UK: Budget 2011 - Personal Tax Highlights

Should I stay or should I come? The UK makes its case for inward investment

'The Government recognises that non-domiciled individuals make a valuable contribution to the UK economy and the current tax rules can discourage them from investing their foreign income and gains in the UK'. In the Budget today the Government came good on its promises to introduce a fairer, more stable and more competitive tax system in United Kingdom. As suggested in the Tax Policy Making: A new approach document published in June last year, a majority of the measures announced today will first be subject to detailed consultation before being introduced in the Finance Bill 2012 at the earliest.

Today's announcements contain much welcome news for individual taxpayers and we have examined the highlights below.

Non-domiciled taxpayers

There has been a much vaunted 'review of the taxation of non-domicilaries' in the offing since the Conservatives and Liberal Democrats published their "Programme for Government" in May 2010. Speculation has been rife, with predictions ranging from a full scale abolition of the remittance basis for non-doms to the introduction of a 'deemed domicile' rule for income tax and capital gains tax purposes.

With the detail yet to be announced, the truth appears to be somewhat more positive than commentators had feared with the Chancellor explicitly acknowledging the wider economic contributions made by non-doms.

The remittance basis of taxation

From 6 April 2012, those non-doms who have been resident in the UK for 12 or more years will continue to be able to enjoy the benefit of the remittance basis of taxation, but at the higher cost of £50,000 a year in addition to tax due on income or gains arising in or remitted to the UK. The lower £30,000 charge will be retained for those non-doms who have been resident in the UK for more than 7 years but fewer than 12 years.

Potentially of more significance, however, is the Chancellor's announcement that, also from 6 April 2012, non-doms will be able to remit foreign income or gains to the UK for 'commercial investment in UK businesses' with no charge to UK tax. We will be in suspense for some time yet as to the scope of this rule change - there is to be consultation in June 2011, with the legislation forming part of Finance Bill 2012. However, such a financial incentive demonstrates a commitment to encouraging inward investment by non-doms and would seem to indicate that the Government has no current intention to introduce a more wide ranging reform of the way in which non-doms are taxed in the UK. Finally, the Government has confirmed that there will be no other substantive changes for the remainder of this Parliament.

Statutory residence test

There is currently no statutory test for UK tax residence. Whether or not an individual is tax resident in the UK is ascertained by applying a combination of the rules contained in statute, case law and HMRC's interpretation. Changes in Finance Act 2008, the Gaines-Cooper case and HMRC6 have left the law uncertain - particularly for those seeking to leave the UK. This lack of certainty, perpetuating what the 1936 Committee on Codification of Income Tax Law referred to as a state of affairs that was 'intolerable that should not be allowed to continue', has placed the UK at a competitive disadvantage when competing to attract wealthy individuals to the UK and investment in business here, by depriving them of certainty in regarding how they will be taxed.

After a period of consultation, a statutory definition will be introduced from 6 April 2012.

However, while the certainty this will bring is welcome, some caution should be exercised. A statutory test will clarify the status of many individuals, but the current rules will continue to apply for the time being. Consequently, those who have specific requirements, for example individuals who intend to be non-UK resident for five tax years, will need to be mindful that goal posts may move during their period of non-residence and so further advice must be sought before their return. Further, when the new rules are introduced they may require individuals who are currently treated as non-resident to significantly change their lifestyles to maintain that treatment in future years.

Overall however, increased certainty in this area, coupled with the other changes announced, can only increase confidence in the stability of the UK regime and encourage wealthy individuals who have been deterred from coming to the UK in recent years to reconsider their position.

50% income tax rate

While no immediate or future reduction of the 50% tax rate was announced today, the Chancellor made it clear that he regarded the 50% top rate of income tax as a temporary rather than a permanent measure, giving a signal for a reduction in the rate later in this Parliament.

Tackling tax avoidance

The Government today announced the launch of a new HMRC anti-avoidance strategy. The background to the strategy is that the latest estimate of the 'tax gap' is £42 billion for 2008-09, of which 17.5% is stated to derive from avoidance by 'using the tax law to get an advantage that Parliament never intended'.

Particularly within HMRC's sights are tackling disguised remuneration, SDLT planning and transactions involving companies and capital gains.
Moving forward, the new anti-avoidance strategy will comprise three core elements, namely:

(i) preventing avoidance at the outset where possible;

(ii) detecting it early where it persists; and

(iii) countering it effectively through legislative change or challenge.

While redolent of treating the tax system like a medical patient requiring a cure, the manner in which this is to be achieved is instructive. Certainly, there seems to be a commitment to tackling avoidance in a structured rather than a piecemeal manner (although inevitably there remains the possibility that last minute, possibly retrospective legislative change will occur).

Prevention

Prevention of tax avoidance is primarily to be achieved by a robust, principles-based tax system. To the extent further perceived risk remains, however, there will be policy reviews of high risk areas. The first two areas to be subject to such review are schemes focussing on income tax losses, and the commercial use of unauthorised unit trusts for avoidance.

Detection

Meanwhile, the robust, principles-based system is to progress through ongoing consultation on a General Anti-Avoidance Rule ('GAAR') and giving consideration to extending the hallmarks under which schemes are made subject to the Disclosure of Tax Avoidance Schemes rules.

The concept of a GAAR is riven with difficulties, not least of which is ensuring that it is cast wide enough to catch those transactions it is intended to catch, but not so wide that the law of unintended consequences applies. One option would be to incorporate a clearance procedure into the GAAR, although this would require significant HMRC resources if it is to work effectively. No doubt this is currently being considered in some detail within the consultative framework, and we look forward to hearing the results of this work.

Counteraction

Counteraction is to be addressed primarily by a combination of legislative change and an operational strategy which will include identifying taxpayer groups perceived as being of concern, including wealthy individuals and large businesses. The third element of the counteraction part of the strategy is litigation, no doubt designed to make clear that while the desire is not to litigate HMRC will not run shy of such measures where appropriate.

It would appear that selected groups of taxpayers can look forward to further attention from HMRC, which places emphasis on ensuring proper compliance with self assessment, and may also discourage such groups from, for example, undertaking planning using schemes which are subject to the DOTAS rules.

Unscheduled changes

It remains the case that despite a pro-active approach to tackling avoidance, and thereby seeking to enhance fairness and certainty, last minute changes to block abuses will not disappear. In recognition of this, an amended Protocol sets out the criteria that Ministers undertake to use in deciding whether an announcement of immediate legislative change is needed and justified, and the procedure that must be followed in such cases. It is to be hoped that the Protocol will operate to minimise uncertainty and instability caused by excess piecemeal retrospective legislative changes.

On balance, this set of proposals appears to set out a sensible approach to tackling anti-avoidance. However, there is a concern that by focussing on taxpayers obtaining advantages that Parliament never intended, accepted tax planning techniques may be harshly targeted, and this in itself will be unhelpful and will introduce uncertainty. Much will depend on those further areas which HMRC decides to focus on, and it remains to be seen whether this will restrict what is considered acceptable tax planning and mitigation, rather than focussing on abusive planning.

Inheritance tax

To encourage charitable giving, for deaths on or after 6 April 2012, a reduced rate of IHT will apply where 10 per cent or more of a deceased's net estate (after deducting IHT exemptions, reliefs and the nil rate band) is left to charity. In those cases the current 40 per cent rate will be reduced to 36 per cent.

Charities

Gift Aid

In an important step in reducing compliance costs for charities, the Government will consult on the proposal that it should no longer be a requirement to obtain signed gift aid declarations on the first £5,000 of small donations (£10 or less) per year in order for those donations to qualify for the tax relief, instead gift aid will be automatically applied.

Works of Art

Also announced was an expected consultation on proposals to encourage gifts of works of art and items of historical value, which is very good news for philanthropists.

Donor benefits

The Chancellor has also announced a rise from next month in the level of donor benefit which is acceptable within the Gift Aid scheme, from £500 to £2,500. This is clearly aimed to help foster a culture of giving by lifting some of the existing restrictions on charities showing their thanks and appreciation to donors.

Detailed changes

Entrepreneurs' Relief

The lifetime limit on Entrepreneurs' Relief which was increased from £2 million to £5 million in the June 2010 Budget will be increased further to £10 million with effect from 6 April 2011.

Tax simplification

It was announced that 43 tax reliefs whose "rationale are no longer valid" will be abolished in light of the report by the Office for Tax Simplification published earlier this month. This is not intended as a revenue raising measure and should be of limited consequence. However, the effect that this will have on the Black Beer and Angostura Bitters industry will remain to be seen.

Income tax and National Insurance

As widely leaked in advance of the Budget, the Government will consult on options for integrating the operation of income tax and national insurance contributions. As an objective this could be compared with tying the Gordian knot and it will be a challenge for the Government to find a way to achieve this while maintaining its overriding objectives of fairness and simplicity. Positively they have confirmed that there will be no extension of the scope of national insurance either to the over 65s or to other forms of income as part of this review.

Tax thresholds

Again as widely trailed before the Budget, income tax thresholds will rise, with the personal allowance increasing to £7,475 for under 65s in April 2011, moving closer to the Government's target of £10,000.
The capital gains tax annual exempt amount for individuals will increase to £10,600 next year.

Enterprise Investment Scheme and Venture Capital Trusts

The rate of income tax relief given under in the EIS will increase from 20 per cent to 30 per cent of the amount subscribed for shares from 6 April 2011. The amount that can be invested under the scheme will increase from £500,000 to £1 million from 6 April 2012.

Legislation is also to be included in Finance Bill 2012 to expand the range of companies and investments that will qualify for EIS and VCT reliefs.

Corporation tax

The rate of corporation tax will be reduced to 26 per cent for the Financial Year commencing 1 April 2011, not 27 per cent as previously announced (the small profits rate of corporation tax from April 2011 will be 20 per cent). It will reduce further to 25 per cent for the Financial Year commencing 1 April 2012.

SDLT

As already 'spotlighted' by HMRC, a number of SDLT anti-avoidance rules will be introduced to counter known planning that seeks to avoid a charge to SDLT through sub-sale, alternative finance and exchange arrangements.

IR35

In response to the Office of Tax Simplification's Report, it was announced that IR35 (the bête noir of small businessmen nationwide) will be retained, but simplified. Entrepreneurs will hope that the stated aims of increasing clarity and certainty will help remove them from the mire of red tape and bureaucracy in which they currently find themselves.

Click here to visit our Budget 2011 web feature.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Christopher Groves
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Smith & Williamson
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Smith & Williamson
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions