The UK Chancellor, Jeremy Hunt, delivered the UK's Budget to the House of Commons on 6 March 2024. It is likely to be the last fiscal event before a general election. It has been widely reported that the UK's total tax revenue is set to reach record levels, as a share of national income; in part due to an increase in the main rate of corporation tax and a freeze to thresholds and allowances in the personal tax system. In his "Budget for long-term growth", the Chancellor announced a number of tax measures for individuals and businesses:
National Insurance Contributions ("NICs") rate reduction
The Government has announced a reduction in the rate for Class 1 employee NICs; the revised rate will be 8% (down from 10%) from 6 April 2024. The Class 4 NICs rate (which is the main rate for self-employed individuals) will be reduced from 8% to 6%. These rate changes will apply to all countries within the UK.
This announcement follows the Government reducing the Class 1 employee NICs rate by 2% in the Autumn Statement (with effect from 6 January 2024). The Government also announced in the Autumn Statement that the Class 4 NICs rate would be reduced from 9% to 8% and that Class 2 NICs would not need to be paid on profits over £12,570, as covered in our summary of the Autumn Statement.
The Chancellor has resisted the pressure to reduce income tax rates and has instead chosen to focus on NICs. As NICs are paid on earnings and self-employed profits, the tax cut targets those in work rather than those receiving passive income. Reducing rates of NICs is also a cheaper option for the Government than reducing rates of income tax.
The Government has framed this rate reduction as a tax cut with a saving of £900 for the average worker, when taking into account the Autumn Statement rate reduction. However, this has to be put in the wider context of a growing tax burden, which is approaching its highest level since 1948. The percentage of taxes as against Gross Domestic Product is currently 36% and forecast by the Office of Budget Responsibility to reach a post-war high of 38% by 2028/29. According to the Institute for Fiscal Studies, the rate reduction will slow this rise slightly, but does not reverse the effects of the frozen tax thresholds that, when combined with high inflation and wage growth in recent years, has brought many more people into higher tax bands.
According to The Guardian, the Resolution Foundation has calculated that only those people earning between £27,000 and £59,000 will make a saving as a result of the overall reduction in NICs rate from 12% to 8% once the freezing of the thresholds is taken into account. However, people with a salary of, "£16,000 will lose almost £500 a year, as will those receiving more than £60,000".
Moreover, thresholds for personal allowance reduction and tax-free childcare (£100,000) and the high income child benefit charge (currently £50,000), have created inflated marginal tax rates for people with salaries above these thresholds and parents or carers are particularly affected by these inflated marginal tax rates.
High Income Child Benefit Charge ("HICBC")
The HICBC has faced criticism since its introduction in 2013 for its inherent unfairness and complexity. That criticism has intensified as more people are brought within the charge due to the effects of inflation and the frozen thresholds.
The Government has announced that the HICBC will be amended to take into account household income rather than individual personal income. This will require HMRC to be able to assess household income, which it currently isn't set up to do. Therefore, this change cannot be introduced quickly and HMRC will publish a consultation on the next steps to achieve this.
As an interim measure, the current threshold for when the HICBC starts to apply will be increased from £50,000 to £60,000 and the threshold at which eligibility for child benefit is removed entirely will increase from £60,000 to £80,000 from 6 April 2024. These increased thresholds do not address the underlying unfairness of the HICBC. Until household income is assessed, a household with two incomes of £59,000 each will continue to be able to claim child benefit in full, whereas a household with a single income of above £60,000 will either have to pay the HICBC or will not be eligible for child benefit at all if household income is above £80,000. The same problem arises for tax-free childcare, where the threshold for eligibility is personal income of £100,000, but no mention was made of changes to this in the Budget.
We will need to see the details of how the Government proposes to assess household income. The Government will consult on this proposal at some point in the future, possibly as soon as April. It will be interesting to see whether the household assessment will be introduced by April 2026, particularly in the context of a general election taking place later this year and the complexity of assessing household, rather than personal, income.
Abolition of the Furnished Holiday Lettings tax regime
The Government has announced that it will abolish the Furnished Holiday Lettings ("FHL") tax regime from 6 April 2025. The Chancellor said he made the decision to try to increase the number of long-term lettings, particularly for people in common holiday locations.
What is the Furnished Holiday Lettings tax regime?
Under the current system, if your letting qualifies as an FHL it is treated as a trade rather than as property letting business. This means that you can:
- Claim capital gains tax reliefs ("CGT") for traders (such as business asset rollover relief, business asset disposal relief ("BADR"), relief for gifts of business assets, and relief for loans to traders).
- Benefit from plant and machinery capital allowances for items like furniture, equipment, and fixtures.
- Count the FHL profits as earnings for pension purposes.
- Set off finance costs without restriction.
These advantages are not available to property letting businesses. Under the FHL regime, there was potential for significant tax savings using BADR on qualifying properties, with owners potentially seeing their capital gains tax rates on a sale reduced from 18% or 28% down to 10%.
Draft legislation is yet to be published but we are told it will include an anti-forestalling rule. This will be designed to prevent the FHL owners obtaining CGT relief under the current FHL tax rules from 6 March 2024.
What is the impact of the abolition of the FHL tax regime?
Reports in The Times newspaper have suggested that the move could generate an estimated £300 million for the Government. However, it is unclear over what time period this figure arises. The Telegraph estimates that holiday home owners could lose an average of £2,835 a year and this change could negatively affect the UK's tourist hotspots. The change may be felt by those wishing to holiday in the UK if the number of furnished holiday lets available is reduced or the price of such holidays increase.
Figures shared by Tax Watch suggest that the majority of landlords that benefit from the FHL rules own a single holiday let property, rather than a larger holiday lettings business.
Capital gains tax on residential property
A higher rate of CGT applies to gains arising from the disposal of residential property by individuals, trustees and personal representatives. Until the Budget these rates were 18% or 28%, instead of the rates of 10% and 20% that apply to most other assets. The Chancellor has announced that the higher rate of 28% will be reduced to 24% from 6 April 2024.
The lower CGT rate of 18% for any gains arising from residential property that fall within an individual's unused CGT basic rate band will remain the same.
The rate change does not affect the operation of Private Residence Relief, which exempts most gains on the disposal of an individual's only, or primary, residence from CGT.
The 18% and 28% rates of CGT that apply to gains on carried interest (broadly, a share of profits that arise to fund managers where fund investments perform above a certain level), will also remain the same.
This means there are now five different rates of CGT for individuals (at 10%, 18%, 20%, 24% and 28%) depending upon an individual's personal circumstances and the type of asset disposed of. These changes do not affect corporation tax on chargeable gains.
According to the Chancellor, this tax cut will, "pay for itself" by encouraging landlords and second-home owners to sell their properties earlier, which will raise more revenue and make more properties available for potential buyers. The rate reduction will be welcomed by individual landlords and may encourage them to dispose of their investment properties sooner.
UK ISAs
The Government has published a consultation on the introduction of a new UK ISA as part of the Budget. This consultation proposes an additional ISA allowance of £5,000 for UK linked-investments. This is in addition to £20,000 that can currently be invested into the existing cash ISAs, stocks and shares ISAs or innovative finance ISAs. The stated policy objectives underpinning the introduction of the new UK ISAs are encouraging investment in UK companies and improving the popularity of the UK's listing regime.
Which objective will the policy do more for? Perhaps unsurprisingly, the Chancellor's speech gave 'investment in the UK' top billing. On the face of it, that's what the UK ISA is all about – supporting investment in UK companies. However, the consultation document suggests the new product might have a bigger impact on the popularity and competitiveness of the UK's listing regime.
The consultation suggests that the UK ISA wrapper will be permitted to hold shares in UK incorporated companies that are listed or admitted to trading on a regulated stock exchange. That's the LSE and AIM (amongst others) – including the FTSE 100 Index.
Many of those companies operate globally, not just in the UK. The lion's share of FTSE 100 revenue derives from overseas. To the extent that UK ISA holders invest in those companies, they support the liquidity and depth of the UK listing regime through increasing demand for those equities, but may not contribute much by way of UK investment.
The consultation even notes as much. The proposed definition of UK equities may "not take into account the proportion of the listed group’s commercial activities conducted in the UK". That's an oddity if commercial activities conducted in the UK are the very thing which holdings in the UK ISA are supposed to target.
On the other hand, it is less of an issue if the goal is to deepen the liquidity of the UK's listing regime through incentivising the deployment of taxpayer funds into it and to increase the price at which the companies listed on it trade at. It is also convenient given the increased scrutiny and global competition that the UK's various listing markets have come under of late.
Another potential quirk is that the consultation suggests that UK Gilts will be permitted in UK ISA holdings. That might come as a surprise if you thought the purpose of UK ISAs was to provide financing for the UK private sector. However, the Government justifies extending the tax advantages of UK ISA treatment to finance its own borrowing on the basis that, "investing in gilts helps support the UK economy through financing public services". That logic is interesting because the co-dependency of public and private sectors does not give rise to equivalent treatment in other areas of the UK tax code – not least in relation to other specific exemptions for Gilts.
Non-UK domiciled individuals
The Government has announced the abolition of non-domiciled status for income and capital gains taxes from April next year. This seems to bring an end to a long process of reform to the way the UK taxes the internationally mobile dating all the way back to 2003. Domicile was the last survivor of the old subjective common law tests of residence, ordinary residence and domicile. Now everything is governed by one all encompassing (not to mention highly complex) statutory residence test. (Although national insurance, predictably, has its own quirks.)
Under current rules, so-called 'non-doms' only pay UK taxes on income and gains that either arise in, or are "remitted to", the UK. This means that individuals of foreign origin could avoid UK taxes on wealth kept offshore, even if they lived solely in the UK for a number of years, in a way that those of UK origin could not. The rules also provided a perverse incentive for non-doms not to invest in the UK, unless they were able to claim relief under complex business investment relief rules. The rules governing when income was treated as remitted to the UK were amongst the most complex on the statute book. The rules on domicile have long been politically divisive and have been tightened over the years, most notably with the introduction of the remittance basis charge in 2008 and the deemed domicile rules in 2017.
All of this is to go. Instead, the intention is that individuals with at least ten consecutive years of non-UK residency will be exempt from UK income tax and capital gains tax on foreign income and gains for the first four years after becoming UK resident. After those four years, new residents would pay UK taxes on all income and gains arising anywhere in the world, on the same basis as other UK residents, unless they became non-UK resident for another ten years. Importantly, it appears that the four year exemption operates on a strict basis. An individual who is UK resident one year, and not for the next three years but becomes resident again in the fifth will have no benefit in that fifth and any subsequent years despite only benefitting from the rules for a single year.
Although details are lacking at this stage, it does appear that there will be a concept of remittance under the new regime, so taxpayers claiming exemption for foreign income and gains will be able to remit these to the UK free of tax. The draft rules are likely to be complex and it is likely they will contain targeted anti-avoidance rules. Foreign income and gains on which the remittance basis was previously claimed will continue to be subject to the remittance regime (subject to the temporary relief rules discussed below).
The Government has set out a number of transitional provisions that it intends to implement as part of the transition to the new regime as follows:
- A 50% reduction in foreign income (but not gains) subject to tax in the tax year 2025-26 for non-doms who will lose access to the remittance basis on 6 April 2025 and are not eligible for relief under the new regime.
- A rebasing of foreign capital assets so that individuals who:
- a) have claimed the remittance basis (and presumably cannot claim relief under the new regime);
- b) are neither UK domiciled nor UK deemed domiciled by 5 April 2025; and
- c) dispose of a foreign asset acquired prior to 5 April 2019,
can elect to be subject to capital gains tax on the disposal of foreign capital asset only on the increase in value since 5 April 2019. Obviously, this presents potentially complex valuation issues, which taxpayers would need to consider. The 2019 date is presumably to align with the 2019 rebasing applying to non-UK residents disposing of UK land, although these are separate tax regimes.
- A "temporary repatriation facility" for tax years 2025-2026 and 2026-2027 under which remittances of pre-April 2025 foreign income and gains (for which the remittance basis was claimed) would be taxed at 12%. This clearly provides an opportunity for a significant and time limited tax saving that non-doms will need to be aware of. The Government has indicated that there will be some relaxation of the notoriously complex mixed fund rules to aid this repatriation.
Finally, the Government has indicated that it will also look to reform the inheritance tax system from April 2025 so that it is also based on residence rather than domicile. The precise principles of this will be subject to consultation. However, there is an important caveat in that the Government has indicated that pre-April 2025 non-domicile trusts would continue to enjoy non-domicile inheritance tax exemption, except on new property added to the trust after 6 April 2025. This presents a potential inheritance tax planning opportunity for existing non-doms.
Stamp Duty Land Tax ("SDLT")
The Chancellor announced a number of changes to stamp duty land tax ("SDLT") as part of the Budget.
Multiple Dwellings Relief
The most important of these changes was the abolition of multiple dwellings relief ("MDR") for all transactions that complete or are "substantially performed" on or after 1 June 2024. There are transitional provisions that allow the relief to be claimed where contracts are exchanged on or before 6 March 2024 and complete (without amendment) on or after 1 June 2024. The Government consulted on MDR with a view to deciding which of four proposed reforms would be most suitable for preserving the positive benefits of MDR, while tackling the dubious MDR claims and avoidance that have produced a string of Tax Tribunal decisions in recent years. Abolishing MDR entirely goes far beyond those proposals.
The Government's decision to abolish MDR was apparently motivated by research that it commissioned that showed that 51% of MDR claims were made by individuals and that MDR was not a "significant" factor in businesses' decisions to purchase residential property, the purpose for which MDR had been introduced. Looking at the research itself, the results appear more mixed. The Government cites MDR as being "important" for 32% of private rental buyers, but ignores the 65% for whom it had "some" influence and the 62% of businesses who would have spent less if faced with a 50% higher SDLT bill.
The Government also does not acknowledge that there are some circumstances where public bodies and social landlords were able to use this relief to reduce their SDLT bills when other reliefs, such as for registered providers of social housing, were not available.
It remains to be seen what effect the abolition of MDR will have on the private rental market.
Registered providers of social housing
Another change made by the Government (with effect from 6 March 2024) was to amend the full SDLT relief available to registered providers of social housing relief in certain circumstances (broadly on purchases: from relevant bodies, by tenant controlled registered providers, or with certain public subsidies). Most of these were minor amendments to correct outdated provisions, but two changes in particular are worth noting:
- English local authorities that are registered providers of social housing are now specifically treated like non-profit registered providers for the purposes of this relief. HMRC had previously stated that local authorities were non-profit "by nature". The Government state that this change is to "remove uncertainty", but it does raise the question whether HMRC will rethink their previous guidance.
- Certain recycled grant funding resulting from disposals of grant funded property being used to acquire other property may be treated as a public subsidy for the purposes of the relief.
Public bodies and the 15% rate
As an anti-avoidance measure a 15% SDLT rate is charged on some property "enveloping" transactions. The conditions under which this applies are very similar to those under which the annual tax on enveloped dwellings ("ATED") applies.
For ATED, there is a wide exemption for public bodies. This was previously not the case for the 15% rate in what appeared to be a clear lacuna in the SDLT rules. This gap has now been filled from 6 March 2024, with "public bodies" (as defined in the legislation) being effectively excluded from the 15% SDLT rate.
VAT thresholds
The Chancellor announced in the Budget that, from 1 April 2024, the VAT registration threshold will increase from £85,000 to £90,000. This means that UK businesses with a taxable turnover of less than £90,000 will not be required to register for VAT; however, business can still voluntarily register for VAT regardless of their turnover. The taxable turnover threshold that determines whether a business may apply for VAT deregistration will be increased from £83,000 to £88,000, also from 1 April 2024.
The Chancellor stated that this change will reduce the VAT burden for many small businesses and over 28,000 business will benefit in 2024/25 from no longer being required to be VAT registered. Given the changes to the corporation tax regime in recent years, the Chancellor has clearly decided to focus on other taxes that affect UK businesses.
While some small businesses will welcome the increase in the registration threshold, it does not go far enough for others. Businesses in the hospitality, retail and leisure sectors had urged the Chancellor to cut the standard rate of VAT (currently 20%) to a rate that is more in line with other European countries, such as 12.5%. An increase of £5,000 in the registration threshold is also not likely to affect the majority of businesses. There is also an argument that a lower registration threshold, coupled with a lower headline rate of VAT, would be a fairer system as it would leave only the smallest businesses outside of the VAT regime while allowing all businesses to benefit from a lower headline rate.
Energy Profits Levy
The Energy Profits Levy ("EPL") has been extended by a further 12 months to the end of March 2029. The Government stated that it expected oil and gas prices to remain high for longer than initially anticipated.
The EPL was introduced in May 2022 in the context of huge increases in the prices of oil and gas in the wake of the Russian invasion of Ukraine and subsequently the profits of companies in the sector increased significantly. The measure was partly intended to mitigate the perceived unfairness of companies profiting from a cost of living crisis in the UK.
The EPL is charged on certain profits of oil and gas companies operating in the UK or the UK continental shelf. The levy is in addition to Ring Fence Corporation Tax (which is charged at 30%) and the Supplementary Charge (which is charged at 10%). The EPL was initially 25% and was increased to 35% from 1 January 2023.
In the next Finance Bill, the Government will legislate to provide for the energy security investment mechanism ("ESIM"), which enables the Energy Profits Levy to cease if the six month average price for both oil and gas is at or below threshold prices.
Cryptoassets
The Government is to consult on the UK's implementation of the OECD's Cryptoasset Reporting Framework ("CARF") and Amendments to the Common Reporting Standard ("CRS 2.0") package.
This is part of a series of measures from the OECD to prevent tax evasion. Cryptoassets have presented a challenge to HMRC and have previously managed to avoid being taxed on their exchange due to their novelty and the inflexible nature of tax legislation in the UK and elsewhere.
In order to assist HMRC to collect tax on the trading of, and income from, Cryptoassets, the Government is seeking views on how to align domestic third party reporting standards with the international reporting outlined in CARF and CRS 2.0.
CARF operates by requiring increased reporting and compliance standards from Cryptoasset Service Providers and collaboration between international tax authorities to identify tax non-compliance. The implementation of CARF in the UK will require a greater level of data sharing and transparency from the Cryptoasset Service Providers. Due to the unregulated and decentralised nature of Cryptoassets and the motives behind many Cryptoasset investors, HMRC will face resistance to the level of data sharing required to implement CARF.
HMRC is seeking views from stakeholders as to how to implement CARF in the UK.
Creative industry tax reliefs
In the Budget the Government announced what it estimates to be over £1 billion of new tax reliefs for the UK’s creative industries.
From 1 April 2025 an enhanced audio-visual expenditure credit will be available for UK independent film at a rate of 53% of qualifying film production expenditure. The credit is designed to incentivise the output from the film industry on qualifying projects with budgets under £15 million.
Additionally, the tax relief for visual effects costs in film and TV will be increased to 39% (up from 34%) and the cap that was on qualifying expenditure for visual effects costs will be removed completely.
The Government also announced specific business rates relief for eligible film studios. The eligible studios that benefit will receive a 40% reduction on gross business rates bills for the next 10 years (until 2034). The Government estimates that this tax cut is worth around £470 million over the next 10 years for those who can benefit from this relief.
Other measures for the creative industries include tax reliefs for theatres, orchestras, museums and galleries being made permanent at 45% for touring and orchestral productions and 40% for non-touring productions. The rates were due to reduce to between 20 – 25% by 2026, but have instead been maintained at these higher rates.
The increased tax reliefs will be welcomed by those businesses operating across the creative industries. However, concerns have been raised that there was nothing in the Budget relating specifically to individuals working in the arts and entertainment sector, who have been affected by Brexit and Covid-19.
Full expensing
In the Budget, the Government announced full expensing for leased assets would reviewed. Full expensing provides for 100% of qualifying capital expenditure to be deducted in determining taxable profits in year. Full expensing was introduced for many assets from 1 April 2023 and made permanent following the Autumn Statement 2023. Most leased assets have, to date, been excluded from this preferential treatment.
The broad principle that leased assets should be included in full expensing appears to have been accepted by the Government. It will shortly publish draft legislation and a technical consultation to help the Government consider whether or not to make the change. The extension of full expensing to leased assets will, says the Government, occur when the fiscal conditions allow.
Vaping products duty – consultation on new duty opened
The Chancellor announced in the Budget that a consultation on the design and implementation of the proposed new duty on vaping products opens on 6 March 2024, and closes on 29 May 2024. The introduction of the duty, and associated one-off rise in tobacco duty, which would also be implemented in October 2026, aims to reduce vaping amongst young people and non-smokers, whilst maintaining the incentive for current smokers to use a vape, rather than traditional tobacco products.
The published consultation document contains a detailed explanation of the structure of the proposed duty, which would be progressive, i.e. a tiered system where nicotine-free products would have the lowest duty charged at £1 per 10ml, products containing about the same amount of nicotine as an average cigarette charged at £2 per 10ml and products containing more nicotine than an average cigarette charged at £3 per 10ml.
The suggested rates are accompanied by an anticipated compliance and enforcement plan.
The proposed new duty shares many similarities with other excise regimes for alcohol and tobacco. This extends to an exploration of whether the vaping liquid supply chain should be regulated in a similar way to the supply chain for tobacco products, using a track and trace system.
Tobacco and alcohol duty
Having introduced a new vaping product duty, the Chancellor announced a one-off increase to tobacco duty of £2 per 100 cigarettes or 50g of tobacco.
By contrast the Chancellor announced a freeze to alcohol duty. This extends the six-month freeze announced at Autumn Statement 2023, which is now due to end on 1 February 2025. The Government suggests that this will result in 2 pence less duty on a pint of beer, 1 pence less duty on a pint of cider, 10 pence less duty on a bottle of wine, and 33 pence less duty on a bottle of spirits, than if the planned duty increase had gone ahead. The measure aims to support pubs specifically and the hospitality sector generally.
The end of the alcohol duty stamp scheme was also announced. The scheme currently requires 35cl or larger bottles (and other retail containers) of spirits, wine, or other fermented products with an ABV of 30% or more to bear a duty stamp if they are intended for consumption in the UK.
Economic Crime Levy adjustment
The Economic Crime (Anti-Money Laundering) Levy (the "Economic Crime Levy") will be increased from £250,000 to £500,000 per annum for "very large" entities. "Very large" entities are businesses with UK revenue of more than £1 billion. The increase will take effect for accounting periods ending on or after 1 April 2024, meaning that the first increased payment will be due by 30 September 2025.
The Economic Crime Levy was first announced at the 2020 Budget and came into effect from 1 April 2022. It applies to anti-money laundering regulated entities with UK revenue of more than £10.2 million. However it is only the levy for very large entities that was increased by the Budget. The Government has introduced this increase because the Economic Crime Levy has failed to meet its target of raising £100 million per year. The main sectors that are expected to be affected are financial institutions, accountants, law firms, estate agents and letting agents, and crypto-asset exchange providers.
Fuel duty
The Government will extend the cut in the rates of fuel duty (five pence per litre) by a further 12 months to March 2025, maintaining the current rates of duty for heavy oil (diesel and kerosene), unleaded petrol and light oil, with a proportionate percentage cut for other fuels and rebated fuels.
Freeports
The Chancellor confirmed that the Government will extend the sunset clauses for claiming tax reliefs in designated Freeports. The Government had already announced in the 2023 Autumn Statement that the Freeport regime and benefits would be extended from five to ten years, to end in September 2031. After discussions with the Scottish and Welsh Governments, the ten year window to claim tax reliefs has been agreed, meaning that reliefs will be available until 30 September 2034 for Scottish Green Freeports and Welsh Freeports.
