The main announcement that was designed to grab the headlines was “the abolition of the annual tax return”. In reality, it appears that this proposal will be an online return pre-populated by HMRC with information it already holds, such as employment earnings, benefits in kind, bank interest and pension contributions. It is unlikely, however, to extend to dividends received from a private company, income from self-employment, rental income, capital gains and any number of other items. While this measure is to be welcomed as it should help simplify matters for a number of individuals with relatively simple affairs, including those that should not currently be within the self assessment system, it does seem that describing this as the death of the tax return is very likely a case of setting expectations that cannot be met.
Measures already announced included:
· The introduction of a capital gains tax charge on non-UK residents who sell residential property located in the UK after 6 April 2015. The existing CGT rates of 18% and 28% will apply to such gains. A practical difficulty here is the calculation of the gain: the new tax only applies to that part of the gain which has accrued since 6 April 2015, so the taxpayer has a choice of rebasing the value of his property as at that date or using a time apportionment method to calculate the gain that falls before and after the introduction of the new charge. Supplementary rules are needed to ensure that this extension of CGT works effectively and fairly, including the access to Principal Private Residence relief subject to meeting a minimum occupation requirement.
· The removal of Entrepreneurs’ Relief on capital gains arising on the incorporation of a sole trader or partnership business. The ability to sell an unincorporated business to a newly formed company had become a popular and tax efficient method of realising the value of the business at the favourable 10% CGT rate. In many cases the company could also benefit from a corporation tax deduction for the amortisation of the goodwill that it had acquired. The Chancellor announced in his Autumn Statement last December that Entrepreneurs’ Relief and tax deductions for goodwill amortisation would no longer be available for incorporations that take place after the date of that announcement.
· A statutory exemption for trivial benefits in kind that cost £50 or less. An annual cap of £300 will be introduced for office holders of close companies and their family members. We have yet to analyse the potential planning opportunities in detail, but it appears that business owners and their employees could receive up to £300 each tax free through a number of small benefits that cost less than £50 each.
· For those living and working in areas affected by flooding, a new tax relief for contributions to the cost of flood defences is being introduced. The relief is available to both companies and individuals.
Newly announced measures include:
· People who have already bought an annuity with their pension fund will also be able to benefit from the increased pension flexibility that was announced last year. From April next year, they will be able to sell the income stream from their annuity to a third party in return for a lump sum, which will be taxed at their marginal income tax rate instead of the penal 55% rate that currently applies. This proposal will require the development of an efficient and well regulated market in second hand annuities.
· The future introduction of a “Personal Savings Allowance” which appears to be a tax exemption for up to £1,000 of a basic rate taxpayer’s savings income. The allowance for a 40% taxpayer will be £500 and those paying tax at the top rate of 45% will receive no allowance. This allowance is in addition to the existing tax benefits available through ISAs.
· Another step aimed at helping savers is the introduction of a Help to Buy ISA. These accounts will be available to first time buyers and offer a Government top-up contribution of 25% of the balance in the account, capped at a maximum top-up of £3,000. Up to £200 can be saved each month, so to get the maximum contribution from the Government a saver will have to put away the maximum of £200 per month for five years.
· The Chancellor announced plans to tackle the avoidance of inheritance tax through the use of Deeds of Variation. While such deeds can, and have been, used to avoid inheritance tax we believe that their primary use is to achieve the practical and commercial benefits of making a poorly drafted will work as intended. The exact proposals are not yet known, but it presents a timely reminder that all clients should be advised to ensure their will is still up to date and fit for purpose.
· Class 2 NIC will be abolished in the next Parliament and Class 4 NIC will be revised.
The personal allowance will increase to £10,600 in 2015/16, £10,800 in 2016/17 and £11,000 in the following year.
The higher rate threshold will rise to £42,385 in 2015/16, £42,700 in 2016/17 and £43,300 in 2017/18, the first above-inflation increases in the threshold for seven years.