UK Budget: What Should HNW Individuals, Advisors Watch For?

Natasha Taghavi

20 March 2013

This Wednesday will see UK finance minister George Osborne deliver his fourth budget speech against a difficult domestic and foreign backdrop. The UK is one quarter away from a “triple-dip” recession, and Moody’s, the ratings agency, recently stripped the UK of its triple-A rating, the first time the UK has been in this situation in over three decades. With a high and rising debt burden and a big budget deficit, this year’s budget is arguably one of the most important for the coalition government to date. This publication looks at some of the potential changes that could affect high net worth individuals.

Mansion tax

Although a mansion tax had been previously ruled out by Osborne, he is widely expected to make changes to the taxation of property. Labour and the Liberal Democrats have, at different times, backed such a tax. With over 70,000 home owners in the southeast and London potentially being hit by a 1 per cent tax on all homes worth over £2 million, its controversial nature is clear.

“Despite ongoing pressure for a ‘mansion’ tax on high-value residential properties, this measure could still seem to be too unpopular with many of the Conservative party’s core support for the government to pursue it at the present time. Many believe that it would be exceptionally difficult to efficiently administer such a policy and it is also often argued that any such tax could have an unfair impact on some living in certain property ‘hot spots’,” said Dominic O’Connell, head of tax, trust & estate planning at Coutts.

“The government's focus remains on stamping out certain types of stamp duty land tax avoidance in a way that does not damage business by focusing on attacking high-value residential property transactions and investments, with wide-ranging exemptions if the property is part of a rental or development operation. However, despite the reliefs, these changes make it necessary for overseas holders of residential property worth £2 million (around $3 million) and held for “personal use” via a non-natural person (effectively a company) to consider significant restructuring prior to 5 April 2013,” said Stacey Eden, partner at Crowe Clark Whitehall.

Pension tax relief

There is much speculation around the government planning to limit pension tax relief to the basic rate of 20 per cent, reducing the annual tax allowance even further. After recent budgets saw annual pensions allowance drop from £255,000 to £40,000 and the maximum lifetime allowance cut from £1.5 million to £1.25 million, the question is, how many more cuts can pension tax relief take?

“There was a great deal of speculation around the 2012 autumn statement regarding the continued availability of tax relief on pension contributions when in fact the actual changes that were announced concerned the lifetime allowance and annual allowance levels. Although the changes are not due to come into force until April 2014 it would be surprising if any other fundamental changes to pensions were announced in the 2013 budget,” said O’Connell.

“Tax relief for pension contributions has been repeatedly restricted in recent years as successive governments have sought to emphasise that a pension is a vehicle to prevent pensioners being dependent on the state, not a tax planning mechanism. Further restrictions are possible, either through a reduction in the maximum permitted annual contribution or perhaps the abolition of relief for higher-rate taxpayers,” said Sophie Dworetzsky, partner at Withers, the law firm.

Inheritance tax

Inheritance tax looks set to remain static at best. However, as reforms will cost the Exchequer £1 billion a year by the end of the next parliament, according to the HM Revenue and Customs, this cost will be met in part by extending the freeze on the inheritance tax threshold at £325,000 by three years. As announced in the autumn statement, the inheritance tax nil-rate band will increase by 1 per cent to £329,000 in 2015 to 2016.

Meanwhile, the tax rate will be cut to 36 per cent from April 2012 for estates leaving 10 per cent or more to charity.

“There are lots of very good reasons to leave this alone, not least of them political pressures. I can however foresee some tinkering here. The coalition plans to fund the new £75,000 cap on elderly care costs with changes to IHT. So far, they have proposed to freeze the nil-rate band for another few years. This seems unlikely to be enough to cover the care costs, and so something further may need to be done," said Tim Gregory, partner at Saffery Champness.

Business growth

Osborne could choose to support small businesses by extending some of the available reliefs on Enterprise Investment Schemes and Seed Enterprise Investment Schemes, which were launched in April this year. John Williams, managing partner at Kuber Ventures believes that the government must continue to make the investment cases for such vehicles compelling, if it is to bolster small businesses and “get the UK economy back on track”.

“There is talk, at the moment, of people saying EIS can be used as a sort of pension. Hopefully Enterprise Investment Schemes will be renewed and continue, because that’s not really taken off yet, so it would be sad to kill it at birth,” said David Kilshaw, chairman of private client at KPMG.

Non-doms

It is expected that Osborne will increase the existing £30,000 annual charge to £50,000 for non domiciles who have been UK resident for twelve or more years and who want to retain access to the remittance basis of taxation. The £30,000 charge will be retained for those who have been resident for at least seven years, but less than twelve years. Meanwhile, the statutory resident test expected to come into force last summer, which was delayed, may now come into effect.

“Non-domiciled individuals using the remittance basis of taxation for offshore income saw their annual charge rise to £50,000 in 2010, but have since escaped the spotlight. There are only around 4,000 persons paying the remittance basis charge, so increasing it would not raise significant sums, but could the government now look to increase it again to score political points,” said Christopher Groves, partner at Withers.

Anti-avoidance rules

Government plans to adopt an anti-avoidance rule was explicit in Osborne’s autumn statement, and will likely be reinforced in this Wednesday’s budget. The General Anti-Abuse Rule is expected to come into effect later in the year, but O’Connell believes it would be unsurprising if more specific measures were announced in the budget to ensure that “artificial and abusive avoidance schemes are tackled as efficiently and robustly as possible”.

“The Chancellor announced in the autumn statement that the government will be pushing ahead with a General Anti-Avoidance Rule in its attempt to counter perceived abuses of the tax system. The GAAR is intended to give HMRC broader powers in closing off abusive tax avoidance. The majority of taxpayers would argue they are not involved in abusive tax arrangements and it will be interesting to see how many people will be surprised by HMRC enquiries,” said Laurence Field, partner at Crowe Clark Whitehall.

Personal allowance

As pressure mounts on the coalition to reach its target of £10,000 by April 2015, O’Connell says it will not be surprising if there was a further small increase to the personal allowance for the upcoming tax year.

“To fund this, there could be an NI increase for the self-employed, who currently pay less than the employed, that might be justified by the government on the basis of the introduction of a flat rate state pension. However, as the pension change is not scheduled until 2017, introducing such an NI ‘alignment’ before then could be controversial,” said O’Connell.

Capital Gains Tax

The increase in the higher rate tax threshold and the capital gains tax exempt amount will be kept at 1 per cent for 2014 to 2015 and 2015/16. However, Osborne is expected to reduce capital gains tax for assets held over a certain period of time.

“We may well see a reduction in the headline rate of CGT, bringing it down from 28 per cent to 25 per cent. This would be a very nice little incentive to get people investing again. Recent evidence suggests that CGT has also raised less tax since it was increased to 28 per cent, so a return to 25 per cent would make sense on a fiscal level too,” said Ronnie Ludwig, partner at Saffery Champness.

Coutts, Saffery Champness and Crowe Clark Whitehall have all been shortlisted for awards at the WealthBriefing Awards 2013 event to be held in London on 2 May.