UK individual tax update
This article considers some of the key changes to applicable to individuals from 6 April 2019.
Sale of UK real estate by non-residents
From 6 April 2015, non-UK resident individuals have been subject to CGT on gains made on a disposal of residential UK property subject to certain exemptions.
These rules are extended from 6 April 2019 to gains from the disposal of non-residential (e.g. commercial) UK property, and on the disposal of interests in certain companies and entities that derive at least 75% of the vendor must have had a 25% interest in the company at some point in the two years prior to the disposal. An exemption is available for the sale of interests in certain companies which use UK land for trading purposes.
Generally only the increase in value from 5 April 2019 is taken into account for the purpose of this new tax charge.
Offshore assessment time limits
HMRC generally have up to four years from the end of a tax year to assess additional tax due where the taxpayer took reasonable care, up to six years for careless mistakes., and up to 20 years for deliberate errors.
The time limit is now extended to 12 years in cases of non-deliberate offshore matters. Non-deliberate matters cover both situations where taxpayers took reasonable care and situations where taxpayers have been careless. The 12 year time limit does not apply if HMRC received information before the end of the 12 year period (e.g. under the Common Reporting Standard), which they could reasonably be expected to use to assess the tax due.
For income tax and capital gains tax, the extended time limit applies from 2013/14 for careless errors and otherwise applies from 2015/16. For IHT, the rules apply to tax lost in relation to transfers made 1 April 2013 onwards if reasonable care was not taken and from 1 April 2015 onwards in other cases.
Anti-profit fragmentation rules
The anti-profit fragmentation rules were introduced to prevent business profits which the government believes should be subject to UK tax from being shifted to offshore entities and thereby escaping UK taxation.
The legislation applies where value relating to business profits is transferred between a UK resident and an overseas resident and there is a resulting tax mismatch i.e. the overseas entity pays less than 80% of the tax the UK entity would have paid on the relevant profits.
Entrepreneurs’ relief (ER) results in a 10% capital gains tax rate on up to £10m of capital gains during an individual’s lifetime from the sale of certain business interests. Three changes have been made to the ER rules.
(i) holding period – to be eligible for ER on interests in companies (e.g. shares), the individual must be an employee or director and hold 5% of the shares throughout a minimum period immediately preceding a disposal of shares or securities. This period increased from 12 months to 24 months in respect of disposals on/after 6 April 2019.
(ii) dilution – because the tests must be satisfied for a two year period prior to disposal, ER could cease to be available if an individual’s shareholding is diluted below 5% because the company has issued further shares.
From 6 April 2019, an additional share issue is made for commercial reasons, ER will still be available on the gain accrued on shares until the point the individual’s shareholding falls below 5% because of the share issue. An election must be made and a further election can be made to defer the capital gains tax on the gain until the shares are actually sold.
(iii) the 5% shareholding test – this test previously required the individual to own at least 5% of the ordinary share capital in the company to be able to exercise at least 5% of the voting rights in the company, as a result of that shareholding.
Where the shares are disposed of on or after 29 October 2018, either or both of the following additional conditions must be satisfied in order to qualify for ER:
1 – the individual must be entitled to receive at least 5% of amounts available for distribution to ‘equity holders’ of the company (by virtue of the ordinary share holding), and at least 5% of amounts that would be payable to equity holders on a winding up.
2 – the individual would expect to receive 5% of the sale proceeds if the entire ordinary share capital of the company was sold for market value.
Companies holding residential property are subject to the “annual tax on enveloped dwellings” (ATED) unless an exemption applies. The ATED annual charges have risen as follows:
Property value (for ATED purposes) ATED charge
£500,001– £1m £3,650
Over £20m £232,350
Gifts to charities
Individuals are eligible for tax relief where cash gifts are made to qualifying charities, however the relief is restricted in circumstances where the donor receives a benefit from the charity.
The benefit to donor rules have been simplified for gifts by individuals as follows:-
For gifts of less than £100, benefits of up to 25% of the gift can be received
For gifts of more than £100, the limit is £25 plus 5% of the amount given in excess of £100, subject to a maximum benefit of £2,500.
Entrepreneurs’ relief (ER) results in a 10% capital gains tax rate on up to £10m of capital gains during an individual’s lifetime from the sale of ordinary shares in an unlisted trading company. The shares must have been subscribed for in cash, on or after 17 March 2016 and held for at least three years following 6 April 2016.
Investors’ relief will therefore be available on qualifying disposals from 6 April 2019.
Deductibility of interest against rental income
The deduction for interest in respect of rental real estate is restricted to 25% of the interest from 6 April 2019, with the remaining 75% given as a 20% tax reduction. From 6 April 2020 the deduction for mortgage interest will be completely eliminated and replaced by the 20% tax reduction.
Social investment tax relief
Social investment tax relief provides an income tax reduction of 30% on qualifying investments up to £1,000,000 per annum. Capital gains realised from the disposal of shares and loans in qualifying entities are exempt from CGT. Furthermore, gains on the disposal of other assets can be deferred if the proceeds are invested into qualifying social investments.
SITR was due to expire for new investments from 6 April 2019, but has now been extended so
that income tax relief and the CGT exemption are available for investments made before 6 April 2021. The legislation allowing a deferral of CGT on gains made on disposal of other assets has not been extended, therefore it is only possible to hold over gains made before 6 April 2019.
From 6 April 2019, the lifetime allowance will increase from £1,030,000 to £1,055,000. The standard annual allowance will remain at £40,000 and will continue to be subject to tapering to a minimum of £10,000 for individuals with adjusted income in excess of £150,000.