2011 UK Budget

Friends Provident have provided us with a summary of the salient points relating to our clients.

Pensions


The Government announced last year that it would consult with employers and the pensions industry with a view to reducing the 2010/11 annual allowance of £255,000. Today’s budget confirmed the annual allowance from 6 April 2011 will be £50,000

The Lifetime allowance will be reduced to £1,500,000 from April 2012.

The effective requirement to annuitise by age 75 is removed from April 2011.

Disguised remuneration – anti avoidance measures

New legislation effective from 6 April 2011 will introduce an income tax charge on members of third party arrangements designed to avoid, reduce or defer tax in respect of employee remuneration. The charge to income tax will be payable on the contribution amount being paid to the arrangement or if the reward is by way of an earmarked asset allocation, on the higher of the cost or market value. The new rules will particularly affect individuals in the UK who are or would have considered membership of an Employer Financed Retirement Benefits Scheme (EFRBS).

EFRBS have previously been attractive to high earners affected by the restrictions on pension tax relief enabling them to make retirement provision in a tax effective manner. Whilst no relief was available on contributions being paid into an EFRBS, tax was deferred until benefits were taken.

These new rules make offshore bonds an excellent alternative for funding future retirement provision for high earners. Tax is deferred until benefits are drawn and unlike the third party arrangements, is only payable on any chargeable gain as opposed to the whole of the proceeds. The bond is portable, enabling the investor to move around the world without having to change the arrangement.

IHT
The IHT nil rate band will remain frozen at £325,000 until 2014/15. There are no changes to the 40% IHT rate for the 2011/12 tax year. However from April 2012, a reduced rate of IHT of 36% will be introduced where 10 per cent or more of a deceased’s net estate is left to charity. The new rate will apply where death occurs on or after 6 April 2012. The Government will be consulting on the detailed implementation of this measure and will issue a consultation document before the summer.

Review of Non-Domicile Taxation

Following on from an announcement in the June Budget 2010, of its intention to review the tax treatment of non-UK domiciled individuals resident in the UK, the Government has announced the following proposed tax changes:

• Increase the existing £30,000 annual charge to £50,000 for non-domiciles who have been UK resident for 12 or more years and who wish to continue to benefit from the remittance basis of taxation. The £30,000 charge will be retained for those who have been resident for at least seven of the past nine years and fewer than 12 years.

• Remove the tax charge when non-domiciles remit foreign income or capital gains to the UK for the purpose of commercial investment in UK businesses.

• Simplify some aspects of the current tax rules for non-domiciles to remove undue administrative burdens.

A consultation document on the detailed proposals will be issued in June, with a view to implementation from April 2012. The Government has also announced that there will be no other substantive changes to these rules for the remainder of this Parliament.

Statutory Residence Test

The current rules that determine tax residence for individuals are unclear and complicated, and practitioners have long called for the introduction of a statutory residence test. The Government intends to issue a consultation document in June with a view to implementation from April 2012.

OTS review of reliefs and Government response

The Government has listed a selection of reliefs, identified by the Office of Tax Simplification, which it intends to abolish. In respect of insurance policies, 2 reliefs will be abolished with effect from April 2012 - life assurance premium relief and relief for life assurance premiums paid by employers under EFRBS.

Entrepreneurs’ relief

Budget 2011 announced that the entrepreneurs’ relief lifetime limit of gains will increase from £5 million to £10 million from 6 April 2011.

Enterprise Investment Scheme and Venture Capital Trusts

The rate of income tax relief given under EIS will be increased from 20 per cent to 30 per cent from 6 April 2011, subject to EU State Aid approval.

From April 2012, subject to EU State Aid approval, legislation will be introduced in Finance Bill 2012 to increase:

• the employee limit to fewer than 250 employees;

• the size threshold to gross assets of no more than £15 million before investment;

• the maximum annual amount that can be invested in an individual company to £10 million;

• the annual amount that an individual can invest under the EIS to £1million.

NIC

The Government has announced that it will consult on the integration of income tax and National Insurance contributions (NICs). The aim is to remove distortions created by the tax system, reduce burdens on business and improve fairness for individuals. The consultation document is due to be published later this year. The Chancellor stated that the integration wouldn’t extend NICs to individuals above State Pension age or to other forms of income such as pensions, savings and dividends.

From 2012 -13 the Consumer Prices Index (CPI) is to replace the Retail Prices Index (RPI) as the default indexation for all National Insurance contributions rates, limits and thresholds:

Junior ISAs

The Government will introduce a new Junior ISA product which will be available for UK resident children who do not have a CTF account. Junior ISAs will be tax-relieved and will have many features in common with existing ISA products. They will be available as a cash or stocks and shares product. It is expected that Junior ISAs will be available from autumn 2011

Corporation Tax
In addition to the reductions announced in the June Budget, the main rate of corporation tax will be reduced by a further 1%. This will take the main rate from 28% to 26% in April 2011. This rate will be reduced further over the next 3 years. The small profits rate from April 2011 will be 20%, as announced in June.

Tackling Tax Avoidance

A progress report has been published today outlining the Government’s strategy on countering tax avoidance, including:

• Identifying new generic defences against avoidance, including considering the case for a General Anti-Avoidance Rule (GAAR). A study Group on the GAAR will report in October 2011

• A programme for reviewing areas of the tax system that have repeatedly been subject to avoidance attack. Initially 2 areas have been identified for review – income tax losses and unauthorised unit trusts

• A new proposal to reduce the cash flow benefits that taxpayers can gain from using high risk avoidance schemes

• Several targeted tax measures aimed at specific avoidance risk

The above information is based on the 2011 Budget released on 23 March 2011 and is not guaranteed to become law