2012 Budget: key private client tax announcements

The Chancellor, George Osborne, delivered his Budget on 21 March 2012. This update summarises the most important private client tax announcements. (Free access.)

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Contents

References to "Overview" are to the HMRC/HM Treasury Overview of Tax Legislation and Rates published on 21 March 2012; references to "TIIN" are to HMRC/HM Treasury Tax Information and Impact Notes published on 21 March 2012. We link throughout this update to the Overview document, with a reference to the specific paragraphs relating to the measure reported on. As we experienced a high incidence of the Overview being inaccessible during 21 March 2012, we have also created a standalone version: 2012 Budget: Overview of Tax Legislation and Rates (www.practicallaw.com/3-518-5860), in case the problems persist in the days following the Budget.

 

Lifetime planning

50% tax rate to reduce to 45% in April 2013

As widely predicted, the Chancellor confirmed that the 50% rate of tax for taxpayers with income in excess of £150,000 will reduce to 45% from 6 April 2013. There is a corresponding reduction in:

  • The dividend additional rate: from 42.5% to 37.5% (giving an effective tax rate of 30.6% when account is taken of the dividend tax credit).

  • The rates applicable to trusts: from 50% to 45% for the main trust rate and from 42.5% to 37.5% for the dividend trust rate.

The Chancellor reported that HMRC's analysis of how much revenue the 50% rate had actually raised (based on self-assessment tax returns for the first year of its application (2010-11)) revealed only around £1 billion and possibly less had been raised (against an expected yield of £2.5 billion). HMRC's analysis also reveals that there was a "considerable behavioural response" to the rate change, which included around £16 to £18 billion of income being brought forward to the 2009-10 tax year. On the basis of this evidence, it would appear that the behavioural response to the government's advanced announcement of the rate reduction will be that a considerable amount of income will be shifted from 2012-13 to 2013-14. The Office for Budget Responsibility estimates the amount to be in the region of £6.25 billion.

(See Overview, Annex B: Rates and allowances, Income tax rates and Allowances 2012-13 and 2013-14, TIIN, The Exchequer effect of the 50% additional rate of income tax and Office for Budget Responsibility, Box 4.2.)

Personal allowance increase to £9,205 from April 2013

As widely anticipated, the Chancellor announced an acceleration in the implementation of the coalition government's plan to increase the personal allowance to £10,000 over the parliament. The personal allowance for under-65s will increase (by £1,100) in 2013-14 to £9,205. At the same time, the basic rate limit will be reduced (by £2,125, to £32,245), bringing the higher rate threshold to £41,450. Although this increase in the personal allowance will be of some benefit to those higher rate taxpayers who enjoy the personal allowance (that is those with income of up to £118,410 in that year), the benefit will be small, at £15 or less (that is, 20% of £2,200 - £2,125).

(See Overview, Annex B: Rates and allowances, TIIN and Income tax rates and Allowances 2012-13 and 2013-14.)

Changes to allowances for the over 65s

At present, individuals qualify for higher personal allowances when they reach 65, but the additional allowances are withdrawn at the rate of £1 for every £2 of income above the income limit (£25,400 for 2012-13) until the allowance equals that of a person under 65.

With effect from 6 April 2013, individuals born after 6 April 1948 will not qualify for higher personal allowances when they reach 65 and individuals born after 6 April 1938 will not qualify for a higher age-related allowance at 75. Those who do qualify for the age-related allowances in 2012-13 (£10, 500 for those aged 65 to 74 at the end of the tax year and £10,660 for those aged 75 and over) will continue to receive the allowance, frozen at its 2012-13 level, until such time as the personal allowance for under 65s (£9,205 for 2013-14) equals or exceeds that amount.

(See Overview, para 2.2: Income tax personal allowance for 2013-2014 and TIIN.)

Child benefit income tax charge for higher income taxpayers

In response to criticism over the proposed total withdrawal of child benefit, with effect from 7 January 2013, where one spouse or partner in a household has income over the basic rate limit, the Chancellor has proposed an incremental approach. There will be no means-testing in relation to the amount of child benefit paid. Instead, a tax charge, at the rate of 1% of benefit received for every £100 of net income (after pension contributions, charitable contributions and offset of losses) over £50,000 will apply where the individual or the person with whom they are living, receives child benefit. If both partners have net income in excess of £50,000, the charge will apply only to the partner with the higher income. At income levels of £60,000 and above, the entire child benefit will effectively be clawed back. Households may decide instead to elect not to claim the benefit. Such an election can be withdrawn if circumstances change.

Draft legislation will be contained in the Finance Bill 2012 and will operate in relation to all child benefit paid from 7 January 2013 onwards. Solicitors and accountants who advise small companies or trustees will need to ensure that their clients have given proper consideration to the impact of the child benefit charge when considering the timing of bonus or dividend payments or discretionary income distributions.

(See Overview, para 1.12: Child benefit income tax charge and TIIN.)

Income tax rules on interest

The government will consult on changes to the income tax rules on the taxation of interest and interest-like returns, and the rules on deducting tax at source from such interest. There will be further opportunities to contribute to the development of policy following the consultation period. Any legislation will be included in Finance Bill 2013.

(See Budget Report, para 2.71 and Overview, para 2.19: Income tax rules on interest.)

Income tax and NICs reform

The 2012 Budget confirmed that the government will issue a consultation shortly on the various options for integrating the operation of income tax and NICs. This proposal was originally announced in the 2011 Budget and the government seems to be committed to the indicative timetable for reform published in November 2011 (see Legal update, Government plans for integration of income tax and NICs and simpler personal taxation (www.practicallaw.com/6-513-3488)).

(See Overview, para 2.24: Income tax and NICs reform.)

Consultation on increasing inheritance tax exemption for non-domiciled spouses

In early summer 2012, the government will publish a consultation document, with draft legislation, on its plans to increase the amount that a UK domiciled (www.practicallaw.com/8-382-5679) individual can give to his spouse or civil partner free from inheritance tax (www.practicallaw.com/3-382-5648) (IHT). This legislation will form part of Finance Bill 2013.

There is no limit on gifts made by non-domiciled spouses to domiciled spouses. The current lifetime restriction of £55,000 only applies to gifts from domiciled spouses to non-domiciled spouses. There have been no inflation-tracking increases in the £55,000 cap since it was introduced. The restriction creates anomalies and has been criticised as contrary to EU law. For more information on IHT exemptions and reliefs, see Practice note, Inheritance tax: overview: Exemptions available for both lifetime gifts and on death: gift to a spouse or civil partner (www.practicallaw.com/3-383-5652).

The consultation will propose an increase in the spouse exemption which will then track any future increases in the IHT nil rate band (www.practicallaw.com/1-382-5649). The nil rate band has been frozen at £325,000 until April 2015. The consultation will also propose an option for non-domiciled spouses to elect to be treated as deemed domiciled for IHT so that they can benefit from the unlimited spouse exemption that gifts to UK domiciled spouses currently enjoy.

(See Budget Report, para 2.79 and Overview, para 2.18: Inheritance tax: spouses and civil partners domiciled outside the UK).

Life insurance policies: chargeable event gains

The government has announced three measures relating to the chargeable event gain (www.practicallaw.com/3-384-1846) regime, under which there is a charge to income tax on investment gains arising on certain events (such as maturity) in non-qualifying life insurance policies (Chapter 9, Part 4, Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)). While these policies are often arranged through financial advisers, clients may ask their tax adviser about changes to the tax rules.

For information about the current rules, see Practice note, Income tax: calculation of income profits: Gains from contracts for life insurance, life annuities and capital redemption (www.practicallaw.com/5-385-1245) and Robert Maas, Anti-Avoidance Provisions (Bloomsbury Professional, 2011), Chapter 11: Transactions involving Life Assurance.

Income tax avoidance

The Finance Bill 2012 will amend the rules for calculating chargeable event gains to put beyond doubt that:

  • Earlier gains can be deducted only if they are attributable to a person chargeable to tax under the chargeable event gain regime (or under the transfer of assets abroad rules in Chapter 2 of Part 13 of the Income Tax Act 2007).

  • Interdependent policies will be treated as a single policy for the purposes of the regime. This will apply where the value of benefits payable from one policy depends on premiums paid into another policy, not to ordinary cluster policy arrangements under which the individual policies are completely independent of each other.

These changes will apply to policies issued on or after 21 March 2012, and to policies issued earlier if certain events (including payment of further premiums) occur on or after this date. The changes result from disclosed avoidance schemes.

(See Budget Report, para 2.215; Overview, para 1.64: Life insurance: income tax avoidance; TIIN and draft legislation.)

Conditions for qualifying policies

The Finance Bill 2013 will provide that life insurance policies issued on or after 6 April 2013 can be qualifying policies only if premiums paid for an individual into a policy or policies do not exceed £3,600 in a 12-month period. The limit will apply across all policies beneficially owned by the individual. Transitional provisions will apply to qualifying policies issued on or after 21 March 2012 and before 6 April 2013, and to policies issued earlier if the premium paying term is extended on or after 21 March 2012. There will be a formal consultation on these changes.

There is currently no limit on the amount of premiums that may be paid into a qualifying policy under the conditions set out in Schedule 15 to the Income and Corporation Taxes Act 1988 (see Anti-Avoidance Provisions: Chapter 11: Transactions involving Life Assurance: Meaning of a 'qualifying policy'.)

(See Budget Report, para 2.124; Overview, para 2.34: Life insurance: Qualifying Policies; and Technical Note, Life Insurance - Qualifying Policies.)

Time apportionment rules for residence outside the UK

The government will consult on reform to the time apportionment rules in the chargeable event gain regime that reflect a policyholder's period of residence outside the UK (section 528, ITTOIA 2005), with a view to including legislation in the Finance Bill 2013. The consultation will consider extending the rules to policies issued by insurers within the UK and reflecting the residence position of previous owners of a policy.

(See Budget Report, para 2.215; Overview, para 2.35: Life insurance policies; and TIIN.)

Venture capital schemes: changes to maximum investment threshold and minimum investment requirement

The government published revised TIINs in respect of the changes to the enterprise investment scheme (www.practicallaw.com/9-107-6532) (EIS) and the venture capital trust (www.practicallaw.com/0-107-7480) (VCT) scheme (as to which, see Legal update, Reform of venture capital and creation of seed enterprise investment relief: draft Finance Bill 2012 (www.practicallaw.com/1-515-4548)).

The main substantive changes are:

  • The maximum annual amount that can be invested in an individual company is reduced from £10 million to £5 million.

  • The requirement that the investor must subscribe at least £500 has been removed.

It is anticipated that the draft Finance Bill 2012 legislation, to be published on 29 March, will reflect these changes.

(See TIIN: Enterprise Investment Scheme and Venture Capital Trusts: Increases to Thresholds and TIIN: Enterprise Investment Scheme and Venture Capital Trusts: Simplification.)

Seed Enterprise Investment Relief: changes

The government has announced that it will make changes to the draft Finance Bill 2012 legislation to implement the new Seed Enterprise Investment Relief (SEIS). For details about SEIS and the draft legislation published on 6 December 2011, see Legal update, Reform of venture capital and creation of seed enterprise investment relief: draft Finance Bill 2012: Seed enterprise investment scheme relief (www.practicallaw.com/1-515-4548). The changes will:

  • Allow previous (but not current) employees of the issuing company to qualify for relief.

  • Allow the issuing company to qualify if it has subsidiaries.

  • Determine eligibility by reference to the age of any trade rather than to the age of the company. This means that the issuing company's trade must be no more than two years old when the SEIS shares are issued.

  • Remove the requirement to include a proportion of the gross assets and employees of the issuing company's related entities when calculating the issuing company's gross assets and employees.

  • Allow directors who have qualified under SEIS to continue to qualify under EIS, subject to time limits.

No changes will be made (or only small, technical changes will be made) to the draft legislation implementing the capital gains tax exemption for gains realised on disposals of assets by individuals in 2012-13 and invested through SEIS in that year. (For details of that draft legislation, see Legal update, SEIS reinvestment relief from CGT: draft legislation (www.practicallaw.com/2-517-9063).)

HMRC has published guidance on SEIS, which confirms that HMRC will operate an advance assurance procedure from the date the Finance Bill 2012 receives Royal Assent. However, from 6 April 2012, it will provide advice on how the legislation is likely to apply assuming it is enacted as drafted.

(See Overview, paras 1.7: Seed Enterprise Investment Relief (SEIS) and 1.69: Measures unchanged following consultation and guidance.)

New 7% SDLT rate on homes over £2 million

The rate of SDLT (www.practicallaw.com/2-107-7304) will increase (by 2%) to 7% on residential properties where the chargeable consideration (www.practicallaw.com/0-107-5891) is over £2 million. This new rate of SDLT will apply to transactions with effective dates (www.practicallaw.com/3-107-6200) (generally, the date of completion) after 21 March 2012. However, transitional provisions will ensure that, broadly speaking, the old rate will continue to apply in respect of contracts entered into before 22 March 2012 but completed on or after that date. The measure will apply to freehold purchases and leasehold assignments where the consideration exceeds £2 million and to the grant of a lease where the premium exceeds £2 million. Note that a new top rate of 15% will apply to purchases over £2 million by certain "non-natural persons", such as companies (see SDLT: new penal rate for enveloping high value residential property). The 5% SDLT rate will apply to wholly residential transactions where the chargeable consideration is more than £1 million but not more than £2 million.

For more information about SDLT, see Practice note, Tax data: stamp taxes: Stamp duty land tax (SDLT) (www.practicallaw.com/6-385-5907).

(See Overview, para 1.51: Stamp duty land tax (SDLT) rate and TIIN.)

Capital Gains Tax: Single Payment Scheme

The government has announced that it will preserve CGT roll-over relief for farmers and companies carrying on a farming business who dispose of, or acquire entitlements under the Single Payment Scheme (SPS).

The SPS was introduced by Council Regulation (EC) 1782/2003 (Regulation 2003) and replaced most existing crop and livestock payments from 1 January 2005. Under the SPS, farmers are allocated payment entitlements that, subject to conditions, entitle them to receive the Single Farm Payment (SFP). The SPS is not linked with production from land and can be transferred independently from the land from one person to another, for example by sale, lease, gift or inheritance.

Regulation 2003 was repealed on 1 January 2009 and replaced with Council Regulation (EC) 73/2009 (Regulation 2009). SPS entitlements under Regulation 2009 do not qualify for roll-over relief, because the roll-over relief legislation defines SPS entitlements in terms of Regulation 2003. The effect of this is that disposals and acquisitions of entitlements under the current SPS are no longer included under the classes of assets that are eligible for CGT roll-over relief.

The government intends to legislate to ensure that farmers are not disadvantaged by losing their existing right to claim CGT roll-over relief when they dispose of or acquire entitlements to SPS payments.

The revisions will be retrospective and will have effect on or after 1 January 2009.

(See Budget Report, para. 2.77.)

Unlimited tax reliefs to be capped

In a statement that begged more questions than it answered, the Chancellor announced that income tax reliefs, other than those that have a statutory limit (such as pension contributions or investments in Enterprise Investment Schemes) are to be capped for individuals at £50,000 or 25% of income, whichever is the greater. This capping will have effect for 2013-14 and subsequent tax years.

Draft legislation will be published for consultation later in the year and will be included in the Finance Bill 2013. If such a cap on reliefs is not to act as a disincentive to business expansion, it is to be hoped that there will be significant carve-outs, particularly in relation to trading losses.

(See Overview, para 2.3: Cap on unlimited tax reliefs.)

Finance Bill 2012: measures unchanged following consultation

The government announced that the following measures will be introduced in Finance Bill 2012 with no changes made to the drafts following consultation, except for small, technical amendments to the final legislation.

Capital gains tax: annual exempt amount

The capital gains tax (CGT) annual exempt amount (AEA) is to increase in line with the consumer prices index (www.practicallaw.com/3-378-7892) from 2013-14 onwards. The CGT AEA level for 2012-13 is to remain at its 2011-12 level.

For further information, see Legal update, Draft Finance Bill 2012 legislation: key private client measures: Lifetime planning: Capital gains tax: annual exempt amount (www.practicallaw.com/9-515-2668). To follow the progress of this legislation, see Private client tax legislation tracker 2011-12: Lifetime planning: CGT: annual exempt amount (www.practicallaw.com/6-508-1880).

(See Budget Report, para 2.73 and Overview, para 1.69: Measures unchanged following consultation.)

Inheritance tax nil rate band: switch to Consumer Prices Index

The inheritance tax nil rate band (www.practicallaw.com/1-382-5649) (NRB) is to rise in line with the consumer prices index (www.practicallaw.com/3-378-7892) from 6 April 2015, using the increase in the CPI for the year to September 2014. The NRB is to remain frozen at £325,000 up to and including 2014-2015. For further information, see Legal update, Draft Finance Bill 2012 legislation: key private client measures: Lifetime planning: Inheritance tax nil rate band: switch to Consumer Prices Index (www.practicallaw.com/9-515-2668). To follow the progress of the legislation, see Private client tax legislation tracker 2011-12: Lifetime planning: IHT: CPI indexation of nil rate band (www.practicallaw.com/6-508-1880).

(See Budget Report, para 2.82 and Overview, para 1.69: Measures unchanged following consultation.)

Gifts of pre-eminent objects to the nation

Draft legislation, published on 6 December 2011 together with HM Treasury's response to the earlier consultation, to implement a reduction in income tax and capital gains tax for gifts of pre-eminent objects to the nation. To follow this measure see, Draft Finance Bill 2012 legislation: key private client measures: Lifetime planning: Tax reduction for gifts of art to the nation (www.practicallaw.com/9-515-2668) and Private client tax legislation tracker 2011-12 (www.practicallaw.com/6-508-1880).

(see, Budget Report, para 2.87 and Overview: para 1.69: Measures unchanged following consultation).

 

Wills

Inheritance tax: reduced rate for charitable testators

The Finance Bill 2012 will provide for a reduced rate of inheritance tax for testators who leave at least 10% of their net estates (as defined for this purpose) to charity. The reduced rate will apply in relation to deaths on or after 6 April 2012. The government announced that this measure will be introduced in Finance Bill 2012 with no changes made to the drafts following consultation, except for small, technical amendments to the final legislation. For more information and links to precedents, see Private client tax legislation tracker 2011-12: IHT: reduced rate for charitable testators (www.practicallaw.com/6-508-1880) and Practice note, Inheritance tax: leaving 10% of an estate to charity (www.practicallaw.com/7-500-1086).

(See Overview, para 1.69: Measures unchanged following consultation.)

 

International individuals

CGT on disposals of residential property by non-resident non-natural persons

As part of a package of measures aimed at tackling tax avoidance in connection with UK residential property, the government will extend the scope of capital gains tax to cover gains arising on disposals by non-resident non-natural persons of UK residential property and shares or interests in UK residential property. Legislation will be included in Finance Bill 2013, to take effect from April 2013. The government will consult on the detail of the measure alongside its consultation on the annual charge for high value residential properties (see Annual charge for high value residential properties).

The term "non-natural persons" is not defined for this measure, but the Tax Information and Impact Note on the new SDLT rate for enveloping of high value residential properties indicates that, for the purposes of that measure, the term will include companies, collective investment schemes (including unit trusts), and partnerships in which a non-natural person is a partner (see SDLT: new penal rate for enveloping high value residential property).

(See Budget Report, paras 1.195 and 2.75 and Overview, para 2.7: CGT charge on non-resident non-natural persons.)

SDLT: new penal rate for enveloping high value residential property

The government has announced that it will introduce, with immediate effect, an SDLT rate of 15% for UK residential property acquisitions by "non-natural persons" (whether or not acquired together with others) if the consideration is over £2 million. This new rate will apply to transactions with an effective date (www.practicallaw.com/3-107-6200) after 20 March 2012, but transitional rules will disapply the new rate if the sale contract was completed and signed by all parties to the transaction before 21 March 2012. These measures will be included in the Finance Bill 2012.

A "non-natural person" includes companies, collective investment schemes and partnerships in which a non-natural person is a partner. Property developers and corporate trustees "in certain circumstances" will be excluded from the new rate. The definition of residential property in section 116 of the Finance Act 2003 will be modified for this purpose; residential accommodation for school pupils and the armed forces will be specifically excluded.

Although an attack on the use of offshore companies holding UK residential property was widely expected, the ferocity of it will have surprised many. High net worth individuals commonly use companies in structures for holding UK property for capital tax, and non-tax, purposes. Clearly, these sorts of arrangements will need to be reviewed once the detailed rules become available. (See also Annual charge for high value residential properties.)

(See Budget Report, para 2.174, Overview, para 1.52: Stamp duty land tax: enveloping of high value residential property and TIIN.)

Annual charge for high value residential properties

The government has announced that it will consult on introducing an annual charge on residential properties over £2 million owned by certain "non-natural persons". The measures implementing the annual charge, effective from April 2013, will be in Finance Bill 2013.

This has the feel of being a last minute concession to the Liberal Democrat element of the government, who have by all accounts been pushing for a so-called mansion tax. The undeveloped nature of this policy announcement is, perhaps, reflected in its description as an annual charge in the Budget Report and Overview, paragraph 2.56, and an "SDLT enveloping annual charge" in the Overview, paragraph 2.7. It is difficult to imagine how the annual charge can easily be fitted into the SDLT code, which is concerned with taxing acquisitions of chargeable interests.

(See Budget Report, para 2.174 and Overview, paras 2.7: CGT charge on non-resident non-natural persons and 2.56: Enveloping annual charge for high-value residential properties.)

Ordinary residence to be abolished as statutory residence test proceeds

The government has announced that ordinary residence will be abolished for tax purposes with effect from 6 April 2013, the same date that the new statutory residence test will take effect. Both measures will be legislated in Finance Bill 2013, with draft legislation to be published following Budget 2012 for consultation.

The government consulted during summer 2011 on both the statutory residence test and reform of ordinary residence. It now appears that the government has decided to proceed with the first of its two proposed options for reform of ordinary residence, which involved retaining the concept only for overseas workday relief under section 26 of the Income Tax (Earnings and Pensions) Act 2003. (For further information on the consultation, see Legal update, Statutory residence test: consultation document published (www.practicallaw.com/8-506-5153).) A summary of responses to the government's summer 2011 consultation will be published alongside the draft legislation.

For further detail about the proposed statutory residence test and the reforms to ordinary residence, and to follow their progress to implementation, see Private client tax legislation tracker 2011-12: Statutory residence test (www.practicallaw.com/6-508-1880). For information about the current rules, see Practice note, Residence and ordinary residence: definitions for UK tax purposes (www.practicallaw.com/0-385-8051).

(See Budget Report, paras 2.51 and 2.52 and Overview, para 2.4: Statutory residence test and para 2.5: Ordinary residence.)

Statement of Practice 1/09 (SP 1/09)

The government is to consult after Budget 2012 on draft legislation putting SP 1/09 on a statutory footing. The measure will be implemented in Finance Bill 2013 and will be effective from 6 April 2013. The existing SP 1/09 will remain in force for the tax year 2012-13.

SP 1/09 allows certain employees who carry out duties both in the UK and overseas under a single contract of employment to apportion their employment income rather than operate the burdensome mixed funds rules (see Practice note, Residence, ordinary residence and domicile: UK tax implications: Remittances from mixed funds (www.practicallaw.com/3-385-8059)).

The measure was originally due to be included in Finance Bill 2012, but in December 2011 the government announced its postponement until Finance Bill 2013, pointing out that this would allow it to tie the new provisions in with the reforms on residence now due to take effect from April 2013 (see Legal update, Draft Finance Bill 2012 legislation: key private client measures: Taxation of non-UK domiciled individuals (www.practicallaw.com/9-515-2668)).

For more information about the government's reforms to the taxation of non-UK domiciled individuals and to follow future developments, see Private client tax legislation tracker 2011-12: Taxation of non-UK domiciled individuals (www.practicallaw.com/6-508-1880).

(See Budget Report, para 2.53 and Overview, para 2.6: Statement of Practice 1/09 (SP 1/09).)

Transfer of assets abroad and attribution of gains rules

Following Budget 2012, the government will consult on draft legislation amending anti-avoidance rules that deal with the transfer of assets abroad (Chapter 2, Part 13, Income Tax Act 2007) and the attribution of gains realised by non-UK tax resident companies that are closely controlled by UK participators (section 13, Taxation of Chargeable Gains Act 1992). The changes will be implemented in Finance Bill 2013 and will have retrospective effect to 6 April 2012 although, exceptionally, a taxpayer may elect for the new rules to apply from 6 April 2013.

The move was originally announced in December 2011 and is likely to be in response to the European Commission's formal request of 16 February 2011 that the UK amend these rules. In the Commission's view, they discriminate by taxing non-UK investments more heavily than UK investments and are, therefore, incompatible with the fundamental EU rights to freedom of establishment and free movement of capital.

For further background and to follow the progress of this legislation, see Private client tax legislation tracker 2011-12: Transfer of assets abroad and attribution of gains rules (www.practicallaw.com/6-508-1880).

(See Budget Report, para 2.78 and Overview, para 2.17: Transfer of assets abroad and gains on assets held by foreign companies.)

Inheritance tax avoidance using excluded property trusts

The government has published draft anti-avoidance legislation targeting inheritance tax (IHT) avoidance schemes that enable UK domiciled individuals to reduce their IHT estates by acquiring interests in excluded property trusts. The new rules will be included in Finance Bill 2012 and will take effect from 21 March 2012.

Broadly, an excluded property trust is a trust created by a settlor who was neither domiciled nor deemed domiciled in the UK when he transferred assets to it, and which holds only non-UK assets. (For further information, see Practice note, Inheritance tax: overview: Excluded property (www.practicallaw.com/3-383-5652).)

For schemes entered into on or after 21 March 2012, any reduction in the UK domiciled individual's IHT estate will be charged to IHT as if the individual had made a transfer of an equivalent value to a relevant property trust (www.practicallaw.com/0-382-6277). In addition, the settled property in which the individual acquired an interest will cease to qualify as excluded property and will become subject to the relevant property regime (www.practicallaw.com/2-382-6276).

For schemes entered into before 21 March 2012, the settled property will cease to qualify as excluded property from 21 March 2012 and will become subject to the relevant property regime.

(See Budget Report, para 2.216, Overview, para 1.60: Inheritance tax: offshore trusts and Draft legislation with TIIN.)

Taxation of non-UK domiciled individuals

Legislation to be introduced in the Finance Bill 2012, and to take effect from 6 April 2012, will increase from £30,000 to £50,000 the remittance basis charge for individuals who have been resident in the UK in 12 or more of the last 14 tax years, exempt from tax overseas income and gains remitted for the purpose of making a commercial investment in a qualifying business, and simplify the remittance basis rules relating to nominated income and the taxation of assets remitted to and sold in the UK.

For more information about the reforms to the taxation of non-UK domiciled individuals and to follow these measures towards implementation, see Private client tax legislation tracker 2011-12: Taxation of non-UK domiciled individuals (www.practicallaw.com/6-508-1880). For information about the current rules, see Practice note, Residence, ordinary residence and domicile: UK tax implications: Remittance basis of taxation (www.practicallaw.com/3-385-8059).

(See Budget Report, para 2.50 and Overview, para 1.11: Reform of the taxation of non-domiciled individuals.)

Implementation of UK/Switzerland tax co-operation agreement

The draft Finance Bill 2012 provisions to implement the tax co-operation agreement signed by the UK and Switzerland on 6 October 2011 will be amended to reflect the Protocol to the agreement signed on 20 March 2012. Changes include:

  • A new mechanism for deducting tax on savings income that is subject to a retention under the 2004 agreement between the EU and Switzerland on the taxation of savings income (providing for measures equivalent to those in the EU Savings Directive (Council Directive 2003/48/EC)). A separate "tax finality payment" will be made which, together with the retention, will result in a deduction equivalent to the single withholding rate under the UK/Swiss agreement. It was originally intended that any retention under the EU/Switzerland agreement would have been credited against the withholding tax under the UK/Swiss agreement.

  • A levy on the assets of individuals who die on or after 1 January 2013 (when the UK/Swiss agreement is expected to come into force).

We will report separately on the contents of the Protocol, much of which appears to result from the European Commission's insistence that member states should not sign agreements that overlap with the EU/Swiss agreement. To follow developments, see Private client tax legislation tracker 2011-12: UK/Switzerland tax co-operation agreement (www.practicallaw.com/6-508-1880) and Practice note, UK/Switzerland tax co-operation agreement (www.practicallaw.com/1-509-7850).

(See Budget Report, para 2.220; Overview, para 1.67: UK/Switzerland Agreement and TIIN.)

Finance Bill 2012: measures unchanged following consultation

The government announced that the following measures will be introduced in Finance Bill 2012 with no changes made to the drafts following consultation, except for small, technical amendments to the final legislation.

Capital gains tax: foreign currency bank accounts

Exemption for individuals (both UK domiciled and non-UK domiciled), trustees and personal representatives from capital gains tax arising on withdrawals of money from foreign currency bank accounts. For further information on the draft legislation, see Legal update, Draft Finance Bill 2012 legislation: key private client measures: International individuals: Capital gains tax: foreign currency bank accounts (www.practicallaw.com/9-515-2668). To follow the progress of this legislation, see Private client tax legislation tracker 2011-12: International individuals, Capital gains tax: foreign currency bank accounts (www.practicallaw.com/6-508-1880).

(See Budget Report, para 2.74 and Overview, para 1.69: Measures unchanged following consultation.)

 

Charities

Cap on unlimited tax reliefs: impact on major donations to charities

The government plans to introduce a limit on all uncapped income tax reliefs, see Unlimited tax reliefs to be capped.

The charity sector has expressed serious concern about the impact that these plans may have on major donations to charities. The government has recognised this issue and undertaken to "explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations" (see Budget Report, para 1.193).

VAT: charitable buildings withdrawn from energy-saving reduced rate

Measures will be introduced in Finance Bill 2013 to withdraw charitable buildings (these are buildings used by charities for non-business purposes and/or village halls) from the scope of the reduced rate of VAT for the supply and installation of energy-saving materials. The reduced rate will continue to apply to residential accommodation, including residential accommodation operated by charities.

The government has not explained why it considers it necessary to exclude charitable buildings from this VAT reduced rate.

(See Budget Report, para 2.187 and Overview, para 2.47: VAT: reduced rate for energy-saving materials in charitable buildings.)

VAT: removal of zero-rating of approved alterations to listed buildings will impact on charities

As part of measures to address anomalies in VAT treatment, the current zero-rating (www.practicallaw.com/2-107-7530) of approved alterations to listed buildings will be removed. This zero-rating currently applies to buildings used by a charity for non-business purposes, and to residential buildings such as nursing homes or student accommodation. It is proposed that the measure will take effect on supplies made on or after 1 October 2012 (subject to transitional arrangements to protect contracts entered into before 21 March 2012).

Charities affected by these measures will no longer be able to reclaim the additional VAT incurred. Charity Tax Group has estimated that this could cost the sector £63 million a year.

(See Budget Report, para 1.201, Overview, para 1.47: VAT: correcting anomalies and closing loopholes, and TIIN.)

Small Gift Aid scheme: maximum donation amount doubled

The 2011 Budget announced that a new scheme will be introduced from April 2013 enabling charities (and CASCs) to apply for a "Gift Aid style" repayment (capped at £5,000 a year) on small donations without obtaining Gift Aid declarations for such donations (see 2011 Budget: key private client tax announcements: Gift Aid: records for small donations (www.practicallaw.com/1-505-3530)). The 2012 Budget announced that the maximum donation amount that will qualify for the new scheme will be doubled from £10 to £20.

(See Budget Report, para 2.88: Gift Aid Small Donations Scheme.)

Community Amateur Sports Clubs (CASCs): registration and Gift Aid

Finance Bill 2012 will amend the CASC and Gift Aid legislation to ensure that it operates as originally intended. In particular, the payment of Gift Aid to CASCs will be put on a statutory basis and the constitution requirement in section 658(1) of Corporation Tax Act 2010 will be corrected so that CASCs will not have to amend their constitutions to remain registered.

HMRC has been registering CASCs and allowing Gift Aid repayments on a concessionary basis. The measure will have retrospective effect from 1 April 2010 for Gift Aid and 6 April 2010 for Gift Aid claims.

(See Budget Report, para 2.83, Overview, para 1.17: Community Amateur Sports Clubs: Registration and Gift Aid and TIIN.)

Gift Aid: corrected measures for in-year repayments to charitable companies and CASCs

Finance Bill 2012 will correct the current legislation allowing charitable companies and CASCs to make claims to repayment of Gift Aid outside a tax return (that is, "in-year") to ensure that it works as originally intended (paragraph 9 of Schedule 18 to Finance Act 1998 as amended by Finance Act 2010). The revised measure will apply for claims made on or after 6 April 2012.

(See Budget Report, para 2.86, Overview, para 1.18: Gift Aid for Charitable Companies and Community Amateur Sports Clubs and TIIN.)

Charity shops: simplification of Gift Aid administration

The government will work with the charity sector to simplify the administration of Gift Aid in the context of charity shops.

(See Budget Report, para 2.84: Charity Shop Donations.)

Social investment

HM Treasury will conduct an internal review into the financial barriers to social enterprise.

(See Budget Report, para 2.49: Social investment.)

Review of regulation of volunteer events

The government will launch sector-based reviews of regulation to ensure it is enforced at the lowest possible cost to business, the first of these will include a review of volunteer events.

(See Budget Report, para 2.240: Regulatory enforcement.)

Finance Bill 2012: measures unchanged following consultation

The government announced that the following measures will be introduced in Finance Bill 2012 with no changes made to the drafts following consultation, except for small, technical amendments to the final legislation.

(See Budget Report, paras 2.85 and 2.191, and Overview, para 1.69: Measures unchanged following consultation.)

VAT: EU cost sharing exemption

See Draft Finance Bill 2012 legislation: key private client measures: VAT: EU cost sharing exemption (www.practicallaw.com/9-515-2668).

In-year repayments of income tax to charities

See Draft Finance Bill 2012 legislation: key private client measures: In-year repayments of income tax to charities (www.practicallaw.com/9-515-2668).

Withdrawal of Self Assessment Donate scheme

See Draft Finance Bill 2012 legislation: key private client measures: Withdrawal of Self Assessment Donate scheme (www.practicallaw.com/9-515-2668).

 

Trusts

Corporate settlor-interested trusts

Measures are to be introduced, with effect from 21 March 2012, to prevent corporate settlors (www.practicallaw.com/7-107-7245) from using the settlor-interested trust income tax rules to avoid tax.

Settlors of trusts in which they retain an interest either because they or their spouse can benefit, or where their minor unmarried children receive trust income, are taxable on all trust income. Until 21 March 2011, these rules applied to all settlors whether they were individuals or companies. For more information on the income tax rules for settlor-interested trusts see, Practice note, Taxation of UK trusts: overview: income tax: how settlor-interested trusts are taxed (www.practicallaw.com/0-383-6634).

HMRC had become aware of tax avoidance schemes that exploited the attribution of income to settlors of settlor-interested trusts. The scheme used corporate settlors of interest in possession (www.practicallaw.com/1-382-5654) trusts to avoid higher and additional rates of income tax that would otherwise be due on dividends paid by a subsidiary of the corporate settlor. The measure announced in the Budget works by adding corporate settlors to the list of exceptions set out in section 627 of the Income Tax (Trading and Other Income) Act 2005.

Many commentators have criticised the settlor-interested trust rules as being circular, obscure and complicated to operate. It is a shame the opportunity was not taken to abolish the rules altogether or, at least, simplify them.

(See Budget Report, para 2.217 and Overview, para 1.61: Tax Avoidance: Corporate Settlor-interested Trusts.)

Simplifying inheritance tax charges for relevant property trusts

The government will publish a consultation document in early summer 2012, on its plans to simplify the way inheritance tax (IHT) is calculated for ten-yearly and exit charges in relevant property trusts (www.practicallaw.com/0-382-6277).

IHT is charged on transfers into and out of relevant property trusts and on every ten-year anniversary. The rate of tax varies from 20% for transfers into trust to up to 6% for the exit and ten-yearly charge. The way in which the tax rates are calculated is designed to produce the same amount of tax that would be produced if the assets remained in personal ownership and were transferred once a generation. For more information on IHT charges in relevant property trusts, see Practice note, Inheritance tax: overview: inheritance tax and trusts: relevant property trusts (www.practicallaw.com/3-383-5652).

The calculation of exit and ten-yearly charges has been identified as an area where simplification is long overdue. HMRC plan to discuss what might be included in the consultation with interested professional bodies. The aim will be to simplify the calculations in a revenue-neutral way.

The Office of Tax Simplification has identified that IHT needs root and branch reform. It is surprising that this consultation seems to involve examination of only one area when what is needed is a more fundamental consideration of what the tax is designed to achieve.

(See Budget Report, para 2.80 and Overview, para 2.21: Inheritance tax: periodic charges on trusts.)

Welfare reform and disabled persons' trusts

The government will publish a consultation document in the next few months to explore the impact of the abolition of Disability Living Allowance (DLA) on one of the criteria for inheritance tax-favoured status for disabled persons' trusts.

If a trust is established for the benefit of a disabled person (www.practicallaw.com/8-382-5622) for the purposes of section 89(4) of the Inheritance Tax Act 1984 it will not be regarded as a relevant property trust (www.practicallaw.com/0-382-6277) and will not suffer inheritance tax (IHT) on transfers into and out of the trust or at every ten-year anniversary. One of the eligibility tests for disabled trust status is that the beneficiary of the trust receives DLA at the highest or middle rate. This is assessed when property is first added to the trust. For more information on the tax treatment of disabled persons' trusts, see Practice note, Taxation of UK trusts: overview: how IHT applies to trusts: Disabled persons' interests (www.practicallaw.com/0-383-6634).

One of the changes brought about by the Welfare Reform Act 2012 is that DLA will be replaced by the Personal Independence Payment (PIP) from 2013-14. The threshold for eligibility for PIP is higher than for DLA. This may mean that beneficiaries who would previously have had a qualifying interest in a disabled trust for IHT will no longer be eligible. Existing disabled trusts are "grandfathered" because eligibility is assessed when property is first added to the trust. Property added from 2013 may not qualify for preferential IHT treatment.

Consultation on a new definition of a disabled person for IHT is welcome. It is a shame that interested parties were not consulted, and that this issue was not debated in more detail, during the passage of the Welfare Reform Bill through Parliament.

(see, Budget Report, para 2.231 and Overview, para 2.23: Personal Independence Payment (PIP): tax reliefs).

Heritage maintenance funds and held-over gains

Provisions in the Finance Bill 2013 that will be effective from April 2012 will ease restrictions on holdover relief for capital gains tax (CGT) in heritage maintenance funds (HMFs) when they re-settle assets.

HMFs are trusts set up to hold land and buildings together with funds for their maintenance that are considered to be of pre-eminent quality and that ought to be preserved for the benefit of the nation. They are exempt from inheritance tax (IHT) but subject to income tax and CGT at trust rates. For more information on HMFs, see Practice note, Inheritance tax: overview: exemptions available for both lifetime gifts and on death: Gifts to heritage maintenance funds (www.practicallaw.com/3-383-5652). The growth in HMFs has been virtually static for many years and the tax incentives associated with them are regarded as too restricted. A particular problem is that, to maintain their favoured IHT treatment, HMFs often distribute assets to another HMF. Hold-over relief for CGT is restricted on these re-settlements and the Finance Bill 2013 measure will ease the holdover restriction in these circumstances. Interested parties will be consulted informally on the measure.

The under-use of HMFs has been lamented by bodies such as the Historic Houses Association for many years. This measure may go some way to promoting them as a non-charitable, tax-favoured vehicle for maintaining historically important land and buildings for the public.

(See, Budget Report, para 2.76 and Overview, para 2.20: Heritage maintenance funds (HMF)).

 

Owner-managed businesses

Corporation tax rates further reduced from 2012-13

Finance Bill 2012 will contain legislation reducing the main rate of corporation tax (CT) to 24% for the financial year commencing 1 April 2012 and to 23% for the financial year commencing 1 April 2013. Legislation in Finance Bill 2013 will reduce the CT main rate to 22% from April 2014. The main rate applies to companies and groups whose annual profits exceed £1.5 million. These changes represent an additional 1% reduction on top of the annual reductions announced in the 2011 Budget (see Legal update, 2011 Budget: key business tax announcements: Corporation tax rates further reduced from 2011-12 (www.practicallaw.com/6-505-3575)).

The CT rate for companies with ring-fenced profits from oil extraction in the UK and UK continental shelf will remain at 30% for the financial years commencing 1 April 2012 and 1 April 2013. Finance Bill 2012 will keep the small companies rate of CT (which applies to companies and groups whose annual profits do not exceed £300,000) at 20% for the financial year commencing 1 April 2012. However, for the year commencing 1 April 2013, the small companies rate of CT has yet to be confirmed.

(See Overview, para 1.19: Corporation tax rates, Overview, Annex B (Rates and Allowances) and TIIN.)

Simplifying tax for small businesses

Following the recommendations of the Office for Tax Simplification, the Chancellor announced that, with effect from April 2013, small businesses (those with a turnover of less than £77,000, the VAT registration threshold) will be able to opt for a simplified cash basis for calculating their taxable profit. This will replace the obligation to account on an accruals basis and value stock and work-in-progress.

The proposals, which will include the use of standard deductions for mileage, an alternative to capital allowances and a reduction in record-keeping requirements, will be put out for consultation shortly. There will also be a consultation on whether there is a demand for some kind of disincorporation relief and the form that it should take.

(See Overview, para 2.32: Tax simplification for small businesses and HMRC: Making tax easier, quicker and simpler for small business.)

 

HMRC and tax policy

General anti-abuse rule

The government has announced that it will consult on the introduction of a general anti-abuse rule (GAAR) in summer 2012, with a view to introducing legislation in the Finance Bill 2013.

The government first announced that it would consider introducing a legislative general anti-avoidance rule in the June 2010 Budget. A study group led by Graham Aaronson QC was duly established, and the group published its final report in November 2011. It recommended the introduction of a targeted GAAR and included illustrative draft legislation and guidance. For further detail, see Legal update, Aaronson recommends targeted GAAR (detailed update) (www.practicallaw.com/9-511-2130)).

The government has confirmed that it accepts the recommendations of the Aaronson report, and that it will consult on:

  • New draft legislation, to be based on the recommendations of the Aaronson Report.

  • Establishment of the Advisory Panel

  • The development of full explanatory guidance.

The government has also announced that it will extend the GAAR to stamp duty land tax (SDLT).

Note that "GAAR" was initially an acronym for "general anti-avoidance rule". It is now apparently an acronym for "general anti-abuse rule". Presumably this is intended to demonstrate an intention that the rule should only catch abusive transactions, rather than legitimate tax planning.

(See Overview, para 2.58: General anti-abuse rule (GAAR).)

Disclosure of tax avoidance schemes (DOTAS)

The government has confirmed that it will consult formally on extending the disclosure of tax avoidance schemes (DOTAS) "hallmarks" (the descriptions of schemes required to be disclosed for income tax, capital gains tax and corporation tax). The formal consultation will take place over the summer, with the intention of publishing draft regulations later in the year.

HMRC launched an informal consultation in June 2011, which considered possible changes for employment income schemes disclosures, offshore tax planning arrangements relying on a lack of complete tax transparency in certain overseas jurisdictions and loss schemes aimed at individuals. For further detail, see Legal update, Informal HMRC consultation on DOTAS hallmarks (www.practicallaw.com/9-507-1144) and Practice note, Disclosure of tax avoidance schemes under DOTAS: direct tax: Future reform of the DOTAS regime (www.practicallaw.com/1-107-4933).

(See Overview, para 1.66: Disclosure of tax avoidance schemes (DOTAS).)

FATCA: information powers

On 8 February 2012, HM Treasury published a joint statement setting out an agreed approach to implementation of the Foreign Account Tax Compliance Act (FATCA), which aims to combat cross-border tax evasion. The statement was issued jointly with the governments of France, Germany, Italy, Spain and the United States (see Legal update, HM Treasury joint statement on intergovernmental approach to FATCA implementation (www.practicallaw.com/5-517-9467)). The government has announced that HMRC will consult with affected financial institutions about how to facilitate exchange of information between those institutions and the US Internal Revenue Service, with a view to introducing legislation in the Finance Bill 2013.

(See Overview, para 2.65: Information powers.)

Tax agents: dishonest conduct

The government announced that it will amend the draft Finance Bill 2012 legislation that will empower HMRC to publish the name and details of a tax agent that is liable to a penalty of £5,000 or more for dishonest conduct. The information that may be published includes the details of any third party organisation for which the tax agent works (or worked) if HMRC feels that this information is needed to clarify the tax agent's identity. The amendment will give the third party organisation the right to make representations (presumably to HMRC). No further details are provided and therefore it is not apparent whether the right to make representations will encompass a right to make a statement alongside the publication of its details. (For background, see Legal update, Tax agents: revised draft legislation on deliberate wrongdoing and responses to consultation (www.practicallaw.com/6-506-8968).)

(See Overview, para 1.68: Tax agents: dishonest conduct.)

Simplification of regulatory penalties

The government has confirmed that it will not be simplifying regulatory penalties as the cost would outweigh the benefits. It will, however, introduce a new power in the Finance Bill 2013 for inflationary increases in the value of fixed regulatory penalties and will repeal a small number of defunct penalties. (For background, see Legal update, Simplification of regulatory penalties: consultation paper (www.practicallaw.com/2-506-5641).)

(See Overview, para 2.62: Simplification of regulatory penalties.)

Criminal investigations

Legislation will be introduced in the Finance Bill 2013 to bring HMRC's direct tax criminal investigation powers into line with its indirect tax powers. These powers will enable HMRC to seize suspected criminal cash under the Proceeds of Crime Act 2002 and to exercise search and seizure warrants under that Act.

(See Overview, para 2.66: Criminal investigations.)

Power to withdraw notice to file a self-assessment return

HMRC will consult later this year on a new power to be included in the Finance Bill 2013, which will enable HMRC to withdraw a notice to file a self-assessment tax return.

(See Overview, para 2.63: Withdrawing a notice to file a self-assessment return.)

OTS review of reliefs

The Finance Bill 2012 will repeal (wholly or partly) various reliefs recommended for repeal by the Office of Tax Simplification, including the following:

  • Mineral royalties.

  • SDLT: disadvantaged areas relief.

  • Grants for giving up agricultural land.

  • Luncheon vouchers.

  • Certain payments arising from a reduction in pool betting duty.

  • Stamp duty: relief on certain transactions in shares.

  • Tax reserve certificates issued by HM Treasury.

  • Capital allowances: flat conversion allowances.

  • Stamp duty: relief for certain transactions in land.

  • Deeply discounted securities: incidental expenses.

  • Life assurance premium relief.

  • Life assurance premiums paid by employers under an employee financed retirement benefit scheme.

On 6 December 2011, HM Treasury published its response document to the consultation on the abolition of 36 tax reliefs (see Legal update, Consultation on abolition of tax reliefs (www.practicallaw.com/2-506-3034)) as well as draft legislation and some TIINs (see Legal update, Abolition of tax reliefs: draft Finance Bill 2012 legislation and response document (www.practicallaw.com/5-517-1273)). The Finance Bill 2012 provisions will make either no changes to the draft legislation or small, technical amendments.

(See Overview, para 1.69: Measures unchanged following consultation.)

Finance Bill 2012: measures unchanged following consultation

The government announced that the following measures will be introduced in Finance Bill 2012 with no changes made to the drafts following consultation, except for small, technical amendments to the final legislation.

Stamp duty land tax: disclosure of tax avoidance schemes

Draft legislation amending the disclosure of tax avoidance schemes (DOTAS) rules applicable to stamp duty land tax (SDLT).

The legislation, which permits the removal of the grandfathering rules for certain avoidance schemes using the sub-sale rules, and removes the thresholds for making a disclosure, was first published on 6 December 2011 (see Legal update, Draft Finance Bill 2012 legislation: key business tax measures: SDLT: disclosure of tax avoidance schemes (www.practicallaw.com/6-515-2146)). For background, see Practice note, SDLT disclosure regime (www.practicallaw.com/6-201-2437).

(See Overview, para 1.69: Measures unchanged following consultation.)

Obtaining information from third parties

The government has announced that no (or only small, technical) changes will be made to the draft Finance Bill 2012 legislation published on 6 December 2011 to implement a new power for HMRC to obtain information from third parties. (For background, see Legal update, Obtaining information from third parties: revised draft legislation (www.practicallaw.com/9-516-9310).)

(See Overview, para 1.69: Measures unchanged following consultation.)

 

Links to other announcements

 
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