Personal and trust taxes

Income tax personal allowances

The Government has announced a long term commitment to increase the basic personal allowance for individuals aged under 65 to £10,000. It is being increased from £7,475 to £8,105 with effect from 6 April 2012, and being further increased to £9,205 from 6 April 2013.

The enabling legislation will be contained in Finance Bill 2012 and the basic rate limit will be reduced from £35,000 to £34,370. For 2013/14, the basic rate limit will be further reduced by £2,125 to £32,245. This means that overall most higher rate taxpayers will receive one quarter of the benefit that accrues to basic rate taxpayers.

Income tax rates

The 50% additional rate of tax will be reduced to 45% from 6 April 2013. The dividend additional rate will be set at 37.5%, the trust rate will be 45% and the dividend trust rate will be 37.5%. The Government believes that the existing high top rate of tax risks damaging the UK's economy in the longer-term.

Age related personal allowance

From 2013/14 the availability of the age related personal allowance will be restricted - the allowance of £10,500 for 2012/13, available for those aged 65 to 74 will be restricted to individuals born after 5 April 1938 but before 6 April 1948.

The age related personal allowance of £10,660 for 2012/13, available to people aged 75 and over will be restricted to those born before 6 April 1938. The allowance of £10,660 will not be increased in 2013/14.

Cap on unlimited reliefs

From April 2013 a new limit on all uncapped income tax reliefs will be introduced. In order to ensure that those with the highest incomes pay their ‘fair share', relief will be restricted to the greater of £50,000 or 25% of income.

Child benefit - income tax charge for those on higher incomes

A new income tax charge is being introduced from 7 January 2013 on taxpayers who are both in receipt of child benefit and whose annual income exceeds £50,000. This charge also applies if it is the partner of the taxpayer earning £50,000 in a tax year who is in receipt of the child benefit. In a case where both partners earn over £50,000 in a tax year, the income tax charge will only apply to the partner with the higher income.

For taxpayers with income in a tax year of above £60,000, the tax charge will equate to the amount of the child benefit. For those taxpayers with an income of between £50,000 and £60,000, the income tax charge will be 1% of the amount of child benefit for every £100 of income above £50,000.

Child benefit is a tax free receipt and the amount that may be claimed is not amended by the income tax charge.

Reform of ordinary residence

The Government will abolish ordinary residence for tax purposes from 6 April 2013, although it will retain overseas workday relief and put it on a statutory footing.

Taxation of non-resident sports people

The tax treatment of worldwide endorsement income for non-resident sports people will be revised to take training days into account when calculating the proportion liable to UK income tax.

Capital taxes: Capital Gains Tax (CGT) annual exemptions

The Government announced in 2011 that the CGT annual exemption would increase in line with rises in the CPI rather than in the RPI. Parliament is entitled to override automatic indexation and set a different figure.

However, the Budget Day press releases confirm that the CGT annual exemption will remain at £10,600 with effect from 6 April 2012. The CGT annual exemption for trustees and personal representatives remains at £5,300.

The entrepreneurs' relief lifetime limit of gains remains at £10 million. Qualifying gains are taxed at a 10% rate of capital gains tax rather than at 18% or 28%. Entrepreneurs' relief was introduced in April 2008. It is available for an individual or a trustee who disposes of either the whole or part of a trading business or shares in a trading company

CGT regime and non-residents

The CGT regime will be extended to gains on disposals by non-resident non-natural persons of UK residential property and shares or interests in such property, commencing from April 2013.

Inheritance tax

The nil rate band remains at £325,000 for the year ended 5 April 2013 and the inheritance tax rate remains at 40%

The Government announced in 2011 that a reduced rate of inheritance tax would apply where 10% or more of a deceased person's net estate (after deducting IHT exemptions, reliefs and the nil rate band) is left to charity. The tax rate applies 36% where death occurs on or after 6 April 2012.

Inheritance tax: avoidance using offshore trusts

The inheritance tax legislation is being amended from 21 March 2012 to curtail a number of avoidance schemes that have attempted to circumvent the excluded property and settled property rules. The schemes worked by permitting a UK-domiciled individual to acquire an interest in settled property in an offshore trust thereby reducing the value of the individual's estate that was subject to inheritance tax. Assets which would have been subject to inheritance tax were converted by a series of transactions into excluded property, which is outside the scope of inheritance tax.

National insurance contribution rates

The Chancellor has announced that he is considering the integration of the income tax and national insurance systems in order to make the system more user friendly - a consultation document was published in July 2011. The Government has previously announced that:

  • The contributory principle will be maintained
  • National insurance contributions will not be extended to pensioners or to pensions income, savings income or dividend.

Tax avoidance: corporate settlor interested trusts

A number of avoidance schemes have been promoted to enable an individual to gain a tax advantage by a diversion of income to another person who is liable at a lower rate of tax. The schemes generally involve the use of an ‘interest in possession' settlement and a corporate settlor in order to divert the income tax liability away from the beneficial owners of the income.

The schemes have been curtailed with effect from 21 March 2012 by amending the settlements legislation so that any income which arises under a settlement, and originates from any settlor who is not an individual, is not treated as that of the settlor. The effect of the changes will be that the settlements legislation will not apply where the settlor is not an individual. Where the settlements legislation no longer applies, the income arising under the settlement will be taxed on the beneficiaries of the interest in possession trust as it would be in a non-settlor interested case.