Budget 2012

Personal allowances

A great deal of the media coverage has focused on the impact on pensioners of the changes to the higher personal allowances for those aged over 65. Taxpayers aged between 65 and 74 and those aged over 75 will be entitled to a higher personal tax allowance of £10,500 and £10,660 respectively for the year ending 5 April 2013. This is however reduced by £1 for every £2 that the individual’s total income exceeds £25,400 until it is at the level of the standard personal income tax allowance.

With effect from 6 April 2013, higher personal tax allowances will be frozen, the consequence being that at some point in the future all taxpayers irrespective of age will be entitled to the same level of income tax exemption.

This is portrayed as a simplification, which indeed it is for those taxpayers with income falling within the band requiring adjustment. But for those below that income level, there is no simplification and they will be worse off each year for the rest of their lives assuming that the higher allowances would have continued to increase each year.

The accelerated increase in the standard personal allowance will help to offset the effect of this change. This will be £9,205 for 2013/14 compared with the current higher allowances of £10,500 and £10,660 and its rise appears inexorable to £10,000, perhaps as early as 6 April 2014. This will however still be lower than the current age allowances and many pensioners will find budgeting more difficult.

Higher rate threshold

In the 2011 budget, the personal income tax allowance was increased for 2012/13 from £7,475 to £8,105, but the 20 per cent rate band was reduced by the same amount so that the 40 per cent tax rate still applied from the same point, i.e. gross income of £42,475. As incomes increase therefore, more taxpayers will find themselves liable to the higher rate, even if their earnings merely keep pace with inflation.

The position however is different when we move from 2012/13 to 2013/14. This will bring an increase in the personal allowance of £1,100 from £8,105 to £9,205 but there will also be a greater reduction in the higher rate threshold from £42,475 to £41,450, thus bringing more people into the higher rate net even where their income does not increase.

Top rate of income tax

This announcement, while fuelling fierce debate, has been somewhat overshadowed by the age allowance changes once the wider implications of the changes started to be appreciated. The reduction from 50 per cent to 45 per cent for those with income in excess of £150,000 will be welcomed by those benefiting.

Those that are able to influence the timing of their income might well decide to defer taking it until after 5 April 2013 to take advantage of the new lower additional higher tax rate. The impact assessment associated with this change recognises that this might happen with tax revenues falling in the short-term. The chancellor can however expect a tax boost after 5 April 2013, leading up to the next general election.

There are of course many who are able to influence the timing of their income, but practical cashflow considerations mean that they will still require the equivalent of their income. For those, there might be a tax benefit in taking a loan from their company. If an individual receives a loan from their employer, they are taxed on notional interest charged at 4 per cent (for 2012/13).

If a loan is provided to a 50 per cent taxpayer for 2012/13 and cleared with a dividend in 2013/14, the overall effective rate is around 32.5 per cent for the individual taking account of income tax on both the loan and the dividend (33 per cent overall after taking account of the company’s NIC on the notional loan interest), compared with 36.11 per cent if the dividend is taken in 2012/13. This could therefore not only defer but also save tax. Care should be exercised to ensure that the company is not required to pay tax on the amount loaned.

Whether or not the chancellor benefits from a tax boost after April 2013 will remain to be seen. Many taxpayers who had not previously engaged in tax avoidance have been tempted to do so since the introduction of the 50 per cent rate. It remains to be seen if these taxpayers will continue to do so having acquired a taste for it. There is of course a psychology of tax which might lead many to shrug shoulders and pay the lower rate of tax. This is encouraged by other announcements to counter avoidance and deter people from seeking to avoid tax after 5 April 2013 as explained later.

Capping of tax reliefs

The proposal to limit tax reliefs that are not already capped by legislation to the higher of £50,000 and 25 per cent of income from 6 April 2013 appears on the face of it to be a direct assault on what were referred to as “high risk areas of the tax code” in June 2011 when a paper for consultation on the subject was issued. This focused on income tax loss relief and among the options mentioned was limiting the tax relief to £25,000 for all losses, however incurred.

It is good that the proposals do not set such a low limit. That said, while the cap will not affect many running businesses, it will affect some genuine entrepreneurial taxpayers who establish businesses. Those businesses might only suffer a timing disadvantage but it could reduce the available resources to invest into the business and so will be of concern to them.

What is also concerning is the proposal that this limit will also apply to relief for gift aid payments and other qualifying gifts of assets to charities. Whilst most donors do not make gifts to secure tax reliefs, this measure might nonetheless deter wealthy philanthropists from making substantial donations at a time when the charitable sector is increasingly plugging gaps left by public services.

This does not appear to have been fully thought through and there is a significant amount of ongoing discussion on this measure as charities band together to influence government. This could be a classic case of the law of unintended consequences in operation.

Anti-avoidance

The chancellor labelled tax avoidance as “morally repugnant” and is clearly keen to deter what he sees as abusive tax schemes.

As well as capping tax reliefs, he has also announced the introduction of a general anti-avoidance rule in next year’s Finance Bill, something which has been on his agenda since the election.

A panel headed by Graham Aaronson QC, was commission by the Treasury to look at whether or not such a rule could be introduced in the UK. The panel has reported, setting out a draft rule for illustration purposes which could form the basis of the final rule.

We will need to wait to see what final form this rule will take but the concern remains that a general avoidance rule will affect taxpayers who are not artificially seeking to avoid tax but are carrying out genuine commercial transactions. The report does say “Responsible tax planning is an essential feature in a complex tax regime, such as the UK’s” and also refers to “the centre ground of responsible tax planning”. The difficulty will be in defining the limits of “responsible tax planning”.

The report suggests that an independent advisory panel is established to provide a quick and cost-effective way of helping taxpayers and HMRC identify these limits, without running the risk of giving greater discretionary powers to HMRC which could result in it being the sole arbiter on such matters.

Finally the report states, as well as seeking to deter abusive tax planning, that it seeks to

• contribute to providing a more level playing field for business;

• reduce legal uncertainty around tax avoidance schemes;

• help build trust between taxpayers and (HMRC); and

• offer opportunities to simplify the tax system.

These ambitions are welcomed but it will be a significant challenge to achieve them.

Child benefit

Following a vociferous public debate the new rules for child benefit were finally announced. Rather than claw back all child benefit when one parent is a higher rate taxpayer, there will be a reduction on a sliding scale where one parent has income between £50,000 and £60,000. This is an improvement on the ‘cliff-edge’ effect of all benefit being lost where one parent is a higher rate taxpayer but it still contains the anomaly that two parents could have income of up to £100,000 between them without losing benefit while a family where one parent in the house has income of £60,000 will not receive any benefit.

The measure of ‘income’ is the adjusted net income, i.e. after trading losses, pension contribution and gift aid payments so in certain circumstances it might be possible to manipulate income to tax advantage of this basis of calculation to preserve child benefit. That said those families reliant upon child benefit might not be in a position to make pension or gift aid payments.

Property matters

It was anticipated that there would be significant changes to Stamp Duty Land Tax (SDLT), perhaps to satisfy coalition partners as an alternative to the mansion tax and also to address tax avoidance, and so it was.

The measures introduced are:

• An increase in the top rate of SDLT from five per cent to seven per cent on purchasing residential properties for more than £2m.

• A punitive rate of SDLT of 15 per cent for purchases via a non-natural person (typically a company), with an annual charge thereafter, details of which are to be announced, though it is difficult to see how this might be achieved in practice given the relative anonymity of offshore companies. Matters will potentially be more complex where nominees hold property and there might also be valuation issues. It is hoped that matters will become much clearer as the consultation process unfolds.

• An attack on SDLT avoidance through the use of sub-sale relief and options.

The chancellor said: “Let me make this absolutely clear to people. If you buy a property in Britain that is used for residential purposes, then we will expect stamp duty to be paid. That is the clear intention of parliament.”

The idea of property owners paying their fair share of tax is unexpectedly extended to include capital gains tax so that UK residential property owned by a non-natural person will fall under the extended CGT regime. This further anti-avoidance measure departs from the usual basis of taxation of capital gains, ie that of the residence of the owner in favour of one based on the location of the property.

It should be noted that the taxation of capital gains made by non-resident individuals disposing of UK residential property without such a structure in place will remain the same. This change still leaves the UK out of step with some other jurisdictions which impose tax on profits realised on the sale of property if it is located in the jurisdiction irrespective of the residence of the individual (subject to any provision which might be contained in the relevant double tax agreement).

Finally on SDLT, the chancellor said that he will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found. This is a clear signal of intent. Combined with a general anti-avoidance rule this will make avoidance of SDLT extremely difficult.

Stephen Barratt is a director in the private client team at accountants James Cowper. He can be reached by email: sbarratt@jamescowper.co.uk