What the 2018 UK Budget means for individuals

Out-Law Analysis | 02 Nov 2018 | 12:41 pm | 3 min. read

ANALYSIS: For individuals the 2018 UK Budget was used to ensure compliance and reduce tax avoidance. In particular, taxation of property income has been tinkered with yet again, and a few capital gains tax exemptions tightened.

The changes mean that if you have let your principal residence you should consider selling it before the loss of the substantial lettings relief.

If you are not domiciled in the UK, and where some of your business profits are received by an offshore company, you should ensure they are realistic and in line with any work carried out by that entity.

Property

Generally, any gains realised from the sale of an individual’s main residence are exempt from capital gains tax (CGT). The exemption is restricted where the individual no longer lives in the property at the time of sale.

However, where a residence has been let, the owner having moved, lettings relief of up to £40,000 (£80,000 per couple) is currently available on the eventual sale. From April 2020 such relief will only apply to individuals who are in shared occupancy with their tenant.

Some vendors unhappily fall into the trap of owning two properties even for a short while. To alleviate such pain upon any sale, the final 18 months of ownership remain exempt, even if the home is not occupied by the owner. It was therefore possible to obtain two exemptions for 18 months.

From April 2020 this period will be reduced to nine months. Although it should be noted that a disabled person or someone moving into a care home is still afforded the 36 month exemption.

Currently an additional rate of Stamp Duty Land Tax is payable on the purchase of a second property, where the first remains unsold. From 29 October this additional tax may now be reclaimed where an individual sells their original home within three years of the second purchase.

We are now familiar with the legislation that taxes non-residents on the disposal of UK residential property. From 6 April 2019, the sale of non-residential property and indirect disposals of UK land will also be subject to CGT.

An indirect disposal occurs where an entity has more than 75% of its asset value in UK land. However, an exemption is available to investors who currently, or at least within two years of sale, have held less than a 25% interest. All interests will be traced through shareholdings, partnership interests and settled property.

To soften the blow, from 6 April 2020, non-UK resident companies which carry on a UK property business or have letting income will be liable to pay corporation tax, rather than income tax, thus benefiting from a lower rate of tax.

The rather good news is that Annual Tax on Enveloped Dwellings related CGT, which taxed UK residential property owned by a company, will be abolished on 6 April 2019.

Entrepreneurs’ Relief

There is an immediate tightening of Entrepreneurs’ Relief, which allows individuals to benefit from a reduced 10% rate of tax on gains realized on a disposal of shares in a company that they are employed in or hold an office, such as a directorship.

The conditions for the relief to apply have been changed so that they must now be met for two years prior to disposal rather than one. Currently, to qualify for the 10% rate of CGT (on lifetime gains of up to £10 million) an individual must have 5% of the company’s voting rights and share capital.

Now, the individual must also hold a 5% interest in both the distributable profits and net assets of the company.

Profit Fragmentation

As the government is keen to clamp down on tax avoidance it has implemented a few measures to ensure compliance.

Legislation will be introduced to tackle profit fragmentation and so prevent UK traders and professionals avoiding tax by arranging for part of their business profits to be taxed in low tax jurisdictions.

In essence, where such profits routed offshore are not commensurate with the work undertaken by the offshore entity then they will fall to be taxed in the UK.

Giveaway

Surprisingly, given the Brexit backdrop, the chancellor has managed to meet his manifesto commitments one year early, so the personal allowance will increase to £12,500 from April 2019 and the higher rate band threshold will increase to £50,000. The annual allowance for CGT will increase to £12,000.

Anne Healy-McAdam is a private client tax expert at Pinsent Masons, the law firm behind Out-law.com. This article first appeared on Bloomberg tax.