Budget 2018: Private Client
The Chancellor has got ahead of himself by bringing the increases in the personal allowance and higher rate thresholds into force a year early. The big surprise was around changes to the principal private residence relief which, in a property market that has significantly slowed, will generate capital gains tax liabilities through the loss of lettings relief and a shortening of the final period exemption. Pensions were left pretty much alone but, as we are promised another Budget in the event that Brexit does not go to plan, the Chancellor may choose to raid the tax relief on pensions in the spring.
Personal tax allowances
The personal allowance is being increased to £12,500 and higher rate threshold is being increased to £50,000 from April 2019.
These levels were one of the government’s manifesto promises to be introduced from April 2020. Their introduction a year early is to be welcomed for the 30 million taxpayers who will benefit, but will come at an expected cost to the Treasury of more than £2.5 billion in 2019/20.
The increase of the personal allowance also widens the anomaly of the tax system where individuals earning between £100,000 and £125,000 will be paying tax at 60%.
Restrictions to principal private residence relief (PPR)
One of the perceived sacred cows of our tax system is the exemption from capital gains tax for gains made on someone’s own home. However, as with many reliefs, the government perceives there to be abuses of this and is proposing two changes that will restrict the extent of relief in some cases.
Currently where a property has been your only or main residence, the final 18 months of ownership will always form part of the exempt period. A consultation has been announced to consider reducing that period of 18 months to just 9 months from April 2020.
The consultation will also look at restricting the additional exemption available where a property occupied at any time as a main residence is let out for part of the ownership period. Currently this extension to the main PPR relief can exempt up to a further £40,000 of gains (£80,000 for a couple owning the home jointly). It is proposed that from April 2020 this additional exempt amount will only be available where there is shared occupancy with the tenant.
Typically the relief will avoid any taxable gain where there is an overlap in ownership between two homes and for most people the change will make little difference – as a former home would be sold when acquiring a new one, so will still be fully exempt. The change may, however, affect those owning more than one property used as a residence. On a sale of such a residence, the exempt period may be shorter and, if other reliefs are not available, could give rise to an actual tax liability.
This may be bad news for those that let out their home at some point during their period of ownership. Currently they will enjoy this additional exemption but after April 2020 may see the capital gains tax cost increase by a maximum of £22,400 for a jointly owned property.
Rent-a-room relief – proposed shared occupancy test abandoned
Rent-a-room relief provides an exemption for up to £7,500 of rental income from letting furnished accommodation in your own home. It had been proposed that the relief would be restricted and only apply where the letting period at least partly coincided with the owner occupying the property at the same time as the tenant. However, this is being dropped “to maintain the simplicity of the system”.
This is a welcome move to avoid complexity and will benefit those that may have been affected. This relief is clearly an area of concern for the government though perhaps particularly in the context of Airbnb and similar lettings, so there may be other changes in the future.
Pensions lifetime allowance
This will increase in line with inflation to £1,055,000 from April 2019
While this is only an index linked increase, it means that pension savers will not be penalised for growth in their pension pots due to inflation.
Individual savings account limits
The adult ISA limit is unchanged at £20,000 for 2019/20, while the subscription limit for Junior ISAs and Child Trust Funds increases in line with inflation to £4,368.
For the second year running the adult ISA limit has not been increased. This is disappointing news for regular savers.
As previously announced a consultation will be published on trusts.
This consultation was originally announced in November 2017 and it is not clear why nothing has been published yet. It is hoped that the consultation process will recognise that trusts perform an important role in asset protection rather than being used as a tax saving device.