Individuals

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Fiscal drag and tightening the income tax net
Sun goes down on furnished holiday lettings
Pension relief for higher earners tightened
200% penalty for those who don't disclose
Inheritance tax threshold frozen and more anti-avoidance rules
Equitable liability here to stay
Keep warm, talk less
What has not changed.....yet

Fiscal drag and tightening the income tax net

Income tax thresholds generally rise in line with the retail price index (RPI) in September each year. As the RPI was in negative territory in September 2009, thresholds have been frozen for the 2010/11 tax year. However, the Chancellor stated that from 6 April 2012, the point at which taxpayers start paying higher rate income tax (40%) will be frozen for a further year, instead of rising with inflation. This measure is a return to fiscal drag and is expected to raise £400 million alone.

In addition, proposals were announced which signal an intention to clamp down on tax avoidance schemes, including those designed to combat the 50% income tax rate for top earners. There are plans to extend the requirements for tax advisers to inform HM Revenue & Customs periodically throughout the year of clients who are taking up certain planning arrangements

A prime concern is that this is to be introduced in conjunction with a change in the definition of what is a 'tax avoidance scheme' for these purposes which may catch some fairly benign tax planning arrangements, introducing further uncertainty for high earners who simply wish to plan their affairs within a complex tax system.

Taken in conjunction with the advent of the 50% tax rate, the 1% hike in National Insurance from 6 April 2011 and the slashing of higher rate pension relief, this may be the straw that breaks the camel's back for internationally mobile individuals, who may decide the UK is no longer the best place for them to reside.

Sun goes down on furnished holiday lettings

The 2009 Budget extended the tax reliefs available on Furnished Holiday Lettings (FHL) to properties situated within the European Economic Area. Previously this regime only applied to UK properties. However this extension is to be short lived as the FHL rules will be abolished completely from 6 April 2010 (1 April 2010 for companies).

This measure will affect all landlords who own properties that are eligible for the FHL tax reliefs. Under the FHL regime, the rental lettings business is treated as a 'trading business' (rather than an investment business) for the purposes of loss relief (which includes the ability to offset losses against general income), capital allowances and certain capital gains tax reliefs. Income deriving from the FHL business is also included as relevant earnings for pension purposes.

After the withdrawal of the FHL regime, income and gains from furnished holiday properties will be taxed in line with that from other property rental businesses. Any unrelieved losses incurred before 6 April 2010 (or in accounting periods starting before 1 April 2010 for companies) will only be available to be offset against future profits of the same property business.

However, as a potential upside, landlords may be able to start claiming the 10 per cent wear and tear allowance or the Landlord's Energy Savings Allowance, neither of which are currently available under the FHL regime. In addition, whilst expenditure on plant and machinery after 6 April 2010 (1 April 2010 for companies) will no longer attract capital allowances the attractive FHL capital allowances regime continues for expenditure prior to this date.

Pension relief for higher earners tightened

As announced in the 2009 Budget it has been confirmed that tax relief on pension contributions for higher earners will be restricted from 6 April 2011. This affects those earning over £150,000 and tapers away the higher rate relief until at an income level of £180,000 only basic rate relief is due. At the time, numerous anti-forestalling provisions were also introduced to ensure that taxpayers could not easily act to take advantage of the relief before it disappeared.

The Chancellor has confirmed in his Pre-Budget Report that the £150,000 threshold will now include employers' pension contributions but he also introduced a 'floor 'of £130,000 so that individuals with earnings below this amount (excluding employer pension contributions) will not have their tax relief restricted.

While the clarification is welcome, it does bring within the rules taxpayers who earn between £130,000 and £150,000, many of whom previously thought they were not caught by the proposed changes. The tax charge in this income range will be calculated in the same way as those earning in excess of £150,000. The Chancellor announced draft legislation and a consultation in relation to the implementation of these rules.

Two other changes impacting on pensions were also announced. Firstly, where a pension scheme repays contributions of a member who has completed less than two years' service, the pension scheme is required to deduct tax at the appropriate rate. The Chancellor announced that the rate of 20% on the first £10,800 and 40% thereafter will be amended to 20% on the first £20,000 and 50% thereafter. This change in tax rates will apply to refunds made on or after 6 April 2010.

Secondly, payments made by an employer funded retirement benefit scheme (EFRBS) to an entity who is not an individual will be taxed at 50% from 6 April 2010 (increased from 40%).

200% penalty for those who don't disclose

The Chancellor has announced in his Pre-Budget Report (PBR) that, in the future, combined penalties of up to 200% of the unpaid tax could apply to taxpayers who do not disclose income from their offshore accounts. He announced that legislation will be brought forward to ensure that those who fail to declare offshore tax liabilities "will face tough penalties attracted by deliberate tax evasion".

Although full details have not yet been released, the Chancellor also made reference to the fact that a notification procedure to HM Revenue and Customs (HMRC) will be introduced when opening bank accounts in certain jurisdictions and a separate penalty regime in relation to this will apply.

In his speech, the Chancellor noted that HMRC has requested details of at least 100,000 offshore accounts at over 300 financial institutions, and warned that taxpayers can expect much tougher penalties in the future. HMRC introduced a new disclosure opportunity (NDO) on 1 September 2009 under which taxpayers were encouraged to come forward with details of their offshore accounts to secure lower penalties.

"Today's announcement comes further to the recent extension of the NDO's online registration deadline from 30 November to 4 January 2010 after a very low take up of the initiative" says Paul Roberts, Head of Tax Investigations at Grant Thornton.

"Such a draconian penalty relating to tax evasion existed for many years but fell away in the late 1980s. But its reintroduction demonstrates the resolve of HMRC to ensure that those opening offshore accounts going forward are under no allusions and that they must meet their compliance obligations with the UK tax authorities" concludes Roberts.

Inheritance tax threshold frozen and more anti-avoidance rules

In his Pre-Budget Report, the Chancellor announced that the inheritance tax (IHT) threshold will not be increased to £350,000 in April 2010 as was enacted to happen by means of the Finance Act 2007. The Chancellor commented that given the impact of the downturn on the country's finances and also the decline of asset prices, this uplift was no longer a priority. The nil rate band will therefore be maintained at £325,000 for the 2010/11 tax year, although the Chancellor noted that this will still mean that fewer than 3% of estates will pay IHT.

This freeze on the threshold is only estimated to raise £80 million additional revenue in the 2010/11 tax year, although if there are no further increases in the threshold it is estimated to raise a further £180 million in the 2011/12 tax year and £190m in the 2012/13 tax year when asset prices are expected to return to higher levels. This move also draws a clear distinction with the Conservative Party, who have stated that if elected they will consider raising the nil rate band to £1 million.

In addition, anti-avoidance legislation has been introduced to counteract planning designed to avoid inheritance tax charges on the transfer of assets to a trust, either by purchasing trusts or including reversionary interest rights.

The proposed new rules state that where trust interests which were previously not within the relevant property regime are purchased on or after 9 December 2009, the trust interest will remain within the person's estate and the trusts will now fall within the relevant property regime (ie be subject to 20% on transfers into trust and be liable to other IHT charges).

There has also been a tightening up on the tax charges arising on reversionary interests in trusts which have been exploited to pass assets into trusts without triggering a charge to IHT on the transfer.

The new anti-avoidance rules highlight the fact that it is becoming increasingly difficult for clients to structure their affairs in a manner to reduce IHT. Furthermore, the Chancellor also announced that the Government is considering the wider issue of how taxpayers are using trusts to avoid inheritance tax. This appears to overlook the fact that for the majority the motive in relation to using trusts is the protection of family wealth and not the avoidance of tax. It is worth noting that many trusts are already subject to a very strict tax regime, with income tax rates of 40% (to be increased to 50% in April) and ten yearly inheritance tax charges.

Equitable liability here to stay

Despite HM Revenue & Customs (HMRC) announcing the withdrawal of the practice of equitable liability from 1 April 2010 earlier this year, the Chancellor has confirmed in his Pre-Budget Report that the Government will legislate the current practice.

Equitable liability for income tax and corporation tax is a practice whereby HMRC will accept the evidence of time-barred returns, accounts, claims etc where they would reduce the original tax liability of a taxpayer, but for the fact that there is no longer any legal right to adjust that liability. For example, when a taxpayer has missed the deadline for appealing against an HMRC estimate of their tax liability.

Under the concession, the amount of the original liability is not actually amended, but HMRC agree not to pursue the difference between that and the revised amount. However, HMRC will only apply the current concessionary treatment when the taxpayer:

• shows that the figure is excessive
• what the correct amount should have been; and
• brings their tax affairs up to date, including payment of tax, interest and penalties.

HMRC had originally intended to withdraw the practice of equitable liability from 1 April 2010 as part of an ongoing review of extra statutory concessions, however, this particular concession will now be legislated following representations from various professional bodies, including The Institute of Chartered Accountants in England and Wales and The Chartered Institute of Taxation, who felt that the principle of equitable liability should be preserved as an important 'safety valve' in the tax system.

Keep warm, talk less

The Pre-Budget Report announced a boiler scrappage scheme dubbed the 'Greener Boiler Incentive Scheme' - a £400 incentive to help up to 125,000 households upgrade old inefficient (G rated) boilers to the latest energy efficient models or renewable heat units. The Government will expect to recoup some of the cost of this through VAT in a similar way to the car scrappage scheme.

This measure is coupled with an additional £150 million to provide resources for the Warm Front scheme which provides free and subsidised heating and insulation for 75,000 vulnerable households to heat their homes.

In addition, the Pre-Budget Report confirms that income received from the clean energy cash-back scheme will be tax-free. This scheme incentivises households to generate small scale renewable energy for their own use and is worth on average £900 per year

HM Treasury, HM Revenue & Customs, and the Department for Business, Innovation and Skills will shortly consult on the implementation of the landline duty previously discussed in a ministerial statement. The duty of 50 pence per month (£6 annually)for each land line is being introduced to help fund the roll-out of superfast broadband to 90 per cent of the country by 2017. The Digital Britain White Paper committed to introduce the new duty in the financial year 2010/11.

What has not changed.....yet

While there were some new announcements in the Pre-Budget Report, many anticipated changes for individuals were noticeable by their absence. It had been mooted that the Chancellor would increase the rate of capital gains tax, which currently stands at 18%, in order to close the gap between this and the prospective higher rate of income tax (due to be 50% from April 2010). But this did not happen. Similarly, there were no details of the expected targeted anti-avoidance rules to prevent sources of income being 'converted' into capital.

There were no substantial changes to the rules for private residence relief, whereby any gains are exempt on the sale of a main residence by an individual. It had been suggested that following the MPs' expenses saga that these rules, particularly the ability to elect for a main residence amongst multiple residences, would be tightened or revised.

An extension to the Stamp Duty Land Tax holiday was not announced, and as such the starting band for residential properties reverts to £125,000 from 1 January 2010. With a faltering recovery of the housing market an extension to this would have been welcome.

The majority of allowances have been frozen, including the personal allowance at £6,475, along with the income tax thresholds for 20% and 40% for the tax year 2010/11. These are not expected to rise now until at least the following tax year (2011/12).

There were no further changes to the remittance basis regime (save for clarification on foreign currency accounts) and nothing further was announced with regard to setting up a statutory test to help determine an individual's tax residence.