On 27th October 2021 Rishi Sunak delivered the latest budget Rishi Sunak delivered the tax budget and there was a lot to address, especially in the face of COVID19 and the financial pressures that the disease has brought to the United Kingdom. The critical tax changes are as follows: – Income Tax: no change Corporation tax: Tax remains at 19%, but as we already know, this increase to 25% for companies that reach £250,000 from 2023. There is also a scaled rate tax charge from £50,000 to £250,000. Banks will face an increase in corporation tax to 28%. – Stamp Duty Land Tax (SDLT): No change – Value Added Tax (VAT): There are no significant changes from the planned changes for the hotel, leisure, and hospitality industries that will see a rate increase from 12.5% back to the normal rate of 20%. – Capital Gains Tax (CGT): No change, which is a major surprise given that Rishi Sunak has invested time and money to see if CGT should be amended to be aligned with income tax similarly to Australia. The key highlights of the budget are as follows: – £5 billion will be used to remove unsafe cladding from UK buildings – £850 million assigned to museums and galleries – £150 million given to training for the early years workforce – £560 million will be provided to the youth services – £200m provided to local football – £21 billion for road improvements – £46 billion will be made available for railways to connect local towns to major cities – £5.9 billion per year for core science funding – £107 million to be assigned to offshore wind in Teesside – £560 million to be provided to increase numeracy in adults, where it was reported that the average age of numeracy is nine years of age – 50% business tax rate discounts for the hotel, leisure and hospitality – 28% corporation tax applied for all UK large banks – £9.50 minimum national living wage – Latest block grants for devolved nations since 1998 – Alcohol duty system, to be overhauled with the ending of 28% of sparkling wines such as Prosecco Income Tax Budget Changes We also need to remember that the 2020/21 income tax rates were as follows – 0%: £0 to £12,570 – 20%: £12,571 to £50,270 – 40%: £50,271 to £150,000 – 45%: £150,000+ Several tax incentives were applied to all UK individuals in addition to the £12,570 personal allowance. These are as follows: – £1,000 tax-free profits made on self-employment (beneficial if you have a side business) – £1,000 tax-free profits made from UK land and property – £2,000 tax-free dividends from UK limited companies – £5,000 tax-free interest from the “starting rate for savers” but will start to be reduced once your other form of income reaches £17,570. – £1,000 tax-free interest under the banner “personal savings allowance” that is in addition to the above £5,000 starting rate for savers. This £1,000 savers allowance is reduced to £500 for high rate taxpayers and £0 for additional rate taxpayers. Starting rate for savers example: £16,000 of wages and £200 interest on your savings. £16,200 total earnings Your Allowance is £12,570. It’s used up by the first £12,570 of your wages. The remaining £3,430 of your wages (£16,000 minus £12,570) reduces your starting rate for savings by £3,430. Your remaining starting rate for savings is £1,570 (£5,000 minus £3,430). This means you will not have to pay tax on your £200 savings interest. We also need to bear in mind a few more things when it comes to income tax. – When your taxable income reaches £100,000 and above, the individual will start to lose their £12,570 personal allowance. The personal allowance will be reduced by £1 for every £2 earned over £100,000. This means that an individual that earns more than £125,140 will lose all of their personal allowances. For UK landlords we also need to be mindful of the Section 24 mortgage interest relief cap. This double tax means that UK landlords cannot offset the mortgage interest costs against their property income. This means that all UK landlords could pay more income tax. There will be a 20% income tax reducer based on the mortgage interest costs. Corporation Tax Budget Changes Corporation tax is currently 19% but will increase to 25% in 2023. However, there is a scaled rate that will apply as follows to corporate profits made in a UK limited company – 19%: £0 to £50,000 – scaled from 19% to 25%: £50,001 to £250,000 – 25% £250,000+ profits A calculation will need to be made to work out the specific tax for those UK limited companies that make more than £50,000. Annual Investment Allowance (AIA) to mitigate CGT for entrepreneur’s The £1 million Annual Investment Allowance (AIA) will now be extended until March 2023. You can deduct the full value of an item that qualifies for an annual investment allowance (AIA) from your profits before tax. You can only claim AIA in the period you bought the item. – when you sign the contract if payment is due within less than 4 months – when payment’s due if it’s due more than 4 months later – If you buy something under a hire purchase contract you can claim for the payments you have not made yet when you start using the item. You cannot claim on the interest payments. If your business closes, you cannot claim AIA for items bought in the Example: You buy a laptop for £600. You use it outside your business for half of the time. The amount of capital allowances you can claim is reduced by 50%. Capital Gains Tax (CGT) budget changes Each individual has an Annual Capital Gains Exemption of £12,300. This means that CGT does not need to be paid unless an asset generates a profit in excess of £12,300, Capital Gains Tax ( CGT) have different rates of tax depending on the asset sold – 10% for basic rate taxpayers (individual earning less than £50,270) – 20% for high rate taxpayers (individual earning more than £50,270) UK landlords & property investors have been given a different unfair rate as follows – 18% for basic rate taxpayers (individual earning less than £50,270) – 28% for high rate taxpayers (individual earning more than £50,270) Business owners that sell their business will be able to get a further reduction under the Business Asset Disposal Relief (BADR). Entrepreneurs Relief (ER) now Business Asset Disposal Relief (BADR) Like me and many other business owners, we will be aware of the old Entrepreneurs Relief (ER), renamed Business Asset Disposal Relief (BADR). To qualify for relief, both of the following must apply for at least 2 years up to the date you sell your business: – you are a sole trader or business partner – you owned the business for at least 2 years – Your investment was 5% The typical rates of Capital Gains Tax may be seen above Anyone that sells a business for £1.5m will need to pay tax as follows (assuming the individual is a high rate taxpayer) – £100,000 – 10% tax on the first £1 million – £100,000 – 20% on the remaining £500,000 – £200,000 total capital gains tax liability Care is required when applying for the Business Asset Disposal Relief (BADR) due to the number of trip-ups Stamp Duty Land Tax (SDLT) changes We must remember that there are a variety of Stamp Duty Land Tax rates. The two key rates are for residential and commercial property. Residential rates of SDLT – 0%: £0 to £125,000 – 2%: £125,001 to £250,000 – 5%: £250,001 to £925,000 – 10% £925,000 to £1,500,000 – 15%: £1,500,001+ We must also remember that there is a 3% higher rate of SDLT for individuals that are buying a second property in their name or a limited company. The 3% SDLT higher rates start when the property exceeds £40,000. This is in addition to the above scales SDLT rates when buying a residential property. There is also a 2% SDLT foreign surcharge for non-UK tax residents that purchase the UK real estate property. Commercial property SDLT rates The non-residential property includes: – shops or offices – Mixed-use properties where you have a residential and a commercial element – property that isn’t suitable to be lived in forests – agricultural land that’s part of a working farm or used for agricultural reasons any other land or property that is not part of a dwelling’s garden or grounds – 6 or more residential properties bought in a single transaction The amount of SDLT that people will pay on non-residential rates (commercial property) is as follows: – 0%: £0 to £150,000 – 2%: £150,001 to £250,000 – 5% £250,001+ Value Added Tax (VAT) budget changes Value Added Tax (VAT) is applied to goods and services. The normal rate is 20%. Hotel, leisure and hospitality industries Different rates for hotel, leisure and hospitality industries that have temporarily reduced rate are as follows: – 12.5% until 31st March 2022 – 20% rate will be reapplied from 1st April 2022 UK land and property VAT rates There are a number of different rates that UK landlords and property investors need to be made aware of – 0% VAT rate for property developers building new homes – 5% VAT rate for property developers that change a commercial building into residential usage – 5% VAT rate for property developers that increase or decrease the number of dwellings in a property (changing a house into two flats as an example). – 5% VAT rate for property refurbishment projects whereby the asset has been left empty for more than two years. Inheritance Tax (IHT) budget changes Inheritance Tax (IHT) is 40% for anyone that has assets above £3250,000. Homeowners that have a property of more than £325,000 will get an increase as follows (example of someone with a property of £1 – £325,000 Inheritance Tax lifetime allowance – £175,000 Residential Nil Rate Band – £500,000 assets that will not be subject to IHT. These rates apply for individuals, which is doubled for couples. This means that a husband/wife/civil partner would not have to pay IHT on £1m if they have a high valued home. Individuals need to be aware that the assets subject to IHT are net assets rather than gross assets. This means you reduce your asset values by the debts that you have in your name.