Budget 2010 Summary Report
Fri 26th Mar 2010
Introduction
Chancellor Alistair Darling’s pre-Election Budget lasted just under an hour and much of that time was spent emphasising the economic ‘positives’ of lower than expected (if still very high) Government borrowing requirements and lower unemployment benefit payments. Both he and Mr Cameron seemed keen to emphasise the differences between now and 1997 although with a slightly different emphasis.
As ever, the speech was light on detail but the press releases and associated notes more than made up for that deficiency.
The winners in this Budget would seem to be entrepreneurs (Entrepreneur’s relief was doubled) and anyone funding income through use of capital gains (no change to the CGT rates). Cider drinkers will, however, be slightly upset as will some Belize domiciled individuals and anyone buying a £1,000,000 plus house.
This summary has been prepared based on the content of the Chancellor’s speech and the associated documents published immediately after it. We have concentrated on those changes which have the most relevance to financial advice and are most immediate.
Please note that it is likely that the Finance Bill will not be available for some time in light of the imminent General Election. The Government’s tax collecting powers for next year were, however, ratified by Parliament. As ever, the Budget Proposals are just proposals until the Finance Bill receives Royal Assent so that changes may well be made, and the General Election means that such changes are even more likely than normal.
Rates and Allowances
Income Tax
As expected, there are no changes to the tax rates and personal allowances from those advised in the Pre Budget Report in December last year. These rates are effective from 6 April 2010 and are noted below for your convenience;
- Personal Allowance £6,475
- Age Related Allowance (65-74) £9,490
- Age Related Allowance (75 +) £9,640
- Basic Rate Tax band (20%) £0 - £37,400
- Higher Rate Tax band (40%) £37,401 - £150,000
- Additional Rate Tax (50%) £150,000 +
The amount of personal allowance will gradually be reduced (£1 for every £2 of excess income) for those with income of £100,000 and over.
Corporation Tax
The main rate of Corporation Tax will remain at 28% for those companies with profits above the upper limit (currently £1.5
million), with the main rate for ring fenced profits remaining at 30%.
Similarly, the Corporation tax small profits rate will remain at 21% (19% ring fenced profits).
Personal Taxes
Income Tax
- The Remittance Basis
The remittance basis is an optional basis of taxation available to individuals who are resident but either not domiciled or not ordinarily resident in the UK. Individuals who choose to use the remittance basis will be subject to UK tax on their foreign income and gains only when they are remitted to the UK, rather than on their total worldwide income and gains.
This Budget change makes a further minor amendment to the definition of ‘relevant person’, effective from 6 April 2010.
The concept of relevant person was introduced in FA 2008 to ensure that any foreign income or gains of an individual which are remitted to the UK by way of any relevant person, or for the benefit or enjoyment of any relevant person, are taxed on the individual. A relevant person is widely defined and includes the individual, their spouse, civil partner, children and grandchildren under the age of 18. It also covers close companies and their subsidiaries in which such persons are participators.
However, it is not explicit that references to a close company are intended to include subsidiaries of non-resident companies which would be close companies if they were resident in the UK. To remove any uncertainty, and to remove the potential for abuse, the legislation will be amended to make clear that a relevant person includes these companies.
- Share Incentive Plans
Legislation will be introduced in Finance Bill 2010 to combat abuse of the corporation tax (CT) deduction provision, where companies pay money to SIP trustees to buy shares from director-shareholders, but no real value is transferred to employees under the SIP. In future, CT deductions will not be allowed where a payment to a SIP trust is made as part of a tax avoidance scheme, where the main purpose or one of the main purposes of the company in making the payment is to obtain a CT deduction. This change will not affect companies that are not involved in avoidance, and which make payments with the purpose of genuinely enabling their employees to obtain shares under the SIP.
The measure will also close potential loopholes in the provisions allowing HMRC to withdraw approval of a SIP where alterations to share capital or changes in rights attaching to shares materially affect the value of participants’ plan shares.
The measure will have effect in relation to payments made and alterations to share capital or rights attached to shares taking place on or after 24 March 2010.
- Company Share Options
At the moment, shares in a company which is under the control of a listed company are allowed to be shares to which an approved CSOP scheme could apply. Provided the requirements of the scheme are met, there will be no charge to income tax or National Insurance Contributions on the exercise of the options. Under CSOP, an individual can be awarded options over shares with a market value of up to £30,000 at the time of grant.
Arrangements are currently being used which fall under the general description of “geared growth” and which can be used to deliver additional reward to employees, beyond that intended under the schemes. This avoidance involves share options granted over shares in companies which are under the control of a listed company.
This Budget measure will counter this avoidance by restricting the type of shares which can be used in CSOP. Shares in a company which is under the control of a listed company will no longer be shares to which an approved CSOP scheme could apply.
The measure will have effect in relation to options granted over shares in a company which is under the control of a listed company on or after 24 March 2010. Companies will have a transitional period of six months to amend their scheme rules to bring them into line with this change, if an amendment is necessary.
- Transactions In Securities
Legislation will be introduced in Finance Bill 2010 to replace the existing transactions in securities legislation with clearer legislation targeted more effectively at arrangements involving tax avoidance.
The scope of the new legislation is limited to transactions with a tax avoidance purpose but now additionally applies to certain arrangements involving close companies. The effect of the legislation continues to be to counteract the income tax advantage.
The measure will generally have effect for transactions where the tax advantage is obtained on or after 24 March 2010. Some aspects of the measure affect the Corporation Tax Act 2010 and will have effect at the same time as that Act.
Current legislation in the Income Tax Act 2007 provides for the counteraction of an income tax advantage when a person enters into certain transactions in securities involving the receipt of an abnormal amount of dividend with a view to obtaining that income tax advantage. Previous legislation covered UK listed as well as non-listed companies. The replacement legislation is
targeted only at close companies including overseas companies.
This is a significant restructuring of the scope of the legislation. A wider range of companies will be covered but the new income tax advantage test and a new exemption covering fundamental changes in ownership of close companies will mean fewer individuals need to consider whether the rules apply to them.
Certain transactions by corporate bodies involving “dividend stripping” and similar arrangements are no longer covered by the legislation because avoidance opportunities involving these arrangements have been removed.
Capital Gains Tax
Legislation will be introduced in the Finance Bill 2010 to increase the lifetime limit on gains for Entrepreneurs’ relief from £1 million to £2 million, with effect for disposals on or after 6th Aril 2010.
Where individuals or trustees make qualifying gains above the previous £1 million limit before 6th Aril 2010, no additional relief will be allowed for the excess above the old limit, however if they make qualifying gains after 5th April 2010, they will be able to claim a further £1 million. This will give relief on accumulated qualifying gains up to the new limit of £2 million.
The other rules for this relief are unchanged, continuing to be reduced by 4/9th, leaving the effective rate of capital gains tax as 10%.
Inheritance Tax
The nil rate band for inheritance tax is normally increased automatically each year in line with inflation and it was currently provided that it would rise to £350,000 for transfers made, or deemed to be made, on or after 6th April 2010.
The Finance Bill 2010 proposes that this planned increase is stopped and instead the threshold is set at £325,000 until the end of 2014/15.
Stamp Duty
First time buyers with a completion date between 25th March 2010 and 24th March 2012 will receive relief from Stamp Duty Land Tax where the purchase price is not more than £250,000 (no SDLT currently for purchase prices below £125,000).
Purchasers of property where the consideration exceeds £1,000,000 will have a SDLT rate of 5% where completion is after 6th April 2011 (current rate 4% where consideration exceeds £500,000).
Income Tax Adjustments Between Settlors and Trustees
Currently, where the settlor of a ‘settlor interested trust’ receives a tax repayment (in respect of the trust income) as a result of an “allowance or relief”, he/she is required to pass the payment to the trust.
Legislation is to be introduced in the eventual Finance Bill to extend this requirement to all repayments of tax arising in this way – specifically to include repayments arising because of the settlor having a lower tax rate than the trust.
The payment to the trust will be disregarded for IHT purposes.
Corporate Tax
Capital Allowances: Plant and Machinery
Legislation to be introduced in the Finance Bill 2010 is to increase the maximum amount of the Annual Investment Allowance (AIA) from £50,000 to £100,000 on certain capital assets, such as plant and machinery. This allowance allows businesses to write off the costs, effectively a 100% allowance applying to qualifying expenditure up to the limit.
The increase will apply with effect from 1st April 2010 for Corporation Tax or 6th April 2010 for Income Tax. Where a business has a chargeable period that spans the operative date of the increase, the maximum allowance is the sum of:
• The AIA entitlement, based on the previous £50,000 annual cap for the portion of the year falling before the relevant operative date and
• The AIA entitlement, based on the new £100,000 annual cap for the portion of the year falling on or after the relevant operative date.
Rules about the entitlement to AIA are contained in sections 51A to N of the Capital Allowances Act 2001.
In addition, Anti-avoidance legislation will be introduced to disallow property loss relief against general income, to the extent that the loss is attributable to the AIA as from 24th March 2010.
Capital Allowances: Environmentally Beneficial Technologies
Following this year’s review of the Energy Technology Criteria List and the Water Technology Criteria List the Lists will be revised with effect from a date to be appointed by Treasury Order (to be made prior to the summer 2010 Parliamentary recess) to
include two new sub-technologies:
• Permanent Magnet Synchronous Motors and
• Biomass Fired Warm Air Heaters
One existing technology (Compact Heat Exchangers) and one sub-technology (Liquid Pressure Amplification) will be removed and further minor housekeeping changes made.
Enterprise Management Incentives (EMI)
A company granting qualifying EMI options to its employees will, in future, have to have a “permanent establishment” in the UK, as opposed to the current requirement that the company must operate “wholly or mainly” in the UK. This change is being made in order that EMI complies with EU State aid guidelines.
This change will be effective in respect of EMI options granted on or after the date that the Finance Bill receives Royal Assent.
Release of loans to participators in close companies
Currently, when a close company makes a loan or advances money to a relevant person (participator), a charge equivalent to Corporation Tax (CT) is imposed on that company. Under the CT rules governing loan relationships the company may be entitled (subject to anti-avoidance rules) to a full deduction against its CT liability. A loan released or written off will normally give rise to an expense recognised in the company’s accounts.
This new measure prohibits any deduction being brought into account for loan relationship purposes for the release or write off of such a loan (in whole or in part) on or after 24 March 2010.
Business Rates
The Chancellor has announced plans (full details not available at time of publication) to reduce Business Rates for one year starting in October 2010. He claimed that this would reduce the tax for over 500,000 businesses of which around 345,000 will pay no business rates at all.
Investments
Venture Capital Schemes
Measures are being made to bring the final four changes to EISs and VCTs agreed with the European Commission for their approval as State aids.
The following changes will have effect when the forthcoming Finance Bill receives Royal Assent, but will not affect monies raised by a VCT before that date.
• Shares in a VCT will now be required to be admitted for trading on any EU regulated market, rather than the Official List of the UK. This means that VCTs will be able to be listed on markets throughout the EU/EEA.
• The percentage of eligible shares to be held by a VCT throughout the relevant accounting period will be increased from 30% to 70%.
• Companies treated as an ‘enterprise in difficulty’ for the purposes of the European Commission’s Rescue and Restructuring Guidelines, will not be qualifying companies for EIS or VCT.
• For shares issued on or after the commencement date of the legislation, the company issuing the shares must have a permanent establishment in the UK. This will replace the rule that there must be a qualifying trade carried on wholly or mainly in the UK. The definition of ‘permanent establishment’ is to be published in secondary legislation after the primary legislation receives Royal Assent.
At the same time as this secondary legislation comes into force, the definition of eligible shares will change to allow VCTs to include preference shares.
Life Insurance Policies: Deficiency Relief
Deficiency relief is available where the final calculation of a chargeable gain (typically on a non qualifying Investment or Capital Redemption bond) produces a loss on a policy which has previously been the subject of a gain on partial encashment and higher rate tax has been paid. Relief will be extended to include the ‘new’ additional rate where this has previously been paid by the
policyholder.
Financial Services Compensation Scheme
Where the FSCS has to intervene to protect policyholders with insurance or annuity contracts there are several possible outcomes including – providing financial assistance to the provider, transferring policyholders’ rights to another provider or paying compensation to the policyholder.
The Finance Bill will include legislation allowing regulations to be made to ensure that the policyholder’s tax position will not be altered as a result of the FSCS’ intervention. It will be possible for such regulations to be introduced in respect of interventions made before the legislation is introduced provided that they do not increase the policyholders’ tax liabilities.
Real Estate Investment Trusts
Current legislation requires that a UK REIT distributes 90% of the profits from its property rental business by way of dividend in each accounting period. This is known as a ‘property income distribution’. The investor receiving this dividend is treated as receiving property income.
Stock dividends do not count as property income distributions and thus cannot be used by the REIT to meet this requirement (the distribution requirement). The Finance Bill will introduce changes to the legislation so that stock distributions will be treated in the same way as property income distributions for both the REIT and the investor.
Individual Savings Accounts
With effect from 6th April 2011 and for the whole course of the next Parliament (maximum 5 years), ISA limits will be increased every year in line with the increase in the RPI. The increase will be calculated by reference to RPI in the September prior to the start of the tax year.
Any increase will be rounded to the nearest multiple of £120, to make monthly investments more straightforward. In the event that RPI is negative the ISA limit will simply remain unchanged. The Cash ISA limit will remain at 50% of the total limit.
Pensions
Restriction of Pension Tax Relief
It has now been confirmed that from 6th April 2011 the threshold income levels for tax relief restriction, started by the nti-forestalling legislation, will be:
• Employees with a total annual income of £130,000 or over whose annual employer funding, or eventual funding, of the pension scheme is £20,000 or over (taking the total to £150,000 or over). In both cases the income is calculated before deduction or relief for pension contributions and charitable donations.
• Individuals with total income of £150,000 or over, again before deduction or relief for pension contributions and charitable donations.
As already announced, a taper will then apply for those on incomes between £150,000 and £180,000, gradually reducing tax relief on pension contributions until it is restricted to the basic rate. The restriction will apply to the individuals’ contributions and to any pension benefit funded (or eventually funded) by their employer. The restrictions of tax relief will continue to be delivered through Self-Assessment, with a new high income excess relief charge payable by those affected.
Lifetime Allowance and Annual Allowance from 2011
When they were introduced in April 2006 the Lifetime and Annual Allowances were set at £1,500,000 and £215,000 respectively, rising to £1,800,000 and £255,000 by 2010/11. A Treasury Order has confirmed today that these limits will remain at these levels for a further 5 years up to and including the 2015/16 tax year.
The limits that are set in reference to the Lifetime Allowance, e.g. the trivial commutation limit at 1% of the Lifetime Allowance will, therefore, also remain constant.
Changes to Pensions Taxation
Essentially this proposed future legislation is to smooth the way for the National Employment Savings Trust (NEST) and the automatic enrolment of employees planned for 2012. The proposals detail the following changes:
• A measure to allow NEST to register with the HMRC and be subject to the same tax rules as other tax-registered pensions schemes
• The Pensions Act 2008 obliges the employer to make pension contributions to a qualifying pension scheme on behalf of the employee. If the contributions are paid late then the Pensions Regulator may ask that interest is paid to the employee’s pension account. Under Section 360 of the Income Tax (Trading and Other Income) Act 2005 the employee would then be taxed on this interest. It is proposed that this tax charge is removed.
• It is also proposed to remove, by secondary legislation, any other unintended tax charges which may arise following the introduction of NEST and the implementation of employer duties.
• It is suggested that changes will be introduced to allow a registered pension scheme to be established and to start operating without a charge to tax that would normally arise if the borrowing is in excess of half the value of the fund. This is subject to certain conditions.
VAT
Fuel Scale Charges
The VAT fuel scale charges for taxing the private use of road fuel have been updated and are effective from 1 May 2010. The link below provides access to the new scale charges; http://www.hmrc.gov.uk/budget2010/bn44.pdf
Turnover Thresholds
The registration threshold for VAT has increased from £68,000 to £70,000 and will take effect from 1 April 2010. Those companies with a turnover of less than £68,000 (up from £66,000) can apply for deregistration.
Review of HMRC Powers – Late Filing
This measure is intended to complete the reform of the penalty regimes for late filing of tax returns and late payment of tax. It will affect taxpayers who do not file their tax returns on time or pay their tax liabilities in full and on time for:
• VAT and insurance premium tax;
• aggregates levy, climate change levy and landfill tax;
• air passenger duty, alcoholic liquor duties, tobacco products duty, hydrocarbon oil duties, general betting duty, pool betting duty, bingo duty, lottery duty, gaming duty and remote gaming duty; and
• other excise duties.
The Government intends include this measure in the Finance Bill. Implementation will be staged over a number of years to allow for updating of computer systems and the substantial education and preparatory period that will be necessary for both taxpayers and their agents. The new provisions will be brought into effect by Treasury Orders which will specify the dates from which they will have effect.