UK: Budget 2009 – Personal Tax Highlights

Last Updated: 23 April 2009

Higher Earners And Trustees Face A 50% Income Tax Rate

In a Budget delivered against a backdrop of public borrowing which is set to be 12% of GDP for the current year, the stakes were raised with the introduction of a new 50% additional income tax rate for those with income of £150,000 or more, effective from 6 April 2010. This was combined with restricted tax relief for pension contributions, again for those earning £150,000 or more. The new income tax rate will apply equally to most forms of discretionary trusts.

These measures highlight the increasing differential between income and capital gains tax rates, and from next April this will be up to 32% for 50% rate taxpayers. This must place increasing emphasis on a careful tax strategy in investment selection, and seeking to invest for capital rather than income returns. It may therefore be said that the introduction of the reporting status fund regime, under which certain types of offshore fund can elect for investors to receive capital gains rather than income treatment on the sale of their investments, is very timely and likely to be of interest to many such funds. It may also be said that there is some contradiction between the corporation tax measures designed to enhance the UK's attractiveness as a jurisdiction for international holding companies, and the higher income tax rates, which will apply to the executives of those companies if they choose to base themselves in the UK.

Income Tax

A New Additional Rate For Individuals And Trustees

In contrast to the announcement at the Pre-Budget Report last November, those with taxable income above £150,000 will pay income tax on that income at a rate of 50% from 6 April 2010. It had previously been announced that the income tax increase would be to 45% with respect to such income only from 6 April 2011. This increase also applies to dividends received by individuals with taxable income above £150,000, which will be taxable at a new 42.5% dividend rate. This reflects the one-ninth tax credit available for dividends paid by UK resident companies and, in some circumstances, by non-UK resident companies.

The 50% rate and the 42.5% dividend rate will apply equally to trustees of most discretionary trusts, and appears to continue the trend of treating trusts unfairly. Trustees will be taxed in the same way as those with income of £150,000 or more, notwithstanding the actual level of taxable trust income.

Restricted Personal Allowances

It was further announced that personal allowances will be restricted for those with 'adjusted net income' of £100,000 or more, as of 2010-2011. Above this threshold, £1 of allowance will be lost for £2 of income, with a possible reduction in the allowance to nil according to the amount of income above the threshold. This is a change from the announcement in the Pre-Budget Report in November, in which a two-stage reduction was contemplated.

Essentially 'adjusted net income' refers to gross income minus specified deductions, including trading losses and payments made gross to pension schemes, as well as grossed up Gift Aid contributions and grossed up pensions contributions which have already been subject to tax relief at source.

Restricted Pensions Credit

In addition to the introduction of the additional 50% rate, it was announced that income tax relief on pension contributions will be restricted, so that relief will be progressively reduced to the basic 20% rate, as of 6 April 2011. Under current rules income tax relief at the higher rate is available on pension contributions up to £245,000 (subject to a limit of 100% of earned income) and will be available for contributions up to £255,000 for the 2010-2011 tax year.

To forestall increased contributions in advance of that date, a series of 'anti-forestalling' measures were announced to deprive higher rate income tax relief on contributions made from today for taxpayers with income of £150,000 or more who, between now and April 2011 either (i) change their normal pattern of pension contributions, or (ii) change the way in which their pension benefits are accrued, where their total benefits or contributions exceed £20,000 a year.

The type of additional contributions which will trigger restricted relief between now and April 2011 vary according to the nature of the scheme, and whether it is a money purchase arrangement or a defined benefit scheme.

Fund Taxation

Taxation Of Offshore Companies And Funds

New rules have been introduced regarding the taxation of interests in offshore companies and funds.

In 2008, the Government harmonised the taxation of dividends paid by offshore companies with that of UK companies, so that foreign dividends benefited from the same one-ninth tax credit that UK dividends receive, but only where shareholders owned less than 10% of the company. This has now been extended to all shareholders, regardless of the size of their shareholding, but only for companies resident in "qualifying territories" – ones that have a double tax treaty with the UK with a non-discrimination provision. The anomaly whereby this tax credit is available to UK resident domiciliaries but not non-domiciliaries appears to survive this change.

This will also apply to offshore funds structured as companies, subject to a significant exception. Where the fund derives more than 60% of its income from interest bearing assets then any distribution will be treated as a payment of interest, taxed at the full rate of income tax and the dividend tax credit will not be available. This will increase the rate of tax for holders of interests in offshore liquidity funds who have hitherto been able to claim the preferential dividend rate on their returns.

Technical rules will also be introduced to clarify the capital gains tax treatment of certain non-UK fund structures (Luxembourg FCPs or Irish Common Contract Funds).

As announced previously, the new definition of an offshore fund and the new reporting fund regime will apply from 1 December 2009.

Taxation Of UK Funds

Currently UK authorised funds, which are exempt from taxation on capital gains, are subject to corporation tax on their income. From 1 September 2009, such funds will be able to elect to be a 'tax elected fund'. This will effectively remove the liability to corporation tax from the fund and instead investors will be taxed as if they received the income directly. This measure should improve the competitiveness of UK based funds in the international market.

Classification Of Transactions As 'Trading' Or 'Investment'

The classification of a transaction as 'trading', under which profits are charged to income tax, or 'investment', which gives rise to a charge to capital gains tax has not until now been set out in statute, but is governed by somewhat uncertain case law. New legislation will publish a "white list" of transactions that will be treated as non-trading transactions if carried out by investment funds.

Non-UK Domiciliaries

Aside from a few technical clarifications to the new rules on the remittance of income and gains introduced by the Finance Act 2008, there have been no significant amendments to the rules specifically affecting non-UK domiciliaries.

Certain exemptions relating to the remittance of property purchased with relevant foreign income have been extended so that they will apply to property purchased with foreign employment income and foreign capital gains with effect from 6 April 2008.

Disclosure

Following on from the 2007 Offshore Disclosure Facility, a 'New Disclosure Opportunity' (NDO) has been announced. This will provide holders of offshore accounts the opportunity to disclose details of those accounts to HMRC and settle any unpaid tax. The NDO will run until March 2010. HMRC will also seek to issue notices to financial institutions to provide information about offshore account.

Naming And Shaming

Plans have been announced to publish the names and details, including addresses, of deliberate tax defaulters (both individuals and companies) who deliberately under declare tax due or overstate claims or losses by more than £25,000. The legislation will be intended to catch only deliberate defaults or omissions and not errors arising from a failure to take reasonable care. HMRC will publish a list of names and details of defaulters quarterly and they will be removed after one year (assuming no further infringements). No details of deliberate defaults committed prior to the legislation becoming effective will be published. Those who make an unprompted disclosure or a full prompted disclosure will not have their names and details published.

Any person who incurs a penalty for deliberately understating tax by at least £5,000 will be required to provide more information on their tax affairs for up to 5 years to allow HMRC to monitor future compliance but will not have their names and details published unless they meet the £25,000 limit.

Whether or not these rules are compatible with the Human Rights Act remains to be seen.

Capital Gains Tax

The annual exemption from capital gains tax for individuals will rise to £10,100 and for most trustees to £5,050.

Inheritance Tax

Nil Rate Band

The nil rate band for inheritance tax will rise to £325,000 from 6 April 2009 as previously announced.

Agricultural Property Relief

Responding to a request earlier this year by the European Commission, agricultural property relief and woodlands relief from inheritance tax have been extended to cover property located in the European Economic Area, not just the United Kingdom, Channel Islands and Isle of Man as previously. These provisions are backdated to 23 April 2003.

Stamp Duty Land Tax

The temporary SDLT relief on purchases of residential property of less than £175,000 was due to expire on 2 September 2009. This will now be extended to 31 December 2009, reverting to the previous threshold of £125,000 on 1 January 2010.

Islamic Finance Arrangements

Under provisions to be introduced in the Finance Act 2009, relief from SDLT and CGT will be available where land assets are issued as securities in alternative finance arrangements. Up until now, such tax charges had acted as a bar to using land assets in alternative finance bonds.

Stock-Lending And Repo Arrangements

It was announced in the Pre-Budget Report that steps would be taken to remove certain adverse tax implications which arose as a result of the insolvency of one of the parties to stock lending and repurchase arrangements. More detail of the proposed changes has been provided in the Budget announcements today.

Corporation Tax

Extension Of Trading Loss Carry Back For Business

Finance Bill 2009 will provide companies and unincorporated businesses with more opportunity to claim relief for their trading losses against their profits of earlier tax years. This is an extension of the one-year period announced in the Pre-Budget Report last year. The legislation which currently only permits businesses to set their trading losses against their profits of the prior year will be extended to permit a limited carry back to two further years for a limited period.

Unlimited losses can be set against profits of the prior year and, if there remain unutilised losses after this set-off, up to £50,000 can be carried back a further two years. This will apply to companies with accounting periods ending between 24 November 2008 and 23 November 2010 and to trading losses made by unincorporated businesses in the tax years 2008-2009 and 2009-2010.

Foreign Dividend Exemption

A general tax exemption will be introduced from 1 July 2009 for receipts of foreign dividends by UK companies. There will be certain exempt classes of dividend and certain anti-avoidance rules will also apply but, in principle, all dividends paid to UK companies by non-UK companies will in future be exempt from UK taxation in the hands of a UK company. It was originally proposed that a 10% minimum shareholding requirement be imposed in some situations but it seems that this restriction has now deliberately been removed.

In association with the introduction of this general tax exemption, certain changes will be made to the taxation of controlled foreign companies and also to the tax-deductibility of corporate debt. As regards the latter, there has never previously been any particular restriction on the tax-deductibility of a company's interest costs (other than under transfer pricing rules or where special anti-avoidance rules applied). But a general restriction on tax-deductibility of interest will now apply in certain situations, based upon a rather complex formula that is designed to prevent a UK company's interest deductions exceeding the total funding costs of an international corporate group of which it is a member.

Personal Responsibility Of Company Officers For Corporate Tax Compliance

In future, the senior accounting officers of large companies will be obliged to take reasonable steps to establish and monitor accounting systems to ensure that they are adequate for accurate tax reporting. The relevant officer will have to certify annually that a company's systems are adequate in this respect, specify any inadequacies and inform the company's auditors of these. Penalties for noncompliance will be imposed on both the company and on the accounting officer personally.

Offshore Financial Centres

As announced in the 2008 Pre-Budget Report, the Government commissioned a review into the longterm opportunities and challenges facing the British Crown Dependencies and Overseas Territories as financial centres (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Jersey, Isle of Man and Turks & Caicos Islands). An interim progress report was issued today which highlights the discussions that have taken place to date.

This progress report does not itself make any recommendations, but does note the increased pressure on such financial centres to implement agreed standards for the exchange of information and that 'it will be important for the financial centres covered by this Review to be able to respond positively to the emerging consensus'. No doubt the final report will increase the pressure on offshore financial centres to follow through on the commitments that have already been made in this regard.

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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