Chancellor George Osborne delivered his Budget speech to Parliament on 19 March 2014. The main headline for private clients is the package of measures to impose higher taxes on residential properties held through corporate envelopes and worth more than £500,000. Many of the announcements concerning personal taxes were first made in the Autumn Statement 2013 and whilst confirmed in the Budget, were not therefore unexpected. Unlike recent years, there were no real nasty surprises in this year's Budget for private clients, which will come as a relief.

Taxation of high-value residential property


The Finance Act 2013 introduced an annual charge (the annual tax on enveloped dwellings - "ATED") on high-value residential property held through a corporate envelope. The Act also extended the capital gains tax ("CGT") regime to disposals of the same property. The measures were introduced to target perceived tax avoidance from holding UK property in a company structure. The types of property caught are those worth in excess of £2 million and held by a resident or non-resident company, collective investment scheme or partnership which has a company as a partner. Properties held by trusts fall outside the scope of the regime.

It was recently reported by the Treasury that ATED raised £92 million in its first year of operation, five times the amount originally expected, and the government has seemingly capitalised on this in this year's Budget.

ATED is being extended by the introduction of two new ATED bands: (i) from 1 April 2015, for properties worth more than £1 million and not more than £2 million (the annual charge being £7,000); and (ii) from 1 April 2016, for properties worth more than £500,000 and not more than £1 million (the annual charge being £3,500). Currently, the annual charge for properties in the ATED starting band of £2 million to £5 million is £15,000.

ATED-related CGT

All properties affected by the new ATED bands will also be subject to CGT on disposal at a rate of 28%, although as above the effective dates are delayed and staggered, with the CGT charge on properties worth more than £1 million and not more than £2 million being 6 April 2015, and the CGT charge for properties worth more than £500,000 and not more than £1 million being 6 April 2016. In both cases, the CGT charge will only apply to that part of the gain that is accrued on or after the effective date, which will provide some relief for those affected.


There is no such delay however with the corresponding measures relating to stamp duty land tax ("SDLT"). Currently a rate of 15% applies to properties being purchased through a corporate envelope and worth more than £2 million, but this threshold is being reduced, as from 20 March 2014, to £500,000. Transitional provisions will apply ,however, where contracts for sale were exchanged prior to 20 March 2014.

It was widely speculated that SDLT would come under the spotlight in this year's Budget but predictions had focussed on moving the 1% and 3% SDLT thresholds (which apply to properties worth more than £125,000 and £250,000 respectively) so as to help first time buyers and reflect average property prices, but these thresholds were left untouched. It is questionable how effective the extension of the 15% band will be when, in our experience, it is unlikely to be cost effective to use a corporate envelope for a property around the £500,000 mark. Many will see the extension of the 15% rate as a way of raising money through high-value property without introducing a mansion tax. Jeremy Raj, partner in Wedlake Bell's Residential Property team, had this to say on the SDLT announcement:-

"Stamp Duty Land Tax is an area ripe for reform in order to assist first time buyers and all those purchasing at average or below average prices; instead we have Government focusing on a largely non-existent problem on properties worth half a million pounds or more, waving a stick that is unlikely to hit anybody that deserves it."

Tax thresholds

It was confirmed that the income tax personal allowance will increase to £10,000 from 6 April 2014, as first announced in Budget 2013. As predicted, the government announced that the allowance will increase to £10,500 from 6 April 2015. An announcement that was not widely predicted, however, was the restriction of the personal allowance to UK residents and those overseas with strong economic connections to the UK. A consultation is being launched which could see non-UK residents ceasing to be eligible for the full personal allowance, as they are currently.

The 40% "higher rate" threshold will rise slightly to £41,865 as from 6 April 2014 (from £41,450), but the increase is less than inflation and will lead to continued discontent from the increasing numbers of middle-income earners being pulled into the 40% tax bracket.

The CGT annual exempt amount for 2014-15 for individuals will be £11,000 and for trustees will be £5,500.

The IHT nil-rate band will remain frozen at £325,000 until 6 April 2017, as first announced in Budget 2013.

CGT - non-UK residents

It was announced in the Autumn Statement 2013 that CGT would be extended to non-UK residents owning UK property as from 6 April 2015, but we are awaiting a consultation on how the charge will be introduced. It was announced in the Budget that this consultation will be published "shortly". For further information on the proposed new rules, please see our previous update.

CGT – Private Residence Relief

Also announced in the Autumn Statement 2013 were changes relating to principal private residence relief ("PPR") for CGT as from 6 April 2014. The changes will see the "final period exemption" for PPR reduced from 36 to 18 months. Currently, where a property has been your main residence at any time during your period of ownership, any gain made on the property in the last 36 months of ownership is effectively exempt from CGT whether it is your "main residence" or not during that period, thereby allowing taxpayers (most publically, politicians) to "flip" this exemption from one property to another, so as to achieve PPR for the whole period for each property.

It was confirmed in the Budget that this change will go ahead as part of the Finance Act 2014.

Solicitor Kate Davies had this to say:-

"The "flipping rule" has been on borrowed time since it hit the headlines in connection with the politicians' expenses scandal, but with over 1.5 million people recording two or more addresses on the 2011 Census it is not just those in Westminster who will be effected. House prices are increasing at record rates and on the sale of an average UK home an extra £7,000 of tax would be payable, rising to £25,000 on the sale of an average London home."

IHT and trusts

A consultation was launched following Budget 2013 on simplifying the inheritance tax ("IHT") relevant property regime for trusts and the Budget confirmed that some of the proposals will be introduced in the Finance Bill 2014. However we still await a further consultation on the most controversial "simplification" measure: splitting the IHT nil-rate band among trusts created by the same settlor. There was no indication in the Budget on when this might be published. For further details on these IHT proposals please see our previous update.

IHT – liabilities and foreign currency bank accounts

It was announced in Budget 2013 that certain categories of borrowing would no longer be deductible for IHT purposes. The general rule is that you do not pay IHT on money that you have borrowed.

One of the restricted categories is borrowing used to fund the acquisition, maintenance or enhancement of "excluded property" (broadly, property owned by a non-UK domiciled individual or a trust with a non-UK domiciled settlor which is situated outside the UK and thus not chargeable to IHT).

HMRC have identified that it is possible for non-UK resident, non-UK domiciled individuals to side-step the rules by placing borrowed funds in in a UK bank account in a foreign currency, as the funds would be treated as deductible from the value of the estate. Under new rules to be introduced in Finance Bill 2014, borrowed funds will be disallowed as a deduction where they have been put into a foreign currency bank account so as not to be chargeable to IHT at death.

Non-doms and split contracts

Rules will be introduced from 6 April 2014 to prevent high-earning non-domiciled employees from artificially splitting their employment contracts in order to shift income to an "offshore contract", outside the scope of UK income tax. Tax may be levied on the full employment income where a comparable level of tax is not payable overseas on the offshore contract.

The new rules were first announced in the Autumn Statement 2013 and draft legislation published in January 2014, but documentation released with the Budget makes clear that changes have been made to the rules to ensure that arrangements not set up for tax avoidance purposes are not caught.

Schemes for Heritage Assets

There are currently two particular schemes designed to encourage the donation of heritage assets (such as pre-eminent artwork, sculptures and manuscripts) to the nation: the Cultural Gifts Scheme and the Acceptance in Lieu Scheme. Under both schemes the donor is offered tax relief as an incentive to participate. There is currently a combined cap of £30 million that can be claimed in tax relief under both of these schemes. However it was announced in the Budget that this cap will be raised to £40 million from 6 April 2014. Hopefully this will see many more valuable heritage items being donated for the public benefit going forward. For more information on these schemes, please see our article on tax reliefs for heritage assets.

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.