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An image of Rutton ViccajeeThe second part of Rutton’s guide to the Budget, 2016, this time focussing on corporation tax..  Financial health warning: This is general guidance / reading only. Before acting, always ask for specific guidance tailored to your situation, particularly if there is any amount of tax at stake.

Some comments are courtesy of CWB Tax – with thanks

Corporation tax

The rates for all companies (small or large) from 2015 are now in line at 20%.

Our clients have been paying 20%, of course, for some time.

From April 2020, the corporation tax rate will be reduced further to 17%.

This will apply to companies of all sizes, providing the lowest corporation tax rate in the G20.

This presumably can now be re-announced twice a year for the next four years – until someone changes their mind!

Company losses

A useful relaxation where a company has more than one trade, or a trade and lettings income:

Under the current system, carried forward losses can in many cases only be offset against the same income stream – e.g. trading losses against trading profits.

For losses incurred from April 2017, losses will be available to be carried forward against future profits from other sources or from other companies within a group under group relief.

Loans to participators

This tax applies when you have an overdrawn balance sheet, or where a company makes (e.g.) a loan to a director:

The so called “s455 tax” (or old s419 – the 25% deposit that companies have to make when loans are made to participators) has always been aligned with the effective higher rate dividend tax rate.

When the new dividend rates are introduced in April 2016, s455 tax will follow suit by increasing the charge to 32.5% to match this.

Capital gains tax

Rates

For disposals made on or after 6 April 2016, CGT rates will be reduced to:

– a lower rate of 10% (from 18%) and
– a higher rate of 20% (from 28%).

Residential property

However, an 8% surcharge will apply to residential property that does not qualify for private residence relief, so that the current rates continue to apply to these.

Residential property will include land which has at any time in the person’s ownership consisted of or included a dwelling as well as an interest in land in connection with an off-plan purchase.

There will be provisions for calculating gains on mixed-use properties.

While a reduction in rates is welcome, CGT is becoming very complex with rates of 10% or 18% for some assets and 10%, 20% or 28% for others.

It is not clear whether the gain on a property which qualifies for private residence relief for part only of the period of ownership will be taxed at 20% or 28% but we think it is the former.

It seems somewhat harsh that a person who bought a house and demolished it 10 years ago and constructed a warehouse on the site should have to pay the 28% rate when he sells the warehouse simply because he lived at the site of the warehouse 20 or 30 years earlier.

National Insurance

Class 2 National Insurance contributions, which are paid, normally monthly, by the self-employed, are to be abolished from 6 April 2018. T

This will give a self-employed individual (or a partner) a saving of £130 per annum.

The Class 4 rules (also payable by the self-employed) will be amended to benefit entitlement to Class 4 instead of Class 2 but the government has not yet worked out how to do this.

Administration

Simple assessment

This is a new power for HMRC to assess a taxpayer under self-assessment without him having to first submit a tax return.

The idea is that if the taxpayer’s affairs are straightforward and HMRC know all the necessary information already, they do not need to wait for a tax return.

It will be interesting to see how well this works. It is a first step towards digital tax accounts. If it works well, that should provide a degree of reassurance. If it doesn’t …

IHT

And finally – don’t forget last year’s big IHT relief:

The IHT main residence nil band

Who is likely to be affected?

Anyone who dies with an estate over £325,000 and a house to pass on:

This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.

This will be:

– £100,000 in 2017 to 2018
– £125,000 in 2018 to 2019
– £150,000 in 2019 to 2020
– £175,000 in 2020 to 2021

(So it has not come in yet! More future announcing.)

It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards.

Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.

The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.