Emergency Budget June 2010 – summary

 In Tax, Trusts

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The Emergency Budget produced a modest 45 Budget notes to kick-start the Chancellor’s five year plan to rebuild the British economy. Somewhere in the mix are the 6 issues of interest to private client practitioners which are the subject of this summary.

1. Personal Tax – BN01

The first thing to note is that the announcement introduces changes with effect from 6 April 2011. The existing legislation requires the Government to increase personal allowances and rates by annual percentage increases to the RPI for the year to September preceding the new tax year so there will be an order made to set the relevant amounts for 2011-12 after the relevant percentage is published in October 2010.

However, the Government will override the amounts that would otherwise be set on this basis for the personal allowance for those aged under 65 and the basic rate limit. The exact amount of the basic rate limit for 2011-12 will not be known until after the publication of the September RPI but it is intended to be lower than now so that higher earners will not benefit from the increase of £1,000 in the personal allowance for the under 65s. The Treasury’s ‘Red Book’ says “based on current RPI forecasts, the basic rate limit will be reduced by £2,500 and the higher rate threshold by £1,650 below the plans the government inherited.”

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Taxable Band 2011-12 (£) 2010-11 (£)
Basic rate: 20% (for CGT gains in this bracket are taxed at 18%) 0-34,900??
Personal allowance
under 65 – £7,475
Personal allowance
under 65 – £6,475
Higher rate: 40% 34,901 – 148,350?? 37,401 – 150,000
Additional higher rate: 50% Over 148,350 ?? Over 150,000


2. CGT – BN20

The changes introduced to CGT will operate from 23 June 2010 so any gains arising on or after 23 June 2010 will be subject to the new regime. Actually, it is rather a return to the old way of looking at CGT since individuals will add their total taxable income and gains together for the year after all allowable deductions. Where the total is less than the upper limit of the basic rate income tax band, the rate of CGT will still be 18% but once the total taxable income and gains exceeds the upper limit of the income tax basic rate band the new 28% rate applies to gains or any part of gains above that limit.

Trustees and Personal Representatives, however, will be subject to a flat rate of 28% on all gains after all allowable deductions.

The added complication to this changeover is the fact that it is happening part way through the tax year. Any gains realised before 23 June 2010 will be subject to the 18% rate and will not be taken into account in calculating the top-slicing effect e.g.

Andrew has taxable income after all allowable deductions in 2010-11 of £25,000. This is £12,400 below the upper limit of the income tax basic rate band of £37,400.

He sells a chargeable asset in May 2010 and makes a chargeable gain of £15,000. In October 2010 he sells another chargeable asset making a gain of £25,000. Andrew is not entitled to Entrepreneur’s Relief and has no allowable losses to set against these gains.

It makes sense to set the whole of his annual exempt amount against the gain subject potentially to 28% CGT – this results in a chargeable gain of £14,900 instead of £25,000.

The chargeable gain made on the disposal of the asset in May is subject to the flat rate of 18%.

To calculate how much of the second disposal is taxed at 18% and how much at 28% it is necessary to ascertain how much of the basic rate income tax band is unused – £12,400. So the first £12,400 of the chargeable gain of £14,900 will be subject to 18% whilst the balance of £2,500 will be subject to the new rate of 28%.

April 2010/11 23 June 2010 – 11
Standard rate 18% 18%
Higher rate which applies to higher and additional rate taxpayers 18% 28%
Entrepreneurs’ relief rate 10% 10%
Entrepreneurs’ relief – lifetime limit of gains £2 million £5 million
Annual exempt amount £10,100 £10,100
Trustees’ annual exemption £5,050 £5,050

As far as Entrepreneur’s Relief (ER) is concerned the formula for ensuring that the first £1 million of gains was charged at only 10% is no longer relevant. Instead, if a disposal qualifies for ER on or after 23 June 2010 the rate of tax on the gains will be 10%.

The amount of an individual’s gains that can qualify for ER is subject to a lifetime limit and this limit is increased from £2 million to £5 million from 23 June 2010.

Trustees of certain trusts are eligible for ER and the £2 million limit for them is that of the beneficiary of the settlement who meets the conditions for the trustees to claim the relief. Again, the limit rises to £5 million from 23 June 2010.

In view of the fact that the lifetime limit has changed three times in as many months – £1 million to 5 April 2010; £2 million from 6 April – 22 June 2010 and £5 million from 23 June 2010 – there is no retrospection if an individual or trustees exceed the relevant limit before 23 June. Instead, any further disposals from 23 June may be made within the new limit.

The rate of tax will be calculated by setting those gains which qualify for ER against any unused basic rate band before non-qualifying gains.

3. Settlor-interested trusts – BN25

From 6 April 2006 trust income in trusts which are settlor-interested is subject to tax on the trustees and no credit or exemption for the Settlor is given whose income it is deemed to be. At that time the Settlor received a tax credit for the tax paid by the trustees; on that basis:

  • s.624(1) ITTOIA treats income of a Settlor-interested trust as “income of the Settlor and of the Settlor alone”.
  • s.622 ITTOIA states that the person liable to tax is the Settlor; and
  • s.646(8) ITTOIA says that “nothing in s.624…is to be read as excluding a charge to tax on the trustees as persons by whom any income is received.”

Section 646 sets out the relationship between the Settlor and trustee and, recognises the fact that the Settlor is being taxed on the income he or she may never receive; so it gives the Settlor power to require the trustees to reimburse any tax liability suffered by the Settlor under s.624. Without s.646(8) no tax would be payable by the trustees but they would be required to make good the tax paid by the Settlor on the income deemed to be the Settlor’s under s.624.

Effectively, the trustees as recipients of the income pay the tax on the fund out of the fund and as such this tax paid is treated as tax paid on behalf of the Settlor. If he was a higher rate tax payer no further income tax in respect of this income was required but if he was a standard rate taxpayer then, apart from the 10% non-repayable credit on any dividend income, the excess tax paid was available for repayment to the Settlor.

The previous Government had planned to bring this repayment treatment to an end in part but this Budget Note makes the proposal more draconian. In essence all repayments of tax received by the Settlor in relation to trust income must be repaid to the trust.

4. Tackling Tax Avoidance – Press Notice 3

The Government announced as part of Tax policy making – a new approach that it intends to examine whether to resurrect the concept of a General Anti-Avoidance Rule as a means of developing sustainable responses to the risk of avoidance.

 5. The Disclosure of Tax Avoidance Schemes regime – Press Notice 3

The Government said it will consult over the summer on the prospect of bringing inheritance tax (IHT) on trusts within the Disclosure of Tax Avoidance Schemes regime. There was no other change to IHT so the nil rate band remains frozen at £325,000 until 5 April 2015 as per the previous Budget in March (24 March 2010 BN 31).

6. Furnished Holiday Lettings – supplementary documents 22 June 2010

The previous Government’s decision to withdraw the Furnished Holiday Lettings rules from 6 April 2010 has been reversed and so the rules will apply for 2010-11. However, there will be a consultation over the summer about plans to change the tax treatment from 6 April 2011. The proposals will ensure that the rules apply equally to properties in the European Economic Area; increase the number of days that qualifying properties have to be available for and actually let out as a commercial holiday letting and change the way in which loss relief is given.

© Gill Steel, LawSkills Ltd

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