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2021 Autumn Budget – brief overview

No big surprises in this year’s autumn budget, given some of the announcements leading up to the budget and the “leaks” of information too.

Below is a brief summary on the key areas of personal and business tax.

Personal tax

Tax rates and allowances for 2022/23

Personal tax rates and the personal allowance remain unchanged

Personal allowance of £12,570

Basic rate limit £37,700

Basic rate, higher rate and additional rate income tax will remain at 20%, 40% and 45%.

The additional income tax rate threshold will remain at £150,000

The capital gains tax (CGT) annual exempt amount will remain at £12,300 – CGT rates are unchanged for 2022/23.

Scotland has its own rates and rate bands, to be set for 2022/23 by the Scottish Parliament at its Budget on 9 December 2021, and the Welsh Parliament could also modify income tax rates for Welsh taxpayers at its Budget on 20 December 2021.

The starting rate for savings limit (applicable throughout the UK) will remain at £5,000 for 2022/23, and the starting rate itself at 0%. The Personal Savings Allowance also remains unchanged.

Inheritance tax thresholds and rates are unchanged, and the nil rate band is fixed until April 2026.

Dividend tax rates

As previously announced, tax on dividends will increase by 1.25% on all three rates for 2022/23 onwards.

The dividend nil rate will remain at £2,000. 

The increase is meant to fund the NHS and social care.

National Insurance contributions rates and thresholds

The Upper Earnings Limit and Upper Profits Limit will be maintained at 2021/22 levels, in line with the higher rate threshold for income tax.

A 1.25% Health and Social Care Levy from 6 April 2023 that had already been announced will be added to the national insurance rates.

Van benefit charge and fuel benefit charges for cars and vans

The van benefit charge will increase to £3,600, the multiplier for the car fuel benefit will increase to £25,300, and the van fuel benefit charge will increase to £688.

ISAs, junior ISAs and child trust funds

The annual subscription limits for ISAs, junior ISAs and child trust funds will remain unchanged for 2022/23 – the limit for ISAs will be £20,000, and the limit for junior ISAs and child trust funds will be £9,000.

Increase in normal minimum pension age

The earliest age at which most individuals can access their pensions without incurring an unauthorised payments tax charge, is to increase from 55 to 57. The increase will have effect from 6 April 2028.

Pensions tax relief administration: top-up for low earners in net pay arrangements

The Government is set to introduce a system to make top-up payments directly to lower earners (those with taxable incomes below the personal allowance) who are saving in pension schemes using a net pay arrangement from 2024/25 onwards. These top-ups will be paid after the end of the relevant tax year, with the first payments being made in 2025/26. 

Business tax

Residential property developer tax

The Government had previously announced a new residential property developer tax as part of its measures to address unsafe cladding on high-rise buildings. It will apply with effect from 1 April 2022 to the relevant profits arising on or after this date of companies undertaking residential property development activities. It was confirmed in the Budget that the tax will be charged at 4% on profits exceeding an annual allowance of £25 million.

Basis period reform

The basis period rules for self-employed individuals and partners are to be reformed. A business’s profit or loss for a tax year will be the profit or loss arising in the tax year itself, regardless of the accounting date of the business. On transition, all basis periods will be aligned to the tax year and all outstanding overlap relief given.

The rules will come into place from April 2024.

Capital allowances

The increased annual investment allowance (AIA) of £1 million has been extended for a further 15 months to 31 March 2023.

Research and development (R&D)

From April 2023, research and development (R&D) tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud costs. 

Cross-border group relief

Due to Brexit, the existing beneficial cross border group reliefs relating to EEA-resident companies have been repealed for accounting period ending on or after 27 October 2021.

Creative industries

From 27 October 2021, there will be a temporary increase in the rate of theatre tax relief, orchestra tax relief and museums and galleries exhibition tax relief.

Other announcements

  • The national living wage has been increased from £8.91 per hour to £9.50 per hour
  • Businesses in leisure and hospitality and retail will benefit from reduced rates on business rates.
  • Business rates will now be re-evaluated every 3 years instead of 5 years for all businesses.

Please get in touch here, if you have any questions.

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FHLs and interest costs

For tax purposes, furnished holiday lettings are something of a special case and benefit from a number of advantages not available to standard residential lets. One of these advantages is in relation to the treatment of interest and finance costs.

Residential landlord – Restriction of relief

Residential landlords can now only obtain relief for interest and finance costs, such as mortgage interest, as a basic rate tax reduction, regardless of the rate at which the residential landlord pays tax. The interest and finance costs are not deducted when working out the taxable profit, and the tax is initially worked out on the profit without taking account of the interest and finance costs. The resulting tax liability is then reduced by 20% of the interest and finance costs, capped at the lower of 20% of the taxable profit or the amount that reduces the tax liability to nil. Any unrelieved interest and finance costs can be carried forward for relief as an income tax deduction in calculating the tax liability of the same property business in a later tax year, with the costs being relieved at the first available opportunity.

This approach has a number of downsides – relief is only given at 20% even if the landlord is a higher or additional rate taxpayer and relief may not be given in full in the tax year in which the costs are incurred.

Furnished holidays lettings – Deduction in full

The changes to interest rate relief do not apply to furnished holiday lettings, and where a let qualifies as furnished holiday let, interest and finance costs can be deducted in full when working out the taxable profit. The deduction is not capped, and can give rise to a loss which may be carried forward and set against future profits from the same furnished holiday business. Also, as relief is by deduction, relief is given at the landlord’s marginal rate of tax not at 20% where the landlord is a higher or additional rate taxpayer.

Example

Toby is a residential landlord. For 2021/22 his taxable profit before taking account of interest costs on the associated mortgage is £30,000. Mortgage interest paid in the year is £8,000. 

Toby has other income from his photography business and pays tax at the higher rate of 40%.

Before applying the basic rate tax reduction, the tax on the property income is £12,000 (£30,000 @ 40%). The basic rate tax reduction in respect of the mortgage interest reduces this by £1,600 (£8,000 @ 20%) to £10,400.

Tom has a furnished holiday let on which profit before deduction of interest costs is also £30,000. He too pays mortgage interest of £8,000 and, like Toby, has other income and is a higher rate taxpayer.

However, unlike Toby, he can deduct the full amount of the mortgage interest, reducing the taxable profit to £22,000, on which tax of £8,800 (£22,000 @ 40%) is payable.

Despite identical profit and interest, Tom pays £1,600 less in tax than Toby as he is able to obtain relief for his interest costs at his marginal rate of 40%.

Please get in touch here, if you have any questions

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Stamp duty land tax refunds

The additional stamp duty land tax (SDLT) rate of 3% is payable by purchasers of residential properties costing £40,000 or more and if all of the following conditions apply:

  • it will not be the only residential property worth £40,000 or more owned (or part owned) by the purchaser anywhere in the world
  • the previous main home has not been sold or gifted and
  • no one else has a lease on it which has more than 21 years left to run

The charge applies even where the second property is the buyer’s new home (main residence), and they intend to sell the other property but have not done so because, for example, they have not been able to find a buyer. However, the legislation recognises that such difficulties can arise and allows a refund to be claimed in specific circumstances. The buyer will initially have to pay the 3% SDLT surcharge and then apply for the refund provided that their existing main residence is disposed of within 36 months of completing the purchase of the ‘replacement’ home. 

Extensions due to exceptional circumstances

In the vast majority of cases, this 36-month timeframe provides sufficient time for people to sell but, in certain specific cases, an extension to the 36 months can be granted if an affected taxpayer has not been able to sell due to exceptional circumstances outside of their control. Such taxpayers must make a sale as soon as practicable once the exceptional impediment to sale ceases to apply; this applies to those whose refund window ended on or after 1 January 2020.

SDLT refunds can also be claimed on property transactions where the purchaser was a first-time buyer who has purchased a shared ownership property for £500,000 or less and paid on the purchase. The chancellor removed the liability for SDLT payable on these transactions in the autumn Budget and made the change retrospective thereby applying to first-time buyers who purchased their homes on or after 22 November 2017.

SDLT refunds for uninhabitable properties

In addition, SDLT refunds may also be available in situations where a second property has been purchased, which was unfit to live in at the time of purchase but was purchased with intent to renovate it as a buy-to-let investment. The additional 3% may have been charged at the time of purchase but following the tax case of P N Bewley Ltd v HMRC[2019] UKFTT 65 (TC), it was ruled that properties that are not habitable at the time of completion do not constitute a ‘dwelling’ and therefore are not liable to the 3% additional SDLT charge. The judge ruled that ‘a dwelling will, as a minimum, contain facilities for personal hygiene, the consumption of food and drink, the storage of personal belongings, and a place for an individual to rest and to sleep’.

Purchasers of property who have incurred the surcharge since 2016 (on properties that they believe were uninhabitable at the time of purchase) can apply for a SDLT refund if they are able to prove that the property is not a dwelling. Furthermore, a property deemed not suitable to be a dwelling is not only not subject to the 3% surcharge, but it is treated as a non-residential property liable to SDLT at the applicable rates.

Applying for a refund under the 36 months ‘replacement’ rules can be online with the time limit for making the refund being 12 months after the sale of the previous main residence (or 12 months from the filing date of the return for a new return). HMRC may permit this deadline to be extended in exceptional circumstances such as if the house could not be sold due to Covid. Refunds under other circumstances are usually via a letter.

Please get in touch here, if you have any questions.