The Budget contained very few changes concerning personal taxation. The much-anticipated hike of the capital gains tax rate did not materialise. There are no changes to rates of income tax and national insurance, and the thresholds for income tax have been frozen until 2026. The Inheritance tax nil rate band, lifetime pension and capital gains tax allowances will also be frozen.
Income Tax, Inheritance Tax and Capital Tax
The freezing of allowances and nil rate bands has been described as a “stealth tax” but the Chancellor was clear that this is a revenue raising measure. The Inheritance Tax nil rate band has been frozen since 2009, and with the increase in the value of house prices over that period (particularly in London and the South East of England), more and more individuals have found their estates within the scope of inheritance tax.
Prior to the budget many individuals were accelerating gifts to reduce their estate over a concern about potential changes to the inheritance tax rules, including the ability to make potentially exempt transfers (unlimited gifts which can fall outside an individual’s estate if the donor survives the gift by seven years). The gifting of assets to family members will often be treated as a disposal at market value, potentially triggering capital gains tax. Whilst the Inheritance Tax nil rate band remains stubbornly low and where an individual has sufficient resources; the gifting of UK assets should always be considered to start the 7 year clock running.
Most non-resident individuals and trusts with UK residential property interests are now also within the scope of UK inheritance tax. As the tax rate for individuals on death is 40%, there is a need to consider how to mitigate this exposure.
The budget contained several further spending commitments to help individuals and businesses through the pandemic, leading many to wonder whether further changes to capital gains tax and inheritance tax are inevitable, but have simply been postponed.
The headline tax change from the budget was in relation to Corporation Tax, as many had predicted. Corporation Tax will go up from 19% to 25% in April 2023, although the highest rate will only apply to companies with profits of over £250,000. Whilst many businesses have suffered during the pandemic, there are some who have made very significant profits during this time. The Chancellor’s targeted approach aims to result in only larger profitable trading companies paying the higher rate, and according to the Chancellor, will keep the UK corporation tax regime highly competitive amongst the G7. There is a concern that the change may send out the wrong message internationally, in light of the twin challenges of Brexit and the pandemic, but the 2 year advance notice of this change is helpful.
Companies will ‘small profits’ (£50,000 or less) will continue to pay tax at 19%, however, the small profits rate will not apply to close investment-holding companies. This means that many family investments companies (FICs) will be subject to the higher rates of Corporation Tax from April 2023. However, it is important to note that most dividends received by a UK company (including foreign dividends) are exempt from corporation tax and so the impact of the higher tax rate may be limited. Whilst some will want to review existing structures, we anticipate FICs will remain a popular estate planning tool.
Companies with profits between £50,000 and £250,000 will be subject to a tapered relief, allowing them to claim an amount of marginal relief that bridges the gap between the lower and upper limits. Companies subject to Corporation Tax will also be incentivised to invest in plant and machinery by temporarily allowing for increased reliefs on this expenditure. From 1 April 2021 to 31 March 2023 (up until the increase in the Corporation Tax rate), for qualifying expenditures companies will be able to claim:
- a super-deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances; and
- a first year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances
Furthermore, there will be a temporary extension to carry back trading losses for Corporation Tax and Income Tax. Currently unused trading losses can be carried back one year, but under new changes it will be possible to carry these back a further 2 years. This measure will provide a cash flow benefit to many businesses who have struggled at this time.
A much welcome and highly publicised announcement was the extension of the temporary increase in the SDLT nil rate band for residential property (from £125,000 to £500,000) until the end of June 2021. From then until 30 September 2021, the nil rate band will be reduced to £250,000 and revert to the £125,000 on 1 October.
It should be kept in mind however that alongside this SDLT relief, a 2% surcharge for non-UK buyers of UK residential property will be implemented from 1 April 2021 and the additional 3% surcharge in relation to additional residential properties still applies.
Extension of VAT reduction for tourism and hospitality
Needless to say, tourism and hospitality sectors have been some of the most severely impacted by the pandemic. The government will expand the temporary reduced rate of VAT of 5% for these industries until the of September 2021, after which a reduced rate of 12.5% will apply until 31 March 2022.
There was no suggestion in the Budget of the proposed one-off wealth tax, nor any change to the taxation of non-domiciled individuals and offshore trusts. This is very positive news and suggests the government appreciates the importance of the UK remaining attractive to wealthy international individuals to live, work and invest in the UK. Coupled with the new immigration rules which make it easier for the movement of skilled workers, the UK remains highly attractive for international families.
Overall, this was a very welcome Budget for high net worth individuals. The Chancellor’s approach of giving advance notice of the one significant tax change (corporation tax) bodes well in the event (as many suspect) the Chancellor decides to introduce personal tax changes in the future. We would still encourage individuals and their advisors to think and plan ahead, but the Budget contained no cause for alarm.