What are the major tax changes for private clients in new Chancellor Rishi Sunak’s first Budget?
It has been rather overwhelmed by events, and even the major provisions to help the economy through the crisis that were announced on 11 March have now been superseded by further crisis provisions. There’s been one tax change postponement, on IR35 which is detailed below, but otherwise these significant changes are worth further comment, after a week of reflection.
Reduction of the lifetime limit for Entrepreneurs’ Relief (ER)
As expected, the government announced there would be changes to entrepreneurs’ relief for Capital Gains Tax (CGT) which has been changed to a maximum of £1 million, but perhaps in simpler terms than it could have been. The government’s objective is clear that they’re investing in growth and supporting businesses in this cycle rather than giving big tax breaks, supporting the economy as well as research and development.
ER applies to disposals of business interests where certain conditions are met. Where the relief is successfully claimed, tax payers can benefit from a flat CGT rate of 10%, regardless of whether they’re a basic rate, higher rate or additional rate taxpayer. Prior to 11 March 2020, you could claim ER for capital gains of up to £10m during their lifetime. For disposals made on or after 11 March this lifetime limit is being reduced to £1m, which was the limit originally set when ER was first introduced in 2008. Certain disposals made before 11 March will also be subject to the new £1m cap.
When does ER apply?
ER is available where an individual makes a “material disposal” of “business assets”. This includes the disposal of a sole trade or partnership and certain shares and securities in trading companies which qualify as the taxpayer’s “personal trading company”. ER can also be available for the disposal of certain assets used in a business when it ceases to trade and certain EMI shares.
The Budget announcement follows other recent changes made to ER. The minimum period for certain qualifying conditions to be met increased from one year to two years from 6 April 2019. A new “economic interest” element to the definition of “personal company” was also introduced for disposals after 28 October 2018.
Anti-forestalling rules
The new legislation introduced on 11 March contains rules targeting arrangements by taxpayers aiming to secure the 10% rate before Budget-day by using certain CGT rules to trigger a disposal early. These “anti-forestalling” measures cover arrangements involving uncompleted contracts where a CGT disposal has occurred without a genuine third party purchaser. There are exceptions for certain situations where arrangements were not intended to create a tax advantage and (on disposals to connected parties) were for entirely commercial reasons. There are also anti-forestalling rules for ER claims on share for share exchanges where there is no substantial change in ownership or control. Where taxpayers are caught by these rules, the new £1m cap on lifetime gains will apply even though the disposal occurred before 11 March.
There aren't any transitional rules for any disposals made on or after 11 March. Anyone who has already claimed ER for £1m or more of capital gains will not benefit from ER on any future disposal. It will therefore be a considerable loss to some entrepreneurs who will see their CGT rate double to 20%. Anyone who has previously claimed ER on gains of less than £1m will be able to claim on further disposals up to the new £1m cap. If necessary, business owners should take advice on how to maximise the availability of ER and other tax reliefs so tax can be reduced or deferred as appropriate.
We can help
A 90% cut in the amount of entrepreneurs limit is a big loss to those entrepreneurs who’ll face paying an extra £900,000 in CGT on a £10m qualifying disposal. Many serial entrepreneurs will already have used their £1m allowance. It’s important to ensure that the relief is maximised wherever possible, for example ensuring family members involved in the business meet the qualifying conditions or possibly rolling over realised capital gains into new qualifying business ventures.
If you'd like advice on CGT, ER or other estate planning matters relevant to business wealth, contact a member of our Tax, Trusts and Estates department.
Changes to Capital Gains Tax on the sale of UK residential property
A detailed article on these changes can be read here.
Changes to top slicing relief on life insurance policy gains
This is a welcome clarification of the way in which top slicing relief (TSR) on chargeable events on investment bonds is calculated. The personal allowance will be reinstated within the TSR calculation to ensure that the personal allowance restriction, if any, is only based on other income in the year and a proportion of the gain. In addition, it has been clarified that allowances and reliefs have to be set as far as possible against other income in preference to the gain.
The reinstatement of the personal allowance will reduce the tax bill for those taxpayers realising large chargeable events in a tax year taking them over £100,000 of income.
It should be noted that these changes only apply to chargeable events on or after 11 March 2020 so calculations for 2019/20 and 2020/21 could still be complicated by chargeable events prior to that date.
Off-payroll work (“IR35”)
The government has announced (on 17 March 2020) that, as a result of the coronavirus pandemic, it has decided to delay the introduction of the changes announced in the Chancellors budget from 6 April 2020 through to 6 April 2021. They were keen to point out that this was a deferral and not a cancellation of these changes. This will be welcomed news for those contractors who supplied their services via a personal service company although it may now put them in a difficult position if they've already been notified by their engagers that they considered them to be “inside IR35”. They may struggle to justify keeping the perceived benefits from this for the 20/21 tax year even though the rule change has been deferred.
The businesses who engage these contractors may be disappointed that they’ve spent so much time preparing for these changes only to have them delayed at the last moment. Whilst some of the work will come in handy for when the rules do change, it’ll need to keep the processes operational throughout the year even if they don’t have to withhold any PAYE/NIC. Some businesses decided not to engage contractors through personal service companies from 6 April 2020, and it’ll be interesting to see if they continue with this approach even though the rule change has been deferred for a year.
Pensions tax relief – Tapered annual allowance
There'd been a significant amount of press coverage over the past six months regarding pensions tax relief and whether or not the Chancellor would target this within his budget. In addition, there were a number of articles covering the impact of the tapered annual allowance on NHS doctors leading them to refuse further work and an expectation that some changes would help to alleviate this.
In his budget the Chancellor didn’t take away any higher rate tax relief for pension contributions, which is welcome news for higher rate taxpayers who would have seen pension costs rise. He also announced substantial increases in the tapered annual allowance rates that are expected to take out a substantial number of workers from the restricted annual allowance. The threshold income rose from £110,000 to £200,000, and the adjusted income rose from £150,000 to £240,000, thus meaning that anyone with a net income of £200,000 wouldn’t be subject to any taper relief of the £40,000 maximum annual pension scheme contribution.
At the same time, however, the maximum reduced annual allowance has been lowered from £10,000 down to £4,000 resulting in very high earners getting little tax relief for pension contributions. It is still possible for an individual to contribute pension contributions in respect of any unused annual allowance for the previous three years. Those with unused pension allowances from the 2016/17 tax year have a small window, before 6 April 2020, to take advice from their financial planner and use carry forward to benefit from tax relief in the current tax year.
Unfortunately these changes will operate from 6 April 2020, meaning that taxpayers who were caught under the old rules will potentially have tax charges for the year to 5 April 2020.
Changes to Stamp Duty Land Tax (SDLT)
The Government have announced a 2% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021.
This is an additional 2% on top of the normal and additional residential SDLT rates, as set out in the below table:
| Consideration |
Rates of SDLT |
Rates of SDLT with non-UK residents 2% surcharge |
Rates of SDLT with additional properties 3% surcharge |
Rates of SDLT with additional properties 3% surcharge and non-UK residents 2% surcharge |
| < £125,000 |
0% |
2% |
3% |
5% |
| £125,000 - £250,000 |
2% |
4% |
5% |
7% |
| £250,000-£925,000 |
5% |
7% |
8% |
10% |
| £925,000-£1.5m |
10% |
12% |
13% |
15% |
| £1.5m + |
12% |
14% |
15% |
17% |
By way of example, if a property was purchased for £1.7m, the amount of SDLT due (not considering any reliefs or exemptions) would be as follows:
| Consideration |
Rates of SDLT |
Rates of SDLT with non-UK residents 2% surcharge |
Rates of SDLT with additional properties 3% surcharge |
Rates of SDLT with additional properties 3% surcharge and non-UK residents 2% surcharge |
| < £125,000 |
£0.00 |
£2,500.00 |
£3,750.00 |
£6,250.00 |
| £125,000 - £250,000 |
£2,500.00 |
£5,000.00 |
£6,250.00 |
£8,750.00 |
| £250,000-£925,000 |
£33,750.00 |
£47,250.00 |
£54,000.00 |
£67,500.00 |
| £925,000-£1.5m |
£57,500.00 |
£69,000.00 |
£74,750.00 |
£86,250.00 |
| £1.5m-£1.7m |
£24,000.00 |
£28,000.00 |
£30,000.00 |
£34,000.00 |
| Total SDLT Due |
£117,750.00 |
£151,750.00 |
£168,750.00 |
£202,750.00 |
As shown by the above example there is quite a substantial difference in the amount of SDLT due as a result of this change. In the example a further £34,000 would be due if the purchaser was a non-UK resident.
The Government state that this measure is to help with house price inflation and to support UK resident purchasers to move up the housing ladder. However, it remains to be seen whether this SDLT increase could have a negative effect on the London housing market which could, in turn, ripple out to the regions. As always, the devil is in the detail, and, in particular, the distinction between residential and mixed use (or commercial) property could become ever more important.
Completions which happen on or before 31 March 2021 will not be affected by this change. So as we approach next year’s deadline, it will certainly be worth getting relevant transactions completed before 1 April next year.
We can help
Tax law changes often, and can make it difficult to stay on top of your various financial obligations. Our Tax, Trusts & Estates team have a deep knowledge of this field, as well as a wealth of experience in tax issues both in the UK and internationally. Contact a member of our Tax, Trusts and Estates team.
Published: March 2020
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March 2020
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