On 20 March 2013, George Osborne delivered his Budget to Parliament. Many of the measures were announced on 6 December 2012 in the Chancellor's Autumn Statement but there were several new measures of note for our clients. Wedlake Bell Partner, Camilla Wallace, summed up the Budget as follows:-
"A budget of basic housekeeping for the aspiration nation. Tax cuts to kick start the economy and attract UK investment have to be funded. Cost cutting in public sector bureaucracy (such as the predicted £11.5bn Government department underspend) and trimming of the "bloated" welfare system are unavoidable. Furthermore, increasing the collection of taxes by reducing rates, implementing further anti-avoidance legislation and entering into additional international agreements with traditional tax havens are no brainers. If you're owed money you seek repayment – expect the UK Government and HMRC to do the same."
As previously announced, the personal allowance will be increased to £9,440 for tax year 2013/14 (for those born after 5 April 1948). Many had expected the Government to bring forward their plans to increase the personal allowance to £10,000 and this was confirmed: this will now take effect from next tax year, 2014/15. Those with middle to high incomes will pay the price for the increase however, as the threshold at which the 40% rate applies will be lowered to £32,010 for tax year 2013/14 and then further lowered to £31,865 for the following tax year. As previously announced, the 50% rate, which applies where taxable income exceeds £150,000, will be lowered to 45% (or 37.5% on dividend income).
Trusts that pay income tax at the "special trust rate" for tax year 2013/14, will pay at the rate of 45% rather than 50%. The dividend trust rate will be 37.5% rather than 42.5%.
Capital Gains Tax
As previously announced, the capital gains tax ("CGT") annual exemption for individuals will be £10,900 for tax year 2013/14 and £5,450 for trustees. The rate of CGT for individuals remains at 28% if their taxable income exceeds the basic rate band of 20%, failing that, 18%. The rate of CGT applicable to trusts remains at a flat rate of 28%.
As announced on 11 February 2013, the threshold after which inheritance tax ("IHT") becomes payable (known as "the nil-rate band") will be frozen at its current level of £325,000 until 5 April 2018, in order to fund the Government's social care reforms. This measure is expected to result in many more estates falling into the IHT net as the nil-rate band fails to keep track with inflation. For more on this topic, see our previous update .
More generously however, albeit as a response to criticism from Europe, it was confirmed in the Budget that the cap on the IHT spouse exemption for transfers from a UK domiciled spouse to a non-UK domiciled spouse will be increased to £325,000 (from £55,000) as reported in our recent update.
The unexpected announcement on the subject of IHT was that a limitation will be placed, from 6 April 2013, on the amount that can be deducted from a deceased's estate for IHT purposes. Currently, the general rule is that debts and liabilities can be deducted (in full) from the value of the overall estate, so as to reduce the IHT payable. However, it was announced in the Budget that where such liabilities relate to one of the following, the deduction will be restricted in whole or in part:-
- schemes creating artificial liabilities where the creditor is never repaid;
- loans to purchase assets that will qualify for IHT relief (such as Business Property Relief, Agricultural Property Relief or Woodlands Relief); or
- loans to purchase assets that are outside for scope of IHT (for example, non-UK assets held by a non-UK domiciled individual are excluded from IHT).
The latter two liabilities operate so that the value of an estate is doubly reduced, and although such arrangements are viewed as legitimate commercial planning by many, the Government views them as contrary to its anti-avoidance strategy and fairness agenda. These restrictions on the above IHT liabilities will take effect from the date the Finance Bill 2013 received Royal Assent (usually around July) and will apply to estates where the death occurs on or after that date. Commercial loans (such as mortgages to buy a UK residential property) will be unaffected.
The tax avoidance measures previously announced which are applicable to "non-natural persons" (broadly, companies, collective investment schemes and partnerships with a corporate partner) holding UK residential property worth more than £2 million are confirmed. From 1 April 2013, an annual tax for enveloped dwellings ("ATED") will apply to the value of such property, as will the UK CGT regime if a disposal is made of the property (after 6 April 2013) by a UK resident or non-UK resident "non-natural person". For further information on these measures, see our previous update.
The new UK statutory residence test, a draft of which was published on 11 December 2012 following a long period of consultation, is also confirmed to come into force from 6 April 2013. The statutory test replaces the web of case law, legislative provisions and guidance that currently make up the UK's residency rules, and should provide clarity to those who are unsure of their UK residency status for tax purposes. Our bulletin on the statutory residence test explains further:
Tax Avoidance was a key theme in this year's Budget with the Government confirming that it is pushing ahead with a general anti-abuse rule. The rule will seek to counteract abusive tax schemes (albeit currently legitimate) that are designed to avoid tax. The rule will affect arrangements entered into on or after Finance Bill 2013 receives Royal Assent. As Wedlake Bell Partner, Camilla Wallace, commented: "the optimistic among us tax advisers continue to wait for further guidance on its application and the dividing line between acceptable tax planning and "morally repugnant" and unacceptable tax avoidance."
The Government also announced in the Budget that they are launching a consultation in spring 2013 on two specific measures to tackle tax avoidance through the use of partnerships.