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Eye-catching announcements for private clients

The chancellor has unveiled sweeping tax cuts, many affecting private clients in a radical way, in an attempt to stimulate the UK into growth mode and simplify the UK’s tax system. With two years until the next general election, the government has placed a big bet on that growth materialising but what is the impact for private clients?

Income tax

Perhaps the most eye-catching tax cut announced by the chancellor from a private client standpoint was the change to the additional rate of income tax, currently 45% on income over £150,000. This will be scrapped completely from April 2023, leaving a single higher rate of income tax of 40%, affecting around 660,000 individuals. To put that in context, France, Japan and Germany all have top rates of 45%, whilst Italy has 43% and, out of all G7 countries, only the US and Canada will have lower top rates then the UK.

Additional rate payers will further benefit from the abolition of the additional rate of dividend tax. The 38.1% rate will be removed to align with the dividend upper rate, which is being reduced to 32.5% from 6 April 2023.

The chancellor announced no detail on how the removal of the additional rate of tax will impact trusts, which pay tax on trust income and dividends at a rate equivalent to the additional rate. Further clarification is keenly awaited and may be included in the Autumn Statement or when draft legislation is published in the Finance Bill.

In addition, the basic rate of income tax will fall from 20% to 19% on income and it is understood that the chancellor is considering further changes including reinstating the income tax personal allowance for workers paid more than £100,000 and lifting the lifetime allowance for pensions.

Undoing last year’s tax rises

The government will reduce class 1 and class 4 NICs by 1.25 percentage points from November and cancel the introduction of the Health and Social Care Levy as a separate tax from April 2023, reversing the 1.25 percentage point increase in dividend tax rates applying UK-wide from 6 April 2023. Whilst these changes will be welcomed by private clients, it does raise the question as to how the shortfall in the Health and Social Care scheme is going to be financed going forward.

Lifting the cap on bankers’ bonuses

With a view to supporting growth in the UK economy, the current cap to bankers’ bonuses, which limits remuneration of certain bank staff to 100% of their fixed pay (or 200% with shareholder approval) will be removed.

Corporation tax

As anticipated, the planned increase in the rate of corporation tax (CT) from 19% to 25% from April 2023 will not go ahead. The announcements mean the UK will continue to have the lowest CT rate in the G20. Even with the planned rise the UK would have had the lowest CT rate of any G7 country but, at 19%, the rate remains six percentage points lower than any other G7 country.

The planned rise was due to eat away at one of the benefits of family investment companies (FICs); the differential between the additional rate of income tax and the corporation tax rate, although in this context, the cancellation of the corporation tax rate rise is mitigated by the cancellation of the additional rate of income tax. At any rate, following HMRC’s recent absorption of its dedicated FIC team into the wider Wealthy and Mid-Size Business team and its confirmation that FICs will be considered ‘business as usual’, FICs will remain an attractive wealthholding vehicle.

The cancellation of the CT rate rise will also have implications for investors looking to purchase UK real estate through corporate structures to benefit from the comparatively beneficial tax rates on rental income versus personal ownership.

This not so ‘mini-Budget’, will draw close attention from private clients and intermediaries around the world

SDLT

In a bid to ‘get the housing market moving’, the government will increase the threshold above which SDLT must be paid on the purchase of residential properties in England and Northern Ireland from £125,000 to £250,000.

The government will also increase reliefs for first-time buyers. The changes are effective from 23 September 2022 and are a small step in the correct direction in terms of stimulating the residential property market. However, it is not clear what impact, if any, it will have on the stagnation of certain parts of the London residential property market that has been driven by rates of SDLT of up to 17%.

Tax-free shopping

On a lighter note, non-UK visitors to the UK will be pleased to know that there will be a new VAT-free shopping scheme enabling them to obtain a VAT refund on goods they can squeeze into their suitcases for the return journey.

Conclusion

This not so ‘mini-Budget’, will draw close attention from private clients and intermediaries around the world. These eye-catching reforms show that the chancellor is determined to place the UK on the map not just as a place to drive growth and to stimulate investment, but also as a more attractive jurisdiction for the internationally-mobile private wealth community.

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