UK: Budget 2015: Summary Of Key Tax Provisions

On 18th March 2015, George Osborne delivered his sixth budget as Chancellor and the last of the current Parliament. Amongst the announcements were a number of developments relevant to tax planning, the key points of which are summarized below:

Capital Gains Tax – Entrepreneurs’ Relief

Entrepreneurs’ Relief (ER) reduces the rate of CGT to 10% on up to £10 million of gains arising on the sale of interests in trading businesses. From 18 March 2015, the availability of ER will be restricted as follows:

ER will be denied on the disposal of shares made on and after 18 March 2015 in a company that is not a trading company in its own right. This is to counter arrangements where joint ventures were used to set up structures under which someone with a small indirect stake in a trading company could benefit from ER.
individuals will be prevented from claiming ER on the disposal of personal assets used in a business carried on by a company or a partnership unless the claimant is significantly reducing their participation in the business by a sale of at least 5% shareholding in the company or a 5% share in the partnership assets. This also has immediate effect.
Inheritance Tax – Deeds of Variation

Deeds of Variation are widely used to vary the disposition of an estate post-death. They are used to take account of changes in family circumstances since the Will was prepared and to take advantage of tax benefits that may not have been used on death.

The Chancellor announced a review of Deeds of Variation as part of the Government’s wider strategy to clamp down on tax avoidance. This is of concern if the review ultimately leads to the abolition of Deeds of Variation, and the tax planning implications this would have. However, reviews of Deeds of Variation have been announced several times previously without ultimate change by the Government so it remains to be seen whether this review will come to fruition.

Inheritance Tax – Taxation of Trusts

The Government intends to pursue a reduction in tax avoidance through the use of multiple trusts. However, the changes are likely to be significantly less extensive than those suggested a year ago. Full details have not been revealed but so far it has been confirmed that:

the rules will only apply to additions to more than one relevant property trust made on the same day;
there will be a de minimis of £5,000 (ie. additions to a trust of less than £5,000 will not be treated as a same-day addition);
non-relevant property will not have to be included in the calculation of the exit charges and ten year anniversary charges; and
the grace period for additions to existing will trusts where the will was executed before 10 December 2014 will be extended to include deaths occurring before 6th April 2017.
Pensions

The Government has continued its emphasis on flexibility as regards pensions. As of April 2016, the tax rules will be adjusted to allow pensioners who have already purchased an annuity to sell that annuity to a third party (subject to the agreement of the annuity provider). The proceeds of the sale of the annuity can then be paid in a lump sum to the pensioner, or drawn down over a number of years subject to income tax at their marginal rate.

The Lifetime Allowance for pension contributions will be reduced from £1.25million to £1million from April 2016. It is proposed that transitional protection for rights over £1million will be introduced alongside the reduction to ensure that the change is not retrospective and the Lifetime Allowance will be indexed annually in line with the CPI from 6 April 2018.

Personal Taxation

The tax-free personal allowance is to rise from £10,600 in 2015-6 to £10,800 in 2016-7 and £11,000 in 2017-8.

The threshold at which people start paying 40p income tax is to rise by above inflation from £42,385 in 2014-5 to £43,300 in 2017-8.

Annual tax returns are to be abolished and replaced by digital accounts.

The annual savings limit for ISAs will be increased to £15,240. A new “fully flexible” ISA will allow savers to withdraw money and put it back later in the year without losing any of their tax-free allowance.

Finally, a new “Help to Buy” ISA for first-time buyers will commit the Government to top up every £200 saved for a deposit by another £50, up to a total bonus of £3,000.

Summary

Overall, there was nothing particularly ground-breaking in the Budget and many of its proposals will ultimately depend on the outcome of May’s election. Nevertheless, the Budget serves as a reminder of the importance of personal tax planning, and being aware of changes to tax and pensions legislation as they arise.

This article was written by Ian Bradshaw, partner, private client with assistance from Elizabeth McClenan, trainee solicitor.