The Chancellor of the Exchequer, Philip Hammond, delivered the 2018 Budget to the House of Commons. Most measures in the 2018 Budget will enter into force on 6 April 2019, which will mark the beginning of the new fiscal year.
Or they should become effective at that time. The Chancellor indicated that a new “fiscal event” (read a new budget) may be required in early/ mid-2019 depending on the outcome of the Brexit negotiations. The message is clear: any giveaways in this Budget only stand as long as the UK economy does not crash following a breakdown of the negotiations with the European Union.
How is this Budget impacting your Personal Finances?
While some changes had already been announced (or leaked), below are the key announcements applicable to your personal finances:
Tax Thresholds and Pension Allowances
Without a doubt, this was the chancellor’s “rabbit” (i.e. for our non-UK readers, the Chancellor’s “rabbit in the hat” is usually a positive surprise announcement made at the end of the Budget speech). This year’s rabbit is about fulfilling a key pledge of the Conservative manifesto: to increase the tax-free personal allowance and applicable tax thresholds by 2020. Instead of waiting until 2020, the surprise gift arrived a year early:
- Income tax: from 6 April 2019, the tax-free personal allowance will increase to £12,500 (currently £11,500). The basic rate limit will increase to £37,500 (currently £34,500). The higher rate threshold will increase to £50,000 (currently £46,350). These rates are expected to remain the same until April 2021. The personal allowance and basic rate limit will follow the Consumer Price Index from April 2021.
Unfortunately, taxpayers will continue to pay a 60% tax rate on their earnings above £100,000 to HMRC due to the lack of announcements in relation to the tapering of the personal allowance.
Still, the increase of the tax-free personal allowance will be a welcomed announcement. For someone earning £12,500, the increase is worth an additional £130. For someone on a salary of £50,000, it is a £860 gain, which is reduced to a £520 gain if we include recent measures on National Insurance Contributions (“NICs”).
Scotland has its own income tax due to its devolved powers. Any announcements to the starter rate and higher thresholds will be announced in the Scottish Budget in December.
- Pensions lifetime allowance: the lifetime allowance for pension savings will increase in line with the consumer price index for the tax year 2019-20 to £1,055,000 (currently £1,030,000).
I suspect that high earners will appreciate the lack of announcements in relation to pension contributions. After the introduction of the tapering of pension contributions for higher earners, some had come to suspect that the Chancellor would extend the tapering measures to a larger proportion of taxpayers. For now, nothing changes.
- Capital Gains Tax (CGT) annual exempt amount: for the 2019-20 tax year, the CGT annual exempt amount for individuals will increase to £12,000 (currently £11,700) and, for trustees of settlements, to £6,000 (currently £5,850).
Stamp Duty – Shared Ownership
The chancellor decided to extend stamp duty relief for first-time buyers to those purchasing shared ownership homes that are worth up to £500,000.
As a reminder, last year, the chancellor had scrapped land duty for first-time buyers purchasing homes worth up to £300,000 and reduced stamp duty on homes valued between £300,000 and £500,000 to 5% on the portion of the purchase price above £300,000.
This measure is unlikely to have any meaningful impact as it fails to address the lack of affordable available properties and does not incentivize builders to build more homes.
Stamp Duty Land Tax Surcharge for Non-Residents
The chancellor will publish in January 2019 a consultation on a Stamp Duty Land Tax (“SDLT”) surcharge of 1% for non-residents purchasing residential property in England & Wales. As stated previously, the idea is to deter opportunistic buying by foreign buyers for the benefit of first-time buyers residing in the UK. If implemented, I expect the measure to have the most impact in London.
Changes to higher SDLT rates for additional dwellings
Since 1 April 2016, individuals have been liable to higher rates of SDLT (an extra 3%) for additional properties if they buy a new home before completing the sale of their original home. Where the original home is sold on or after 29 October 2018, a refund of the additional SDLT rate can now be claimed the later of a) 12 months from selling the original home; and b) 12 months from the filing date of the SDLT return for the new home.
Help to Buy
The government announced that the Help to Buy equity loan scheme would be extended for an additional two years from April 2021 and would end in March 2023. The chancellor did make small changes to the rules: the scheme is now only available to first-time buyers only and price caps have been set on the market value of homes based on a regional scale (1.5 times the current regional average prices and up to £600,000 in London).
Private Residence Relief – Lettings
From April 2020, and subject to a public consultation, the government intends to reform certain letting relief rules, including the principal private residence relief from capital gains (“PRR”). The intention is to more narrowly target owner-occupiers.
Currently, landlords who at some point lived in the property they rent out can gain relief from capital gains tax when they sell it. The relief is calculated in function of the period of time the landlord occupied the property, with an exemption granted for the final 18 months of ownership.
Under the expected reforms: (i) the relief will only apply to rentals where the landlord is sharing occupancy of the home with the tenant; and (ii) the “final period exemption”, which allows for a short period of non-residence in the final period of ownership, will be reduced from 18 months to 9 months.
Rent a Room Relief
The proposed changes requiring shared occupancy of the home in order to be eligible for the rent-a-room allowance seem to have been abandoned. Therefore, you can move out of your apartment and rent it during the next 6 Nations or Wimbledon tournament and you may still qualify to Rent a Room relief.
ISAs
The individual savings account (“ISA”) annual allowance for 2019-20 will remain unchanged at £20,000. The subscription limit for Junior ISAs is increased in line with the consumer prices index to £4,368.
Wedding Venues
The chancellor will ask the Law Commission to review wedding venue laws to implement a “simpler and fairer system” so that couples may have a “meaningful choice.” The commission’s task is to find ways to reduce unnecessary red tape and lower the cost of wedding venues for couples by allowing more outdoor weddings to take place. Such a change would bring England & Wales in line with rules already in effect in Scotland.
Additional Measures Of Interest
The “Millennial Railcard,” which will give one-third off the price of rail fares to people aged 26-30, is expected to be available across the network by the end of the year. 4.4 million people could potentially benefit.
The national living wage for over-25s will increase from £7.83 an hour to £8.21.
As previously announced, fuel duty will be frozen again for the ninth year in a row.
Duty on beer, cider, and spirits are frozen for one year. Wine amateurs will have no such luck as they face an increase in duty of 3.4%.
Online betting companies will see the levy increased to 21% to fund the loss of revenue as fixed off betting machines stakes are reduced to £2.
How is this Budget impacting your Business?
In addition, the chancellor also made some key announcements for businesses across the country.
Digital Service Tax
The chancellor announced a new digital services tax (“DST”). The DST will be a 2% tax on the revenues of large technology companies, including social media platforms (Facebook), search engines (Google), online marketplace (Amazon) relating to revenue derived from UK-based users, subject to a £25 million annual allowance. Under the current proposal, the DST would be applicable to technology companies with global revenues in excess of £500 million. Further details such as how to collect the tax will be disclosed at a later stage.
Entrepreneurs’ Relief
For sales made on or after 29 October 2018, individuals realizing gains on a sale of stock in a company must satisfy two new conditions to benefit from the Entrepreneurs’ Relief.
- New Condition 1: in addition to the existing 5% ordinary share capital and voting rights requirements, the shareholder must now have a 5% interest in both the company’s distributable profits and its assets available for distribution to holders of equity on winding up.
- New Condition 2: For sales made on or after 6 April 2019, individuals will need to have satisfied the qualifying conditions for ER for a minimum of two years instead of one year.
The stated rationale is that the Government intends to focus on supporting long-term investments by extending the minimum period.
Annual Investment Allowance
Effective from 1 January 2019, there will be a temporary (two-year) increase in the annual investment allowance to £1 million (from the current £200,000), which is intended to boost business investment. The message is that Britain is open for business.
IR35: Off-payroll working
From April 2020, similar to measures recently imposed on Government departments and public bodies that engage the services of personnel who work through their own companies, all medium and large private sector businesses will effectively be required to decide whether a person is an employee or an independent contractor. Therefore, medium and large businesses will be responsible for withholding and accounting for income tax and employees’ and employer’s NICs accordingly.
This measure increases the tax and regulatory compliance burden for businesses that regularly engage staff on a “non-employee” basis. It remains to be seen how the measures will be rolled out in practice but it could have a significant effect on companies such as Deliveroo and Uber.
Tax in the event of an insolvency
The tax and insolvency rules are to be amended so that:
- in a liquidation, HMRC becomes a preferred creditor in respect of amounts previously collected by the insolvent business as “agent” for HMRC (effectively, VAT collected on sales and deductions such as PAYE and employees’ NICs) from employee wages). This measure will negatively affect the recoveries by creditors with floating charges and unsecured creditors as the funds remaining within the estate of the liquidated company will be reduced in order to first pay HMRC, and
- directors and other persons involved in a tax avoidance scheme will become jointly liable for company tax liabilities in an insolvency procedure. The aim is to prevent directors to enter into insolvency proceedings with the purpose of avoiding paying taxes.
Anti-avoidance rules: distribution of profits and permanent establishments
The government will legislate to ensure that UK businesses’ taxable profits reflect actual (i.e. commercial) profits. The goal is to prevent businesses from avoiding UK tax by having their “UK” profits accrue to non-UK entities residing in low-tax jurisdictions.
Effective from 1 January 2019, the government will also ensure that foreign businesses in the UK cannot take advantage of rules which exempt certain low value “preparatory or auxiliary activities” from creating a permanent establishment in the UK. Here the government does not want businesses to split their activities between different locations and entities to avoid the creation of a permanent establishment (i.e. if all those activities were carried out by the same company, then a permanent establishment would have been created).
Gains on UK real estate
- Non-Residents: from 6 April 2019, gains realized by non-UK residents on the sale of non-residential UK property will be subject to UK capital gains and corporation tax. Therefore, from that date, all non-UK residents will be taxable on gains for sales of interests in UK land. Moreover, non-UK residents will also be subject to tax on gains on interests in “UK property-rich entities” (for instance where shares in a company derive at least 75% of their value from UK land, whether commercial or residential).
- Non-Resident Companies: from 6 April 2020, non-UK resident companies that have a UK real estate business (or have other types of UK property income) will now be charged corporation tax instead of income tax (as it was the case). This means that non-UK companies will become to UK interest restriction and loss restriction rules regarding their UK rental income.
Offshore receipts from intangible property
Effective 6 April 2019, income from intangible property located in low-tax jurisdictions will be subject to UK income tax to the extent that such income is attributable to the sale of goods or services in the UK and arises from the ownership of the relevant intangible property.
The measure is aimed at non-UK entities that are based in jurisdictions with whom the UK does not have a full tax treaty. Specific anti-avoidance and anti-forestalling rules will apply to arrangements entered into on or after 29 October 2018.
Restrictions on carry-forward losses
From 1 April 2020, the use of carry-forward capital losses is to be restricted. The aim is to ensure that no more than 50% of a company’s income and gains in any year can be offset by carry-forward losses. This new measure will align the rules on carry-forward capital losses with the ones already in existence for carry-forward income losses.
Special rate writing down allowance
The rate of the writing down allowance on special rate expenditure on plant and machinery will reduce from 8% to 6%, effective from April 2019. Special rate expenditure typically includes expenditure on long-life assets, thermal insulation, and integral features. Businesses will continue to receive full tax relief but over an extended timeframe.
Capital allowances for structures and buildings
The chancellor announced a new “Structures and Building Allowance” for new non-residential structures and buildings. Tax relief is expected to be available for eligible construction costs incurred on or after 29 October 2018 at an annual rate of 2% on a straight-line basis.
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