As anticipated, there was no let up in the quest to increase the Income Tax take, and no new changes were announced to personal taxation effective for 2011/12. Just to recap, there will be an increase in the personal allowance to £7,475 and an increase in the age allowance to £9,940. The personal allowance is available to all UK resident individuals and certain others, including Commonwealth citizens and nationals of states within the EEA.
As mentioned in my last article, personal allowances are, of course, no longer available if the relevant income limits are exceeded. To ensure that the benefit of the increased level of allowances is confined to basic rate taxpayers, the basic tax rate band is reduced to £35,000.
There will also be a 1% increase in both the employer and employee rate of National Insurance contributions and a corresponding increase for the self-employed.
Capital Gains Tax
An increase in the annual exemption from £10,100 to £10,600.
An increase in the lifetime limit of gains qualifying for Entrepreneurs Relief and taxed at 10% from £5m to £10m.
The limits for investments into Individual Savings Accounts are now as follows:
Equity ISAs £10,680 – minimum age 18.
Cash ISAs £5,340 – minimum age 16.
A junior ISA is expected to be available from the Autumn at The Children’s ISA for UK resident children under 18 years of age who do not have a Child Trust Fund account. The annual contribution limit will be £3,000.
Probably the most significant changes were those announced to the Enterprise Investment Scheme (EIS).
Income Tax Relief – currently 30% on an investment up to £500,000 (previously 20%) with the facility to carry back to the previous tax year, but with the relief based on the previous rate, provided that the investment is held for three years.
Capital Gains Tax (CGT) – can defer a CGT liability by investing a gain that arose in the previous three years or arising in the next 12 months. Any capital gain made on the disposal of the investment is exempt from CGT, provided income tax relief has been obtained.
Inheritance Tax – a qualifying EIS company benefits from Business Property Relief and falls outside of IHT if held for at least 2 years.
Loss Relief – should an investment fail the net loss (after initial Income Tax relief) can be offset against income or gains.
The EIS is often compared to a Venture Capital Trust (VCT) which is probably the better known of the Venture Capital Schemes. A VCT itself is a company quoted on the London Stock Exchange and will generally invest in small companies with a track record, whereas an EIS company will be unquoted and can invest in start ups.
Other changes for both schemes to be introduced from 6 April 2012 include:
– Raising the employee limit from fewer than 50 to fewer than 250.
– Increasing the £7m gross assets threshold to £15m before the investment is made.
– Increasing the maximum annual subscription to an individual company from £2m to £10m.
– Increasing the annual investment eligible for Income Tax relief under an EIS from £500,000 to £1m.
Whilst an investment in an EIS is generally further up the risk scale than a VCT and not suitable to risk averse investors, the increase in the initial tax relief to 30%, combined with the other reliefs, will enhance the attraction compared to a VCT. This will be particularly so if the concept of an EIS fund spreading the risk among a number of investee companies can be developed, especially if this is coupled with a track record.
The annual allowance reduced from £255,000 to £50,000 and the lifetime allowance reduced from £1.8m to £1.5m.
The complicated rules restricting tax relief for those earning more than £130,000 are to be replaced by a new limit of £50,000 qualifying for tax relief at the individual’s marginal rate. Furthermore, a carry forward facility is introduced, whereby an unused annual allowance from the three previous tax years can be used.
Following consultation from April 2012 to remove the tax charge on remittances of income or Capital Gains to the UK for the purpose of commercial investment, the concept of what constitutes a commercial investment needs to be developed, but this promises to be a very valuable concession to UK resident non-domiciled clients.
There is a proposal to introduce a higher £50,000 annual charge for individuals who have been resident for 12 years or more and who claim the remittance basis of taxation. Currently the charge for these individuals is £30,000.
Furnished holiday lettings
Accommodation in both the UK and EEA will be eligible, thus providing a level of relief for mortgage interest on these overseas properties. Losses made on qualifying accommodation in the UK or EEA may only be set against income from the same business. This will prevent the set off of losses against other income that was permissible up to 2010/11.
The rate will be reduced from 40% to 36% on death on or after 6 April 2012 where at least 10% of a deceased’s net estate is left to charity.
This is obviously only a brief summary. However it hopefully demonstrates that whilst at first glance the changes announced seemed to be negative, there are on further investigation a number of valuable planning opportunities for those with the appropriate risk appetite and resources to utilise.