UK: The 2013 Budget

Last Updated: 3 April 2013
Article by Smith & Williamson

INTRODUCTION

We had been told by the media to expect a "boring Budget", particularly bearing in mind that much of the headline news had been included in the Autumn Statement last December.

The 'tom-toms' were certainly quieter this time around than on previous occasions, with less leaking of news until the Evening Standard got ahead of itself. We did have Liam Fox calling for a capital gains tax holiday to kick start the economy, which left us wondering whether as a former cabinet minister he had the Chancellor's ear.

And then the day before the Budget the Treasury announced an extension to the childcare scheme to come in Autumn 2015 (after the next Election). That immediately raised the question of what taxes would go up to pay for it.

In the event there was little in the way of new tax news in the Budget speech, but as always the devil is in the detail. The Overview of Tax Legislation itself contains 185 pages of proposals which are considered in this booklet.

With very little cash to give away, there was some good news for entrepreneurs and individuals alike.

Significant changes have taken place to assist home buyers to get onto and move up the property ladder, at least when the home is worth less than £600,000. These initiatives should provide an enormous fillip to home ownership and new build projects.

The headline measure on jobs announced by the Chancellor was the introduction of an employers' national insurance relief of £2,000 per year from 2014 for all businesses. This will help smaller businesses in particular and indeed as a result many will pay no employers' national insurance at all.

There is also a simplification of corporation tax from 2015 when there will be a single 20% rate of corporation tax applying to all companies.

The one-off CGT exemption for a capital gain reinvested in a Seed investment enterprise scheme (SEIS) made in 2012/13 has been extended for 2013/14, but only to the extent of a maximum one-half of the gain. This will give a boost to SEIS, a relief that started slowly but is now beginning to take off.

On the other hand there were some worrying developments for businesses and individuals. There is to be a consultation on how members of LLPs are taxed which could result in yet more complications for firms to wrestle with. And proposals to restrict business property relief and agricultural property relief could result in potentially significant extra inheritance (IHT) tax liabilities for farmers and business owners in particular. I have a vision of farmers marching down Whitehall, with muck spreaders bringing up the rear.

1 PERSONAL AND TRUST TAXES

1.1 Income tax rates and thresholds

Income tax and national insurance contribution (NIC) rates and thresholds will remain at their 2012/13 levels in 2013/14, except where noted below. All thresholds are set out in the appendix.

The personal allowance for individuals born after 5 April 1948 will increase by £1,335 to £9,440 for 2013/14. The upper threshold of the basic rate band will be reduced by £2,360 to £32,010.

For 2014/15, the personal allowance for individuals born after 5 April 1948 will increase to £10,000. Again, there will be a decrease in the basic rate band this time by £145 to £31,865.

The additional rate of income tax will be reduced from 50% to 45% and the dividend additional rate from 42.5% to 37.5% from 6 April 2013.

Comment: The rates and increases for 2013/14 have all been announced in the previous Budget and Autumn Statement.

The increase in the basic personal allowance to £10,000 has been brought forward one year and is a welcome move.

As previously announced, the personal allowances for those born before 5 April 1948 remain frozen. This begins the phasing out of age related allowances to bring them in line with a universal allowance for all.

1.2 Cap on tax reliefs

As announced in Budget 2012, a cap on certain income tax reliefs claimed by individuals 'sideways' against general income will apply from April 2013.

Comment: This well trailed cap will be introduced in line with the post-consultation proposals. Much of the controversy surrounding the cap when it was first announced at this time last year related to the impact on the charitable sector. As such, gift aid and other charitable donations were quickly excluded. Further representations, via the consultation process, then also led to the exclusion of enterprise investment scheme (EIS)/seed EIS losses and overlap relief from the cap.

Even after these amendments, the cap will still affect many individuals especially in relation to qualifying loan interest and loss relief for shares not within the EIS.

1.3 Universal credit

The previously announced replacement of the tax credit system with universal credit begins its phased introduction from April 2013. It is expected that tax credits will be fully withdrawn by 2017.

The Government has now announced that it will legislate to ensure that universal credit will be exempt from income tax.

Comment: The introduction of the universal credit, together with the tax free childcare scheme, is part of the Government's pledge to improve work incentives and help families become more independent by ensuring it is worthwhile to work full time.

1.4 London Anniversary Games 2013 and Glasgow Commonwealth Games 2014

In the 2012 Budget, the Government revised its practice on the taxation of non-UK resident sports people for certain high profile sporting events. In keeping with this approach, legislation will be introduced in the Finance Bill 2013 to provide an exemption from UK tax on the earnings of non-UK resident sports people and officials in relation to the London Anniversary Games in 2013 and the Glasgow Commonwealth Games in 2014.

Comment: These exemptions are in line with those given previously for the Champions League Final 2013 and the Olympics. It remains to be seen whether a general exemption will be given or whether the Government will continue to give such exemptions on an ad‑hoc basis to entice similar events to the UK.

1.5 Statutory residence test

Following consultation which commenced in December 2011, the statutory residence test (SRT) will be enacted from 6 April 2013.

As part of this, overseas workday relief (OWR) and the previous concession which allowed apportionment of earnings under the OWR rules will also be enacted.

Comment: Residence is a fundamental concept as it defines the scope of an individual's UK tax liability. To date there has not been a full legal definition of tax residence, meaning that the rules were unclear, complicated and seen as subjective. This created uncertainty for individuals regarding their residence status and that uncertainty was a deterrent to businesses and individuals considering investing in the UK.

After being delayed, the SRT will finally be enacted providing a higher degree of certainty in this area.

2 PENSIONS, INVESTMENTS AND CAPITAL TAXES

2.1 Pension contributions

When pension simplification was introduced in 2006/07, the annual allowance was £215,000 rising to £250,000 over the following four years.

Since then we have seen the introduction of the special annual allowance charge as an interim measure and recently the reduction in the annual allowance to £50,000 from 5 April 2012 together with the ability to use unutilised relief from the previous three years.

This will now fall to £40,000 with effect from 6 April 2014.

Comment: The reduction in the annual allowance reflects the Government's policy to reduce tax relief for high earners on their pension contributions.

2.2 Lifetime allowance

On 6 April 2006, a measure known as the lifetime allowance was introduced, effectively capping the value that individuals could accumulate tax efficiently within pension plans to £1.5m.

This rose to £1.8m over the next four years before being reduced to £1.5m from 6 April 2012.

A further announcement has been made that it will now fall to £1.25m with effect from 6 April 2014.

Comment: By reducing the lifetime allowance the Government is reducing the maximum amount of tax free cash that is available, as well as the tax efficient accumulation that can be made within pension schemes. Again, this will impact mostly on high earners.

The changes are accompanied by rules whereby individuals can elect to adopt the current lifetime allowance of £1.5m provided that they pay no further pension contributions or accumulate further pension benefits after 5 April 2014.

Individuals will also be able to adopt their own individual allowance representing the value of their fund if it falls between £1.25m and £1.5m. Again, they will not be able to pay further contributions after 5 April 2014 but it will mean that they can remain members of defined benefit schemes going forward. Furthermore, if their fund values fall below their personal lifetime allowance they will be able to pay contributions again without having to adopt the new lower limit of £1.25m. Further announcements on the individual allowance will follow shortly. It remains to be seen whether it will be possible to make the election to adopt after 6 April 2014, bearing in mind that a valuation on that date will be needed before a decision can be made.

2.3 Overseas pension schemes

Transfers can be made from UK pension schemes to qualifying recognised overseas pension schemes (QROPS) which can be useful in cases where individuals are leaving the UK permanently.

If payments are made from those QROPS and the individual was resident in the UK in the year of payment or any of the previous 10 fiscal years, they have to be reported to HMRC. As part of obtaining QROPS qualification, their administrators have agreed to comply with these and other reporting requirements.

It has been announced that QROPS will need to re-notify HMRC every five years that they continue to meet the reporting and other requirements to be a QROPS and former QROPS will also have to continue to report payments out of transfers that they received from UK schemes while they were QROPS.

Additional reasons for excluding pensions schemes from being a QROPS will also be introduced.

2.4 Drawdown

Unisex pension rates were introduced in December 2012 and as a result the Government Actuary's Department (GAD) had been asked to review the drawdown tables that currently apply to drawdown pension schemes. These govern the maximum amount of income that can be drawn from those schemes.

It has also been announced that as of 26 March 2013 the maximum income that can be withdrawn from drawdown plans will revert to 120% of the equivalent GAD rate, which takes us back to the position up to 5 April 2011.

Comment: Following falls in 15 year gilt yields, notably since April 2011, the GAD rate, and therefore the amount that can be withdrawn from drawdown schemes has reduced quite significantly and these changes are welcomed as they will realign the amounts pensioners can withdraw from their drawdown plans closer to where it was in spring 2011.

2.5 Child trust fund and junior ISAs

It is not currently possible to transfer funds within a child trust fund (CTF) to a junior ISA (JISA) and those who have them cannot currently open a JISA as they are obliged to make savings into their existing CTF.

New rules are to be introduced to allow individuals with a CTF to invest in a JISA going forward. It is understood that currently over £4bn is invested in CTFs and there is to be a consultation on allowing the transfer of CTFs to JISAs.

2.6 Seed enterprise investment scheme

The Government has announced two changes to the SEIS rules.

The first change is to amend the independence condition so that companies which were incorporated by formation agents (and initially controlled by another company) are not disqualified from being able to benefit from SEIS investment.

The amendment will allow 'off the shelf companies' not to be disqualified from SEIS relief provided that the corporate control only exists when the company has subscriber share(s) in issue and has not begun, or prepared to begin, its trade.

This new rule will apply to shares issued after 5 April 2013.

The second change to the SEIS rules is to extend the capital gains tax (CGT) relief on gains realised in 2013/14 which are reinvested in one or more SEIS companies. It should be noted that the extension of this relief is restricted to 50% of the qualifying reinvested amount (previously there was no restriction).

To illustrate, in relation to gains arising in 2013/14, an individual would be able to reinvest into a SEIS company in 2013/14 or 2014/15 a maximum of £100,000 of which a maximum £50,000 of the original gains would not be subject to capital gains tax.

This is in contrast to the maximum amount an individual could re-invest in 2012/13 or 2013/14 of £100,000 in relation to capital gains realised in 2012/13, whereby the maximum £100,000 could be exempt from capital gains tax.

This amendment does not affect the maximum amount of £100,000 that can be invested each tax year under SEIS in order to qualify for income tax relief at 50%.

Comments: The change to allow companies originally incorporated by formation agents to benefit from SEIS was expected and followed a number of representations by various advisors, companies and interested bodies.

The extension of the CGT relief for reinvested gains is welcome news, and should maintain the popularity and momentum of the scheme.

2.7 Capital gains tax: annual exempt amount

The Government announced in the Autumn Statement that it would increase the annual exempt amount by £300 to £10,900 for 2013/14.

Thereafter it will increase by £100 to £11,000 in 2014/15 and a further 1% to £11,100 in 2015/16.

Comment: After a two year freeze, the rise in the annual exempt amount is welcomed, as is the absence of any increase in the rate of headline CGT.

2.8 Heritage maintenance funds (HMF)

The easing of restrictions for HMFs announced in the 2012 Budget is to be introduced with retrospective effect from 6 April 2012.

Comment: The decision to remove the existing quirk in the legislation which could result in a double tax charge for beneficiaries of HMFs was welcome news and it is hoped that it will improve the appeal of HMFs.

2.9 Inheritance tax: nil-rate band

The freeze on the tax free nil-rate band for IHT will now be extended for a further three years than that previously announced.

The current rate of £325,000 will therefore remain frozen until 2017/18.

Comment: The extension of the freeze was originally announced on 11 February 2013 and forms part of the Government's package to fund a cap on care costs for older people.

The freeze is expected to result in an increased administrative burden for approximately 5,000 additional estates that will fall within the charge of IHT by 2017/18.

2.10 Inheritance tax: spouses and civil partners domiciled outside the UK

The Government has confirmed that the current £55,000 limit on IHT-free transfers from a UK domiciled individual to a non-UK domiciled spouse or civil partner is to be increased to be in line with the nil-rate band, with further rises linked to any future changes in the nil-rate band.

A non-UK domiciled spouse or civil partner may also elect to be treated as domiciled in the UK for IHT. The election will be irrevocable and will only cease to have effect after the individual has been non-UK resident for more than four consecutive tax years.

The election will enable a non-UK domiciled spouse to claim the spousal exemption in full, but will bring their worldwide assets within the scope of UK IHT.

The election can be made at any time after marriage or registration of civil partnership or retrospectively up to two years after a death occurring on or after 6 April 2013.

Moreover, the applicant can make an election from a specific date (the earliest of which can be 6 April 2013) up to seven years earlier, such that any lifetime gifts are covered by the election.

Comment: The increase to £325,000 is welcome as the limit of £55,000 has remained unchanged since 1982.

Careful thought will be needed, however, before a non-UK domiciled individual opts into the UK IHT net to facilitate transfers from their spouse or civil partner, lest a short-term benefit is outweighed by long-term consequences.

2.11 Inheritance tax: limiting the deduction of liabilities

In calculating IHT, relief for debts is available in most instances. Where it is necessary to determine which asset has its value reduced by a debt, it is generally the asset against which the debt has been charged or secured.

With effect for transfers or deaths occurring on or after the date of Royal Assent to the Finance Bill 2013, it is intended that certain restrictions or conditions are applied as set out below.

  • A deduction for a liability will only be allowed to the extent that it is repaid to the creditor, unless it is shown that there is a commercial reason for not repaying the liability and it is not left unpaid as part of arrangements to obtain a tax advantage.
  • No deduction will be allowed for a liability to the extent that it has been incurred directly or indirectly to acquire property which is excluded from the charge to IHT. This is unless the property has since been disposed of or where the liability is greater than the value of the excluded property.
  • Where the debt has been incurred to acquire assets on which an IHT relief such as business, agricultural property and woodlands relief is due, the debt will reduce the value of the assets that qualify for relief. Any excess liability over the value of the assets qualifying for relief will be allowable as a deduction against the estate in general, subject to the new rule about unpaid debts.
  • Trustees as well as individuals will be subject to the new rules except that for trustees the unpaid liabilities rule will not apply to the calculation of the value for the purposes of the ten yearly anniversary charge.

Comment: When borrowing to invest in a business it has been common practice for many years to secure the borrowings against an asset which would otherwise be chargeable to IHT, such as residential property. The business may well qualify for business property relief and not be chargeable to IHT. The residential property is chargeable to IHT, and therefore at present benefits from a reduction in taxable value by having debt secured on it. Such sensible arrangements now seem to be tarred as a 'scheme'. Aside from tax efficiency, it may well be easier to persuade a lender to advance debt, and on more advantageous terms, if that debt is secured on bricks and mortar rather than on an untested business.

If one of two joint owners of such a property dies, the loan will not necessarily be repaid to the creditor, but could be taken on by the survivor. In order for the loan to be deductible, would this have to be classed as a 'commercial' reason for non-repayment?

Where an employee benefit trust (EBT) has made a loan to a beneficiary, the beneficiary may have used that to acquire an asset, but if the beneficiary dies there would currently be a debt in his estate to reduce the total value subject to IHT. If the loan is not repaid when the beneficiary dies but perhaps waived by the trustees, such arrangements would seem to be caught by the new rules, unless it can be shown that there is a commercial reason for not repaying the liability and it is not left unpaid as part of arrangements to obtain a tax advantage.

There has been no advance warning of these proposed restrictions, and these new rules are not open to public consultation, so it is to be hoped that informed parliamentary committee members will consider the commercial aspects.

2.12 Social investment tax relief

The Government has announced that it is to consult over the summer on the introduction of a new tax relief to encourage investment into social enterprise with a view to introducing the legislation in Finance Bill 2014.

Comment: Although any relief for philanthropic acts is of course welcome, until further details are released as part of the consultation it is not clear what the scale or scope of this new relief will be.

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