The Finance Act 2020 came into effect on 22 July 2020 and brought with it a number of changes to personal tax and pension planning.

The areas that have key changes are:

• Pension allowance changes
• Entrepreneurs' Relief
• Private Residence Relief
• Land and Buildings Transaction Tax

We've summarised the changes and steps for consideration are summarised in this short blog.

Pension allowance changes

What’s changed

The Annual Allowance is the maximum amount a person can obtain tax relief on. The Annual Allowance is usually £40k but it can be reduced if your “Adjusted Income” and “Threshold Income” exceed the relevant thresholds. An individual may carry forward three years of unused Annual Allowances. There can be significant tax charges where someone exceeds their Annual Allowance and a number of people, particularly those in the public sector or with final salary pensions, have been affected by these rules.

From 6 April 2020, the Adjusted Income limit rose to £240k (previously £150k) and Threshold Income limit rose to £200k (previously £110k). This is a welcome change, however, the minimum tapered Annual Allowance has been reduced from £10k to £4k. Previously, someone with adjusted income of £210k or more would have the minimum Annual Allowance. Those with adjusted incomes of £300k may now be affected by the reduced minimum allowance.

The Lifetime Allowance has increased with inflation to £1,073,100.

Planning opportunities

• Those with incomes between £150k - 240k may be able to make increased pension contributions.
• Owner managed businesses should consider how best to make contributions, e.g. by company or individually.
• Further opportunities may open up to transfer assets into a Self-Investment Personal Pension (SIPP) if they are better funded over time.
• Those with incomes above £240k should review contributions given the cut in the minimum tapered Annual Allowance.

Entrepreneurs' Relief

What’s changed

Entrepreneurs’ Relief has been renamed to “Business Asset Disposal Relief”.

The most significant change is that the lifetime allowance has been cut to £1m, from the previous £10m. 

There are also anti-forestalling rules, brought in to stop people undertaking transactions prior to 11 March 2020 to get the £10m limit. These rules apply to transactions where:

• The contract was signed before 11 March but completion takes place after 11 March. These can apply to transactions with both connected and unconnected persons, but there is a purpose test which will allow some transactions to benefit from the £10m limit.
• There has been a share exchange, but the taxpayer elects to disapply the share for shares rules. The result of the election is that CGT is payable and a claim for Business Asset Disposal Relief may be made.

If a company is an individual’s personal company and it ceases to be their personal company because of a share issue, they can now make an election to be treated as having made a deemed disposal to claim Business Asset Disposal Relief at this time. Electing to defer the tax until the shares are sold is also an option. 

Planning opportunities

With the limit reduced to £1m, the tax benefit has reduced from £1m per individual to just £100k. It has become more important to diversify shareholdings across the family where this is practical (e.g. gifting shares to spouses or children). Holdover Relief (capital gains tax) and Business Property Relief (inheritance tax) should be considered before any transfers are made. Non-tax issues, such as legal rights and matrimonial property, must also be taken into account.

Private Residence Relief

What’s changed

Where a property qualified as a main residence at some point during the period of ownership, you can obtain relief for the final nine months of ownership, even if the property was not occupied at this time. This final period was previously 18 months, and 36 months before that. The relief was designed to help individuals where there is a delay in selling their property. In current circumstances, nine months may not be sufficient to prevent some homeowners being exposed to some Capital Gains Tax when their former residence is eventually sold.

In addition to this, Lettings Relief has been curtailed. Previously, an additional relief was available where the property had been a main residence and had been let at some point. As of 6 April 2020, relief is only available if it has been let and occupied as a main residence at the same time. Lettings relief is therefore unlikely to apply unless there is a sale of a B&B or similar establishment.

Two concessions have now been legislated for, which cover:

• Late nomination of a main residence outside the normal two year window where all but one residence has negligible capital value (e.g. taxpayer owns a freehold and a short lease); and
• Where there has been a short delay in taking up occupation because of works being carried out. Relief will apply from the day of purchase if the house is occupied within two years (so long as nobody else has occupied the property).

Additionally, a spouse will inherit their spouse’s Private Residence Relief history when a property is transferred from one spouse to another. Previously this only applied if it was the transfer of the spouse’s main residence at the time of the gift. This change has closed off some planning ideas, but opened the door to others.

Also, remember that if there is tax to pay on a residential property sale after 5 April 2020 this must be declared within 30 days.  The 30 day deadline can often be overlooked, and penalties will escalate quickly - although no penalties will be issued for returns received late up to and including 31 July 2020.

Land and Buildings Transaction Tax (LBTT)

What's changed

• The Scottish Parliament has passed legislation to extend the period for reclaiming Additional Dwelling Supplement (ADS) from 18 months to 36 months for certain buyers impacted by the COVID-19 pandemic. Some buyers who purchased a property prior to 25 March 2020 may have been unable to sell their previous main residence within the usual 18-month time limit for reclaiming ADS, due to the impact of lockdown on the property market. Consequently, the time limit for selling a previous main residence and reclaiming ADS has been extended to 36 months if the following conditions are met:
• The new property was purchased in the period 25 September 2018 to 25 March 2020 and occupied as the buyer’s main residence;
• The buyer paid ADS on the purchase of the new property;
• The buyer disposes of their previous main residence within 36 months of acquiring the new residence; and
• The dwelling sold was used as the buyer’s only or main residence at any time in the 18-month period before acquiring the new property.

The legislation provides flexibility for Ministers to further amend the time limit and dates as required.

Residential or non-residential rates

The boundary between the classification of property as residential or non-residential for LBTT purposes is not always clear-cut in practice. The classification of property as non-residential can result in a significant reduction in the amount of LBTT payable for higher value properties (£350,000 or more). This issue arises in relation to dwellings purchased with a large area of land (e.g. farmhouse or an estate). In recent times both HMRC and Revenue Scotland have argued that the land surrounding the house (even if it extends to a significant number of acres) constitutes garden or grounds rather than commercial land. For example, a recent SDLT case held that a farm purchased with 27 acres of land was entirely residential.

These cases are very fact-specific and it’s always recommended that you work closely with your accountant, who will help to determine if LBTT could be saved by classifying part of the property as non-residential.  

Get in touch

If you would like to discuss any of the points covered above, please contact me at Billy.Cleland@jcca.co.uk, or your usual Johnston Carmichael adviser.