UK: Budget 2011 - Key Points For Private Individuals

Last Updated: 28 March 2011
Article by Lyndsey L.M. West


The tax changes for private clients announced in George Osborne's budget speech on 23 March support the push for entrepreneurialism on one hand and the notion of "giving something back" on the other. Thus, both entrepreneurs' relief and the Enterprise Investment Scheme are to become more generous. At the same time giving to charity will become more tax efficient.

On the international front, the announcement of a consultation for a statutory residence test, with a view to its introduction by April 2012, is very welcome. The announcement of a £50,000 annual charge (up from £30,000) for non-UK domiciled remittance basis users who have been UK resident for 12 tax years may be balanced by the promised simplification of aspects of the current rules "to remove undue administrative burdens". We await the consultation on this.

The changes announced by the Chancellor fall into three categories. First, consistent with the Government's aim to make tax policy more transparent, a number of changes coming into effect on 6 April 2011 were announced in November's pre-Budget report and we have already seen the draft legislation to be enacted in Finance Act 2011. A further set of changes, announced today, take effect from 6 April 2011. Finally the Government will consult during the current tax year on a final set of changes with a view to introducing them in Finance Act 2012.

We await publication of the Finance Bill itself, due on 31 March. Meanwhile, this briefing note is based mainly on the Chancellor's speech and on the documentation published immediately afterwards on HM Treasury's website.

Private individuals and business

Entrepreneurs' relief The effect of entrepreneurs' relief is to reduce from 28% to 10% the rate of capital gains tax ("CGT") on disposals by individuals of entrepreneurial businesses. Detailed requirements must be satisfied for the relief to apply. This is a lifetime relief and as announced by George Osborne on 23 March, the amount of the relief is to be doubled from £5m to £10m. This takes effect from 6 April 2011.

Enterprise Investment Schemes ("EIS") The rate of income tax relief given under the Enterprise Investment Scheme ("EIS") is to be increased from 20% to 30% with effect from 6 April 2011, but subject to State aid approval. Further changes are proposed for Finance Bill 2012. The EIS provides tax incentives for individuals to invest in shares in companies that meet certain conditions and carry on qualifying activities. It is intended to help small, higher risk, unquoted trading companies to raise start up finance by issuing ordinary shares.

Furnished Holiday Lettings ("FHLs") FHLs can be treated as a trade, rather than as a property business, provided certain conditions are met. Trading treatment is more beneficial for tax purposes. However, to comply with EU law the relief is extended to lettings throughout the European Economic Area but, as previously announced the conditions for it to apply are tightened up. In particular from 6 April 2012 the property must be available for letting for 210 days (up from 140) and .the days on which the property must be actually let is increased from 70 to 105 days. This last test is likely to be the most difficult condition to satisfy but businesses which meet the "actually let" requirements in one tax year can elect to be treated as having met it in the following two years provided certain conditions are met. In the Budget it is now indicated that these "period of grace" provisions apply from 2010/11.

Private individuals and giving something back

Inheritance tax ("IHT") If you give to charity at least 10% of your estate you will pay a reduced rate of IHT on death. (The 10% of your estate is calculated after deducting inheritance tax exemptions such as the spouse exemption, reliefs such as business property relief and the nil rate band). The reduced rate of IHT is 36% (compared to the normal rate of 40%). The reduced rate will apply in respect of deaths occurring on or after 6 April 2012. If an individual with a taxable estate of £100,000 (having used his nil rate band during his lifetime) on death gives £10,000 to charity and £90,000 to his children, the IHT on his estate will be £90,000 x 36% ie £32,400. Thus £10,000 will go to charity and the children receive £57,600. If the charitable gift had not been made the children would have received £60,000 and the Exchequer would have received £40,000. In other words the gift to charity of £10,000 in effect "costs" the children only £2,400.

Gift Aid: donor benefits Legislation is to be introduced in Finance Bill 2011 to increase, from £500 to £2,500, the maximum value of benefits that individuals (and companies) may receive following a Gift Aid donation to a charity of more than £10,000. This limit is subject to the existing rule that the benefit must not exceed 5% of the gift.

Gift Aid: records for small donations From April 2013 charities receiving small donations of £10 or less (but capped at a total of £5,000 per charity per year) will be able to claim Gift Aid without obtaining Gift Aid declarations from donors. This will help, for example, in relation to street collections. To qualify for this the charities will have to have been recognised by HMRC for Gift Aid purposes for at least three years, have been operating Gift Aid successfully during that time and have a good compliance record.

Gifts of art A consultation will take place over the summer about the possible introduction of a tax reduction for individuals giving a art works or historical objects of national importance to the state.

International private individuals

Remittance basis At the moment non-domiciliaries who elect for the remittance basis (and where necessary pay the £30,000 charge straight to HM Revenue & Customs) are taxed on the so-called remittance basis. This means that they pay UK income and capital gains tax on non-UK income and gains only if such income and gains are remitted to the UK. Two main changes are proposed to this:-

  • There should be no UK income or capital gains tax charge for non-domiciliaries when they remit foreign income or capital gains to the UK for the purpose of commercial investment in UK businesses.
  • The £30,000 annual remittance basis charge is to be increased to £50,000 for UK resident non-domiciliaries who have been resident in the UK for 12 tax years (but the £30,000 charge will remain for those who have been resident in seven out of nine tax years but fewer than 12 tax years).

In addition to the foregoing there is to be some simplification of the rules for non-domiciliaries. A consultation document on these changes is to be issued in June and the Government intends to implement the reforms from April 2012.

Statutory Residence Test In view of the complexity and lack of clarity in the UK's law on residence, the Government will be consulting on introduction of a statutory definition of residence. A consultation document is to be issued in June with a view to the measure being implemented from April 2012.

Other measures affecting private individuals

Income Tax: Personal Allowance For the tax year 2011/12 (starting on 6 April 2011) the personal allowance for individuals aged under 65 is to be increased from £6,475 by £1,000 to £7,475. However there is to be a corresponding reduction in the level of income at which the 40% tax rate starts from £37,400 to £35,000. This is to ensure that the increase in personal allowance does not extend to those paying higher rate income tax.

Restricting pensions tax relief As previously announced the annual allowance for tax relief on pension savings for individuals is to be reduced from a maximum of £255,000 to £50,000 from 2011/12. The lifetime allowance is to be reduced from £1.8m to £1.5m from 2012/13. Tax charges apply to those whose pension savings exceed these allowances. However, where highly paid taxpayers in final salary schemes breach these allowances, the legislation as originally proposed (published on 9 December 2010) is to be amended so that where individuals' savings breach the annual allowance resulting in tax charges, in some cases such individuals will be able to elect that the tax liability be met from their pension fund. This is most likely to be relevant to highly paid employees in final salary schemes.


The shape of some of the more important changes for private clients announced today, (including the new inheritance tax relief for charitable giving and the new rules for non-domiciliaries) is still sketchy. For the time being it will be a case of "watch this space". But we believe that many of the measures outlined above are likely to be positive for private individuals.

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.

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