The Autumn statement contained few surprises, however, the Chancellor did announce significant tax changes, notably the changes to Stamp Duty Land Tax on residential property. We summarise below the main tax changes which will impact on the personal tax position of individuals.
1. Private Client
1.1 Non-Dom Remittance Basis Charge Set to Increase
Non-UK domiciliaries who are long term UK resident currently pay a Remittance Basis Charge (RBC) for the privilege of being taxed on the ‘remittance basis’. Currently the RBC is £30,000 for those who have been UK resident for seven out of the last nine years and £50,000 for those who have been UK resident for 12 out of the last 14 years.
Additionally, the non-UK domiciliary can decide annually – based on each year’s income and gains – whether to elect to pay tax on the remittance basis.
The RBC charge will remain the same for those who have been UK resident for seven out of the last nine years; however it is set to increase for those who have been resident in the UK for more than 12 years:
- The existing charge for those who have been resident for 12 out of the last 14 years is set to increase to £60,000 from 2015/16.
- For those who have been resident in the UK for 17 out of the last 20 years a third tier charge of £90,000 is also proposed.
In addition, the government will consult on making the election apply for a minimum of three years.
These changes raise the hurdle at which it will be economically sensible for a non-UK domiciliary to pay the RBC, thus bringing more non-UK domiciliaries under the ‘arising’ basis of taxation (or prompting them to leave perhaps?).
In addition, the proposal for a minimum three year election period will make it harder for non-UK domiciliaries to plan how the RBC might be used. For example, those likely to make large gains only in year 3 might have to suffer the RBC in years 1 and 2 too when they might otherwise have wished to avoid doing so.
The introduction of a 17 out of 20 years test is interesting. This is one of the periods used for ‘deemed domicile’ for inheritance tax. Does this herald a ‘deemed domicile’ rule for income and capital gains tax in the future?
1.2 Inheritance Tax on Trusts
Relevant property trusts are subject to a separate inheritance tax ‘periodic charge’ regime – charges arising on each ten year anniversary and when capital leaves the trust. HMRC have been consulting on simplifying the calculation of these charges, the latest proposals in relation to which create the concept of a single ‘settlement nil-rate band’ for allocation across new settlements by the same settlor.
It was announced in the Autumn Statement that the settlement nil-rate band idea will not go ahead. Instead, targeted anti-avoidance to combat the use of multiple or pilot trusts will be introduced alongside other simplification measures.
This announcement is a big surprise. There have been three separate consultations on the simplification of periodic charges and the level of detail provided in relation to the ‘settlement nil rate band’ idea (including a proposal that the new rules should apply to all trusts created on or after 6 June 2014) gave the distinct impression that this latest incarnation would be the one that went ahead. We await the latest proposals with great interest!
1.3 Annual Tax on Enveloped Dwellings Set to Rise
At present certain non-natural persons holding high value residential property pay an annual tax charge (the ‘ATED’ charge).
The government intends to increase the charge by 50% above inflation for residential properties worth more than £2 million.
|Property Value (£)||Annual charge in 2014/15||Annual charge in 2015/16|
|1m – 2m||£nil||£7,500|
|2m – 5m||£15,400||£23,350|
|5m – 10m||£35,900||£54,450|
|10m – 20m||£71,850||£109,050|
Additionally, from 2016/17, there will be a £3,000 charge on enveloped properties worth between £0.5m and £1m.
+Increasing the tax charges so soon after the introduction of the ATED charge creates further uncertainty to those investing in UK property.
No doubt, many individuals will look to ‘de-envelope’ UK property to avoid these charges.
1.4 ISA Changes
Since 1 July 2014 individuals have been able to pay £15,000 per annum into an ISA. The ISA can be held in shares, cash or any combination of both.
The returns made on the assets held within the ISA are exempt from income and capital gains tax.
On death an individual can pass their ISA to their spouse or civil partner free from inheritance tax; however the transferred fund has, to date, lost its other tax advantages on transfer.
From April 2015, the ISA allowance will rise to £15,240.
More importantly, for deaths from 3 December 2014, where the deceased had an ISA, the surviving spouse or civil partner will receive an additional ISA allowance. This additional allowance, available from 6 April 2015 will be equal to the value of the ISA held by the deceased at death.
These changes will make ISAs even more attractive to married couples, enabling potentially large pots of tax exempt investments to be accumulated. It needs to be remembered, however, that the investments will still be subject to inheritance tax and will lose their tax exempt status if left.
1.5 Increase in Personal Allowance
At Budget 2014, the government announced that the personal allowance would increase to £10,500 from April 2015.
This rise has been increased by £100 so that the personal allowance will now be £10,600 in 2015/16.
In addition the full increase will be passed on to higher rate taxpayers so that the point at which higher rate income tax is paid will increase from £41,865 in 2014/15 to £42,385 in 2015/16.
The increase in personal allowances from 2014/15 to 2015/16 will be worth £120 to a typical basic rate taxpayer and £172 to a typical higher rate taxpayer.
The government has also reiterated its wish to ultimately raise the personal allowance to £12,500 – so that people working full time on the minimum wage will pay no tax at all.
1.6 Pensions ‘death tax’
The Autumn Statement confirmed the removal of the 55% ‘death tax’ applying to pension funds. This change was first mooted when pension flexibility was announced at Budget 2014 and has been the subject of recent announcements (see our article ‘Pension ‘Death Tax’ Abolished from 2015/16).
Instead, from April 2015, no charge will apply to death benefits where the member dies before the age of 75. From the same date, where death occurs on or after 75 the charge will be at the beneficiary’s marginal tax rates or 45% if a lump sum is taken (with a marginal rate charge applying from 2016-17).
1.7 Inheritance Tax Exemption for Aid Workers
An inheritance tax exemption is given on the estate of members of the armed forces. The exemption applies where death is caused or accelerated by an injury or illness suffered while on active service. Budget 2014 announced a consultation on extending this exemption to members of the emergency services who are responding to an emergency.
Finance Bill 2015 will now further extend this exemption to humanitarian aid workers who are responding to emergency circumstances, and all these changes will apply to deaths occurring on or after 19 March 2014.
This change will bring humanitarian aid workers in line with other front line workers.
1.8 Lump Sums Provided Under the Armed Forces Early Departure Scheme
The Early Departure Payment Scheme is being introduced alongside the revised Army Pension scheme from April 2015.
Early Departure Payments are unique to the Armed Forces and are not pensions. They allow for the payment of a lump sum and periodic payments when membership of the Regular Forces ceases and certain conditions relating to age and service as a member of the Regular Forces are met.
The government is legislating to ensure that lump sum payments made under the Early Departure Payment scheme are exempt from Income Tax and NICs. This change will take effect from 1 April 2015, when the new scheme is introduced.
This measure demonstrates the government’s ongoing commitment to support the armed forces.
No doubt, many individuals will look to ‘de-envelope’ UK property to avoid these charges.
2. Stamp Duty Land Tax (SDLT)
2.1 A New Progressive Tax System for Stamp Duty Land Tax
Stamp Duty Land Tax (‘SDLT’) on residential properties has historically operated on a ‘slab’ system, meaning that a single rate of tax is charged on a purchase, depending on which charging band the property falls within. For example, a property valued at £510,000, (the average house price in London) would pay 4% on the total consideration, resulting in SDLT of £20,400.
For transactions effected after midnight on 3 December 2014, new SDLT rates will apply. Unlike the current system, these rates will be progressive, meaning that only the proportion of the consideration which falls within the particular band will be subject to that rate of tax. There will be five bands, ranging from 0% for consideration below £125,000 to 12% for consideration in excess of £1.5m. For a property valued at £510,000, the SDLT will be £15,500 (£125,000 x 0% plus £125,000 x 2% plus £260,000 x 5%), £4,900 less than under the current rates.
For transactions that have exchanged before 4 December but have not completed, there are transitional rules, which broadly will allow the taxpayer to elect to apply the old rules and rates if they wish rather than the new regime.
These new rules will also apply to all residential property transactions in Scotland up to April 2015, when SDLT will be replaced in Scotland by the Land and Building Transaction Tax, which is to be a progressive rate tax.
There have been no changes to the slab system and SDLT rates that apply to commercial properties. There have also been no changes to the SDLT rate that applies to transactions falling within the scope of ATED regime (which remains at 15% for dwellings valued at over £500,000).
All those purchasing residential property for less than £937,500 will pay less SDLT under this new regime. The Government has indicated that this should mean that 98% of all house purchases will now pay less SDLT. As well as being welcomed by home owners, these rate reductions will also be applicable to portfolio residential purchasers who elect to use multiple dwellings relief (available where 2 or more dwellings are purchased) and therefore could represent significant savings, provided that each of the average dwellings is valued at less than £937,500.
This reduction in SDLT will particularly benefit first time buyers and those purchasing property at the lower end of the market, where the greatest reduction in SDLT charge arises. The removal of the slab scheme should also eliminate the ‘cliff edge’ effect and market distortion that currently exists in the pricing of properties, around the changes in SDLT banding rates.