Fire and Ice: Spring Budget 2021

Personal tax

It's a freeze for individuals! The 2021 budget included a relatively long list of rates and allowances to be frozen for the time being. It is therefore business as usual in terms of personal tax rates although the freezes will be felt in people’s pockets assuming inflation does not also drop in temperature!

After expected increases for the next tax year (starting on 6 April 2021) the following will be frozen until 2026:

• Income tax allowance (frozen at £12,570)
  
  
• 40 per cent higher rate threshold (frozen at £50,270)
  
  
• Capital gains tax annual exemption (frozen at £12,300)
  
  
• Inheritance tax nil rate band (frozen at £325,000) and residence nil rate band (frozen at £175,000)
  
  
• Pension lifetime allowance (frozen at £1,073,100)
  
  
• Adult ISA contribution limit (frozen at £20,000)
  
  
• Duties including alcohol and fuel (confirmed freeze for a year)

Notable omissions from the list are the threshold for additional rate tax and CGT rates. This leaves open the possibility of using these to raise additional funds in the next budget, if the Chancellor is prepared to break a manifesto commitment.

Businesses

The future looks less frosty for businesses. The 2021 budget includes measures designed to light a fire under the UK business community to help it out of the current economic downturn. However, it also introduces the first in what may be a series of new and increased taxes to begin to repay the Government’s ballooning national debt.

The main business tax headline is that Corporation Tax is set to be increased to 25 per cent for businesses making profits over £250,000 from April 2023. The UK’s Diverted Profits Tax is set to increase commensurately to 31 per cent. However, there are other corporation tax changes introduced alongside this to soften the blow:

• The current 19 per cent corporation tax rate will be frozen for smaller businesses with profits under £50,000. Marginal relief will also be granted for companies with profits between the two thresholds.
  
  
• The corporation tax surcharge for banks is expected to be reduced, to ensure the UK tax regime remains competitive for financial services businesses.

Further ignition is being given to businesses by a range of new and extended tax incentives and reliefs:

Trading losses

• Incorporated and unincorporated businesses may carry back losses from the 2020/2021 and 2021/2022 tax years to reduce their tax bill for up to the previous three years (rather than one year under the prior rules).
  
  
• The maximum amount that can be carried back beyond one year is generally capped at £2m. However, there is no limit on the losses that can be carried back one year under existing rules.

EMI

• The Government has proposed extending the scope of the existing Enterprise Management Incentives (EMI) scheme so that more high-growth companies can access it.
  
  
• In the meantime, employees who are furloughed or unable to work their usual hours due to the pandemic will continue to be eligible for the benefits offered by existing EMI schemes, even if their reduced working hours would ordinarily disqualify them. This relaxation will apply until April 2022. Employers can also continue to offer qualifying options to affected employees.

VAT

• VAT is charged at a reduced 5 per cent rate for certain supplies relating to hospitality, hotel and holiday accommodation and admission to some attractions. This will be extended until 30 September 2021.
  
  
• A new VAT rate of 12.5 per cent for these supplies will then be introduced until 31 March 2022.
• 
  The VAT registration and deregistration thresholds will remain at £85,000 and £83,000 respectively until April 2024.

Capital allowances

• A new “super-deduction” capital allowance rate of 130 per cent and a new first year capital allowance rate of 50 per cent are available until 31 March 2023 to promote business investment and expansion.
  
  
• Businesses investing in most new plant and machinery that would otherwise qualify for the main rate of allowances should qualify for the “super-deduction”. The new first year rate should apply to other investments currently subject to special rate allowances, such as longer life assets.
  
  
• The annual investment allowance will be increased from £200,000 to £1m for expenditure on plant and machinery incurred from 1 January to 31 December 2021.
  
  
• The new measures are expected to allow businesses investing in qualifying assets to reduce their corporation tax bill by up to 25 per cent, potentially reducing the impact of the forthcoming hike in corporation tax rates.

Freeports

• Eight areas in England are expected to become “Freeports”, which will benefit from a generous range of tax incentives and reliefs.
  
  
• These areas are mostly outside the south-east of England and therefore look set to provide a further incentive for businesses looking to invest outside the London area. Tax benefits available to Freeport investments include:
  
  - a complete exemption from SDLT
  - an enhanced capital allowances rate of 100 per cent and a structures and buildings allowance rate of 10 per cent.
  - full business rates relief
  - exemptions from customs duties and VAT
  - a proposal to relieve all employer National Insurance Contributions for employees in Freeports.

The resurrection of multiple corporation tax rates looks set to add a further complication to businesses’ tax compliance and forecasting, but the new incentives brought in alongside should provide some welcome respite in the meantime.

However, yesterday’s announcements are unlikely to be the end of the story. In addition to longer term measures which many expect to be introduced to increase the Treasury’s tax take over the coming years, further changes are also expected on the so-called “tax day” of 23 March. The cool respite of the 2021 budget may yet heat up!

Residential property

There is very welcome news for residential property purchasers. The following new measures have been announced:

• The stamp duty land tax (SDLT) holiday has been extended for residential properties.
  
  
• However, non-resident purchasers (generally those who have not lived for in the UK for at least 183 days in the 364 days prior to purchase) will still be subject to an additional 2 per cent surcharge for completions from 1 April 2021.
  
  
• The SDLT nil rate band will remain at £500,000 for purchases where the effective date (usually completion) takes place on or before 30 June 2021. It will then reduce to £250,000 for purchases completed between 1 July 2021 and 30 September 2021 (inclusive). The nil rate band will return to its usual level (£125,000) for completions on or after 1 October 2021.
  
  
• The government is also providing a government backed guarantee to lenders for any 95 per cent mortgage they offer so we can expect an increase in the availability of 95 per cent mortgage loans.

Ultimately, purchasers buying before the end of June can still save up to £15,000, reducing to a maximum saving of £2,500 in July, August and September (compared to what they will pay from 1 October 2021). This saving can potentially be multiplied where transactions involve more than one dwelling. Although non-resident purchasers will be entitled to these savings and will pay less than they would have done if the SDLT holiday had not been extended, they will still be in a worse position from 1 April and will pay an additional 2 per cent on what they would have paid on 31 March. These measures (combined with the continuing latent demand) should keep the market on the boil for the rest of this year.

If you require further information about anything covered in this briefing, please contact Claire Randall, Annabel Dean, James Bromley, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2021