Comprehensive Budget 2013 review

Burton SweetOn 20 March 2013 George Osborne announced the latest Budget.

Amid an economy stricken by rising debt and with stagnating growth, the Chancellor announced a Budget aimed at large Business. Cuts to Corporation Tax, Employers National Insurance savings, and tax free shares to employees are all aimed at encouraging employment and attracting big businesses to the UK.

Rachel Finch, Tax Advisory Partner at Burton Sweet Accountants, summarises the key announcements made:

Personal 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 (CPI).

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.

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.

New Childcare Scheme

A new childcare scheme is to be introduced to support working families with their childcare costs. For childcare costs of up to £6,000 per year, support of 20% will be available worth up to £1,200. From the first year of operation, all children under five will be eligible and the scheme will build up over time to include children under 12.

The scheme will provide support for families where all parents work a minimum of 16 hours per week and they are not receiving support through tax credits or universal credit and where neither parent earns over £150,000 a year.

The new scheme will be phased in from autumn 2015 as the current system of Employer Supported Childcare will be phased out for new applicants from autumn 2015.

Company Car Tax Rates

From 2015/16, two new appropriate percentage bands will be introduced for company cars with a rate of 5% for cars emitting 0-50 g/km of carbon dioxide and a rate of 9% for cars emitting 51-75 g/km of carbon dioxide.

As announced previously, the remaining percentages will be increased by two per cent for cars emitting more than 75 g/km, to a new maximum 37%. For cars without CO2 emissions, the appropriate percentage will be set at5% for cars incapable of producing CO2 emissions under any circumstances when driven, and at 37% for other cars.

Employee Shareholder Status

Late 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 their employer’s company.

Furthermore, the Budget announced that the first £2,000 of share value received by a qualifying employee will also be free of Income Tax and National Insurance.

These tax changes will apply to shares received through the adoption of the new ‘employee shareholder’ status on or after 1 September 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.

Capital Taxes

Inheritance Tax – Nil Rate Band

Tax Year 2012/2013 2013/2014 2015/2016 2016/2017

Standard Threshold £325,000 £325,000 £325,000 £325,000

The Government had previously announced in Budget 2010 that the Nil Rate Band for Inheritance Tax would be frozen at £325,000 until April 2015, at which point a 1% increase would be applied.

In Budget 2013 the Chancellor announced that this intended increase would be cancelled and the Nil Rate Band would remain frozen until April 2018.

This continued freeze has been implemented to help pay for the cap on ‘reasonable care costs’ of £72,000 for older people from April 2016.

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.

Capital Gains Tax

Tax Year 2012/2013 2013/2014

Lower rate 18% 18%

Higher rate 28% 28%

Annual exemptions: Individual £10,600 £10,900

Settlements £5,300 £5,450

Entrepreneurs Relief: Applicable Rate 10% 10%

Lifetime Limit £10m £10m

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.

However, unlike the previous year, for 2013/14 relief is only available for 50% of the reinvested amount.

Savings

ISAs

Tax Year 2012/2013 2013/2014

ISAs Overall Investment Limit £11,280 £11,520

Maximum cash element £5,640 £5,760

Junior ISA Overall Investment Limit £3,600 £3,720

Reducing The Pension Annual And Lifetime Allowances

The pension annual allowance has been £50,000 since 2011/12, but it is being reduced to £40,000 from 2014/15.

The pension lifetime allowance for an individual has been £1.5 million since 2012/13. It is being reduced to £1.25 million from 2014/15.

If an individual accrues pension benefits in excess of the lifetime allowance then the lifetime allowance tax charge is applied to the excess.

The tax rate is 25 per cent if the excess is taken as a pension and 55 per cent if it is taken as a lump sum.

A transitional protection regime will also be introduced for individuals with UK tax relieved pension rights of more than £1.25 million, or who think they will exceed £1.25 million by the time they take their pension benefits.

This is known as ‘fixed protection 2014’ and individuals will need to inform HM Revenue & Customs by 5 April 2014 if they wish to rely on it.

The downside of the protection is that individuals in a defined pension contribution scheme must ensure that no further pension contributions are made to the scheme after 6 April 2014.

Business Tax

Corporation Tax

Financial Year (starting 1st April) 2012 2013 2014 2015

Taxable Profits:

First £300,000 -20%

Next £1,200,000 25% 23.75% TBA 20%

Over £1,500,000 24% 23% 21% 20%

As previously announced the main rate of Corporation Tax reduces to 23% from 1 April 2013 and will be further reduced to 21% from 1 April 2014.

In addition, it was announced in the Budget that from 1 April 2015 the main rate of corporation tax will be reduced to 20%.

This further reduction will result in the unification of the small profits rate and main rate to produce a single rate of corporation tax, simplifying the corporation tax system.

Simpler Income Tax For Small Businesses

The new simpler income tax rules announced for small self-employed or partnership businesses (generally not exceeding the VAT registration threshold) will come into force from the 2013/14 tax year.

As planned the measure will allow small businesses to prepare accounts on a ‘cash basis’ rather than on an ‘accruals basis’.

Employment-Related Loans

From 6 April 2014, employers who provide their employees with interest free or low interest loans will no longer be required to report the cash equivalent on small loan balances where the outstanding balance is £10,000 or less throughout a tax year. This is double the current threshold of £5,000.

Employment Allowance:

From April 2014 every business and charity will be entitled to a £2,000 Employment Allowance towards their employer national insurance contributions (NICs) bill.

The Employment Allowance will be introduced from April 2014, delivered through standard payroll software and HM Revenue & Customs Real Time Information system.

VAT

Changes To Registration And Deregistration Thresholds

From 1 April 2013, the taxable turnover threshold, which requires a person to register for VAT, will be increased from £77,000 to £79,000 per annum; the threshold below which a VAT-registered person may apply to deregister will be increased from £75,000 to £77,000 per annum.

Duties
Fuel Duty

The 1.89p per litre fuel duty increase due to take effect on 1 September 2013 will be cancelled.

Beer

Beer duty was due to increase by three pence with effect from 18:00 on 20 March 2013. The changes below are intended to reduce beer duty by 1p. The Budget announced reductions in the duty on beer as follows:

• Low strength beer will be reduced by six per cent
• Medium strength beer by two per cent, and
• High strength beer will be reduced by 0.75 per cent

Tobacco Duty

Tobacco duty rates increased by 2% over and above inflation (RPI) from 18:00 on 20 March 2013. This will add, for example, 26p to the price of 20 cigarettes and 9p to the price of a pack of five small cigars.

Vehicle Excise Duty

Vehicle Excise Duty has been frozen in 2013/14 on heavy goods vehicles (HGVs), buses, and related categories of vehicle that are linked to the lower HGV rate (minor rates) for 2013/14.

Stamp Duty For Companies On Growth Market.

It was announced that from April 2014, the Government will abolish stamp duty on shares for companies listed on growth markets including the Alternative Investment Market (AIM) and the ICAP Securities & Derivatives Exchange (ISDX) Growth Market.

Other Announcements

Bank Levy

The full rate of the bank levy will be increased to 0.142 per cent from 1 January 2014.

Anti-Avoidance

A new General Anti Avoidance Rule (GAAR) will be introduced from April 2013. The rule will apply to Income Tax, National Insurance, Corporation Tax, Capital Gains Tax, Inheritance Tax and Stamp Duty Land Tax.

The rule will aim to counteract ‘abusive tax avoidance arrangements’.

Help To Buy Mortgage Scheme

The Help to Buy Mortgage Guarantee Scheme is being introduced by the Government with the aim of increasing the appetite of mortgage lenders to provide high loan-to-value (LTV) lending to creditworthy customers.

The scheme will provide lenders with the option to purchase a Government guarantee that compensates them for up to 80% of their losses in the event of foreclosure.

The Government will charge a commercial fee for the provision of this guarantee.

In order to qualify a mortgage must meet the following criteria:
• residential mortgage not buy-to-let;
• Individual(s) only not company;
• Property in the UK with purchase value of £600,000 or less;
• LTV between 80% and 95%;
• Repayment mortgage only
• Be taken out between the dates of the scheme
• The borrower must meet certain requirements in terms of their ability to repay the mortgage

The scheme is intended as a temporary measure. It will be open from January 2014 and will run for 3 years.

Furthermore, from April 2013 a 20% deposit scheme will also be introduced. Under this scheme the Government will provide buyers with an equity loan of up to 20% of the value of a new build property.

The loan is interest free for the first five years. From year 6 a fee of 1.75% is payable on the equity loan, which rises annually by RPI inflation plus 1 %.

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