UK: Budget 2009, Prosper Newsflash

Last Updated: 23 April 2009
Article by Deloitte Tax Group

Most Read Contributor in UK, August 2017

The 2009 Budget contained significant changes for individuals as Alistair Darling demonstrated his intention to repay public borrowing by increasing tax on those with the highest income. The Chancellor also looks to further target tax avoidance and 'name and shame' tax defaulters. As promised previously, only minor changes were made to the new rules for non-UK domiciles.

Tax rate and personal allowance changes for higher rate taxpayers

From 6 April 2010 there will be changes to the tax rates and the personal allowance applying to higher rate taxpayers. An additional rate of 50% will apply to taxable income above £150,000.

The basic personal allowance will also be reduced for those with income exceeding £100,000. There will be a reduction in the allowance by £1 for every £2 by which a taxpayer's net income exceeds £100,000, giving a 60% marginal rate on incomes between £100,000-£112,950, assuming personal allowances are unchanged.

In addition, from 6 April 2010 there will be three rates of tax applying to dividends. To reflect the new top rate of tax, an additional dividend rate of 42.5% will be introduced for those with incomes of over £150,000.

Increase in income tax rates for trusts

From 6 April 2010, the income tax rate for UK resident discretionary trusts is to be increased to 50% on income above £1,000.

UK personal allowances and reliefs for non-UK resident individuals

From 6 April 2010 UK personal allowances and reliefs will no longer be available to non-UK resident individuals who benefit from UK personal allowances and reliefs solely because they are Commonwealth citizens. However, it is expected that some non-UK resident individuals will continue to qualify for allowances and reliefs through other means, such as the application of a relevant double tax agreement.

Increase in Individual Savings Account limits

The new Individual Savings Accounts (ISA) investment limit will be increased to £10,200, of which £5,100 can be saved in cash. Currently the maximum is £7,200 (£3,600 cash). This increase will be made in two stages, it will come into effect from 6 October 2009 (2009/10) for those aged 50 and over, and from 6 April 2010 (2010/11) for everyone else.

Venture Capital Schemes

The Chancellor announced several measures designed to improve tax relief for individuals investing in Venture Capital Schemes.

To date, investors in Enterprise Investment Scheme (EIS) companies have been able to treat 50% of their investment as being made in the previous tax year (subject to an overall investment limit of £50,000). For 2009/10 onwards, the annual investment limit for income tax relief on EIS subscriptions remains at £500,000 and it is possible for the full amount to be carried back and treated as being made in the preceding year.

The new measures will also relax the time limits by which venture capital companies need to employ the money invested, and will apply to investments made on or after 22 April 2009.

Tax relief for pension contributions to be restricted

Higher rate income tax relief is being restricted for contributions by or on behalf of individuals to UK registered pension schemes and qualifying overseas pension schemes. Higher rate relief will be tapered away for those with taxable incomes of between £150,000 and £180,000, so that those with incomes above £180,000 will only benefit from basic rate tax relief.

The main change comes into effect from 6 April 2011, but "anti-forestalling" rules apply from 22 April 2009 to prevent individuals taking advantage of the deferral.

In each case the new rules will only apply to those who change their "normal pattern", which is defined as being payments made quarterly or more frequently of amounts which do not fluctuate, and whose total pension savings exceed £20,000 per annum.

Foreign dividend tax credit extended

With effect from 22 April 2009, individuals receiving dividends from a non-UK company of which they own 10% or more will be eligible for a 10% notional tax credit, as long as the source country is a 'qualifying territory'; broadly one with a double tax treaty with the UK, with a non-discrimination article. Currently the tax credit is only available to shareholders with 10% or less.

No credit is available where the company is an offshore fund, unless it is largely invested in equities. Where the fund is substantially invested in interest-bearing assets, no credit will be available.

Remittance basis for non-UK domiciles – minor changes

As promised, only minor changes were made to last year's new rules for non-UK domiciles. Some relaxations were introduced.

Currently some items purchased from foreign investment income and foreign trading income can be brought to the UK without triggering a remittance. These include personal clothing and jewellery, property brought to the UK on a temporary basis, or brought to the UK for repair and items costing less than £1,000. These exemptions have been extended to purchases out of foreign earnings and foreign capital gains. This is welcome as there is no longer any need to consider the source of the funds used to purchase these items. This applies from 6 April 2008.

A number of relaxations to the requirement to file a tax return to claim the remittance basis have been made. Individuals such as non-working spouses of non-UK domiciled individuals will be exempt from submitting UK tax returns to claim the remittance basis where they do not have a UK tax liability or they have less than £100 of taxed interest.

In addition, no formal remittance basis claim will be required where unremitted income and gains are less than £2,000 – it will be given automatically unless the individual wishes to be taxed on an arising basis.

A new exemption has also been introduced for non-UK domiciled employees who have paid foreign tax on overseas earnings. Where these earnings are less than £10,000 and foreign interest is less than £100, no claim for the remittance basis will be required.

The legislation will be amended to ensure that the £30,000 remittance basis charge is available as a tax credit to cover gift aid payments to charity. The changes will be effective from 6 April 2008.

Carry back of trading losses

The Budget confirmed a previous announcement that companies and unincorporated businesses making trading losses will generally be able to carry back these losses for up to three years rather than the current one year. For companies the new rules will apply for accounting periods ending between 24 November 2008 and 23 November 2010, while for unincorporated businesses the new rules will apply in respect of trading losses for the 2008/09 and 2009/10 tax years. This is an extension by one year of the original proposal. The one year loss carry back will remain unlimited, whereas the carry back to earlier periods will be capped at £50,000.

Furnished holiday lettings

From 6 April 2010 the furnished holiday letting (FHL) rules will be repealed because HMRC have operated them in a way that was potentially non-compliant with European law. These measures currently treat landlords as trading for certain tax purposes provided that they satisfy certain conditions. Until the FHL rules are repealed, HMRC will extend these rules to furnished holiday accommodation elsewhere in the EEA, but not outside it.

Once repealed, the consequences will be that:

  • Any losses can only be carried forward against future profits of property letting; no sideways relief against other income will be available;
  • The 10% wear and tear allowance will be replaced by a claim for capital allowances;
  • Profits will not be pensionable;
  • Capital gains tax reliefs such as rollover relief, holdover relief and entrepreneurs' relief will no longer be available.

Extension of agricultural property and woodlands reliefs

In January 2009 the European Commission made a formal request to the UK to amend inheritance tax (IHT) legislation to bring to an end the practice of restricting relief to UK land. In response, with immediate effect, IHT agricultural property relief will be extended to property in the European Economic Area (EEA). Tax due or paid after 23 April 2003 in relation to agricultural property located within the EEA will qualify for a refund.

The scope of a number of related IHT reliefs for woodlands has also been extended in a similar way. In a surprise move, holdover relief for capital gains tax purposes has also been extended to include agricultural property, farmed by someone other than the owner, in an EEA state. Claims can be made retrospectively where they are still in date.

No changes were made to the conditions for Business Property Relief (BPR) as it does not have the same territorial restrictions.

Targetted anti-avoidance measures

Certain specific measures will be introduced to deny tax benefits arising from the creation of employment income losses, the sale of income streams, interest payments on loans and losses arising from offshore life assurance policies. These are targetted measures to counteract perceived abusive tax avoidance.

Increase in substantial donor threshold for charities

If a charity enters into certain specified transactions with a substantial donor this can result in a tax charge on the charity. The rules are designed to prevent individuals from using charities to avoid tax rather than for charitable purposes.

There are annual and six yearly thresholds of gifts by which an individual can be a substantial donor. The annual threshold is to remain at £25,000, but the six year threshold for total gifts will increase from £100,000 to £150,000.

Offshore disclosure

The Government has announced that a new disclosure opportunity will run until March 2010. This is intended to give holders of offshore accounts a final opportunity to voluntarily disclose details of unpaid tax or duties. Taxpayers who do so will have to pay the tax due, together with interest and a reduced penalty. HMRC stated that they will pursue those who do not avail themselves of this opportunity and they can expect to pay the tax, interest and penalties due in full.

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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