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Budget 2016: Tax, Trusts & Succession implications for individuals

These are some of the key areas where our private individual clients are likely to be affected by the 2016 Budget. We have also produced a more detailed briefing on the main points.

Our overview

The Government has taken a clear stance that its priorities lie in encouraging investment into business, and is aligning the tax regime accordingly. Capital gains tax on the sale of a residential property is no worse than it was before the Budget, with disposals of a main residence remaining tax free, but by reducing the headline rate of capital gains tax and extending Entrepreneurs' Relief for other assets, the Government is sending a clear signal as to where it would like to steer investment. It remains to be seen whether we will see a further extension of Entrepreneurs' Relief to other, more passive investments into business. A return of a form of business asset taper relief may not be out of the question.

The past few years have seen a bewildering pace of change in property taxation and today we received draft legislation for the new 3% SDLT surcharge on second and additional properties which was announced in November 2015 and will take effect on 1 April 2016.  We believe that instability in tax policy, and frequent changes to the rules, can be as dangerous to the perception of the UK as an investor-friendly jurisdiction as increases to the rates of tax themselves.  In comparison with many other countries, the UK remains a good place in tax terms for international investors to buy residential property, but those investors reasonably require certainty as to how they will be taxed.  So stability and certainty in tax policy is very important.  We hope the Government will now put the brakes on any further significant property tax policy changes for the rest of this Parliament.

Key points at a glance

Capital Gains Tax (CGT)
  • The government will reduce the higher rate of CGT from 28% to 20% and the basic rate from 18% to 10%.  The 28% and 18% rates will continue to apply for carried interest and for chargeable gains on residential property.  These changes will take effect to disposals of assets on or after 6 April 2016.

  • Entrepreneurs’ relief will be extended to long-term investors in unlisted companies.  The new rules will apply to newly issued shares purchased on or after 17th March 2016.

Stamp Duty Land Tax (SDLT)

The residential property perspective

A 3% surcharge will now be applied to purchases of second and additional properties.  Key points from this legislation:

  • There is no exemption for large-scale investors, as had been suggested by the original consultation. However, purchase of six properties in a single transaction can still be taxed at the commercial rates, which in some cases will be more favourable than the residential SDLT rates. Great care is needed about taking advantage of this relief, however.

  • Properties owned anywhere in the world (and not just in the UK)  will be counted in determining whether a property purchase is caught by the surcharge.

  • If you buy a new main residence before selling your old one, then on completion you are liable for the surcharge. However, provided you dispose of your previous main residence within 36 months (increased from 18 months in the original proposals) you can claim a refund of the surcharge.  If you sell your main residence before buying a new main residence, there is no surcharge on the purchase, provided this takes place within 36 months (increased from 18 months in the original consultation) of the completion date of your sale.

  • Married couples who are separated may each purchase a residential property of their own without the surcharge applying provided the separation is likely to be permanent.

  • The surcharge is not applicable to the purchase through a company of an owner occupied property for over £500,000.  Such a purchase is already subject to a penal rate of SDLT of 15%.

The commercial property perspective

  • The stamp duty land tax rates on non-rental consideration for non-residential property will be reformed with effect from midnight on Budget Day.  The old “slab” system is being replaced by a “slice” system (which is the system already in place for residential property), meaning that the consideration for a property will be taxed according to how much of it falls within a particular band, rather than the entire consideration being taxed at one rate.  The new top rate is 5% on the amount of consideration for the property that exceeds £250,000.

  • In addition, a new 2% rate of SDLT will apply to rent on non-residential property with a net present value above £5 million.

Non-UK domiciliaries
  • The government did not shed much further light on the major reforms to non-dom taxation announced  in the Summer Budget 2015 save, broadly, that they are: (i) pushing on  with their plans to charge  inheritance tax on all UK residential property indirectly held through an offshore structure from 6th April 2017; (ii) as may be expected,  individuals who expect to become deemed UK domiciled under a new ‘ 15 out of 20 year rule’ will be subject to transitional provisions with regards to offshore funds to provide certainty on how amounts remitted to the UK will be taxed; (iii) that UK born individuals with a  UK domicile of origin (typically someone born in the UK to British parents)  will ‘revert to  their UK domiciled status for tax purposes whilst resident in the UK’ (as previously indicated); and (iv), perhaps most interestingly,  that  there will be a re-basing of offshore assets as those non-doms who become deemed domiciled in April 2017 can treat the cost base of their non- UK based assets as being the market value of that asset on 6 April 2017 (which is welcome news but we shall need to see the details to see how useful this provision will be in practice). 

Residence nil-rate band (RNRB)
  • As expected, ‘downsizers’  who cease to own a home on or after 8th July 2015 may still benefit  from the new residence nil rate band that comes into play from 6th April 2017, broadly when assets are passed on death to direct descendants.  This is good news but the legislation is complex and it would have been a lot simpler to have raised the existing nil rate band. Indeed,   because of the way that the RNRB works,  for estates worth approximately 2.35 Million GBP (for single individuals) or 2.7 Million GBP (for  a surviving spouse), we expect that the benefit of the RNRB will be lost in any event by virtue of tapering rules.

Offshore property
  • New rules have been announced that target offshore property trading and development planning.  The Jersey, Guernsey and Isle of Man double taxation agreements with the UK have been amended with immediate effect to allocate taxing rights to the UK in respect of UK real estate and a specific new charging provision will be implemented that taxes profits from disposals of UK property by non-UK residents, irrespective of whether the non-UK resident entity trades through a permanent establishment in the UK.  That charging provision will apply to disposals that occur on or after the date the legislation is introduced in Parliament at Report Stage (expected to be in June 2016), but there will be transitional rules to prevent forestalling after Budget Day.