Budget Alert 2012Personal tax
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This section looks at the main changes to personal tax law announced in the Chancellor's Budget.
- The top rate of income tax
The last Labour Government introduced the top rate of income tax at 50% in 2010. The then Chancellor, Alistair Darling, stated that this was a temporary measure. Today, the Chancellor has announced that the top rate of income tax will fall from 50% to 45%.
The additional rate of income tax, which applies to income in excess of £150,000, will be reduced from 50% to 45% with effect from 6 April 2013.
In previous years the Chancellor has cut the corporation tax rate while leaving the highest income tax rate unchanged. This year, in an attempt to create what he describes as ‘the most competitive tax system in the G20’, the fall in corporation tax has been accompanied by a fall in the income tax rate. The 50% tax rate has been widely seen as a disincentive for entrepreneurs and businesses considering locating in the UK and its removal will have a positive effect on the competitive image of the UK. Given the Chancellor’s acknowledgement that the rate raises little additional tax, it is disappointing that we must wait until 2013 for this much needed reduction.
- Personal tax rates and allowances
As announced at Budget 2011, from 6 April 2012, the income tax personal allowance will increase by £630 to £8,105 in 2012/13. The basic rate income tax limit will be reduced to £34,370.
From 6 April 2013, the income tax personal allowance will increase by £1,100 to £9,205. The basic rate income tax limit will be reduced to £32,245. The additional rate of income tax will be reduced from 50% to 45%. Additionally, the dividend additional rate will be reduced from 42.5% to 37.5%.
The basic and higher income tax rates for 2013/14 will remain at the 2012/13 levels.
From 6 April 2013, the age related allowance available to those aged 65-74 (£10,500 for 2012/13) will be limited to those born between 6 April 1938 and 5 April 1948, and the higher age related allowance available to those aged 75 and over (£10,660 for 2012/13) will be limited to those born before 6 April 1938. Individuals born after 5 April 1948 will receive a personal allowance of £9,205 for 2013/14. The age related allowances will be frozen from 6 April 2013 at the 2012/13 rates until they align with the personal allowance, at which point the age related allowances will be removed.
The Government will consult on integrating the operation of income tax and national insurance contributions after Budget 2012.
The capital gains tax annual exempt amount will remain unchanged at £10,600.
The additional £1,100 increase in the personal allowance from 2013/14 is the next step towards the Government’s commitment to supporting those on low and middle incomes by making the first £10,000 of income free from income tax.
Whilst the Chancellor has insisted that the changes to the age related allowances will not result in any pensioners losing out in cash terms, overall this measure is likely to see a gradual reduction of real disposable incomes for those affected. As stated in the Government’s own analysis, following this announcement, in 2013/14, 4.41 million people are expected to be worse off in real terms with an average loss of £83, 360,000 individuals aged 65 will lose an average of £285 and an additional 230,000 people will be brought into income tax.
- Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT)
The 2011 Budget announced that the Government would seek to simplify qualification for EIS and VCT relief and also increase the maximum investment and size of company qualifying for relief. The aim is to encourage further EIS and VCT investment. In this Budget the Government has confirmed that the expected changes will be implemented in April 2012.
Subject to State Aid approval from the EU, for shares issued on or after 6 April 2012, the thresholds for a qualifying investment will change as follows:
- The limit on number of employees will rise from 49 to 249
- The company’s gross assets limit will rise from a maximum of £7m to £15m before investment and from £8m to £16m after investment
- The maximum annual amount that a company may raise from VCT and EIS schemes will rise from £2m to £5m
In addition, for EIS, the amount that an individual may invest in any one tax year will rise from £500,000 to £1m (State Aid approval has already been given for this).
The Government also announced measures intended to simplify qualification for EIS relief as follows:
- Exclusion of the value of loans when considering whether an individual owns 30% or more of the company’s capital. An individual with 30% or more may not claim EIS relief.
- Allowing qualifying shares to carry preferential rights to dividends providing the dividends are not cumulative and their amount and the date on which they are payable is not dependent upon a decision of the company, the shareholder or anyone else.
- Removing the £500 minimum investment.
Also announced is the removal of the £1m limit on investment by a VCT in a single company except where that company is in a partnership or joint venture.
For both schemes the Government has confirmed that it will introduce a ‘disqualifying purpose test’ which is aimed at preventing what it considers to be artificial schemes designed with a tax avoidance motive from qualifying for the relief. Monies used to acquire shares in another company will not be regarded as ‘employed’ in a qualifying business activity.
We welcome both the simplification of the rules and the extension of thresholds for qualifying companies and investments as an encouraging sign for entrepreneurial businesses.
- Seed Enterprise Investment Scheme (SEIS)
In December 2011 the Government announced its intention to introduce the SEIS to encourage investment in start-up businesses. The Budget has confirmed that SEIS will be introduced from April 2012.
SEIS applies to start-up companies with 25 or fewer full-time employees and assets of up to £200,000. There is a cumulative investment limit of £150,000 per company and the rules are broadly similar to those of EIS.
Individuals can invest up to £100,000 in a qualifying trading company’s shares and receive income tax relief at the SEIS rate, currently 50%, regardless of their marginal rate. The scheme will run for five years from 6 April 2012.
Following consultation, the Government announced amendments to the proposals of December 2011 in order to increase the attractiveness of the scheme.
It has also been confirmed that there will be a ‘CGT holiday’ for the first year of the scheme, exempting any capital gains realised in the 2012/13 tax year that are reinvested through SEIS in the same year.
We welcome the introduction of SEIS as an encouragement to invest in smaller and entrepreneurial businesses.
Despite speculation prior to the Budget, there were no announcements on further restrictions to tax relief on personal pension contributions. It had widely been anticipated that higher rate tax relief would be withdrawn to help pay for a reduction in the 50p rate of income tax. Other changes were announced following consultations in 2011.
Pensions tax relief for individuals
The annual allowance remains at £50,000 and individuals will still be able to claim tax relief at their highest marginal rate.
The reduction of the lifetime allowance from £1.8m to £1.5m in Finance Act 2011 comes into effect on 6 April 2012. Individuals should ensure they have reviewed their position and applied for protection of the higher limit where appropriate prior to 6 April 2012.
Overseas pension schemes
The Government is keen to ensure that Qualifying Recognised Overseas Pension Schemes (QROPS) broadly mirror a UK pension scheme and, following draft legislation and consultation, is to introduce legislation in Finance Bill 2013 to tighten the conditions and the reporting requirements for QROPS. As well as the increased reporting requirements, QROPS providers will need to check that they still qualify from that date. QROPS have become increasingly popular for individuals looking to retire abroad, who can transfer fund values of less than the lifetime allowance from a UK registered pension tax-free to a non-UK pension scheme.
Single tier pension
The Government has announced that it intends to combine the basic state pension and state second pension into one state pension for future pensioners. This follows the Green Paper published by the Department for Work and Pensions on 4 April 2011, and the consultation process which ran to 24 June 2011. The new system will be introduced early in the next Parliament, and further detail will be issued in a White Paper in the Spring. There will also be an automatic review of the state pension age. Both changes will cost no more than the current state pension system.
There were no immediate changes to pension legislation. Pension savers have suffered uncertainty over the tax reliefs in an area where a long term strategy is needed, and the Government’s approach is welcome.
- Cap on unlimited income tax relief
A cap is to be introduced on income tax reliefs which are currently unlimited.
Legislation will be introduced in the Finance Bill 2013 to cap income tax reliefs claimed by individuals. This cap will apply from 6 April 2013 and will only apply to reliefs which are currently unlimited. A cap of 25% of income (or £50,000, whichever is greater) will be applied to anyone seeking to claim relief of more than £50,000. Draft legislation will be published after the Budget and consultation will take place.
This is the latest in a long series of measures targeted at restricting loss relief. It is, however, more far reaching as it appears to catch not only reliefs such as trading loss relief, sideways loss relief, but also charitable giving, interest relief, top slicing relief on insurance policy gains and income tax relief for losses made on certain share disposals. EIS and VCT relief should not be caught by this new measure.
- Capital gains tax on residential property held in non-UK vehicles
The Government will consult on the introduction from April 2013 of capital gains tax on the disposal of UK residential property held in non-UK resident companies and other vehicles.
This measure forms part of the Government’s focus on the use of non-UK companies to avoid tax on high value residential properties.
It is proposed that the capital gains tax regime is extended to catch gains on the disposal of UK property and shares or interests in such property by non-UK resident companies and other ‘non-natural persons’, a phrase which presumably includes trusts and foundations.
This will primarily affect non-UK domiciled or non-UK resident individuals who hold UK homes through offshore structures, and is introduced alongside measures imposing additional Stamp Duty Land Tax charges on such arrangements.
The Government will consult on the details of the measure prior to its proposed implementation from April 2013.
This measure is designed to discourage the acquisition of UK homes using offshore companies. However, it is not clear if the rules will also affect businesses holding UK residential properties for investment purposes.
- Statutory residence test (SRT)
The Government has confirmed its intention to introduce a SRT with effect from 6 April 2013. In addition, ordinary residence will be abolished but Overseas Workdays Relief will be retained with effect from 6 April 2013.
The current rules that determine tax residence for individuals are unclear and complicated and rely largely on case law and HMRC guidance.
The proposed new rules should provide greater clarity and certainty for individuals either on arrival in, or departure from, the UK. The SRT published as part of a consultation in June 2011 comprised three parts:
- Part A – provides a clear set of factors to be treated as non-UK resident
- Part B – provides a clear set of factors to be treated as UK resident
- Part C – combination of connecting factors and day count test to determine residence position where Parts A and B not met.
A response to the consultation and draft legislation will be published shortly.
A statutory residence test is long overdue and the commitment to introduce one is welcome in giving taxpayers much needed certainty.
- Reform of non-domicile taxation
The Government has confirmed that the reforms to the taxation of non-domiciled individuals, announced in the Budget 2011 and published as draft legislation on 6 December 2011, will be implemented from 6 April 2012. Any changes following the consultation on the draft legislation will be included in the Finance Bill 2012, to be published on 29 March 2012.
The changes, subject to Royal Assent, can be summarised as follows:
- An increase in the annual remittance basis charge (RBC) to £50,000 for non-domiciliaries who have been UK resident for 12 out of the previous 14 tax years. For those who have been UK resident for any part of seven out of the previous nine years, the £30,000 charge will continue to apply.
- A new investment relief will allow non-domiciled individuals and other relevant persons (including certain trusts and companies) to invest overseas income and gains in qualifying investments in the UK without incurring a tax charge. Qualifying investments will, broadly, comprise investments in unquoted trading companies. The investment must be either a share subscription or loan. Where the investment is sold (or ceases to qualify), the investor will have a limited period to withdraw the proceeds from the UK or reinvest into another qualifying investment to prevent a tax charge arising.
- Presently, individuals who pay the RBC are required to nominate overseas income/gains. However, complex anti-avoidance rules can apply where even £1 of this is remitted to the UK. From 6 April 2012, individuals will be able to remit up to £10 of nominated income without triggering these rules. Individuals who choose only to nominate £1 of income will no longer need to maintain a separate bank account to hold it. Those who claim credit for the RBC in other jurisdictions may still need to maintain separate bank accounts.
It is welcome that the new investment relief will allow remittance of otherwise ‘tainted’ income/gains. The Government also announced in December 2011 that it will consider extending the investment vehicles to partnerships – a further positive step in encouraging inward investment.
- Capital gains tax (CGT): Foreign currency bank accounts
The Government has removed foreign currency bank accounts from the scope of CGT.
The Chancellor has confirmed that, as announced in December 2011, gains on foreign currency bank accounts of individuals and trustees will not be chargeable and losses will not be allowable. The measure will have effect from 6 April 2012.
The calculation of gains and losses on foreign currency bank accounts is a huge burden for individuals and trustees resulting in little tax for the Treasury and this change will come as a great relief. It is disappointing that the relief cannot be backdated to prevent the need for complex, time-consuming calculations for 2011/12.
- Inheritance tax (IHT): Spouses and civil partners domiciled outside the UK
The Government has announced a consultation to increase the lHT exempt amount that a UK domiciled individual can transfer to his or her non-UK domiciled spouse/civil partner. There may be further legislation to allow individuals who are domiciled outside the UK with a UK domiciled spouse/civil partner to elect to be treated as UK domiciled for the purposes of IHT. Legislation will be included in Finance Bill 2013.
The current legislation exempts all transfers between spouses/civil partners who are both UK domiciled or non-UK domiciled. However, where a UK domiciled spouse/civil partner makes a transfer to a non-UK domiciled spouse/civil partner, the exemption is limited to £55,000 in total.
The increase in the IHT exempt amount on transfers from UK domiciled to non-UK domiciled spouses/civil partners 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.
- Inheritance tax: Periodic charges on trusts
The Government has announced that it will consult on simplifying the calculation of IHT charges to which trusts are subject at 10 yearly intervals and when certain property is transferred out of the trust.
Most, but not all, trusts are subject to a charge every 10 years on the value of the trust assets and to an exit charge upon capital distributions to beneficiaries. The maximum rate of tax is currently 6%.
Any simplification, provided there is no increase in tax, will be welcomed.
- Countering inheritance tax avoidance using offshore trusts
IHT will be charged where a UK domiciled (or deemed UK domiciled) individual enters into arrangements through which they acquire an interest in excluded property which results in a reduction in the value of their estate for IHT purposes.
This measure is designed to counter arrangements involving the acquisition of interests in ‘excluded property’ trusts. These are trusts settled by non-UK domiciled individuals that are not subject to the inheritance tax charges applicable to most trusts under the ‘relevant property’ regime.
Under the new rules, the reduction of a person’s estate through such an arrangement will be charged to IHT as if the person had transferred assets of that value directly to a ‘relevant property’ trust. The assets in the trust will also cease to be excluded property and thus be subject to 10-yearly and exit charges.
This will apply to new arrangements entered into from 21 March 2012, and to existing arrangements only in relation to 10-yearly and exit charges that arise from this date.
This measure has been introduced to counter a specific inheritance tax avoidance scheme. The Budget press release refers to the use of offshore trusts, although in fact the same IHT effect could be achieved using UK trusts, so the new rules may extend to these trusts.
- Countering income tax avoidance using corporate settlors
This measure is designed to prevent the use of companies to settle trusts in order to achieve a lower rate of tax on trust income.
- Existing anti-avoidance rules treat trust income as the income of the settlor if the settlor has an interest in the trust.
- Where a company is the settlor, the trust income will be taxed at lower rates than if the settlor were an individual.
- With effect from 21 March 2012, the existing anti-avoidance rules will be disapplied where the settlor is not an individual. The intention is that trust income will then be taxed on the beneficiaries of the trust in the same way as income of non-settlor interested trusts.
This measure is designed to counter a specific arrangements involving interest in possession trusts, but is likely to apply to any type of trust.
- Transfer of assets abroad and gains on assets held by foreign companies
The Finance Bill 2013 will include amendments to these two anti-avoidance legislation measures. A consultation document will be published after the Budget which will include draft legislation.
This announcement comes in response to a request by the EU for HMRC to consider these measures in the light of EU anti-discriminatory legislation. HMRC announced that it would consider this further in December 2011. The changes will have effect from 6 April 2012 but a taxpayer may elect for the new rules to apply from 6 April 2013. The Government has announced that the changes are unlikely to be disadvantageous to the taxpayer.
Any reduction in the scope of these provisions is welcome.
- Previously announced measures
The following personal tax measures, which have previously been announced, will be included in Finance Bill 2012:
- relief for gifts of pre-eminent objects to charity
- reduced inheritance tax rate for estates leaving 10% or more to charity
- inheritance tax nil rate band to increase by reference to CPI, and
- the withdrawal of self assessment donation to charities for 2011/12 onwards.
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