The Budget contains some interesting changes for individual tax payers


24-03-2011

Deloitte comment from Kirsten Tassell, a tax partner in the private client services practice at Deloitte, on yesterday’s Budget implications for individuals:

“In terms of rates and allowances, the increase in personal allowance from £6,475 to £7,475 was announced in Summer 2010. The additional increase of £630 to £8,105 and the fact that it will benefit both basic and higher rate taxpayers will be welcome, although the saving is small and will only go some way to mitigating the increase in national insurance contributions which will affect all employees earning over about £25,000 from 6 April 2011. The 50% rate remains for the moment although the Chancellor did give a commitment to a review of the amount raised with a view to assessing its viability.

Investment and enterprise
There are several changes which will benefit entrepreneurs - in particular the doubling of the lifetime limit for the 10% rate on qualifying business disposals from £5m to £10m from 6 April 2011 will be welcome, although there have been no other changes to the structure of the relief which in some cases can give anomalies. This relief has been increased several times in recent years – prior to 6 April 2010 it was only £1m; it has been increased in stages since that date. However, it is unfortunate that the relief has not been extended to employees, unless their shareholding is more than 5%, as these individuals were eligible for business asset taper relief giving a minimum capital gains tax rate of 10%.

Business investors will also welcome the increases to available limits for the Enterprise Investment Scheme (EIS) and Venture Capital Trusts. These are being introduced in two stages. Firstly, the income tax relief for EIS investments will increase from 20% to 30% from 6 April 2011. From 6 April 2012, the maximum annual investment that an individual can make in a year will be doubled to £1m. Also, from 6 April 2012 the Company based requirements have been made more generous for both EIS and VCT companies.

Charitable giving
Charities receive welcome assistance. The Gift Aid regime is being simplified, allowing online filing for the charities making repayment claims and their record keeping requirements will be relaxed.

There are two new tax breaks to encourage charitable giving. Firstly, for inheritance tax from 6 April 2012 there is a reduction in the tax rate from 40% to 36% provided at least 10% of the estate is given to charity. Whilst this is clearly a tax efficient incentive to encourage charitable giving, it seems that there will be a cost to the beneficiaries of the estate by using this option. Ignoring the nil rate band (which is set to be frozen until 2015) it seems that it will cost beneficiaries only £24,000 to give £100,000 to charity, although we await the detailed legislation in order to be clear on this.

Secondly, there will be a consultation process to enable tax breaks to be given to individuals when they donate works of art or certain historical objects of national importance to the state. Any tax break to encourage such donations will be welcome although it remains to be seen how this will interact with the relief already available for inheritance tax purposes.

Non-domiciles and residence
Following rumours of further wholescale changes to the non-domicile tax regime, the actual changes proposed are limited in scope, and it is welcomed that there will be consultation before any changes are introduced from 2012/13, and a commitment not to make any further changes after this round. The proposals include increasing the £30,000 charge which currently applies to individuals who have been in the UK for more than 7 years to £50,000 for those who have been here for 12 or more. Particularly welcome are proposals to allow tax free remittances into the UK if this is being invested in a UK business.

The announcement of a consultation process to conclude a statutory residence test is not unexpected, as this has been considered before. The aim will be to provide more certainty to taxpayers in their affairs, following the numerous tax cases regarding residence in recent years. The difficulty will be to provide a meaningful and workable definition, whilst still giving HMRC the flexibility to attack specific cases.

Tax Simplification
Following the Office of Tax simplification review of the tax reliefs available, action will be taken to abolish 43 reliefs which are considered to be unnecessary. These range from the 15p daily non taxable luncheon voucher allowance to late night taxi relief and a number of other reliefs.

A further review into the taxation of small businesses, in particular the operation of IR35, recommended the integration of tax and national insurance and also further consideration of the way in which IR35 operates. There will be a consultation on the integration of tax and national insurance but this is noted to be complex and will take a number of years. One difficulty would be whether this would mean a tax increase for pensioners and those with investment income, and the Chancellor confirmed that this would not be the case.

A wholescale reform of the IR35 regime has been ruled out at present but there will be improvements in the administration of the regime – with better guidance and access to specialist staff. This is a complex area and those affected will welcome the additional assistance. However, because corporate tax rate will fall to 26% from 6 April 2011 rather than the planned 27% rate and then will fall to 23% by 6 April 2014 there may still be tax incentives to operate under a corporate regime.
 

 

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