Budget Report 2008

The overriding themes of Alistair Darling's 2008 Budget were stability and opportunity - and the changes put in place are likely to provide aspects of both for us all.

The introduction of the 18% flat rate of capital gains tax (CGT) for individuals and confirmation that the Government does not see the need for any change to the taxation of life insurance bonds as a result of CGT reforms provide certainty and significant opportunities.

By working with providers that offer the full range of tax wrappers and the necessary technical support, Butcher & Moody can ensure that we deliver the right financial solutions, tailored to your needs.

Budget Summary

The following provides a high-level summary of some of the key aspects from the Budget 2008. Please remember, this may be subject to change before being enacted as part of this year's Finance Act.

Personal Tax - from 6 April 2008

Income Tax
It was confirmed that:

• the basic rate of income tax will be reduced to 20% (from 22%)

• the existing 10% starting rate will be abolished, except for savings income.

Capital Gains Tax
It was confirmed that the new 18% flat rate will apply to individuals and trusts. Indexation and taper relief will be removed from 6 April 2008.

The first £1 million of gains that qualify for entrepreneurs' relief will be charged to CGT at a rate of 10%. Gains in excess of £1 million will be charged to CGT at 18%.

An individual will be able to claim relief on qualifying disposals made on or after 6 April 2008. Claims may be made on more than one occasion, up to a 'lifetime' limit of £1 million. Disposals on or before 5 April 2008 do not affect the lifetime limit.

Inheritance Tax (IHT) - Transitional Serial Interests
The transitional period for trustees of Interest in Possession (IIP) settlements created on or before 21 March 2006 to vary a beneficiary's interest will be extended from 6 April 2008 to 5 October 2008.

Companies Holding Investment Life Insurance Policies
Although not specifically addressed in any Budget Notice, a number of changes will be introduced to the previously announced rules which bring corporately owned life assurance policies under the loan relationship rules:

Policies of life assurance (but not annuities or capital redemption contracts) which were held on 13 March 1989 and have not been enhanced since will be excluded from the new proposals.

Any credits representing the difference between a lump sum payout on death or the onset of a critical illness over the surrender value at that time will be outside the scope of the loan relationships code.

The formula which provides for an addition to any loan relationships non-trading credit arising as a result of any related transaction is amended slightly to give a more accurate result.

Enterprise Investment Scheme
The amount on which an investor can obtain relief in any tax year will be increased from £400,000 to £500,000.

Income shifting - Arctic Systems Case
It was announced that the Government will consult further on this issue with a view to legislating in the Finance Bill 2009.

Corporation Tax

It was confirmed that the main rate of corporation tax is to be 28%. Legislation will also be introduced to set the main rate at 28% on and after 1 April 2009. The main rate for ring-fenced profits will remain at 30% for both years.

Legislation will be introduced to set the small companies' rate at 21% from 1 April 2008, and set the fraction used in smoothing the difference between the main rate and the small companies' rate at 7/400.

The small companies' rate for ringfenced profits will remain at 19% and the marginal small companies' relief fraction for ring-fenced profits will remain at 11/400. These marginal rates apply from 1 April 2008.

Residence And Domicile

Annual £30,000 tax charge for some users of the remittance basis

Finance Act 2008 will ensure that adult non-domiciled or not ordinarily resident individuals (who have been in the UK more than seven of the past ten tax years) will continue to be able to access the remittance basis of taxation on payment of an annual charge of £30,000. This charge applies on the foreign income and gains they leave outside the UK, unless their unremitted foreign income and gains are less than £2,000. This £30,000 charge is in addition to any tax due on UK income and gains or foreign income and gains remitted to the UK.

Following consultation there are three main changes to the draft legislation published on 18 January 2008, as follows:

• The charge does not apply for remittance basis users who have unremitted foreign income and gains of less than £2,000 in the year of assessment.

• The charge will apply to adults, so under-18s will not have to pay the £30,000 charge until their 18th birthday.

• The charge will take the form of tax on unremitted income and gains rather than a standalone charge.

The charge will be payable through the self-assessment system and will not be taxed as remittance if paid directly to HM Revenue & Customs (HMRC) by cheque or electronic transfer from an offshore source. Individuals can choose yearly whether to claim the remittance or pay tax on their worldwide income and gains.

As a tax charge on unremitted income and gains (or a combination of the two) rather than a standalone charge, the tax charge introduced from April 2008 will be different from that described in the 18 January 2008 draft legislation. It is HMRC's view that as a result, the tax paid will either be income tax or CGT and should be treated as such for the purposes of Double Taxation Agreements.

The Residence Test And Day Counting Rules
These changes mean that from 6 April 2008, for residence test purposes an individual present in the UK at midnight will be counted as present in the UK on that day.

There will be an exemption for passengers in transit between two non-UK locations. Days in transit will not be counted as days of UK presence, so long as the individual does not engage in activities during transit that are substantially unrelated to their passage through the UK.

Personal Allowances And The Remittance Basis
Finance Act 2008 will end entitlement to certain personal allowances and income tax reliefs and the annual exempt amount (AEA) for capital gains for individuals who:

• have unremitted foreign income and gains in excess of £2,000 a year,

• are resident in the UK, and

• claim the remittance basis of taxation.

Allowances include the basic personal allowance and age-related allowances, blind person's allowance, tax reductions for married couples and civil partners*, relief for life insurance payments and the AEA for capital gains.

A de minimis limit will allow remittance basis users who have unremitted foreign income and annual gains of less than £2,000 to retain access to those allowances they are entitled to. Individuals will be entitled to the personal income tax allowances and the AEA for capital gains in a particular year if they do not claim the remittance basis in that year.

* As defined by the Civil Partnership Act 2004.

Amendments To The Remittance Basis
Finance Act 2008 will remove various planning approaches, including the areas of 'ceased source' and 'cash only:

Investment Funds

Property Authorised Investment Funds (PAIFs) - New Tax Regime
A new tax regime for PAIFs will be introduced from 6 April 2008, and will apply to OEICs that adopt the new basis and invest in real property and certain property companies.

The new rules are intended to move the point of taxation from the PAIF to the individual investor, so that investors face broadly the same tax treatment on rental income as they would had they owned real property or UK REIT shares directly. Under the current regime, UK Authorised Investment Funds (AIFs) invested in property are unattractive to exempt investors, as rental income is distributed as a dividend with nonrecoverable tax credit. The changes therefore primarily benefit tax-exempt UK investors (pensions, charities, ISA, or SIPP) as property income can be received gross, or the tax credit can be reclaimed.

The new regime will divide income received and distributed by the AIF into three categories:

• Property income

• UK dividend income

• Interest distributions

Funds Of Alternative Investment Funds (FAIFs)
Draft regulations for the taxation of FAIFs were published and will be enacted at a date as yet unannounced by HM Treasury. The aim is to remove certain tax disadvantages for FAIFs compared to qualifying funds.

Offshore Funds
Regulations will be made under Finance Act 2008 to deal with the taxation of offshore fund investors.

Investors disposing of their interest in a fund with distributor status are subject to a more favourable tax treatment than if the fund has non-distributor status, as they are liable to CGT on chargeable gains rather than income tax and the CGT Annual Exempt Amount can therefore reduce the tax payable.

The new regulations will allow certain offshore funds to be classed as 'reporting funds' with distributor status, provided the fund 'reports' income instead of making a distribution. UK investors will then be taxed on the reported income. The regulations will take effect at a date to be announced by HM Treasury.

Pension Schemes

Income Tax
The basic rate income tax reduction to 20% will require clients funding personal pension schemes to increase their net contributions from 6 April 2008 in order to maintain the same level of gross saving. For higher rate taxpayers, the split of tax relief received at source and the higher rate tax relief claimed back via their local inspector will be equalised in the new tax year. Personal contributions paid into occupational registered schemes will continue to be paid gross, with appropriate tax relief through the net pay system.

Corporation Tax
Alongside the aforementioned changes, companies with trading years ending 31 March 2008 may wish to consider whether funding made before the end of trading period against members' 2007/08 Annual Allowance may be beneficial in reducing overall liability.

Protected Pension Commencement Lump Sum Calculation
HMRC has confirmed changes announced in the Pre-Budget Report to ease the basis of calculation of any additional post A-Day lump sum as a result of pension right accrual since 6 April 2006.

There will be no need for post A-Day accrual to be effected for a client to receive the pre A-Day protected tax-free sum increased by the rise in the Lifetime Allowance (LTA), and an additional lump sum of 25% of the increase in the fund value (in excess of the LTA rate of increase).

This will benefit those clients unable to make a post A-Day accrual to pre A-Day entitlements within a scheme, such as deferred occupational scheme members or pre A-Day S32 contract holders.

Trivial Pensions
The rules relating to trivial commutation are to be eased. In addition to the normal aggregate trivial commutation limit of £16,500 for the 2008/09 tax year, regulations will allow pension savings in occupational schemes of less than £2,000 to be commuted using the same tax principles, ie 25% of the lump sum will be tax free, with income tax applied to the remaining capital.

Amendment To Unauthorised Payment Regime
Certain types of payments will be treated and taxed as authorised payments instead of unauthorised payments. These situations will be limited to overpayment of ongoing pension, pension paid after the member's death, and payments made after a member's death where payment before death was not possible.

Tax Relief On Pre A-Day Employer Contributions To Pension Schemes
It has been confirmed that for employer contributions to registered pension schemes between 1 April 2004 and 5 April 2006, corporation tax relief will be granted to the cash value of the contributions paid and not the amounts shown in the company accounts.

Scheme Pension/Lifetime Annuity IHT And Unauthorised Payment Charges
Finance Act 2008 will impose unauthorised payment charges in the following circumstances:

• If a member surrenders rights to payments under a lifetime annuity, a scheme pension, a dependant's annuity or a dependant's scheme pension.
  Effective from 10 October 2007.

• If a member with rights to the above dies and a connected person becomes entitled to an increase in their benefits attributable to the death.
  Effective on deaths on or after 6 April 2008.

The Act will also impose an IHT charge for deaths on or after 6 April 2008, where a member with any of the above dies aged 75 or over and there is an unauthorised payment in the form of a lump sum or increase in pension rights of a connected person in the scheme attributable to the death.

Exemption from these charges will be given on schemes where at least 20 members receive a uniform increase in entitlement as a result of the member's death.

Taxable Property Provisions
Amendments to current legislation will change the definition of investment regulated pension schemes to ensure that it does not include schemes (particularly large occupational schemes) where individual members could not be expected to influence scheme decisions to invest in taxable property.

IHT On Overseas Schemes
Finance Act 2008 will restore IHT protection to UK tax-relieved pension savings held in overseas pension schemes, bringing them into line with the protection available to funds held in UK registered pension schemes.

National Insurance Contributions
As a result of Pre-Budget Report announcements there is a significant increase (to £40,040) in the Upper Earnings Level against which employees will pay National Insurance this year.

The Government is also bringing forward changes to S2P accrual to 6 April 2009, whereby a flat rate accrual will then apply to the Upper Accrual Limit which will fall below the Upper Earnings Level against which full National Insurance contributions will continue to be funded by both employer and employee.

For these individuals, an opportunity to actively consider salary/bonus sacrifice as a tax-efficient means of funding future retirement provision now arises.