Tinker, tailor

The latest budget contained some clever new measures and did a good job of grabbing newspaper column inches. While there were some giveaways, they were not as generous as some might have expected just before a general election, or indeed as suggested by some of the headlines. For those working in the private client world, there were only a handful of surprises.

'Death of the tax return'

For the professional adviser community, perhaps the most significant new measure is the expansion of real-time reporting to HMRC. This will do away with the need for annual tax returns
for millions across the country, but not for all.

The system is expected to be phased in from 2016, when individual tax-payers will be given digital tax accounts. HMRC and employers will populate these accounts automatically. As HMRC already receives this data but requests it again in our annual tax returns, this system will cut out unnecessary duplication of efforts.

However HMRC will not be able to collect everyone's data effortlessly. A large number of people will need to keep track of their affairs and deal directly with revenue and customs.
For example there is no way at present for HMRC to know about many kinds of income or gains such as rent and dividends, without being informed about them.

Readers will also be aware that certain individuals' tax and financial affairs are very complicated by nature. These must be planned from year to year and real-time reporting actually complicates matters. Our tax laws and rates (not to mention those of other countries for those with interests abroad) are also based upon yearly intervals. Therefore we will still need some kind of annual catch-up.

Given that it is human nature to put things off, there may still be a rush to finalise matters before any deadline. Perhaps the customary January rush
will become easier, but we are short
on details.

It should also be borne in mind that HMRC are highly attuned to the logic of carrot and stick. If they offer a more flexible system which benefits most people, expect tougher penalties for those who do not toe the line. A points-based fines system with penalties of up to £2,000 has already been mooted.

Reviews of entrepreneurs' relief and deeds of variation

In recent years the government has become concerned that entrepreneurs' relief is being abused. In particular, it wishes to target holding structures that have been contrived to allow shareholders in a trading company to qualify for the relief (by owning more than five per cent of the shares in that holding structure), where their actual interest in the company is much less.

Entrepreneurs' relief is a powerful tool to encourage business investment. It is good that the government is conducting a review to ensure that the right people benefit, as the alternative would be to abolish the relief altogether.

Meanwhile the announcement of entirely welcome. Families have used these countless times over many years with good reason. They are a useful mechanism for rectifying defective or incomplete wills. What is more, with the introduction of the transferable allowance for couples in 2007, the tax planning benefits to this mechanism are now minimal in most cases. It would be a shame if this essential tool is shelved just so that the chancellor can embarrass the opposition.

Income tax and NICs

The personal allowance threshold will rise to £10,600 next year, then to £10,800 in 2016/17, and then to £11,000 in 2017/18. This coalition flagship policy has benefited millions, but the stated goal of £12,500 is still some way off.

George Osborne also announced an increase in the threshold for higher rate tax from £41,865 to £42,385 in 2015-16, and £43,300 by 2017-18. Of late, when the personal allowance has been raised, the 40p tax band has been lowered to pay for it. This has brought about one million people into this tax band, which was never intended for middle earners.

While the increase of the threshold is welcome, it will still be lower than it was when the coalition came to power (£43,875). The Conservatives have previously indicated an intention to increase the threshold to £50,000 in the next parliament, and this rate of increase would require a large jump.

ISAs and pensions

The pension lifetime allowance has been cut to £1m, with the level being £1.5m just a couple of years ago. This is disappointing and will affect not only the wealthiest, but also middle earners.

After the shakeup to pensions last year, including a reduction in the lifetime allowance to £1.25m in April 2014, we may have expected some time to let things bed down before further changes.

To put it into perspective, a pension pot of £1m will currently buy you an annuity income of roughly £25,000.
This could support a comfortable retirement, but not a wealthy one.
One side effect we may see is increased investment in buy-to-let properties,
by those planning their retirements.
This may have negative effects on the housing market, and will divert cash away from the institutional investors, which are a vital part of our financial system.

The new freedom to sell annuities on a secondary market is in keeping with the suite of pensions changes announced in the 2014 budget. Effectively, tax on exiting annuities will drop from 55 per cent to the marginal rate.

While it may suit some who feel they are locked into poor deals and would prefer a cash lump sum to low regular payments, in reality the uptake is likely to be low, especially while the market is undeveloped. The dangers of being stung with a poor deal on the way in and on the way out, as well as that of mis-selling, should not be ignored.

Meanwhile removing tax on savings income for basic rate tax payers plays well with the Tories' target voters. The benefits of this change may have been overstated however. It should be remembered that this only applies to the first £1,000 of income from savings interest for basic rate tax payers; an extra £200 per year.

The benefits for those on higher rate tax and above are small to negligible.
As interest will be paid gross, it may also draw more individuals into the regime of reviewing their account with HMRC.

Tax evasion and abusive avoidance

Measures combatting abuses against the tax system feature in every budget, so it was no surprise to see several more.
New sanctions for professional advisers who aid and abet tax evasion are eye-catching, but should worry very few.

However with the complete shift in attitudes towards tax avoidance in recent years, the government should tread carefully when pursuing practices that were deemed acceptable and were transparent, at the time they occurred.

One particular measure that practitioners should be aware of is the early closure of the Liechtenstein Disclosure Facility (LDF) and Crown Dependencies Disclosure Facilities. These will now end in December this year, rather than in April and September 2016.

While this was somewhat unexpected, it paves the way for tougher measures which are more in keeping with the government's anti-evasion drive.

When these facilities close they will be replaced by a 'last chance' disclosure facility up to mid-2017. Unlike the current arrangements, this will not offer immunity from prosecution in exchange for full disclosure, and a tougher penalty of 30 per cent on top of the tax owed will apply.

With the introduction of the international Common Reporting Standard, tax transparency is going to step up several gears. The upshot of all this is that there is no better time than now for clients to regularise their tax affairs.

The budget document also made reference to a new duty upon financial intermediaries and advisers. They will need to notify their UK resident clients with UK or overseas accounts about the Common Reporting Standard, and the new penalties for evasion and opportunities to disclose. We don't know when this will come into force and how exactly it will work, but it will certainly
be one for the industry to watch closely.

Closing thoughts

This budget wrapped up the term of this coalition government appropriately as many of the measures announced built upon the work of previous years. As ever, we will only know the true impact of some of the more controversial announcements with time.

Meanwhile the slow march towards digitisation of our tax system and transparency has picked up pace.

Lucy Brennan is a partner at Saffery Champness