30 October 2018

Personal tax rates and allowances update

2018 Budget contained minimal changes but there was one dramatic announcement

Rates and allowances update

The 2018 Budget contained minimal changes to personal tax rates and allowances affecting all parts of the UK except Scotland – but there was one dramatic announcement by the Chancellor.

This was to announce the acceleration of his party’s 2017 election manifesto pledge and use his Budget speech to increase the income tax personal allowance and higher rate (40%) threshold. These will rise to £12,500 and £50,000 respectively from 6 April 2019, one year earlier than planned. These thresholds will then remain in place for the 2020/21 tax year.  These will not apply in Scotland, and the Scottish Budget on 12th December will set out next years personal tax allowance, tax rates and thresholds for Scottish taxpayers.

The Chancellor confirmed that Class 2 NICs will not be abolished in this Parliament. However, the previously announced reforms to the NIC treatment of termination payments and income from sporting testimonials will be legislated for, taking effect from April 2020.

The starting (0%) rate band for savings income will remain at £5,000 for 2019/20. The ISA allowance will also remain at £20,000 for 2019/20, but the annual subscription limit for Junior ISAs will increase, in line with CPI, to £4,368.

The lifetime allowance for pension savings will also continue to increase in line with CPI for 2019/20, rising to £1,055,000.

Finally, a consultation will be held in 2019 on draft regulations for maturing Child Trust Fund accounts. The Budget also announced that the annual subscription limit for Child Trust Funds will be increased for 2019/20, again in line with CPI, to £4,368.

Chancellor tightens rules on Entrepreneurs’ Relief

Chancellor Philip Hammond today announced two measures to tackle the misuse of Entrepreneurs’ Relief by individuals disposing of business interests.

Entrepreneurs’ Relief is an attractive tax relief. It allows an individual to benefit from a flat 10% tax rate on disposals of shares in their personal trading companies, sole trades and partnerships, together with other associated assets. Multiple disposals can qualify, up to a lifetime limit of £10 million.

However, the Chancellor wants to make sure that only genuine entrepreneurs benefit. From 6 April 2019, the minimum holding period for all such disposals will increase by 12 months to two years, with an exception for businesses that ceased prior to 29 October 2018. Although there are already checks in place to ensure an individual making the disposal is involved in the underlying business, the Government believes that longer-term involvement would be more indicative of ‘true entrepreneurial activity’.

Under the second measure to tackle abuse, which is effective immediately, an individual disposing of shares in their personal company will only qualify for Entrepreneurs’ Relief if they are entitled to 5% of the distributable profits and net assets of a company – in addition to  5% of share capital and voting rights previously required.

However, as previously announced, the Government will legislate to protect individuals’ entitlement to Entrepreneurs’ Relief where shareholdings are ‘diluted’ below the 5% qualifying threshold as a result of a new share issue. This is to ensure that entrepreneurs are not discouraged from seeking external investment. This measure will have effect for shares held at the time of fundraising events which take place on or after 6 April 2019.

Trusts and IHT

Consultation on taxation of trusts

The Autumn Budget of 2017 announced that the Government would hold a consultation in 2018 on the taxation of trusts. The 2018 Budget has now confirmed that this will take place, with the focus on making the taxation of trusts simpler, fairer and more transparent. No further information was given.

IHT residence nil rate band

The inheritance tax residence nil rate band (RNRB), introduced on 5 April 2017, is an additional nil rate band that applies where, broadly, a residence is passed to a direct descendant. The relief is being phased in. The current band is £125,000, with the full band of £175,000 being available in 2020/21.

Two minor technical amendments are to be introduced, to be contained in the Finance Bill 2018/19, which will take effect in relation to deaths after 29 October 2019. The amendments relate to the ‘downsizing’ provisions and clarify the definition of ‘inherited’ for RNRB purposes in cases where the ‘gifts with reservation of benefit’ rules apply.

Property: relief and rule tightening

Property remains a favoured area for Budget tinkering. In line with previous changes, the latest announcements seek to provide relief to first-time buyers while targeting those with second homes and buy-to-lets.

Tightening up of private residence and lettings relief

Lettings relief  is up to £40,000 for those who let out a property that is, or has been, their main residence. From April 2020 the relief will only be available to those in shared occupancy with a tenant. The Chancellor also announced a change to private residence relief. Final period exemption provides relief from capital gains tax on gains made in the final 18 months of ownership, even if the individual is not an owner-occupier during that period. From April 2020, the exemption will be reduced to nine months. There will be no change to the special rules giving 36 months of exemption to those in (or moving into) care homes and people with a disability.

Finally, in light of perceived avoidance, the Government announced its intention to consult on the criteria for self-catering and holiday lets to be within the scope of business rates rather than council tax.