Budget 2020 - Personal Taxes
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There were few changes to personal tax in the Budget. The single most important was the changes to Entrepreneurs’ Relief. There were also changes to pensions tax relief and top slicing relief.
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Entrepreneurs’ Relief (ER) allows business owners to benefit from a reduced rate of Capital Gains Tax at 10% when disposing of all or part of their business, subject to conditions being met. After much speculation about the abolition of ER, the Government has decided to retain the relief in order to encourage genuine entrepreneurial risk-taking.
However, the relief has been significantly curtailed by reducing the lifetime limit for qualifying gains from £10m to £1m, the level it was at when first introduced in 2008.
The change is effective immediately, and means that business owners making disposals on or after 11 March 2020 will only be eligible to claim ER on the first £1m of gains. As expected, this limit will be reduced by any previous claims, so serial entrepreneurs or those who have previously sold part of their business may have already exceeded the reduced lifetime limit.
Anti-forestalling provisions have also been introduced which may apply the new £1m limit to arrangements entered into before 11 March 2020.
The first anti-forestalling provision applies when an unconditional contract has been entered into prior to 11 March 2020, but the conveyance or transfer of the asset does not take place until on or after that date. In this case, the date of disposal will be deemed to be the date when the asset is conveyed or transferred - unless the individual concerned is able to demonstrate that they did not enter into the contract to obtain a tax advantage by accelerating the date of the tax point.
Where the transfer is to a connected person, there is an additional requirement for the individual to prove that the contract had been entered into wholly for commercial reasons. Individuals who wish to set aside the new anti-forestalling rule will need to make a formal claim including a statement that the conditions are met.
The second anti-forestalling provision applies when an individual has made a disposal of shares in one company in exchange for new shares in another company between 6 April 2019 and 10 March 2020 and the ‘share-for-share exchange’ provisions apply.
The general rule is that a share-for-share exchange is not treated as a disposal for capital gains purposes, but it is possible to make an election to opt out of this treatment in order to crystallise a gain and claim ER. However, where the election is made on or after 11 March 2020, the date of disposal will be deemed to be the date the election is made (meaning the £1m lifetime limit will apply) rather than when the share exchange took place, but only if:
- Both companies are owned or controlled by substantially the same persons, or
- Immediately after the exchange, the persons having exchanged their shares hold a greater percentage of shares in the second company than they held in the first company before the exchange, the second company (at 11 March 2020) is the individual’s ‘personal company’, the company is a trading company or holding company of a trading group, and the individual is an officer or employee of the company or another company in the trading group.
This second anti-forestalling rule is not dependent on the transaction being motivated by achieving a tax advantage. It seems possible that commercial transactions may be brought within these provisions.
HMRC has confirmed that taxpayers will be able to seek clearance if they are uncertain about whether the anti-forestalling provisions apply to them.
For many business owners, the changes will have a significant impact on their tax position and they may wish to review their options. Those who have already entered into a contract for disposal which has not yet completed, or have undertaken a share-for-share exchange in the current tax year, should seek advice on how the anti-forestalling provisions may affect them.
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Pensions tax relief
Pension tax relief has been used by successive governments as a means to encourage everyone to save for their retirement. It has been very successful if expensive incentive. Each year an individual is able to obtain tax relief for pension contributions up to their Annual Allowance of £40,000. Where contributions have been paid in excess of the annual allowance, an additional tax charge applies. However since April 2016, where an individual’s ‘adjusted income’ exceeds £150,000 the annual allowance has been restricted by £1 for every £2 of income in excess of £150,000 down to a minimum of £10,000. The restriction is not applied where ‘threshold income’ does not exceed £110,000.
Most individuals avoided exceeding their restricted annual allowance by reducing their pension contributions, or agreeing a reduction in their employers’ contributions. However, some employers have been unable to reduce their contributions, leading to their employees having to pay the annual allowance charge.
This has been a particular issue with the NHS and its defined benefit scheme with some consultants refusing to work additional hours when their adjusted income for the year reached £150,000. For 2019/20, the NHS allowed the local NHS trusts flexibility to agree that certain income was not pensionable to help with the exposure to tax charges. The NHS has also announced that in certain cases where a tax charge arises from excess pension growth, the individual will be compensated.
Today’s announcement seeks to address this issue and provide a level playing field for all by raising both the ‘adjusted income’ and ‘threshold income’ amounts by £90,000 to £240,000 and £200,000 respectivelyFurthermore, where the annual allowance is restricted, the minimum annual allowance will be £4,000 for 2020/21 and later years rather than £10,000.
As a consequence of the raised threshold, the Government hopes that almost all NHS clinicians will no longer be within the restrictions. The special arrangements introduced in the NHS for 2019/20 will not be continued.
In line with the Conservative manifesto promise, the Chancellor has also announced a review of the pension system as it applies to employees earning less than the personal allowance. This is to investigate a perceived inconsistency where some employees receive an injection into their pension equivalent to the basic rate of tax, whereas others do not.
The lifetime allowance will also be increased in line with CPI to £1,073,100.
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Technical change to calculation of Top Slicing Relief
Where UK resident individuals hold investments via UK life Insurance Bonds, tax is only payable when a gain is realised on the surrender of the policy. These gains are called Chargeable event gains. Part surrenders of up to 5% of accumulated premiums can be taken without any immediate tax charge
Chargeable event gains on UK bonds are not liable to basic rate tax. The method of calculating the tax charge on the gain is called Top Slicing Relief (TSR).
The change announced and effective immediately allows an individual’s personal income tax allowances are to be included in the TSR calculation. However, the personal allowance must be set off against other income in preference to the life insurance gain. This change follows a recent First-Tier Tribunal case and will have retrospective effect. This corrects previous uncertainty and should not however have a significant impact for most investors.
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