Click on the headlines below to navigate our personal tax analysis from the Autumn Budget:
Personal tax allowance and higher rate threshold targets reached one year early
Changes to Capital Gains Tax - Private Residence Relief
No changes to Rent-a-Room Relief
Trust tax changes
Minor changes to Inheritance Tax Residence Nil Rate Band
The Government has introduced two important changes to Entrepreneurs’ Relief (ER). ER reduces the rate of capital gains tax (CGT) on disposals of certain business assets from 20% to 10%. The changes make ER more difficult to claim for business owners and their management teams.
Longer holding period for Entrepreneurs’ Relief
The Chancellor announced an increase to the holding period for business assets and shares held by individuals. Individuals will need to hold the assets or shares for at least two years, as opposed the current twelve months, before they can claim ER on the disposal.
There had been significant speculation that more radical changes were being contemplated such as abolishing ER altogether. However, the Chancellor strongly reiterated his commitment to ER as an important means of supporting entrepreneurial activity in the UK and as a “longer-term business investment”.
The change will apply to disposals made on or after 6 April 2019. Individuals who have held their assets or shares for more than one year but less than two at the date of disposal will not be eligible for ER.
Changes to the definition of ‘personal company’ - 5% ‘economic interest’ test
The second change introduces two additional tests that must be satisfied before ER is available – both take effect from 29 October 2018. These changes mean that the existing condition that an individual holds 5% of the ordinary share capital and votes will be extended to:
- 5% of distributable profits (dividends); and
- 5% of assets available on a winding up of the company.
This means that to qualify for ER an individual must have a 5% ‘economic interest’ in the company.
The additional tests address an anomaly (or “an identified abuse of the current rules”) whereby individuals could hold 5% of the votes and nominal value of the company but not have a commensurate economic interest. The change affects the eligibility for ER of those who hold shares that have voting rights that are disproportionate to their entitlement to economic benefits in the company.
These further conditions are added to the conditions for relief on associated disposals and the withholding of relief on goodwill.
ER on the sale of EMI shares
Some individuals also qualify for ER by virtue of holding options over shares granted under the Enterprise Management Incentive (EMI) regime. The holding period will be extended to two years for such option holders to qualify for ER, as opposed to the current twelve months. This applies to disposals of EMI shares from 6 April 2019.
The changes to the 5% rule outlined above do not appear to affect EMI option holders (based on the draft legislation). This means that EMI option holders do not need to hold 5% of shares by nominal value, voting rights or dividend rights. Consequently, it appears to remain possible to grant EMI options over non-dividend bearing, non-voting shares.
ER on other transactions
The changes to ER affect the availability of the relief on the sale of shares originally issued after incorporation of a trade. A transfer of trade in exchange for shares should benefit from ER, if a trade existed for at least two years prior to incorporation. This is a change from the current regime that would have required the resulting shares to be held for two years before disposal. The change benefits sole traders who incorporate the trade shortly prior to selling the business.
The current legislation could catch other transactions that involve transfers of business and the full impact has yet to be understood.
ER on gains made before dilution
The Government confirmed a change that allows minority shareholders to retain their ER in certain circumstances where their shareholding falls below 5% because of equity investment. Under the new rules, a shareholder can elect to claim ER on the gains accrued before dilution below 5%, provided the dilution resulted from an issue of new shares for cash. ER may be claimed on the eventual disposal of qualifying shares.
The change addresses the perceived disadvantage of losing entitlement to ER by minority shareholders adversely affected by equity investment. It also encourages minority shareholders not to obstruct investment opportunities and should support angel investment at early stages of business growth.
The Government’s commitment to raise the higher rate threshold to £50,000 will be reached one year early.
The personal allowance will go up to £12,500 (from £11,850) from 6 April 2019. The basic rate band will be increased to £37,500 (from £34,500) so taxpayers with incomes of less than £50,000 a year will only pay 20% income tax. A taxpayer with an annual income of £50,000 will see a reduction in their income tax liability of £860 per year – although this will be clawed back in part by an increase in employee’s NIC.
The personal allowance and basic rate band will remain at these new levels for 2020/21, and thereafter will increase annually in line with the Consumer Price Index. The personal allowance will also continue to be tapered for those with incomes in excess of £100,000. The level at which the additional rate of income tax of 45% applies will remain at £150,000.
Private Residence Relief (PPR)
The Government will consult on two changes that will affect a widely used tax relief on private homes.
Private Residence Relief is a relief from Capital Gains Tax (CGT) on the sale of an individual’s main home.
Where an individual is selling a property that has been their main home for only part of the period of ownership, the last 18 months of ownership is always deemed a period of qualifying occupation for PPR purposes. The Government proposes that this period will be reduced to the last nine months of ownership for property disposals after 6 April 2020.
If the changes come in as planned, individuals buying a new home, before selling their old one, will need to ensure a sale of the old property takes place within nine months to avoid a potential CGT charge.
The Government is also proposing a change to lettings relief. This relief applies where an individual sells a property that has been their main home and which has also been let out for a time. Currently, in such a situation, letting relief can exempt up to £40,000 of any gain on disposal. From 6 April 2020, lettings relief will only apply in situations where the owner of the property is in shared occupancy with the tenant.
As a result of the proposed changes, the relief currently worth up to £11,200 of CGT, would be lost unless the individual selling the property lived in the home at the time it was let out.
Under Rent-a-Room Relief an individual can rent a room in their main residence to a lodger and receive up to £7,500 a year without having to pay tax. If the individual does not have to complete a tax return for any other reason, there is no need to submit a return to report this income.
If an individual receives more than £7,500 in rent, they can deduct the allowance from the amount subject to tax, or they can choose to deduct the actual expenditure as normal. In both cases, a tax return will need to be completed.
The Government consulted on adding a ‘shared occupancy test’ to the relief. It believed the relief was increasingly being applied to shorter terms lets, and that the ‘tenants’ could frequently be holidaymakers, rather than lodgers. However, the Government has opted for simplicity and decided not to make any changes to the relief.
The Government will legislate in the Finance Bill 2019-20 to clarify the inheritance tax (IHT) treatment of additions of assets to existing trusts. HMRC regards such additions by UK-domiciled (or deemed domiciled) individuals to trusts made while they are non-domiciled as not covered by the excluded property rules although this has been disputed by some taxpayers. The new clauses will formally confirm HMRC’s position and, regardless of the date of the addition, will apply to IHT charges arising on or after the date of Royal Assent to the Finance Bill 2019-20.
The Chancellor has also announced that a consultation will be launched to examine the taxation of trusts and how this can be made ‘simpler, fairer and more transparent’.
The Government has announced two technical changes to the Inheritance Tax Residence Nil Rate Band (RNRB). Both changes will apply to an estate if the individual died on or after 29 October 2018.
Firstly, a measure to ensure the correct calculation of the ‘lost relievable amount’ where part of the residence goes to an exempt beneficiary.
The second change aims to clarify the application of RNRB on residences that were a gift with reservation of benefit. The property is only treated as being inherited by a direct beneficiary and so qualifying for the RNRB, where property became part of that direct descendant’s estate through the lifetime gift.
Since April 2017, an additional nil rate band has been available where an individual leaves the family home to their direct decedents. In addition to having the usual nil rate band of £325,000, a RNRB of £125,000 may also be available.
Up to £450,000 of an estate will be free of IHT and up to £900,000 where the nil rate band and RNRB has been transferred in full to a surviving spouse. It had already been announced that the RNRB will increase to £150,000 from 6 April 2019 and £175,000 from 6 April 2020. The RNRB is tapered for estates of £2m or more.
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