The unexpected introduction of a ‘sugar tax’ on soft drinks in George Osborne’s Spring 2016 Budget drew headlines, but investors and companies have found a range of sweeteners in the Chancellor’s statement.
The Chancellor set out plans to eliminate the national deficit over the next four years, with £3.5 billion of savings to come from reduced departmental spending in 2019-20.
The tax on soft drinks aims to raise £520m through a two-tier levy on companies that will be introduced in two years. The first tier will affect drinks with total sugar content above 5g per 100ml and the second for drinks with more than 8g per 100ml. Pure fruit juice and milk are excluded from this levy, which will be used to double the amount of funding available to primary schools for sporting activity. The theme of schools and sports continued with the Chancellor announcing the end of the 3.30pm school bell for secondary schools, who can opt into a longer school day from September 2017, to offer a wider range of extra-curricular activities for pupils.
Tax allowances were extended for basic rate tax payers, to £11,500, and the 40% higher rate tax threshold to £45,000, with effect from April 2017, and the National Minimum Wage for 21-25 year olds will increase to £6.95 with effect from October 2016, running alongside the new National Living Wage for eligible over-25s from April.
But the big news on tax rates was for investors, with the announcement of a substantial cut in capital gains tax rates (CGT) and a change to taxation on dividends.
CGT is paid on gains on assets that have increased in value and is paid at a basic or higher rate depending on the rate of income tax being paid. From 6 April 2016, CGT will reduce from 28% to 20% for higher rate tax payers and from 18% to 10% for lower rate tax payers. This reduction does not apply to gains on residential property when a property is a second home, or a landlord-owned buy-to-let. Capital Gains Tax on residential property does not apply to a first or main home, only to additional properties.
For dividend income, the 10% dividend tax credit is being abolished from 6th April 2016, so the cash dividend received will be the gross amount potentially subject to tax, but that is combined with a new Dividend Tax Allowance that means taxation will not kick in until dividends exceed £5,000 in a tax year. Above £5,000, tax will be charged at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers, with dividend income forming part of overall income and using up the basic rate tax band. The move means individuals with up to £5,000 worth of dividend income will gain under the new regime, and it may increase the appeal of holding investments that provide dividend returns, when compared with the low interest rates on savings, as it can be combined with the CGT annual exemption to realise profits on sale of the investments.
Savers will also be able to get tax relief on financial advice in future, and from April the personal ISA limit will rise by almost £5,000 to £20,000 per annum. A new lifetime ISA for the under-40s will enable them to save up to £4,000 each year, receiving a 25% bonus from the government in return.
There was good news for smaller businesses, with the announcement of cuts to starting rates for commercial stamp duty and business rates.
Commercial stamp duty changes are introduced with immediate effect, and will change the way duty is calculated. Rates previously applied to the whole transaction value, but from 17th March 2016 will be applied in bands against the value of the property.
The new rates and tax bands are zero for the first £150,000 of the transaction value, 2% between £150,001 and £250,000, and 5% above £250,000. The move means that buyers of commercial property worth up to £1.05 million will pay less in stamp duty.
Alongside, the stamp duty rates for leasehold rent transactions will also change, with a new 2% stamp duty rate on leases with a ‘net present value’ over £5 million.
Business rates will be cut for smaller businesses, with a new threshold meaning that many smaller enterprises should be taken out of business rates altogether. From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates, a doubling of the current exemption rateable value of £6,000. In addition, there will be a tapered rate of relief on properties worth up to £15,000.
Corporation tax will be also be cut, reducing a further 3% to 17% in 2020, which the Chancellor says will benefit over one million businesses.
Said Kalpa Prajapati, Partner and Head Wills & Probate at Grant Saw solicitors : “There were many themes expected in this Spring Statement which the Chancellor chose to leave for another day. Food and drink manufacturers have expressed concerns that the so-called ‘sugar tax’ was introduced without greater consultation, but this is a crowd-pleaser for many, particularly those who are better-off, or running a smaller business.”
She added: “Combined with the changes to stamp duty on landlords and second home owners which come in next month, the changes to CGT may see some shake-up in the rented sector as such residential property will not benefit from the reduced CGT rates. However, bigger commercial landlords operating within a corporate structure are not affected, and we may see a shift in the way the rental sector operates, so that landlords can secure themselves against higher rates of stamp duty and CGT charges by moving to a corporate structure, for example, or by trading shares in companies that own residential property.”
This is not legal advice; it is intended to provide information of general interest about current legal issues.