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Budget 2018: What do private clients need to know?

With the buzz of Monday's Budget still alive, we pull it apart and look at what bits private clients need to know about.

Another promised Trust consultation 

The long promised consultation into the taxation of trusts with the aim of simplifying the system is due to be launched soon, having first been announced in the 2017 Autumn Budget.

This is not the first time the government has attempted to tackle this issue, with a consultation on a similar topic in 2013. Although several changes came from the previous consultation, a number of issues were left untouched (perhaps too difficult). We will bring you the latest updates as they arrive.

 

Additions to Trusts

The tax legislation for additions to ‘excluded property’ trusts is changing to reflect HMRC’s established legal position (and indeed, our understanding). Where an individual who is UK-domiciled (or deemed UK domiciled) makes an addition to a trust set up when they were not UK domiciled, the added property will not be ‘excluded property’ and will therefore be subject to UK Inheritance Tax (IHT).

This change will affect any charge to IHT following Royal Assent, regardless of when the addition was made.

You should consider carefully, and seek advice, before adding property to a trust to ensure an innocent mistake doesn’t cause your trust and you significant tax complications. You may also wish to review any previous additions to ensure you will not fall foul of this change.

 

Capital Gains Tax (CGT) and Corporation Tax: Direct and indirect disposals by non-UK residents of UK property

All non-UK residents will become liable to CGT or corporation tax, as appropriate, on all disposals of UK land, from 6 April 2019.  This will replace the current Non-Resident Capital Gains Tax regime that currently applies only to UK residential property and brings commercial property into the tax net as well.  Annual Tax on Enveloped Dwellings (ATED) related CGT will be abolished as a result.

The charge will also be extended to disposals of interests in ‘property rich’ companies (i.e. where at least 75% of the value of the company is derived from UK land). However, the non-UK resident will also need to hold at least a 25% interest in the company.  Interests held by ‘connected parties’ will be aggregated when applying the 25% test.  A trading exemption will be available where the land is used in the company’s trade, which will be particularly relevant for retailers and hoteliers.

Capital gains on UK residential property will continue to be calculated as if property was acquired at market value on or after 5 April 2015 (unless it was actually acquired later), with all other UK land treated as acquired at market value in April 2019, unless the taxpayer elects to use the actual cost.

Returns will have to be submitted to HMRC with the tax paid within 30 days of completing the disposal.

If non-UK residents are to avoid being caught out by the tight deadlines for submitting these Returns and paying CGT on UK property disposals, they must consider their reporting obligations before completion of a sale or gift and obtain advice from their UK tax adviser. Our experience with ATED Related CGT and Non-Resident CGT is that the awareness of this requirement is low and penalties are frequent.

This levels the playing field between UK and non-UK investors in UK property and provides the Chancellor with the opportunity to expand the UK tax net and raise additional tax revenue.

 

IHT: a further twist to the Residence Nil Rate Band

The IHT Residence Nil Rate Band will eventually increase the potential tax free amount passing on death to £500,000 per person, with therefore up to £1m when the second person in a married couple or Civil Partnership dies.  This relief is restricted if the value of your estate is over £2 million and eliminated if over £2.35 million.  

Assuming your estate qualifies, there are still numerous hurdles for what is given and to whom, in order to make a claim. This change adds another hurdle, albeit in slightly less usual circumstances. In essence, if you gift your home and continue to live in it, (gift with reservation of benefit) the gift must be to your direct descendants personally, otherwise the relief will be denied.

The rules are complicated, so if you are hoping that your family will benefit from this relief then ensure your planning is done correctly.

 

 A valuable Relief lives to fight another day

Thankfully, Entrepreneurs’ Relief was not abolished, which was rumoured. This means that the effective 10% CGT rate on sale of a qualifying interest in a business remains a key incentive to entrepreneurs. However, it was made slightly more focused:

1) With immediate effect, the holding period required to qualify has been extended from one year to two years and the “5% test” now also requires an interest of at least 5% in the distributable profits and net assets of the company on a winding up, as well as the existing criteria of share capital and voting rights. 

2) To assist those who would miss out on the relief if their shareholding is diluted below the 5% threshold before a sale, there will be an option to make an election (within a specific time-frame) to preserve it; this will be available from 6 April 2019.

Having an ongoing conversation with us in relation to your qualifying business interests ensures that you can benefit from this Relief and do not miss any election deadlines.  The tax that will be due on a potential sale should be considered at the same time or even before negotiations begin, rather than an afterthought, as it would significantly impact your personal position.

 

Property tax – letting a main residence

If you rent space in your home, there is a tax free threshold for the amount you can receive. This was being reconsidered but has avoided the chop. 

However, consultation is due to be issued concerning when you do sell your home and making the usual relief from Capital Gains Tax (the Principal Private Residence Relief) less generous if you rented the property out at any point while you were not also living there. 

In addition, there are plans to reduce the final period for which Principal Private Residence Relief will apply regardless of the actual occupation of the main residence, from 18 months to 9 months. This had previously been reduced from 36 months to 18 months with effect from 5 April 2014.

The government will consult on these two changes, which would be effective from April 2020. The current provisions that extend the period to 36 months for disabled people or those in a care home will be unaffected.

 

Returns of disposals of land and payments of tax

From 6 April 2020, UK residents disposing of UK residential property, where a chargeable capital gain arises, will be required to submit a Return and pay the tax due within 30 days of completing the disposal.  This aligns the reporting requirements for UK residents with non-UK residents.  HMRC will accept reasonable estimates of values and apportionments if the information is not available before the deadline. 

It will be essential to speak to your tax adviser as early as possible where there is any doubt that the gain on the disposal of your home will be completely exempt as your main residence.  The calculations of the chargeable amount in such cases can be complex and may require valuations at several dates and research into the use of the property over the years.

This accelerates the payment of capital gains tax by up to 20 months and will assist the Chancellor with his cash flow. In our experience elsewhere, this could result in significant penalties while people are completely unaware of this new obligation usually covered by their personal Tax Return deadlines.

Optional remuneration arrangements: cars and vans

Salary sacrifice schemes, by which salary was generally exchanged for benefits of equal value, provided both employers and employees with opportunities to save tax and NICs.  Due to HMRC’s concern with their over-exploitation, salary sacrifice schemes were replaced by so-called optional remuneration arrangements (OpRAs) with effect from 2017/18.  Under an OpRA, the greater of the salary foregone and the value of the benefit provided is treated as earnings.  The effect of the new amendment is that where there is a taxable car or van provided through an OpRA, the amount forgone will include such costs connected with the car or van (e.g. vehicle insurance) as they are regarded as part of the benefit in kind under the normal rules. 

 

Exemptions relating to emergency vehicles

There have been some minor but important extensions to the exemption for limited private use of emergency vehicles.

This exemption from the car benefit charge is restricted to cars not used as a private vehicle and not suitable for private use (e.g. emergency vehicles with flashing blue lights).  The extended scope of the exemption will remove a disincentive for employees in the emergency services from taking vehicles home.  This in turn will facilitate faster response times and maintain the level of flexibility expected from the emergency services. 

 

Exemption for vehicle-battery charging facilities at or near the workplace

A new exemption has been introduced where an employer provides a benefit in the form of charging facilities for all-electric and plug-in hybrid vehicles at or near the employee’s workplace.  The exemption from income tax on the provision of these facilities will also apply where the employee is a passenger in a vehicle using the charging facilities.  The charging facilities must be available generally to employees at the workplace in question, though multiple workplaces of the same employer need not all be equipped with charging facilities.  The exemption will be effective from the beginning of the tax year 2018/19.

The removal of any income tax liability from employees removes a tax deterrent from the use of all-electric and plug-in hybrid vehicles.  No immediate action is required from employer firms, other than to consider the provision of the newly exempt facilities, but the success of the proposal in environmental terms will depend on the initiative of employees.

The shortage of charging facilities in residential areas has historically reduced public take-up rate of all-electric and plug-in hybrid vehicles.  The provision of charging facilities by an employer for a vehicle which is not a taxable car or van (which are exempt from a facilities charge under separate provisions) would otherwise be a benefit in kind and subject to income tax and NIC.  The new exemption removes a policy disincentive from the achievement of Air Quality and Climate Change initiatives. 

 

Exemption for expenses related to travel

This change will affect employers who make expenses payments or reimbursements to employees for subsistence expenses, such as food and drink costs, to which HMRC benchmark scale rates will apply.   It will remove the requirement for the employer to check receipts and replaces it with a system for checking that employees were engaged in qualifying travel in relation to the amounts paid or reimbursed. 

As a result of this change, employers no longer need to check expenses item by item, and are thus relieved of an administrative burden. 

Read our Budget 2018 overview here.