Autumn Statement 2014

Where was the rabbit?!

George Osborne pulled a very large rabbit out of the hat in his Budget speech earlier this year when he announced extremely favourable changes to pensions and given that today was effectively his last chance for further big tax announcements before next May’s election (the coalition government are very unlikely to be able to agree on significant tax changes in next year’s Budget), there was an expectation that the Chancellor would have another favourable tax surprise for the voting electorate.

Today, the Chancellor’s big showcase announcement was Stamp Duty Land Tax (SDLT) which, whilst welcome, was something of an anti-climax when compared to the radical changes that are taking place with pensions.  The SDLT changes on residential property largely copy those that have been previously announced in Scotland two months ago and we see these as having a relatively modest impact on the residential property market.  A cynical view is that the changes are largely political and seek to undermine Labour’s proposed Mansion Tax policy given that the buyers of more expensive residential property will now incur a higher SDLT charge.  This view is further supported by the fact that the Chancellor has retained the old SDLT rules for commercial property (whereas the Scottish government logically chose to update them in a similar manner to the new rules on residential properties).

On a much more positive note, it was very pleasing to hear the Chancellor announce that there will be a fundamental review of the Business Rates system.  The current system has remained largely unchanged for the last 400 years and is viewed by many as being out of touch with the way that the modern business world operates.  So businesses may yet get the rabbit they have been long asking for, but they will have to wait a little longer before it is revealed!

As always, there were winners and losers from today’s tax announcements and we have outlined the main new tax changes below.

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Stamp Duty Land Tax

Arguably the most fundamental change made in the Autumn Statement is the change to the rates of Stamp Duty Land Tax (SDLT) paid on residential property.

Under the previous rules, which end on 3 December 2014, you paid this tax at a single rate on the entire price paid for the property. This could lead to large variations in the amount paid due to the so called “slab effect”.

For example, under the previous rules a person paying £250,000 for a property would pay 1% on the full purchase price, so a bill of £2,500. A person paying £250,001 for a property would have paid 3% stamp duty on the full cost, so a liability of £7,500. Your tax liability could therefore have been £5,000 higher, simply because you paid £1 more for the property.

The new rules will eliminate this problem. It introduces different rates of tax, and you are only required to pay SDLT on the amount of the price falling within a particular rate band. The new rates and bands are as follows:-

SDLT Pic

The Chancellor announced that 98% of home buyers would pay less tax SDLT under the new rules. This will include everybody who pays less than £937,500 for their new house, and somewhat bizarrely, also those who pay between £1million and £1,125,000.

Please see the graph below which illustrates the impact of the SDLT changes.

The new rules also state that if you are purchasing a mixed use property, where part of the property is used as a home and part is used as commercial premises the full amount will be charged under the commercial property SDLT rates. The rates and rules for commercial property have not changed so the existing slab rate of charging SDLT will continue to apply.

If you have exchanged contracts on a house purchase before 4 December, but have not completed the contract, you can choose whether to use the new or old rules. For most people it will be beneficial to use the new tax rules.

The new SDLT rates will also apply to residential properties in Scotland until 1 April 2015, when they will be replaced by Scotland’s new Land and Buildings Transaction Tax (which is very similar in nature).

Graph

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Tax-Free Personal Allowance

The personal allowance – the amount you earn before you have to start paying income tax – will be increased again from £10,000 to £10,600 from 6 April 2015.  This is an increase of £100 over the previously announced figure of £10,500.

The income level at which higher rate tax will begin to be paid will be increased to £42,385 (currently £41,865) from 6 April 2015. .

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Individual Saving Account (ISA)

Currently, if someone dies they cannot pass on their ISA to their spouse and keep the tax-free status, so the spouse starts paying tax on the income.

From 3 December 2014, if an ISA holder dies, they will be able to pass on their ISA benefits to their spouse or civil partner via an additional ISA allowance which they will be able to use from 6 April 2015.

The surviving spouse or civil partner will be allowed to invest as much into their own ISA as their spouse used to have, in addition to their normal annual ISA limit, which from April 2015 will increase from £15,000 to £15,240.

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Pensioner Bonds

New 65+ pensioners bonds will be available from National Savings and Investments in January 2015, giving savers a welcome opportunity to invest at higher interest rates than are currently being offered on general savings accounts.  The rates on these bonds will be published during the week commencing 8 December 2014.

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Capital Gains Tax

The Chancellor slipped into his speech that he would “strengthen Entrepreneurs’ Relief” and tighten up on the transfer of intangibles on incorporation.  What he didn’t say – and as we know, the devil is in the detail – is that from today, Entrepreneurs’ Relief will not be available on the transfer of goodwill to a related company (commonly referred to as “incorporation”).

This restriction will have a major tax impact on traders or partnerships who incorporate/sell their goodwill to their related company; tax will be payable at 18% (or more likely 28%) on the gain relating to the goodwill element, instead of 10%.  Not quite what we expected when we heard the word “strengthen”….Businesses with incorporation plans on the table will be sorely chagrined as there are no transitional provisions.  The new measure is now in effect.

In a more helpful change to Entrepreneurs’ Relief, the Chancellor has announced that any gains which qualify for Entrepreneurs’ Relief but are deferred into Enterprise Investment Scheme investments will remain eligible for Entrepreneurs’ Relief when the gain is realised.

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Restriction on Corporation Tax Relief for Goodwill

Alongside the surprise measure denying Entrepreneurs’ Relief on disposals of goodwill to related companies, the Chancellor also introduced a restriction on Corporation Tax deductions for goodwill acquired from a related party on incorporation.  The restriction applies to transfers on or after 3 December 2014. Companies already receiving relief for goodwill recognised on incorporation will not be affected.

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Research and Development

The Chancellor stated that “scientific advancement is crucial to our economic future” and to underline this he has increased the tax relief available for companies undertaking Research and Development.  From 1 April 2015 the ‘above the line’ credit for large companies will be increased from 10% to 11% and the already extremely generous Small & Medium Enterprise (SME) scheme rate will increase from 225% to 230%.  An advance assurance scheme to assist small businesses making their first R&D claim will also be introduced.

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Creative Tax Reliefs

In addition to the new theatre tax relief to be introduced from April 2015 for theatre production companies, the Government will consult in early 2015 on the introduction of an orchestra corporation tax relief from 1 April 2016.

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Reform of Business Rates

Following persistent calls from many businesses, the Government have announced that they will conduct a fundamental review of the future structure of business rates, to report by Budget 2016. No further details have been announced, but the Government will publish terms of reference in due course.

It is worth noting however, that this is not an easy problem for the Government to solve given that business rates raise £22 billion per year for the Government (which dwarfs other taxes, such as inheritance tax for example, which raises only £3 billion per year).

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Small Business Rates Relief

Some good news for business property owners is that the Chancellor announced that the doubling of Small Business Rates Relief will be extended for another year, until 1 April 2016.

For properties with a rateable value (RV) of £6,000 or less, the relief is 100%, meaning no business rates are payable.

The relief for properties with a RV of between £6,001 and £12,000 is tapered from 100% to 0%, meaning a significant reduction in the business rates payable.

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Help the High Street

The discount on business rates for retail and food and drink premises with a RV of less than £50,000 has been increased from £1,000 to £1,500 for one year from 1 April 2015.

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Corporation Tax Crackdown

The Chancellor stressed again, as he has done previously, that multinationals and banks should pay their fair share of tax.  To underline this point he announced two new measures in an attempt to ensure that this happens:

  • Multinational companies which are undertaking economic activity in the UK but diverting their profits abroad through complicated business structures and the manipulation of international tax rules will be caught by a new tax from April 2015.  Profits generated in the UK but moved abroad through the manipulation of these rules will be taxed at a special rate of 25%.  This applies to both UK and foreign multinational companies.
  • Banks which made losses in the financial crisis (and subsequent misconduct and costs associated with mis-selling) will have their associated tax reliefs restricted. Under the current rules, these losses can be offset against current profits, thereby eliminating taxable profits.  This means these banks may not be paying corporation tax for many years to come.  Mr Osborne noted that as banks were supported by public money during the crisis “they should support the public now”.  To achieve this, from 1 April 2015, the Government  will restrict the amount of banks’ annual profits that can be offset by carried forward losses to 50%. This is estimated to raise an extra £4 billion pounds for the public purse over the next 5 years.

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Support for Charities

Air ambulance and search and rescue charities will be able to reclaim VAT on the costs of their non-business activities, which are broadly the costs they incur in delivering their charitable objectives.  This will begin from April 2015.

Hospices will also begin to receive refunds of the VAT they incur on their costs.

There will also be a consultation on whether gift aid should be reclaimable on membership and entrance fees. Currently, only the donation element of this income is eligible for gift aid.

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National Insurance Rates

The changes to the rates for National Insurance Contributions have been announced in the Autumn Statement today, with only small increases to the levels at which contributions start to become payable having been made.

Self employed with earnings above £5,965 per annum will pay Class 2 NIC at a weekly rate of £2.80, and also pay class 4 NIC at a rate of 9% on profits between £8,060 and £42,385. If profits are above this level the NIC charge will be levied at a rate of 2% of the profits.

Employees will pay Class 1 NIC at a rate of 12% on income above £155 per week, and 2% on any income in excess of £815 per week.

Employers will pay 13.8% Class1 NIC on all employment income paid to employees in excess of £156 per week.

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NIC Relief for Employers

In addition to the abolition of employer NIC on under 21s from April 2015, the Chancellor also announced today that from April 2016 employers will not have to pay NIC for all but the highest earning apprentices aged under 25.

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Air Passenger Duty

From 1 May 2015 Air Passenger Duty will be abolished for children under 12.  This will be extended to children under 16 from 1 March 2016.  This will save an average family of four £26 on a flight to Europe and £142 on one to the US – but only on economy flights.

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Inheritance Tax and Trusts

The government has made a U-turn with regard to plans to introduce a single nil-rate band for trusts.  Rules were proposed to prevent multiple trusts being set up on different days, each with its own nil-rate band below the £325,000 inheritance tax limit. Such multiple trusts have been popular over recent years, as the tax savings were potentially significant.  The documents for the 2014 Autumn Statement confirm that following further consultation, the government has decided not to introduce a single nil-rate band for trusts.

Instead of the single nil-rate band, the government has announced that it will introduce new rules to target avoidance through the use of multiple trusts. It will also simplify the calculation of trust rules.

No details of the new rules have been announced yet.  There have already been three consultations on the simplification of trusts – we now await a fourth!

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Renewable Energy Tax Reliefs

The Government have announced that Anaerobic Digester and Hydro Power schemes which generate electricity will no longer qualify for the advantageous tax reliefs that are afforded by the venture capital tax reliefs (i.e. VCT, EIS and SEIS tax reliefs).  Solar and Wind Power schemes are already excluded from changes that were introduced back in 2012.

The good news is that the changes to Anaerobic Digester and Hydro Power schemes will not take effect until 6 April 2015, so there is a window of opportunity to take advantage of the current tax reliefs which businesses and individuals may wish to consider.

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If you have any queries on the Autumn Statement, please do not hesitate to contact one of our tax specialists on 01228 530913 or 01768 864466.

Comments

  1. Caroline Holland says:

    What a fantastic summary of key changes in a clear and accessible format. Great job Dodd and Co.

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