Private Client Tax Analysis
In delivering last year's Autumn Statement the Chancellor told us that while Britain's economic plan was working, there was more to do and difficult decisions still to be made to restore stability in the current fiscal crisis. As that message was repeated several times in the run up to today's Budget, most commentators felt that, despite the General Election in 2015, significant tax cuts, other than the personal allowance increase for individuals announced last December, were unlikely. In the main, that proved to be the case although Mr Osborne's announcement of a further increase in the personal allowance from April 2015, and a significant increase in the permitted level of savings in Individual Savings Accounts, will be very welcome.
We were aware from last year's Autumn Statement that from April 2014 the income tax personal allowance would be increased to £10,000. This means that a typical basic rate taxpayer will pay £705 less income tax per year compared with 2010-11. The rumours that Mr Osborne might further increase the allowance to £10,500 ahead of next year's election proved to be correct. This measure, aligned with married couples and civil partners being able to transfer £1,050 of their income tax personal allowance to their spouse/civil partner from April 2015 (although only where neither is a higher rate taxpayer), will put the potential annual tax saving for a married or civil partnership couple close to £2,000. On the other hand, actual, or effective, reductions in the basic income tax rate band have brought significantly more middle-income taxpayers into the 40% bracket. While the threshold for 2014-15 had already been increased to £41,865 the Chancellor responded (somewhat meekly, some may say) to calls to reduce the number of higher rate taxpayers, by announcing a further 1% increase in the threshold from April 2015.
In regard to tax on pensions, we already knew about the reduction in the annual contribution allowance from £50,000 to £40,000 and the reduction in the lifetime allowance to £1.25 million, both from 6th April this year. Many pension savers have been able to plan ahead of these changes and the introduction of individual protection 2014 (IP14), which will allow individuals to lock into a lifetime allowance equal to the value of their pension savings at 5th April 2014 subject to an overall maximum of £1.5 million, was well received. However, those pension savers who have exhausted their tax relieved contributions to their pension funds are likely to welcome the changes announced to the savings limits within Individual Savings Accounts (ISAs).
Between 6th April 2014 and 1st July 2014 the amounts that can be saved in a cash ISA and a stocks and shares ISA will be £5,940 and £11,880 respectively. However, from 1st July this year the overall ISA savings limit for 2014-15 will be £15,000 (an increase of £3,480 on the current tax year limit). Savings within this new annual limit can be in either an all cash ISA, an all stocks and shares ISA or a combination of amounts between a cash ISA and stocks and shares ISA. Also from 1st July it will also be possible to transfer any money held in a stocks and shares ISA into a cash ISA.
In a surprising move, the Chancellor outlined plans to radically change the way in which people in retirement can access their pension savings. From April 2015, individuals aged 55 and over with defined contribution pension funds of any size will be able to take their pension fund in any way they chose subject to their marginal rate of income tax in that year. This offers far greater flexibility for pensioners although those who prefer the security of an annuity will continue to have that option available to them. Free impartial advice on the range of options available will be made available to anyone with a defined contribution pension.
In the meantime, with effect from 27th March 2014, the following changes will provide greater flexibility to pension savers:
- For those with modest total pension savings, the amount of overall pension wealth that may be taken as a lump sum will increase from £18,000 to £30,000.
- The maximum amount that can be taken each year under a capped drawdown arrangement will be increased from 120% to 150% of an equivalent annuity.
- The amount of guaranteed income needed in retirement to access flexible drawdown will reduce from £20,000 to £12,000 per annum.
The 2013 Autumn Statement also included notice of two significant changes to capital gains tax (CGT) on residential property gains. Firstly, the proposal that from April 2015 non-residents are to be brought within the scope of CGT when disposing of residential property located in the UK. This had largely been expected and follows previously introduced measures to bring non-resident companies within the scope of the tax in respect of gains on UK residential property sold for more than £2m. Secondly, and unexpectedly, it was announced that the CGT private residence relief final period exemption would be reduced from 36 months to 18 months. While this apparently is a move to reduce the incentive for those with multiple homes to exploit the rules, there is concern that vendors selling in areas where the housing market remains flat may be adversely affected.
The pre-announced cut in corporation tax – down from 23% to 21% from April this year and scheduled to be cut again to 20% from April 2015 – is a boost for companies although many had hoped the timing of the 20% rate might be brought forward by a year.
Many business sectors have been lobbying for improved tax relief on capital investment needed to stimulate growth. The Chancellor responded positively to this by not only extending the Annual Investment Allowance until 2015 but by also increasing the allowance to £500,000. This will mean that businesses will benefit from 100% up front tax relief on up to £500,000 of annual qualifying investment in plant and machinery from April 2014 until the end of 2015. This is extremely good news for businesses and the economy generally as increased business investment should lead to improved productivity and longer term economic growth.
Additionally, from April this year further support is to be given to innovative start-up companies by raising the rate of research and development (R&D) tax credit from 11% to 14.5% for loss making small and medium sized companies.
Personal tax avoidance and evasion
Tax avoidance remains high on the Government's agenda. Having announced in Budget 2013 the introduction of a new information disclosure and penalty regime for the promoters of tax avoidance schemes, the Government said in the 2013 Autumn Statement that it would introduce a new requirement for taxpayers using avoidance schemes to pay disputed tax up front where the scheme concerned had been defeated in another party's litigation through the Courts. Following consultation on the matter, it is announced today that the Government intends to extend the requirement to pay upfront any disputed tax either associated with schemes falling within the"Disclosure Of Tax Avoidance Scheme" (DOTAS) rules or counteracted under the"General Anti-Abuse Rule" (GARR). This will remove the cash flow advantage for taxpayers holding on to disputed tax during an avoidance dispute with HMRC.
The 2013 Autumn Statement also made us aware of the Government's concern about perceived avoidance in several other areas and the steps being taken to address them. In summary, these are:
- Concerns about the number of high-earning, non-domiciled individuals avoiding UK tax through split contract arrangements where there is an"artificial" division of their employment duties between the UK and overseas. From April 2014, UK tax will be assessed on the full employment income where a comparable level of foreign tax is not payable on earnings under the overseas contract. Although the number of individuals likely to be affected by this will be relatively small, it is further evidence of the Government's desire to keep tax benefits for non-domiciled individuals in check.
- In a move relating to employment income, legislation is to be introduced to prevent employment intermediaries being used to avoid employment taxes by disguising employment as self employment. This is aimed at preventing National Insurance Contributions (NICs) avoidance and existing legislation is to be strengthened to ensure that from April 2014 the correct amount of tax and NICs are paid where the worker is, in effect, employed. Similar measures are to be introduced this year to counter the use of Limited Liability Partnerships to disguise employment relationships to reduce employer NIC costs. Such partnerships are also regarded as potential tax avoidance vehicles where used to funnel profits to corporate partners paying lower rates of tax.
- As announced on 25th October 2013, legislation, effective from that date, was introduced to prevent abuse of the rules relating to"compensating adjustments" in the transfer pricing code. This seeks to counter individuals receiving tax free income as a consequence of contrived arrangements.
In summary, the clear underlying message from today's Budget is that the Government remains committed to rebuilding a resilient economy by keeping public expenditure tightly under control while providing much needed support to business, creating jobs and maintaining a taxation system that is fair to all.
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