Will Abbott, Partner at UK200Group member firm Randall & Payne, looks in depth at the Chancellor's latest Budget statement and explores its effects on SMEs and individuals.
Stamp Duty on Commercial Property
Currently the rate of Stamp Duty Land Tax (SDLT) on commercial property is a single percentage rate dependant on the purchase price of the property. This “slab system” can result in an increase of £1 in purchase price increasing SDLT liability by several thousand pounds.
Following on from reforms to the rules for residential property, the system will now become banded, to remove this “cliff edge” effect. The following rates will now apply:
• £0 - £150,000: 0 percent
• £150,001 - £250,000: 2 per cent
• Over £250,000: 5 per cent
A similar banded system is to be introduced for net present value of leases.
The new bands and rates will apply for commercial property transactions completing on or after 17 March 2016.
Stamp Duty Land Tax – Additional Residential Properties
As previously announced, an additional SDLT charge of 3 per cent will apply to individuals acquiring second or subsequent residential properties (such as second homes or buy-to-let properties) with effect from 6 April 2016.
It is also now confirmed that companies buying residential property will also be subject to the higher rates of SDLT.
Where there is a delay before the old home can be sold, in a situation where there is an overlap of main residences, the additional SDLT charge will be payable on the purchase. There is then a 36 month window to complete the sale of the first home, following which a repayment of the SDLT supplementary charge can be claimed.
The government expects around 10 per cent of residential property transactions in the future to be subject to the higher SDLT rates.
From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates.
Currently, this 100 per cent relief is available to any business that occupies a property (e.g. a shop or office) with a value of £6,000 or less.
There will be a tapered rate of relief on properties worth up to £15,000. This means that 600,000 businesses will pay no rates.
Entrepreneurs’ Relief – Associated Disposals
New rules were introduced in 2015 to require that for a part disposal of an interest in a business to qualify for Entrepreneurs’ Relief (ER), at least 5 per cent would need to be disposed of. However this has resulted in some normal family succession situations where an associated sale of business property is concerned to lose ER on the connected property disposal.
The rules have been adjusted to ensure that a disposal of property used in the business will still qualify for ER where all or part of a business is passed to another family member – even where the amount transferred is less than 5 per cent. The adjustment will be backdated to the date of the rule change in 2015.
Entrepreneurs’ Relief – External Investors
Entrepreneurs’ Relief (ER) will be extended to external investors in unlisted trading companies. Normally such investors would only qualify for ER if they are directors or employees, and own at least 5 per cent.
This therefore encourages investment into such companies where the stake purchased may be lower than 5 per cent, or where the investor will not be involved in the actual running of the company.
The extension applies from 17 March 2016, and requires the shares to be held for a minimum period of 3 years. The same lifetime limit for gains (£10 million per individual) applies as for ER currently.
This is good news for businesses who are seeking investment, notably with the use of crowd funding, where the investors will typically not be getting involved in the business but have vital capital to contribute to the growth and success of the business.
Capital Gains Tax – Rates
In a surprise announcement, headline rates of Capital Gains Tax (CGT) will be cut for disposals from 6 April 2016 onwards. The main rate for higher rate income taxpayers will now be 20 per cent (previously 28 per cent) and the rate for gains falling into any available basic rate band will now be 10 per cent (previously 18 per cent).
The new rates will not apply to disposals of residential property, and main residence relief for the family home is unaffected.
On the face of it this is very good news for individuals with investment portfolios. However part of the Exchequer cost for this change is no doubt covered by the tightening of the rules on winding up companies where there is a continuation of the business in another form, also effective on 6 April 2016. This measure will result in many capital distributions in a winding up or liquidation becoming liable to higher rates of dividend tax instead of CGT.
Capital Gains Tax – Goodwill
In a reverse move, the government will now allow Entrepreneurs’ Relief to be claimed (subject to certain conditions) on goodwill sold from an unincorporated business to a connected limited company, where the company is controlled by 5 or fewer participators or by its directors. This will be backdated to disposals on or after 3 December 2014.
This is great news for small businesses considering incorporation and makes the transfer to limited company status more attractive, particularly where the business is well established with a strong goodwill value.
Corporation Tax – Loans to Participators
With effect from April 2016, the rate of tax payable by a company on any balances lent by it to an individual participator or related unincorporated business will increase from 25 per cent to 32.5 per cent.
This is intended to mirror the effective higher rate of income tax on dividends which is moving from 6 April 2016 at the same rates.
As before, the tax is a temporary tax designed to ensure that the Treasury receives the same amount that it would have if the amount had been paid out by dividend instead. When the loan accounts is repaid to the company, or otherwise cleared or written off, the tax becomes repayable to the company.
Corporation Tax – Rates
A further reduction in Corporation Tax to 17 per cent was announced, effective from 1 April 2020.
The already planned reduction from 20 per cent to 19 per cent on 1 April 2017 will still go ahead, followed by the fall from 19 per cent to 17 per cent on 1 April 2020.
Corporation Tax – Loss Relief
The rules for loss relief in companies has been identified as outdated and significant changes will take place from 1 April 2017. There are three principal changes proposed:
• Losses carried forward by a company can currently often only be used against the same type of profits in the future (especially trading losses). It is proposed that losses carried forward will now be able to be offset against future profits from all sources.
• It is also proposed that losses carried forward by a company within a group can be used against future profits of other companies within the group.
• Where a company has profits in excess of £5 million in any one year and also has losses brought forward, the amount of loss it can use will be restricted to 50 per cent of the profit for that year.
The first two of the above are great news for small and medium sized companies and groups and will provide a very welcome simplification of the rules and a more accurate reflection of the reality of how modern companies operate.
The rules will only apply to losses incurred on or after 1 April 2017, so older losses will still carry the same restrictions. This will prevent a massive Exchequer cost in year one if significant existing losses were suddenly used at the same time.
New tax allowances for money earned from the sharing economy
From April 2017, there will be two new tax-free £1,000 allowances – one for selling goods or providing services, and one income from property.
People who make up to £1,000 from occasional jobs – such as sharing power tools, providing a lift share or selling goods they have made – will no longer need to pay tax on that income.
In the same way, the first £1,000 of income from property – such as renting a driveway or loft storage – will be tax free.
Capital Allowances – Cars
100 per cent Capital Allowances on new low emission cars will be extended for a further three years from April 2018, but the emissions threshold for the allowance will reduce to 50 g/km.
At the same time, the threshold for cars receiving the lower 8 per cent annual writing down allowance rate will reduce from 130 g/km to 110 g/km.
Renewals allowance for tools and equipment
For many years businesses and landlords have been able to include replacement of small tools and equipment as expenses rather than as capital purchases. Recently many businesses have been claiming this allowance for much larger items which was not the intention of the rule.
The rule has therefore been abolished, meaning businesses will now have to claim Capital Allowances on the replacement of tools and equipment, no matter how small. This is potentially bad news for capital intensive businesses who are already likely to be making full use of the £200,000 Annual Investment Allowance, as tax relief on these small items will be significantly delayed.
Residential landlords should be unaffected by the change as the new renewals allowance for furnishings and white goods, effective from 6 April 2016, will preserve the relief for them.
Soft drinks companies will pay a levy on drinks with added sugar from April 2018. This will apply to drinks with total sugar content above 5 grams per 100 millilitres, with a higher rate for more than 8 grams per 100 millilitres. This won’t need to be paid on milk-based drinks or fruit juices.
Duties raised from this levy will be used to double the primary PE and sport premium (the additional money schools have to spend on PE and sports) to £320 million a year.
Personal Tax – Allowances and Rate Bands
Further increases were confirmed for the tax year 2017-18. The personal allowance (tax free income) for individuals is £11,000 for the 2016-17 tax year, and will increase to £11,500 for 2017-18. The basic rate tax band is £32,000 for 2016-17, and will increase to £33,500 for 2017-18. This means that individuals will pay higher rate income tax on income over £43,000 for 2016-17, rising to £45,000 for 2017-18.
The government has already pledged that by 2020 the personal allowance will be £12,500 and the higher rate tax threshold will be £50,000.
From April 2017, any adult under 40 will be able to open a new Lifetime ISA. Up to £4,000 can be saved each year and savers will receive a 25% bonus from the government on this money.
Money put into this account can be saved until the account holder is over 60 and used as retirement income, or it can withdrawn to help buy a first home after at least 12 months.
Funds can also be accessed at any other time for any other purposes, but the government bonus would be repaid to the government, plus a proposed 5 per cent charge.
The total amount an individual can save each year into all ISAs will also be increased from £15,240 to £20,000 from April 2017.
Help to Save
To help the people who find it hardest to save, the government will introduce a new Help to Save scheme for those on low incomes who wish to regularly set aside some of their income. The scheme will be open to 3.5 million adults in receipt of Universal Credit with minimum weekly household earnings equivalent to 16 hours at the National Living Wage, or those in receipt of Working Tax Credit.
It will work by providing a 50 per cent government bonus on up to £50 of monthly savings into a Help to Save account. The bonus will be paid after two years with an option to save for a further two years, meaning that people can save up to £2,400 and benefit from government bonuses worth up to £1,200. People will be able to use the funds in any way they wish.
To help individuals who have multiple pension funds (typically individuals will have 11 different employers throughout their working lives) to keep track of their pensions, it is proposed that a pension dashboard will be implemented by 2019.
In addition, to make financial advice more affordable, the government will consult on measures to allow individuals under the age of 55 to withdraw up to £500 from a defined contribution pension scheme to redeem against the cost of financial advice.
The allowance for an employer to pay for financial advice tax free for employees will also be increased from £150 to £500. Effective dates are to be confirmed.
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