Personal Tax
The Capital Gains Tax changes for individuals and
trustees will be introduced as expected from 6 April 2008
with a flat rate of 18%, and a new 'entrepreneurs' relief' which
will give an effective 10% rate for the first £1million of
gains.
Residence and Domicile changes will also go ahead from 6
April 2008, although there have been some changes to the detailed
original proposals. Individuals who have been in the UK for
seven out of the last 10 years will have a choice between paying
full UK taxation and paying an annual charge of
£30,000.
The rules on income shifting are being deferred until April
2009, although the government has stated its continuing commitment
to change in this area.
On Inheritance Tax (IHT), the ability to transfer an unused
spouse's nil rate band, as announced at the Pre-Budget
Report, was confirmed. Those with certain Trust arrangements were
also given an extra six months to make changes, up to 5 October
2008.
Transitional relief on Gift Aid was good news for
charities. The Government will top up donations to make up for
the fall in the basic rate of income tax, without any extra rules
for the donor.
New capital gains tax
rate and new tax relief for entrepreneurs
Residence and
non-domiciled individuals
Income shifting proposals
deferred
Inheritance Tax (IHT) nil
rate band transfer confirmed
Gift aid transitional relief for
charities
Income tax rate reduces to
20%, 10% tax rate abolished
Tax penalty regime
continues to change
Transitional period
extended for interest in possession and life interest
trusts
Enterprise Investment
Scheme (EIS) changes
Taxation of dividends
received from non-UK resident companies
Pension loophole closed / a
level playing field
Trivial pensions
Individual Savings Accounts
(ISAs), including relief for Northern Rock
Encashments
HMRC
Powers
Incorrect returns
Compliance checks
Tax debt
Tribunal reform
New capital
gains tax rate and new tax relief for entrepreneurs
The Chancellor has confirmed the new 18% capital gains tax (CGT)
rate applies from 6 April 2008 for individuals and trustees but
sweetens the pill for business owners with entrepreneurs' relief,
which we first heard about in January 2008.
This relief restores an effective 10% CGT rate for the first £1
million of qualifying capital gains realised on or after that date.
Not all will qualify for the relief and will find that the removal
of taper relief and the indexation allowance will leave them
significantly worse off in the new tax year if they make a
chargeable gain.
To qualify for enterpreneurs' relief there needs to be a gain
arising on disposals of trading businesses (all or part but not
assets in isolation). This is different to the taper relief rules
which gave relief for single assets. There is also relief for
assets previously used in trading businesses that have ceased,
shares in 'personal' trading companies and personally owned assets
used by 'personal' trading companies or trading partnerships. (An
individual has a 'personal' company where he or she works for the
company or another group company, as an employee or office holder
and owns 5% of the shares and controls 5% of the voting
rights).
Multiple claims within the £1 million lifetime limit can be made
but once the cap is breached, tax is chargeable at 18%.
The new relief has some marked similarities with the old
retirement relief (which ceased to apply for disposals after 5
April 2003) except there is no age limit and the qualification
conditions must only have been met for the 12 months before
disposal or cessation of the business (with a disposal following in
3 years).
Individuals and trustees (where there is a qualifying
beneficiary who must jointly claim) can claim the relief where
their business (or that of their personal company) is trading and
not carrying on, to a substantial extent, activities other than
trading activities. This therefore maintains the taper relief style
qualifying conditions for a trading company. It also means
exclusion for property letting businesses, other than where engaged
in the commercial letting of furnished holiday accommodation in the
UK.
A further extension applies to gains arising before 6 April 2008
but deferred through an exchange of shares for loan notes which are
qualifying corporate bonds, or a qualifying investment in
Enterprise Investment Scheme or Venture Capital Trust shares (if
the original disposal would have qualified for entrepreneurs'
relief had it been available at the time).For non-qualifying
corporate bonds you may also receive entrepreneurs' relief but this
revolves around the qualifying conditions being met when the bonds
are redeemed. It is far more unlikely that taxpayers will meet
these conditions.
Residence and non-domiciled
individuals
The Chancellor has confirmed that non-domiciled individuals will
have to pay an annual charge of £30,000 to benefit from their
foreign income and gains being taxed on the remittance basis. This
will take effect from 6 April 2008. However, there has been a
softening of the original proposals following the issue of the
draft legislation in late January and subsequent consultation. The
Chancellor also said that there will be no further changes to the
regime in this Parliament or the next on the assumption that the
same Government remains in power!
The new charge will apply to non-domiciled adults who have been
UK resident for more than seven out of the past ten years and will
apply to those who have unremitted foreign income and gains in
excess of £2,000.
The charge will no longer be a stand-alone levy as originally
proposed but will now be a tax charge on unremitted foreign income
and gains and should be treated as such for the purposes of Double
Taxation Agreements and Gift Aid donations.
The £30,000 should be creditable, for example, against the US tax
of US citizens and green card holders but not in full because the
US tax rates on income and gains are generally lower than in the
UK.
From 6 April 2008, individuals who claim the remittance basis
will not be able to benefit from personal income tax allowances nor
the CGT annual exemption.
Various loopholes have been closed in the remittance basis
legislation and non-domiciled individuals will no longer be able to
benefit from certain long established tax planning techniques from
6 April onwards. Although, some concessions have been made such as
for works of art for public display and existing offshore
mortgages
Clear statutory rules will be introduced to determine how the
remittance of mixed funds will be treated for UK tax purposes and
these will be much more comprehensive than the current rules.
The day counting rules for residence test purposes will change
from 6 April 2008. Currently days of arrival and departure are
excluded from the UK day count but from 6 April any day where the
individual is present in the UK at midnight will now be counted as
a day's presence in the UK for tax residence purposes. This is an
improvement on the original proposals where any time in the UK
would have counted as a day of residence. There will be exemptions
for transit passengers and these have been widened from those
originally proposed.
Comprehensive changes have been announced to the CGT regime for
non-resident trusts but the Government has listened during the
consultation process and these changes differ significantly from
those announced in January 2008.
From 6 April 2008, non-domiciled individuals who claim the
remittance basis and are beneficiaries of a non-resident trust will
be taxed on the remittance basis on all UK and offshore assets.
It is proposed that trustees will be able to make an irrevocable
election to rebase assets held in trust as at 6 April 2008 for the
purpose of excluding accrued gains relating to the period pre-6
April 2008 from being taxed on a non-domiciled beneficiary.
The disclosure requirements relating to settlors and
beneficiaries of non-resident trusts have been relaxed
significantly from those proposed in January 2008 on the proviso
that they have made the correct return of their tax liabilities.
They may however be required to provide additional information to
HM Revenue and Customs (HMRC) if the trustees elect to rebase trust
assets or where HMRC decide to enquire into a beneficiary's tax
return.
Anti-avoidance legislation currently in force to prevent UK
domiciled and resident individuals from realising tax free
chargeable gains through a holding in a non-resident company will
be extended to catch non-domiciled individuals.
An error arising from the Tax Law Rewrite will be corrected from
6 April 2008, whereby, higher rate taxpayers claiming the
remittance basis who remit foreign dividend income will be liable
to income tax at 40% rather than the current 32.5% rate.
Income
shifting proposals deferred
Despite a victory for the taxpayer in the Arctic Systems Ltd
case (Jones v Garnett), the Chancellor announced in the October
Pre-Budget Report that he was to undertake consultation with
businesses to counter the practice of what he called 'income
shifting'.
'Income shifting' involves a individual in a company or
partnership arranging their affairs to gain a tax advantage by
passing part of their income via dividends or partnership profits,
to another person who is subject to a lower rate of tax.
Following the initial responses to consultation the Chancellor
announced today there will be a further period of consultation to
ensure the legislation (to be introduced by Finance Bill 2009) will
provide clarity and certainty for businesses and their advisers.
This shows a commonsense response to the strong representations
made that the original proposals were unworkable and overly
burdensome.
Inheritance
Tax (IHT) nil rate band transfer confirmed
As announced in the Pre-Budget Report in October 2008, any
unused nil rate band on a person's death can be transferred to the
estate of the spouse or civil partner who dies on or after 9
October 2007. This will particularly benefit couples whose main
asset is their home and is currently worth more than the nil rate
band (£300,000 in 2007/08). This has led to the idea that the
number of Wills drafted with nil rate band discretionary trusts
(NRBDT) will significantly reduce, but there are still advantages
in including a NRBDT in a Will in many circumstances. The rules
also apply retrospectively (in a good way) so that if the first
spouse has already died, the second spouse can claim the unused
proportion of their nil rate band. This has led HMRC to provide
tables going back to the early decades of the last century to help
people make claims.
The new rules are extended to include the transfer of unused IHT
allowances to the surviving spouse or civil partner on death for
alternatively secured pensions.
Gift aid transitional relief
for charities
The Chancellor compensates charities for the sins of his
predecessor, but only for three years. Until 5 April 2011 they can
claim back the lost tax refunds caused by Gordon Brown's reduction
in the basic rate of income tax from 22% to 20%, which takes effect
from 6 April 2008.
For basic rate taxpayers making donations to charity, tax relief
will only be given at 20% from 6 April 2008, although higher rate
taxpayers can continue to claim relief at 40%.
Income tax rate
reduces to 20%, 10% tax rate abolished
From 6 April 2008 the existing 10% starting rate will be
abolished and a new 10% rate for savings will be introduced. At the
same time the basic rate of income tax will reduce from 22% to
20%.
Tax
penalty regime continues to change
Last year the Finance Act 2007 introduced 'taxpayer behaviour
based' penalty criteria in respect of income tax, corporation tax,
capital gains tax, VAT, National Insurance, PAYE and the
Construction Industry Scheme. This affects returns filed on or
after 1 April 2009. The Budget now extends this regime to all other
taxes (bar tax credits). It thus brings the behaviour based
approach to returns for inheritance tax, environmental taxes,
excise duties, stamp duties, insurance premium tax, pension schemes
and petroleum revenue tax. These new rules affect return periods
starting on or after 1st April 2009 where the return is due to be
filed on or after 1st April 2010.
No penalty will be levied in cases of genuine mistake. Maximum
penalties will be as follows:
- 30% for failure to take reasonable care
- 70% for deliberate understatement; and
- 100% for deliberate understatement with concealment
Transitional period extended for interest
in possession and life interest trusts
Finance Act 2006 changed the inheritance tax rules for interest
in possession or life interest trusts in place before 21 March
2006. This included a transitional rule for the period from 22
March 2006 to 5 April 2008 to enable the life tenant to release the
life interest in favour of other beneficiaries. This transitional
period has been extended by six months until 5 October 2008.
Enterprise Investment Scheme (EIS)
changes
EIS income tax relief is increasing from 6 April 2008 to allow
investors to claim tax relief at 20% on the first £500,000
invested. Previously, the limit was £400,000, making the change
worth £20,000 to investors. This is subject to EU State Aid
approval. But there is bad news for individuals investing in
shipbuilding, coal and steel production, who will no longer be
entitled to EIS relief or to relief under the Venture Capital Trust
scheme.
Taxation of dividends received from
non-UK resident companies
Where dividends received from UK resident companies are charged
to UK income tax, shareholders are entitled to a non-payable tax
credit of one ninth of the distribution. The effect of this is to
lower the effective rates of tax on these dividends to 0% for basic
rate taxpayers and 25% for higher rate tax payers.
Legislation in Finance Bill 2008 will extend this non-payable
tax credit to dividends received by UK resident and other EEA
nationals from non-UK resident companies, on the condition they own
less than a 10% shareholding in the distributing non-UK
company.
It is proposed that Finance Bill 2009 will extend this
eligibility to non-UK resident companies where the individual owns
a 10% or greater shareholding. However the credit will not be
available if the source country does not levy a tax on profits
similar to corporation tax.
Pension
loophole closed / a level playing field
As already indicated by the Government, the loophole that may
have allowed Small Self Administered Pension Schemes (SSAS) to pass
on pension funds tax-free on death has been closed in the
Budget.
The charge will apply to people who die on or after 6 April
2008. The rules will treat any increase in the pension rights of
the member following the death of another member, if the two
members were connected, as an unauthorised payment.
This means recipients will face a 70% tax charge, the same as
applies to funds passed on via an alternatively secured pension
(ASP). The funds passed on from members who die after the age of 75
will also be liable to IHT, bringing the potential tax charge to
82%.
Trivial
pensions
New rules will allow benefits to be paid as a lump sum where the
value is below £2,000. This allows people to take very small
benefits in one occupational scheme as a lump sum under the
triviality rules while receiving an income from another, larger
pension pot.
Previously it was not possible to take small pension pots as a
lump sum if the value of a person's pension saving exceeded 1% of
the lifetime allowance.
Individual Savings Accounts (ISAs),
including relief for Northern Rock Encashments
Relief will be brought in to benefit investors who withdrew
funds from their Northern Rock ISA between 13 and 19 September 2007
(inclusive).
New measures will allow these funds to be re-invested in a new
ISA without impacting on the current year ISA allowance. All
re-investments must be made between 18 October 2007 and 5 April
2008.
ISA allowances will increase from £7,000 to £7,200 as from 6
April 2008. Investors concerned by recent stock market falls will
benefit from the increase of the cash element from £3,000 to
£3,600.
HMRC Powers
HMRC is pushing ahead with a review of all its existing powers.
This covers enquiries, investigations, penalties and all forms of
checking tax returns. The review will last a few more years but we
have some further details on what the Finance Bill will
include.
Incorrect
returns
The Finance Act 2007 included a new framework for assessing
penalties on incorrect returns covering all the major taxes eg
income and corporation tax and VAT. This new regime takes effect
for returns filed after April 2009. This will see penalties imposed
based on taxpayer behaviour and the key to reducing penalties for
errors will depend on whether they took 'reasonable care'.
The Budget extends this framework to almost all other taxes bar
tax credits. The Finance Bill 2008 will include provisions to bring
in the same type of regime for penalties for inheritance tax,
environmental taxes, stamp duties and excise duties. This will
affect returns filed on or after April 2010.
Compliance
checks
The new terminology for HMRC to check that businesses and
individuals are paying the famous 'right amount of tax' is
'compliance checks'. For income tax, corporation tax, capital gains
tax, VAT and PAYE new rules will apply from 1 April 2009. This will
include more stringent record keeping requirements and a power to
look at those records in 'real time'. There will also be a power to
visit business premises but not people's homes. There will be a lot
of concern about how this will all work in practice.
In addition there will be new powers relating to the ability to
search goods and baggage at airports and other places of transit.
Primarily this will allow Customs to open and unpack containers
rather than insisting this is undertaken by the proprietor of the
goods.
Tax debt
Changes are also being made to the way HMRC manage tax debt. For
example, by the autumn of 2008 it will be accepting payment by
credit card. Other changes include giving HMRC the ability to
offset repayments against tax liabilities and greater debt
enforcement powers.
Tribunal
reform
The Ministry of Justice is overseeing major changes to the way
tribunals operate in the UK. The Tribunals, Courts and Enforcement
Act 2007 brought in the idea of a new first-tier tribunal which
will see the end of the General and Special Commissioners as we
know them, from 2009. The Budget confirmed that the Finance Bill
2008 will include a power to introduce secondary legislation to
change the way appeals against HMRC are handled in light of those
changes.
Concessions after Wilkinson
A few years ago the House of Lords decision in Wilkinson [2006]
STC 270 raised concerns about whether HMRC was able to make
extra-statutory concessions. The upshot has been that there have
been no significant concessions since that case and a fear from
HMRC of changing existing ones. The Budget confirmed that after
taking legal advice, HMRC believes its existing concessions are
within its 'collection and management' discretion and therefore
should survive. It is intending to legislate a significant
proportion of them by Treasury Order and will do this via a power
introduced in the Finance Bill 2008.
We will also be seeing discussions begin on the introduction of
a new Taxpayer's Charter. Such a document existed in the 1980's and
then gradually fell into disuse before being removed. The intention
is for it to set out taxpayer rights and obligations. A Charter
will bring the UK into line with most other developed
countries.