The focus of the UK Budget was, understandably, on the potentially significant impact of the coronavirus on the economy, individuals and businesses, particular small and medium-sized businesses. It was acknowledged that the disruption caused by coronavirus will be temporary – but the Budget was short on any long-term measures impacting private clients. Those that are worth noting – in particular, the immediate significant restriction to entrepreneurs’ relief and an increase in the stamp duty land tax payable by non-resident purchases of UK residential property - are detailed below.
Increased rate of stamp duty land tax (SDLT) for non-residents
As expected, the Chancellor has confirmed an increase in the rate of SDLT for non-resident purchasers of UK residential property. From April 2021, non-resident individuals, companies and trustees will pay a 2% SDLT surcharge on purchases of residential property, taking the top rate of SDLT for properties valued at more than £1.5m to 17%.
Although no further details were provided with the Budget documents, the government consulted on the introduction of a SDLT surcharge for non-residents back in February 2019. On the basis of that consultation the surcharge will apply to:
- non-resident individuals – it was suggested in the consultation that an individual will be treated as non-resident for these purposes if he spent fewer than 183 midnights in the UK in the 12 months ending with the date of the transaction. If the individual spends 183 midnights or more in the UK in the 12 months following the effective date of the transaction, he will be eligible for a refund of the surcharge.
- non-resident companies – non-resident companies subject to the 15% flat rate of SDLT (e.g. non-resident companies acquiring residential property for more than £500,000) will also be subject to the 2% surcharge bringing the maximum rate of SDLT payable by such companies to 17%. The existing reliefs from the 15% flat rate of SDLT will remain unchanged.
- a UK resident company that, at the point it acquires the residential property, is controlled by five or fewer persons where one or more is non-resident.
- partnerships – if any one of the partners is non-resident.
Joint purchasers (including married couples/civil partners) – the 2% surcharge will apply if any one of the joint purchasers is non-resident. Where a property is purchased solely by a UK resident individual, the surcharge will not apply just because their spouse/civil partner is non-resident. Where a property is jointly purchased, to be eligible for a refund, all purchasers must be individuals who are resident in the UK for 183 midnights or more in the 12 months following the effective date of the transaction.
Discretionary trusts – the 2% surcharge will apply if the trust is non-resident.
Life interest/interest in possession trusts – the 2% surcharge will apply if the life tenant is non-resident; the residence status of the trust will be irrelevant.
Further details of the scope of the surcharge will be available shortly when the government publishes a summary of responses to the 2019 consultation.
Despite calls from many quarters for entrepreneurs’ relief (ER) to be completely abolished, the government has decided instead to reduce the lifetime limit from £10m to £1m (back to the level it was set at when ER was first introduced in April 2008). This is a significant restriction of the relief which will have an immediate impact. Individuals, and trustees, disposing of qualifying business assets on or after 11 March 2020 will be subject to the new £1m cap. A person who has claimed ER for qualifying disposals before 11 March 2020, in relation to gains of more than £1m, will have used up their lifetime limit and will not be able to make a further claim for ER.
There is a widespread belief that rather than incentivising people to set up and grow trading businesses the relief, which cost the Treasury £2.4bn in 2018, rewards those who have already amassed significant wealth. However, rather than refocusing the relief the government has chosen simply to restrict it.
ER reduces the charge to capital gains tax (CGT) when a person disposes of qualifying business assets. It is available to individuals and some trustees (but is not available to companies or personal representatives). From today, the first £1m of gains that qualify for the relief are subject to CGT at 10%. Gains in excess of £1m will be charged to tax at the taxpayer’s marginal rate of CGT (20%). The relief applies to gains arising on the disposal of interests in a trading business carried on by the individual, as well as assets used in the trading business, and on disposals of shares of a trading company in which an individual has a 5% or greater interest where the individual is an officer or employee of the company.
Pensions - tax relief for high earners
There is no limit on the amount that an individual can pay into a pension scheme but the ‘annual allowance’ is a limit on the amount on which the individual can claim income tax relief. The annual allowance is currently £40,000. However, there is a tapered reduction in the amount of the annual allowance for individuals with income over £150,000.
From April 2020, the threshold at which the annual allowance begins to taper will be increased by £90,000, meaning that taxpayers earning up to £240,000 will benefit from the full annual allowance of £40,000. However, the minimum annual allowance will fall to £4,000 (from £10,000), reducing the amount of pension savings which can benefit from tax relief for taxpayers earning above £300,000.
The main rate of corporation tax will remain at 19% rather than falling to 17%.
Pre-announced measures to take effect from 6 April 2020
It should be remembered that the following previously announced measures will also take effect from 6 April 2020.
- Principal private residence relief (PPR relief)
Gains realised on the disposal of an individual’s house are, generally, exempt from CGT if the property has been his only or main residence throughout his period of ownership. Where a house has been an individual's only or main residence for only part of his period of ownership only a proportion of the gain will be exempt from CGT. However, currently, if a house has qualified as an individual’s only or main residence at some point during his period of ownership, the last 18 months of his period of ownership will always qualify for PPR relief such that the gain treated as arising during that period will be exempt from CGT. From April 2020 this final exempt period will be reduced from 18 months to 9 months.
Where PPR relief is restricted in relation to a house because the property has been rented out during an individual’s period of ownership an additional relief - ‘letting relief’ - may be available. Letting relief is available, provided that the property qualifies for PPR at some point during the individual's ownership. The amount of the relief is the lower of: (i) the amount of PPR available on the disposal of the property (i.e. the amount of PPR available, ignoring letting relief), (ii) the gain relating to the letting period and (iii) £40,000. This letting relief will be restricted, from April 2020, so that it will only be available where the owner is in shared occupation with the tenant.
It should be remembered that PPR relief may also be available if a house has been occupied as his only or main residence by a beneficiary under the terms of a settlement.
- Non-resident corporate landlords - will become subject to corporation tax (at 19%) on UK rental income, rather than income tax.