Budget 2009 - commentary - Personal tax and trusts
"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."
Income tax and National Insurance rates, thresholds and limits
The proposed changes to personal tax rates, allowances and limits and National Insurance Contributions (NIC) rates and thresholds are set out in Appendix 1 of the Budget brochure (to be available from the afternoon of 23 April 2009).
Several significant changes have been proposed to take effect from 2010/11 as follows:
- taxpayers with an ‘adjusted net income' exceeding £100,000 per annum will suffer a reduction to their personal allowance of £1 for every £2 in excess of £100,000. The maximum reduction is the full amount of the personal allowance
- a new higher rate of tax of 50% will apply to taxpayers with income over £150,000 per annum (42.5% for dividend income)
- the rate applicable to trusts will increase to 50% (42.5% for dividend income)
‘Adjusted net income' takes into account specific deductions including payments made gross to pension schemes and trading losses.
Comment
Those earning £200,000 will suffer approximately £7,600 of additional tax per annum as a result of the combination of the increased tax rate of 50% and the reduction in personal allowance. A graph which illustrates this increase is set out below.
Although the increase in the basic rate band for 2009/2010 of approximately 7.5% appears generous, it should be contrasted with the 0.5% increase given in 2008/09 and can therefore simply be seen as a balancing to the usual 3% to 4% annual increase.
The increase in the top rate of income tax was originally announced in the 2008 Pre Budget Report to be an increase to 45% (not the 50% now proposed), to be introduced from 2001/12 (not 2010/11 as now proposed). A nasty double hit for those affected.
The new 50% rate of tax will apply to discretionary trusts, but without the benefit of the £150,000 band. It is therefore worth considering converting discretionary trusts into revocable life interests. Not only will this remove the anomaly of higher rates of tax suffered by discretionary trusts receiving dividend income, but it will also remove the need for beneficiaries with income of less than £150,000 to seek a tax repayment. There should be no capital gains tax or inheritance tax disadvantages of creating revocable life interests.
UK tax exemption on dividends for Lloyd's corporate members
Corporate members of the Lloyd's insurance market will no longer pay corporation tax on UK dividend income received on or after 1 July 2009.
Tax on foreign dividends will also broadly be exempted under the separate foreign profits measures.
Comment
This represents a tidying up provision to bring Lloyd's corporate members into line with general insurance companies who do not currently pay tax on UK dividends.
Taxation of personal dividends
Under current law, UK resident (and non UK resident Commonwealth and EEA) individuals are entitled to a non-repayable dividend tax credit of one ninth of the distribution against their UK tax liability where:
- the distribution is from a UK resident company; or
- the distribution is from a non-UK resident company which is not an offshore fund and where the shareholder owns less than a 10% shareholding
With effect from 22 April 2009, the eligibility of the non-repayable tax credit will be extended to individuals who own shareholdings of 10% or greater in the distributing non-UK resident company.
However, the tax credit will only be available if the source country is a ‘qualifying territory', being a territory which has a double taxation agreement with the UK containing a non-discrimination article. HMRC will be permitted to vary the list of qualifying and non qualifying territories. There will also be anti-avoidance measures to ensure that these new rules are not subject to abuse.
Comment
This change is welcomed to bring the position of shareholders with holdings of 10% or more in line with shareholders of less than 10% of the company. It will be interesting to see how wide ranging the anti-avoidance measures will be when the Finance Act is published.
Taxation of distributions to individuals from offshore funds
Since 6 April 2008, individuals with shareholdings of less than 10% in non-UK resident companies have been entitled to claim a non-repayable tax credit. However the availability of shareholders to receive a similar tax credit in respect of holdings in offshore funds was withdrawn as some collective investment schemes sought to secure tax advantages by locating their cash and bond fund ranges offshore.
Finance Bill 2009 will remove the restriction to the non-repayable dividend tax credit for individuals in receipt of offshore fund distributions, irrespective of the size of the holding, where the offshore fund is largely invested in equities.
However, where the offshore fund holds more than 60% of its assets in interest bearing (or economically similar) form, any distribution will be treated in the hands of the UK individual investor as interest.
Both of these changes will take effect from 22 April 2009.
Comment
The first change brings the tax treatment of such equity based distributions in line with those of non-UK resident company distributions and is therefore welcomed.
The second change results in higher tax liabilities for the shareholders as the tax rates applicable will be those applied to savings income (20%/40%) as opposed to 10%/32.5% for dividends and no tax credit will be available.
It is interesting to note that the dividend credit does not apply to trustees' investments.
Financial Services Compensation Scheme (FSCS): Payments representing income
Legislation will be introduced in Finance Act 2009 to bring into the charge to income tax accrued income received with compensation paid to individuals as a result of defaulting financial institutions. The measure is to ensure that the financial institutions customers are in the same position as if the accrued interest were paid by the defaulting financial institution and will apply to payments received on or after 6 October 2008.
Furnished holiday lettings in the European Economic Area
It has been brought to the attention of Government that the specification that furnished holiday accommodation must be situated in the UK may not be compliant with European law and the following has been announced:
- the special rules for furnished holiday letting will be repealed from tax year 2010/11 onwards
- for the current tax year and prior years (where the return can be amended or where a claim can still be made) HMRC will regard the furnished holiday letting rules as applying to furnished holiday accommodation situated anywhere in the European Economic Area provided the other qualifying conditions are met
- until 31 July 2009, where a property is not situated in the UK but meets all the other furnished holiday accommodation rules and is situated elsewhere in the European Economic Area, HMRC will accept late amendments, claiming one of the reliefs or other favourable treatments, for income tax and CGT tax returns for the tax year ending 5 April 2007 and corporation tax returns for accounting periods ending on or after 31 December 2006
- taxpayers are still in time to file amendments to tax returns for the tax year ending 5 April 2008
Comment
It is apparent that the repeal of the favourable income tax and capital gains tax treatment for qualifying furnished holiday lettings from tax year 2010/11 has been caused by the reluctance of the Government to allow the provisions to apply to qualifying furnished holiday lets anywhere in the European Economic Area. We expect an outcry from the holiday and tourist industry echoing that which occurred in the 1980s (following a change in the late 1970s to the old HMRC practice of regarding the provision of holiday accommodation as a business activity) and which led to the introduction of the current legislation.
If the proposals go ahead then 2009/10 will be the last year for which an owner will be able to claim entrepreneurs' relief on the disposal of a qualifying furnished holiday let. This could result in a rush to try to sell qualifying properties before 5 April 2010 and the resulting surplus of properties for sale could delay any recovery in the housing market in popular tourist areas around the UK.
Where in previous tax years taxpayers have let residential properties in other European Economic Area countries it will be necessary to check whether they meet the qualifying conditions and to see whether favourable amendments or claims can be made. For example:
- a claim for business property taper relief can be made (provided the tax return amendment is submitted by 31 July 2009) if a property situated in (say) Spain would have qualified as a furnished holiday let throughout the period of ownership by the individual (which was at least 12 months) and was disposed of in 2006/07
- a sideways loss relief claim can be made with respect to a loss in tax year 2006/07 (provided the tax return amendment is submitted by 31 July 2009) if it resulted from letting in the tax year a property which apart from being situated in Spain would have qualified as a furnished holiday let
- similar claims can be made for 2007/08 within the usual Self Assessment time limits
UK personal allowances and reliefs for non-resident individuals
Certain non-UK residents can claim the personal allowance in the tax year. The individuals who may qualify are:
- an EEA national
- a resident of the Channel Islands or the Isle of Man
- a person who has previously resided in the UK and is resident abroad for the sake of their own health or that of a member of their family who is resident with the individual
- a Crown servant
- a person employed in the service of any territory under Her Majesty's protection
- a person employed in the service of a missionary society
- a person whose late spouse or late civil partner was employed in the service of the Crown; or
- a UK, Republic of Ireland or Commonwealth citizen
In addition non-UK resident individuals may be able to claim the personal allowance under the provisions of a relevant Double Tax Treaties.
From 6 April 2010 commonwealth citizenship will no longer be sufficient for a non-UK resident to be entitled to claim the UK personal allowance. This is because HMRC have been advised that allowing a non-UK resident individual to claim the UK personal allowance purely by virtue of being a Commonwealth citizen is not compatible with the Human Rights Act. HMRC believe that the vast majority of individuals affected will still be able to benefit through other means such as the provisions of a relevant Double Tax Treaty.
Comment
The Government appears to have had no choice in this matter.
It should be remembered that an individual who will be affected by this change may not actually have been claiming the personal allowance as their UK income profile may mean that the disregarded income provisions are more favourable.
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