Income Tax
Income tax personal allowance
The income tax personal allowance for individuals born after 5 April 1948 is increasing from £8,105 to £9,440 for 2013/14 and further increasing to £10,000 in 2014/15. In subsequent years the income tax personal allowance will be amended by the increase in the consumer prices index. To compensate for this the basic rate limit is reducing from £34,370 in 2012/13 to £32,010 in 2013/14. It will further reduce to £31,865 in 2014/15.
Individuals will therefore start to pay 40 per cent income tax from a higher rate threshold of £42,475 in 2012/13; £41,450 in 2013/14 and £41,865 in 2014/15.
For 2013/14 there will still be three main levels of personal allowance – but availability will depend upon an individual’s date of birth, rather than on their age in the tax year. The higher allowances for individuals born before 6 April 1948 will not be increased and they will be removed from the statute book when the income tax personal allowance for individuals born after 5 April 1948 catches up.
Additional tax rate
As previously announced the additional rate of income tax will be reduced from 50 per cent to 45 per cent from 6 April 2013.
Seed enterprise investment scheme – CGT reinvestment relief
The seed enterprise investment scheme [SEIS] was introduced in 2012 in order to assist small, early stage companies to raise equity finance by incentivising individuals to purchase new shares in the company. One of the original incentives was to enable an individual to shelter a capital gain in 2012/13 by reinvesting the gain in shares that qualify for SEIS income tax relief. The sum reinvested was exempt from capital gains tax, subject to a £100,000 investment limit.
This capital gains tax relief is being extended to gains accruing to individuals in 2013/14 providing the gains are reinvested in SEIS shares in 2013/14 or the following year. The extension of the relief is for half of the qualifying reinvested amount.
Employee shareholder status
In October last year the Government announced its intention to introduce a new ‘employee shareholder’ employment status. Those individuals adopting the status will be eligible to receive between £2,000 and £50,000 of capital gains tax exempt shares.
In the Autumn Statement 2012 the Government announced that it was considering options to reduce income tax and NICs liabilities that arise when employee shareholders receive shares, including an option to deem that employee shareholders have paid £2,000 for shares they receive.
The decision to proceed with this option, which will ensure that the first £2,000 of share value received is also tax free from income tax and NICs, was confirmed in the Budget.
These tax changes will apply to shares received through the adoption of the new ‘employee shareholder’ status on or after 1 September 2013. It is considered that this new entitlement will be of benefit, in particular, to small and medium size firms.
Taxation of high-value UK residential property held by certain non-natural persons
A range of tax measures was announced in Budget 2012 that affected UK residential properties valued at over £2 million and held by ‘non-natural persons’. The intention was to ensure that those persons paid their fair share of UK duties on those UK properties. A consultation document was issued and draft legislation resulted that included the following:
- stamp duty land tax [SDLT] at a rate of 15 per cent on the acquisition of the residential property. SDLT applied from 21 March 2012 and further reliefs will be introduced with effect from the date of Royal Assent to Finance Act 2013.
- an annual tax on enveloped dwellings [ATED] which will be effective from 1 April 2013. There will be four ATED bands, starting with an annual charge of £15,000 for properties valued between £2 million and £5 million. The maximum annual charge is £140,000 on a property valued at over £20 million.
- capital gains tax at 28 per cent will be payable on any gain arising on the disposal of the property. This will come into effect on 6 April 2013. If the property was purchased prior to 6 April 2013, the capital gains tax charge only applies on the increase in the value of the property after that date.
Overseas workday relief
Under the prevailing law the entire earnings of an employee resident in the UK are subject to UK income tax, regardless of where the monies are received. If the individual is not ordinarily resident in the UK and is taxable on the remittance basis then earnings from non-UK duties will not be taxed in the UK if they are not remitted to the UK.
Problems can be caused in deciding the split of earnings between UK and non-UK duties. In some cases it is necessary to calculate the UK income tax liability by reference to each individual transfer from the overseas bank account. Legislation will be introduced in Finance Bill 2013 to allow general earnings to be apportioned on a just and reasonable basis, preserving the approach that was originally introduced as a statement of practice.
Overseas workday relief [OWR] will also be placed on a statutory footing alongside the introduction of the statutory residence test. OWR will be available to all individuals who are not UK domiciled for the tax year in which they become UK resident and the following two tax years. The new rules will commence from April 2013.
Life insurance – qualifying policies
Currently there is no restriction on the investment premiums that may be paid into a qualifying policy thereby enabling individuals to obtain unlimited relief from higher and additional rates of income tax. When the policy is realised the individual should make a gain which is subject to income tax at the individual’s marginal rate. This is known as ‘the chargeable event gain regime’.
With effect from 6 April 2013 an annual premium limit of £3,600 will be imposed on qualifying life insurance policies. Transitional rules will apply for the period between 21 March 2012 and 5 April 2013. The change in policy was originally announced in Budget 2012. The impact will be to restrict the tax relief for higher and additional rate taxpayers with qualifying policies.
Transfer of assets abroad
An anti avoidance measure is introduced that targets UK residents who have transferred assets abroad so that income becomes payable to an overseas person where that or another resident can benefit from such transfers.
An infraction notice (Reasoned Opinion) was issued by the EU on 16 February 2011; this was followed by a consultation document which was published on 30 July 2012.
The new measure adds an exemption from the transfer of assets charge where EU treaty freedoms are engaged. This focuses on the objective nature of transactions and activities related to the transfer rather than their purpose. There are existing exemptions where there is no tax avoidance purpose, or where the transactions are genuine commercial transactions, and any tax avoidance purpose is merely incidental.
The measures will be retrospective with effect from 6 April 2012 for the new exemption and from 6 April 2013 for the clarification changes announced in the Budget.Inheritance tax – nil rate band
The Government announced in Budget 2010 that the nil rate band for inheritance tax would be frozen at £325,000 until April 2015. It will remain frozen at this level until April 2018 in order to help pay for the cap on ‘reasonable care costs’ of £72,000 for older people from April 2016.
Capital taxes
Inheritance tax threshold
| 2013/14 | 2012/13 | |
| Standard threshold | £325,000 | £325,000 |
| Combined threshold maximum for married couples and civil partners | £650,000 | £650,000 |
Inheritance tax – spouses and civil partners domiciled overseas
All individuals, whether domiciled in the UK or overseas, benefit from the inheritance tax nil rate band of £325,000. Transfers of assets between spouses or civil partners are generally exempt from inheritance tax. However if the recipient spouse is not domiciled in the UK the lifetime cap on tax free transfers to that spouse is only £55,000.
The law is being amended with effect from 6 April 2013 so that the £55,000 lifetime cap will be lifted to £325,000. In addition, the non-UK domiciled spouse or civil partner will be able to elect to be treated as if they are domiciled in the UK for the purposes of inheritance tax, should they so choose.
Inheritance tax – limiting the deduction for liabilities
Inheritance tax is charged on the net value of an individual’s estate after deducting liabilities outstanding at the date of death. A number of promoters of inheritance tax avoidance schemes have been taking advantage of this by devising schemes with substantial accrued liabilities at the date of death – if those liabilities subsequently prove to be overstated then insufficient inheritance tax may be paid on the estate.
Under the revised legislation it will only be possible to claim a deduction for a liability to the extent that it is actually repaid to a creditor unless it can be demonstrated that there is a commercial reason for the non-payment. The amendment will apply from the date that Finance Bill 2013 receives Royal Assent.
Capital gains tax
| 2013/14 | 2012/13 | |
| Lower rate | 18% | 18% |
| Higher rate | 28% | 28% |
| Annual exemptions: Individual | £10,900 | £10,600 |
| Settlements | £5,450 | £5,300 |
| Entrepreneurs’ relief: Applicable rate | 10% | 10% |
| Lifetime limit | £10m | £10m |