Budget Alert 2013: Personal Tax
This section looks at the main changes to personal tax law announced in the Chancellor's Budget.
- Rates and allowances
As previously announced, the additional rate of tax on incomes over £150,000 will fall from 50% to 45% from 6 April 2013. At the other end of the spectrum, the Chancellor has announced that the personal allowance for those born after 5 April 1948 will increase to £10,000 with effect from 6 April 2014. The higher allowances for those born before 6 April 1948 will not be increased and in the long term will be removed.
The decrease in the top rate of tax was announced at Budget 2012. When the Coalition came to power it was a stated aim to increase the personal allowance to £10,000 by 2015. The Chancellor announced that, in fact, the personal allowance would reach this level with effect from 6 April 2014. For 2013/14 the personal allowance will be £9,440.
Meanwhile, the basic rate limit, at which people start to pay tax at 40%, is being reduced in 2013/14 to £32,010 and again in 2014/15 to £31,865.
The removal of the 50% rate will be seen by many as a much needed boost for entrepreneurs in the UK. The increase in the personal allowance will be welcomed, particularly by those on lower incomes.
- Tax simplification for unincorporated businesses
As expected, from April 2013 the Government will introduce two simplifications to the taxation of unincorporated businesses. Small businesses will be able to calculate their taxable profits on a cash, rather than accruals, basis and all unincorporated businesses will be able to used simplified flat rates to calculate certain business expenses.
Qualifying small businesses will generally be those with receipts under the VAT registration threshold, which, from April 2013 will be £79,000. The new rules allow them to calculate taxable income by taking business income received in the year and deducting business expenses, meaning they do not need to adjust for items such as debtors and creditors or distinguish between capital and revenue expenditure. Capital Allowances will remain available only for expenditure on cars. Goods taken out of the business for personal use must be accounted for on a just and reasonable basis.
The existing cash basis legislation for barristers will be repealed and qualifying barristers will be able to choose between the new cash basis and the current accruals basis.
All unincorporated businesses, regardless of size, will be able to deduct a flat-rate expense for motoring costs, business use of a home and private use of a business premises.
This simplification will be a welcome boost to entrepreneurs and small owner-managed businesses.
- A review of the taxation of partnerships
The Government has announced a consultation into the taxation of partnerships to prevent perceived avoidance. At the same time the Office of Tax Simplification will carry out a review of ways to simplify the taxation of partnerships.
The Government announced in the Autumn Statement 2012 that it would consider whether partnerships should be reviewed, as part of the rolling examination of high risk areas of the tax code. A consultation document, to be published in the Spring, will consider measures to:
• Remove the presumption of self-employment for limited liability partnership (LLP) partners to tackle the disguising of employment relationships through LLPs, and
• Counter the manipulation of profit/loss allocations by partnerships including company, trust or similar vehicles in order to secure tax advantages.
Legislation is expected in Finance Bill 2014.
Despite HMRC's apparent perception of partnerships as avoidance vehicles, they are widely used as a flexible entity for a large number of businesses. Any amendments to the partnership rules to prevent avoidance will need to be carefully drafted to avoid penalising genuine business enterprises.
- Seed Enterprise Investment Scheme (SEIS)
The SEIS ‘CGT holiday’, which originally exempted capital gains realised during 2012/13 and reinvested through SEIS in the same year, has been extended to 2013/14 but only to exempt half of the qualifying reinvestment. In addition, the independence condition will be amended so that companies established by corporate formation agents will not be disqualified.
SEIS was introduced from 6 April 2012 to encourage equity investment in early-stage companies carrying on qualifying trading activities. To help kick start the scheme, an exemption from capital gains tax (CGT) is available to chargeable gains accruing to an investor in 2012/13 where the gain is reinvested in the same year in shares that qualify for SEIS income tax relief. This is subject to a £100,000 investment limit (which matches a similar cap on SEIS-related income tax relief).
The CGT relief for reinvesting gains in SEIS shares will be extended to 2013/14 provided that the gains are reinvested during 2013/14. The exemption will be for half the qualifying reinvested amount (rather than the full qualifying amount).
The eligibility criteria for a SEIS company will be amended so that companies established by corporate formation agents will not be disqualified under the independence condition (where the other conditions are met). This measure will have effect for shares issued on or after 6 April 2013.
We welcome the extension of the ‘CGT holiday’ and the relaxation of the independence clause, as an encouragement to invest in smaller and entrepreneurial businesses. However, it is disappointing that the extension is restricted to exempt only half of the qualifying reinvested gains.
- Employee shareholder status
This measure exempts from tax any capital gains made by individuals on the disposal of shares acquired through the adoption of employee shareholder status. It also allows the first £2,000 of such shares to be received free from income tax and NICs. The CGT exemption will apply to shares worth up to £50,000 on receipt and applies to shares received from 1 September 2013. The tax advantages detailed here will be subject to anti-abuse rules but there is no detail as to what these might include.
This measure was announced on 8 October 2012 and was originally intended to be effective from 6 April 2013. Employment law is also being amended as part of the proposals as individuals taking up the status will waive certain employment rights. The new employment legislation is included within the Growth and Infrastructure Bill. The draft legislation previously released will be amended to prevent an income tax charge arising on the buyback of CGT-exempt shares and also to strengthen the material interest anti-avoidance provision which denies the exemption where individual employees together with connected persons own more than 25% of the company.
Whilst this measure is a welcome one, it is disappointing that its introduction has been delayed until 1 September 2013 since employers had already been working towards introducing the scheme on 6 April and may, therefore, need to consider alternative incentive arrangements.
- Employee ownership
The Government intends to introduce in the Finance Bill 2014 a new CGT relief on the sale of a controlling interest in a business into an employee ownership structure. The Government will also look at further incentives in this area including situations where employees hold shares through indirect ownership.
The Government is keen to encourage employee shareholding arrangements, in particular indirect holdings based on the ‘John Lewis Partnership’ model, and this announcement is a welcome statement of its intent.
- Loans from close companies to their participators
The existing rules governing loans made by close companies to their participators have been widened to tackle the use of perceived loopholes. The new rules will take effect from 20 March 2013.
Under the current rules, where a close company makes any loan or advances any money to an individual who is a participator in the company (or an associate of a participator), generally it must pay tax at a rate of 25% on any amounts outstanding nine months after the accounting period end. These rules will be widened to include loans to various intermediaries (aimed particularly at arrangements using payments to limited liability partnerships) as well as transfers of value which are not loans.
Currently, where loans are repaid within nine months of the company's year end, tax is not due. This has led to arrangements under which the loan is repaid within the required period and then taken out again shortly afterwards. The repayment rules are being reinforced so that relief is only given for genuine repayments.
The widening of this anti-avoidance legislation is of little surprise given perceived loopholes in the legislation.
- Gift Aid
The Government has announced a consultation aimed at encouraging the take up of Gift Aid on giving through digital channels.
A consultation period is expected to open in Summer 2013 and will consider a range of options, with the possibility of a single declaration by donors to cover all donations made through online platforms (such as JustGiving). Under existing rules, donors must make a declaration each time they give online. Legislation, if necessary, is expected in Finance Bill 2014.
It is hoped that the consultation will lead to the simplification of the system and thus increase the flow of charitable donations.
- Child trust funds
The Government will consult on options around the transferability of child trust funds (CTFs) into Junior ISAs.
In November 2011, the Government introduced Junior ISAs, a new tax-advantaged savings account for children under the age of 18. Children who have a CTF are currently ineligible for Junior ISA, although the Government has ensured that children with CTF accounts are not disadvantaged by increasing the CTF subscription limit to equal the Junior ISA limit (£3,600 in 2012/13 and £3,720 in 2013/14).
The Chancellor announced that he will seek to enable CTFs to be transferred into Junior ISAs (which typically offer higher interest rates, lower charges and a wider choice of investment funds). There will be a consultation into the mechanics of the transfers.
This announcement will be welcomed and should encourage saving from an earlier age.
- Inheritance tax: Nil rate band
The Government has announced plans to freeze the inheritance tax (IHT) nil rate band until 2017/18.
It had previously been announced in Finance Bill 2012 that the threshold below which estates are not liable for IHT would rise in line with the CPI from 6 April 2015. This announcement is now superseded, with the nil rate band remaining frozen until 5 April 2018.
The freeze will result in an increase in the number of estates being subject to IHT and is part of the package to fund a cap on reasonable care costs for the elderly from April 2016.
- Inheritance tax: Spouses and civil partners domiciled outside the UK
The Government had previously announced plans to increase the IHT exempt amount that a UK domiciled individual can transfer to his or her non-UK domiciled spouse and an election to allow individuals who are non-UK domiciled with a UK domiciled spouse to elect to be treated as UK domiciled for IHT purposes. All references to spouse include civil partner.
Currently all transfers between spouses who are both UK domiciled or non-UK domiciled are exempt from IHT but, where a UK domiciled spouse makes a transfer to a non-UK domiciled spouse, the exemption is limited to £55,000 in total. This limit will be increased to the prevailing nil rate band for IHT, currently £325,000, for transfers from 6 April 2013. The election to be treated as UK domiciled for IHT purposes is now available from 6 April 2013 (previously proposed for Summer 2013). This election will allow transfers between spouses to be exempt from IHT. A new proposal will allow the election to be backdated seven years, but no earlier than 6 April 2013. The election is irrevocable while the electing individual retains UK tax residency status although the election may cease to have effect where the individual breaks UK residency for four consecutive tax years.
The increase in the IHT exempt amount on transfers from UK domiciled to non-UK domiciled spouses is welcome and creates a potential IHT saving of 40% of the increased exemption. The ability of the non-UK domiciled spouse to elect to be deemed UK domiciled for IHT will allow IHT to be deferred until the death of the second spouse and also allows time for further IHT planning. The earlier start date and backdating are favourable. Nonetheless, the election should not be undertaken lightly and advice should be taken.
- Inheritance tax: Limiting the deduction for liabilities
This measure has been introduced to counter IHT arrangements designed to obtain a deduction for a liability regardless of how the borrowed funds have been used or whether or not they are repaid after death.
The revised legislation will provide as follows:
• A deduction for a liability will only be allowed to the extent that it is repaid to the creditor (unless there is a commercial reason for not repaying the liability).
• In general no deduction will be allowed to the extent that the liability has been incurred to acquire ‘excluded property’.
• Where the liability has been incurred to acquire assets on which a relief is due (e.g. business property relief) the liability will be taken to reduce the value of those assets in priority.
Most of these new rules will also apply to settled property.
The legislation will have effect for deaths and chargeable transfers on or after the date on which Finance Bill 2013 receives Royal Assent.
This measure has been introduced to counter inheritance tax arrangements which are perceived to be contrived. Until full details are available, it is not clear to what extent genuine arrangements will be caught and it is disappointing that there has been no consultation on these changes. Anyone who is relying on a deduction for a liability should review their arrangements to see if the deduction will be restricted.
- Additional changes to new exemptions to anti-avoidance provisions relating to non-UK interests
Legislation was published on 11 December 2012 to reform two anti-avoidance provisions that were deemed by the European Commission to breach the treaty freedoms of the single market, being:
• The attribution of gains to members of closely controlled non-resident companies (the ‘section 13’ provisions)
• The ‘transfer of assets abroad’ provisions
Additional amendments to the provisions have been announced.
As announced on 11 December 2012, the transfer of assets abroad provisions will be amended to exempt ‘genuine’ transactions in relation to which a charge to tax under these rules would constitute ‘an unjustified and disproportionate restriction’ on a freedom protected by EU treaty rules.
Transactions will not be regarded as ‘genuine’ unless they are on arm’s length terms, and in the case of transactions for the purposes of a business establishment, give rise to income attributable to economically significant activity that takes place overseas.
It was announced in the Budget that:
• There would be a further element to this test to enable HMRC to make an apportionment where appropriate between a ‘genuine’ and ‘non-genuine’ part of a transaction, and to charge only income attributable to the non-genuine (‘artificial’) part to tax,
• The previously proposed changes to clarify the ‘matching rules’ (the rules governing the calculation of the income chargeable when an individual other than the transferor receives a benefit following the transfer of an asset) have been postponed pending further consultation and legislation will be introduced in Finance Bill 2014.
It was also made clear that the operative date for the ‘clarification changes’ to the provisions would be 6 April 2013, while the other amendments would have retrospective effect from 6 April 2012.
The ‘clarification changes’ include:
• The amendments to prevent double charging in circumstances where the same income could be subject to tax under the transfer of assets rules and also under another part of the Taxes Act, and
• The amendments relating to the interaction of reliefs under double taxation agreements with the transfer of assets rules to ensure that neither ‘is used in an unintended way to claim a relief that would not otherwise be due’.
In relation to the amendments to the section 13 provisions, a further amendment is announced that will remove the requirement in the new ‘economically significant activity’ exemption for activity to be carried on wholly outside the UK through a non-UK business establishment. No further details are currently available.
For details of the previously announced amendments to these provisions, see our commentary in our Finance Bill 2013: Draft Clauses publication.
These areas of the legislation needed urgent attention, but the proposed exemptions remain very difficult to apply in a personal tax context and the resultant legislation may remain non-EU compliant. The delay to the implementation of the matching rules gives much needed time for reflection.
- Measures unchanged following Consultation
For the following Personal Tax measures, draft legislation has been published for consultation, and no changes were made as a result or small, technical amendments have been made to the final legislation to be introduced in Finance Bill 2013:
• Income tax basic rate limit and personal allowance 2013/14
• Cap on unlimited tax reliefs
• Personal services companies and IR35
• Pensions tax relief: family pension plans
• Bridging pensions
• Pensions tax relief: lifetime allowance-technical changes
• Qualifying Recognised Overseas Pensions Schemes
• Life insurance: qualifying policies
• Life insurance policies: time-apportioned reductions
• Inheritance tax: investments in open-ended investment companies and authorised unit trusts
• Non-domicile taxation