News & views

25 March 2011

2011 Budget Highlights

Personal taxes

From 6 April 2012 the default indexation assumption for direct taxes will be the Consumer Price Index (CPI) rather than the Retail Price Index (RPI).  This will include the capital gains tax annual exemption, inheritance tax nil rate band and National Insurance thresholds.

To ensure that employers and older people do not lose out, for the duration of this Parliament the annual increases in employer NIC threshold, the age-related allowance and other thresholds for older people will continue to be indexed at RPI.

There will be a consultation on the merger of income tax and National Insurance (NI), however the Chancellor made it clear that there is no intention for those who currently pay no NI to pay more in tax. 

Income tax

The personal income tax allowance for those aged under 65 will increase above the rate of inflation to £7,475 for 2011/12 (£8,105 in 2012/13) to help lower earners. This benefit will be offset for higher rate taxpayers by reducing the threshold to £35,000 for 2011/12 (£34,370 in 2012/13).

This means that higher rate tax becomes payable above £42,475 in 2011/12 and 2012/13 for those that benefit from the full personal allowance.

The Chancellor reconfirmed that the 50% income tax rate is a temporary measure and HMRC are to investigate the amount of revenue raised from this tax, with a view to withdrawing it in the future. 

Towry view: The personal allowance is becoming progressively more valuable in real terms. It therefore becomes more important to be aware that the personal allowance will be reduced and ultimately eliminated if net adjusted income is above £100,000. Care needs to be taken when planning that that the allowance is not reduced unnecessarily.  

Capital gains tax 

The capital gains tax annual exemption for 2011/12 was confirmed as £10,600.

The lifetime limit on gains qualifying for entrepreneurs' relief will double from £5m to £10m for qualifying disposals on or after 6 April 2011.

Inheritance tax

The nil rate band remains frozen until 6 April 2015. From 2015/16 CPI will then replace RPI as the default indexation for the nil rate band.

A reduced rate of 36% will apply where 10% of the deceased's net estate (after deducting IHT exemptions, reliefs and nil rate band) is left to charity. The new rate will apply where death occurs on or after 6 April 2012.  The Government will consult on the implementation of this measure and at present the detail is unclear. 

Towry view: The government forecast that its inheritance tax 'take' will increase by £600m over the next five years. That's an additional £1.5bn of assets falling into the inheritance tax net. Wealthy clients need to plan!

For philanthropic investors the reduced inheritance tax rate may prove attractive but without details of how this will be implemented it is too early to tell. Lifetime gifts to charities can ensure an immediate reduction in the taxable estate and a reduction in any higher rate tax liabilities. 

Corporation tax

The main rate of corporation tax is reduced to 26% from April 2011, a reduction of 2% in the current rate instead of the 1% reduction previously announced. There will be further 1% reduction from April 2012 and it is intended to continue reducing the rate until it reaches 23% in April 2014.

Mainstream rate:

• 26% from 1 April 2011
• 25% from 1 April 2012
• 24% from 1 April 2013
• 23% from 1 April 2014

The small companies' rate, which applies where profits are less than £300,000, will reduce to 20% from 1 April 2011 as previously announced. No decision has yet been made about future years. However, it is expected that there will be a review of small companies' taxation as part of the tax simplification project. 

ISAs

The ISA allowance will increase to £10,680 from 6 April 2011.

The Chancellor announced that Junior ISAs are expected to be available from autumn 2011.  These will provide tax efficient savings to all UK resident children aged under 18 who do not have a Child Trust Fund.  Draft legislation outlining how these will work and contribution limits will be published in the week commencing 28 March 2011.

Pensions 

There are no major changes to the draft pension legislation published in December 2010; however, changes to the State Pension system and public sector schemes were announced.   

Taxation of pensions

As previously announced, the annual allowance for pension savings will reduce from £255,000 to £50,000 from 6 April 2011.

The lifetime allowance will reduce from £1.8 million to £1.5 million with effect from 6 April 2012 and transitional protection will be available to help protect those who already have or, with growth, expect to accrue benefits of a value in excess of £1.5 million.

The effective requirement to purchase an annuity at age 75 will be removed from 6th April 2011. 

Towry view: The changes taking effect from 6 April 2011 provide greater flexibility for those planning for retirement. High earners previously caught by 'anti- forestalling' rules in the last two tax years may now have the opportunity to increase the amount they can contribute to their pension arrangements.

The State Pension system

The Chancellor announced that the Government intends to reform the state pension system for future pensioners so that it provides a simple, contributory, flat rate pension above the current level of means tested benefits (approximately £140 per week).

The Department for Work and Pensions will shortly publish a Green Paper to consult on options for reform, which will include a proposal for moving towards a single tier state pension.  This would essentially lead to the abolition of the State Second Pension system which was in any case moving towards a flat rate scheme.

Towry view: This will remove the current uncertainty that means-testing creates when funding for retirement. However it is important to stress that the Government has said that the State Pension system will continue to be contributory. For now it has rejected calls for at least part of the State Pension to move to a universal benefit based on residency.

State Pension Age

Given the continuing improvements in life expectancy, the Government wishes to bring forward proposals to manage future changes in state pension age more automatically through holding regular independent reviews of the implication of longevity changes. 

Public Service Pensions

The Government welcomes and accepts the proposals outlined by the Independent Public Sector Pensions Commission, and will use this as the basis for consultation with public sector workers, trade unions and others. The Government will set out their proposals in the autumn. 

Tax led investments 

Enterprise Investment Scheme (EIS)

From 6 April 2011, income tax relief will increase from 20% to 30%. This places the EIS on an equal footing with Venture Capital Trusts (VCT) for income tax planning.

From 6 April 2012 the maximum contribution level for EISs will increase from £500,000 to £1m, allowing for an income tax benefit of up to £300,000 per year.

There will also be a relaxation of several investment rules for EISs and VCTs that should reduce some of the risks associated with smaller companies. This is because EISs and VCTs will be able to invest in larger (more mature) companies.

Investments in companies that rely on feed-in tariffs will not be qualifying after 6 April 2012. 

Towry view: We welcome the increase in the income tax relief on EIS qualifying investments. An investor making a £100,000 investment will therefore be able to claim up to £30,000 in income tax relief and this brings EIS on an equal footing with VCT. Given the additional benefits of Capital Gains Tax Deferral and Business Property Relief we see an increased interest in the role for Enterprise Investment Schemes in financial planning. Further changes announced for 6 April 2012 will only add further to the attractiveness of the EIS as well as the VCT. 

Business Premises Renovation Allowance (BPRA)

The Business Premises Renovation Allowance deadline will be extended from 5 April 2012 to 5 April 2017. 

Residence and domicile 

Following the latest review of residence and domicile, the Government has announced relatively minor changes only, effective from 6 April 2012. 

• The remittance basis charge will increase to £50,000 for non-domiciliaries who have been UK tax resident for twelve or more years; the charge remains at £30,000 for those remittance basis users who have been UK resident for at least seven but less than twelve years
• No UK tax charge on remittance of foreign income or gains if for the purpose of commercial investment in UK businesses
• Some technical simplification of the rules to ease administration burdens for non-doms.

There is no change to the '17 out of 20 tax years' residence rule under which a non-dom is treated as UK domiciled for inheritance tax purposes. This gives continuing opportunities to settle foreign assets into an excluded property trust before becoming 'deemed domiciled' – creating an effective and permanent ring fence for the settled assets, even if the settlor subsequently remains UK tax-resident.  

The government has also confirmed that it will make no other changes to the taxation of non-doms in this Parliament, and that there will be consultation on a statutory residence test, again with a view to implementation in April 2012. This will give a much more stable basis for planning. 

Anti-avoidance

The government is pressing ahead with its 'disguised remuneration' legislation aimed at employee benefit trusts and employer funded retirement benefit schemes (EFRBS) which seek to avoid tax and NIC on employment income. There will be amendments to the draft legislation to take out some unintended targets but the measure will still be drafted in wide terms and careful professional advice will be needed in relation to both existing and any new employee reward schemes.

The consultation on a general anti-avoidance rule will continue. The study group will report by 31 October 2011 and if proposals are taken forward there will be further consultation.  There will be measures in Finance Act 2012 to stop tax avoidance based on double taxation treaties.

If you would like to learn more, please speak to your usual contact at Towry.

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