Tax Partner Christine Tuckerman takes a look at how the autumn Budget affects private clients and their wealth.
Despite much media chatter about a new wealth tax, the Chancellor decided to leave well alone, at least for now. But one cannot ignore the possibility that some form of wealth tax may emerge in the years to come, particularly if there is a change of Government.
And whilst there are no changes this time to pension contributions tax relief, one cannot ignore the possibility that there will be future limits on this, as it costs the Treasury billions of pounds.
There were no changes to Inheritance Tax announced this time, but there is a review being undertaken by the Office for Tax Simplification that could usher in new legislation in the next Budget.
Capital gains tax (CGT) private residence relief is one of the most valuable tax reliefs available to the individual. The Chancellor is bringing in two measures to restrict its availability.
Firstly, lettings relief, which can exempt up to £40,000 of gain, or £80,000 for a jointly-owned property, is to be restricted. From April 2020 the Government will reform it so that it only applies in circumstances where the owner of the property is in shared occupancy with the tenant.
The second change to PRR will be subject to a consultation before being introduced. The final 18-month period of ownership of a main residence is always exempt from CGT. However, the Government wants to halve this to just 9 months.
But there will be no changes to the 36 months final period exemption available to disabled people or those in a care home.
In addition, there are changes taking place from 6 April 2019 that were included in last year’s Budget. CGT on gains made by non-residents on the disposal of UK residential property will be extended to gains made on commercial land and property. Non-residents may also be affected by a proposed 1% Stamp Duty Land Tax surcharge, subject to consultation.
And finally, the rules requiring non-residents to pay their CGT on property gains within 30 days of completion are to also apply to UK residents with effect from 6 April 2020.
ER is an extremely valuable relief as it reduces the amount of CGT paid on disposals of businesses, or shares in a personal company, by offering a reduced 10% tax rate on up to £10 million worth of lifetime gains.
There was speculation that ER would be abolished in the Budget, but even though, thankfully, that did not happen, the Chancellor decided to bring in a couple of new restrictions.
From 6 April 2019 the Government wants to more carefully target the relief by doubling the minimum period throughout which all qualifying conditions for the relief are met, from the current 12 months to 24 months. This will affect a number of tax planning issues as the longer two-year period will need to be factored in to disposals taking place after April next year.
ER has also been restricted with immediate effect to remove what the Government sees as an abuse. In addition to the current requirements on share capital and voting rights, from 29 October 2018 shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company to claim the relief.
This counters some tax planning structures which used special share classes created specially to secure the relief. It could mean that anyone already in such a structure, or using loan notes, may be forced to crystallise their original gain early to secure a measure of ER.
There is some good news in that ER is actually being strengthened with two measures. This first preserves the relief where a holding is diluted below the required 5% due to the raising of fresh capital. Secondly, ER will be given where, within the 24-month qualifying period, a business has been carried on first as a sole trade or partnership and then through a company.
The Government is rolling out the controversial off-payroll working (IR35) rules from the public sector to the private sector with effect from April 2020. Responsibility for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker.
This will undoubtedly create a great deal of uncertainty for individuals, as working out whether you are employed or self-employed for tax purposes is not straightforward and relies on a vast body of case law. Even the tax office’s own online status determination tool is inefficient, incomplete and biased towards employment. Even though the tax office has also lost a string of cases before the courts on employment status, it appears determined, to the point of intransigence, to continue with the IR35 rules.
From 6 April 2019 the personal allowance will increase from its current £11,850 to £12,500, one year earlier than expected. However, it will also remain at this amount for 2020-21, but will then increase by reference to the Consumer Price Index. The £650 increase means that in 2019-20 a typical basic rate taxpayer will pay £130 less tax than in 2018-19 and £1,205 less tax than in 2010-11.
Also, from 6 April 2019 the Higher Rate Threshold at which taxpayers start to pay 40% income tax will increase from £46,350 to £50,000, again one year earlier than planned. The threshold will remain at the same level in 2020-21.
Whilst the increase in the allowances is welcome, National Insurance thresholds are not increasing in line with income tax, so the difference in thresholds and rates continues, with no sign of any move towards merging the two taxes.
Which brings us neatly onto a big issue which successive Governments have not only failed to tackle but have made worse: tax complexity.
We need a simpler personal tax system that can be understood by individuals and even computers. A recent report from the Office of Tax Simplification (OTS) highlighted the very real problems with the current system: it is just far too complex. The report recommended the amalgamation of some allowances and to make clearer the order in which they are given in a computation.
There are around 25 different personal tax allowances and reliefs available, even for a fairly straightforward tax computation.
We need to urgently reduce this tax complexity to bring our system into the 21st century and to coincide with its evolving digitalisation. A big part of the problem is that we now have more than 22,000 pages of rules made up of myriad reliefs, allowances and anti-avoidance measures. A simplification of the tax code would reduce contradictions and loopholes, and even free up business growth for the post-Brexit UK.
It was Adam Smith who said in the ‘Wealth of Nations’ that taxes should be equitable, certain, convenient and efficient. At the moment it feels like the tax system is failing on all four counts.