Pre-Budget Report 2009

Pre-Budget Report 2009

With Government debt running to hundreds of billions, the Chancellor was unlikely to give much away. There was the introduction of further anti-avoidance provisions in a number of areas as well as a final prompt for individuals to disclose holdings in offshore accounts.

There was an interesting announcement relating to a reduction in Bingo Duty. However, on closer inspection this Duty was in fact increased in Budget 2009 from 15% to 22%, and is now being 'reduced' to 20% (Budget Notice 73 April Budget 2009). Similarly, the 0.5% increase to both employee and employer National Insurance (NI) announced today is in addition to a 0.5% increase already announced, which means that in 2011/12 NI levels for both employees and employers will increase by 1%.

There are some new green incentives being introduced. These include replacing your old boiler and selecting an electric car for your company car, as the Government continues to strive towards reducing our carbon footprint.

In a move that was widely anticipated, discretionary bonuses over £25,000 paid to bank employees will effectively be taxed twice. The intention is not to catch asset management companies by this measure, and employers will only be subject to a one-off 50% tax rate if they undertake 'banking activities'. VAT will revert back to its old level of 17.5% and the stamp duty holiday on property purchases will return to its previous threshold, both on 1 January 2010.

Personal allowances and thresholds have remained virtually unchanged based on the fact that the annual change in the Retail Prices Index was negative for September - the month used in legislation. The Basic State Pension, however, will be increased by 2.5% from April 2010 and certain benefits, such as Child Benefit, will increase by 1.5%.

Impact on financial planning

Key changes impacting financial planning focus on two areas: pensions and inheritance tax.

Pensions (Pre-Budget Report Notes 18 and 19)

Reduced relevant income threshold

The Chancellor announced that, from 6 April 2011, those with income over £130,000 will have employer pension contributions added to see if they are over the £150,000 income threshold that will trigger restrictions on higher-rate tax relief.

As a consequence, there will be an immediate increase in the number of individuals who will potentially have restricted relief on significant future pension accrual between 9 December 2009 and 5 April 2011.

Individuals whose relevant income (excluding employer contributions) exceeds £130,000 for the current tax year or two previous tax years will, from 9 December 2009, be subject to the same restrictive tax relief provisions that, since 22 April 2009, had applied to individuals with relevant income over £150,000.

Key elements are:• A special annual allowance of £20,000 will apply for the remainder of the 2009/10 tax year and the 2010/11 tax year.
• Any accrual made on or after 9 December 2009 that exceeds the special annual allowance and is not a protected pension input or within the higher infrequent money purchase contribution threshold will be subject to a special annual allowance charge of 20% in the current tax year.
• Accruals or contributions made in the current tax year up to 8 December 2009 will not subject any affected client to a special annual allowance charge. The value will, however, reduce or completely negate the special annual allowance the client has available.
• Annualised regular savings immediately preceding 9 December 2009 will be treated as a protected pension input, as will the infrequent money purchase contributions threshold based on the average of such payments over the 2006/07-2008/09 tax year period capped at £30,000.
• The same rules as applied on 22 April 2009 for the original anti-forestalling measures covering re-structuring of contributions to separate registered pension schemes will apply to individuals caught by the new threshold.
• Employer contributions resulting from any new salary sacrifice arrangements entered into from 9 December 2009 will be included in the relevant income definition for threshold testing.
The changes announced today will mean a need to revisit future planning for those individuals now brought into the more restrictive relevant income threshold definition. Accruals and contributions already received into schemes by close of business yesterday will be protected from any special annual allowance charge. The changes, however, may restrict future use of pension arrangements for these individuals.

Special annual allowance tax charge for the 2010/11 tax year

The level of charge applicable to excess contributions paid in the 2010/11 tax year will be a variable rate based on the underlying rate of income tax to which the individual is subject. The stated aim is to reduce the effective rate of relief to 20%, ie the basic rate. This will create a variable charge of between 0-30% depending on the income tax rate of the individual concerned.

Smaller companies corporation tax

The Pre-Budget Report announced a deferral of the proposed increase in the rate to 22% until April 2011. The rate will remain at 21% until then.

Short service refund lump sums

The Pre-Budget Report announced changes to be effective from the 2010/11 tax year. The tax charges that will apply are 20% for the first £20,000 of the refund and 50% on any excess above £20,000.

Employer-funded retirement benefit scheme (EFRBS) - scheme payments

Where certain lump sums, gratuities or other benefits are received from an EFRBS by an entity that is not an individual, the rate of tax paid by the recipient will increase from 40% to 50% effective from the beginning of the 2010/11 tax year.

Inheritance Tax (Pre-Budget Report Notes 20 and 21)

Pre-Budget Report Note 20 announced that the Finance Bill 2010 will set the limit of the inheritance tax (IHT) nil-rate band for the 2010/11 tax year at £325,000 - the same level as in 2009/10. The Finance Act 2007 currently provides that the nil-rate band will rise to £350,000 for 2010/11 and this announcement will stop the increase.
Pre-Budget Report Note 21 announced that legislation will be introduced in the 2010 Finance Bill to counter two tax avoidance schemes that have been designed to avoid IHT charges on property in trusts.
The measure will have effect for:
• transfers into a trust where the settlor retains a future interest, or where a future interest in a trust is purchased on or after 9 December 2009;
and
• interests purchased in trusts on or after 9 December 2009.
This measure will apply:
• where a person transfers property into a trust in which they (or their spouse or civil partner*) retain a future interest or where a person purchases a future interest in a trust. It provides that there will be a chargeable event for IHT purposes when the future interest comes to an end and the person becomes entitled to an actual interest under the trust. If that future interest is given away before the person becomes entitled to an actual interest, it may be immediately chargeable to IHT;
and
• where a person purchases an interest in possession in a trust at full value. It provides that such an interest will be treated as part of the purchaser's estate for IHT purposes. If the interest comes to an end during the purchaser's lifetime, there may be an immediate charge to IHT.
Draft legislation has been published and is available at:
http://www.hmrc.gov.uk/pbr2009/inheritance-tax-avoid-3770.pdf
It would appear from first reading that this draft legislation does not impact traditional Discounted Gift Trust (DGT) or Loan Trust arrangements. The Pre-Budget Report mentions a wider review of the use of trusts to avoid IHT charges, but no further detail is included at this stage.

Offshore disclosure

Legislation will be brought forward to ensure that those who fail to declare offshore tax liabilities will face the tough penalties attracted by deliberate tax evasion. There will also be a new requirement to notify HMRC when opening offshore bank accounts in certain jurisdictions, supported by a separate penalty regime. Evading tax offshore could result in combined penalties of up to 200 percent of the unpaid tax. Further details are expected to be announced on this.

Summary

Many of these proposed announcements will not happen for another year or two and with a general election looming some of these may even change again before their start date. Given the possibility of two Budgets next year, making use of the planning opportunities which exist today may well be a prudent approach.
I hope you find this summary useful. As ever, the need for advice on these issues will be critical for clients to fully understand the impact of the changes.