Budget 2011 - Encouraging investment in the UK and philanthropy
This note is intended to provide information about the 2011 Budget announcements made on 23 March and which are most relevant to wealthy families, entrepreneurs, non-UK domiciled individuals and those who engage in philanthropy.
The overall effect of the changes in the Budget is positive, particularly for those who start or invest in businesses. Non-domiciled individuals who live in the UK, or who will come to the UK in future, with a view to investing will now have access to a more attractive package. Changes to the "investor visa" will entitle them to remain in the UK indefinitely after just three years of residence, if they invest £5m in the UK or after two years if they invest £10m or more. They will be able to bring in foreign income and gains to invest in UK businesses, without paying tax on the remittance. Both for non-UK domiciled investors and for UK entrepreneurs, welcome changes to the rates of corporation tax mean that international businesses which are headquartered in the UK will also have more favourable tax treatment. Entrepreneurs who dispose of businesses may be taxed at 10% (the entrepreneurs' relief rate) on the first £10m of gains made as a result - a doubling of the existing allowance.
Higher-rate taxpayers will take encouragement from the Chancellor's statement that the effects of the 50% rate are being studied, and that it is a temporary rate only. This suggests that, if the top rate is not raising significant sums, it could be reduced or removed in the shorter term.
For non-domiciled individuals who stay in the UK for 12 years or more, the news of an increased annual charge of £50,000 for continuing to use the remittance basis may seem unsettling. The Government's promise that this (and taxation rules specific to non-UK domiciled individuals) will not be changed again during the life of this Parliament may seem familiar, but, seen in the context of other, more favourable changes, and the general economic environment, we consider this should not, by itself, send a negative message to longer-term residents.
In support of the Government’s push towards the Big Society, the Budget also brought good news for charities and philanthropists. In anticipation of a wholesale review of inheritance tax (recently recommended by the Office of Tax Simplification) the Government plans to offer a tax advantage to those who give generously on death, with some additional benefits (through an administrative revamp of the Gift Aid system and an increase in "reciprocal" benefit level) for those who wish to give to charity during their lifetimes.
NON-UK DOMICILED INDIVIDUALS
Taxation – The Budget recognises that non-UK domiciled individuals make a valuable contribution to the UK economy and many of the proposed changes to the current tax rules are intended to encourage them to invest in the UK. However, other changes are intended to ensure that non-UK domiciled individuals, especially those who have been resident in the UK for many years, make a greater contribution in return for continuing to use the remittance basis.
The proposed reforms include:
increasing the existing £30,000 annual charge to £50,000 for non-domiciled individuals who have been UK resident for twelve or more years and who wish to continue using the remittance basis of taxation. The £30,000 charge will be retained for those who have been resident for at least seven years but fewer than 12 years;
a new rule that, when non-UK domiciled individuals remit foreign income or capital gains to the UK for the purpose of commercial investment in UK businesses, this is not a taxable remittance; and a simplification of some of the current rules to remove undue administrative burdens for non-UK domiciled individuals. The Government will consult on the detail in June ahead of legislating in Finance Bill 2012, but it is hoped that these changes will be directed at some of the practical difficulties (on record-keeping as to the source of funds used to make purchases, for example) that non-UK domiciled individuals, and the professionals who advise them, have pointed out since 2008 when the rules were introduced.
Residence - The current rules that determine tax residence for individuals are unclear and complex. The Government will consult in June on the introduction of a statutory residence test to provide greater certainty for taxpayers with effect from April 2012.
OTHER TAXATION CHANGES
Capital gains tax - Effective from 6 April 2011, the lifetime limit on capital gains qualifying for Entrepreneurs’ Relief (where eligible gains are taxed at a 10 per cent rate of Capital Gains Tax) will be doubled to £10 million. This will encourage both larger-scale business owners, and smaller-scale serial entrepreneurs who want to reinvest gains.
Inheritance tax - no changes, except one designed to promote charitable giving (see below). Note also that the Office for Tax Simplification has recommended a wholesale review of Inheritance Tax.
Income tax - the Chancellor confirmed he saw the top rate of tax as a temporary measure and said that the Government is reviewing the amount of tax raised by the 50% rate.
In line with its recently published Green Paper on Giving, the Government has taken its first steps to bolster charitable giving and philanthropy and to support the voluntary sector.
The proposals so far are as follows:
a reduction in the rate of inheritance tax for those who leave 10% or more of their estate to charity. This means that in certain circumstances, the rate of tax on the balance of an individual's estate will be reduced from 40% to 36%;
in recognition of an donor's generosity and to enable a charity to say a more significant "thank you" where appropriate, the amount a charity can spend on gifts, entertainment or other ways of showing its appreciation to a benefactor will increase to £2,500. Until now, a donor could only benefit to the tune of £500 from a charity to which he had made a donation;
to consult on proposals to encourage donations of pre-eminent works of art or historical objects to the nation in return for an income tax reduction;
a welcome simplification of the administrative burdens currently associated with a claim for Gift Aid relief by charities which qualify, through the introduction of a new system of online filing which is intended to bring Gift Aid into the 21st century; and
the introduction of a Gift Aid small donations scheme. This will allow charities to claim Gift Aid on up to £5,000 of small donations (from collecting tins, for example) per year without the need for Gift Aid declarations.
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