UK: Budget 2015: Our Full Analysis

Last Updated: 19 March 2015
Article by Tina Riches

INTRODUCTION

With fewer than 50 days until the General Election, Chancellor George Osborne took this last pre-election opportunity to highlight the successes of the economy over this parliament. With plenty of playing to the audience, he delivered a polished performance to mirror his underlying messages.

He confirmed that certain crowd-pleasing measures previously announced in the 2014 Autumn Statement would proceed, albeit in some cases further enhanced. He also emphasised the commitment of the Government to support UK businesses to grow and flourish, as well as to support individuals who may have borne the brunt of the recent recession.

The Government has continued to demonstrate a commitment to tackle tax evasion and aggressive tax avoidance with new sanctions and penalties.

The following were among the headline comments.

  • The Chancellor has announced further measures to support savers, workers and those aspiring to own their own homes. This includes further increases in the personal tax allowance, new measures to make ISAs more flexible, and the introduction of a new personal savings allowance for basic and higher rate taxpayers. However, there is a less welcome reduction from £1.25m to £1m in the pension contributions Lifetime Allowance (LTA) from 6 April 2016.
  • The Government confirmed that non-residents will be subject to capital gains tax (CGT) on some gains accruing on the disposal of UK residential property on or after 6 April 2015, with the standard rates applying to UK individuals and corporate taxpayers. Annual exemptions for individuals and indexation allowance for companies will also be available.
  • New legislation will give the UK power to implement the Organisation for Economic Cooperation and Development (OECD) model for country-by-country reporting, as part of the OECD's ongoing Base Erosion and Profit Shifting (BEPS) project.
  • New rules prevent Entrepreneurs' Relief (ER) being claimed on disposals of personal assets being used in a company or partnership business if there is not a simultaneous disposal of at least a 5% share in the company or partnership, and new provisions from today prevent ER applying to certain indirect holdings in trading companies.
  • The Government's proposal to toughen sanctions for tax evaders came as no surprise. What was more unexpected is the early closure of the Liechtenstein disclosure facility (LDF) and the Crown dependency facility, at the end of 2015. This will provide a very sharp twist of the arm to anyone still hesitating to come forward; the alternative is likely to be a criminal conviction when HMRC finds them.

Our tax experts have provided their detailed and insightful analysis of the Budget measures and the implications of the Chancellor's comments for taxpayers. While generic in nature, we hope this provides a very useful flavour of the Budget implications.

You can also see our analysis online on the Smith & Williamson website.

1 PERSONAL AND TRUST TAXES

1.1 Personal allowances and thresholds

Increases to both the personal allowance and higher-rate band for 2015/16 were confirmed with announcements made for 2016/17 and 2017/18.

Income tax rates and thresholds will remain at their 2014/15 levels in 2015/16, except as noted below. All thresholds are set out in the appendix.

As announced at the 2014 Autumn Statement, the personal allowance in 2015/16 for those born after 5 April 1938 will increase to £10,600 with the higher-rate threshold increasing to £42,385.

The plan set out is for the personal allowance to increase to £10,800 for 2016/17 and to £11,000 for 2017/18 for all taxpayers regardless of age. The benefit of this increase will be passed on to higher rate taxpayers with an increase in the higher-rate threshold taking it to £42,700 in 2016/17 and £43,300 in 2017/18.

The national insurance upper earnings and upper profits limits will remain aligned with the higher-rate threshold.

The blind person's and married couple's allowances and thresholds will increase in 2015/16 in line with the retail prices index (RPI).

Comment: The further increases to the personal allowance reflect the ongoing pledge by the coalition Government to support those on low and middle income. This has seen a rise in the allowance from £6,475 in April 2010 to the above levels.

However, although the increases are welcome news, not all taxpayers benefit. Those earning above £100,000 continue to see their personal allowance abated on a £1 for £2 basis.

1.2 A new personal savings allowance

From April 2016, a new personal savings allowance will be created, exempting individuals from tax on the first slice of their savings income.

Basic-rate taxpayers will be exempt from tax on the first £1,000 of savings income and higher-rate taxpayers on the first £500. Additional-rate taxpayers will not be entitled to an allowance. Coupled with this, HMRC plans to code out automatically taxable savings income that remains taxable through PAYE from 2017/18, although trials will commence in autumn 2015.

Because so many people will no longer pay tax on their savings, the Budget announced that the automatic deduction of 20% income tax by banks and building societies on non-ISA savings will cease from April 2016.

Comment: With low interest rates on savings, the income from significant deposits could potentially be exempt from tax. Even for those receiving interest at a rate of 1%, income from savings of up to £100,000 would be exempt from tax. This is a welcome relief for pensioners and it will be interesting to see how the banks cope with requests to have interest paid gross although they do have a year to prepare.

The details of automatic coding are not yet available, but it appears that this might accelerate the payment of tax for individuals with taxable savings income. It is hoped that this will not add further levels of complication for those who will need to report the income to HMRC in any case.

1.3 Alternative to the annual tax return

Digital accounting will replace the need for individuals and small businesses to complete annual tax returns. Also, a consultation will take place on enabling the collection of tax and national insurance contributions (NIC) through these digital accounts.

With the aims of modernising and simplifying the UK tax system, the existing tax returns will be replaced by 'digital accounts'.

These accounts will allow HMRC to use information it holds to calculate tax liabilities without the need for taxpayers to re-supply that information. It will also supply a gateway for both individuals and small businesses to upload details of income and gains not already held by HMRC.

The ultimate aim is that these digital accounts will replace the need for these individuals and small businesses to file annual tax returns.

Other services will also be offered, allowing access to a wide range of government services through one portal.

The aim is to start the introduction of the digital tax accounts from 2016, allowing accounting software to feed data straight into digital tax accounts, and fully replace the tax return by the end of the next parliament. Individuals and small businesses will have the option to 'pay as you go' to help manage their cash flow. Taxpayers will be able to let agents manage their digital account on their behalf.

Further details will be released later this year and a consultation will also take place on a new payment process for tax liabilities which will use these digital accounts.

Comment: Any attempt to modernise and, more importantly, simplify the UK tax system should be welcomed.

Many will see the compliance burden reduced, especially where their income is limited to accurate information HMRC receives from third parties, such as employment income, pension receipts and bank interest. However, all taxpayers will need to check the online information to ensure it is correct as the obligation to ensure their tax affairs is correct remains with the taxpayer.

In addition, those with more complex affairs will still need to engage with the 'digital account' in the same way they currently engage with HMRC's online filing software to provide other information not currently in HMRC's possession, such as business accounts, capital gains and claims for relief.

It is likely that the same deadlines on provision of information and payment liabilities will apply to these more complex situations. Also, the responsibility for accuracy of the information will remain with the taxpayer, meaning engagement will still be needed by all taxpayers.

How the digital accounts will interact with third-party software and how accounts information will flow through to HMRC automatically will need to be explored. Use of XBRL tagging down to a granular transaction level, which has been discussed before, and which is accessible and transparent in real time to HMRC, may be a step too far.

As always, it will be necessary for HMRC to consult on the specific detail of the policy and administrative changes before casting this in stone. If handled properly, it could bring advantages to HMRC, taxpayers and their agents.

1.4 Remittance basis charge – changes

The Government has announced changes to the remittance basis charge applying to long-term residents from 6 April 2015, including the introduction of a new £90,000 charge for certain remittance basis users.

As announced at the 2014 Autumn Statement, an increased remittance basis charge of £90,000 will be introduced from 6 April 2015 for non-UK domiciled individuals resident in the UK for 17 out of the previous 20 tax years.

Also applying from 6 April 2015, the Government has announced an increase to the current charge for those individuals resident in the UK for 12 of the previous 14 tax years from £50,000 to £60,000.

The £30,000 charge for those individuals UK resident in seven of the previous nine tax years will remain unchanged.

Comment: An increase in the remittance basis charge is perhaps not surprising given the apparent willingness that a number of non-UK domiciled individuals have shown to pay the annual charge.

In addition, a consultation is ongoing regarding the proposal to introduce a minimum period of three tax years for a remittance basis claim. If introduced, careful planning will be required for each claim, particularly in light of the increased annual charges.

1.5 Extending averaging periods for farmers

From April 2016, the period over which farmers will be able to average their profits for income tax purposes will increase from two years to five years.

Currently, self-employed farmers can elect to average profits over a two-year period in order to help even out fluctuating results. From April 2016, this period is to be extended to five years.

Various conditions will need to be satisfied to access the existing averaging relief. The main one is that the difference between the profits for the two years must be at least 30% of the profits of the year with the better result, subject to a tapering of relief down to 25%.

Consultation is to take place in 2015 on the specific design and implementation of this extension.

Comment: This is a welcome extension to the existing relief, which was championed by the National Farmers' Union in the run-up to the Budget. It is expected to assist 29,000 farmers to deal with a 'volatile market place'.

Averaging means that lower marginal rates of tax may apply than otherwise would to the peaks, assisting cash-flows. Implementation of the change will be key, so we await the further discussions with interest.

1.6 National insurance contributions

As part of the planned reforms to tax administration, the Government will abolish class 2 NIC and reform class 4 NIC to introduce a new contributory benefit test.

Class 2 and class 4 NICs are the contributions payable by self-employed individuals including partners in partnerships.

Class 2 is paid at a flat rate (£2.80 per week for 2015/16), while class 4 is based on an individual's profits for the tax year.

A consultation is proposed on the abolition of class 2 NIC and the reform of class 4 NIC to introduce a new contributory benefit test.

Consultation is expected later this year on both the specifics and timing of the changes.

Comment: Although the current collection of class 2 NIC is being brought within the self-assessment payment regime, it still adds a level of complexity and inefficiency to the system which seems unnecessary given the low level of class 2 NIC. The suggestion of abolition is therefore welcomed.

We shall need to see further details on the proposed changes to class 4 NIC to ascertain the impact of the proposed contributory benefit test and to confirm that individuals' entitlements to these benefits are not eroded by the change.

It is also unclear whether or not the proposed consultation will survive any change in Government.

1.7 Simplified expenses for partnerships

The Government will revise the existing simplified expense regime to ensure that partnerships can access relief for partners' business use of their own homes.

The simplified expenses regime was introduced in Finance Act 2013 to make it easier for unincorporated businesses to account for their income and expenses and included flat-rate allowances for car expenses, use of home and interest payments.

Although the existing regime was available to unincorporated partnerships, it will be extended to ensure that partnerships can fully access the provisions relating to the business use of a home and where business premises are also a home.

Comment: It is not clear at this stage what shape these proposals will take and we await further announcements as to what specific amendments will be made.

1.8 Miscellaneous loss relief

Provisions will be included in Finance Bill 2015 to limit miscellaneous loss relief.

Income Taxes Act 2007 provides for a category of income or transaction called 'miscellaneous income', which includes some very specific items, generally not arising from current trading, such as post-cessation receipts, income from sale of patent rights and the transfer of assets abroad.

Broadly, miscellaneous income relief provides a deduction against miscellaneous income for losses on certain transactions arising from possibly quite unrelated arrangements.

The Government announced in the 2014 Autumn Statement that legislation would be introduced with effect from 3 December 2014 to counteract perceived avoidance of miscellaneous loss relief and this will now be included within Finance Bill 2015. From 6 April 2015, relief will be further restricted so that a loss can only be relieved against income arising under, or by virtue of, the same provisions.

Comment: The proposed legislation targets 'relevant tax avoidance arrangements' and is clearly designed to thwart avoidance schemes that make use of these otherwise open-ended miscellaneous loss relief provisions.

1.9 Payments from sporting testimonials

The Government has announced it will delay changes to the existing treatment of payments from sporting testimonials while it considers the response to its call for evidence.

Currently, an extra statutory concession allows the proceeds of a sporting testimonial, to which an individual was neither contractually nor implicitly entitled, not to be taxable as earnings.

In October 2014, HMRC requested feedback on the proposal to withdraw this concession and treat such payments as earnings, in line with the treatment applying to other voluntary payments made by the public, such as tips to waiters and taxi drivers.

The Government has confirmed that no changes will be made before April 2016 while it considers the representations made in response to the call for evidence.

Comment: Although the Government appears intent on proceeding with the withdrawal of the existing concession, it is pleasing that any changes have been delayed to allow proper consideration to be given to responses made to its consultation.

1.10 Armed forces early departure scheme

Lump sum payments made under the new armed forces early departure scheme (AFEDS) will be exempt from income tax and class 1 NIC.

Further to the announcement made in the 2014 Autumn Statement, the Government has confirmed that lump sum payments made under the new AFEDS will be exempt from income tax and class 1 NIC.

The change will take effect from 1 April 2015 when the new scheme is introduced.

Comment: Although limited in terms of its application, these changes will be well received by those affected by the AFEDS.

1.11 Gift aid small donations scheme

The maximum annual donations on which gift aid can be claimed through the small donation scheme will be increased to £8,000.

The gift aid small donations scheme (GASDS) allows charities and community amateur sports clubs (CASCs) to claim gift aid relief on cash donations of up to £20, subject to an overall limit. This effectively treats the donations as made net of basic rate tax paid by the donor, allowing the charity or CASC to claim a sum totalling 25% of the donations, even in circumstances when it would be unreasonable to expect the individual donors to make formal gift aid declarations.

From April 2016, the total donations on which tax can be reclaimed by a charity or CASC under the GASDS in any tax year will be increased from £5,000 to £8,000. This will result in an increase in relief of up to £750 in each tax year.

Comment: While the sums may appear small, the GASDS is a welcome relaxation of the administration requirements for charities or CASCs, especially those that are smaller and less well-resourced.

1.12 Private equity management fee planning

From 6 April 2015, provisions will come into effect to ensure that sums that arise to investment fund managers for their services are charged to income tax.

The Government announced in the 2014 Autumn Statement that provisions would be brought in with effect from 6 April 2015, to target perceived 'disguised' investment management fees, which would not otherwise be subject to income tax or NICs.

The provisions apply to individuals involved in the management of private equity fund or other investment funds, who are members of a limited partnership or limited liability partnership (LLP), or involved in arrangements including partnerships. Carried interest and co-investment arrangements will not, however, be caught by the new rules.

Comment: The scope of this reform is limited somewhat by the exclusion of carried interest and co-investment arrangements, so it will be interesting to see whether or not it will have a significant impact. The proposals appear, however, broadly framed in line with the current trend towards provisions to curtail any perceived exploitation of the tax system or disguising of income to avoid tax.

2 PENSIONS, INVESTMENTS AND CAPITAL TAXES

2.1 Capital gains tax: annual exempt amount

The increase to the capital gains tax (CGT) annual exempt amount for 2015/16 was confirmed.

The Government has reiterated that the CGT annual exempt amount will increase by £100 to £11,100 for 2015/16.

Comment: Given that the annual exempt amount was frozen for two years prior to 2013/14, the increase, albeit by only £100 per year, is welcome to reduce the effects of inflation.

2.2 Entrepreneurs' Relief and deferred gains

ER will be made available for eligible gains deferred into investments which qualify for the Enterprise Investment Scheme (EIS) or for Social Investment Tax Relief (SITR).

An individual can defer a capital gain realised on the sale of an asset if the proceeds are reinvested under the EIS or for SITR. The qualifying investment must be made within a period of time before or after the disposal giving rise to the capital gain being deferred. The deferred gain crystallises at the point that the EIS/SITR investment is sold or redeemed, or when it ceases to be a qualifying investment.

Under the former rules, if a gain on an asset qualifying for ER – and the 10% CGT rate – was deferred, the ER was not deferred with it. The Government has now confirmed that ER can be maintained where qualifying deferred gains come back into charge.

This change will apply to gains qualifying for ER on or after 3 December 2014, which are deferred into an EIS or SITR investment.

Comment: This is a very welcome change. Previously, potential investors were discouraged from reinvesting gains into EIS and SITR because of the loss of ER on those gains, resulting in them being taxed at 28% when the gain subsequently crystallised rather than 10%.

2.3 CGT: wasting assets

Finance Bill 2015 will clarify that the CGT exemption for wasting assets will only apply if the person selling the asset has used it in their own business.

Certain wasting assets are exempt from CGT. This includes assets used as plant or machinery where capital allowances could not be claimed.

The legislation will be amended to make clear that an asset will only qualify for the exemption if the person selling it used it as plant or machinery in their own business.

The change will take effect from 1 April 2015 for corporation tax and 6 April 2015 for CGT.

Comment: This clarification follows a recent case ruling that the exemption applied to an asset lent by the owner to a third party, shortly before the sale took place, to use as plant in their business.

There was a concern that, unless changes to the legislation were made to counteract this decision, other taxpayers could set up similar arrangements with relative ease and avoid CGT that would otherwise be payable on the sale of such assets.

2.4 Venture capital scheme changes

As announced in the 2014 Autumn Statement, companies benefiting substantially from subsidies from the generation of renewable energy will be excluded from benefiting from Seed Enterprise Investment Scheme (SEIS), EIS and Venture Capital Trust (VCTs). In addition, the Government has announced a number of further changes to the venture capital schemes, which are subject to state aid approval, and also clarified a number of points on social investment tax relief.

As previously announced, with effect from 6 April 2015, companies benefiting substantially from subsidies from the generation of renewable energy will be excluded from benefiting from EIS, SEIS and VCTs. This is subject to the exception of community energy generation undertaken by qualifying organisations which will, in future, become eligible for the social investment tax relief.

Subject to receiving state aid approval, a number of changes will be introduced for EIS and VCT purposes (effective from the date of receiving the state aid approval).

  • Investments have to be made for the purpose of growing and developing the business.
  • All investors are to be independent from the qualifying company at the time of the first share issue.
  • Companies must be less than 12 years old when receiving their first EIS or VCT investment, except where the investment will lead to a substantial change in the company's activity.
  • A £15m cap on total venture capital investment a company can receive (£20m for 'knowledge intensive' companies).
  • The employee limit is increased to 499 (from 249) for knowledge intensive companies.

Knowledge intensive companies are broadly ones that are innovative, with R&D spending, and must meet criteria relating to the skills and ambition of the company.

With effect from 6 April 2015, it was also confirmed that the requirement that 70% of SEIS money has to be spent before EIS or VCT shares or securities can be issued will be abolished.

Subject to state aid approval, the Government has announced a new 'social VCT' will be introduced. The rate of income tax relief for investment in a social VCT will be 30%. Investors in such schemes will pay no tax on dividends from, or CGT on disposal of, shares in social VCTs.

Comment: Removing the requirement that 70% of SEIS money has to be spent is welcome and removes any delay and unforeseen practical issues between raising SEIS and EIS/VCT monies for fast-growing companies.

The other proposed changes to the venture capital schemes are likely to have limited impact. However, where a company can fall into the knowledge intensive definition, higher limits will be available, which may assist in seeking further investment.

2.5 Making ISAs more flexible

Individuals are to be given the ability to withdraw and replace funds from their cash ISA within the year without it counting towards their annual ISA subscription limit.

The change is due to come into effect from autumn 2015 following a technical consultation on the implementation with ISA providers.

Comment: The ability to withdraw and replace funds may be of limited use to those with sufficient funds to top up their ISA each April, without the need to access those funds later in the year. However, for those with tighter finances, access to funds is often required in-year, for example, to provide short-term finance, for emergencies or to meet other short-term obligations. Knowing that they will be able to access such funds without losing their entitlement may encourage savers to start at an earlier point in the year, potentially leading to higher levels of saving.

Development of the previously-announced provisions allowing spouses to inherit their deceased spouses' ISA was not mentioned in the Budget, therefore additional anticipated rules around ISAs and estates are not expected to be introduced in the short term.

2.6 Help to Buy ISA

The new Help to Buy ISA for first-time buyers provides those who save up to £12,000 toward their first home with a further 25% Government bonus. For every £200 a first-time buyer saves, the Government will provide a £50 bonus, up to a maximum of £3,000.

The bonus will be provided at the point the saver uses his savings to purchase his first home. From autumn 2015, accounts will be available from banks and building societies, for those aged 16 or over.

After an initial deposit of up to £1,000, regular monthly savings of £200 can be added. They will be limited to one per person as opposed to one per house so both individuals in a couple can benefit from the government bonus. They can be used on house purchases up to £450,000 in London and £250,000 outside.

Comment: This new scheme is welcome. It is good to see that the Government is committed to helping first-time buyers who are being priced out of the market by an unprecedented increase in property prices, fuelled by the increase in buy-to-let landlords and overseas money, as well as very low interest rates. Depositors will have to demonstrate eligibility, although the mechanics of doing so are not yet clear.

2.7 Extending ISA eligibility

The eligibility of qualifying ISA investments will be extended to a number of other investments from summer 2015.

These will include listed bonds issued by a co-operative and community benefit society and small and medium sized enterprise (SME) securities (not just equities) admitted to trading on a recognised stock exchange.

Consultation as to whether or not debt and also equity securities offered through crowd funding platforms should also be allowed will be initiated in the summer. The Government is also due to respond on the previous consultation on peer-to-peer loans.

Comment: Given the significant increase in interest in alternative investment, it is good to see the Government seeking to treat such investments on a par with other investments when it comes to ISAs. This is likely to further encourage investment in SMEs.

2.8 Annuities

Individuals will be able to assign their income to a third party in exchange for a lump sum in future, allowing those who are currently locked in to benefit from the new pension freedom rules.

This is planned to be legislated in a future finance bill, after the election. The Government specifically intends to create a secondary market for annuities rather than permit the annuity provider itself to purchase the annuity back, though it recognises that this is a balanced decision. It recognises that there may also be operational difficulties such as the fact that the annuity provider may not know when to cease payment. A consultation document has therefore been issued to help consideration of this proposal.

Comment: It will be interesting to see how this market develops and how it is priced, bearing in mind that we have such low annuity rates at present. Those who bought annuities many years ago might receive a windfall relative to what they originally paid for them but whether it is worth the exchange, given that fees may be charged, remains to be seen. Annuity providers might be very happy to buy out liabilities provided the deal suits them.

2.9 Lifetime allowance for pension contributions

The LTA will reduce from £1.25m to £1m from 6 April 2016 and will be indexed annually in line with the consumer price index (CPI) from 6 April 2018.

Transitional protection for pension rights that are already over £1m are to be introduced alongside this reduction to ensure the change is not retrospective.

These provisions are expected to be legislated in a future finance bill in the next parliament.

Comment: The Chancellor's reduction in the LTA for pensions from £1.25m to £1m appears to be yet another attack on the pension savings of those in the private sector whilst exempting public sector pensions, funded out of general taxes.

For example, an annual public sector pension of £50,000, index linked and with a spouse's pension, will not fall foul of the reduced LTA of £1m, as it is only multiplied by a factor of 20 for the purpose of valuing it for the LTA.

However, anyone in the private sector who has saved throughout their working life and built up a pension pot of £1m when they retire at 65 will only be able to provide themselves with a guaranteed annual pension of around £29,000 on similar terms to the public sector pension.

When the Chancellor states that only 4% of individuals have a pension pot worth £1m at retirement, the figures would be rather different if they included public sector workers with an annual pension entitlement of more than £29,000.

It is appreciated that the Government is keen to reduce the expense of tax relief on pension contributions and the retention of the £40,000 annual allowance is therefore welcome. However, it seems unclear why the private sector is bearing the brunt of the overall changes.

It is quite clear that many more people will be affected by this change than previous LTA reductions and those in their 30's and 40's will have to consider their savings strategy carefully. Pensions advisers should be sharpening their Excel skills, as it might be a very fine balance for some as to whether they should be opting out of their existing scheme and electing to adopt the £1.25m allowance or continuing on with their pensions accrual or contributions with a £1m allowance. It is possible many will do the latter, oblivious of the tax liabilities that await them when they retire, as it may not occur to them to take advice in this area.

2.10 Changes to the taxation of inherited annuities

The Government has confirmed that certain beneficiaries of individuals, who die under the age of 75, with a joint life or guaranteed term annuity, will be able to receive any future payments from such policies tax free.

This will apply from April 2015, where no payments have been made to the beneficiary before 6 April 2015.

From this date, joint life annuities can be paid to any beneficiary. Where the individual was over 75, the beneficiary will pay tax at his marginal rate of income tax rather than at a higher rate of up to 70%.

Comments: This change will put beneficiaries of annuities on a similar footing to those who inherit other pension assets.

2.11 Deeds of variation

The Government will review the use of deeds of variation for 'tax purposes'.

The Government has announced a review of the use of deeds of variation to alter the will of deceased individuals after their death, where these are used for the purpose of inheritance tax (IHT) planning.

Comment: The alteration of wills via deeds of variation is a well-established practice and can serve a number of purposes, one of which might be IHT planning. While the announcement took a prominent place in the Chancellor's speech, few details of the proposed review have been published and there will be concern that this effort to target perceived tax avoidance will result in anomalies and injustices in practice.

2.12 IHT exemptions extended

As announced in the 2014 Autumn Statement, the existing exemptions from IHT for medals and other decorations and for members of the armed forces, whose death is caused or hastened by injury on active duty, will be extended to cover various additional categories of awards and persons, respectively.

It was announced in the 2014 Autumn Statement that, from 3 December 2014, the existing exemption from IHT for medals and other decorations would be extended to cover all medals awarded to members of the armed forces and emergency services and to awards made by the Crown for achievements and service in public life.

It was also announced that the IHT exemption for individuals whose death is caused or hastened by injury on active service would be extended to cover members of the emergency services and humanitarian aid workers responding to emergency circumstances.

It has now been confirmed that the legislation to enact these reforms will be included in Finance Bill 2015.

Comment: While these changes are limited to narrow circumstances and will not affect the majority of taxpayers in practice, the aim of the exemptions should be applauded.

2.13 IHT and trusts

It has been confirmed that plans to introduce a single settlement nil-rate band (SNRB) will be dropped following consultation.

As announced in the 2014 Autumn Statement, following consultation, the Government has decided to abandon plans to introduce a SNRB, for the purposes of calculating IHT charges on trusts. Instead, it will seek to introduce new rules targeting perceived avoidance through the settlement of multiple trusts.

The Government will also look at other means to simplify the rules concerning the calculation of trust IHT charges and how the nil-rate band should be applied when calculating such charges.

Comment: This is a welcome announcement given the far-reaching impact of the Government's initial proposals.

We await the Government's revised proposals to address tax avoidance through the use of multiple trusts and to simplify trust IHT charges. It should be noted that no date has been set for these.

3 PROPERTY TAXES

3.1 Capital gains tax for non-UK residents disposing of UK residential property

As announced in the 2014 Autumn Statement, following a period of consultation, capital gains tax (CGT) will be charged on gains accruing on the disposal of UK residential property by non-UK residents.

Currently, the scope of CGT in the UK is generally limited to those persons resident in the UK. Following a consultation, this scope will be extended from 6 April 2015 to include non-UK resident individuals, trusts, personal representatives and narrowly controlled companies disposing of UK residential property.

Non-UK residents will be subject to the same rates of tax as UK taxpayers (18 or 28% for individuals and 20% for corporates) but only gains accruing from 6 April 2015 will be subject to tax.

The non-UK resident is able to 'rebase' the property to its 6 April 2015 market value or, if more beneficial, can either time-apportion the gain or have the entire gain/loss taken into account.

A new tax form is to be introduced to report the gain. The 'non-resident capital gains tax (NRCGT) return' needs to be filed 30 days after completion of sale. Tax is also due at that time if the seller does not have an existing self-assessment record. If they do have a live record, payment is due under the normal self-assessment regime.

Comment: As noted at the time of the 2014 Autumn Statement, the flexibility on calculating the gain is welcome and will reduce the impact of the tax at least in the early years.

However, this does represent a major change in the UK tax system with many non-UK residents now subject to UK CGT for the first time. The interaction with the existing ATED regime also adds complexity for corporates owning properties. Therefore, detailed advice will be required to ascertain the impact and any tax that may be payable under this extension.

3.2 CGT: private residence relief changes

Access to private residence relief (PRR) will be restricted in circumstances where the property is located in a jurisdiction in which the taxpayer is not resident.

The PRR rules reduce CGT payable on an individual's only or main residence. Where the individual has more than one residence, notification can be made as to which one is treated as the main residence for the purpose of the relief.

From 6 April 2015, a property will only be capable of being regarded as a residence for these purposes for a tax year where the individual is tax resident in the same territory as the property, or spends at least 90 midnights in that property (or across all of their qualifying properties in that territory). Additional nights spent by a spouse/civil partner may also be counted for these purposes.

Comment: Changes to PRR formed part of the wider consultation into the extension of CGT to non-UK residents owning UK residential properties. Original proposals suggested that the ability to elect for a main residence would be lost completely. As such, the final restrictions to PRR are not as far-reaching as first feared.

However, the changes will have an impact on both non-UK residents selling UK properties and UK residents selling overseas holiday homes.

Also, there is an interesting quirk to the new rules whereby non-UK residents can make the election to treat a qualifying property as their main residence after selling it through the new NRCGT return. This is in contrast to UK residents, who are required to lodge noticiation within a strict two-year time limit of acquiring the second or further residence. As such, the new rules create a two-tier system for claiming PRR.

Lastly, non-UK tax residents should be aware of the potential impact on their UK residence status under the statutory residence test exceeding 90 days in the UK.

3.3 Annual tax on enveloped dwellings related capital gains

Changes are being made to CGT legislation to take account of reduced thresholds at which the ATED charge applies.

ATED-related CGT is charged at a rate of 28% for gains accruing from 5 April 2013 on the disposal of high-value residential dwellings with a value exceeding £2m that are subject to the ATED charge. Such properties are subject to the ATED charge if they are owned by a corporate, a partnership with a corporate or an open-ended investment company.

Finance Act 2014 reduced the threshold at which the ATED charge applies to £1m with effect from 1 April 2015 and £500,000 with effect from 1 April 2016. Amendments to the CGT legislation to take account of these reduced thresholds is being introduced in Finance Bill 2015, so that the reduced thresholds also apply for ATED-related CGT for gains accruing from 6 April 2015 and 6 April 2016, respectively.

Comment: Following the outcome of the consultation on taxation of non-UK resident owners of UK residential property, it is clear that the ATED-related CGT charge is to be retained. Changes to take account of the reduced ATED thresholds are therefore to be expected.

3.4 Stamp duty land tax measures

Measures are proposed to make the operation of stamp duty land tax (SDLT) simpler in cases involving low cost housing. There are also proposals that could increase the property fund activity located in the UK if implemented.

There are three changes to SDLT.

  • SDLT multiple-dwellings relief is to be extended to superior interests in residential property such as shared ownership. This will apply where the transaction is part of a lease and leaseback arrangement, if acquired from a qualifying body such as a housing association. The change will take effect from the date on which Finance Bill 2015 receives Royal Assent.
  • The Government intends to introduce an SDLT seeding relief for property authorised investment funds (PAIFs) and co-ownership authorised contractual schemes (CoACS). It will also make changes to the SDLT treatment of CoACS investing in property so that SDLT does not arise on transactions in units. This will be a matter for a future finance bill and is in part dependent on the inclusion of appropriate anti-avoidance rules.
  • Changes to the definition of a financial institution for SDLT alternative finance reliefs will mean that persons authorised to provide home purchase plans will come within that definition. This is to ensure that buyers who use a home purchase plan to finance their home purchase will pay the same level of SDLT as buyers who use a conventional mortgage. This will take effect from the date on which the Finance Bill 2015 receives Royal Assent.

Comment: These changes confirm those announced in the 2014 Autumn Statement.

The extension to multiple-dwellings relief should reduce the cost to investors participating in funding arrangements associated with lease and leaseback of shared-ownership arrangements.

The proposals for change to the SDLT rules on setting up PAIFs and CoACS are in response to representations from the property fund industry that would facilitate a rationalisation of property ownership structures and facilitate their relocation to the UK, with associated economic benefits.

If the relief is eventually introduced it is to be hoped that it will be extended to real estate investment trusts (REITs) in due course.

The measure refining the definition of a financial institution for SDLT should rationalise SDLT costs for those who finance the purchase of their home using a home purchase plan.

To read this Report in full, please click here.

We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2015.

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