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Personal Tax

Income Tax

As announced in the 2007 budget, the basic rate of income tax will be reduced from 22% to 20% for 2008/09. The starting rate of 10% is being abolished from the same date although it will remain for savings income at the same level, i.e. taxable savings income up to £2,320. However, this is only available if an individual’s non-savings income is less than this £2,320 savings starting rate, otherwise all savings income will be taxed at 20%.

Inheritance Tax

Finance Act 2006 changed the inheritance tax rules for certain trusts.  The intended transitional period from 22 March 2006 to 5 April 2008 to enable the trustees to reorganise trusts without being subject to the new rules has been extended to 5 October 2008 for interest in possession trusts. This is welcome news and will give Trustees more time to consider their position and take any action.

The effect of the transitional provisions was unclear where pre 22 March 2006 IIP trusts are replaced with a Transitional Serial Interest for the same beneficiary. 

The new legislation will ensure that the new rules will not have effect where this kind of change is made in the transitional period, but where the change is made after the transitional period with a new IIP trust for the same or a different beneficiary, the new rules will apply.

Pensions

New rules will allow pension benefits to be paid as a lump sum where the value is below £2,000. This allows people to take very small benefits in one occupational scheme as a lump sum under the triviality rules even if they are receiving an income from another, larger, pension pot.

Currently it is not possible to take small pension pots as a lump sum if the value of a person's pension savings in total exceeds £16,000.

Forcing people to buy annuities with very small pension funds means inevitably that they don't receive decent value for money. Allowing small pension pots to be paid as a lump sum even though people may be receiving income from other, larger, pensions is good news for consumers. It is however somewhat disappointing that the Government is suggesting restricting this only to occupational schemes.

The inheritance tax provisions for alternatively secured pensions (ASP) will change, in line with the proposals for transferring the balance of the unused nil-rate band on the death of a surviving spouse. At present, a charge arises on left-over ASP funds once a relevant dependant’s pension benefits cease. The rates of tax that apply are those in force at that time rather than those that apply at the date of death of the scheme member. This rule is to be modified to take into account the proposed changes so that relief will be given where the inheritance tax nil-rate band was not fully used when the original ‘owner’ of the ASP died. This proposal brings about a fairer position and is therefore to be welcomed.

Residence and domicile

As expected, the Chancellor has announced changes to the rules regarding residence status and the taxation of non-domiciliaries. 

From 6 April 2008 the method in which days are counted for determining residence will be changed. Any day where the individual is present in the UK at midnight will be counted as a day of presence in the UK for residence test purposes.

This is subject to an exception for passengers in transit, provided that they do not use the time travelling through the

UK for other activities unrelated to travel, such as attending business meetings.

Remittance basis: For non-domiciled individuals using the remittance basis, personal allowances and reliefs for

UK income tax and capital gains tax will be withdrawn - unless their unremitted foreign income and gains are less than £2,000 a year.

Further ‘loopholes’ relating to the use of the remittance basis are also going to be closed from the Budget date. In future, income remitted into the UK will be taxed when it is remitted, even if it was earned in a previous year. Legislation will also be enacted to tax overseas assets purchased with overseas income which are subsequently brought into the UK.

Previous legalisation only levied UK tax on cash remitted from overseas. 

Legislation will also be enacted to align the treatment of non-resident employees receiving shares or options with

UK resident employees.

Annual £30,000 charge for users of the remittance basis: The Government has confirmed the introduction of a £30,000 annual charge for non-domiciled individuals who wish to access the remittance basis of taxation. This will be levied on non-domiciled adults who have been in the

UK for at least seven of the last ten tax years and who have unremitted income or gains exceeding £2,000. 

Since the pre-budget report, the application of the charge has been refined, so that payments of the £30,000 made directly to HMRC will not count as remitted income to be taxed again. In addition, the charge will be matched against unremitted income and gains so that, if these funds are remitted in the future, no further tax will be due.

It is anticipated that this charge will be available as a credit under double tax treaties, including for US citizens, but this has not yet been confirmed.

Taxation of Personal Dividends

As of 6 April 2008 individuals who are UK resident and non-resident Commonwealth and EEA nationals will now have their dividends from non-UK resident companies treated in the same way as those received from UK resident companies. These individuals will now be entitled to a non-payable tax credit on dividends from non-UK resident companies.

This will apply to shareholdings of less than 10% in the distributing non-UK resident company.

This will be extended from 6 April 2009 to shareholdings over 10%, with certain restrictions.

Individual Savings Accounts and Northern Rock Bank

Legislation has been introduced which will allow all those investors who withdrew cash from their Northern Rock ISAs between 13 and 19 September 2007 to re-invest these funds with the same or a different ISA provider. This re-investment will not count towards that investor’s annual ISA subscription limit as long as it is made no later than 5 April 2008.

Double tax relief and income from an overseas trade or profession

This change applies to individuals on income arising after 6 April 2008. Similar legislation was introduced for companies in 2005 and this legislation is in line with those changes and confirms existing practice.

Essentially the foreign tax credit on trade income from overseas is now more than the UK income tax due in respect of the same earnings.

Restrictions on trading losses for individuals

Anti-avoidance legislation is to be introduced effective from 12 March 2008 to prevent an individual claiming income tax loss relief on a trade where the individual spends less than 10 hours a week on the activities of the trade.

Last year similar legislation was introduced to prevent partners obtaining relief for tax losses in the same circumstances. This was as a result of the many loss schemes introduced that generated such a loss. To side step the partnership rules, the scheme providers restructured the schemes so that instead of being a partner the individual became a syndicate member trading in his own name.

These proposals now prevent losses created by these schemes from being used and make the scheme uneconomic.

However the restrictions apply only to trades. It is possible for an individual to generate a tax loss by investing in plant eligible for 100% capital allowances. Such a loss can be offset against income of the same tax year or the next tax year.

Anti avoidance measures

A previous statement issued on 31 January 2008 confirmed that anti-avoidance legislation would be introduced to prevent income tax relief being obtained using manufactured payments.

A number of anti-avoidance schemes had been available that enabled losses to be created for individuals and offset against other income.

Legislation will be introduced in the Finance Bill 2008 to prevent further use of these arrangements.