This On the Subject contains a summary of the main points arising from the Coalition Government’s Emergency Budget which are likely to be of interest to private clients.
Capital Gains Tax (CGT)
As widely anticipated the Budget announced changes to the CGT regime. The current rate of 18 per cent will remain for individuals whose total taxable income and taxable gains (being gains after deduction of reliefs, losses and the annual exempt amount) are within the income tax basic rate band. Where the individual is a higher rate taxpayer, or where a portion of the taxable gains exceeds the basic rate band for income tax, these gains will be taxable at a rate of 28 per cent. Personal representatives of deceased persons and trustees will be taxed on gains at 28 per cent.
The new 28 per cent rate takes effect from 23 June 2010. The Chancellor, George Osborne, confirmed that he has no intention at present to reintroduce either indexation or taper reliefs, however concerns about the impact of the anticipated changes on entrepreneurs are reflected in the increased lifetime limit for entrepreneurs’ relief from £2 million to £5 million of gains. Gains qualifying for entrepreneurs’ relief will continue to be taxable at 10 per cent. The increased lifetime limit takes effect from 23 June 2011. The annual exempt amount remains at £10,100 for the current year.
Offshore trustees will need to consider carefully the potential tax implications of making distributions to UK resident beneficiaries of offshore trusts which are matched against gains in the current tax year. The matching mechanism operates by looking at gains matched and distributions made in the tax year taken as a whole. It is not clear how the change in rates part way through the tax year will interact with this mechanism. The transitional rules will need to be drafted carefully. It is by no means certain that distributions made on or before 22 June 2010 will be subject to the 18 per cent rate in the hands of the beneficiary. Distributions made that, when matched, are subject to the 28 per cent rate and are liable to the supplemental charge are likely to be taxable at effective rates of up to 44.8 per cent, depending on the length of time the gain has remained in the trust since being realised, with six years resulting in the maximum 44.8 per cent rate.
The outgoing Labour Government’s last Finance Act, enacted in April 2010, introduced rules restricting higher rate tax relief on pension contributions in certain circumstances (very broadly relief on contributions was to be restricted to the lower rate where the individual had gross income, including any employer pension contributions, of £150,000 or more for the tax year). The Budget announced that these rules will be repealed but that the Coalition Government will instead introduce a revised regime which aims to raise revenue by restricting tax relief on pension contributions. At present it seems the alternative approach may involve a significant reduction in the annual allowance (perhaps down to a figure between £30,000 and £45,000, from the current annual allowance of £255,000). A consultation process will determine the detail of the new regime.
In addition, the Budget announced that the Coalition Government will from April 2011 end the obligation to purchase an annuity by the age of 75. There will be a consultation process on the detail of how this will be implemented. Persons turning 75 on or after 22 June 2010 will be subject to transitional rules which will enable them to defer purchasing an annuity until after the new rules are in place.
Taxation of Non-Domiciliaries
The Coalition Agreement, made between the Conservative and Liberal Democrat parties for their five-year term of government, set out the intention of the Coalition Government to review the taxation of non-domiciled individuals. The Budget restated this intention and indicated that the aim of the review is to “assess whether changes can be made to the current rules to ensure that non-domiciled individuals make a fair contribution to reducing the deficit, in return for greater certainty and stability for those bringing skills and investment to the UK.” There is no indication of the likely timing of such a review.
Value Added Tax (VAT)
The rate of VAT will increase from 4 January 2011 to 20 per cent.
The income tax personal allowance will be increased by £1,000 for the tax year 2011/12 to £7,475. The Coalition Government will introduce other measures which will have the effect that the increase in the personal allowance will only benefit basic rate taxpayers and will not benefit higher rate taxpayers.
Together with Germany and France, the United Kingdom will introduce a Bank Levy based on the level of risk indicated on an institution’s balance sheet. Broadly speaking, it is proposed that the levy will apply to UK banks, building societies and overseas banks operating in the United Kingdom. Further details of the legislation will be published later in the year.
Measures Affecting Employee Benefit Trusts (EBTs) and Similar Arrangements
The Budget confirmed that the Coalition Government intends to introduce legislation from 6 April 2011 to tackle arrangements between employers and employees using trusts and other vehicles to avoid, defer or reduce liabilities to income tax and national insurance contributions. This is likely to have a significant impact on existing EBTs and other arrangements.
There will be a formal consultation over the summer on bringing Inheritance Tax as it applies to trusts within the regime for the Disclosure of Tax Avoidance Schemes.
The Budget did not announce any changes to the thresholds and rates applicable for Inheritance Tax. The nil rate band remains at £325,000.
Stamp Duty Land Tax (SDLT)
The Coalition Agreement contained a statement that the Coalition Government would develop the Liberal Democrat manifesto proposals on tackling tax avoidance. These included a proposal to prevent the avoidance of SDLT by holding UK land via company and/or trust structures. No such proposals have made their way into the Budget.
The new 5 per cent rate, introduced in the Labour Government’s Finance Act, remains. From 6 April 2011 purchasers of properties where the consideration will be £1 million or more will pay SDLT at the rate of 5 per cent.
Statutory Residence Test
As anticipated, there was no further information on the likely timing or detail of a comprehensive statutory residence test.