BUDGET 2020 – Principal measures of interest for individuals and trustees
The UK Budget 2020 announced on 11 March 2020, was rather overtaken by world events. Having been long-delayed and thrown into doubt by the resignation of the former Chancellor, Sajid Javid, in February, in the end it was COVID-19 that really moulded the new Chancellor's speech.
Whilst there have been unprecedented developments since the Budget, both in regard to the global pandemic itself and the UK government's subsequent response, it is still worth reflecting on the announcements made in the Budget and the impact they will have for individuals and trustees.
There was much speculation regarding possible measures that might be introduced – not least in relation to IHT, especially the possible abolition of APR and BPR – but in fact, the only changes of significance for wealthy individuals and their families and advisers, were those that had been long anticipated and trialled in the Conservative manifesto. These were the restriction of the lifetime limit on gains eligible for Entrepreneurs' Relief (ER) from £10 million to £1 million, and the introduction from April 2021 of an SDLT surcharge for non-residents purchasing UK residential property (NRSDLT).
Restriction on Entrepreneurs' Relief
What is changing?
The headline change is that the lifetime limit on the value of chargeable gains that will qualify for ER reduced from £10 million to £1 million with effect from 11 March 2020. ER provides for a lower rate of CGT, 10%, to be paid on disposal of all or part of a business subject to certain conditions. Interestingly, £1 million was the original lifetime limit when ER was introduced in 2008. This limit was raised to £2 million and then £5 million in 2010, and then to £10 million in 2011, where it has remained until the Chancellor's announcement on 11 March 2020. The Chancellor indicated that this change would affect fewer than 20% of those using the relief.
What anti-forestalling provisions were introduced?
The change in limit aside, the real stings in the tail were the anti-forestalling provisions that were also introduced. These applied to certain arrangements involving an unconditional contract made before 11 March 2020 where the asset or assets in question had not been conveyed or transferred in accordance with the contract before that date. In this situation the relevant provision would apply unless the parties confirm that obtaining a tax advantage was not a purpose of entering the contract or, in the case of connected parties, also confirm that it was entered into for wholly commercial reasons.
Similar provisions were also put in place for certain arrangements where shares were exchanged for those in another company on or after 6 April 2019 but before 11 March 2020 with the aim of locking in a gain that could qualify for ER at the time of the exchange rather than on a later disposal under the general CGT rules. An election is required to achieve this. In the specified circumstances, broadly where the two companies involved are closely connected in terms of their ownership, if such an election is or has been made on or after 11 March 2020, the disposal of the relevant shares is to be treated as taking place at the time of the election rather than at exchange.
In both cases, where the anti-forestalling provisions apply, ER will only be available up to the £1 million lifetime cap rather than the £10 million limit.
The anti-forestalling provisions are unusually harsh, as Budget day provisions are generally introduced with effect from midnight on Budget day at the earliest, with the effect that any arrangements entered into on or prior to that day would be grandfathered. Perhaps because a change in ER had been trailed by the Government in its manifesto, albeit with no detail, the Chancellor chose to target arrangements that had little or no commercial reality but were simply intended to lock in ER against its restriction or abolition.
What is the likely impact?
While the Chancellor noted that 80% of businesses will be unaffected by the restriction, there are still many more successful business owners for which this will be a significant blow. Nonetheless, it is worth bearing in mind that, even without ER, CGT is currently at historically low levels – 10% for basic rate taxpayers and 20% for others (for all assets apart from residential property) – rates that are half or lower than the corresponding income tax rates of 20% or 40% respectively, or 45% for those earning over £150,000.
Non-resident SDLT surcharge
What is changing?
As with a change to ER, there was little surprise that the Government announced the introduction of a surcharge for non-residents acquiring UK residential property. The Government consulted on such a surcharge at a possible rate of 1% between February and May 2019. In November 2019, the Conservative party announced in its election manifesto in November 2019 that it would introduce the surcharge at 3%. In the event, in his Budget, the Chancellor announced that the surcharge would be set at 2% and will take effect for acquisitions on or after 1 April 2021.
What anti-forestalling provisions/transitional rules were introduced?
However, as discussed in our note here, transitional rules have been put in place, the effect of which is that contracts exchanged on or after Budget day may be caught by the surcharge unless completion or substantial performance is achieved before 1 April 2021. Thus, where possible, anyone who wishes to avoid the surcharge and did not exchange on a property prior to Budget day, should aim to achieve exchange and completion (or substantial performance) of any new purchase within the transitional period.
What is the likely scope of the surcharge?
While we know when the new surcharge will be introduced and its rate, for potential buyers who spend periods of time in the UK, there is still doubt as to whether they will be regarded as non-resident for this purpose. In the consultation last year, the Government set out its proposals for the application of the surcharge, which are summarised in our note here of 15 February 2019, but it has not yet published a summary of responses to the consultation nor, more importantly, an update on its proposals.
The principal issue is the test for non-residence. The consultation proposed a simple 183-day test for individuals (and life tenants of life interest trusts) whereby, if an individual spent fewer than 183 days in the UK in the 12 months ending with the effective date of the transaction, they would be regarded as non-resident for this purpose. If this test is introduced, it will give rise to a situation where an individual could be UK resident for general tax purposes under the statutory residence test but non-UK resident for the purposes of the surcharge – effectively, the worst of all worlds.
The position is less stark for companies, for which the proposed test was the place of their central management and control, and for discretionary trusts, whereby the proposed test of the residence of the trustees was to be a modified form of the statutory residence test, considering the position over a period of 12 months ending with the date of the transaction, rather than over a tax year. As we argued in our response to the consultation last year, it was unclear why this test could not also have been applied to individuals.
In addition to the residence test, we also had concerns with regard to acquisitions where more than one person was involved, whether this was a partnership, a married couple or civil partnership, tenants in a collective enfranchisement, or purchasers in a linked transaction. In each of these situations, the consultation proposed that one non-resident person would taint the entire transaction, rather than the surcharge being proposed proportionately according to the interest or interests of the non-resident person or persons involved.
What happens now?
The Budget papers indicated that the Government will shortly publish a summary of responses to the consultation. This is likely to be accompanied by final details of the scope of the surcharge and the applicable rules, and possibly also draft legislation. It is to be hoped that changes may have been made to the residence test and other proposed provisions of the measure following representations by ourselves and others.
Due to the impact of COVID-19, we understand that the Chancellor's Budget had to be significantly rewritten. It is to be hoped that by later in the year, we will be over the worst of the current pandemic. We know that the Government intends to hold a second Budget in the Autumn and it is likely that measures that had to be omitted from this Budget may then re-emerge. It is not impossible that such measures might include changes to IHT, possibly even a complete rethink of the tax, maybe along the lines floated in a recent paper by an All-Party Parliamentary Group (discussed here).
Certainly it is likely that the impact of Brexit and the Government's plans to invest in infrastructure and to support the economy may give rise to more ambitious tax measures in the Autumn than we have seen in this Budget. However, in the meantime, it seems likely that our attention and that of the UK Government, and governments worldwide, will be focussed firmly elsewhere.