Budget 2020 and the tax changes effective from 6th of April 2020
Rishi Sunak delivered his first Budget to the UK parliament on Wednesday 11 March and announced a raft of spending for public services, infrastructure and combating coronavirus. From a personal tax perspective there were no surprises despite the reports that surfaced towards the end of last year suggesting that Inheritance Tax would be simplified or completely abolished. However, there are some major personal tax changes, announced in previous budgets, which come into force from 6th of April this year. Each tax change is outlined below:
The UK Government froze the Income Tax Personal Allowance at £12,500. As has been the case since 6th April 2017 the Scottish Government sets its own rates and bands for Income Tax. The recent Scottish Budget confirmed the rates and bands for 2020/2021 as:
£0 - £12,500
Income Tax Personal Allowance
£12,501 - £14,585
£14,586 - £25,158
Scottish Basic Rate
£25,159 - £43,430
£43,431 - £150,000
Scottish Taxpayers who earn over £25,159 are immediately at a disadvantage to their English counterparts.
Landlord Mortgage Interest Relief
Since April 2017, tax relief on mortgage interest for landlords has been slowly reduced and replaced with a tax credit based on 20% of mortgage interest payments. From 6th April 2020, no mortgage interest will be deducted at all from rental income before Income Tax is calculated. The 20% tax credit will then applied after the calculation of Income Tax on the rental income and reduce the taxable rental income by 20%. This is bad news for those taxpayers who are intermediate, higher or top rate Scottish taxpayers as they will have increased Income Tax bills. Prior to April 2017, all mortgage interest was deducted from rental income prior to Income Tax being assessed, effectively reducing the landlords Income Tax bill at the appropriate rate. From April, as no mortgage interest is deducted, a taxpayer will pay Income Tax on the gross rental income at their effective rate and then claim the Tax Credit at 20%. The following example shows the difference a landlord in Scotland with a salary of £55,000 will face in comparison from 2016/2017 to 2020/2021:
Annual Rental Income
Annual Mortgage Interest Payments
Income Tax on rental income
The loss of the mortgage interest relief combined with the Scottish rate of Income Tax means Scottish Landlords may make significantly less profit on rental income than they would have pre April 2017 depending on their circumstances.
For those considering investing in the buy-to-let market there is also the Additional Dwelling Supplement (ADS) payment, which now sits at 4% of the purchase price, to consider along with the Land and Buildings Transaction Tax (LBTT). All in in all it could take buy-to-let investors a significantly longer time to recuperate their expenditure and break even.
As already noted there were no amendments to the regime for Inheritance Tax in Mr Sunak’s budget. The IHT Nil-rate band (NRB) will remain at £325,000 per person. However, from 6th April 2020 the Residence Nil-Rate Band (RNRB) will be increased to £175,000 per person. The RNRB was first announced in George Osborne’s Summer Budget of 2015 and was implemented in April 2017. In order for an estate to qualify for the RNRB the deceased person must leave their home (or a share of it) to a direct descendant. The initial band introduced in the 2017/2018 tax year was £100,000 and has increased every year by £25,000 until 6th April 2020 when the band will stand at £175,000 and thereafter increase each new tax year in line with the Consumer Price Index (CPI). The RNRB does though reduce where the total assets in an estate are valued at over £2 million. The rate of reduction is £1 for every £2 the estate is over the £2 million threshold.
Both the NRB and RNRB are transferable on death to a spouse or civil partner. What this means is that a married couple (or civil partnership) can effectively make over £1 million of assets on death without paying any IHT.
Capital Gains Tax (CGT)
Mr Sunak’s budget has increased the CGT annual allowance to £12,300 for individuals and £6,150 for Trust in 2020/2021. This is in line with the usual CPI increase.
There are three major changes that are being implemented on 6th April 2020 to the CGT regime. The first of these changes relates to the disposal of residential properties which do not qualify for Principal Private Residence Relief. From 2020/2021 where a CGT liability arises on the disposal of a residential property a provisional calculation will be submitted to HMRC along with the payment any tax liability. This provisional calculation and payment must be submitted within 30 days of disposal. The gain will still be reported on a tax return and any adjustment to the tax payable made thereafter.
The second change to the CGT regime concerns Lettings Relief. Currently, individuals who sell a property which has been their main home at some point and which they have let out for periods as well. An individual can claim up to a maximum of £40,000 in Lettings Relief. This can save the taxpayer a maximum of £11,200 in CGT. For disposals after 6th April 2020, it will only be possible to claim lettings relief if the owner lives in the property at the same time as their tenant. All owners who had let out their property on the basis of Lettings Relief will lose the relief if they crystallise their gain after 6th April 2020.
The third change relates to the principal private residence relief. Previously, where a property has been a main residence, the final 18 months of ownership were deemed to qualify for Principal Private Residence relief and as such were exempt from CGT. This period has now been reduced to 9 months.
All in all these changes to CGT may mean that some tax payers pay a larger CGT bill if they dispose of residential property after 6th April. When combined with the mortgage interest relief being removed, it may encourage landlords to quit while they are ahead and sell up their let properties.
While there were no big tax headlines in the Budget there are certainly significant changes coming on 6th April 2020 which especially hit owners of second homes and/or buy-to let properties, especially those looking to invest. A number of investors now incorporate their rental portfolios due to the punitive tax regime in Scotland. This is not a perfect fit for all however and there are specific tax consequences which should also be considered before proceeding.
27th November 2020
The Chancellor has asked the OTS to undertake a review of CGT
26th March 2020
The Law Society of Scotland has issued guidance of how the process can continue during COVID-19.
20th March 2020
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