What are the key changes in the budget 2018 and how will they impact you?
Personal Tax Allowance to Rise to £12,500 One Year Earlier than Originally Announced
The personal tax allowance is set for all individuals in the UK and was due to increase to £12,500 in April 2020, however the Chancellor announced that the increase would apply one year earlier from 6th April 2019.
The increase in the threshold after which higher rates of tax are paid was also brought forward by one year and is increased to £50,000 from next April.
Both the personal tax allowance and the basic rate tax band will apply for the next two tax years.
Capital Gains Tax
Annual exemption to Rise to £12,000
Legislation will be introduced in Finance Bill 2018 increasing the annual exempt amount to £12,000. This will also have the effect of increasing the annual exempt amount for trustees of settlements to £6,000.
Entrepreneurs’ Relief – Selling your company after budget day will add a few new hoops to jump through
Shareholders of small companies may have different rights depending on the type of shares they hold. Sometimes they have rights to a lesser or greater proportion of the profits, likewise the distribution of the assets should the company be wound up.
However, when selling a business or retiring, the shareholder wants to be certain they can benefit from a low tax rate on the money they receive, after all they have built up the business and the profits of the company have already been subject to corporation tax.
The low rate of tax is called Entrepreneur’s Relief (ER). ER reduces the Capital Gains Tax (CGT) due to a rate of 10% on a maximum of £10 million of lifetime gains and was designed to encourage those with a business mind to build businesses, retaining funds in the business to make them grow rather than stripping all of the profits from the business.
From budget day 29th October 2018 the shareholders who can claim this lower tax rate are restricted to those who have rights to a minimum of:
- 5% of the company’s distributable profits
- 5% of its assets available for distribution on a winding up
The shareholder must be either an employee or office holder of the company.
From budget day the timeframe for which the shares must be held has also increased from one year to two years.
Capital Gains Tax – Principle Private Residence (PPR) and Letting Relief
Capital Gains Tax (CGT) is due when an asset is sold at a profit. However, it is generally the case when an individual sells a property which, throughout their period of ownership, has been their only or main residence the gain in value is exempt from CGT.
Sometimes for personal or investment reasons a property, which has been an only or main residence is retained and not sold, possibly let to tenants. In these circumstances CGT is due on the proportion of the profit or gain which relates to the period when the property was a let property but it is not due on the period of time the property was the only or main residence.
The final period of ownership is always deemed to be part of the PPR calculation to allow for a period of time when the property might be empty, for example, whilst arranging for a sale. This period has been falling and Budget 2018 announced that from April 2020 the period will be reduced to 9 months.
The 2018 Budget has also drastically reformed a long standing relief known as Letting Relief.
Letting Relief is used to reduce the gain chargeable when a property had been both an individual’s main residence and also a let property during the period of ownership. Budget 2018 announced that from April 2020 Lettings Relief will no longer be available except in the exceptional circumstances where the owner is in shared occupancy with a tenant.
Private Sector Contractors
Since 2016 many contractors working on contracts within the public sector have found it increasingly difficult to be paid for work done on an invoice basis. The public sector body has been required under the IR35 rules to assess if the contractor was in fact an employee and, often with little or no understanding of these complex employment status rules, HR departments have been regularly assessing the contractor to be an employee and as such deducting PAYE tax and employees NIC.
Sadly this employment classification does not give the contractor the same rights as an actual employee to, for example sick, holiday or maternity/paternity pay, making the legislation unpopular with contractors.
In the 2018 budget the Chancellor has extended this rule to the contracts between contractors and large and medium sized private sector businesses and it will come into play from April 2020.
The Annual Investment Allowance (AIA)
The AIA is specifically for expenditure on plant and machinery with a few exceptions, the main one being cars. It’s a beneficial allowance of 100% of the expenditure incurred, with a limit for the period. Budget 2018 announced that AIA limit will increase for two years from 1st January 2019 until 31st December 2020 from £200,000 to £1 million pounds.
Advice needs to be sought on the timing of expenditure because the amount of the allowance is dependent on the business accounting year end date.
Business Rates for the High Street
The Business Rates for Shops, Pubs, Restaurants and Cafes will be cut by one third if their rateable value is below £51,000. It is estimated that will be up to 90% of all High Street retail properties. This cut will be for 2 years from April 2019.
The Return of Allowances for Expenditure on Commercial Buildings.
A new Structures and Buildings Allowance (SBA) will be immediately available on the eligible construction costs of new commercial structures and buildings.
The allowance is intended to give tax relief over a period of time for the construction costs of buildings intended for commercial use, for the costs of improvement of existing structures and buildings including the cost of converting existing premises for use in a qualifying activity.
If the structure or building is of mixed use i.e. it has some residential element then the relief will be apportioned accordingly.
It is not available for workspaces within a domestic dwelling, for example a home office.
The relief will be limited to the original construction or renovation costs over a fixed period of 50 years at a rate of 2% per year. This will be granted regardless of changes of ownership.
The Special Rate Writing Down Allowance
Special rate expenditure includes expenditure on long-life assets, thermal insulation, integral features and expenditure incurred on or after 1 April 2018 on cars with CO2 emissions of more than 110 grams per kilometre driven.
The special rate of plant or machinery writing down allowance is currently 8% per annum on a reducing balance basis.
Legislation will be introduced in Finance Bill 2018-19 to the special rate of writing down allowance which will be changed from 8% to 6%.
VAT Registration Threshold
The VAT registration and deregistration thresholds will be frozen until 31 March 2022.
The taxable turnover threshold which determines whether a person must be registered for VAT, will remain at £85,000.
The taxable turnover threshold which determines whether a person may apply for deregistration will remain at £83,000.
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