17 March 2016

The Chancellor presented his 2016 Budget yesterday. The following is a summary of the main points that affect individuals and small businesses:-

Corporation Tax

Corporation tax will be cut to 17% by 2020.

Income Tax

From April 2017 the personal allowance will increase to £11,500 (£10,600 in 2016/17) and the point at which people pay higher rate tax of 40% will be set at £45,000 (£43,000 in 2016/17). Of course, by that time the Scottish Parliament will set the thresholds of Scottish tax payers so we will need to see how they intend to implement this.

Income Tax - Disguised remuneration schemes 

Action will be taken to crack down to ensure that users of such schemes pay their fair share of National Insurance contributions (NICs) and tax. The original disguised remuneration rules were introduced in 2011 primarily to attack schemes where employers paid a contribution to a third party (usually an Employee Benefit Trust) instead of paying remuneration directly to the employee. The new changes will introduce additional targeted anti-avoidance rules with immediate effect.

National Insurance Contributions

From April 2018 employers will need to pay National Insurance contributions on termination payments above £30,000 where Income Tax is also due. Employees will not need to pay National Insurance on any of the payment.Class 2 National Insurance contributions for self-employed people will be scrapped from April 2018. They will still be required to pay Class 4 National Insurance contributions.

ISAs

Savers will be able to save £20,000 per year in an ISA from April 2017. The Chancellor announced a new type of account known as the Lifetime ISA to help young people save in a flexible manner for the long-term. From April 2017, people under the age of 40 will be able to open a Lifetime ISA and contribute up to £4,000 in each tax year. The Government bonus of 25% is payable on contributions up until the point that the individual reaches age 50.

The funds and Government bonus can be withdrawn at any time from 12 months after opening the account for the purposes of buying a first home up to a purchase price of £450,000. The funds can otherwise be withdrawn from age 60 for any other purpose free of tax. Withdrawals can also be made at any time for other purposes but this will involve a return of the Government bonus element to the Government and a charge of 5%.

Capital Gains Tax

One of the biggest changes to tax was the Chancellor’s announcement that Capital Gains Tax was going to be reduced from 18% to 10% for basic rate tax payers and 28% to 20% for higher rate tax payers, effective from 6 April 2016. Buried in the budget notes was the detail that this is not going to apply to the disposal of residential properties (that do not qualify for principal private residence relief). The rate for these disposals will remain at 18% and 28%. The policy objective here is intended to provide an incentive for individuals to invest in companies over property. Buy to let investors are once again being discouraged.

Lifetime limit on Employee Shareholder status exemption

Individuals who receive shares under an Employee Shareholder Agreement are currently exempt from CGT on the disposal of the shares. In respect of Employee Shareholder Agreements entered into after 16 March 2016 there will be a lifetime limit of £100,000 on the CGT exempt gains that a person can make. Thereafter CGT will be chargeable.

Entrepreneurs’ Relief

The budget also contained changes to Entrepreneurs’ Relief for Capital Gains Tax. The relief is extended to individuals who are not employees or officers of a company who purchase shares in an unlisted trading company on or after 17 March 2016 and hold them continually for 3 years from 6 April 2016. When the shares are disposed of, gains are taxed at 10% rather than at the usual higher rates. The amount of gains that can qualify for the relief is capped at £10 million for each individual.The government have also reacted to criticisms of changes to Entrepreneurs’ Relief contained in the Finance Act 2015. Now Entrepreneurs’ Relief will be available to individuals who dispose of their whole interest in a company that is less than 5%, where they have previously held a larger stake. This is designed to ensure the relief is available on the transfer of family businesses as part of normal business succession planning. In addition, the definitions of “trading company” and “trading group” have been introduced for joint ventures and partnerships.

Pensions

Despite there being much discussion on potential changes to pensions in the days leading up to the Budget there was no change announced to the tax relief on pension contributions or on changes pensions to a system similar to ISAs. There were some more minor changes to pensions including a change that enables an individual over the age of 75 with serious ill health to take a lump sum from a pension plan that has already been accessed and pay tax and their marginal rate as opposed to at 45%.

Inheritance Tax

Some changes to estate duty legislation were announced. Estate duty was replaced by Capital Transfer tax and then by Inheritance Tax but is still relevant in some cases where objects are subject to an exemption due to their national, scientific, historic or artistic interest. Further details on this will follow in the Finance Act.

Alcohol and tobacco

Beer and cider duty is to be frozen as is the levy on whisky and spirits. There will be a 2% increase on tax on cigarettes and 3% increase on rolling tobacco.

SDLT (as opposed to LBTT)

The Chancellor reaffirmed the introduction, from April 2016, of higher rates of Stamp Duty Land Tax (SDLT) in respect of second properties in England and Wales, which has effectively been copied by the Scottish Government with its Land and Buildings Transaction Tax (LBTT) Additional Dwelling Supplement (ADS). However, with regard to SDLT in England and Wales, he has announced that the period within which a reclaim can be made will be extended from 18 months to 36 months. It remains to be seen whether this extension will be mirrored by the Scottish Government in respect of the LBTT ADS in Scotland.

For further advice on how the measures announced in the Budget could affect you please contact the BTO Tax Planning team.

Contact: Ross Brown, Partner rbr@bto.co.uk T. 0141 221 8012