While the Chancellor spoke at length about the ways in which his economic recovery plan is working, with repeated references to the improved forecasts from the Office for Budget Responsibility (OBR), he also made it clear that the Government continued to face difficult decisions to ensure public finances are on a sustainable path. In the context of taxation, his message was that everyone is expected to pay their fair share and that tackling tax avoidance remained high on his agenda.
While the anti-avoidance measures focus largely on corporate transactions – in particular, the technique of diverting profits away from the UK tax net through complex international structures – individual taxpayers are also in the spotlight. There are three main proposals:
- Firstly, the Government wants to prevent entrepreneurs from claiming the 10% capital gains Entrepreneur's Relief (ER) rate on disposals of business goodwill when they transfer their business to a related close company. This will affect transfers with immediate effect.
- Secondly, legislation will be introduced to counter the avoidance of income tax involving losses from miscellaneous transactions. Loss relief on these transactions will be denied where the loss arises from tax avoidance arrangements and will have effect from 3rd December 2014. Legislation will also be introduced with effect from tax year 2015-16 to limit relief to miscellaneous income of the same type as the loss.
- Thirdly, legislation will be in place from April 2016 to enhance civil penalties for offshore tax evasion. This will amend the existing offshore penalties regime to include inheritance tax (IHT) and domestic offences where the proceeds are hidden offshore, and include a new"aggravated penalty" of up to a further 50% for moving hidden funds to circumvent international tax transparency agreements.
However, there was some good news for entrepreneurs and other individual tax payers. Capital gains that are eligible for ER (referred to above), but which are instead deferred into investments which qualify for the Enterprise Investment Scheme (EIS) or Social Investment Tax Relief (SITR), will now remain eligible for ER when the gain is realised. This is a welcome change to the existing rules and will apply to qualifying gains on disposals that would be eligible for ER but are deferred into EIS or SITR on or after 3rd December 2014.
Continuing his theme of rewarding those who work hard and save, the Chancellor announced that the personal income tax allowance is to be increased from £10,000 to £10,600 from April 2015. Higher rate taxpayers will enjoy the full benefit of this increase. As the higher rate threshold above which income tax rate is charged at 40% will be set at £31,785, higher rate tax will effectively apply to taxable income above £42,385. The introduction of these measures is said to be a further step towards the Government's goal of a £12,500 personal allowance and £50,000 basic tax rate threshold by the end of the decade.
Those who save through an Individual Savings Account (ISA) will benefit from an increase in the annual savings limit (up £240 to £15,240 from April next year). In addition, the Government will introduce legislation to allow an additional ISA allowance for spouses or civil partners when an ISA saver dies, equal to the value of the deceased spouse's ISA.
As widely expected there is also good news for house purchasers as Stamp Duty Land Tax (SDLT) is being reformed, with effect from 4th December, in respect of residential property purchases. The revised SDLT rules will mean the tax will be payable at varying rates on the portion of the purchase price falling within each of five bands. This contrasts with the current system of taxing the whole of the purchase price at a single rate. Under the reform, the portion of the transaction value up to £125,000 is charged at a rate of 0%, the portion of the transaction value between £125,001 and £250,000 is charged at a rate of 2%, the portion between £250,001 and £925,000 is charged at a rate of 5%, the portion between £925,001 and £1,500,000 is charged at a rate of 10% and the portion over £1,500,001 is charged at a rate of 12%.
While the SDLT reform is of limited attraction for house purchases in Scotland which will be subject to the Scottish"Land and Buildings Transaction Tax" (LBTT) from April 2015, accelerating the purchase of a Scottish residential property to take advantage of the new SDLT rates, before the introduction of LBTT, could be attractive. Depending on the purchase price of the property, SDLT could be significantly cheaper than LBTT and prospective purchasers should take advice on the matter.
The tax net is however widening on individuals not domiciled in the UK. The annual remittance basis charge (RBC) paid by non-domiciled individuals resident in the UK who wish to retain access to the remittance basis of taxation will be increased. The charge paid by people who have been UK resident for seven out of the last nine years will remain at £30,000. The charge paid by people who have been UK resident for 12 out of the last 14 years will increase from £50,000 to £60,000. A new charge of £90,000 will be introduced for people who have been UK resident for 17 of the last 20 years. The Government will also consult on making the election apply for a minimum of three years. If legislated, this will significantly reduce the flexibility for planning the timing of foreign income to minimise the impact of the RBC.