The Chancellor’s most headline-grabbing measures affect the personal taxation of low-earning individuals, many announced last year to come into effect this year, such as the child tax credit and the working tax credit. However there have been no great changes to the personal taxation of the majority of UK resident and domiciled taxpayers announced in this Budget.
The extra 1% National Insurance contributions charge announced last year comes into effect for 2003/04 and will hit those below State pension age with employment income. The rise is set to hit individuals, for examples taking over £300 from a £40,000 salary. The shifting of the tax bands means the effect of this is likely to be compensated by a reduction in tax for the majority of the workforce affected by this increase.
The main changes which the Finance Bill contains are summarised below:
Individuals and trustees will no longer be required to complete the ‘capital gains pages’ of the tax return if their chargeable gains in the year, are less than the annual exemption or the sale proceeds are less than four times the annual exemption (i.e. 4 x £7,900 = £31,600 for the tax year 2003/04).
There has also been a broadening of the circumstances in which individuals or trustees can claim business asset taper relief. An asset owned by an individual or trustee used in a business carried on by any individual, trustee or partnership (irrespective of whether the owner of the asset is involved in the business) will now qualify as a business asset.
Earn-out payments (unascertainable deferred consideration)
The traditionally harsh capital gains treatment of "earn-out" payments will be somewhat mitigated by provisions in the new Finance Bill. Currently, where a business, shares or other asset is sold in whole or in part for a right to a future share of profits, a tax charge arises immediately on the current value of the right. A further gain or loss will then arise when the payment is made on the difference between that value and the sum actually received. If the taxpayer realises a loss, this cannot be carried back against the initial gain.
This has been mitigated by the introduction of a rollover relief in 1997 where the earn-out right is satisfied in the form of shares and/or debentures, which defers any tax charge until the disposal of the shares or debentures and preserves continuity of taper relief. To get this treatment, taxpayers have had in the past to make an election. This will now be automatic, although taxpayers will be able to opt out of this treatment in the (relatively rare) event that it is not beneficial. This should reduce the administrative burden, but will be of relatively little practical effect.
Additionally, where the roll-over relief provisions do not apply, individuals (but apparently not companies) will be allowed to carry back losses on earn-outs against the original gain and against gains in intervening years arising from the original disposal.
Anti-avoidance – offshore trust scheme
The Chancellor has introduced measures to block the so called “flip-flop” scheme, whereby UK resident and domiciled individuals sought to avoid a capital gains tax charge by trustees who have realised a gain transferring funds to a second trust at a time when they have outstanding borrowings.
Personal pension schemes
Measures will be introduced to formalise the existing practice that tax relief for contributions by both employees and employers to be restricted by reference to the age-related cap on earnings. The earnings cap for this purpose for 2003/04 will be £99,000. This change is to take effect from 9 April 2003.
Domicile and residence
The Inland Revenue have published a background paper on domicile and residence. It is thought that the Chancellor wishes to bring certain aspects of UK resident individuals’ worldwide income or savings within the charge to UK tax. No specific proposals have been put as yet. However this will be an important area to watch over coming months.