George Osborne had his sums all tied up; he would bring the country’s accounts back into surplus by 2019/20 by making £12bn worth of social security savings. This plan was flagged up before the election, but the detail was not revealed until the Budget after the election, when it became clear that £4.4bn of the social security savings would come from cutting tax credits paid to low income households.
He decided that the alteration in tax credits rates and thresholds would be made by a device called an affirmative statutory instrument, which is a form of legislation which is not normally subject to detailed debate in the House of Commons, and is often waived through. However, both Houses of Parliament must approve it, and this is where George’s plans came unstuck; as the House of Lords chucked it out and asked the Chancellor to think again.
As a result of the Lords’ action George Osborne must now find an additional £4.4bn of expenditure cuts from other sources, or reign-in his target of a £10bn surplus in 2019/20 by borrowing more and perhaps phasing-in the tax credits cuts over five years. A third option is to raise taxes or duties, but the pesky tax lock has limited his action in that direction.
So what can he do to raise funds? Three taxes which are not covered by the tax lock are CGT, IHT and SDLT, all of which are stuffed with reliefs and exemptions ripe for culling.
Capital Gains Tax (CGT)
Entrepreneurs’ relief received some significantly body-blows in last year’s Autumn Statement on 3rd December 2014, and in the Budget on 18th March 2015. I suspect the Chancellor has more attacks planned for this year, such as a removal of the relief when:
- Transferring shares to family members to trigger a material disposal; or
- Incorporating a property letting business.
Another very generous CGT relief is the exemption for gains made on shares taken by employees in return for giving up a bunch of employment rights (employee shareholder shares). The first £2,000 worth of shares are free of tax and NI on acquisition, but up to £50,000 of shares (measured on acquisition value), are also free from CGT on disposal, whatever the size of the gain. This is a great relief for private equity investors and is ripe for reform.
Inheritance Tax (IHT)
Business property relief (BPR) and agricultural property relief (APR) provide 100% exemption from IHT when passing on a business or farmland. There have been rumours for years that BPR may be cut from the current 100% rate, or restricted in scope.
The value of quality English farmland has more than doubled in recent years and the price of farmland in other parts of the UK is similarly buoyant, which encourages investors. To have such a valuable asset protected from IHT by 100% APR, and be subject to 10% CGT under Entrepreneurs Relief in many circumstances may be too tempting for George. Expect some tweaking, if not a wholesale reduction of IHT and CGT reliefs in that area.
Stamp Duty (SDLT)
Commercial property values have not increased in line with residential property, but the number of non-residential property transactions is steadily increasing, according to recent statistics. When SDLT was reformed in December 2014 only residential properties were affected. Now there are two different methods of calculating SDLT for residential and non-residential property transactions, and two methods of calculating the commercial land tax charges north and south of the Scottish border. This confused picture is ripe for “simplification”, which may well subtly increase the yields.
Currently there is a relief from SDLT where a family partnership incorporates, and that too could be vulnerable to be closed as a “loop-hole”.
The government appears determined to deter tax-incentivised incorporation. The recently announced Dividend Tax is one line of attack; another is the proposed restriction of travel, hotel and meal expenses for contractors working through intermediaries. Both changes are due to take effect from 6 April 2016. On top of those there is a rumour of further tweaking of the IR35 rules to force contractors on to their engager’s payroll where the engagement lasts for a set period, possibly as little as 12 months.
The Autumn Statement on November 25th will definitely be interesting, but I suspect not in a positive way for small and medium sized businesses.
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.