PBR 2009 - Who pays?
The Chancellor's Pre-Budget Report on 9 December contained a number of changes which will affect high net worth individuals and private banks. Although predicted changes, such as an increase in the rate of CGT, were not introduced, individuals will notice changes to income tax, national insurance contributions and inheritance tax in particular. However, the real focus of this year's PBR was on banks and financial businesses - how they remunerate their employees, and how they engage in tax planning or provide tax planning services to their clients.
Key changes for individuals
Inheritance tax: the nil rate band will not rise to £350,000 in April 2010 as previously announced, but will stay at £325,000 (current year levels).
Income tax: personal allowances and tax bands are frozen for 2010-11 at current year levels. There was no announcement or further detail on the previously heralded progressive reduction in the personal allowance - it remains to be seen how and if this will be introduced. The effect of this is that more taxpayers will pay tax at higher rates, including the new top rate of 50%. However, wage inflation in 2009-10 has been very low, meaning that in practice this is unlikely to have an immediately noticeable effect for many individuals.
Capital gains tax: there was no announcement on CGT and the rates tables do not mention it - the assumption is that rates and allowances remain unchanged for 2009-10.
Stamp Duty Land Tax: the threshold is reduced (after a holiday which was previously stated to be temporary) from £175,000 to £125,000. All property transactions worth more than £125,000 and less than £250,001 will be taxed at 1%; but the other bands are unchanged. However, Stamp Duty Land Tax savings schemes will now come within the ambit of DOTAS (disclosable tax avoidance schemes) rules for properties worth more than £1million.
National insurance: NIC rates will rise an additional 0.5% (in addition to the 0.5% already announced) from April 2011, but the lower threshold is to be increased so that the lowest earners are unaffected.
Pension contributions: higher rate tax relief to be restricted from £130,000 upwards (not £150,000) meaning that those earning above that figure will be partially affected by the rules introduced to prevent top-rate taxpayers capturing the full benefit of tax relief on pension contributions at the new 50% rate. The amount of contributions that can be made is capped.
There is a proposed new requirement (set out in a consultation paper) for UK resident individuals (other than non-UK domiciled persons using the remittance basis) and their advisers to disclose the opening of new offshore bank accounts (at least in jurisdictions which have no tax exchange agreements with the UK) and to make a further report when the balance of such accounts reaches £25,000. The obligation on advisers may for the first time be extended to barristers, historically exempted from a similar requirement to report the creation of offshore trusts by UK domiciled individuals.
Key changes relating to trusts
There will be a consultation on the use of trusts for IHT avoidance, to be published in January. Two schemes for IHT avoidance have been indentified in the PBR, involving the creation of trusts with future interests for the settlor or his spouse, or situations where a person purchases an interest in a trust to avoid IHT.
The existing obligation to report the creation of a non-UK resident trust by a UK domiciled settlor is likely to be extended so that it affects trusts created by UK resident individuals (other than non-UK domiciled persons using the remittance basis), and this obligation may be extended to barristers for the first time.
Private banks - the key changes
Bank payroll tax: the PBR heralded the the introduction of a new tax, payable by a bank, building society, UK resident investment or financial trading company (or the UK branch of its foreign equivalent), whenever a bonus of more than £25,000 is paid during the period from 9 December 2009 to 5 April 2010 (and potentially beyond that date). The rate payable is 50%, payable by the employer and not the employee and it is due on 31 August 2010. The tax arises in respect of any remuneration or benefit which is discretionary or flexible according to performance, and is payable to or in respect of any employee who is UK resident in the tax year 2009-10 (that is, someone who fulfils the residence criteria at any time during the year) or whose duties are, at any time during the year, carried on wholly or mainly in the UK. It applies to a bonus paid by a bank or other business providing certain types of investment services to any employee whose duties wholly or mainly relate to activities which are regulated under FSMA 2000, with certain exceptions such as the insurance industry.
Bonuses which the bank had a contractual liability as at 9.12.09 to pay are excluded, as are fixed (non-discretionary) salaries and benefits and certain types of share option/incentive schemes. EBTs are expressly included, so that payments through EBTs are caught by the new tax. The clear aim of this legislation is not to raise tax, but to increase the cost to the bank of providing large bonuses such that this becomes unattractive. The stated objective is to ensure that banks change their remuneration policies to have a greater fixed/non-discretionary element, and so that discretionary elements above £25,000 are payable only through share option/incentive schemes of certain approved types.
DOTAS rules: the existing disclosure of tax avoidance schemes rules are to be extended, and a consultation paper has been published. The effect, if the changes are adopted, would be to require disclosure at the development stage rather than the marketing/promotion stage, and to extend the range of "hallmarks" by which schemes are to be classified as disclosable. The new hallmarks include schemes or products the aim of which is to secure the conversion of income into capital, and certain employment-related schemes. Introducers will be required to provide, on request by HMRC, the name of the scheme promoter; and there will be penalties on a daily basis for non-compliance. In addition, promoters will be required to provide HMRC on a quarterly basis with lists of the persons to whom they have issued a scheme number (ie those who have used a particular scheme).
Code of Practice on Taxation for Banks: following a consultation which closed in the autumn, the draft Code has been amended substantially, and its purpose has been clarified. In particular, whilst banks are still required to consider whether the proposed transaction is contrary to the intentions of Parliament, they are now required only to form a view on whether the tax result would be "too good to be true" or would "surprise" HMRC - both difficult concepts, but softened by the (expressly) non-binding and non-legal nature of the Code, which is now without any sanctions or 'consequences'.
It is now made clear that the proposed obligation to consult HMRC in advance will not be introduced, so pre-clearance or agreement with HMRC is not compulsory. Banks are at liberty to discuss a transaction with HMRC to obtain HMRC's view of the transaction in advance, but it is expressly stated that HMRC has non quasi-judicial or quasi-legislative powers and has no power to give a binding statement of what the law is; consistently with this, banks need not wait for HMRC's ruling and are not obliged to halt a transaction if HMRC's view is unfavourable. If they obtain a view from HMRC which is different from their own, they remain at liberty to proceed with the transaction if they wish. There is a stronger expectation that banks will disclose transactions in respect of which they have doubts immediately after the transaction has completed. The risk they face in disclosing either before or after the event is that HMRC will open an enquiry into the relevant tax return in due course, and the effect of disclosure will be to bring particular planning techniques to HMRC's attention, such that it may (if appropriate) inform the Treasury and Ministers with a view to changing the law, but banks will be warned if their particular proposal is likely to be passed to HM Treasury or Ministers in this way.
Normal lending and participation by a bank in other transactions (such as derivatives) are excluded, as HMRC agree that banks cannot be expected to have sufficient information about a third party's transaction to determine whether or not the transaction is contrary to the intentions of Parliament. Non-compliance with the Code will not now be reported to the relevant regulator, except in extreme cases (for example, dishonesty). However, HMRC intends to publish annual league tables showing the levels of compliance with the Code.
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