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The Chancellor of the Exchequer pulled out a few surprises in his Autumn Statement. The most eye-catching is the reform of stamp duty land tax (SDLT), which is payable by purchasers of land and property. The changes should reduce the SDLT payable on 98% of transactions which complete from 4 December 2014 onwards.
Small businesses should be pleased with the £1,500 business rate discount for small high street shops, cafes, pubs and restaurants. All employers will benefit from the zero rate of employers’ national insurance for workers aged under 21, which is to be extended to apprentices aged under 25 from April 2016.
People employing carers in their own homes will qualify for the employment allowance of up to £2,000 per year. Where an ISA is passed on to the surviving spouse or civil partner on death, the tax shelter for the savings will be preserved.
Further detail on all these points is given below. This newsletter is based on the documents released on 3 December 2014. It is possible that a different position will be shown by the draft legislation which will be published on 10 December 2014. We will keep you informed of any significant developments.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) is paid by purchasers of land and buildings. The tax is regarded as unfair, as it is imposed in a slab system on the whole value of the property according to the highest rate applicable for the property value.
From 4 December 2014 the new rates and bands of SDLT apply (see below) and the tax is imposed in a progressive fashion such that each slice of the property value bears tax at the rate according to that band, like income tax. These changes only apply for residential properties, not for commercial properties.
Until 3 December 2014 a house which sold for £260,000 would attract SDLT at 3% on the entire value, so the purchaser would pay £7,800 (£260,000 x 3%), although SDLT for properties costing up to £250,000 was just 1%.
Where the contract for the same house at the same price completes on or after 4 December 2014 the SDLT will be calculated as:
|£250,000 – £125,000 x 2%||£2,500|
|£260,000 – £250,000 x 5%||£500|
This saves the purchaser £4,800.
Buyers who have already exchanged contracts to purchase, but have not completed the transaction before 4 December 2014 will pay SDLT at the new rates and bands which are:
|Purchase price||Rate of SDLT on each band|
|£0 – £125,000||0%|
|£125,001 to £250,000||2%|
|£250,001 to £925,000||5%|
|£925,001 to £1,500,000||10%|
The changes for SDLT will mean that purchasers of residential properties costing less than £937,500 will pay less tax, but purchasers of properties over that threshold will pay more tax, and for purchasers of properties costing over £2.1 million will pay considerably more.
Land and Building Transaction Tax
From 1 April 2015 purchasers of land or buildings in Scotland will pay Land and Building Transaction Tax (LBTT) in place of SDLT. This new Scottish tax will be imposed in a progressive fashion, like the new SDLT. However, the new progressive LBTT will apply to both residential and commercial properties at the following rates and bands:
|Purchase price||LBTT rate|
|Up to £135,000||0%|
|£135,001 to £250,000||2%|
|£250,001 to £1m||10%|
|Purchase price||LBTT rate|
|Up to £150,000||0%|
|£150,001 to £350,000||3%|
Annual Tax on Enveloped Dwellings
The annual tax on enveloped dwellings (ATED) is paid by the owners of residential properties (dwellings), where the property is held by a non-natural person such as a company, partnership with one or more corporate members, unit trust or similar structure. A number of reliefs and exemptions are available which must be claimed on a property by property basis for dwellings that are commercially let, held as stock for development companies, used as employee accommodation or as farmhouses, or are open to the public.
This tax was introduced in April 2013 and has raised five times more than expected, so the Chancellor is putting up the annual charges to apply in 2015/16 as follows:
|Up to £1,000,000||£Nil||£Nil|
|£1,000,001 to £2,000,000||£Nil||£7,000|
|£2,000,001 to £5,000,000||£15,400||£23,350|
|£5,000,001 to £10,000,00||£35,900||£54,450|
|£10,000,001 to £20,000,000||£71,850||£109,050|
The Chancellor has ordered a full review of the future structure of business rates to report by Budget 2016. In the meantime the high level of small business rates relief (SBRR) will be extended to 31 March 2016, and the increase in business rates for that year will be capped at 2%.
High street shops, pubs, restaurants and cafes with a rateable value of less than £50,000 currently qualify for a discount on business rates of £1,000 per year. This discount will be increased to £1,500 per year for 2015/16.
The employment allowance was introduced from 6 April 2014. It is worth £2,000 per year per employer to set against the employer’s national insurance liability. For 2014/15 individuals who employed people in their own home, such as nannies, housekeepers or gardeners could not claim the employment allowance. This blanket ban for domestic workers also applied to carers, but from April 2015 the employment allowance will be available to households who employ care and support workers.
From 6 April 2015 employers will not have to pay employers’ NI on the wages of workers aged under 21, for wages up to £815 per week. From 6 April 2016 that exemption from employers NI will be extended to wages paid to apprentices aged under 25, with the same weekly cap on the amount paid.
Drivers of very low-emission cars may be in for a shock from 6 April 2015. Those vehicles with CO2 emissions from zero (i.e. electric) to 50g/km will be subject to tax as a benefit in kind for the first time. Tax will be payable on 5% of the vehicle’s list price, or 8% for diesel cars. The benefit in kind chargeable amount for all other cars will increase by 2% of the list price, including those cars which are currently taxed on 35% of the list price, as the maximum benefit rises to 37% of the list price.
Where a company car driver receives free fuel (petrol, diesel or LPG) for private journeys, the taxable benefit is calculated as the percentage of the list price for the car applied to the fuel charge multiplier set at £22,100 for 2015/16 (£21,700 for 2014/15) . The maximum taxable benefit of receiving free road fuel for private use will increase to £8,177 for 2015/16 from £7,595 for 2014/15.
Where the employer pays for the electricity to charge an electric company car there is no tax on the benefit of using that electricity on private journeys. Equally there is no standard rate to reimburse employees when they use their own domestic electricity supply to charge an electric company car.
Driving from home to work in a company van is not considered to be a private journey, but it is when the vehicle is a company car.
When a company van is used for private journeys the driver is taxed on £3,090 for 2014/15. This increases to £3,150 for 2015/16. When road fuel is provided for private journeys in a company van the taxable benefit is £581 for 2014/15, rising to £594 for 2015/16.
An electric van is currently tax-free for the driver, even when it is used for private journeys. However, from 6 April 2015 the private use of an electric commercial vehicle will be a taxable benefit, calculated as £630 for 2015/16. The taxable benefit for electric vans will increase each year until it is equal to other vans from April 2020.
Corporation tax rates for all sizes of company in the UK (excluding the oil and gas sectors which pay at special rates) are aligned at 20% from 1 April 2015. This removes the need for the associated companies rule that restricts the use of the small profits rate of corporation tax, so those rules are abolished from April 2015.
However, large companies must pay their corporation tax by quarterly instalments once their taxable profits exceed £10 million, and the tax due is at least £10,000. From 1 April 2015 those thresholds are divided by the number of companies in the corporate group which are related by a 51% holding.
The Chancellor has proposed the Northern Ireland Executive could take control of corporation tax rates, and directly collect corporation tax from companies based in that region. There is no indication of when this change may occur.
In 2013 and 2014 the Government introduced various new tax reliefs for companies that produce high-end TV programmes, video games or theatre productions. These reliefs are all similar but not exactly the same.
A new tax relief along the same lines for companies that produce children’s TV programmes will be introduced from April 2015. It will also consult on introducing a new tax relief for orchestras from April 2016.
Research and Development
Companies have been able to claim enhanced tax relief for expenditure on research and development (R&D) for many years. The amount spent on specific classes of costs relating to qualifying R&D projects is multiplied by a percentage, before the total is deducted from the company’s taxable income for the year. Since 1 April 2012 that percentage has been 225%.
For R&D expenditure incurred from 1 April 2015 that percentage is increased to 230%. However, the costs that qualify for this deduction will be further defined to remove materials which are used in products that are sold.
Large companies claim R&D tax relief as an expenditure credit equal to a percentage of the R&D spend for the accounting period. That credit (known as “above the line” credit) is generally set against the company’s corporation tax liability for the year. The percentage of R&D costs translated into the “above the line” credit was 10% for periods since 1 April 2012, and will be increased to 11% from 1 April 2015.
Income Tax Allowances
The standard personal allowance will increase from £10,000 to £10,600 on 6 April 2015, but the personal allowances for those born before 6 April 1938 are frozen. From 6 April 2015 married couples and civil partners will be able to transfer £1,060 of their unused personal allowance to their spouse/ partner, if the recipient is taxed at no more than the basic rate for the year (20%).
The income tax rates for 2015/16 on earnings and dividends are the same as apply in 2014/15. However, the savings rate is reduced from 10% to zero and the savings rate band is increased to £5,000. The savings rates only apply if the individual’s net non-savings income does not exceed the savings rate limit.
The Chancellor announced in September 2014 that the “death tax” on undrawn pensions, set at 55% of the value of the pension fund, would be removed from 6 April 2015 where the deceased was aged under 75. Where the deceased was aged 75 or more the undrawn pension fund is taxed in the hands of the beneficiary (usually the surviving spouse) at their marginal rate of tax, or at 45% where the fund is taken as a lump sum.
Those tax changes would not apply where the pensioner had already bought an annuity with his pension fund, leaving the surviving spouse worse off. From 6 April 2015 where the pensioner dies before age 75 and had purchased a joint life annuity or guaranteed term annuity to provide for the spouse, further payments from the annuity made after the death of the pensioner will be tax free.
The Government likes to welcome foreign-born individuals to the UK, especially if they are very wealthy. Such individuals have a special tax status, which is almost unique to the UK, called “non-domiciled”. Even though the individual is resident for tax purposes in the UK their non-domiciled status allows them to keep their overseas income and gains outside of the UK tax net, such that it is only taxed when it is brought into the UK. This tax arrangement is called the remittance basis.
To take advantage of the remittance basis the non-domiciled person must elect to do so, and pay an annual charge which varies according to how long they have been living in the UK:
- 7 out of last 9 tax years: £30,000
- 12 out of last 14 tax years: £50,000 to be increased to £60,000
- 17 out of last 20 tax years: £90,000 (new charge)
Tax Favoured Investments
For deaths on and after 3 December 2014 the surviving spouse or civil partner will inherit the deceased person’s ISA including all its tax benefits. This means the survivor will be able to contribute into the ISA account that belonged to their partner, as well as into their own ISA. The income from the deceased person’s ISA will continue to be tax free in the hands of the survivor.
The tax free ISA investment limits will increase as follows:
(limits from 1 July 2014)
|Shares and cash ISA||£15,000||£15,240|
|Junior ISA and Child Trust Fund||£4,000||£4,080|
Social Investment Tax Relief
Social investment tax relief (SITR) was introduced from 6 April 2014 and provides income tax and capital gains tax reliefs for individuals who invest in social enterprises. The activities the social enterprise can undertake will be expanded to include community farms and horticultural businesses, with effect from 6 April 2015.
The maximum investment each social enterprise organisation can receive is limited to about £283,000 for each three year investment period. The Government is to seek EU approval to increase this limit to £5 million per year, up to £15 million for each investment period.
Gains on UK Dwellings
People who are not tax-resident in the UK do not pay UK capital gains tax when they sell a property in the UK, although the gain may well be taxed in the country where the individual is tax-resident.
From 2015/16 non-resident owners of UK homes (dwellings) will have to pay UK capital gains tax on the gain that arises on the sale of their home for periods from 6 April 2015 onwards. However, the non-resident individual can elect for their UK home to be treated as free from capital gains tax, if they spend at least 90 midnights in that home in the UK during the tax year. Those 90 days may be spread over several properties if they own several homes in the UK. Spending 90 days in the UK could make the individual tax-resident in the UK for the tax year in question.
This 90 day rule will also apply to UK residents who own a second home outside of the UK. Currently the owner can elect for an overseas home to be treated as free of capital gains tax. From 6 April 2015, an overseas property will only be eligible to be free of UK capital gains tax if the owner spends at least 90 midnights there during the tax year, or is treated as being tax resident in the country where the property is situated. It is possible to be tax resident in more than one country concurrently.
Entrepreneurs’ relief was introduced from 6 April 2008 to apply a 10% tax rate on gains made on disposing of a business, part of a business, or shares held in a personal company.
Entrepreneurs’ relief has always been available to apply to gains that arise on the incorporation of a business, which often involves the transfer of goodwill created by the unincorporated business into the company that takes over the trade. The Government has decided that this use of entrepreneurs’ relief is unfair. From 3 December 2014 entrepreneurs’ relief will not be available for gains arising on the transfer of goodwill on the incorporation of a business.
EIS or SITR Shares
Where an individual makes a gain that taxpayer can defer tax on the gain by investing in Enterprise Investment scheme (EIS) shares, or shares or loan notes issued under the social investment tax relief (SITR) scheme. Where such an investment is made any entrepreneurs’ relief due on the original gain is normally lost. For investments under EIS or SITR from 3 December 2014, the entrepreneurs’ relief can be retained, and may be claimed when the EIS or SITR investments are subsequently disposed of.
From 6 April 2013 you can use two “simplifications” to make accounting easier for your unincorporated businesses: the cash basis and fixed rate deductions. If your business falls within the size criteria you can use one or both of these simplifications, or neither, the choice is yours.
To start to use the cash basis your business must have annual turnover of less than the VAT registration threshold (currently £81,000). There are slightly different rules if you also claim the Universal Credit benefit (successor to tax credits). You must stop using the cash basis if your turnover reaches double the VAT registration threshold.
You can opt to use the cash basis on a year by year basis and make that decision after the end of the year when you complete your tax return. For example you can opt into the cash basis for 2013/14 then and opt out for 2014/15. There are no specific rules to prevent you from doing this, but adjustments may need to be made to your taxable income when moving out of the cash basis to the accruals basis (normal accounting).
You can’t claim capital allowances (CAs) for most assets you buy while using the cash basis, as a full deduction is given for the cost of the asset when it is paid for. But the cost of a car can’t be deducted under the cash basis, so CAs for cars used for the business should be claimed, subject to a reduction for any private use of the vehicle.
However, claiming CAs for the car means that fixed rate deductions (45p or 25p per business mile) can’t be claimed for that vehicle. It is possible to have some cars subject to fixed rate deductions (for which CAs haven’t been claimed) and others that don’t qualify for fixed rate deductions (where CAs are claimed) within the same business.
There are a number of confusing rules about capital allowances which have been claimed for assets that you hold when you start to use the cash basis.