22/06/2010

Following a period of uncertainty for professional advisers since the general election, Chancellor George Osborne delivered his, and the Conservative Liberal Democrat coalition’s, first Budget on Tuesday 22 June 2010. No one was expecting a giveaway Budget and the Chancellor certainly didn’t disappoint; this Profile looks at the main announcements as they impact investment and retirement provision.  

Pensions

Restriction of pension tax relief
The government is to proceed with restricting higher-rate pensions tax relief but most probably not in the format already legislated for which would have seen a tapering in tax-relief for those earning £150,000 or more from 6 April 2011.  Instead, the government believes that a reduction in the annual allowance might better meet its objectives; provisional analysis by the government suggests an annual allowance in the region of £30,000 - £45,000.  The lifetime allowance may also need adjusting.

The government will repeal the existing legislation once it has decided upon its approach.  It will do this following discussion with employers, pension schemes, experts and other interested parties.

It is important to note that the current anti-forestalling regime will continue until the revised legislation is implemented.

This announcement will be a relief to virtually all in the pensions industry, who have lobbied hard for such a change to the overly complicated changes already implemented.

Those individuals who earn in excess of this proposed new annual allowance, but with relevant income of less than £130,000 for this tax year and the preceding two, should consider making a large contribution in 2010/11 before this opportunity potentially disappears with the introduction of a new lower annual allowance.

Auto enrolment/National Employers’ Savings Trust (NEST)

A review of auto enrolment and NEST is being launched on Thursday 24 June 2010. It will look at the scope of automatic enrolment, the capacity of the industry to cater for the target population, the viability of outcomes for members and value for money for the taxpayer under the NEST proposals. The review will complete its findings by October 2010

Age 75 rule

The requirement to purchase an annuity by age 75 will cease with effect from April 2011.  A consultation will be launched shortly and legislation will be introduced in the 2010 Finance Bill to provide transitional arrangements for those individuals who will reach age 75 in the meantime.  These individuals (i.e. those who reach age 75 after 22 June 2010) will have the immediate right to defer annuity purchase until age 77, by which time the new rules will be in place; it will do this by effectively extending income drawdown up to age 77.  These individuals will still have to crystallise benefits before age 75 and take any pension commencement lump sum.

State pensions

The government has confirmed the introduction of a triple guarantee for the basic state pension.  From April 2010 it will be increased by the higher of the increase in prices, earnings or 2.5%pa.

Following a short review process the government intends to bring forward the date that the state pension will rise to age 66.

Default retirement age

The government is to consult shortly on how it will quickly phase out the default retirement age of 65 from April 2011.

Public sector pensions

Announced a few days before the Budget, ex-Labour cabinet minister John Hutton has been appointed by the government to head a Commission to undertake a fundamental structural review of public sector pensions. It will produce an interim report in September 2010 ahead of the Spending Review. The Commission will make recommendations on how public sector pensions can be made sustainable and affordable in the long-term, fair to both the public sector workforce and the taxpayer, and ensure that they are consistent with the fiscal challenges ahead.

The Commission will consider issues including:

• the growing disparity between public and private sector pension provision;
• the need to ensure that future pension provision is fair across the workforce;
• how risk should be shared between the taxpayer and employee; and
• wider Government policy intended to encourage adequate saving for retirement and longer working lives.
  

Existing accrued pension rights will be protected.

Investments

Individual Savings Accounts (ISAs)
The government confirmed that it would index link the annual ISA subscription limit from 2011/12

Taxation and Trusts

Income tax
The personal tax allowance for individuals under age 65 is to be increased by £1,000 to £7,475 with effect from 6 April 2011.  On the same date, the higher rate tax threshold will be reduced by £2,500, based on current estimates of the RPI.  However, the Chancellor will confirm this reduction in the autumn.

The basic rate threshold for income tax will also be frozen until 2013-14.

The rate of income tax that Trustees pay, on income in excess of their available standard rate band, will remain unchanged: at 42.5% on dividend income and 50% for all other types of income.

National insurance contributions (NIC)

With effect from 6 April 2011, the level at which employers will commence payment of NIC will increase by £21 per week above indexation.  The previously proposed increase in the rate of NIC payable of 1% remains unchanged and will also come into effect on 6 April 2011.

Following the reduction proposed to the level of the higher rate threshold for income tax purposes, the upper earnings limit and upper profits limit for NIC will also be reduced on6 April 2011 by an estimated £1,650 (to be confirmed in the Autumn) to bring them into line

Inheritance tax (IHT)

No changes have been made to IHT and the nil rate band remains frozen at £325,000.

As the nil rate band will remain at £325,000, more individuals will fall into the IHT net and they will need advice on how to mitigate this tax.

Corporation tax

With effect from 6 April 2011, the main rate of corporation tax for companies with profits above the upper limit of £1.5 million will be reduced by 1% to 27%. Further reductions will be made in the following tax years to 26% in 2012-13, 25% in 2013-14 and 24% for 2014-15.

Also from next April, the small profits rate of corporation tax for those companies with profits below the lower limit of £300,000 will be reduced from 21% to 20%.

Capital gains tax (CGT)

With effect from 23 June, the rate of capital gains tax payable on chargeable gains will rise to 28% for those individuals with total income and taxable gains above the higher rate tax threshold. However, basic rate taxpayers will continue to pay a rate of 18% on their chargeable gains.  The level of the annual exemption remains unchanged at £10,100.

From the same date, the way in which CGT entrepreneur's relief is given, which currently results in an effective rate of 10% being charged on entrepreneurial business activities, will be simplified. The relief will be provided through the application of a flat 10% rate of CGT charged on qualifying gains within the lifetime limit - which itself is to be extended from the first £2 million to first £5 million of eligible gains. Both of these changes will apply in respect of disposals made on or after 23 June 2010.

Gains of trustees or personal representatives of deceased individuals will also be charged at 28%.

The increase in the rate of CGT for higher and additional rate taxpayers will re-open the debate between investment bonds and collectives

Value added tax (VAT)

From 4 January 2011 the standard rate of VAT will be increased to 20%

Bank levy

A bank levy is to be introduced with effect from 6 April 2011, based on a bank’s balance sheet.  The levy will be set at a proposed rate of 0.07%, with a lower initial rate of 0.04%.

Furnished Holiday Lettings

It was announced in the Budget that the furnished holiday letting (FHL) rules will not be withdrawn from 6 April 2010, enabling UK taxpayers to continue to choose whether to apply the current FHL rules in respect of qualifying holiday lettings situated in the European Economic Area or the normal rules for property businesses for the current tax year 2010-11.

• However, the Government plans to publish a public consultation over the summer to review the tax treatment of furnished holiday lettings with effect from April 2011, in particular:- That the FHL rules apply equally to properties in the EEA
• An increase in the number of days qualifying properties should be available for and let as commercial holiday lettings
• Change the way in which FHL loss relief is given.

Disclosure of IHT avoidance

The Government has announced that there will be a formal consultation over the summer on bringing IHT, as it applies to discretionary trusts, within the regime for Disclosure of Tax Avoidance Schemes (DOTAS). HMRC has stated that it is not targeting trust schemes such as discounted gift trusts, loan trusts or protection policy trusts

General anti-avoidance rule (GAAR)

The Government has announced that there will be informal discussions with interested parties over the summer as to whether the UK should adopt a General Anti-Avoidance Rule. The purpose of such a rule would be to deter or counteract tax avoidance generally. New Labour in 1997 also proposed introducing a GAAR but they dropped the idea when confronted with universal opposition.

Venture Capital Schemes & EIS

The Government has confirmed that the final four changes to EIS and Venture Capital Trust schemes (VCTs) - previously announced in Budget 2010 (BN12) – which had been agreed with the European Commission as a condition of securing their continued approval by the Commission as approved State aids, will be legislated for.

Broadly, for VCTs, there will be a widening of the scope for shares to be able qualify as “eligible shares”. However, such shares will need to represent at least 70% (up from the current 30%) of the VCTs qualifying holdings – although the changes to the definition of “eligible shares” will not affect funds raised by VCTs before the proposed legislation receives Royal Assent.

It will no longer be necessary for shares forming part of a VCT’s ordinary share capital to be included in the official UK list throughout the relevant accounting period. Instead, provided that the shares are admitted for trading on any EU regulated market, they can form part of the scheme’s ordinary share capital.

For both VCTs and EIS, shares will no longer be permissible, if they are considered to be those of a company that would be treated as an “enterprise in difficulty” in accordance with the European Commission’s Rescue and Restructuring Guidelines.

For both schemes the current requirement that a company must carry on a qualifying trade wholly or mainly in the UK will be replaced with the less onerous condition of simply having a permanent establishment in the UK.

Life Insurance Deficiency Relief

The Government has confirmed in the Emergency Budget 2010 that it does not believe it is appropriate to extend life insurance deficiency relief to the additional rates of income tax from 6 April 2010, as was announced on 24 March 2010. Instead the deficiency relief rules will continue as at present and will reduce tax due on income subject to the higher rate and dividend upper rate of tax only.

Income Tax adjustments between Settlor & Trustees

Current anti-avoidance legislation in respect of income tax repayments received by the settlors of settlor –interested trusts have been clarified to ensure that where the settlor

receives an income tax refund as a result of being taxed on trust income, the whole of the tax refund should be repaid to the trustees, regardless of how it has arisen.  HMRC have also confirmed that these payments made to the trustees by the settlor will be disregarded for IHT purposes.

Use of trusts to reward employees

The March 2010 Budget announced action to tackle arrangements using trusts and other vehicles to reward employees which seek to avoid, defer or reduce liabilities of employees and directors to income tax and NICs or to avoid restrictions on pensions tax relief. The Government confirms that Employer Financed Retirement Benefit Schemes are within the scope of this measure. Legislation will take effect from April 2011.

And finally

Whilst an outline was given of the 25% cuts that are to be made to most government departments by 2014/15, the details will not be known until the results of the spending review; this will be announced on 20 October 2010.

Full details of tax and national insurance rates and allowances can be found at -
http://www.direct.gov.uk/en/Nl1/Newsroom/PreBudgetReport2009/DG_183037 

Legal & General will issue further bulletins, if appropriate, as details concerning the Budget announcements and subsequent reviews become clearer.

If you wish to contact one on the technical teams please e-mail:

• Pensions team - pensions.technical@landg.com
• Investments team - investmenthelpdesk@landg.com
• Taxation and Trusts team – tax.estateplanning@landg.com  

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