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Date of publication: March 2012
Following the March 2012 Budget, we thought it would be useful to summarise the main points which may affect our private clients, and draw your attention to some planning areas. Naturally, we will be happy to advise on any points which are of relevance to you. If you would like further details on any of the areas covered below or to discuss your individual circumstances, we would be happy to help.
The tax free personal allowance is increased to £8,105 for 2012/13 and to £9,205 from 2013/14. Both increases are matched by a reduction in the basic rate limit.
The higher rate of 50% will reduce to 45% from 2013/14 onwards. For 2012/13 the effective marginal rate of 60% for income between £100,000 - £116,210 remains in force.
The methodology by which child benefit is to be “phased out” for higher earners means that there are effective marginal rates of tax in force in excess of 60% for those with income between £50,000 - £60,000.
As a presage to a common single personal allowance for all tax payers the higher personal allowance for those aged 65 and over, and 75 and over is being restricted as from 2013/14.
The clear message from all of the above is that tax payers should pay close attention to their level of income and be aware of both possible traps and opportunities.
With effect from 2013/14 legislation will be introduced to apply a cap on income tax reliefs claimed by individuals. The cap will only apply to reliefs which are currently unlimited and will be set at the greater of £50,000 and 25% of income.
The major candidates for this restriction appear to be trading losses incurred by unincorporated businesses and charitable giving. However, the restriction will not affect reliefs specifically given by statute e.g. EIS relief. Fortunately, 2012/13 will provide an opportunity to plan for these restrictions which shouldn’t be ignored.
With effect from 6th April 2012 three changes are made to the taxation of UK resident non-domiciled individuals claiming the remittance basis of taxation:
Pending further consultation the introduction of the statutory residence test has been deferred until 6th April 2013.
For deaths on or after 6th April 2012, the normal rate of IHT is reduced to 36% if at least 10% of the deceased’s net estate is left to charity.
With the introduction of a cap on charitable gifts out of income tax there is an increased attraction in gifting part of an estate to charity and taking advantage of the lower rate of IHT for the rest of the estate.
The practice of holding UK residential property via an offshore company (whereby non-domiciled individuals can avoid IHT) has been dealt a blow following the introduction of a new higher rate of SDLT (15%) for this type of entity and the prospect of an annual levy on such entities.
It seems likely that the new legislation will have an adverse effect on property values at the very top end of the market. However, in terms of exposure to IHT it should be remembered that a loan secured against a property, correctly structured, will reduce its chargeable value for IHT purposes.
Following major changes to pension tax reliefs announced in last year’s Budget, this year has thankfully seen little change. Despite widespread rumours of an attack on higher rate tax relief or a further cut to the annual allowance, there were no major announcements in this Budget.
The 2012/2013 tax year will be the last year that 50% tax relief will be available. Therefore those affected should consider maximising their pension funding during 2012/13 to obtain tax relief at the higher rate. Contributions in excess of the annual allowance of £50,000 can be achieved by carrying-forward pension allowances from previous years.
Hither to it was envisaged that as from January 2013 child benefit would be withdrawn completely for families with at least one higher rate taxpayer. The Chancellor has now announced in the 2012 Budget that the reduction in child benefit won’t affect anyone with an income of less than £50,000. Furthermore, for every £100 of income above £50,000 child benefit will be clawed back gradually to avoid a ‘cliff-edge’ loss of benefit to the point where those with income above £60,000 lose all their child benefit.
Individuals can choose to give up child benefit to avoid the tax charge but should be mindful of the potential loss of National Insurance credits towards state pension entitlements, where at least one child is still under 12. This will take effect from 7th January 2013.
For the purposes of calculating the tax on child benefit, income means ‘adjusted net income’. (This is similar to the calculation used for assessing entitlement to the personal allowance when income exceeds £100,000).
This means that pension contributions, salary exchange or charitable donations may help to preserve child benefit for those with incomes above £50,000 in 2012/2013. The effective tax relief to be obtained through recovering some or all child benefit via (say) a pension contribution varies according to the number of children and the total amount of the benefit.
The ISA investment limits for 2012/13 are as follows:-
ISA limits will increase annually in line with the Consumer Prices Index (CPI) with the cash ISA subscription limit remaining half of the stocks and shares ISA limit.
The Junior ISA subscription limit remains at £3,600 for 2012/2013. This amount can be spread between cash and stocks and shares in any proportion. The Child Trust Fund limit also remains at £3,600.
A change to the qualifying rules means it will only be possible to invest up to £3,600 in any one tax year into MIPS, with effect from 6 April 2013. Transitional rules mean contributions paid into new MIPs taken out with effect from 21 March 2012 will count towards this limit, as will any premiums paid into existing MIPs that are varied in certain ways from 21 March 2012 onwards. As gains on qualifying policies are not subject to personal tax, they had been seen as attractive alternatives to pensions for higher and additional rate taxpayers, particularly in light of the increasing restrictions on pension contributions.
ISA accounts remain a valuable tool for your financial planning. Where affordable they should be used in full each year either through single investments or regular savings.
Junior ISAs have become popular for parents and grandparents looking to save on behalf of young family members. With a number of mainstream providers offering these contracts, an attractive range of investments is now available.
Those with existing MIP accounts who extend the term of the investment are likely to be caught by the new restricted investment levels.
The following changes apply from 6th April 2012:
This new tax-advantaged investment launches in April 2012. It aims to attract investment into small start-up companies by offering generous tax incentives. The scheme offers 50% income tax relief for individuals investing in qualifying companies. It also offers capital gains tax benefits. There is a capital gains tax exemption for gains on assets disposed of and reinvested through SEIS in the 2012/2013 tax year. The annual investment limit for individuals is £100,000 and the cumulative investment limit for a company is £150,000.
The extension of EIS investment levels to £1 million per individual will provide further scope for tax planning. EIS plans remain an attractive solution for those with high incomes, capital gains tax liabilities or those looking to plan against Inheritance tax
The new Seed Enterprise Investment Scheme offers significant tax advantages for those willing to accept the additional risk associated with investing in small start-up companies.
This guide does not contain a full statement of the law and it does not constitute legal advice. Please seek legal advice if you have any questions about the information set out above.