Personal tax

The Capital Gains Tax changes for individuals and trustees  will be introduced as expected from 6 April 2008 with a flat rate of 18%, and a new 'entrepreneurs' relief' which will give an effective 10% rate for the first £1million of gains.

Residence and Domicile changes will also go ahead  from 6 April 2008, although there have been some changes to the detailed original proposals. Individuals who have been in the UK for seven out of the last 10 years will have a choice between paying full UK taxation and paying an annual charge of £30,000.  

The rules on income shifting are being deferred until April 2009, although the government has stated its continuing commitment to change in this area. 

On Inheritance Tax (IHT), the ability to transfer an unused  spouse's nil rate band, as announced at the Pre-Budget Report, was confirmed. Those with certain Trust arrangements were also given an extra six months to make changes, up to 5 October 2008.

Transitional relief on Gift Aid was good news for charities. The Government will top up donations to make up for the fall in the basic rate of income tax, without any extra rules for the donor.

New capital gains tax rate and new tax relief for entrepreneurs
Residence and non-domiciled individuals
Income shifting proposals deferred
Inheritance Tax (IHT) nil rate band transfer confirmed
Gift aid transitional relief for charities
Income tax rate reduces to 20%, 10% tax rate abolished
Tax penalty regime continues to change
Transitional period extended for interest in possession and life interest trusts
Enterprise Investment Scheme (EIS) changes
Taxation of dividends received from non-UK resident companies
Pension loophole closed / a level playing field
Trivial pensions
Individual Savings Accounts (ISAs), including relief for Northern Rock Encashments
HMRC Powers
Incorrect returns
Compliance checks
Tax debt
Tribunal reform

New capital gains tax rate and new tax relief for entrepreneurs

The Chancellor has confirmed the new 18% capital gains tax (CGT) rate applies from 6 April 2008 for individuals and trustees but sweetens the pill for business owners with entrepreneurs' relief, which we first heard about in January 2008.

This relief restores an effective 10% CGT rate for the first £1 million of qualifying capital gains realised on or after that date. Not all will qualify for the relief and will find that the removal of taper relief and the indexation allowance will leave them significantly worse off in the new tax year if they make a chargeable gain.

To qualify for enterpreneurs' relief there needs to be a gain arising on disposals of trading businesses (all or part but not assets in isolation). This is different to the taper relief rules which gave relief for single assets. There is also relief for assets previously used in trading businesses that have ceased, shares in 'personal' trading companies and personally owned assets used by 'personal' trading companies or trading partnerships. (An individual has a 'personal' company where he or she works for the company or another group company, as an employee or office holder and owns 5% of the shares and controls 5% of the voting rights).
Multiple claims within the £1 million lifetime limit can be made but once the cap is breached, tax is chargeable at 18%.

The new relief has some marked similarities with the old retirement relief (which ceased to apply for disposals after 5 April 2003) except there is no age limit and the qualification conditions must only have been met for the 12 months before disposal or cessation of the business (with a disposal following in 3 years).

Individuals and trustees (where there is a qualifying beneficiary who must jointly claim) can claim the relief where their business (or that of their personal company) is trading and not carrying on, to a substantial extent, activities other than trading activities. This therefore maintains the taper relief style qualifying conditions for a trading company. It also means exclusion for property letting businesses, other than where engaged in the commercial letting of furnished holiday accommodation in the UK.

A further extension applies to gains arising before 6 April 2008 but deferred through an exchange of shares for loan notes which are qualifying corporate bonds, or a qualifying investment in Enterprise Investment Scheme or Venture Capital Trust shares (if the original disposal would have qualified for entrepreneurs' relief had it been available at the time).For non-qualifying corporate bonds you may also receive entrepreneurs' relief but this revolves around the qualifying conditions being met when the bonds are redeemed. It is far more unlikely that taxpayers will meet these conditions.

Residence and non-domiciled individuals

The Chancellor has confirmed that non-domiciled individuals will have to pay an annual charge of £30,000 to benefit from their foreign income and gains being taxed on the remittance basis. This will take effect from 6 April 2008. However, there has been a softening of the original proposals following the issue of the draft legislation in late January and subsequent consultation. The Chancellor also said that there will be no further changes to the regime in this Parliament or the next on the assumption that the same Government remains in power!

The new charge will apply to non-domiciled adults who have been UK resident for more than seven out of the past ten years and will apply to those who have unremitted foreign income and gains in excess of £2,000.

The charge will no longer be a stand-alone levy as originally proposed but will now be a tax charge on unremitted foreign income and gains and should be treated as such for the purposes of Double Taxation Agreements and Gift Aid donations.
The £30,000 should be creditable, for example, against the US tax of US citizens and green card holders but not in full because the US tax rates on income and gains are generally lower than in the UK.

From 6 April 2008, individuals who claim the remittance basis will not be able to benefit from personal income tax allowances nor the CGT annual exemption.
Various loopholes have been closed in the remittance basis legislation and non-domiciled individuals will no longer be able to benefit from certain long established tax planning techniques from 6 April onwards. Although, some concessions have been made such as for works of art for public display and existing offshore mortgages

Clear statutory rules will be introduced to determine how the remittance of mixed funds will be treated for UK tax purposes and these will be much more comprehensive than the current rules.

The day counting rules for residence test purposes will change from 6 April 2008. Currently days of arrival and departure are excluded from the UK day count but from 6 April any day where the individual is present in the UK at midnight will now be counted as a day's presence in the UK for tax residence purposes. This is an improvement on the original proposals where any time in the UK would have counted as a day of residence. There will be exemptions for transit passengers and these have been widened from those originally proposed.

Comprehensive changes have been announced to the CGT regime for non-resident trusts but the Government has listened during the consultation process and these changes differ significantly from those announced in January 2008.

From 6 April 2008, non-domiciled individuals who claim the remittance basis and are beneficiaries of a non-resident trust will be taxed on the remittance basis on all UK and offshore assets.

It is proposed that trustees will be able to make an irrevocable election to rebase assets held in trust as at 6 April 2008 for the purpose of excluding accrued gains relating to the period pre-6 April 2008 from being taxed on a non-domiciled beneficiary.

The disclosure requirements relating to settlors and beneficiaries of non-resident trusts have been relaxed significantly from those proposed in January 2008 on the proviso that they have made the correct return of their tax liabilities. They may however be required to provide additional information to HM Revenue and Customs (HMRC) if the trustees elect to rebase trust assets or where HMRC decide to enquire into a beneficiary's tax return.

Anti-avoidance legislation currently in force to prevent UK domiciled and resident individuals from realising tax free chargeable gains through a holding in a non-resident company will be extended to catch non-domiciled individuals.
An error arising from the Tax Law Rewrite will be corrected from 6 April 2008, whereby, higher rate taxpayers claiming the remittance basis who remit foreign dividend income will be liable to income tax at 40% rather than the current 32.5% rate.

Income shifting proposals deferred

Despite a victory for the taxpayer in the Arctic Systems Ltd case (Jones v Garnett), the Chancellor announced in the October Pre-Budget Report that he was to undertake consultation with businesses to counter the practice of what he called 'income shifting'.

'Income shifting' involves a individual in a company or partnership arranging their affairs to gain a tax advantage by passing part of their income via dividends or partnership profits, to another person who is subject to a lower rate of tax.

Following the initial responses to consultation the Chancellor announced today there will be a further period of consultation to ensure the legislation (to be introduced by Finance Bill 2009) will provide clarity and certainty for businesses and their advisers. This shows a commonsense response to the strong representations made that the original proposals were unworkable and overly burdensome.

Inheritance Tax (IHT) nil rate band transfer confirmed

As announced in the Pre-Budget Report in October 2008, any unused nil rate band on a person's death can be transferred to the estate of the spouse or civil partner who dies on or after 9 October 2007. This will particularly benefit couples whose main asset is their home and is currently worth more than the nil rate band (£300,000 in 2007/08). This has led to the idea that the number of Wills drafted with nil rate band discretionary trusts (NRBDT) will significantly reduce, but there are still advantages in including a NRBDT in a Will in many circumstances. The rules also apply retrospectively (in a good way) so that if the first spouse has already died, the second spouse can claim the unused proportion of their nil rate band. This has led HMRC to provide tables going back to the early decades of the last century to help people make claims.

The new rules are extended to include the transfer of unused IHT allowances to the surviving spouse or civil partner on death for alternatively secured pensions.

Gift aid transitional relief for charities

The Chancellor compensates charities for the sins of his predecessor, but only for three years. Until 5 April 2011 they can claim back the lost tax refunds caused by Gordon Brown's reduction in the basic rate of income tax from 22% to 20%, which takes effect from 6 April 2008.

For basic rate taxpayers making donations to charity, tax relief will only be given at 20% from 6 April 2008, although higher rate taxpayers can continue to claim relief at 40%.

Income tax rate reduces to 20%, 10% tax rate abolished

From 6 April 2008 the existing 10% starting rate will be abolished and a new 10% rate for savings will be introduced. At the same time the basic rate of income tax will reduce from 22% to 20%.

Tax penalty regime continues to change

Last year the Finance Act 2007 introduced 'taxpayer behaviour based' penalty criteria in respect of income tax, corporation tax, capital gains tax, VAT, National Insurance, PAYE and the Construction Industry Scheme. This affects returns filed on or after 1 April 2009. The Budget now extends this regime to all other taxes (bar tax credits). It thus brings the behaviour based approach to returns for inheritance tax, environmental taxes, excise duties, stamp duties, insurance premium tax, pension schemes and petroleum revenue tax. These new rules affect return periods starting on or after 1st April 2009 where the return is due to be filed on or after 1st April 2010.

No penalty will be levied in cases of genuine mistake. Maximum penalties will be as follows:

• 30% for failure to take reasonable care
• 70% for deliberate understatement; and
• 100% for deliberate understatement with concealment

Transitional period extended for interest in possession and life interest trusts

Finance Act 2006 changed the inheritance tax rules for interest in possession or life interest trusts in place before 21 March 2006. This included a transitional rule for the period from 22 March 2006 to 5 April 2008 to enable the life tenant to release the life interest in favour of other beneficiaries. This transitional period has been extended by six months until 5 October 2008.

Enterprise Investment Scheme (EIS) changes

EIS income tax relief is increasing from 6 April 2008 to allow investors to claim tax relief at 20% on the first £500,000 invested. Previously, the limit was £400,000, making the change worth £20,000 to investors. This is subject to EU State Aid approval. But there is bad news for individuals investing in shipbuilding, coal and steel production, who will no longer be entitled to EIS relief or to relief under the Venture Capital Trust scheme.

Taxation of dividends received from non-UK resident companies

Where dividends received from UK resident companies are charged to UK income tax, shareholders are entitled to a non-payable tax credit of one ninth of the distribution. The effect of this is to lower the effective rates of tax on these dividends to 0% for basic rate taxpayers and 25% for higher rate tax payers.

Legislation in Finance Bill 2008 will extend this non-payable tax credit to dividends received by UK resident and other EEA nationals from non-UK resident companies, on the condition they own less than a 10% shareholding in the distributing non-UK company.

It is proposed that Finance Bill 2009 will extend this eligibility to non-UK resident companies where the individual owns a 10% or greater shareholding. However the credit will not be available if the source country does not levy a tax on profits similar to corporation tax.

Pension loophole closed / a level playing field

As already indicated by the Government, the loophole that may have allowed Small Self Administered Pension Schemes (SSAS) to pass on pension funds tax-free on death has been closed in the Budget.

The charge will apply to people who die on or after 6 April 2008. The rules will treat any increase in the pension rights of the member following the death of another member, if the two members were connected, as an unauthorised payment.
This means recipients will face a 70% tax charge, the same as applies to funds passed on via an alternatively secured pension (ASP). The funds passed on from members who die after the age of 75 will also be liable to IHT, bringing the potential tax charge to 82%.

Trivial pensions

New rules will allow benefits to be paid as a lump sum where the value is below £2,000. This allows people to take very small benefits in one occupational scheme as a lump sum under the triviality rules while receiving an income from another, larger pension pot.

Previously it was not possible to take small pension pots as a lump sum if the value of a person's pension saving exceeded 1% of the lifetime allowance.

Individual Savings Accounts (ISAs), including relief for Northern Rock Encashments

Relief will be brought in to benefit investors who withdrew funds from their Northern Rock ISA between 13 and 19 September 2007 (inclusive). New measures will allow these funds to be re-invested in a new ISA without impacting on the current year ISA allowance. All re-investments must be made between 18 October 2007 and 5 April 2008.

ISA allowances will increase from £7,000 to £7,200 as from 6 April 2008. Investors concerned by recent stock market falls will benefit from the increase of the cash element from £3,000 to £3,600.

HMRC Powers

HMRC is pushing ahead with a review of all its existing powers. This covers enquiries, investigations, penalties and all forms of checking tax returns. The review will last a few more years but we have some further details on what the Finance Bill will include.

Incorrect returns

The Finance Act 2007 included a new framework for assessing penalties on incorrect returns covering all the major taxes eg income and corporation tax and VAT. This new regime takes effect for returns filed after April 2009. This will see penalties imposed based on taxpayer behaviour and the key to reducing penalties for errors will depend on whether they took 'reasonable care'.

The Budget extends this framework to almost all other taxes bar tax credits. The Finance Bill 2008 will include provisions to bring in the same type of regime for penalties for inheritance tax, environmental taxes, stamp duties and excise duties. This will affect returns filed on or after April 2010.

Compliance checks

The new terminology for HMRC to check that businesses and individuals are paying the famous 'right amount of tax' is 'compliance checks'. For income tax, corporation tax, capital gains tax, VAT and PAYE new rules will apply from 1 April 2009. This will include more stringent record keeping requirements and a power to look at those records in 'real time'. There will also be a power to visit business premises but not people's homes. There will be a lot of concern about how this will all work in practice.

In addition there will be new powers relating to the ability to search goods and baggage at airports and other places of transit. Primarily this will allow Customs to open and unpack containers rather than insisting this is undertaken by the proprietor of the goods.

Tax debt

Changes are also being made to the way HMRC manage tax debt. For example, by the autumn of 2008 it will be accepting payment by credit card. Other changes include giving HMRC the ability to offset repayments against tax liabilities and greater debt enforcement powers.

Tribunal reform

The Ministry of Justice is overseeing major changes to the way tribunals operate in the UK. The Tribunals, Courts and Enforcement Act 2007 brought in the idea of a new first-tier tribunal which will see the end of the General and Special Commissioners as we know them, from 2009. The Budget confirmed that the Finance Bill 2008 will include a power to introduce secondary legislation to change the way appeals against HMRC are handled in light of those changes.

Concessions after Wilkinson

A few years ago the House of Lords decision in Wilkinson [2006] STC 270 raised concerns about whether HMRC was able to make extra-statutory concessions. The upshot has been that there have been no significant concessions since that case and a fear from HMRC of changing existing ones. The Budget confirmed that after taking legal advice, HMRC believes its existing concessions are within its 'collection and management' discretion and therefore should survive. It is intending to legislate a significant proportion of them by Treasury Order and will do this via a power introduced in the Finance Bill 2008.

We will also be seeing discussions begin on the introduction of a new Taxpayer's Charter. Such a document existed in the 1980's and then gradually fell into disuse before being removed. The intention is for it to set out taxpayer rights and obligations. A Charter will bring the UK into line with most other developed countries.