Given the lack of room for manoeuvre amid the global economic slowdown, Chancellor of the Exchequer George Osborne’s latest UK budget contained a surprising number of tax measures.
Given the lack of room for manoeuvre amid the global economic slowdown, Chancellor of the Exchequer George Osborne’s latest budget contained a surprising number of tax measures.
Business tax roadmap
- Corporate income tax and losses
Alongside the budget, the UK government has published a business tax roadmap. This sets out cuts in business rates (an annual commercial property tax), cuts in the rate of corporate income tax from 20% to 17% by 2020, and cuts in the petroleum revenue tax paid by oil and gas companies.
The roadmap also reforms the relief for corporate income losses. Companies will, in future, be able to carry forward such losses against all types of income, and surrender them for use by other companies in the same group. However, if profits exceed £5 million (presumably group not company profits), only 50% of profits can be offset by losses. These two measures should take effect from 1 April 2017, but a restriction on banks only being able to offset 25% of profits against pre-April 2015 losses will be introduced one year earlier.
Also included in the business tax roadmap are changes to the system of stamp duty land tax (SDLT), which businesses pay when they acquire commercial properties. The changes follow the principles adopted by the Chancellor last year for residential property, and will take effect for transactions entered into after 17 March 2016.
Prior to the budget, purchasers paid nothing if the property cost under £150,000, 1% of the total value if it cost between £150,000 and £250,000, 3% if it cost between £250,000 and £500,000 and 4% if it cost more than that. Now purchasers will pay 0% on the first £150,000, 2% on the next £100,000 and 5% on the balance. So, for a business premises costing £200,000, the SDLT will now be £1,000 ((£200,000-£150,000) x 2%) rather than £2,000 (1% of £200,000).
- Interest deductions on taxable profits
The business tax roadmap also includes restrictions on the amount of interest that can be deducted from taxable profits. From 1 January 2017 this will be set at 30% of EBITDA (earnings before interest, tax, depreciation and amortisation) for groups of companies with interest deductions over £2m. There will be a group ratio rule based on net interest to EBITDA for worldwide groups, and the existing worldwide debt cap will be abolished.
There are other anti-avoidance measures in the business tax roadmap, including increasing the chances of a withholding tax applying to royalty payments, and measures to tax offshore property developers on their UK developments. Businesses have been asking for another roadmap and therefore should welcome this document; however the general theme is one of relief for small businesses that is to be paid for by larger enterprises.
From a personal tax perspective, the Chancellor announced the abolition of Class 2 national insurance contributions (currently £2.80 per week for the self-employed) with effect from 6 April 2018. He also announced that individuals will be able to earn £1,000 from trading and £1,000 from renting property without paying income tax. Those with incomes in excess of these sums can either return income less expenses or income less the £1,000 allowance. These allowances take effect from 6 April 2017 and are welcome simplification measures.
Mr Osborne also announced a personal allowance increase for the year ending 5 April 2018. The amount of income that can be earned before any tax is paid will rise to £11,500, and the amount of income on which basic rate tax (broadly 20%) is paid, will increase to £33,500.
- Individual savings accounts
The annual amount that can be saved into an Individual Savings Account (ISA), in which income and gains are tax-free, will increase to £20,000 from 6 April 2017. Few working basic-rate taxpayers can afford to save £20,000 a year, so this is of benefit to higher earners, and to those with pre-existing savings who can move funds from their taxed accounts into ISAs. The Chancellor is also planning to introduce a Lifetime ISA. This will allow persons between 18 and 40 years of age to save up to £4,000 per annum, and the government will top up the fund by £1 for every £4 saved. This measure will be subject to consultation.
Capital gains tax
The Chancellor also announced reductions in the rates of capital gains tax (CGT) from 28% to 18% for higher rate taxpayers and trusts and from 18% to 10% for basic rate taxpayers, although in practice extremely few basic rate taxpayers pay CGT. These changes take effect from 6 April 2016 and may reduce share trading volumes between now and then. The old rates continue to apply to gains on let residential property and second homes, and to “carried interest” for private equity managers. With the previously announced increases in dividend tax rates (to over 38% for the wealthiest taxpayers) taking effect at the same time, investors are likely to be looking for capital returns in future rather than yield, whilst holding their high-yielding investments in the increasingly generous ISAs.
From a stand-alone tax perspective, this was a good budget for savers, and investment managers will now focus on rebalancing their clients’ portfolios.
*This article is accurate at the time of publishing. Many of the proposals therein will appear in the Finance Bill (to be published on 24 March 2016), which the House of Commons must then approve. Other proposals referenced are subject to consultation.
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