Today's budget avoided making dramatic changes to the taxation of individuals and trusts. Where there were more significant announcements they were generally to be welcomed.
At the end of the day entrepreneurialism and philanthropy are likely to be today's big (society) winners. Entrepreneurs' Relief will be increased to a lifetime limit of £10m and the Chancellor trailed a range of charitable tax benefits.
Capital Gain Tax - Entrepreneurs' Relief
In a surprise move, the Chancellor announced that the lifetime limit for qualifying capital gains is to be increased from £5 million to £10 million with effect from 6 April 2011. This relief means that gains of up to £10 million will be taxed at 10% as opposed to rates of up to 28%. The maximum capital gains tax saving is now £1.8m. So now, more than ever, it is vitally important to make sure you qualify for the relief. The additional relief cannot be backdated and so if a disposal is in progress, there could be considerable benefit in delaying the date of the disposal until after 6 April 2011.
Whilst the increase in the limit is very welcome, it had been hoped that the qualifying criteria would be amended to ensure that more employees could benefit from Entrepreneurs' Relief. This could have been achieved by reducing the percentage of the ordinary share capital and the voting rights that an individual is required to hold in a company from 5% to a lower figure or by reducing the period, currently 12 months ending with the disposal, during which the conditions had to be met. This could have enabled many employees who hold shares or options to benefit from the relief.
The individual annual exempt amount will be increased to £10,600 (from £10,100) from 6 April 2011.
Inheritance Tax - Benefits to Charitable Giving
The Chancellor announced after 6 April 2012 a reduced rate of Inheritance Tax (36%) will apply where 10% or more of a person's net estate is bequeathed to a charity or for charitable purposes. This would include establishing a charitable foundation on death. Whilst this reduction is certainly welcomed, the detail has yet to be consulted upon, and intriguingly the Chancellor rounded off this announcement by saying: "Let's be clear, no beneficiaries will be better off...just the charities". It leaves the practical incentive unclear and we await the detail.
The inheritance tax nil rate band remains frozen until April 2015 at £325,000.
Enterprise Investment Schemes & Venture Capital Trusts
As part of the Government's aim to help smaller, riskier UK businesses it announced today amendments to the Enterprise Investment Scheme ("EIS") and Venture Capital Trust ("VCT") regimes which will take effect in 2011 and 2012 subject to State Aid approval.
The first change which will come into force on 6 April this year will be the increase in the rate of EIS income tax relief to 30%, from 20%, of the investment made. EIS relief is given as a reduction of the investor's tax liability for the year of the investment and is a valuable relief so any increase is to be welcomed.
From 6 April 2012 the limits on the size of company which can qualify for EIS or VCT relief will be increased by more than doubling the gross asset limit from £7 million to £15 million and increasing the number of employees that an eligible company may have from 50 to 250. Additionally the maximum amount that a company can raise annually through EIS or VCT investment will be increased from £2 million to £10 million and the maximum annual investment an individual can make which will qualify for EIS income tax relief will be increased to £1 million.
These changes will increase the number of companies that can qualify for both schemes and the increased investment limits coupled with the increase in rate of relief will mean that from 2012 an individual will be able to claim up to a maximum of £300,000 income tax relief under EIS annually.
The annual ISA subscription will increase from £10,200 to £10,680 from 6 April 2011 (of which half can be invested in a cash ISA).
More interestingly, it is anticipated that Junior ISAs will be available from autumn 2011 for any UK-resident child who is under the age of 18 and who does not currently hold a Child Trust Fund. As with existing ISA products, junior ISAs will benefit from tax relief on income and gains and will be available as a cash or stock and shares product.
Their introduction will provide parents with an opportunity to save for their children's future in a tax efficient manner. The accounts will be operated and managed by the person with parental responsibility for the child (normally the child's parent or guardian). Draft legislation with further details is anticipated by the end of this month.
The personal allowance for individuals under 65 will be increased to £7,475 from 6 April 2011 and £8,105 from 6 April 2012. The personal allowance for individuals aged between 65 and 74 will be increased to £9,940 from 6 April 2011 and for those aged over 74, the personal allowance will be £10,090 from 6 April 2011.
The welcome news is that the Chancellor stated an intention that the 50% additional rate of tax will be a temporary measure.
The annual allowance for tax relief on pension savings for individuals will be reduced from £255,000 to £50,000 from 6 April 2011. The lifetime allowance will be reduced from £1,800,000 to £1,500,000 from 6 April 2012.
Legislation will also be introduced to remove the requirement to annuitise by age 75.
The changes to pensions will impact on decisions and strategies in relation to death benefit lump sums and "tax free cash" within pension funds. We propose to issue further guidance where appropriate on this issue.
The Chancellor announced today a number of changes to the taxation of non-domiciled individuals.
Foreign income and gains that are brought into the UK by non-domiciled individuals are currently subject to a tax charge. However, this is perceived to be damaging to inward investment. It is proposed now to remove the tax charge on foreign income or capital gains brought into the UK by non-domiciled individuals for the purposes of investing in UK businesses. This measure is likely to be attractive to both non-domiciled individuals and UK businesses.
Less welcome is the proposal to increase the annual charge that non-domiciliaries currently pay in order to be taxed in the UK on the remittance basis from £30,000 to £50,000. The increase in the charge will only apply to those who have been resident in the UK for more than 12 years and wish to continue to benefit from the remittance basis of taxation. The £30,000 charge will remain for those who have been resident for at least 7 of the past 9 years and fewer than 12 years.
A consultation document on these proposals is to be issued in June and the Government plans to implement these changes with effect from April 2012.
Statutory Residence Test
It has also been announced today that the Government will issue a consultation document in June in relation to a statutory definition of residence for individuals to take effect from April 2012. This will be a welcome change to the UK tax system as the current rules are complicated and do not provide individuals with any certainty. For Scottish residents, it will be of interest how this test interacts with the new definition of a "Scottish taxpayer" under the Scotland Bill.
The Chancellor provided good news for charities and charitable giving. The Budget seems to be designed to positively encourage giving to charity. The Chancellor stated that society ("Big" or otherwise) is not defined simply by economic output. After the introduction of changes in 2010 to charity regulation viewed broadly as unhelpful, 2011 offers much better news.
In the first place the amount of Gift Aid that can be claimed on donations in excess of £10,000 will be increased from £500 to £2,500. This will also apply to Community Amateur Sports Clubs ("CASCs"). Donors will not lose on their entitlements to tax relief on these donations.
Staying with Gift Aid, for smaller donations of £10 or less (up to a total of £5,000 per annum), charities and CASCs will be able to benefit from a simplified Gift Aid inspired benefit without complex form filling. The system will be open to charities that have successfully operated Gift Aid for three years or more. The detail will be revealed following consultation with the charity sector. Overall the Government is committed to moving towards an online system of operating Gift Aid generally.
Following earlier trailers there is confirmation in the Budget that the "substantial donor rules" will be replaced in the Finance Bill 2011. It is hoped that this will actually provide substantial improvement to rules that placed an undue burden on charities and failed to catch the artificial transactions associated with charitable giving that resulted in the substantial donor rules being created. The new rules will apply to donations of any size (not just "substantial donors") and will be focused on arrangements designed to achieve financial advantages to the donor.
Also announced was the retention of community investment tax relief. This allows investors in community development finance institutions to reclaim up to 25% of their investment in tax relief over five years. The Office of Tax Simplification has recommended its abolition.
It was additionally announced as part of the package of pro-philanthropy proposals that consideration will be given to introducing wider tax benefits for those who give a work of art or historical object of national importance to the State. A consultation will be run over the summer months.
For further details on the impact of the changes for charities please contact Alan Eccles.
For further information, please contact:
0141 271 5347
0141 271 5322
0141 271 5346
Director of Tax
0141 303 2497
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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.