On 6 December 2012, the Treasury published draft legislation for Finance Bill 2012. This includes draft legislation for the measures announced by the Chancellor of the Exchequer in his Autumn Statement on 29 November 2011, giving us a better idea of how these measures will operate in practice ( click here to read our previous update). The parts of the Finance Bill 2012 that we consider to be of particular relevance to our clients are summarised below.
As announced in the Autumn Statement, the capital gains tax ("CGT") annual exemption for individuals and personal representatives will be frozen at its current level of £10,600 for tax year 2012/13. The annual exemption for trustees is frozen at £5,300. It is confirmed that, from tax year 2013/14 onwards, the annual exemption will rise in accordance with the Consumer Prices Index ("CPI").
The threshold for the 40% rate of income tax will be lowered to £34,370 for tax year 2012/13 from its current level of £35,000. The 50% higher rate will remain and will apply to taxable income in excess of £150,000.
The nil-rate band for inheritance tax ("IHT") will stay fixed at £325,000. It will remain fixed at this level until 5 April 2015 when it will then rise annually in line with the CPI.
Tax Relief for Entrepreneurs
The draft legislation includes further details on the new Seed Enterprise Investment Scheme ("SEIS"), as first announced in the Autumn Statement.
SEIS is targeted at entrepreneurs and is designed to help small start-up companies raise external finance when they might otherwise face barriers to doing so because of their perceived riskier status.
Investors will receive income tax relief on their subscription for shares in a "qualifying company" to the value of 50% of the amount they have invested. Investors will also be entitled to a CGT exemption if they make a gain when they dispose of their shares. For 2012/13 only, there will also be a CGT exemption (or "holiday") for gains made by investors on their personal assets, provided those gains are reinvested in SEIS shares in the same year. We do not yet have draft legislation for this CGT holiday but this is expected in January 2012.
To qualify, the investor must have a stake of less than 30% in the company. A "qualifying company" will be one which has 25 employees or less and assets of up to £200,000.
Investments must be limited to £100,000 annually but any unused part of this allowance can be carried back to the previous year.
This looks to be a generous scheme; particularly as the 50% income tax relief will apply regardless of the investor's personal rate of tax. The scheme is intended to come into effect from 6 April 2012.
Tax Relief for Donations of Pre-Eminent Objects
In order to encourage donations of pre-eminent works of art and items of national, scientific, historic or artistic importance to the nation, draft legislation has been published for a new tax incentive for donors, as first announced in the Autumn Statement.
If a donor gifts or loans a pre-eminent object to an appropriate institution (such as an accredited museum or gallery) for public display, the donor will receive a reduction in their income tax or CGT liabilities. The amount of relief will be 30% of the agreed value of the object (20% for corporate donors). Donors will be able to spread the value of the tax reduction across a period of up to 5 years.
The maximum tax reduction will be set at £30m per year (combined with any reduction received under the existing IHT Acceptance in Lieu scheme).
There is presently no similar relief available for lifetime gifts of pre-eminent objects to the nation, so this relief is welcome. The present IHT Acceptance in Lieu scheme applies to gifts of pre-eminent objects from the estate of a deceased person, and operates in respect of IHT only.
IHT relief for charitable legacies
As first announced earlier this year, the Government proposes to offer a reduction in the rate of IHT from 40% to 36% where 10% or more of a deceased person's estate is left to charity.
We had been awaiting further details of how the relief will operate in practice and in particular how the 10% will be calculated. This is now clearer but complex rules will apply to determine whether the charitable gift meets the 10% threshold where the estate includes jointly owned assets, interests in certain types of trust or assets which are subject to "the gift with reservation" rules. The draft legislation confirms that the relief will apply to charitable gifts made via a "deed of variation", as well as to gifts made by Will.
The new relief will apply to deaths on or after 6 April 2012. If you would like to include a qualifying gift to charity in your Will, or would like us to review your Will to advise whether an existing charitable gift should qualify, please contact us.
Non-domiciled clients and the remittance basis
Draft legislation has been published to implement changes to the rules for non-domiciled individuals who pay UK income and capital gains tax on the "remittance basis". These changes were first announced in the summer. We will be shortly publishing a separate update on these changes.
Statutory Residence Test
It was announced in the summer that the Government would be introducing a statutory residence test from 6 April 2012. The test would have the effect of providing individuals with greater certainty of whether their presence in the UK amounts to "residence" for UK tax purposes. At present, there is no such statutory test, and individuals must instead rely on a complex body of case-law and non-statutory guidance from H M Revenue & Customs.
However, it was announced on 6 December 2011 that the statutory residence test will be postponed until 6 April 2013, in order to allow more time to finalise the details. This is disappointing and prolongs the period of uncertainty for clients who do not live in the UK full time, or have left the UK but perhaps retain some connections here. The delay goes to show the complexities in this area which will clearly take further time to resolve.