Modernising the Personal Tax System

The headline is of course the reduction in the basic rate of income tax to 20% from 2008-09. However, the detail reveals that this measure is not quite as generous as it seems.

The starting rate of tax (currently 10%) is payable on the first £2,150 (from 6 April, £2,230). This starting rate is to be abolished which means that this first slug of income will now be subject to tax at 20% rather than 10%.

The other change that partly pays for the reduction in the income tax rate is the alignment of thresholds for income tax and national insurance contributions. From 2008-09, the threshold below which Class 1 national insurance contributions are due at 11% and Class 4 at 8%, (both 1% above this level), is to rise and be aligned with the threshold for 40% income tax, currently £33,300 (from 6 April, £34,600).

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Alternative Finance Arrangements

A “Sukuk” is a financial certificate that is popularly perceived as a Shari'ah compliant investment bond. New provisions will ensure that “sukuk’s” which fall into the relevant definition and meet certain conditions will be taxed in a similar manner to debt securities. Amounts paid by the issuer will be deductible under the loan relationship rules; amounts received will be taxable as if they were interest in the hands of the holder.

These new rules will apply to new investment bonds and also to existing investment bonds which fall into the statutory definition.

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Tax Relief on pension contributions funding personal term assurance policies

As part of the pensions simplification process, it became possible for individuals to purchase term assurance and get tax relief on the contributions made to the policy. From 6 April 2007 (1 August 2007) for occupational schemes), this tax relief will be removed.

If any similar products come to market to try and work round these rules, secondary legislation will be passed to ensure that these products can have any tax relief quickly removed.

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Alternatively Secured Pensions and inheriting tax relieved pensions savings

Changes will be made to ensure that a minimum income must be drawn from an ASP and that a tax charge will arise if funds are transferred to another member of a scheme on the death of a member.

Additionally, consultation is announced to ensure that tax-privileged pensions savings cannot be inherited.

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Offshore Funds

Changes are to be made which will affect the tax treatment of offshore funds (i.e. offshore collective investment schemes) and UK investors in those funds.

Fund of funds

A UK investor pays income tax on gains from the sale of an interest in an offshore fund unless that fund is a “distributing fund”.

New rules will be introduced to allow a fund to retain its distributor status even if it makes multi-tiered investments in other offshore funds (provided those other funds could also be distributing funds). So an offshore fund could invest in another offshore fund of funds and still, in some circumstances, retain its distributor status.

Definition of offshore fund

The definition of “offshore fund” is to be expanded to cover investments in open-ended investment companies where the investor can reasonably expect to dispose of his or her interest within seven years (until now this period was six months).


Rules will be introduced to make it clear that losses on a disposal of an interest in an offshore fund will be treated, for tax purposes, as capital losses.

Investment Trusts

An investment trust’s income must be derived wholly or mainly form shares or securities. New rules will be introduced to make it clear that income from offshore funds will not count for the purposes of meeting that requirement (although offshore income gains will be taxed as income in the hands of the investment trust).

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Taxation of personal dividends

From 6 April 2008, individuals who receive dividends from non-UK resident companies will be taxed on the same basis as if they received the dividends from UK resident companies, providing they own less than 10% in the non-UK company and they receive less than £5,000 in total from non UK-resident companies.

This is effected by extending the application of the non payable dividend tax credit of one ninth of the distribution which currently only applies to dividends received from UK resident companies.

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CGT Anti-avoidance: Capital Loss Buying

This measure was announced in the pre-budget report last year. Broadly, the corporation tax rules introduced in Finance Act 2006 preventing companies taking advantage of losses that have arisen pursuant to tax avoidance arrangements will be extended to cover any taxpayer liable to capital gains tax.

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