The change to capital gains tax (CGT) was correct, and from April 2015 all non UK based investors will have to pay CGT on the gain they make when they sell a UK property. The Government has said this will apply to future gains from the introduction date, which suggests that if a non-UK resident individual already owns a property and sells it after April 2015, they will pay CGT only on the gain which has accrued between the introduction of the tax and the sale date, with the pre-April 2015 portion of the gain being exempt from tax. It is going to be tricky to introduce and a consultation on ‘how best to introduce it’ is to be launched in April 2014 – we will observe developments and update clients accordingly.
Last minute hit on property investors – more CGT for UK owners
Some observers were predicting that mortgage interest tax relief on rental property would be removed but instead, the property sector faced another development which was entirely unexpected; in order to ‘reduce the incentive for those with multiple homes to exploit the rules’ the attractiveness of switching principal private residence (PPR) elections amongst property investments has been curtailed. The final period of PPR relief is to be reduced from 36 months to 18 months with effect from 6 April 2014. This may have the effect of releasing property to the market in the short term and it will of course increase CGT revenues in the longer term. Those who are currently relying on the final 36 month period of exemption for a property which has previously been their PPR may wish to consider selling the property before next April.
Increase to personal allowance and no employers’ NICs for those employing the under 21s
Our prediction for increases to personal allowances was correct, although not unexpectedly so! From April 2014 the individual personal allowance will rise by £560 to £10,000. Of course the threshold at which the higher rate of tax applies has reduced to £41,865, so in reality this is of very little benefit to the majority of tax payers.
To encourage companies to employ young people, employers’ national insurance contributions will not be payable for employees under 21 years of age who are earning less than the upper earnings limit of £32,010. This tax break is however not to be introduced until April 2015, so it has no immediate impact. This measure will hopefully help to reduce youth unemployment and also potentially enable student loans to be re-paid more quickly.
Questionable tax benefit for married couples
A new tax relief for married couples was also correct as previously forewarned, but again this has limited value for the majority of clients. It only applies if both parties are not higher rate tax payers and rather than providing an additional allowance to a married couple (as you could be forgiven for thinking from the hype), it merely allows one party to transfer up to £1,000 of their unused existing personal allowance to their spouse. Again, as this is a tax break, it will not take effect until April 2015. This change is expected to cost the Treasury £500m, in return for each couple saving a maximum of £200 a year, so one has to question how financially worthwhile it is really, apart from the obvious PR value.
Boost for ‘John Lewis’ style companies
New tax reliefs are being introduced for employee owned companies. With effect from April 2014 no CGT will be payable on share disposals where the main beneficiary is an employee benefit trust (EBT). There will also be inheritance tax (IHT) relief on transfers of shares and assets to companies controlled by an EBT and, from October 2014, there will be additional income tax relief for bonuses paid to employees of companies controlled by EBTs.
This combination of new tax reliefs shows the Government remains keen for UK companies to reward their employees with the prospect of a stake in their companies. In addition to increased loyalty and motivation from employees, companies introducing approved share schemes such as the enterprise management incentive (EMI), continue to benefit from many tax planning opportunities.
Continued attacks on large scale tax avoidance
As we expected, tax avoidance continues to be a key theme and there has been a renewed clampdown. The following tax planning strategies are no longer viable and any clients who are affected should discuss their individual circumstances with us:
• Use of employment intermediaries, i.e. PSC companies, to disguise employment.
• Allocation of profits within a partnership to corporate partners where an individual partner may subsequently benefit from the profits.
• Use of limited liability partnerships to disguise what is otherwise an ordinary employment relationship.
• Use of dual employment contracts to divide remuneration between UK and overseas activities by non-domiciled individuals residing in the UK.
• For charities, any organisations suspected of using charitable status for tax avoidance will have their entitlement to tax relief revoked.
New financial support for science
One development we had not anticipated was the new funding injection for scientific research. George Osborne clearly regards scientific research and technology as one of the most important opportunities for the UK to be a world leader in the long term. Generous tax relief is already available for companies through R&D tax credits which allow a company to obtain rebates of up to 225% on funds invested into qualifying projects.
Now, in the Autumn Statement, George Osborne has announced funding of £270m into quantum technology over the next 5 years. This is a very specialised area of science whereby particles can exist across multiple places and energy levels, which allows, for example, computer processing to be completed far more quickly. Osborne described it as ‘cutting edge scientific research that has the potential to deliver huge benefits for the British economy’ which can be used to increase security levels of communications, because any attempt to listen into or change a message is instantly detected.
European wide tax relief on small business loans
In addition, there has been an extension to income tax relief for interest paid on loans to invest in close companies and employee-controlled companies. This relief is being extended to investments made into any companies within the European Economic Area (EEA).
The verdict – was it a good or bad statement?
Do we think it was a good Autumn Statement for business owners? In the main yes, although we can always say the Government could be doing more. It is less positive for buy-to-let investors, and might cause many to rethink their investment decisions. The difficulty remains that with interest rates continuing to be so low and people perpetually concerned about the security of equities, what alternatives exist?
On behalf of everyone at RJP, we wish you a very happy Christmas and New Year 2014.