Budget 2016 - measures affecting wealthy individuals and their families

17 March 2016

In a departure from recent UK Budgets, the Chancellor yesterday announced relatively few new measures specifically targeting wealthy international individuals and their families, or their wealth-holding structures.

Nevertheless, in this note, we highlight a number of the more significant measures announced that will be relevant to such individuals, some of which may be beneficial and others less so.

New measures

Capital Gains Tax - rate reduction

One beneficial measure announced, at least for many UK resident individuals, is an 8% cut in the rate of capital gains tax (CGT) with effect from 6 April 2016. The rate will drop from 28% to 20% for higher rate taxpayers and from 18% to 10% for those paying the basic rate of tax. However, the impact of this rate cut will be reduced by the fact that it will not apply to disposals of residential property, nor to carried interest.

Thus, the rate change will have no impact on non-UK residents, who are only liable to CGT on disposals of UK residential property. They will continue to be taxed at existing rates on any gains on disposals of UK residential property under the provisions of either non-resident CGT or ATED-related CGT, as applicable.

Where non-resident companies are liable to non-resident CGT on a disposal of property, this will be payable at the prevailing rate of UK corporation tax. This is currently 20% but is due to gradually decrease over the next few years. It was announced yesterday that it will reduce to 17% with effect from 1 April 2020.

Stamp duty land tax - reform of charging provisions for non-residential property

Under the pre-Budget rules, stamp duty land tax (SDLT) on acquisitions of non-residential property was paid on a 'slab' system, at a single percentage of the acquisition cost depending on the rate band within which the property fell. This used to be the case also for residential property before the rules were changed in December 2014. For properties valued over £500,000, the rate of SDLT was 4%.

Under the new rules announced yesterday, with effect from today, 17 March 2016, SDLT will be charged at different rates on the portion of the purchase price that falls within each of the new bands.

The new rates and thresholds for freehold purchases and lease premiums are as follows:

Transaction value band Rate
£0 - £150,000 0%
£150,001 - £250,000 2%
Over £250,000 5%

New rates and thresholds for rent paid under a lease are also being introduced, as follows:

Net present value of rent Rate
£0 - £150,000 0%
£150,001 - £5,000,000 1%
Over £5,000,000 2%

Where contracts were exchanged before 17 March 2016, but the transaction was not completed before that date, purchasers will have a choice as to whether the old or new rates should apply.

The new rules will not apply in Scotland as SDLT was devolved with effect from 1 April 2015 and has been replaced by the Land and Buildings Transaction Tax. The new measure will only apply in Wales until 1 April 2018, when SDLT will be devolved to Wales.

As a result of the changes in the rules, acquisitions of non-residential property worth less than £1.05 million will pay the same or less in SDLT than would have been the case under the previous rules. For leasehold rent transactions, those with a net present value of up to £5 million will pay the same in SDLT as under the old rules.

Clearly, the differential in the SDLT rate payable under the new rules compared to the old rules will increase significantly for higher value properties. For example, for an acquisition of non-residential property valued at £10,000,000, under the previous rates, SDLT would have been £400,000. Under the new rules, the SDLT payable would be £489,500.

Nevertheless, for anyone considering investing in higher value non-residential property, the SDLT rates will continue to be significantly lower than for residential property of an equivalent value. For non-UK resident and/or domiciled investors, there may be other potential tax advantages to investing in non-residential UK property.

However, where non-resident investors may be or become involved in trading in and/or developing UK property through offshore vehicles, they should be aware of new rules being introduced in the Finance Bill 2016 to ensure that profits on such activities are taxed in the same way whether the entity carrying them out is based in the UK or offshore. Details of the new provisions are beyond the scope of this note.

Previously announced measures

Higher rates of SDLT on purchases of additional residential properties

At the Autumn Statement in November 2015, the UK Chancellor announced that, with effect from 1 April 2016, an additional 3% rate of SDLT would apply to acquisitions of additional residential properties, such as second homes and buy to let properties. A consultation on the proposed new measure was published on 28 December 2015. A summary of responses to the consultation was published at the Budget yesterday, together with draft legislation. This included a number of amendments to the original proposals.

As originally announced, the additional SDLT rate will not apply to an acquisition of a main residence to replace a previous main residence, even where the owner has another property that is not being sold. However, the consultation proposed that if an individual sold a main residence, he or she would have an 18-month period in which to replace it without incurring the additional rate on a subsequent purchase. If, on the other hand, an individual purchased a new main residence without disposing of his or her previous one, the additional rate of SDLT would be payable, but a refund could be claimed if the original property was sold within 18 months.

Taking into account responses to the consultation, the Government has extended this period to 36 months in either situation.

The consultation also envisaged an exemption from the additional rate for 'large scale investors'. The intention was that this would either apply to investors with a portfolio of 15 or more residential properties, a 'portfolio test' or, alternatively, might apply to a purchaser who bought a minimum number of residential properties in one transaction, a 'bulk purchase test'. Following consultation, the Government has taken account of responses, and noted other incentives for investors in the rental market and existing flexibility within the SDLT system, and has decided to apply the additional rate to all purchasers without an exemption for significant investors.

Other changes to the original proposals include a provision whereby couples who have separated in circumstances where this is likely to be permanent will not be treated as a single unit for the purposes of the new measure. In addition, a share of 50% or less in a property inherited within 36 months prior to a purchase of a residential property will not be considered as an additional property for the purposes of applying the additional rate. This is intended to provide flexibility for purchasers who may find it difficult to dispose of a share in such a property quickly.

Deemed domicile rules for offshore trusts and IHT on UK residential property held in offshore vehicles

While the measures announced are not insignificant, we still await details of the measures of principal interest to non-domiciled individuals. These include the new rules for taxation of the pre-existing offshore trusts of non-UK domiciled individuals who become deemed domiciled after being resident in the UK for 15 out of the past 20 tax years under the new regime taking effect from 6 April 2017. They also include the proposal for inheritance tax to apply to UK residential property held by non-UK domiciliaries through offshore companies and other vehicles. Both measures are also due to take effect from 6 April 2017.

The Budget did confirm that non-domiciliaries who become deemed domiciled in the UK under the new rules in April 2017 will be able to treat the cost base of their non-UK based assets as being the market value of that asset on 6 April 2017. Accordingly, if such an individual disposes of such assets after 6 April 2017, only the increase in value after this date, if any, will be taxed on the arising basis. It is unclear whether the proposed rebasing of assets will be a one-off to 6 April 2017 or whether individuals who become deemed domiciled at a later date will be able to rebase their assets to that date. However, the wording suggests the former may be the case.

The Budget paper also indicated that individuals who expect to become deemed UK domicile under the 15 out of 20 year rule will be subject to transitional provisions with regards to offshore funds to provide certainty on how amounts remitted to the UK will be taxed. Again, we await further details as to the nature and scope of such provisions.With regard to the proposal for inheritance tax to apply to UK residential property held by non-UK domiciliaries through offshore companies and other vehicles, the Budget repeated the Government's intention to publish a consultation. However, no indication was given as to when this may be expected.

It was confirmed that all the above measures will be legislated in Finance Bill 2017. As soon as any further information is available, we will report accordingly.


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