Budget 2009 - commentaries - Pensions & investment
"The commentaries below are written in general terms. Further information can be found in our Budget brochure, which will be available from the afternoon of 23 April 2009. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."
Pension contributions: Higher rate tax relief
Proposed changes have been announced to restrict the income tax relief on pension savings with effect from 6 April 2011 for those with taxable income of £150,000 or more. The tax relief will be tapered away so that for those earning over £180,000, the relief will be worth 20%, the same as to basic rate taxpayers.
In anticipation of that new restriction, new rules are to be introduced from 22 April 2009 to restrict higher rate tax relief on pension contributions for individuals. The restrictions will apply to those;
- whose income is £150,000 or higher
- who change their normal, regular ongoing pension savings, and
- whose total pension savings exceed £20,000
A new ‘special annual allowance' and associated tax charge will be introduced in Finance Bill 2009 which will have the effect of restricting tax relief on the additional pension savings to the basic rate.
For people contributing to a money purchase arrangement, normal, regular ongoing pension savings are defined as ‘the continuation of those contributions paid under agreements made prior to 22 April 2009 that are paid quarterly or more frequently and at a rate that does not increase'.
For people in defined benefit schemes, normal, regular ongoing savings include any increases in pension benefits which arise under the existing pension scheme rules as at 22 April 2009. These include any increased benefits due as a result of normal pay rises and progression.
The allowance and tax charge apply to total contributions i.e. individual, employer or by 3rd party and to all benefits accruing in a defined benefits scheme.
The £150,000 income limit will be tested both in 2009/10 and in the previous two tax years to establish whether the tax charge will apply.
The Disclosure of Tax Avoidance Schemes (DOTAS) regime will be amended to include arrangements to prevent the special adjustment tax charge from applying.
Comment
Although discussed for many years, the proposed restriction on the availability of higher rate tax relief on pension contributions will still come as a surprise to many especially at a time when the Government are keen for individuals to save for the future.
On the forestalling provisions, the defining of ‘normal pattern' is virtually impossible in the self-employed arena in particular where contributions tend to follow profitability. Also, employees with regular annual contributions or a pattern of single contributions are likely to be disappointed with the changes.
Finally, the use of the DOTAS provisions will preclude salary sacrifice arrangements from circumventing the new rules.
Offshore funds
Legislation will be introduced in the Finance Bill to confirm and introduce two long trailed changes to the offshore funds regime:
- definition of an offshore fund - to reduce the scope for avoidance, the Government is changing the definition of an offshore fund from a narrow regulatory provision based on the terms of the Financial Services and Markets Act 2000 (FSMA 2000), to a characteristics based approach. The regulatory definition relied on a technical interpretation of the structure of the fund being treated as a ‘collective investment scheme'. The new definition will look at the characteristics of the fund to determine whether the participants have day to day control over the management of the assets, and whether a reasonable investor could realise his investment by reference to net asset value
- the Reporting Regime - this regime will replace the annual retrospective certification of offshore funds to ensure profits made on disposal of investments are taxed as capital gains rather than income, if they meet the distribution and investment tests. The Reporting regime allows funds to elect to enter the regime, and providing they continue to meet the qualifying criteria, disposals of investments will be treated as capital gains rather than income
Both these measure will apply from 1 December 2009, with transitional provisions to cover existing investments and funds.
Comment
These measures have been the subject of extensive consultations, and delayed start dates, so it is good to finally see a fixed date for their introduction. The Reporting Regime is widely anticipated to be beneficial for ensuring certainty for investors to treat gains made on disposals of offshore funds as capital rather than income. The changes to the definition of offshore fund are less welcome as existing funds may be caught within the offshore fund regime that were previously not within it (the Government's intention), but without necessarily the certainty that investors require.
Chargeable gains and offshore funds
Tax legislation treats many arrangements in offshore funds as if they were shares in a UK company for the purposes of capital gains tax. This means that units in a foreign unit trust scheme, for example, are treated as if they were shares, and the normal capital gains tax rules apply when they are sold.
Certain offshore funds are constituted under arrangements that do not fall clearly within the current rules, particularly some contract based schemes, and changes to take effect for investments made on or after 1 December 2009 will put beyond doubt that these are treated as shares. Where an offshore fund falls within the new definition of offshore fund being brought in from this date, investors' interests will be treated as if they are shares.
Comment
This is a welcome measure to ensure certainty for investors, but as it relies on the new definition for offshore funds it may in fact increase uncertainty, where it is not clear whether or not the new rules apply.
Real Estate Investment Trusts: Amendments
Following consultation with the industry, certain changes will take effect from 22 April 2009 so as to make the legislation clearer and more consistent.
- REITS will be able to issue convertible preference shares
- an accounting based definition will be used when considering the ‘balance of business asset' test, which requires 75% of assets to be included in the rental business
- the rules defining how apportionment applies between property held partly for the rental business and partly outside the rental business will be clarified in respect of the application to the holding of cash from property sales for up to 24 months as part of the rental business
- companies do not have to comply with two of the REIT conditions when they elect to become REITs. These conditions were linked and they have now been de-coupled so that the company need not comply with either or both the conditions
Comment
It is always nice when consultation with the industry results in sensible changes to the legislation, however small.
Real Estate Investment Trusts: Artificial restructuring
The following changes will be introduced from 22 April 2009:
- It will no longer be possible to restructure groups of companies so that they meet the REIT conditions where they would not otherwise have done. Some groups had proposed to let properties from one group company to another so as to meet the rental conditions
- owner occupied properties will be excluded from the tax-exempt business of the REIT
- it will become possible for ‘tied premises' to be included in REITs
Comment
The final point is of significance since it was not possible for pub companies to become REITs as the rents they charged their tenants was often profit related. It appears that this obstacle has been removed but REITs are generally in the doldrums at the moment and are unlikely to be revived by the pub companies.
Individual Savings Accounts (ISAs)
The ISA investment limit will be raised to £10,200 of which £5,100 can be saved in cash. The new limits will apply from 6 October 2009 to people aged 50 and over in 2009/10 and for all ISA investors from 6 April 2010.
Comment
A welcome increase from the current level of £7,200 but there is no obvious reason for the slightly baffling phased introduction, which is likely to create administrative problems for ISA providers.
Improvements to the venture capital schemes
The Government has announced today that the rules regarding the amount of EIS income tax relief an individual may carry back to the previous income tax year will be relaxed. Previously, investors could only carry back relief based on up to 50% of the amount subscribed for eligible shares issued before 6 October in the relevant income tax year, subject to an overall investment limit of £50,000. These criteria will be removed and therefore investors will have total flexibility in carrying back EIS income tax relief to the previous income tax year, subject to the overall investment limit per income tax year of currently £500,000.
In addition, the rules regarding the use of money raised through an issue of shares under the EIS, VCT and CVS will also be relaxed. Historically, 80% of the money raised had to be used within 12 months of the relevant share issue (or start of trade if later) and the remainder in the following 12 months. The new rules will be that the money raised through the relevant venture capital scheme will have to be entirely used within 2 years of the relevant issue of shares (or start of trade if later).
The Government have also announced that a technical anomaly regarding share for share exchanges will be removed and the linking of EIS shares issued on the same day to other shares will also be removed.
Comment
Following the recent consultation exercise, the relaxation of the rules regarding carry back of EIS income tax relief and the rules regarding the use of money raised under the venture capital schemes are a welcome, if somewhat expected, change. In these difficult times, these relaxations to the rules go someway to maintaining the attractiveness of making investments under venture capital schemes. However, we had hoped that there may have been additional incentives introduced, such as, increasing the rate applicable to EIS income tax relief.
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