On 16 March 2016, George Osborne delivered the 2016 UK Budget. In his announcement, the Chancellor described his latest set of fiscal proposals as ‘a budget for the next generation', deciding to ‘act now so we don’t pay later.’ Below is a summary of the key tax proposals as they impact the financial services industry.
Capital Gains Tax (CGT)
Seeking to encourage enterprise and investment, the CGT regime will see a significant rate reduction from 6 April 2016. For gains above the annual exemption, lower rate taxpayers will pay a rate of 10% (a fall from 18%), whilst higher rate taxpayers will see a drop from 28% to 20%, ending a 5-year hike in the rate since 2009/10. However, gains accruing on the disposal of residential property and carried interest will be charged at the same rates as they currently are. It is interesting to see that capital gains arising as a result of carried interest arrangements will remain taxed at a higher rate, signaling that the government does consider carry a special case.
The measure reduces the liability for individuals who make a variety of transactions liable to CGT during the tax-year, including those disposing of shares and other financial and non-financial assets. It will also make the reporting fund regime for offshore funds increasingly beneficial, widening the gap between income tax and CGT rates to 25%.
Entrepreneur’s Relief (ER)
Sticking with the theme of rewarding enterprise, the ER regime that taxes capital gains at a rate of 10% is to be extended to investors in unlisted trading companies that have acquired newly issued shares on or after 17 March 2016 and have been held for a period of three years. The total amount of gains eligible for investors’ relief will be subject to a lifetime cap of £10m per individual and this limit will apply to beneficiaries of trusts.
Other changes include amendments to rules on associated disposals and an attempt to fix the definition of a trading company or group as announced in the Autumn Statement. The Finance Bill 2015 had a number of unforeseen consequences for joint venture companies and partnerships with corporate members that came in with immediate effect from 18 March 2015, so it is pleasing to note that the amendments will be backdated to that date.
Additionally, there may now once again be scope to claim ER in respect of gains on goodwill where a business is transferred to a corporate entity. It will be available where the individual holds less than 5% of the shares and voting power in the acquiring company or where the transfer of the business to the company is part of arrangements for the company to be sold to a new independent owner. The legislation will be backdated to 3 December 2014 to reflect when the rules were last changed.
Pensions and Savings
The U-turn on the anticipated pensions overhaul played out as expected and only minor changes to certain flexibilities were proposed. However, the introduction of the Lifetime ISA will be followed with interest and may be a precursor to more significant changes in the pension space in the Future. It enables 18-40 year olds to save up to £4,000 per annum that will be matched with a 25% bonus by the government. The funds can either be accessed tax free at the age of 60 or be used to purchase a first home. Accessing the funds earlier will lead to a loss of the bonus and a 5% penalty. This approach is not wholly dissimilar to the levies on accessing pensions before the age of 55, although the rates are significantly lower. A comparison will need to be made between using this route for retirement versus a typical pension, however the cap and lack of tax relief for higher rate earners probably makes this less interesting a proposition if you are already a house owner.
The annual personal allowance will increase to £11,500 for 2017-2018, representing a £500 increase from 2016-2017. In addition, the basic rate limit will increase to £33,500 for 2017-2018, which will result in the higher rate threshold of £45,000.
National Insurance Contributions (NIC)
Effective from April 2018, Class 2 NICs for self-employed individuals will be abolished, a move that will bring a small saving to individual partners in LLPs. There has been some discussion on aligning rates to neutralize the tax advantages across different structures and this could perhaps pave the way for a future alignment of NIC for employed and self-employed individuals, or a potential integration with income tax.
The government continues to take action against disguised remuneration schemes. There is a specific legislative change applicable from budget day where people have been using schemes utilizing a specific perceived weakness in the legislation. Additionally they are encouraging settlements of EBT structures by December 2016. To achieve this, they are removing the current exemption of employment taxes on capital growth. Further they are looking to tax loans taken from such disguised remuneration schemes. This will apply where loans are not repaid or otherwise taxed by April 2019. This and other changes focusing on shareholder and self-employed situations will be consulted on over the summer and legislated in Finance Bill 2017.
By way of re-cap, legislation will be introduced in Finance Bill 2016 to deem certain persons, who would otherwise be non-domiciled in the UK as a matter of general law, to be domiciled here for the purposes of income and capital gains tax.
An individual who was born in the UK or who has been UK resident in 15 out of the last 20 years will be considered from 6 April 2017 to be domiciled in the UK. As a result, they will no longer be able to access the remittance basis of taxation, i.e., they will be subject to UK tax on all foreign income and gains not remitted to the UK. They will also, at the time of becoming deemed UK domicile, be subject to IHT on gifts and on death on their worldwide assets.
However, when the reforms were announced at the summer 2015 Budget, the government made it clear that those long-term resident non-doms who have set up an offshore trust before they become deemed-domiciled will not be taxed on trust income and gains that are retained in the trust. These protections will be legislated in Finance Bill 2017. It will be important to see how this approach interacts with the UK’s tough anti-avoidance provisions that can attribute gains and income to individuals resident in the UK and in particular the use of offshore corporate structures will need to be reviewed.
With April 2017 fast approaching and the widening gap in capital gains and income tax rates offshore funds should consider whether UK reporting fund status (RFS) is attractive for their non-domiciled investors given the changes in the way these investors will be taxed from April 2017. Non-domiciled investors in a RFS share class will benefit from being within the CGT regime upon realization of their investment rather than the income tax regime should they be deemed domiciled when they realize their investments. Timing of entry into the regime will also be an important consideration.
The Government published a ‘business tax road map’ setting out the government’s plans for business taxes to 2020 and beyond. This aims to give businesses the certainty they need to plan and make the long-term investments that are vital for growth and for boosting the UK’s productivity.
As previously announced from April 2017 corporation tax will be reduced from 20% to 19%, but this will now drop further to 17% from April 2020. This is an additional 1% cut on top of what was proposed in the Summer Budget of 2015. This continues the trend in recent years differentiating the UK from other major economies. The move would place the UK’s corporate tax rates at less than half of that in the US, over a third less than European rivals in Germany and France and within touching distance of the rates found in Hong Kong and Singapore. However, in reality, the whole package of changes for corporation tax announced is expected to raise an additional £9bn for the government.
Loss Relief Reform
It was announced that the government will reform the rules governing certain corporate losses carried forward from earlier periods. The good news was that the reform will give all companies more flexibility by relaxing the way in which they can use losses arising on or after 1 April 2017 when they are carried forward. However, carried forward losses will be restricted so that they cannot reduce their profits arising on or after 1 April 2017 by more than 50%. This restriction will apply to a company or group's profits above £5m. This follows the approach in the banking industry where the restrictions have been tightened further.
The proposed acceleration of payment dates for very large companies (those with profits above £20m) have been deferred for two years, so they will have effect for accounting periods commencing on or after 1 April 2019. This provides more time to transition to the new payment schedule of quarterly instalments at months 3, 6, 9 and 12 of a 12-month accounting period.
No further amendments were made to the taxation of dividends in the hands of UK resident individuals, but with the previously announced 7.5% tax rise coming into effect from 6 April 2016, companies should review whether it would be appropriate to pay a dividend before this date. Shareholders with a potential exposure to the transfer of assets abroad legislation could also benefit from such a move if dividends were subsequently attributed to them on an individual basis.
Legislation will be introduced in Finance Bill 2016 to update the existing transfer pricing guidelines to reflect the recommendations of the joint OECD/G20 Base Erosion and Profit-Shifting (BEPS) project. The revised guidelines were published in October 2015 and will have effect for corporation tax purposes in relation to accounting periods beginning on or after 1 April 2016 and for income tax purposes from 2016/17. UK businesses with cross-border activity will need to review their existing arrangements and determine the implications for their business under the new regime. The BEPS project represents a fundamental overhaul to the existing project and should not be underestimated.
Building on rules included in the Autumn Statement 2014 to tackle hybrid mismatch arrangements, the Government has announced that the rules will be extended with effect from 1 January 2017.
In line with OECD recommendations, from 1 April 2017, interest expense tax relief will be limited for large multinational enterprises. The government will cap the amount of relief for interest to 30% of taxable earnings in the UK or based on the net interest to earnings ratio for the worldwide group. To ensure the rules are targeted where the greatest risk of base erosion and profit shifting lays the rule will include a threshold limit of £2 million net UK interest expense.
The government will reduce the amount of profit that banks can offset with pre-2015 losses from 50% to 25%, with this taking effect from 1 April 2016. There are also technical changes to the definition of a bank.
Insurance Linked Securities
The government wants to develop a competitive corporate and tax structure to attract insurance linked security vehicles to be domiciled in the UK. A consultation document was published on 1 March 2016 and enacting legislation will be published in the Finance Bill 2016 allowing regulations to be made to give effect to this policy aim.
Loans to Participators
From 6 April 2016, the tax charged on loans made to participators applying to close companies is being aligned to the higher dividend tax rate of 32.5% from the previous rate of 25%. This alignment of the tax charge aims to reduce individuals taking out loans over dividend payments and employment income.
Offshore Investment in UK Land
This proposal seeks to align the taxation of resident and non-resident companies trading and developing land in the UK. Previously protections were afforded to some non-resident companies under certain double tax treaties. The amendments remove the current territorial restriction in UK legislation so that the profits of a trade carried on by a non-resident company are subject to corporation tax regardless of the existence of a permanent establishment. Amendments to the UK’s double tax treaties with Guernsey, Jersey and the Isle of Man have been made with immediate effect. The move will adversely impact the potential returns available to certain investors requiring a reappraisal of their investment activity.
Stamp Duty Land Tax
As announced previously from 1 April 2016 a 3% higher rate of SDLT will be payable on purchases of additional residential properties. The higher rates would apply where an individual owns two or more properties and has not replaced their main residence. Purchasers will have 36 months to claim relief from the additional charge by replacing their main residence. Companies purchasing residential property will also be subject to the higher rates, including the first purchase of a residential property. Where a small share is inherited in a property in the last 3 years or where contracts have been exchanged on or before 25 November 2015 but not completed until on and after 1 April 2016, the higher rates will not apply.
From 17 March 2016, the SDLT rules for commercial properties will be changed such that SDLT is charged at each rate on the portion of the purchase price which falls within each rate band.
Budget 2016 - A Budget for the Next Generation