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2020 capital gains tax review

 

Written by Ray Coman

 

Self Employed Income Support SchemeThe Chancellor has commissioned a review of Capital Gains Tax from the Office of Tax Simplification.  While nothing has been confirmed, the expectation is that the government’s tax take is on the up.  Costs to the UK economy of Cov19 has left the UK with a deficit well above pre-lockdown expectations.  Estimates for the 2020-21 budget deficit vary widely.  The office for budget responsibility forecasts around 300 billion pounds.  The highest since 1945.

 

 

Speculation

An abolition of principal private residence relief on former homes

Deemed periods of occupation

Tax rates

Entrepreneurs' relief for contractors

Rebasing for non resident property owners

Pension and ISAs

Planning

 

Speculation

 

Having a manifesto pledge of no rises in income tax, VAT and national insurance, it is near inevitable that outcome of the review be increases in capital gains tax.  The nil rate band for inheritance tax has not increased since 2009-10 and has therefore been saddled by hefty fiscal drag.  The rate of tax of 40% already leaves many estates in London and the South with selling the family home.

 

Two Budgets have been scheduled this year.  Announcements about capital gains tax are likely in the Autumn Budget.  Possible reforms are surmised below.

 

An abolition of principal private residence relief on former homes

 

The largest group concerned will be landlords letting their prior residence.  Reform would reduce the population of ‘accidental landlords.’  This type of landlord opts to let rather than sell property when moving home.  The practice was commonplace during the period of rapid rises in property prices, especially in the UK’s hotspots, and prior to tax reforms targeted at landlords.  In recent years, the trend is to increase regulation on landlords about pressure on government to make housing more affordable.  With the average age of first-time buyers rising and the pound at historic lows there is sufficient pent up demand to support changes to PPR.

 

Deemed periods of occupation

 

The final deemed period of occupation has been reduced twice recently: from 36 months to 18 months on 6 April 2014 and again to 9 months on 6 April 2019.  The benefit of a further reduction would unlikely be outweighed by the hassle it would put to house movers.  The relief is intended to accommodate the situation where a homeowner temporarily holds two properties to facilitate moving or due to a setback in the disposal of the former home.

 

A further deemed period covers temporary periods of absence, for instance where the homeowner is seconded elsewhere or otherwise unable to live in their home, such as due to jailtime.  It excludes any period in which the individual had another property that qualified as a PPR.  It is also a requirement that there is an actual period of occupation both before and after the period of absence.  While the deemed period of absence is capped at four years for individuals relocating within the UK, there is no time limit for overseas workers.  With an increasingly globalised workforce, this regulation could be regarded as out of date. Following the Budget, the concession could be significantly reformed or simply scrapped.

 

Tax rates

 

An increase in basic and mainstream rates (from 10 percent and 20 percent, respectively.)  As recently as 2007/08 capital gains tax was charged at the highest rate of income tax, which at the time was 40%;

 

Entrepreneurs' relief for contractors

 

Rumours about a scrapping of the relief were circulation following a consultation prior to the 2018 Budget.  Instead the relief was reformed with the minimum holding period extended to two years.  Recent government focus on entrepreneur’s relief suggest that it is on the radar.  Removal of entrepreneur’s relief would have significant ramifications for contractors who have accumulated funds in their business as a form of long term tax planning.

 

Rebasing for non-resident property owners

 

Non-residents are currently exposed to capital gains tax about appreciation in their residential property assets since 6 April 2019.  This contrast with UK residents who are subject to gains accruing over the entire period of ownership.  Rebasing allows non-residents to gain considerable reduction in exposure to CGT as compared to a UK resident.

 

Consequently, an emigrant can obtain a capital gains tax free uplift in value of their asset by rebasing.  This would be applicable, for instance, on buy to let property.  Unlike the old rules, rebasing is not disapplied for temporary non-residents.  Therefore, an individual could move for a contract of employment lasting a year, dispose of their property while non-resident and return to the UK avoiding considerable taxation.

 

By contrast, a non-resident who purchases a property prior to 5 April 2019 and moves to the UK after 6 April 2019 cannot re-base.  An immigrant could face a substantial tax ‘penalty’ on moving to the UK.  Property owners, as such likely to be wealthier on average, are discouraged from residing in the UK because of existing legislation.

 

Regulation should adjust to an increasing mobile and globalised population, to tax assets in the country in which these assets are located rather than the country in which the person finds themselves resident on the date of disposal.

 

With rhetoric across the political spectrum critical about perceived non-domiciled privileges and the referendum as an indicator about the public mood on Brexit, there is the political will for reform on non-resident landlords.  A statutory residence test came into effect on 6 April 2013 and rules concerning the taxation of overseas assets held by non-doms are becoming stricter.

 

The use of market valuation is impractical and open to abuse as compared to transaction values recorded with the land registry.  The system relies on valuers commissioned by the property owner.  Property owners who leave the UK may not have been aware of their future residency at 6 April 2019.  Justifiably, this group would not have had a revaluation at 6th April 2019 and will rely retrospective valuations which have even less inherent reliability.

 

Pension and ISAs

 

Pensions have already been speculated upon a likely area that The Chancellor will turn to plug the financial hole left by lockdown.  The exclusion of certain assets from pension funds would limit the tax shelter.  Commercial property is an obvious example.  A requirement for pension funds to rebase property would be easier to enforce than a rebasing directed at individuals.  With high street values depressed, the longer-term potential for government revenue would be enhanced.  Classic cars, racing horses, gold bullion and various other exempt assets classes could be brought into charge, although the effect on budget deficit would be comparatively minor.

 

Planning

 

Typically in a Budget, certain taxes take effect immediately, most tend to come into force from the tax year following that of the Budget, some reforms are phased in or scheduled further into the future.  Changes that take effect on Budget day tend to relate to indirect taxes, VAT, stamp duty and other levies.

 

Likely there will be time to make changes before 6 April 2021.  A benefit could be achieved by bringing forward a charge to capital gains tax, so that gains are released in 2020-21.  Post-tax proceeds from asset transfers will be affected both by fiscal policy and the effect that policy holds over values.  Where house prices are concerned a short-term advantage could be gained by incentives created in the market by the stamp duty holiday.

Summer Statement 2020

 

Written by Ray Coman

 

Self Employed Income Support SchemeAs Britain emerges from lockdown, Rishi Sunback announces dramatic tax cut and fiscal stimulus measures to kickstart the economy.

 

Emergency Stamp Duty Holiday

Green Homes Grant

Job Retention Bonus Programme

Eat Out to Help Out

Reduced rate VAT for hospitality

Kickstart Scheme

 

Emergency Stamp Duty Holiday

 

The Stamp Duty Land Tax threshold will be temporarily increased with effect from today and until 31 March 2021.  The value at which residential property is taxed will be rise from £125,000 to £500,000 during this holiday period.  This was an attempt to address the reported 50% slump in house transfers throughout May.

 

Green Homes Grant

 

Starting in September landlords and homeowners will be able to apply for a grant to make their homes more energy efficient.  The grant will be used to cover two thirds of the cost of works up to £5,000 per household.  Certain low-income households will obtain a higher grant of the full cost up to £10,000.  The funds can be used on insulation, double glazing, energy efficient doors and the like.

 

Job Retention Bonus Programme

 

The government put in place an incentive for employers to retain staff after furlough ends.  The Treasury will pay employers a £1,000 grant per employee who is still employed on 31 January 2021.  It is a requirement that the employee has been earnings at least the monthly lower earnings limit of £550 on average between the end of the Coronavirus Job Retention Scheme (30 November 2020) and 31 January 2021.

 

Eat Out to Help Out

 

Throughout August 2020, every Monday, Tuesday and Wednesday, the government is offering an incentive for people to eat out.  Restaurants will be able to obtain a subsidy for 50% of food costs capped at £10 per person.  Participating diners in the UK can obtain the grant for eat-in meals and non-alcoholic drinks.  The claim is made weekly and paid within five days.

 

Reduced rate VAT for hospitality

 

The rate of VAT within the hospitality sector will reduce from 20% to just 5%.  Lower rates will apply to food and non-alcoholic drinks from eateries, accommodation from hotels and B&Bs and attractions such as zoos, theme parks and cinemas.  The VAT cut will operate from Wednesday 15th July until 12th January 2021.

 

Kickstart Scheme

 

As a consequence of lockdown, long term unemployment is a higher risk for 16-24 year olds on Universal Credit.  The government will therefore cover the cost of hiring individuals in this group for up to six months.  The subsidy is up to the national minimum wage for the first 25 hours per week and any related national insurance on those wages.

 

In a related move, the government has pledged to subsidise the cost of training new employees.  An employer will receive a grant for each new trainee hired between August and January.  The grant is £2,000 per trainee aged between 16 and 24 and £1,500 per trainee aged over 25.

Furlough and SEISS extension

 

Written by Ray Coman

 

Furlough-extensionAnnounced yesterday, the Chancellor has extended self-employment income support scheme (SEISS) and furlough of employees until October.  The extension, according to Mr Sunak, makes the UK government covid response “amongst the most generous in the world.”

 

SEISS

Furlough extension

 

SEISS

 

The initial SEISS covered self-employment for the three months to 30 June.  Applications for this grant will remain open until 13 July 2020.  Further information can be found in the summary on Self-Employed Income Support Scheme.  By way of recap the grant is 80% of three months’ profits, subject to a limit of £2,500 a month.

 

As second grant will be available from August in which self-employed individuals will be able to claim 70% of profit for an average three months.  The payment will be subject to a monthly limit of £2,250.  This equates to an overall limit of £6,750 for the three month period.

 

Furlough extension

 

Employers are able to obtain support for the cost of paying their staff who are not able to work because of the enforced lockdown conditions.  However, the government plan will relax the lockdown in stages and alongside those measures taper grants.  Currently, employers can reclaim 80% of the salary of any employees who have not been able to work due to Covid.  The reimbursement is capped at £2,500 a month; however, the state will also fund employers NIC and pension obligations related to furloughed pay.

 

That coronavirus job retention scheme will continue in June and July 2020.  It is hoped that with continued falls in the rate of infection more will return to work and in tandem the number furloughed will decline.

 

From August, the government will no longer cover employers’ NIC and nor help towards paying for occupational pensions.

 

In September, the government will help towards only 70% of the pay for furloughed employees and will reduce the cap to £2,187.50.  Employers will be expected to pay the additional 10% of salary.

 

From October, an employer of a furloughed staff member will only receive compensation of 60% of their pay.  The reimbursement amount is to be capped at £1,875.  Until 1 September any top up of pay beyond the government reimbursement is voluntary.  In September and October, the 10% and 20% payments will be a statutory requirement.

Self-Employed Income Support Scheme

 

Written by Ray Coman

 

Self Employed Income Support SchemeAn announcement made today on 26th March aims to bring the support available to the self-employed in line with that already available to employees via the Coronavirus job retention scheme.

 

Grant calculation

Income criteria

Trading criteria

Payment date

Application process

Alternative finance

Working through a limited company

 

Grant calculation

 

A self-employed person can obtain a grant equal to the lower of 80% of net monthly income and £2,500.  Net monthly profits are based on an average of profits for the preceding three tax years.

 

Income criteria

 

Only sole traders or partners with profits below a set limit will be eligible.  The limit is:

 

  • Either a profit of £50,000 or lower for the tax year of 2018-19; or
  • An average profit of £50,000 for the tax years 2018-19, 2017-18 and 2017-16.

 

Therefore, if 2018-19 resulted in a profit spike, eligibility could still be intact by reference to earlier years.  Where self-employment started after 6 April 2016, only the tax years of self-employment would be included in the averaging calculation.  Over 50% of income must be derived from self-employment activity.

 

Trading criteria

 

Unfortunately, sole traders who have registered in 2019-20 will not be eligible.  Sole traders still need to be in business for 2019-20, (or still in business were it not for Covid19), and with the intention to continue trading during 2020-21.  A sole trader must submit a 2018-19 Tax Return by 23 April 2020 in order to protect eligibility.

 

Payment date

 

The grants will be paid from 1 March 2020 to 31 May 2020.  HMRC intends grants to be payable in one lump sum from about June.

 

Application process

 

The facility for making an application is not yet available through the website.  There is no requirement to contact HMRC at this stage.  HMRC will contact taxpayers already registered as self-employed in due course.  Applications will be via online form.

 

Alternative finance

 

Until such a time as the grants are available, self-employed can access cash via Universal Credit and the Coronavirus Business Interruption Loan Scheme.

 

Working through a limited company

 

Sole directors can obtain the grant for Coronavirus job retention scheme if a payroll has been operated.

 

Covid19

 

Written by Ray Coman

 

Covid19The coronavirus is spreading in the UK and across the globe, causing illness and death.  Yesterday, and for an unspecified amount of time, schools, universities, restaurants and other public meeting venues closed.  To encourage business owners to stick to the official guidelines and to mitigate the economic impact, a raft of emergency measures were announced on 20th March 2020.

 

Coronavirus job retention scheme

Coronavirus Business Interruption Loan Scheme

Statutory Sick Pay

Self-employed universal credit

Deferral of payments on account

Time to Pay arrangements

VAT deferral

IR35 postponement

Business rates

Retail and Hospitality Grant Scheme

Residency, domicile and remittance

Self-Employed Income Support Scheme

 

Coronavirus job retention scheme

 

The government has pledged to pay UK businesses suffering due to employees unable to work on account of Covid19.  The aim is to encourage employers to retain staff to prevent largescale disruption to employment.

 

A grant will be available to cover 80% of gross pay per ‘furloughed’ employee, up to a maximum of £2,500 per month. Gross pay for this definition includes employers' NIC and the statutory minimum of pension contributions.  

 

Pay going back to 1 March 2020 will be covered by the scheme.  The payment scheme will initially run to 31 May 2020.  The reference period for determining gross pay will be the month eneded 28th February 2020.  This is to prevent artifical increase of wages post announcement, for the prupose of increasing grant entitlement.  Full pay should be made via payroll and would be subject to PAYE tax, NIC and pension contribution liability for both employee and employer.

 

Affected workers are designated as “furloughed”.  This means that they cannot work for the employer but are, nonetheless, retained on payroll.  The employer needs to inform the employee in writing that they have been furloughed.

 

The grant will be applied for via an online portal on the HMRC website.  However, at the time of writing (21st March 2020), the application facility has not been made available.  HMRC have announced that they aim to have a submission system available by the end of April.  With the measures so new, payroll software providers are yet to release updates to accommodate the required ‘furloughed worker’ adjustments.

 

The sole director of a company can be a furloughed employee.  However, a furloughed employee cannot work and therefore the company of the contractor could not have any income during the period of the claim.  Inconsistency of work is in the nature of self-employment, and therefore a claim for salary support would be inconsistent with a basis for the company to be taxed outside of IR35.  Where lack of work is prolonged, the alternative of becoming a sole trader and relying on the benefits available in that scenario are more tenable.  SSP reclaims would apply in some cases to directors out of work due to illness.

 

Coronavirus Business Interruption Loan Scheme

 

 

For the week commencing 23rd March 2020, new loan types will be available to cover business interruption.  Participating lenders will be able to provide loans which are guaranteed by the government.  For the first 12 months, interest will be paid for by the government rather than by the borrower.  With no interest to pay, the tax effect would be neutral.  The scheme will be facilitated by mainstream lenders.

 

Certain organisations, such as households providing domestic staff and membership organisations will not be eligible.

 

Statutory Sick Pay

 

It has not been possible to reclaim Statutory Sick Pay (SSP) since 2013-14.  However, the government has announced that it will reimburse employers SSP for up to 2 weeks where the employee’s absence was caused by SSP.  Affcted workers would obtain an 'isolation note' from HMRC.  The mechanism for government repayments has not yet been set up on the HMRC website.

 

Self-employed universal credit

 

Self-employed workers who must stay at home because of Covid19 symptoms would not be eligible for SSP.  In this case, a self-employed worker can claim Universal Credit, up to the rate of statutory sick pay and without having to visit the JobCentre.  The chancellor also announced a general increase in universal credit allowance by £1,000 lasting twelve months.

 

Deferral of payments on account

 

Payments on account due by 31 July 2020 can now be deferred until 31 January 2021.  No late payment interest applies to 2019-20 second payments on account during the deferral period.  This will provide cash flow relief to individuals under self-assessment.  The new payment date applies automatically with no need to notify HMRC.

 

Time to Pay arrangements

 

HMRC Time to Pay arrangements will remain in place.  A taxpayer struggling to find the cash to settle a liability can contact HMRC directly.  An arrangement would spread the tax payments beyond the due date and without suffering late payment penalties that would otherwise apply.

 

VAT deferral

 

VAT payments normally due in a deferral period can now be postponed.  The deferral period is from 20 March to 30 June 2020.  Traders will have until 31 December 2020 to settle VAT liability otherwise payable in the deferral period.  The deferral applies automatically and does not need to be applied for.  The mechanism by which the payments will be collected has not yet been made clear.  Any VAT refunds would be processed in the usual timeframes.

 

IR35 postponement

 

The IR35 rules tax place a PAYE requirement on an individual who would be an employee ‘but for’ a company.  The rules are an anti-avoidance provision designed to stop employees forming companies simply to avoid national insurance.  A new ruling was designed to make it the responsibility of the person hiring to assess whether an individual was employed or self-employed.  This new ruling was due to come into force on 1 April 2020.  However, the ruling could also have the effect of deterring business from expanding operations with contractors.  As a result of the impact of Covid19 on the economy, the new ruling will not come into effect until 1 April 2021.

 

Business rates

 

A business rates holiday for 2020-21 will apply for those worse effected in the sector leisure, retail and hospitality sectors.  Businesses do need to make an application. The rates relief is automatically applied.

 

Retail and Hospitality Grant Scheme

 

The scheme provides support of up to £10,000 for affected businesses.

 

Residency, domicile and remittance

 

Days in which an individual is required to stay in the UK as a result of 'lockdown' measures will be treated as exception for the purpose of determining tax residence.

 

Self-Employed Income Support Scheme

 

The Self-Employed Income Support Scheme was introduced three days after the initial package of support.  It is detailed on a separate page found through the link above.

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