George Osborne delivered his third Budget against the backdrop of an improving economic environment.
As expected, anti-tax avoidance measures featured prominently in the Chancellor’s speech, particularly in relation to stamp duty land tax and home ownership through offshore structures.
Other significant changes were announced which will result in the broadening and flattening of the personal tax system and improvements to the business tax system to increase the international competitiveness of the UK.
Mike Wakeford, Tax Partner, Moore Stephens, looks at the key changes that may affect you and your business:
Personal tax
Cap on unlimited tax relief
Attack on ownership of residential property through corporate structures
Child benefit
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Personal tax
Who will it affect?
Most individual taxpayers and certain trustees.
The proposals
The income tax rates and allowances for 2013/14 have been announced. The headline measures are as follows:
• an increase of £1,100 in the tax-free personal allowance to £9,205 as part of the government’s commitment to gradually raise the personal allowance to £10,000
• a reduction in the basic rate limit by £2,125 to £32,245. Broadly this means that most higher rate taxpayers will receive one quarter of the benefit from the reduction in the personal allowance compared to basic rate taxpayers
• a reduction in the top rate of tax from 50% to 45% for those with taxable income in excess of £150,000. There will be a consequential reduction in the dividend rate from 42.5% to 37.5%, so that the effective rate of income tax on dividends falling within the top rate is reduced from 36.11% to 30.6%
• the trust rate will be amended as a consequence to 45% (37.5% for trust dividends, an effective rate of 30.6%)
• those aged over 65 with income under the threshold currently benefit from higher age-related personal allowances. To reduce complexity and move towards a single personal allowance, age-related allowances will be frozen and restricted from 2013/14. From 6 April 2013, only those born before 6 April 1948 will qualify for the 65-74 age allowance while only those born before 6 April 1938 will qualify for the age-related allowance for those aged 75 years and over.
Action points
• 50% rate taxpayers should consider delaying the receipt of income until after 6 April 2013 to take advantage of the lower top rate of income tax.
• Taxpayers should consider accelerating expenditure or reliefs to the 2012/13 tax year.
• Take action, including considering pension and gift aid payments, to avoid paying tax at the 62% marginal rate for income between £100,000 and £118,410.
Mike says: "The increase in the personal allowance is expected to remove a further 840,000 individuals from the tax net, and this is a positive step. However, a further 300,000 people will become 40% taxpayers owing to the scaling back of the higher rate tax threshold.
"The Chancellor’s reduction in the top rate of tax to 45% is also welcome, as the 50% rate was widely seen as anti-competitive and according to HMRC’s own figures, raised very little revenue. However, it is disappointing that the Chancellor did not take the opportunity to address the distortion created by the marginal 62% tax rate applying to individuals with income between £100,000 and £118,410 (for 2013/14)."
Cap on unlimited tax reliefs
Who will it affect?
Individuals seeking certain tax reliefs where the amount involved is in excess of £50,000.
The proposals
The Budget included proposals to cap tax relief available to individuals (a tycoon tax) from 6 April 2013. Tax reliefs which are already capped, such as EIS, VCT and pensions should be unaffected by these changes. However, gift aid may be affected and the government will be consulting with charities which receive large donations from individuals. It is proposed that where anyone is seeking to claim more than £50,000 in reliefs, a cap will be set at 25% of income (or £50,000, whichever is greater).
"Clearly more detail is required of the proposed changes before any action is taken. In particular it is hoped that tax relief for genuine commercial losses will not be affected.
"It is also extremely disappointing that gift aid relief may be affected. One would have hoped that the proposed General Anti-avoidance Rule (GAAR) will catch the more aggressive tax avoidance schemes so that there would be no need for this additional potentially punitive measure. The draft legislation will be awaited with interest" says Mike.
Attack on ownership of residential property through corporate structures
Who will it affect?
Individuals holding residential property through a ‘non-natural person’ such as a company or another entity with corporate personality.
The Proposals
Any non-natural person acquiring a residential property in the UK worth more than £2 million will pay stamp duty land tax (SDLT) at 15% as of 21 March 2012.
Consultation will take place concerning the introduction of an annual SDLT charge on such properties with a view to introducing legislation next year to come into effect in April 2013.
Additionally, the government will extend the capital gains tax regime form April 2013 to gains on disposals by non-resident non-natural persons of UK residential property and shares or interests in such property following consultation on the details of the measure.
Form 21 March 2012, the SDLT rate on properties with a value of £2 million or more will be 7% if they are held personally, although the Budget did not include any plans for an annual charge for property which is owned in the taxpayer’s personal name.
Action points
There is very little detail on the proposals at present. Once further information becomes available it will be possible to assess the impact of these measures on property holding structures. Consideration should then be given to mitigating these charges, possibly by winding up the structure.
Mike says: "The annual SDLT charge on non-natural persons is effectively the introduction of a mansion tax through the back door.
"There seems little justification in taxing a non-UK resident holding property through an offshore company where they would not be taxed personally.
"Those affected will need to take advice on how best to deal with these issues, and we hope that the consultations will move ahead swiftly so that we can advise fully".
Child benefit
Who will be affected?
Individuals in receipt of child benefit whose income exceeds £50,000 in a tax year or those whose partner is in receipt of child benefit.
The proposals
From 7 January 2013, a new income tax charge will apply which is aimed at reducing or removing the financial benefit of receiving the child benefit.
For those with an income between £50,000 and £60,000 the charge will be a proportion of the benefit received. For those with income in excess of £60,000 the charge will equal the value of the benefit received. For a taxpayer whose income is between £50,000 and £60,000, the charge will be 1% of the amount received for every £100 of income that exceeds £50,000.
The charge will be collected through self assessment or PAYE.
Action points
• HMRC will be contacting those affected during the Autumn of 2012 to discuss the new charge
• Those affected will be able to elect not to receive the benefit if they do not wish to pay the new charge
Mike says: "The measures announced in the Budget will see child benefit phased out for taxpayers who earn more than £50,000 per annum. This was expected and is in line with measures announced in the 2010 Spending Review".
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