The following changes are made to income tax rates and allowances:
Entrepreneurs’ Relief (ER)
- Continuing the Coalition’s tax strategy of increasing the personal allowance for individuals, from 6 April 2016 the allowance will be increased to £10,800 and will be £11,000 from 6 April 2017. The Marriage Allowance, to be introduced from 6 April 2015, will also increase in line with the personal allowance.
- The increase in the personal allowance will not be paid for by a reduction in the limit at which the 40% tax rate starts to be paid. From 6 April 2016 the 40% rate will start to be paid from £42,700, up from £42,385 in 2015/16. This will increase to £43,300 from 6 April 2017, and is welcome news for higher rate taxpayers.
- The upper earnings and upper profit limits for national insurance contribution purposes will increase to stay in line with the higher rate threshold.
- There is no change to the basic, higher and additional rates of income tax.
- The blind person’s allowance and the married couple’s allowance will be increased by amounts equivalent to the Retail Prices Index in 2015/16.
The Chancellor announced two changes to ER to tackle perceived contrived structures set up to take advantage of this valuable relief. Both measures apply to disposals on and after 18 March 2015 and will restrict individuals’ claims to the 10% rate of capital gains tax that applies on disposals.
The first tightening up of the rules applies to individuals with an indirect shareholding in a trading company. Typically these structures were used where a group of individuals would otherwise have not met the 5% voting right requirement, and involved creating a holding company to pool the individuals’ interests in the underlying trading entity. For example, four shareholders might each have been entitled to 4% of the votes in a trading company, but they might combine their collective 16% shareholding in a specially formed holding vehicle in which they each owned 25%. An alternative structure involved the use of companies as members of a partnership. Prior to the rule change, the joint venture rules enabled shareholders in the holding company to claim ER on disposals of shares, but that is no longer the case.
The second measure relates to individuals who sell personal assets used in a business and seek to claim ER under the ‘associated disposals’ rules. Under the rules that applied prior to 18 March, individuals were able to withdraw from a business or company and claim ER on the disposal of a personal asset. The change has been brought in to restrict claims where an individual does not make a ‘meaningful’ withdrawal; at least a 5% stake in the business must now be disposed of by a claimant in order to benefit from ER on an associated disposal.
When ER was introduced, the intention was to allow entrepreneurs to benefit from a reduced rate of capital gains tax. Where entrepreneurs held shares in companies, the rules required them to hold a 5% interest to qualify, which would appear to be unnecessarily penal for entrepreneurs holding less than that percentage.
Securing ER has become increasingly important in individuals’ personal tax planning, and it has become apparent that some artificial arrangements were being constructed in an attempt to secure relief in situations never intended to benefit from ER. To the extent that these changes counter cases of blatant manipulation, then it is difficult to object to them. However, it remains to be seen whether they act as a disincentive for genuine entrepreneurs. The restrictions relating to associated disposals should only apply in cases where ER was not intended to apply, so this is seen as a reasonable step to tackle avoidance.
Capital gains tax for non-UK residents disposing of UK residential property
Following consultation last year, the government has confirmed that from 6 April 2015 non-UK resident individuals, trusts, personal representatives and narrowly controlled companies will be subject to capital gains tax on gains arising on the disposal of UK residential property.
Non-resident individuals will be subject to tax at the same rates as UK taxpayers (28% or 18% on gains above the annual exempt amount). Non-resident companies will be subject to tax at the same rate as UK companies (20%). However, the existing ATED-related capital gains tax charge for ‘non-natural persons’ will take precedence over this new non-resident capital gains tax charge.
More details on the new capital gains tax charge for non-residents were published in November 2014 and are discussed here in the Moore Stephens factsheet. More information on the ATED-related capital gains tax charge can be found here.
Class 2 national insurance contributions
As part of the planned changes to tax administration to “make tax easier”, Class 2 national insurance will be abolished and Class 4 contributions will be reformed. The government will consult on these proposals later in 2015.
Capital gains tax: Exemptions for certain wasting assets
In a recent court case, the taxpayer successfully argued that the disposal of an Old Master oil painting should be exempt from capital gains tax on the basis it qualified as a wasting asset – normally one with an expected life of under 50 years – because it qualified as plant following a loan to another party for use in its business. This loophole is now blocked as regards gains accruing on or after 1 April 2015 for corporation tax and 6 April 2015 for individuals. Although the particular facts of the case meant that the decision was unlikely to apply to many disposals, HMRC were apparently concerned that the ruling was open to exploitation through artificial schemes.
Inheritance tax – Deeds of Variation
The Chancellor announced an intention to consult on the use of Deeds of Variation for tax avoidance purposes. These Deeds offer beneficiaries under a will an opportunity to rewrite its terms within two years of the date of death and have the rewritten terms treated as dispositions made by the deceased for both capital gains and inheritance tax purposes. This ability to rewrite a will recognises the difficulties that some beneficiaries face when dealing with a will that has not been updated for many years before the date of death. However, the ability to amend terms to those more favourable for tax purposes has attracted negative press comment recently.
Inheritance tax exemptions
The existing inheritance tax exemption for members of the armed forces whose death is caused by injury while on active service will be extended to members of the emergency services and humanitarian aid workers responding to emergency circumstances. This will have effect for deaths on or after 19 March 2014.