (anywhere in the world) the higher rates of SDLT will apply if the other buys a residential property.
Privacy: residential property owned by foreign companies
The Government announced, on 4 March 2016, that it is considering requiring foreign companies to provide information on their beneficial ownership before they can buy land or property in England or Wales. The requirement is also likely to apply to foreign companies already holding land or property. As a “first step”, the UK Land Registry is publishing the legal owners and addresses of all properties owned in the UK by foreign companies.
No further details have yet been provided on the proposed extension of UK inheritance tax (IHT) to all UK residential property held by non-doms whether held directly or indirectly (e.g. via a non-UK company). The consultation paper on this proposal promised in late 2015 has still not been published.
Currently, UK assets held by a non-dom (or a trust set up by a non-dom) through a non-UK company are not subject to UK inheritance tax. From April 2017, all UK residential property held by a non-dom, whether directly or indirectly, including UK residential property held by offshore companies, offshore trust and company structures and non-UK partnerships will be subject to UK inheritance tax.
Commercial (non-residential) property
Currently, the maximum rate of SDLT on commercial property is 4% - this rate applies where the purchase price is over £500,000.
For purchases on or after 17 March 2016, new rates of SDLT will apply. The new rates for freehold purchases and lease premiums are:
Click here to view table.
A new 2% rate of SDLT will also apply to new leasehold transactions where the net present value of the rent is more than £5m. The net present value (NPV) is based on the total rent over the life of the lease. No SDLT is payable if the NPV is less than £150,000; 1% SDLT is payable if the NPV is between £150,000 and £5m, and 2% at £5m+.
Disclosure facilities: no news on the terms of the ‘last-chance’ facility
Details of the ‘last-chance’ disclosure facility, which is expected to run from April 2016 to September 2018, have still not been published.
The Liechtenstein Disclosure Facility and the UK’s disclosure facilities with Jersey, Guernsey and the Isle of Man closed on 31 December 2015, but few details of the new disclosure facility have been announced. The government announced in March 2015 that penalties of at least 30% on top of the tax owed and interest would be payable under the facility and that there would be no immunity from criminal prosecution, but no further details have emerged since then.
- new restrictions on set-off of losses and interest for businesses
- corporation tax down to 17% from April 2020
- new measures to make sure that anyone developing property in the UK will be subject to UK tax even if the developer is based, and carries on business, offshore
- new £100,000 lifetime limit on CGT-free gains on employee shares
- new £20,000 ISA, and new lifetime ISA for under 40s
- new sugar-tax on soft drinks industry