This Budget delivers few amendments to the headline rates of tax but there are significant changes in the area of savings and pensions.
Those without mortgages who can afford Individual Savings Accounts and those approaching retirement will be pleased by the Pensioner bond and the changes to the taxation of pensions. However, those still saving for their pension will be dismayed by the restrictions on the relief on contributions and the fall in the lifetime limit.
Furthermore there are some worrying increases in HM Revenue & Customs’ powers to collect tax of which many a Labour Chancellor would be proud.
Our non-dom audience may be interested in the changes relating to dual contracts and the changes relating to residential property. Non-resident investors in UK residential property will have to wait to see if capital gains tax is extended to them in 2015. Investors who have bought residential property worth more than £500,000 through an offshore company are on notice that ATED and ATED Capital Gains Tax will be gradually extended from 2015.
Personal Allowances and Rates Thresholds
The personal allowance will increase to £10,000 from 6 April 2014, a year ahead of the target set out in the coalition agreement, although, this will not benefit most non-doms claiming the remittance basis and those with income in excess of £120,000.
Married couples who are both basic rate taxpayers will be able to benefit from the ability to transfer £1,000 of their personal allowance reducing the tax payable by the higher earning spouse by £200 a year from April 2015.
Currently, the personal allowance is available to UK resident individuals and certain non-resident individuals (broadly, individuals who are a citizen of an EEA or Commonwealth country or a resident of a country which holds a Double Tax Agreement with the UK).
The Treasury proposes to launch a consultation on whether the allowance could be restricted to UK residents and those living overseas with strong ‘economic connections’ in the UK.
With effect from 6 April 2015, the former 10% ‘starting-rate’ on savings income is to be changed to a 0% rate. Moreover, the band to which this applies will increase from £2,880 to £5,000.
Although aimed at individuals with low incomes, this will still benefit those people who are largely dependent on the interest earned on their savings.
The proposed change has removed indexation from the savings income band. Whether this will be increased in future budgets remains to be seen.
There will also be a 1% increase in the threshold for paying higher rate tax at 40% to £41,865, somewhat lower than the current rate of inflation. There have been no changes to the 45% rate of tax.
Employee’s National Insurance will be payable at 12% on earnings between £7,956 and £41,450. Earnings in excess of this upper earnings limit will be subject to NICs at a rate of 2%.
From 5 April 2014 HMRC intends to target contrived arrangements which create “artificial divisions between the duties of a UK employment and an employment overseas in order to obtain a tax advantage”. However, in practice many typical arrangements commonly known as “dual contracts”, may be affected.
The new rules apply where:
a) the taxpayer has both a UK and a foreign employment;
b) the UK employer and foreign employer are ‘associated’;
c) the UK employment and foreign employment are ‘related’; and
d) the foreign rate of tax on the foreign income is less than 65% of the UK’s 45% tax rate.
Whether employers are associated and whether employments are related is widely defined.
Where all four conditions are met the foreign income (including employment related securities) will be subject to tax in the UK as it arises, with relief for any foreign tax deducted at source.
In our view these rules are likely to have wide application and anyone with more than one employment should take specialist tax advice to ensure that arrangements still work.
New ISAs (“NISA”)
UK residents will be able to make an investment of £15,000 in any combination of cash, stocks and shares. Junior ISAs and Child Trust Funds will have an increased limit to £4,000.
The previous limits of £5,940 and £11,880 for cash and stocks and shares ISAs, respectively, will remain in force until 1 July 2014. At this date an ISA automatically become a NISA.
Stocks and shares NISAs will also be able to hold ‘cash-like’ funds where they previously had to remain in separate accounts. Furthermore, there will be a wider range of securities made available to NISAs, including Core Capital Deferred Shares.
Taxpayers are only allowed to open one NISA each year, but you can transfer your NISA to another provider to find the best interest rate. However, this should be arranged between providers and not withdrawn by the individual (as doing this would be treated as an additional NISA investment).
Balances can be transferred from previous existing ISAs (NISAs from 1 July 2014) into another NISA and into cash, stocks or shares. However, there are rules relating to transfers of previously invested stocks and shares, whereby investments made between 6 April 2014 and 1 July 2014 will have to be transferred as a whole. Older stocks and shares investments can be transferred in part, but this will depend on the providers.
UK residents over the age of 65 will be able to take out bonds of up to £10,000 from National Savings & Investments (“NS&I”).
More precise figures will be announced in the autumn, but it is expected that there will be 1 year bonds available with a gross AER of 2.8% and 3 year bonds with a gross AER of 4%.
Tax will be payable at the saver’s marginal tax rate on interest received.
This is not the first time this sort of investment product has been made available to pensioners. Although they are no longer available and have now all matured, “Pensioners Guaranteed Income Bonds” were available in the mid-2000s from NS&I for over-60s, for investments of between £500 and £1 million for fixed terms of 1, 2 or 5 years.
In our view it will be interesting to see, with current low ISA rates and the fully-guaranteed nature of savings with NS&I, how advisers suggest using the Pensioner Bond and NISA allowances for those over 65.
The Government announced significant changes to increase the flexibility in accessing pension funds on retirement.
There will be a number of transitional measures for those taking pensions between 27 March 2014 and 5 April 2015.
From 5 April 2015, those with defined contribution pensions will be able to choose from the age of 55 whether to withdraw their entire fund as a lump sum, purchase an annuity or keep their pension fund invested and withdraw it as they wish. Pensioners will continue to be entitled to withdraw a 25% lump sum tax-free but any additional funds withdrawn will now be taxed at their marginal rate rather than the punitive 55% tax rate which was applied previously.
An additional £2 million of funding will also be made available to enable pension providers to ensure that the Government’s commitment to offer free and impartial advice on retirement is met.
This is likely to be a popular measure for those approaching retirement age, contrasting with the measures announced in the Autumn Statement. These were the reduction of the tax deductible amount on which you can get relief to £40,000 p.a. and the reduction of the lifetime allowance to £1.25 million from 6 April 2014 which will affect those who are currently saving towards their retirement.
In our view the Government is sending a mixed message when it comes to saving for retirement. They want you to have a pension, but not too big. If the value of your pension already exceeds £1.25 million then you should seek advice now to protect your pension from unnecessary tax charges.
Qualifying Non-UK Pension Schemes (QNUPS)
A consultation was also announced on changes to the treatment of QNUPS in order to bring them in line with UK registered pension schemes and to remove opportunities for IHT avoidance.
In our view clients should be wary of using QNUPs for IHT tax planning alone.
A formal consultation will commence regarding applying Capital Gains Tax (“CGT”) to non-residents on the profits on the sale of UK residential property with effect from April 2015.
Relief for UK residents from CGT on the disposal of a property that you are no longer occupying but which has previously been your main residence will now only be available for the last 18 months, rather than the last 36 months of ownership.
Enterprise Investment Scheme and Venture Capital Trusts
In the 2013 Budget the Government announced that certain VCT and EIS schemes were providing benefits that were not in keeping with the intention of the legislation. Today the Government announced their intention to make changes to the relief available.
The immediate measures are aimed at VCTs. After 6 April 2014, VCTs will be prevented from returning share capital to investors where the return of capital is not paid out from the profits of the VCT. Distributions made to investors from profits will be unaffected by this change. Where share capital is returned to investors and not sourced from profits, the VCT status will be lost and the relief withdrawn. The Government have announced that they will exclude investments in VCTs that are conditionally linked with share buy backs, or investments that have been made within 6 months of disposal of shares in the same VCT. According to the Government, the purpose of these measures is to encourage well-targeted VCT investments that support the high-growth potential of small and medium sized companies. It can certainly be seen that the measures introduced target the more structured and lower risk VCT products currently available to taxpayers.
Also announced was the intention to launch a wider consultation focusing on other areas of both EIS and VCT products. The proposals confirm that the consultation will focus on low risk structures that benefit from income guarantees via government subsidies and where VCT investments are in the form of convertible loans. These measures continues the theme set by the Government to target EIS and VCT products which are structured to minimise risk to taxpayers as opposed to the more entrepreneurial ventures.
Accelerated Payments of Tax Associated with Schemes
New requirements are to be introduced where taxpayers can be asked to pay disputed tax upfront in certain situations.
HMRC will be able to issue a new “Notice to Pay” to any taxpayer in two situations. Firstly, where the taxpayer has claimed a tax advantage and that claim is subject to enquiry/appeal and it relates to a scheme disclosed under the Declaration of Tax Avoidance Schemes (“DOTAS”) regime. Secondly, where HMRC issues a notice under the General Anti-Abuse Rule that the taxpayer’s arrangements “cannot reasonably be regarded as a reasonable course of action”.
The upfront payment of the disputed tax aims at removing the cash flow advantage of entering such schemes or arrangements.
The taxpayer will have 90 days to pay the disputed tax under the notice; with an additional 30 days extension available if they request HMRC to reconsider the amount due under the notice. Penalties will be due on late payments.f the taxpayer thinks the disputed tax is excessive then the onus will be on the taxpayer to pursue the claim through the courts. If the taxpayer wins his/her case then the tax will be reimbursed with interest.
In our view this is a punitive measure. We think that this is an abuse of law as HMRC in effect stands as judge, jury and executioner. It cannot be equitable that a taxpayer has to pay disputed tax, which quite legitimately might not be due and wait several years for the cumbersome and expensive process of the courts to resolve. In our view the Government would do better to simplify the tax system, in consequence there would be more certainty of the tax due and less tax disputed.
Follower Notices for open enquiries and appeals
HMRC will now be able to issue “Follower Notices” to taxpayers who are users of tax avoidance schemes who have open enquiries or appeals where, in HMRC’s opinion, another judicial decision is relevant to their case and determines the dispute. The notice will inform the taxpayer of HMRC’s opinion, and tell them that they should either amend their return in line with the decision (for the purposes of which the tax return amendment deadline will be extended for the taxpayer) or agree to resolve their dispute with HMRC.
The taxpayer will also receive a “Notice to Pay” and will be expected to pay the disputed tax within 90 days. HMRC are effectively given the power to apply judicial decisions to cases that have not gone to court and demand payment of tax on the basis of this application, where the taxpayer has previously self-assessed as not owing the tax. The stated policy objective is to put users of tax avoidance schemes on the same footing as taxpayers who pay tax upfront and claim a refund through self assessment, as such refunds can be subject to HMRC scrutiny before they are issued.
This is not an unexpected development, as the Treasury has shown itself to be keen to have disputed tax in its own possession rather than that of the taxpayer (see above). However, in our view it is worrying that these provisions give HMRC a considerable amount of power to interpret judicial decisions. The Treasury does seem to have taken on board feedback from its recent consultation on this matter and included an avenue for the taxpayer to appeal against the “Follower Notice”, but as this will only add 30 days to the tax payment deadline it is difficult to see how an appeal will be of any real benefit to the taxpayer. HMRC in its “summary of impacts” documents does acknowledge that this measure is likely to prompt legal challenges.
HMRC Debt Collection Powers Extended
One of the worst kept secrets leading up to Budget was confirmed when Mr Osborne announced that HMRC are being given the power to collect taxes directly from taxpayers’ bank accounts. The detail of the proposal reveals that HMRC will be able to recover financial assets from taxpayers who owe over £1,000 of tax or tax credit debts where they both have the financial means to pay and have been contacted by HMRC multiple times. However, when using these powers HMRC will be required to leave a minimum of £5,000 across the taxpayer’s bank accounts.
Mr Osborne promoted this measure as part of the Government’s strategy to modernise and strengthen HMRC’s debt collection powers. It is likely to provide little comfort to those taxpayers in dispute over their liabilities, especially when viewed in conjunction with other budget measures providing HMRC with the ability to collect disputed tax from “schemes” before the settlement of any dispute.
In our view it remains to be seen whether the legislation will allow HMRC to monitor and collect taxes from a non UK bank account held by a taxpayer or whether they would actually have the jurisdiction to do so in practice.
Deductibility of Liabilities for Inheritance Tax Purposes and Foreign Currency Accounts
Finance Act 2013 restricted the deductibility of loans for Inheritance Tax (“IHT”) purposes where the loans had been used to purchase excluded property. Individuals could avoid this by taking out a loan in GBP and then converting the loan into a foreign currency and thereby receive a deduction for the borrowed funds against their estate at death while still holding foreign currency which is excluded property and therefore not subject to IHT.
Finance Bill 2014 will state that where borrowed funds have been converted into foreign currency so that the funds are not chargeable to IHT at death the deduction will be disallowed. These rules will apply to estates where the taxpayer dies on or after Royal Assent of the Finance Bill 2014.
We can expect additional rules in the event of the liability being repaid in part, either before or after death.
Simplification of Inheritance Tax for Trusts
Filing and Inheritance Tax payment dates on 10 year anniversary and exit charges will be due 6 months from the month end in which the event occurred.
For the purpose of calculating the charge, any underlying trust income which remains undistributed for over 5 years from the 10 year anniversary date will be treated as trust capital.
Further simplification of the Inheritance Tax trust charges and the proposal to split the nil-rate band between trusts will be subject to further consultation.
From 1 January 2015 the place of supply rules will change meaning that VAT will be payable by customers in the UK on purchases of electronic downloads from online retailers. This means that many consumers will notice a significant jump in prices when ordering from online retailers based outside the UK.
Extending ATED and SDLT to more Non Natural Persons
April 2013 saw the introduction of the Annual Tax on Enveloped Dwellings (ATED) and ATED related Capital Gains Tax (ATED-CGT) on residential properties owned by non-natural persons (NNPs) such as offshore companies.
Where these rules previously applied only to residential properties worth over £2 million – it was announced today that these provisions will now be extended to properties valued between £1 million and £2 million (from 1 April 2015) with an annual charge of £7,000; and properties between £500,000 and £1 million (from 1 April 2016) with an annual charge of £3,500.
Properties falling within the £1 million to £2 million band from 1 April 2015 will need to file the relevant ATED return by 1 October 2015; and any relevant ATED paid by 30 October 2015.
Reliefs for bona fide property businesses, such as a letting business to qualifying persons, will continue to apply.
In addition, when a NNP is subject to ATED it will also be subject to ATED-CGT at the rate of 28%. This will apply to properties sold for between £1 million and £2 million from 1 April 2015, and to properties sold for between £500,000 and £1 million from 1 April 2016.
The 15% rate of SDLT will apply to any purchases of residential property by NNPs with consideration over £500,000 starting from 20 March 2014.
The main rate of corporation tax will fall to 21% from April 2014 and 20% from April 2015, bringing the main rate in line with the small profits rate and thereby simplifying corporation tax for those companies with profits between £300,000 and £1.5 million who currently have to apply ‘marginal relief’ fractions when calculating their corporation tax liability.
Group Transfers and Profit Sheltering
Given the media coverage over the last 12 months focusing on the seemingly minimal UK taxes paid by large multi-national corporations it was not surprising that the Government has announced a number of measures in the Budget that seek to target the artificial transfer of profits from the UK to companies within the same group but resident overseas.
The immediate measures announced focus on arrangements designed to avoid existing anti-avoidance legislation, namely s. 695A of CTA 2009 that prevents companies from obtaining a tax deduction on payments made pursuant to Derivative Contracts (essentially an alternate form of corporate borrowing) where the payments are essentially made out of a UK company’s profits. The measures announced in the Budget will mean that any arrangement, the main purpose of which is to secure a tax advantage, will be disregarded when computing the company’s taxable profits. This is a far reaching anti-avoidance provision, but as always the impact will depend on the drafting of the final legislation..
The Government also introduced further measures that will be implemented in accordance with co-operation with the G20 and OECD. The immediate changes include a reinforcement of the “Controlled Foreign Companies” legislation where intra-group interest is paid to an offshore subsidiary and/or when a foreign affiliate’s bank debt is transferred into a UK member of the same corporate group. The Government have also confirmed their intention to continue with the extension of their “base erosion and profit shifting” anti avoidance measures into the 2015 Budget. This is largely as expected and mirrors the legislative approach of the World’s other leading economies.
If you would like to discuss any tax matter raised within the Budget please let us know.
|Mark Davies||Jon Elphick|
|0203 0088 102||0203 0088 103|
This bulletin is intended to provide general information only and is not intended to constitute legal, accounting, tax, investment, consulting, or other professional advice or services. Before making any decision or taking any action which may affect your tax or financial position, you should consult a qualified professional adviser.