UK: UK Budget Analysis

As anticipated today's Budget announcement contained little of great surprise.

'Box-Office Phil', as the press has ironically dubbed him, had been careful to downplay expectations for his first Budget and duly delivered with a Budget speech that was clearly positioned as the lull before the Brexit storm. This is in many ways reassuring given the very significant changes to the taxation of longer term resident non domiciliaries from April 2017.  

The following points are of note.

1. The self-employed

As widely trailed before the Budget speech, the self-employed are most affected by the changes announced today. This is manifest in two different areas:

  1. Taxation of dividends

    Following the abolition of the dividend tax credit in 2016, George Osborne introduced a new tax-free 'Dividends Allowance' for each taxpayer, which exempted the first £5,000 of dividends received from tax. This exemption will be reduced to £2,000 for dividends paid from April 2018. This will raise a further £1.7bn for the Treasury over the next three years.

    In his speech announcing this change Philip Hammond announced this measure as affecting dividends received by a "Director/Shareholder". However from the Budget papers it appears that this reduction will apply to all taxpayers. If this is the case, it represents a significant u-turn for the Government and significantly undermines their manifesto pledge not to increase levels of income tax. Further details will be released in due course.  
  2. National Insurance Contributions (NICs)

    NICs are one of the more arcane areas of our tax system, but are beloved of Chancellors who want to raise revenue without raising 'taxes' or breaking manifesto commitments (apparently).

In summary, the self-employed currently pay:

  • Class 2 NICs at a rate of £2.80 per week if their profits are £5,965 or more a year; and
  • Class 4 NICs if their profits are £8,060 or more a year at a rate of 9% up to £43,000 and 2% thereafter.

Employees pay:

  • Class 1 NICs if their earnings are more than £155 in a week (approx. £8,000 per annum) and at a rate of 12% on earnings between £155 and £827 per week (approx. £8,000 and £43,000 per annum) and 2% thereafter.

It was already proposed to abolish Class 2 NICs. In itself this would have reduced the tax burden for the self-employed. The proposal is now to align the rates for the employed and self-employed and to that end the Class 4 rate paid on earnings will increase:

  • to 10% from April 2018; and
  • to 11% from April 2019.

For a higher rate self-employed taxpayer (for example a partner in a law firm) this will increase their NICs bill by about £350 a year from April 2018 and a further £350 a year from April 2019. The Treasury will see revenues increase by £970m over the next three years as a result.

Class 2 NICs will still be abolished from April 2018, saving self-employed taxpayers earning more than £5,965 a year, £145 a year. The 'average' self-employed person will apparently be 60p a week worse off as a result.

2. Non-doms

Major changes to the way that non-doms are to be taxed, first announced by George Osborne in 2015, are due to come into force on 6 April 2017 and two minor amendments to these changes have been announced today:

  • From 6 April 2017 if the value of a shareholding in a non UK company that is attributable to underlying UK residential property is less than 5% of the total value of the company, the new rules bringing such companies within the scope of IHT will not apply. This de minimis level had previously been set at 1%. 
     
  • In the two tax years following 6 April 2017 non-doms will have an opportunity to segregate any offshore cash funds that currently represent a mixture of capital, income and gains into these component parts. Previously this was only to apply to mixed funds containing income and capital gains arising after 6 April 2008. This will now apply to all mixed funds. Non-doms will now be able to identify and segregate even more 'clean capital' which can then be brought into, and spent, in the UK free of tax, which is exactly what the Government are hoping they will do.

Further details are expected on 20 March when the draft Finance Bill is published.

3. Probate Fees

Fears of an increase in inheritance tax or other 'death tax' to fund adult social care proved unfounded. However the Government confirmed last month that Probate Fees payable on death will increase from the £155 flat rate currently paid to up to £20,000. This significant charge will be payable by a deceased family before they can have access to the deceased assets.

The table of proposed charges is set out below.

Value of estate (before inheritance tax) Proportion of all estates in England and Wales Proposed Fee
Up to £50,000 or exempt from requiring a grant of probate 58% £0
Exceeds £50,000 but does not exceed £300,000 23% £300
Exceeds £300,000 but does not exceed £500,000 11% £1,000
Exceeds £500,000 but does not exceed £1m 6% £4,000
Exceeds £1m but does not exceed £1.6m 1% £8,000
Exceeds £1.6m but does not exceed £2m 0.3% £12,000
Above £2m 0.5% £20,000

4. Anti-avoidance

No Budget is complete without a crackdown on anti-avoidance and the government's focus on anti-avoidance continues to be a priority. The Chancellor noted that the UK now has one of the lowest tax gaps in the world, a reflection of how much has been done over the last 15 years to ensure taxpayers pay the 'right' amount of tax.

5. Tax allowance and thresholds

Incremental changes to tax allowances and thresholds have been announced for 2017/18.

  2016/17 2017/18
Personal income tax allowance £11,000 £11,500
Higher rate threshold £32,001 £32,501
Capital gains tax annual exempt amount £11,000 £11,300

6. Measures already announced

Various measures announced last year have been confirmed as follows: 

  • A corporate group's net deductions for interest will be limited to 30% of EBITDA that is taxable in the UK. All groups will be able to deduct up to £2 million of net interest expenses per annum before these rules apply.
     
  • There will be a consultation on bringing non-UK resident companies, who are currently chargeable to Income Tax on their UK taxable income, and to non-resident Capital Gains Tax (NRCGT) on certain gains, within the scope of Corporation Tax. This may be beneficial as currently such companies pay basic rate income tax at 20% on their income and 20% on gains as opposed to 19% corporation tax from April (and lower in future), but will also bring them within the limitation on corporate interest expense deductibility referred to above.
  • Changes which would have reduced the time limit for paying and filing SDLT from 30 to 14 days have been delayed until 2018.

7. ATED

Whilst a number of UK residential properties are being de-enveloped ahead of 6 April 2017 changes to inheritance tax, those that remain owned by a company and within the ATED charge will face the following small increases in rates of tax:

Property value 2016-17 2017-18
More than £500,000 but not more than £1 million £3,500 £3,500
More than £1 million but not more than £2 million £7,000 £7,050
More than £2 million but not more than £5 million £23,350 £23,550
More than £5 million but not more than £10 million £54,450 £54,950
More than £10 million but not more than £20 million £109,050 £110,100
More than £20 million+ £218,200 £220,350

8. Pensions

The shock news in today's Budget was the introduction of a 25% overseas transfer charge on certain transfers from a UK registered pension scheme to a QROPS (qualifying recognised overseas pension scheme) and transfers of UK tax-relieved funds to a QROPS made on or after 9 March 2017, and any onward transfer of those funds to a QROPS after that date.

QROPS wishing to accepting such transfers will also need to update their undertakings to HMRC by 13 April 2017 if they wish to continue to be a QROPS.

This charge is likely to significantly impact the QROPS market, but it will not necessarily affect individuals looking to invest in QNUPS for IHT planning.

The charge will not apply where:

  • the member is resident in the same country as the country in which the QROPS receiving the transfer payment is established;
  • the member is resident in an EEA country (ie, an EU member state or Norway, Iceland and Liechtenstein) and the QROPS is also established in an EEA country (which need not be the same country), or
  • the QROPS is set up by an 'international organisation' (as defined in regulations) of which the member is an employee, or
  • the QROPS is an overseas public sector scheme or an occupational pension scheme and the member is an employee of a scheme employer.

If the charge is not payable on the original post-9 March transfer, it can become payable if the member's circumstances change within five full tax years of the transfer (eg, the member ceases to be resident in the same country in which the receiving scheme is established). Similarly, the tax charge can be reclaimed if it was paid on the original transfer, but the member's circumstances change within five full tax years.

Members will be jointly and severally liable for the charge with the scheme administrator, and reportable in the member's self-assessment tax return.

It is also confirmed that other pensions-related changes previously announced in last year's Budget and Autumn Statement will appear in the Finance Bill 2017 and will take from 6 April 2017 as planned:

  • Money purchase annual allowance ('MPAA') falling from £10,000 to £4,000

The MPAA applies to restrict future tax relieved contributions to a DC pension scheme where an individual has flexibly accessed pension savings from any of their registered pension scheme arrangements.

  • Income tax exemption for employer-arranged pensions advice – rising from £150 to £500 per employee per tax year

This will cover not only pensions advice (as was the case previously) but also general financial and tax advice relating to pensions. This is also separate from allowance for retirement advice in relation to DC pension savings (also coming into force on 6 April 2017) which will permit individuals to draw £500 per tax year on up to three occasions during their lifetime.

  • Alignment of the tax treatment of pensions with the UK's domestic pensions regime

Going forward 100% of a foreign pension or lump sum paid to a UK resident individual will be taxable (to the same extent as if it was paid by a registered pension scheme). Temporary non-residence rules will also impose tax charges on foreign pensions received by individuals resident outside the UK for less than 10 tax years. Certain criteria for schemes wishing to qualify as a QROPS are also changing.

9. Image rights

In a move that will likely send footballers rushing for their agents, HMRC will seek to "clarify" the taxation of payments to employees for their image rights.

Thus, with barely a whimper the Spring Budget has retreated to the pages of history, possibly never to be seen again.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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