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A summary of key announcements made in the Chancellor's Budget on 19 March 2014.
Key Private Client tax announcements
Many of the announcements in the 2014 Budget had been pre-empted in the December 2013 Autumn Statement. The key new announcements made in the 2014 Budget include far-reaching amendments to the way people access their pension savings and important changes to individual savings accounts. In the Chancellor's words, Budget 2014 was very much a budget for savers.
This document contains a summary of the key announcements relating to Private Clients. For business tax related announcements, see: Budget 2014--Lexis®PSL Tax analysis.
* This table only includes the personal allowance applicable to those born on or after 6 April 1948. The personal allowance for those born between 6 April 1938 and 5 April 1948 remains unchanged at £10,500 and the personal allowance for those born before 6 April 1938 remains unchanged at £10,660.
** There is a starting rate for savings income only. The starting rate limit for savings is £2,790 for 2013-14 and will increase for £2,880 for 2014-15. If an individual’s taxable non-savings income exceeds the starting rate limit the 10% starting rate for savings will not be available for savings income. From 6 April 2015, the starting rate for savings income will be reduced to 0% and the maximum amount of an individual’s income that qualify for this starting rate will increase to £5,000.
As announced in Autumn Statement 2013, from 2015/16, an individual who is not liable to income tax above the basic rate will be able to transfer part of their income tax personal allowance to their spouse or civil partner, provided that the recipient of the transfer is not liable to income tax above the basic rate.
This measure will have effect from 2015/16 and the transferable amount will be £1,050. From 2016/17 the transferable amount will be 10% of the basic personal allowance.
(Budget 2014, para 2.66, OOTLAR, para 1.77, and TIIN: Transferable allowances for married couples and civil partners)
The government announced in Budget 2013 that it will legislate to require the National Audit Office to report annually to the Scottish Parliament on HMRC's administration of the Scottish rate of income tax.
Legislation will be introduced in Finance Bill 2014 to amend the structure of the income tax legislation, which sets out the application of the Scottish rate of income tax to Scottish taxpayers. This will allow subsequent consequential changes to be made in secondary legislation in a more straightforward manner. It has no effect on the amounts of tax that will be paid by any Scottish or other taxpayer.
(Budget 2014, paras 2.74-2.75)
The government intends to consult on whether and how the personal allowance could be restricted to UK residents and those living overseas who have strong economic connections to the UK. Similar restrictions already exist in many other countries, including most other countries in the EU.
(Budget 2014, para 2.67, OOTLAR, para 2.8)
Where a resident but non-UK domiciled employee is required to work partly in the UK and partly abroad all earnings would normally be taxed in the UK on the arising basis. But the employee may be offered two employment contracts, one covering the performance duties in the UK and the other with an associated employer resident overseas covering duties performed in the rest of the world excluding the UK. The intention of such dual contracts is for the earnings from the second employment contract to be chargeable overseas earnings and taxable only if remitted to the UK. HMRC have long taken the view that in most cases separate contracts of this nature will have been artificially arranged in order to obtain a tax advantage and legislation will now be introduced to tackle this perceived abuse.
The legislation will be introduced in Finance Bill 2014 and will apply to income associated with an overseas employment where:
The income caught by this measure will be taxed on the arising basis.
The measure will have effect for earnings arising on and after 6 April 2014. Income which arises on or after this date but which is related to employment duties performed in a year prior to 2014/15 will not be subject to the legislation.
Directors with less than a 5% shareholding in their employer will not be caught by the legislation and it will take into account employments held for legal/regulatory reasons. This is to ensure that charges will not arise on dual contracts which are not motivated by tax avoidance.
As announced in Autumn Statement 2012, the government will increase the annual exempt amount by 1% for two years, ie to £11,000 from 6 April 2014 and to £11,100 from 6 April 2015.
(Budget 2014, para 2.83, OOTLAR, para 1.77)
As announced in Autumn Statement 2013, the Finance Bill 2014 will amend the Taxation of Chargeable Gains Act 1992, s 223 to halve the final period exemption under CGT private residence relief from 36 months to 18 months from April 2014 (Budget 2014, para 2.82, OOTLAR, para 1.77).
The draft Finance Bill clauses suggest this measure will only have effect where contracts for the sale of the property are exchanged on or after 6 April 2014 and not when contracts are exchanged on or before 5 April 2014 and completed on or before 5 April 2015.
The draft Finance Bill clauses excepts from these changes disposals by disabled persons and long-term care home residents or the spouses of such persons. Under the draft legislation, the final period exemption remains at 36 months for such disposals.
Legislation will be introduced in Finance Bill 2014 to ensure that capital gains made by a remittance basis user in the overseas part of a split year of residence are not charged to tax. This corrects a defect in the split year rules contained in the statutory residence test which was inserted by Schedule 45 of Finance Act 2013 and applies from 6 April 2013.
(Budget 2014, para 2.85, OOTLAR para 1.15)
As announced in Budget 2013, the government has confirmed its intention to keep the NRB frozen at the current level of £325,000 until 2017/18 (Budget 2014, para 2.90, OOTLAR, para 1.77).
The government is to consult on options to extend the exemption from IHT for service personnel who die on active service or who later die from wounds received on active service, to all emergency services personnel who die in the line of duty or whose death is hastened from injury that occurs in the line of duty, with a view to introducing legislation in Finance Act 2015 (Budget 2014, para 2.89, OOTLAR para 2.7).
As announced in Autumn Statement 2013, the government extended from 5 December 2013 the CGT uplift provisions that apply on the death of a vulnerable beneficiary enabling trusts benefiting vulnerable beneficiaries to enjoy the full CGT uplift provisions.
The range of trusts that will qualify for special income tax, CGT and IHT treatment will also be extended from 6 April 2014.
(Budget 2014, para 2.87, OOTLAR, para 1.77)
As announced in Autumn Statement 2013, the government intends to simplify filing and payment dates for IHT relevant property trust charges. Amendments to section 216(6) IHTA 1984 (time for delivery of accounts) and section 226 IHTA 1984 (payment of tax) will mean that trustees of relevant property settlements must deliver the IHT account six months after the end of the month in which the chargeable event occurs and pay the tax by the end of the same period.
In addition, income arising in relevant property trusts which remains undistributed more than five years at the date of the ten year anniversary will be treated by new section 64(1A) IHTA 1984 as part of the trust capital when calculating the ten year anniversary charge. Tax would be charged on the ten year anniversary at the full rate on any such undistributed income without any proportionate reduction to reflect the period during which the income has been retained.
These changes will be introduced by Finance Act 2014 and will come into effect in relation to tax charges on or after 6 April 2014.
(Budget 2014, para 2.86, OOTLAR, para 1.77 and TIIN: Inheritance Tax: simplifying charges on trusts)
IHT is charged on the net value of a deceased person’s estate after taking into account any liabilities outstanding at the date of death and after deducting available reliefs and exemptions. But property which is situated outside the UK and which belongs to, or was settled by, a non-UK domiciled individual is ‘excluded property’ and is not chargeable to IHT.
New rules were introduced by Finance Act 2013 to restrict the extent to which an individual or trustees may deduct debts in calculating their liability to IHT in certain situations. Under these rules a deduction for a liability is not allowed if it has been used directly or indirectly to acquire excluded property, or to maintain or enhance the value of such property. The new rules can be sidestepped through the use of foreign currency bank accounts if the depositor is non-UK domiciled and non-UK resident immediately before their death as the balance on the account is not excluded property but is nonetheless not chargeable to IHT.
Legislation will be introduced to amend the rules so that foreign currency accounts in UK banks are treated in a similar way to excluded property for the purposes of restricting the deduction of a liability. This measure will apply to liabilities incurred at any time but only where the death has occurred on or after the date of Royal Assent to Finance Bill 2014.
(Budget 2014, para 2.88, OOTLAR para 1.14)
The government has announced significant extensions to the SDLT, ATED and ATED related gains rules on high value residential properties held by non-natural persons (mainly companies, but also certain partnerships and collective investment vehicles) so that they will all apply to properties valued over £500,000. The implementation date of the changes depends on the tax in question.
This is set in the context of ATED having raised five times more tax revenue in 2013/14 than was expected, so that an extension of the regime is presumably considered an easy revenue raiser, and a political desire to discourage leaving property empty or under-used. These measures may drive a number of property owners to consider de-enveloping their properties from a corporate wrapper. However this may or may not be tax efficient depending on the circumstances (and there are no specific reliefs to encourage such de-enveloping).
The punitive SDLT rate of 15% on the acquisition of dwellings by non-natural persons (which was introduced for dwellings costing more than £2,000,000 with effect from 21 March 2012) will now apply to dwellings costing more than £500,000. It will apply to all transactions with an effective date (usually completion) on or after 20 March 2014.
For contracts that have exchanged, but not completed, by 20 March 2014 transitional rules will be introduced so that the old threshold will continue to apply in most cases.
Legislation will be included in Finance Bill 2014 to be published on 27 March 2014.
The annual tax on enveloped dwellings (ATED) was introduced with effect from 1 April 2013 and applies to non-natural persons owning UK residential property valued at in excess of £2,000,000 at that date (or at acquisition if later). ATED sets an annual charge in a number of bands based on the taxable value of the property. See: ATED—the basics for more detail.
Finance Bill 2014 will introduce two new bands:
The annual charges will be increased by CPI each year.
For properties in the £1–2 million band in the first year, returns will have to be filed by 1 October 2015 and payment made by 31 October 2015.
The government have announced that there will be a consultation on simplifying ATED for businesses that qualify for relief from the tax.
The capital gains tax charge that applies to non-natural persons that dispose of properties that have been subject to ATED (ATED-related gains, for which see: CGT on ATED-related gains) was introduced with effect from 6 April 2013. These rules will be extended to apply to properties falling within the new ATED bands with effect from 6 April 2015 and 6 April 2016 respectively. The portion of the gain that arises after the relevant date will be subject to capital gains tax at 28%.
These changes are not being legislated until Finance Bill 2015.
(Budget 2014, paras 1.192–1.195, 2.183–2.184, OOTLAR 2014, paras 1.35–1.36)
Following announcement at Autumn Statement 2013, the government is consulting further with a view to introducing legislation to amend the definition of a charity for tax purposes to prevent charities established for the purpose of tax avoidance from claiming charitable tax reliefs.
These changes come further to a highly critical report by the House of Commons Public Accounts Committee on the Charity Commission’s role in the registration and investigation of the Cup Trust, which was registered as a charity by the Charity Commission in 2009 with a British Virgin Isles company as its sole trustee. The Cup Trust allegedly used its charitable status for tax avoidance purposes by generating income of £176m over a period of two years while claiming £46m of Gift Aid and giving only £55,000 to charitable causes.
(Budget 2014, para 2.191, OOTLAR paras 1.67)
The government has confirmed that it will follow through the announcement in Autumn Statement 2013 to introduce legislation in Finance Act 2015 to allow non-charity intermediaries to take a greater role in operating Gift Aid.
The Treasury consulted last year on proposals to modernise Gift Aid to enable charities to reclaim tax on donations made by online or by text message. Detailed rules on the role and regulatory regime of non-charity intermediaries are likely to be introduced by secondary legislation following Finance Act 2015.
(Budget 2014, para 2.91, OOTLAR para 2.29)
The government intends to work with stakeholders with a view to simplifying the current rules which determine the treatment of benefits given to donors by charitable organisations. The current rules are very complex. Any legislation arising from this review will be included in a future finance bill.
(Budget 2014, para 2.96, OOTLAR para 2.31)
The government announced that the combined annual budget for the Cultural Gift Scheme (CGS) and the Acceptance in Lieu scheme is to be increased from £30m to £40m from 2014/15.
(Budget 2014, para 2.93, OOTLAR para)
The government has confirmed that following the announcement in Autumn Statement 2013, legislation will be introduced in Finance Act 2014 to ensure that the CGS works as intended in relation to Estate Duty.
The amendment will ensure that the donors of objects, on which there is potentially a charge to Estate Duty, are not financially better off by donating the object under the CGS than if they were to sell the object on the open market.
(Budget 2014, para 2.94, OOTLAR para 1.77)
The government will consult on:
(Budget 2014, para 2.189, OOTLAR 2014, para 2.27)
New rules will be introduced to identify high-risk promoters of tax avoidance schemes and subject them to enhanced information powers and penalties. Following consultation, various changes have been made to the draft legislation published on 24 January 2014 (seeRaising the stakes on tax avoidance).
Details of the changes have not been announced at this stage but will be in the Finance Bill published next week. The rules will take effect from Royal Assent to the Finance Bill 2014.
(Budget 2014, para 2.187, OOTLAR 2014, para 1.62)
A new power for HMRC, taking effect from Royal Assent to the Finance Bill 2014, to require taxpayers who have used avoidance schemes that have been defeated in another party's litigation to amend their returns or settle their dispute with HMRC. HMRC will also be able to demand payment of the disputed tax up front. A consultation document and draft legislation were published on 24 January 2014 (Tackling marketed tax avoidance).
(Budget 2014, para 2.188, OOTLAR 2014, para 1.63)
A new power for HMRC, taking effect from Royal Assent to the Finance Bill 2014, to require disputed tax to be paid up front where the taxpayer has taken part in an avoidance scheme that has been disclosed under the DOTAS (disclosure of tax avoidance schemes) rules, or is counteracted under the GAAR (general anti-abuse rule). This proposal was previously published for consultation, but without draft legislation (Tackling marketed tax avoidance). (Budget 2014, para 2.188, OOTLAR 2014, para 1.64)
The Chancellor announced that secondary legislation will be introduced for New ISAs (NISAs). The new rules for NISAs will take effect from 1 July 2014 when all existing ISAs will become NISAs, which will allow:
(Budget 2014, paras 2.44-2.45, OOTLAR, para 1.73)
The annual limit for Junior ISAs and Child Trust Funds will be increased from £3,840 to £4,000 (Budget 2014, para 2.46, OOTLAR, para 1.73).
In addition, secondary legislation will be introduced to enable peer to peer loans to benefit from the tax advantages within an ISA and the government has suggested that it will explore the possibility of further extending the list of qualifying investments to include debt securities offered via crowdfunding platforms (Budget 2014, para 2.47, OOTLAR, para 2.35).
The biggest surprise of the Budget were the revolutionary changes the Chancellor announced to pensions. They are the biggest changes for almost a century and will fundamentally change the way many people fund their retirement.
The changes affect those over 55 years who have savings in a defined contribution pensions scheme. The position for those in a defined benefit or final salary pension are unlikely to change.
From 27 March 2014, the government will allow individuals with defined contribution pension wealth more flexibility to access their savings by:
The above changes will all be introduced in Finance Bill 2014.
In addition, it was announced that the following broader changes will come into effect from April 2015 and beyond:
The pensions tax rules set a minimum age (currently 55) at which pension benefits can normally be taken from a registered pension scheme. Where pension benefits are taken before this age except in certain prescribed circumstances, for example on the payment of an ill health pension, the payment of benefits will be an unauthorised payment and tax charges apply which are intended to recover all the tax reliefs previously given.
A number of promoters have set up schemes intended to allow individuals to access some or all of their pension benefits before age 55. To do this, they normally try to register a new pension scheme or use an existing registered pension scheme which the member is encouraged to transfer their pension fund to before it is passed to the member. In some cases, payments are made to the member after age 55, but because they are in the form of a loan, will be unauthorised payments. This is commonly known as 'pension liberation' and has significant tax consequences for the member and the scheme administrator. In many cases the member is not told of the tax charges that will apply where these payments are made and therefore they are often left with little or no money after any fees have been deducted in addition to the tax charges due.
Changes announced in Budget 2014 to amend Finance Act 2004
Budget 2014 announced that legislation will be introduced in Finance Bill 2014 to amend Finance Act 2004 in order to:
For further details regarding these changes, see HMRC Pensions Liberation: guidance note.
QNUPS are sometimes used by expats planning for retirement. One advantage has been the exemption from IHT on the member's death. The Government has now announced that it will consult on ways to give equivalent treatment to QNUPS and to UK registered pension schemes to remove opportunities to avoid IHT. This measure will be introduced in Finance Bill 2015.
(Budget 2014, para 2.63, OOTLAR para 2.3)
The government has announced that, shortly after Budget 2014, it will consult on legislation:
We will have to wait for the consultation document to see what the safeguards entail. For now, there are merely references in the Budget 2014 documents to the direct recovery of debts:
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