BudgetNov 23 2017

A taxing Budget?

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A taxing Budget?

There was a little bit of tax tinkering around the edges but no unexpected announcements on taxation in the Budget.

This is particularly surprising as the government does have Brexit to pay for.

Chancellor Philip Hammond revealed the government has set aside £3bn for Brexit, having already invested £700m in the negotiations.

As Jim Meakin, head of tax at RSM puts it: “With the chancellor under such intense political and fiscal pressure – and with his personal future in doubt - it was difficult to know whether the statement would go with a bang or a whimper. 

“But with the Office for Budget Responsibility reducing its growth forecast from 2 per cent to 1.5 per cent for the coming year, the chancellor had little choice but to opt for the latter.”

Trouble in paradise

The recent publication of the Paradise Papers, which once again saw large-scale tax avoidance and evasion come under scrutiny, is likely to be behind the chancellor’s decision to crack down further on this issue.

The chancellor clearly has his eye on the government’s target of the raising of the personal allowance to £12,500 by 2020, and the higher-rate tax threshold to £50,000.Karen Barrett

During his Budget speech, Mr Hammond claimed the UK is “leading the charge”, confirming another package of measures to help the Treasury collect taxes worth £4.8bn by 2022-23.

Mr Meakin suggests that from a tax perspective, “the centrepiece was a review which will conclude in early 2018 looking at how our tax system addresses the digital economy”.

The position paper will address the issue of multinational digital businesses which currently avoid tax by paying royalties to branches in low tax jurisdictions.

The chancellor is hoping by addressing this problem it will raise an additional £200m a year for the Treasury.

“This undoubtedly requires an overhaul as the existing tax rules largely date back to the early 20th century and don’t reflect how digital businesses currently generate revenues across multiple jurisdictions, often without significant physical presence,” explains Mr Meakin.

“What’s interesting is that the UK is seeing itself very much as a thought leader, diverging from the international approach by proposing new solutions for taxing businesses that derive most of their value from user activity on their platforms, for example social media companies.

“This is similar to the approach adopted by the UK when it introduced the diverted profits tax to tackle what it perceived to be avoidance by multinationals.”

But Rajesh Sharma, international tax partner at Smith & Williamson, questions just how far the measures will go in clamping down on tax avoidance.

“Mr Hammond’s announcement, designed to generate £200m annually, is a grand statement, but it is not clear how this figure has been reached, or how income tax will be calculated,” he admits.

“In the short term, the move is designed to send a signal to companies seeking to minimise tax.

“We expected the government to do something, so this announcement does not come as a surprise; however, also as expected, there is a lack of detail and some confusion as to what this will mean in practice.”

This was tax on a global scale, however, proving the UK is set to be a world leader in terms of clamping down on tax avoidance.

Tax stability

There were some announcements related to tax that applies to individuals, with Mr Hammond raising the personal allowance from April next year.

Karen Barrett, chief executive at Unbiased, notes: “The chancellor clearly has his eye on the government’s target of the raising of the personal allowance to £12,500 by 2020, and the higher-rate tax threshold to £50,000. 

“He announced steps in that direction, raising the personal allowance to £11,850 from April 2018, and the higher-rate threshold to £46,350.”

In his speech, Mr Hammond said this will mean the typical basic rate taxpayer is £1,075 a year better off than in 2010.

She points out: “Ironically the latter [higher rate threshold] may end up penalising some near the threshold, as people making pension contributions may lose out on higher-rate tax relief.”

The first Autumn Budget is very good for financial planning, we are seeing stability in the tax system which is very positive for advisers and for financial advice.Alastair Black

Ms Barrett suggests those individuals near this income level should ask their financial adviser about making extra contributions before the change – or, even better, ask their employer for a pay rise.

Alastair Black, head of financial planning propositions at Standard Life, believes the lack of announcements relating to tax in the Budget means advisers can plan for the next tax year with “confidence and clarity”.

He observes: “The first Autumn Budget is very good for financial planning, we are seeing stability in the tax system which is very positive for advisers and for financial advice.”  

He flags that the dividend allowance will be cut to £2,000 as already announced.

“In particular, this will hit small and medium-sized business owners who take their profits as a dividend. Employer pension contributions will become an even more attractive way of extracting profits from a business.”

The capital gains tax allowance will increase by £400 to £11,700.

Future of IHT

There were no surprises when it came to inheritance tax (IHT) but a government consultation published the same day as the Budget hints at more reform to come in this area.

Mr Black notes: “As expected, the IHT nil-rate band will remain at £325,000 until April 2021 and the residence nil-rate band will increase from £100,000 to £125,000. 

“In total that will mean that, from April, couples can leave assets up to £900,000 to future generations free of IHT.”

But Rachael Griffin, tax and financial planning expert at Old Mutual Wealth, points to a commissioned research report looking at how the inheritance tax system is functioning and suggests this provides a further hint the IHT system is "in the crosshairs for future reform".

The system is not without its complexities, so the government may seek to reform it in order to make it more straightforward.

"HM Revenue & Customs’ research focused on business property relief and agricultural property relief, likely seeking to see if the allowances were being misused," Ms Griffin explains. 

"However, the report notes the majority of people are using the exemptions as they are supposed to be used, to allow them to keep the business or farm in the family, without having to break it up or sell some or all of the assets to pay an inheritance tax bill."

She adds: "Indeed, many business-owners feel that their businesses would likely be sold to cover IHT bills if the relief were not available."

Her advice for those who are thinking about estate planning now is to keep an eye out for IHT reform and ultimately to seek advice from a financial planner.

Trusts and estate planning

The taxation of trusts could be one area to watch for in the future as the government announced a consultation on this subject in the Budget yesterday (22 November).

The findings of the consultation are set to be published in 2018.

Les Cameron, tax expert at Prudential, asks whether this might make it harder to reduce an IHT bill.

“The government has looked to simplify the IHT treatment of trusts fairly recently,” he acknowledges. “The changes mooted - broadly having only one nil rate band available for lifetime gifting - did not go ahead.  

“We will need to see if this will be a measure that makes it harder to reduce your IHT bill or easier to administer the taxation of the trusts.”

He believes it is far too early to tell if this will be good or bad for trusts planning.  

“However, it should be remembered that this does not detract from trusts planning. In many cases the use of trusts is about controlling the passing on of your wealth as opposed to making it more tax efficient.”

Offshore interests

The government launched a consultation paper alongside the Budget, which will look at the way commercial property and land in the UK is taxed when it is disposed of by non-residents. 

As it stands, non-residents do not have to pay capital gains tax (CGT) when they sell these assets but the consultation paper proposes removing this CGT exemption.

For advisers, this may only apply to a small proportion of their clients but is worth noting.

Ms Griffin explains further: “The proposals have come at an interesting time, and may suggest the government wants to deter people from switching their residential portfolio holding into commercial property to gain a tax advantage.” 

She recalls: “It was only a couple of years ago that the CGT exemption on residential property was removed, and only this year that the inheritance tax exemption on residential property through an overseas corporate structure was removed. 

“The new rules will help avoid any shift in behaviour towards selling residential property and buying commercial property and will level out the taxation between UK residents and non-residents.”

For a fuller break down of the Budget announcements on tax, see the table below.

TaxChanges in Autumn Budget 2017Changes in 2017 Spring Budget
Income tax and personal allowancesIn April 2018 as previously mentioned, personal allowance will rise to £11,850 and the higher rate threshold to £46,350. NEW: Government will now allow claims for marriage allowance in cases where a partner has died before the claim was made, and can be backdated for up to four years.Government continues with plans to increase personal allowance "by more than inflation" in 2017/2018. Personal allowance confirmed it will rise to £11,500, with a £2,000 increase to higher rate threshold.
Dividend taxNo changes mentionedNEW: Government introduces a £3,000 reduction in the tax-free dividend allowance from £5,000 to £2,000.
Pension allowanceNo changes mentioned; as mentioned in the spring Budget the lifetime allowance will rise in line with CPI, to £1.03m for 2018-2019.No changes to MPPA proposals to reduce it from £10,000 to £4,000. No change to the LTA. Green Paper on Social Care promised. Master Trusts will see their tax registration process amended to align with the Pension Regulator's new authorisation and supervision regime.
Capital gains taxNo changes; as previously announced, the 30-day window between a capital gain arising on a residential property and payment will be deferred until April 2020.No mention of changes to CGT, despite calls from the buy-to-let industry asking for a least a tapered reduction in CGT, on properties owned for 10+ years.
Bank levyGovernment has committed £36m more of banking fines over the next three years to support armed forces charities and other good causes.No changes
Inheritance taxNo changes mentionedStill no movement on the £325,000 threshold for IHT
Corporation taxGovernment will increase R&D expenditure credit from 11 per cent to 12 per cent.Gov't commits to a R&D tax review with the publication of an Industrial Strategy Green Paper to drive up the level of private investment in science, research and innovation.
Tax on savings interestNo changeNo change - but beware the £3,000 reduction in Dividend Tax.
National Insurance ContributionGovernment will delay implementing a series of NICs policies by one year; it confirmed the government will no longer proceed with an increase to the main rate of Class 4 NICs from 9 per cent to 10 per cent.Class 2 Nics abolition has been confirmed by gov't. Main rate of class 4 Nics will rise from 9 per cent to 10 per cent in April 2018, and to 11 per cent in 2019.
Stamp Duty Land TaxNew: reduction of upfront costs for first-time buyers by removing SDLT on properties up to £300,000 nationally and for London and the South East, the first £300,000 of properties worth up to £500,000

eleanor.duncan@ft.com