Independent Financial Advisors - IFA Southampton, UK

Freezing of pension annual and lifetime allowances confirmed

The Chancellor has confirmed that the freezing of the pension annual and lifetime allowances announced in his Pre-Budget speech will be implemented.

Both the pension annual and lifetime allowances will be frozen at their 2010/11 levels until the end of tax year 2015/16. This gives allowances for these years of:

• Annual allowance: £255,000

• Lifetime allowance: £1,800,000.

The Chancellor has announced an increase to £10,000 (from £6,000) in the amount of savings a pensioner can have before they affect their entitlement to state pension credit.

In line with the promise made in the Chancellor's Pre-Budget speech, the state guaranteed pension credit was increased by more than inflation to £130 a week for a single pensioner, or £198 a week for a pensioner couple, from 6 April 2009.

To further help poorer pensioners, the Chancellor has today announced that in future a pensioner will be able to hold savings of up to £10,000 before these affect their pension credit entitlement. This increase from the current limit of £6,000 will take place from November 2009.

The time limits for taxpayers (income tax, CGT, corporation tax) to reclaim tax where a mistake has been made in the claimant's tax return is currently from five years and ten months to six years from the end of the period for which the return was made. From 1 April 2010 repayments must be claimed within four years.

Additionally this measure will remove the requirement that the overpayment must be the result of a mistake in a return and that it must be made under an assessment.

Further information is available in BN87 available on HMRC website.

Further harmonisation of the administration of taxes and duties by HMRC

HMRC have announced further steps in the harmonisation of taxes and duties they administer. Changes affect payments, the introduction of a new voluntary payment plan for individuals and companies, penalties for late filing of returns, and late payment of tax, interest due and more.

The objective of the changes which have been widely consulted on, is to harmonise the administrative framework within which HMRC operate the wide range of taxes and duties they are responsible for.

Specific announcements covering:

• Payments, repayments and debts can be found in BN88.

• Record keeping requirements, inspection and information powers and time limits for claims and assessments can be found in BN89.

• Penalties for late filing of returns and late payment of tax can be found in BN90.

• Interest chargeable on late payment of tax, and on repayments can be found in BN91.

All BN notices can be found on the HMRC website.

The Finance Bill 2009 will include a relaxation of the time limits in which an EIS or VCT has to invest any money raised. Further changes applying to EIS only include changes to the rules for claiming income tax relief in the previous tax year.

The current legislation requires an EIS or VCT to invest 80% of the funds raised within 12 months, with the balance invested within a further 12 months. From 22 April 2009 this restriction will be removed for both EIS and VCTs. The EIS or VCT must now invest the whole amount within two years.

Investors in an EIS receive income tax relief of up to £500,000 per tax year. This may be carried back for up to one year. However, carry back was previously restricted to shares issued before 6 October in the tax year and with a limit of half the subscriptions paid in the tax year, subject to an overall limit of £50,000. The Finance Bill 2009 will remove these restrictions and the only restriction which will continue to apply when calculating income tax relief for any particular year will be the overall limit on tax relief available to EIS investors, currently £500,000. Further information is available in BN08.

The Chancellor has announced that tax relief on pension funding for those with income of £150,000 a year or more will be capped. The new tax rules will be introduced from 6 April 2011, but interim restrictions will be enforced immediately from budget day (22 April 2009) to stop accelerated funding by affected individuals in the run up to 2011.

The Government will consult with interested parties before announcing the detail of the changes to be made, from 6 April 2011, to tax relief on pension funding for those with income of £150,000 a year or more. Their stated aim, however, is to reduce tax relief on a tapered basis so that those with yearly income of £180,000 or more will effectively only receive basic rate relief. On the plus side:

• The changes will not affect those with income of less than £150,000 a year; and

• Tax relief will continue to be applied to pension contributions in the usual way, with any additional tax liability being levied directly on the individual under the self assessment system. This means that the changes will not impact on the processing of pension contributions by employers and pension providers: it will be business as usual for them.

Interim rules are being introduced in this year's Finance Act to discourage those affected by the new rules from boosting their pension funding before 6 April 2011. These rules will apply to anyone with "relevant income" of £150,000 or more for the current tax year or either of the previous two tax years (known as "high income individuals").

• Relevant income means total income for the tax year, before any personal allowances or other reliefs, less any normal deductions such as those for pension contributions (up to £20,000 a year), trading losses and gift aid.

• Where an individual enters into a salary sacrifice agreement after 21 April 2009 in return for pension contributions the sacrificed salary will be included in the calculation of relevant income.

Those affected by the new rules will personally incur a "special annual allowance tax charge" if they:

• Receive total pension provision of more than £20,000 in the period from 22 April 2009 to 5 April 2010 or any subsequent tax year; and

• Accelerate their normal pattern of pension funding after 21 April 2009.

All pension provision for affected individuals, whether made personally or by an employer or third party, will be taken into account. The value of an individual's pension provision is calculated in the same way as is used for the purpose of testing against the pension annual allowance (that is, money purchase contributions at face value plus 10 times the increase in any defined benefits). There will, however, be a general exemption for increases in defined benefit rights unless the scheme rules are changed after 21 April 2009 to increase benefits.

The special tax charge will be based on any excess pension provision above the higher of £20,000 or the normal level of pension provision for the individual before 22 April 2009. The rate of tax charged will be based on the difference between the individual's highest rate of income tax and the basic rate of income tax (currently 20%). If an individual is subject to both the usual annual allowance tax charge and the new special annual allowance tax charge, the special charge will be reduced to prevent any double taxing of the same pension provision.

For more information, please see BN47 on the HM Revenue & Customs' website.

Increase in stamp duty land tax thresholds maintained

The stamp duty land tax threshold for residential property will remain at £175,000 until 31 December 2009. In September 2008 the Chancellor announced a temporary increase of the stamp duty land tax threshold for residential property. This temporary increase from £125,000 to £175,000 was due to end on 2 September 2009. Today the Chancellor announced that this increased threshold will continue to apply until 31 December 2009.

Further information is available in BN45 on the HMRC website.

Corporation tax on foreign dividends received by UK companies

Dividends and other distributions from foreign companies received by UK companies will largely be exempt from corporation tax (CT). This will apply to dividends and distributions received on or after 1 July 2009.

Foreign dividends and other distributions received are currently chargeable to CT, with credit given for any foreign tax withheld from a dividend and (for shareholdings of 10% or more) for foreign tax charged on the profits out of which the dividend is paid (underlying tax). Currently UK distributions received are generally exempt from CT.

The new legislation will treat foreign and UK distributions in the same way. Distributions will generally be exempt if they fall into an exempt class and anti-avoidance provisions do not apply. The vast majority of distributions are expected to be exempt from CT.

Further information is available in BN05 available on the HMRC website.

Child Trust Fund: payments for disabled children

The government will contribute £100 every year to the Child Trust Fund accounts for all disabled children, with severely disabled children receiving £200 per year. The payments will start in April 2010 for children in receipt of Disability Living Allowance at any point in 2009/10.

Every eligible child born on or after 1 September 2002 has a Child Trust Fund account. Family and friends can contribute up to £1,200 into the account each year.

The government will make payments of £100 per year into the Child Trust Fund accounts of all disabled children. Severely disabled children (those who receive the High Care element of Disability Allowance) will receive £200 per year. These payments will not count towards the £1,200 yearly contribution limit.

The payments will start in April 2010 for children in receipt of Disability Living Allowance at any point in 2009/10. Further information is available in BN52 on HMRC website.

Following consultation there are to be a number of minor amendments made to the remittance basis legislation introduced in last years Finance Act, which affect UK resident individuals who are either non-UK domiciled or not ordinarily resident in the UK.

Some of the changes to be incorporated with the Finance Bill 2009 include:

• Clarification of when a formal election is not required.

• An exemption from filing a self assessment return for certain UK employees with small amounts of overseas income.

• The interaction between remittance basis regime and settlor interest trusts.

• Extension to the legislation exempting certain pre 6 April 2008 income which is remitted as trust income.

• The treatment of Gift Aid donations by individuals paying the £30,000 remittance basis charge.

Making a formal election for the remittance basis to apply

The legislation is to be amended to make it clear that an individual who has unremitted foreign income and gains of less £2,000 in any tax year does not need to make a claim via self assessment in order for the remittance basis to apply. This change will apply retrospectively from the 6 April 2008 and assumes that the individual has chosen for the remittance basis to apply.

Exemption from filing a tax return

UK employed individuals who are also in receipt of overseas employment income of less than £10,000 and overseas deposit interest of less than £100, all of which has been taxed in the country of origin, will no longer be automatically required to fill in a self assessment return.

Remittance basis and trust changes

The Finance Bill will include changes to the interaction between the remittance basis regime and settlor interested trusts which will become effective from 22 April 2009. There will also be an extension to the legislation to prevent certain pre 6 April 2008 foreign trust income being treated as a remittance when brought to the UK for the benefit of a UK resident non-domiciled individual.

Gift Aid and remittance basis users

Currently, in order for a charity to be able to claim tax relief on Gift Aid donations, the donor must have been subject to UK tax up to the amount of the donation. The Finance Bill 2009 will extend the definition of tax to include the £30,000 remittance basis charge.

Further details of these and other changes to the remittance basis can be found in BN55 on the HMRC website.

The tax treatment of FSCS assistance to an insurer who makes pension provision is to be broadly the same as that under a registered pension scheme.

The Finance Bill 2009 is to introduce legislation for situations where an insurer receives assistance from the Financial Services Compensation Scheme (FSCS). This assistance can take the form of transferring an individual's rights to another insurer or paying compensation to the individual.

From the date that the Bill receives Royal Assent, these payments will receive broadly the same tax treatment as they would had the FSCS not been involved. Backdating may be allowed, so long as the individual's tax liability is not increased.

Further information is available in BN19 on HM Revenue & Customs' website.

Increased income tax liabilities for high earners and some trusts

From 6 April 2010 there will be a 50% rate of income tax on taxable income above £150,000, and the personal allowance will reduce by £1 for every £2 for individuals with income over £100,000. The trust rate of income tax will increase from 40% to 50%.

Income above £150,000 will be subject to income tax at the rate of 50%. Dividends above this level will be taxed at 42.5%.

Individuals with 'adjusted net income' above £100,000 will have their personal allowance reduced by £1 for every £2 above this level. Adjusted net income will be measured in the same way as income for age allowance purposes. Further details can be found in BN01 on the HMRC website.

With effect from 1 September 2009, investment trusts that invest in interest bearing assets will have the option of reclaiming corporation tax they pay and passing on the tax liability to the shareholder.

Under current tax rules investment trusts are liable to corporation tax on any interest income that they receive. This will not change. However, new optional tax rules will be introduced which will allow an investment trust that invests in interest bearing assets to receive a tax deduction for any interest distributions made. This will effectively remove any corporation tax liability that would otherwise arise on distributed interest type income.

Where an interest distribution is made by an investment trust it will be treated in the hands of the shareholder as if it was a payment of yearly interest.

Further details can be found in BN27 available on HMRC website.

The Finance Bill 2009 will extend the entitlement to a non-payable tax credit on dividends received from a non-UK resident company. UK resident individuals with shareholdings in a non-UK resident company of 10% or more will now be entitled to the credit, in addition to those with shareholdings of less than 10%.

Further, the non-payable tax credit will be restored for offshore funds that are largely invested in equities, irrespective of the size of the shareholding.

These changes will be effective from 22 April 2009.

Under current legislation, individuals in receipt of dividends from UK resident companies are entitled to a non-payable dividend tax credit. Since 6 April 2008, individuals with shareholdings of less than 10% in non-UK resident companies have also been entitled to a non-payable tax credit.

Dividends received by individual shareholders are currently taxed at rates of 10% for basic rate and 32.5% for higher rate taxpayers.

When dividends from UK resident companies are charged to tax, shareholders are entitled to a non-payable tax credit of one ninth of the distribution under the provisions of section 397(1) of the Income Tax Act 2005 (ITTOIA). Because tax is charged on the gross dividend received, including the tax credit, this can result in a basic rate taxpayer having no further tax to pay and a higher rate taxpayer paying 22.5% tax on the gross dividend.

Section 397A of ITTOIA, introduced by the Finance Act 2008, extended the non-payable tax credit of one ninth of the distribution to individuals in receipt of dividends from non-UK resident companies, if they own less than a 10% shareholding in the distributing non-UK resident company.

Legislation in Finance Bill 2009 will amend section 397A of ITTOIA to extend further eligibility for the non-payable tax credit to individuals in receipt of dividends from non-UK resident companies where the individual owns a 10% or greater shareholding in the distributing non-UK resident company. The tax credit will only be available if the source country is a "qualifying territory". A territory is a "qualifying territory” if there is a double taxation agreement with the UK, with a non-discrimination article.

In addition, s397A will extend the eligibility for the non-payable tax credit to individuals in receipt of dividends from offshore funds that are companies and substantially invested in equities. Where an offshore fund holds more than 60% of it's assets in interest bearing form, the distributions will be treated as yearly interest in the hands of UK resident individuals, and not dividends.

Further information is available in BN21 and BN22.

The Finance Bill 2009 will include legislation to prevent the exploitation of income tax loss relief rules using offshore life assurance policies. This measure does NOT in any way affect the ability of an individual to reduce their higher rate income tax liability using the corresponding deficiency relief provisions.

Section 152 Income Tax Act 2007 (ITA) allows 'loss relief' against 'miscellaneous income'. Miscellaneous income includes offshore income gains (from offshore non-distributor funds) and chargeable event gains from offshore bonds (including capital redemption bonds). Where the offshore bond produces a loss rather than a gain there is opinion that this loss can be set against miscellaneous income in general (s.153 ITA 2007).

HMRC believe that this legislation has been abused by avoidance schemes using offshore life policies. Although their opinion is that the current legislation already prevents the use of economic losses from offshore life assurance policies in this way, the new legislation should take this beyond doubt.

The new legislation will change the operation of s.152 ITA 2007 so that a loss from an offshore life policy cannot be used to claim income tax loss relief. The new rules will apply to all losses arising from 6 April 2009 onwards. There will also be transitional provisions which will prevent losses being claimed for 2008/09 where the policy was made on or after 1 April 2009 or earlier policies that are varied on or after 1 April 2009 so as to increase the benefits. Policies taken out before 1 April 2009 will also be affected if, on or after that date, they are assigned to the person claiming relief or used as security for a debt of that person.

Further details can be found in BN57 on the HMRC website.

FSCS compensation which include interest payments

This affects individuals who have (or will) receive compensation from the Financial Services Compensation Scheme (FSCS) because of the default of a financial institution, such as a bank and the compensation includes a payment in respect of accrued interest.

Where the FSCS make a compensation payment which includes an element of interest it is calculated by the FSCS as if the tax deduction rules on interest apply but to date the legal aspect of this structure is unclear, and without legislation treating this payment as interest for income tax purposes the normal tax rules cannot apply.

Legislation will be introduced in Finance Bill 2009 to ensure that compensation claimants are in the same position as if the accrued interest were paid by the financial institution had it not defaulted.

New sections will be added to existing legislation to formalise this. In addition, the FSCS will need to provide the recipient of the compensation payment with a statement showing the gross and net amounts paid and the tax deducted if they are requested to do so in writing. This will allow these people to make a tax repayment claim if a non-taxpayer or treat the amount of notional tax deducted as if it were basic rate tax when calculating any liability to higher rate tax on the accrued interest.

Further information is available in BN15, available on the HM Treasury website.

Inheritance tax reliefs extended

The reliefs from inheritance tax, agricultural property relief (APR) and woodlands relief (WR), have been extended to property in the European Economic Area (EEA). Property qualifying for either relief will also qualify for capital gains tax holdover relief.

Previously, the reliefs applied to property situated in the UK and, in the case of APR only, the Channel Islands and the Isle of Man. The extension to property in the EEA takes effect from 22 April 2009 as well as some earlier events. Inheritance tax due or paid on or after 23 April 2003 in relation to agricultural property in the EEA will become eligible for APR. For deaths before 22 April 2009, property located within the EEA will become eligible for WR. Holdover relief from CGT will be extended to agricultural property in the EEA which has been farmed by a person other than the owner. Holdover relief will also become available for past disposals of EEA situated agricultural property.

Further information is available in BN50 available on the HMRC website.

ISA limits increased

The ISA limit will be raised from 6 October 2009 for people aged 50 and over to £10,200, up to £5,100 of which can be saved in cash. From 6 April 2010 this new limit will apply to all ISA investors.

Those who do not reach 50 in the 2009/10 tax year will have an ISA limit of £7,200 of which up to £3,600 can be saved in cash. The ISA regulations will be amended by Statutory Instrument to reflect the changes announced in BN51 which is available on the HMRC website.