Budget 2014: Deloitte comments on the main personal tax rate changes


Lizzie Hill, a tax partner in the tax practice at Deloitte in Cambridge, comments on yesterday's Budget.

Pensions relaxations

A welcome relaxation to the pensions regime has been announced, with some measures to take effect from 27 March 2014. Others will apply from April 2015 after some consultation.

 At the moment, those going into retirementhave a choice of buying an annuity or using ‘flexible drawdown’.  There are immediate changes to the flexible drawdown rules, in particular an increase in the capped drawdown limit to 150% of an equivalent annuity, up from the current 120%.  The minimum income needed to go into flexible drawdown is reduced from £20,000 to £12,000.  Whilst these changes undoubtedly mean that more people will be able to access flexible drawdown, there are costs involved in doing this and these could be disproportionate at lower amounts.

There are also changes to the trivial commutation limits – at present if total pension pots are less than £18,000 these can be paid as a lump sum.  This is to be increased to £30,000 – a welcome simplification for those affected who currently have to buy an annuity for a small amount.

Of more long-term interest are the proposed changes for those in defined contribution schemes – some 13m according to the Chancellor.  The proposal is that the need to buy an annuity will be abolished and people will be allowed a free choice around what to do with their pension fund. The tax free lump sum of 25% will remain and withdrawals will be taxed at the marginal tax rate (instead of the current 55% which applies to over-withdrawals).  There will be access to free advice to help people choose the best option for their circumstances.  These rules are set to apply from April 2015 for those in defined contribution schemes with consultation for those in defined benefit schemes.  

This will be of great interest to those people who have been affected by poor annuity rates at the time of their retirement.  The only choice up to now has been to go into pension drawdown, which can be expensive for smaller pension pots.

Tax-free childcare

Detailed proposals around the operation of the new tax-free childcare were announced yesterday. The ceiling, which was to have been 20% of childcare costs, up to a maximum of £1,200 per child per annum, will now be increased to £2,000 per child, so that costs of up to £10,000 per annum per child can be covered.  Parents will need to pay £8,000 into a child care account (from which their childcare costs will be paid) to get the maximum Government contribution of £2,000. The scheme will be open to both employed and self-employed parents, providing that neither has income of more than £150,000 per annum.  Both parents need to work.  The relief will be available for children aged up to 12, and will be rolled out to all eligible families within the first year of the scheme, rather than the gradual roll-out originally proposed. 

The childcare accounts will be run by NS&I and there will be a quarterly reconfirmation of entitlement. Whilst administration is apparently being kept to a minimum, there will undoubtedly be some form-filling and the need for quarterly reconfirmation in order to continue to receive the payments.  It is not clear whether there will be costs associated with running the account, or interest paid on credit balances.  Those who already receive childcare vouchers from their employers will be able to continue to do this, providing employers continue to run the scheme.  Those in such schemes, particularly those who joined them prior to 2011, will need to consider their options carefully, to make sure that they are in the scheme which will deliver the highest payment to them.

Social investment tax relief

The Finance Bill 2014 will introduce a range of capital gains and income tax reliefs to incentivise investment by individuals in qualifying social enterprises. Income tax relief will be available at a rate of 30% of the amount invested. The relief will allow eligible social enterprises to receive a maximum of around £290,000 investment over three years. The new rules will apply from 6 April 2014 and further details will be released on 27 March 2014.

Individuals – non-resident capital gains tax

There have been two measures included in today’s Budget notes relating to the taxation of non-UK residents.

The first, as announced in the Autumn Statement 2013, is legislation that will be introduced to charge capital gains tax on non-residents owning UK property.  Whilst we will have to wait for the consultation document (which we expect on 27 March) for more detail, the commentary released today suggests this will only relate to UK residential property and will apply to disposals from April 2015. 

What was more surprising was the second measure.  Today the Chancellor announced an extension of the tax regime relating to ‘high value residential property’ owned by companies, partnerships with corporate members and collective investment schemes (non-natural persons) to properties worth more than £500,000, instead of the previous limit of £2m.

These taxes were originally introduced from April 2013 to apply to residential property worth more than £2m owned by non-natural persons and include a higher stamp duty land tax rate of 15%, together with ongoing annual taxes (Annual Tax on Enveloped Dwellings or ATED) of up to £140,000 depending on the value of the property.  Capital gains tax also applies on sale of the property.

There are a number of exemptions to these taxes, including for buy-to-let investors and property developers.

Detail included in the budget notes today sets out that the extension will apply in a staggered way, starting from tomorrow, as follows:

  • The 15% rate of SDLT will take effect for transactions taking effect on or after 20 March 2014 (so this compares to rates of 4% for properties worth more than £500,000 and 5% for properties worth more than £1m which apply on personal acquisition);
  • ATED will apply to residential property worth more than £1m, but less than £2m from 1 April 2015 and the annual charge will be £7,000 for the first year increasing with CPI;
  • ATED will apply to residential property worth more than £500,000, but less than £1m from 1 April 2016 and the annual charge will be £3,500 for the first year increasing with CPI;
  • Capital gains tax will also apply to all properties within the ATED regime from 6 April 2015 and 6 April 2016 as applicable on growth in value from those dates.

Across all taxes the extension of this regime is expected to raise £35m in 2014/15 and £70m in 2015/16. However, the earlier estimates for yield turned out to be understated so this yield may increase. People who own properties in envelopes may be looking to wind up the structure to minimise future taxes, but may find tax charges on doing so.

It will be interesting to see how the proposals in the consultation document expected shortly to extend capital gains tax to all non-UK residents owning UK residential property will tie into the extended ATED proposals announced today. This was intended to apply to both personal and enveloped properties, so there may be further changes in the pipeline for those who have properties in envelopes.  Equally, there may be a £500,000 value limit for those who own properties individually.



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