INTRODUCTION

In this bulletin we will

• summarise the main new proposals made in the PBR that we believe are of relevance to the financial product and advice sector
• remind you of the (already announced) changes that will be implemented from 6 April 2010

and

• where possible, indentify (or remind you of) the main financial planning opportunities emerging

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INCOME TAX

No changes to the rates of tax, 20%, 40% or 50%. The absence of a lowering of the threshold above which the 50% additional rate is borne (£150,000 from 6 April 2010) will be a relief to many.

And don´t forget…

• tax allowances and thresholds will be frozen in 2010/11
• from 6 April 2010 personal allowances will be removed at the rate of £1 for every £2 of income over £100,000 until the personal allowance is fully removed. With the personal allowance remaining at £6,475 this will mean that the allowance will have been fully removed once income reaches £112,950. This means that the effective rate of tax born by each £1 income between £100,000 - £112,950 will be 60% - 40% as the higher rate tax and 20% as a result of the loss of the tax shelter on behalf of the "excess income

Opportunities..

The time between now and the commencement of the new tax year should be used to look at simple but effective tax strategies to ensure that your income tax exposure is minimised.

Eg.

• Growth based investments
• Maximising allowances between couples and, especially for potential additional rate taxpayers
• Receiving/becoming entitled to income in 2009/10 rather than 2010/11 eg. dividend payments/bonuses - relevant for potential 50% taxpayers.
• Triggering investment bond gains in 2009/10 rather than 2010/11.

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NATIONAL INSURANCE
Changes

For 2010/11

• The lower earnings limit (linked to the basic State pension) will increase by £2 to £97 per week.
• All other NIC rates and thresholds are unchanged for 2010/11.

For 2011/12

• The Class 1 employer rate NIC will be increased by a further 0.5% (in addition to the already proposed 0.5% increase to 13.3%) to 13.8%. This increased rate will also apply to Class 1A and 1 B contributions.
• Class 1 and Class 4 (individuals) NIC will also be increased by further 0.5% to 12% (0.5% higher than the already proposed 11.5%) and 9% (0.5% higher than the already proposed 8.5%) respectively.
• The additional rate of Class 1 and Class 4 NICs will be increased by a further 0.5% to 2% from 2011/12.
• The primary threshold and lower profits limit will be increased by £570 for 2011/12.

Opportunities..

• Subject to the usual conditions and limitations, salary sacrifice arrangements will look even more attractive provided:
  • the "sacrificer" is happy with his "reward" being received as a pension contribution
  • there is awareness that any "new" salary sacrifice arrangements will not be effective to reduce "relevant income" for the purposes of the Special Annual Allowance Charge
  • the new anti-avoidance provisions to prevent tax and NIC avoidance when the sacrificed salary is linked to the provision of food and drink commensurate in value to the amount of income given up
• Business owners should be even more attracted to the receipt of dividends rather than salary or bonus.
• Whenever a decision is made to take other than a salary the non tax/NIC consequences need to be given due consideration eg. the impact on
  • national minimum wage
  • state benefits
  • employer scheme benefits
  • earnings for the purpose of personal (ie. other than employer) pension contributions

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CAPITAL GAINS TAX

Changes

• No changes were announced.
• There had been a relatively strong expectation that we may see an increase (possibly considerable) to the current 18% rate given that it is considerably lower than the 40% and 50% income tax rates. A reprieve - but this space should most definitely be watched.

And don´t forget…

• The individual CGT exemption stands at £10,100 and given the negative rate of RPI it may be that this could be frozen for 2010/11.

Opportunities..

• The retention of the 18% rate continues to offer a huge tax incentive to invest in investments and structures that produce a capital gain as opposed to income. As ever, one needs to carefully consider striking an appropriate balance between investment appropriateness and tax effectiveness.
• Maximising use of a couple´s (and a family´s) CGT exemption can further enhance tax effectiveness of "CGTable" investments.
• Entrepreneurs´ relief remains with us at 10% (up to a "lifetime" cumulative £1m) so a business owner strategy of "self investment" can still look extremely tax attractive. Especially with the additional rate of 50% on income for "high earners", retention of corporate profits and reinvestment with a view to building and realising value through sale will still look tax attractive compared with distribution. Those adopting this strategy should, of course, be made aware of the potential "investment risk" they could be bearing if this represents their main means of securing future financial independence.

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INVESTMENTS

Changes

Furnished holiday lettings:
Legislation will be introduced in the Finance Bill 2010 to withdraw the furnished holiday lettings (FHL) rules from 2010/11. This will mean that the tax treatment of FHL´s will be the same as for any other business. The change will have effect for profits and losses arising and capital on disposals occurring on or after 6 April 2010.
The change removes effective "trading" treatment from FHL businesses.

This will also mean that the availability of

• business asset roll over relief
• entrepreneurs´ relief
• relief for gifts of business assets
• relief for loans to traders

will all be removed in connection with FHLs.

Also, from 6 April 2010, individuals will not be able to include income from FHL within their relevant UK earnings when calculating the maximum relief due for their pension contributions.

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VCTs/EIS

VCT

• Various changes in connection with State aid
• Changes to the definition of small enterprise
• Prevention of large businesses and certain types of investment qualifying for VCT treatment.

EIS
Consultation on companies carrying on their business in partnership with a view to permitting certain smaller enterprises carrying on business in this way to qualify for EIS treatment.

And don´t forget…
The ISA investment limit is at £10,200 for the 2009/10 (current) tax year for those who are 50 or over in this year. This will be the limit for all eligible investors for 6 April 2010.

Opportunities..
The retention of the 18% CGT rate and increase in the dividend tax rate to 42.5% for those with an income of more than £150,000 will bring into even sharper focus the need to carefully consider investment wrapper choice.

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INHERITANCE TAX

Changes

Anti-avoidance:
In the Finance Act 2006, the inheritance tax relevant property rules for settlements were extended to all settlements (other than bare trusts, trusts for the disabled and immediate post death interest (IPDI) trusts).

This means that most gifts to trusts are now chargeable lifetime transfers (CLTs) and if a gift into a trust causes a person to exceed his/her nil rate band (taking account of CLTs made in the previous 7 years) an immediate IHT change of 20% on the excess value would apply. This compares somewhat unfavourable to the previous PET regime that applied to gifts to flexible power of appointment trusts that meant that unlimited gifts could be made without an immediate IHT liability.

The change of rules has however given rise to a number of loopholes that tax planners have sought to exploit. The Government have announced that they will be introducing provisions to prevent this avoidance and have published draft legislation.

Two particular types of scheme will be affected

• (i) if a person makes a gift into a settlement under which he retains a future reversionary interest, that interest would have a value for IHT purposes which means that the transfer of value (the loss to his estate) is reduced which in turn means it is easier to keep the chargeable lifetime transfer within the settlor´s nil rate band. If the settlor subsequently gifted the reversionary interest that would be a PET which would mean that, in the right circumstances, most of the property could be gifted with only a small amount consisting a CLT.
  
  Alternatively, if the settlor´s interest vested and that interest then constituted an interest in possession, under the post Finance Act 2006 rules, that interest would have no value for inheritance tax.
  
  This loophole will be addressed by new legislation which will apply where a person transfers property into a trust in which they (or their spouse/civil partner) retains a future interest. It provides that there will be a chargeable transfer for IHT purposes when the future interest comes to an end and the person becomes entitled to an actual interest under the trust. If that future interest is given away before the person becomes entitled to an actual interest, it may be immediately chargeable to IHT.
• (ii) A non IPDI (immediate post death interest) interest in possession has no value for IHT purposes under the revised legislation. This means that if a person uses cash to purchase an interest in possession under a trust (which is say for the benefit of his family) for full market value he will swop a valuable asset for an asset that has no value for IHT purposes.
  
  The new legislation provides that if such an interest will be treated as part of the purchaser´s estate for IHT purposes and if the interest comes to an end during the purchaser´s lifetime, there may be an immediate charge to IHT.
• (iii) The nil rate band of £325,000 will be frozen for the 2010/11 tax year.

Opportunities..
The anti avoidance provisions prove that it is not unusual for the Government to attack specific tax avoidance plans which exploit loopholes in the legislation.

As with all anti-avoidance legislation, it is important to consider which arrangements it may affect and so this will need careful consideration. In this respect, it is comforting to note that HM Treasury state that this legislation is designed to close down two "artificial schemes designed to avoid inheritance tax charges on relevant property trusts". Also HMRC have stated to us (verbally) that they believe this change will apply to a small number of cases. It seems therefore most unlikely therefore that HMRC will attempt to apply the legislation to the more mainstream mass marketed IHT schemes that are available.

In Press Notice B ("Protecting Tax Revenues") however it is stated that "The Government announces it is also examining wider solutions to the problems of trusts being used to avoid inheritance tax charges". We will watch these developments with interest.

As things stand the range of planning strategies familiar to us including retail investment based trust arrangements and protection plans in trust remain available.

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PENSIONS

Changes

Special Annual Allowance
The Government has announced a major change to the special annual allowance rules effective from 9 December 2009. With effect from that date an individual will only be automatically exempt from the special annual allowance provisions where he/she has "relevant income" of less than £130,000. For this purpose "relevant income" is defined as currently (i.e. very broadly total income, earned and unearned less normal deductions although not the personal allowance). It should also be remembered that "relevant income" of £130,000 or more will be deemed to apply in tax year 2009/10 where the individual had income of this amount in either tax year 2007/08, 2008/09 or 2009/10.

As a result of this change new rules have had to be introduced to cover the position of those individuals whose "relevant income" is £130,000 or more but less than £150,000.

• The rules regarding protected pension input will be as currently applicable but will be considered by reference to 9 December 2009 rather than 22 April 2009. Therefore if an individual was paying regular monthly contributions prior to 9 December 2009 and continues to do so thereafter these will be regarded as protected pension input
• Any contribution paid less frequently than quarterly by or in respect of the individual in tax year 2009/10 prior to 9 December 2009 will be regarded as protected pension input. Where any pension benefit has accrued in 2009/10 tax year for an individual under a final salary scheme a proportion of that benefit will be deemed as protected pension input. That proportion will be determined by reference to the period beginning 6 April 2009 and ending on 8 April 2009.
• A pension input amount relating to a lump sum payment made after 8 December 2009 in accordance with an agreement between the individual and employer that was made no later than 8 December 2009 will be a protected pension input amount.

There are no changes to the provisions regarding those whose "relevant income" is in excess of £150,000 (i.e. protected pension input in their case will continue to be determined with regard to 22 April 2009).

The following 4 examples highlight how the rules will apply from 9 December 2009:

1. Andrew has "relevant income" of £140,000 in 2009/10 and monthly pension savings of £2,000. His total pension input amount for 2009/10 is £24,000 (12 x £2,000). This is Andrew´s only pension saving in 2009/10 and the nature of his pension saving to date means that his special annual allowance for 2009/10 would ordinarily be £20,000. However, all his pension inputs are protected pension input amounts.
   
   Though Andrew´s special annual allowance for 2009/10 is nil (because the amount of his protected pension input amounts exceeds £20,000) and some of his pension saving is paid on or after 9 December 2009, there is no special annual allowance charge in respect of Andrew´s pension saving for 2009/10 as he does not make any savings over and above his protected pension inputs.
2. Chris has relevant income of £140,000 in 2009/10 and monthly pension savings of £2,000, which is a protected pension input amount.
   
   In September 2009 he makes a one-off contribution of £10,000.
   
   His total pension input for 2009/10 is £34,000 ([£2,000 x 12] + £10,000).
   
   This is Chris´s only pension saving in 2009/10 and the nature of his pension saving to date means that his special annual allowance for 2009/10 would ordinarily be £30,000 (based on the average of the lump sum payments [i.e. "infrequent money purchase contributions"] Chris had made over the period of the previous three tax years).
   
   Though Chris´s special annual allowance is reduced to nil for 2009/10 because of the total amount of the monthly contributions and the one-off contribution exceeds £30,000, the one-off contribution was paid before 9 December 2009 and so is not subject to the special annual allowance charge (and nor is the total amount of the monthly pension savings).
3. Mary has relevant income of £140,000 in 2009/10 and monthly pension savings of £2,000, which is a protected pension input amount. She makes a one-off contribution in September 2009 of £5,000 and a further one-off contribution in March 2010 of £5,000. Her total pension inputs are £34,000 ([£2,000 x 12] + £5,000 + £5,000).
   This is Mary´s only pension saving in 2009/10 and the nature of her pension saving to date means that her special annual allowance for 2009/10 would ordinarily be £20,000.
   
   However, Mary´s special annual allowance for 2009/10 is nil because the amount of her protected pension input amounts ([£2,000 x 12] + £5,000) exceeds £20,000.
   
   Mary´s total adjusted pension input amount for 2009/10 is £5,000 (the total pension inputs less the protected inputs) since only one of the one-off contributions was paid on or after 9 December 2009. She is subject to the special annual allowance charge (20%) on £5,000.
4. Jo has relevant income of £155,000 in 2009/10 and monthly pension savings of £2,000, which is a protected pension input amount.
   
   Jo´s special annual allowance for 2009/10 is nil (ordinarily it would have been £20,000 but it has been reduced to nil due to the amount of Jo´s protected pension input amount which exceeding £20,000 (£2,000 x 12)).
   
   Jo makes a one-off contribution in September 2009 of £10,000. Because her income is over £150,000 the calculation of her total adjusted pension input amount is calculated by reference to pension input amounts from 22 April 2009 onwards. She is therefore subject to the special annual allowance charge (20%) on the one-off contribution of £10,000, even though this was paid before 9 December 2009.

Pension Tax Relief From 2011/12
As promised the Government has issued a consultation paper "Implementing the restriction of pensions tax relief" on the way it intends to limit pensions tax relief from tax year 2011/12 onwards.

This consultation indicates that the restriction of pensions tax relief from April 2011 will apply to those individuals with gross incomes of £150,000 and over, where gross income incorporates all pension contributions, including those funded by an employer. This will be subject to an income floor, so that individuals with pre-tax incomes (excluding employer pension contributions) of less than £130,000 will be unaffected. In order to stop individuals with income between £130,000 and £150,000 taking advantage of the current pension tax relief rules before April 2011 the government extended the anti-forestalling provisions as described in 1) above.

We will be providing a more detailed analysis of these proposals in due course.

Tax Charges From 6 April 2010

• The rates for the tax charge on short service lump sum refunds and EFRBS payments, other than to individuals are to be increased, while new rates for the special annual allowance charge apply with effect from 6 April 2010.
• A tax charge arises where a registered pension scheme repays tax-relieved pension contributions to a member who has completed less than two years service. The pension scheme deducts tax currently at 20 per cent on the first £10,800 of the refunded contributions and 40 per cent thereafter. Secondary legislation will be introduced to change the rates to 20 per cent on the first £20,000 and 50 per cent thereafter on refunds made on or after 6 April 2010.
• A tax charge is payable where certain lump sums, gratuities or other benefits are received from an EFRBS by an entity who is not an individual. The tax charge is payable by the recipient and the rate is currently set at 40 per cent. This rate will be increased to 50 per cent for benefits received on or after 6 April 2010.
• Where a special annual allowance charge arises in respect of tax 2010/11 it will be set at the ´appropriate rate´. The ´appropriate rate´ is determined by the rate of tax relief given on the amount of their pension savings which exceeds their special annual allowance and will restrict tax relief on that excess to the basic rate of income tax.

Changes to Tax and National Insurance
The additional 0.5% increase to both employer and employee NI contributions applicable from April 2011 and the freezing of the point at which individuals pay higher rate tax will, when added to the already announced changes to income tax and NI contributions, only serve to increase the attractiveness of using salary sacrifice to pay pension contributions. This is of course provided the individual will not fall foul of the special annual allowance provisions.

Automatic Enrolment
The Government has announced it will be delaying the implementation of personal accounts and the phasing in of the automatic enrolment requirements.

State Benefits
Although the Basic State Pension is normally increased in April each year, based on the increase in the RPI in the year to the previous September, it will in April 2010 be increased by 2.5% as the RPI was negative in September 2009. The revised weekly figures are respectively £97.65 for a single person and £156.15 for a married couple.

The pension credit figures will also be given an above inflation increase to:

• Guarantee credit
  £132.60 p w (single person),
  £202.40 p w (married couple)
• Savings credit threshold
  £98.40 pw (single person)
  £157.25 pw (married couple)

Public Sector Pensions
The contribution of employers to the NHS, Teachers, Local Government and Civil Service pension schemes will be capped, thereby limiting the liability of the taxpayer. These reforms will save around £1bn from 2012/13 and at least twice this amount over the long term. As part of these changes the Government also expects that those earning the highest salaries will pay a greater contribution towards their pensions.

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CORPORATION TAX (and the new bank payroll tax)

Changes

• The small companies rate of corporation tax has been held for another year (the 2010 financial year) at its current rate of 21%. The main rate stays at 29% and the marginal relief (for profits between £300,000 and £1.5m) will mean that the effective rate applicable to the profits qualify for this relief will be 29.75%.
• Legislation in Finance Bill 2010 will introduce a new bank payroll tax. This will be set at 50 per cent. It will be payable by a bank, on the amount of a bonus to which a banking employee is entitled, to the extent that the bonus exceeds £25,000. A bank will also be liable to the bank payroll tax where the bonus entitlement arises in respect of services performed for the bank regardless of who awards the bonus.

The provisions will include anti-avoidance measures.

• The bank payroll tax will have effect from the time of the announcement on 9 December 2009 until 5 April 2010 for all discretionary and contractual bonus awards. There is an exception for contractual bonus entitlements where the payer has no discretion as to the amount of the bonus because of a contractual obligation existing at the time of the Chancellor´s announcement.

Opportunities..
Corporation tax rates remain substantially below income tax rates and so for funds that are not required by owners/managers for current expenditure there will be continuing tax appeal to leaving funds in the company. This will be especially so if there is the future opportunity to realise value through business sale subject to a 10%/18% CGT rate.

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ANTI-AVOIDANCE

Changes
As for the past few years, considerable focus is given to the revenue that can be yielded from effective anti avoidance provisions.

Press Note 3 summarises a list of 13 specific measures including:

• Further robust measures on offshore evasion following up on the disclosure provisions in relation to offshore accounts.
• Further consultation (47 pages) on the disclosure of tax avoidance schemes.
• Closing down tax avoidance schemes with
  • specific draft legislation on two specific inheritance tax arrangements
    and
  • an announcement of an examination of "wider solutions to the problem of trusts being used to avoid IHT charges"
  • avoidance using index linked gilts

to name just three!

And this is in addition to the mass of new provisions supplementing the anti forestalling rules and special annual allowance charge in connection with pensions.

• It is perhaps something of a surprise that there was no specific mention of the growing interest in and activity concerning the establishment of employee and family benefit trusts and employer financed retirement benefit schemes (EFRBS). Currently EBTs/FBTs (broadly speaking) offer non deductible (but non assessable) and non (immediately) taxable contributions. This is then combined with access to trust funds through interest free loans. Income tax is limited to tax on the benefit of any interest not paid on the loan. There has been strong HMRC interest of late through the Courts and in statements that, for close companies, there could be an IHT charge on the shareholders when a contribution is made if they could benefit under the trust. This makes the lack of any specific announcement on EBTs and FBTs surprising.

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This news item is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at July 2008. No action must be taken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.

Burley Financial Services Ltd is a private limited company registered in England and Wales under company no. 121 7536.
Burley Financial Services Ltd is authorised and regulated by the Financial Services Authority.
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