Check back here for expert reaction and analysis in the wake of the Budget
Highlights/lowlights: banking levy increased, corporation tax down by 2%, NI and income tax merged, non-dom levy going up to £50,000 for those here over 12 years + statutory residence test, IHT relief for charitable legacies, lifetime loans to avoid income tax to be banned, private jets to be taxed.
Download the Red Book of the Budget here
Read Spear’s Budget 2011 liveblog here
Robert Field, Farrer & Co: ‘What has been done an awful lot in the past 20 years is for companies to transfer assets into an employee benefit trust (EBT), with no corporation tax or income tax payable. There is no further tax charge until funds come out of the trust. The Finance Act 2008 introduced very draconian rules if any money or assets are allocated or distributed in an EBT, there’s a PAYE charge.
‘There will be few hedge fund managers, for example, who don’t have an EBT, very few banks that do not have an EBT. Everybody in the world has been scrabbling around to work out what to do with the EBT. Nobody in their right mind would want to use them now. Even clever lawyers and accountant will find it hard to replicate what’s been going on for the past 20 years.’
Glen Atchison, partner, Harbottle & Lewis: “As always, the devil is in the detail and we’ll need to wait for that. However, when you consider a number of the announcements together, it’s a Budget that shouts, ‘We’re open for business’. A UK resident non-dom can invest in a UK business using foreign income and gains, without being subject to UK tax on such remittances. This is potentially a massive change.
“An entrepreneur who is setting up a business in the UK and seeking investment from an investor has more chance of getting that investment in light of the improved tax breaks for EIS investors. That same entrepreneur also knows that the highest rate of corporation tax that the company will pay is 26%. And probably best of all, the entrepreneur can build the business in the knowledge that if its successful and sold, he or she will benefit from a 10% rate of capital gains tax up to £10million gain. The clear message is we are here to help UK businesses by encouraging rather than stifling investment.
“Since 2008, we have been braced for potential further massive changes to the rules relating to non-doms, and the UK has suffered under the cloud of further consultation on the issue. With the Lib Dems in the Coalition Government, this risk was heightened, as they had made clear their stance on the tax advantages enjoyed by non-doms. The fact that the changes announced appear to be the end of further reform in this area (at least for the duration of this Parliament!) gives welcome certainty, and seems to be a recognition that non-doms contribute a lot to our economy.”
On the introduction of a statutory residence test: “This is welcome, as the uncertainty following a number of cases on this issue is unhelpful, and confusing for all. However, I don’t envy the draftsmen.”
Julian Hickman, Partner at Longbow Capital, the EIS and VCT healthcare investor: “The Budget has put VCTs and EIS back where they belong and that’s at the heart of enabling private investors to get behind British innovation and allow more companies – not just start-ups – to benefit from tax-efficient investment. Pre-Budget fears that the Chancellor would turn his back on VCTs and EIS have proved unfounded. This Budget shows the Government is seriously committed to VCTs and EISs that genuinely support British enterprise. EIS investments will become really attractive to investors as a result of the Chancellor’s changes. Income tax relief has now been raised to be in line with VCTs, with the amount of upfront income tax relief increasing from 20% to 30%. And the amount of investment that can attract upfront tax relief will double in 2012 from £500,000 to £1 million.
“The Chancellor has dealt a very generous hand to British companies involved in creating wealth through innovation. The number of businesses that will be able to benefit from EIS and VCTs will increase dramatically as a result of today’s Budget. Under existing rules, companies with no more than 50 employees and who met a £7 million pre-money gross asset test could qualify for VCT and EIS relief. But from April 2012, this will now increase to 250 employees, with gross assets to £15m. In addition, companies will also be to take up to £10m investment a year.
“But the Chancellor has also fired a warning shot at companies that are operating outside the original intention of the schemes. He has indicated that over the next twelve months we will see rules emerge that will re-focus both EIS and VCTs to ensure they are targeted at genuine risk capital investments, which means the VCTs and EIS that have not invested in British-based innovation are likely to cease to exist.
“Taken together, these announcements are to be welcomed. They are very good news for investors, for British businesses and the economy as whole.”
Sophie Dworetzsky, partner, Withers: ‘We all knew something was going to happen on non-doms. I’m not sure I’m persuaded it was what people were expecting. The worst people were fearing was that one could become domiciled after a certain number of years and that hasn’t happened. This indicates that there’s an awareness that the remittance basis has an advantage for the UK.
‘There’s going to be no tax if you remit income to invest in UK business, but what does that mean? What is a UK business? Is it your hedge fund? And what’s a commercial investment?
‘It gives a lot more than it takes.
‘The people who have the most to fear are those paying the £30,000 – a lot of them are reasonably well-paid in the City but don’t have billions. They’re not active onshore investors so extra generosity won’t help them. It will help some of the most financially vital people in the UK.
‘It might allay concern about people fleeing the UK. A number of people have said we havne’t had a large exodus because of increased taxes, which is true, but we have far fewer people coming. It might make people less reticent about coming here.’
Ronnie Ludwig, partner, Saffery Champness: ‘It was a very sensible Budget aimed at securing investment into businesses in the UK, especially from non-doms. It’s given some certainty: 0-7 years as a non-dom, you pay nothing; 7-12 years, £30,000 on the remittance basis; 12+ years, £50,000. Uncertainty brings fear and fear makes non-doms walk out.’
On the 50p tax rate: ‘Osborne’s rhetoric didn’t make you think he was going to increase it to 60p – he wants to find out how much it makes, and as we know, it’s paid by less than 1% of the population and it makes very little. It was much more political when it was introduced rather than producing a lot of money.’
‘We’re seeing the rate of corporation tax cut to 23%, which will be one of the lowest in Europe.’
Anthony Thompson, Partner, Head of Tax & Private Capital Group, Lawrence Graham: ‘The government’s proposal to incentivise non-doms by allowing income and gains to be brought in tax-free for commercial investment will be welcomed by those wishing to invest in the UK.
‘The bad news is that although, currently, non-doms after seven years of residence have to pay £30,000 per annum to get the benefit of their tax status, this figure will go up to £50,000 once they have been resident for twelve years. We anticipate this will apply from 2012. Will this increase put people off the UK and either drive them out or discourage them from coming in the first place? Presumably the government think not.
‘The fact that we now know where this government wants to end up on this issue helps to remove some of the uncertainty so disliked by the non-dom community. The government has also said that there will be no substantive changes until the end of this parliament – but how long will that be? The fact that there will be a period of consultation and reform to the current rules and better opportunities to invest in the UK without a tax charge on what is brought in must also be a good thing for non-doms as these people help generate revenue for the UK.’
Tim Gregory, partner, Saffery Champness: ‘The statutory residence test for non-doms will undoubtedly create more certainty. It’s all been looked at in some great depth by the HMRC and everyone is a little shy of trying to push the envelope. All bets were on five or ten years ago and now all bets are off. People will know where they stand. Bearing in mind how difficult it is now to shed your resident status in the UK, it’ll either be as difficult but more certain or less difficult, but not more difficult.’ On non-doms remitting foreign income to UK and getting tax relief for investing it: ‘That’s a big plus – that could create a huge exemption.‘
The increase of 400% in EIS investment and the increase in profits taken before a higher rate of tax to £10m (from nothing three years ago) will be big incentives, Tim said.
Josh Spero, Editor, Spear’s: This is bad for our readers in some ways – from the mysterious threats about making more tax from prime properties and tightening up on tax avoidance (our readers don’t evade, obviously) to taxing private jets. However, a drop in corporation tax is always welcome, as are some nebulous philanthropic improvements (including IHT relief for charitable legacies).
What will really irritate many is that the banks have once again proved a thumpingly large target: Osborne sneered as he increased the banking levy to offset the corporation tax increase. It may be populist, but it’ll make Saturday-night dinner parties a lot more awkward for him.
The main plus for Spear’s readers will be the EIS and entrepreneurs’ relief changes: for those starting businesses, they can now earn £10m before normal rates of tax kick in, and investing in EIS will give better income tax relief and may act as an alternative pension, as the editor of FT Money has suggested.
For current and potential non-doms, there is really good news: the increase in the charge to £50,000 after 12 years will be offset by removing tax on money remitted here to invest in UK businesses.
And the end of the 50p tax rate is in sight – Osborne said he would review how much it brought it, which may well be taken as code for an intended withdrawal when it doesn’t show that it brings in significant revenue.
From Hannah Terrey, head of policy at the Charities Aid Foundation (via charityinsight.com): “The Chancellor said this was a “Budget for making things not making things up” and he has certainly delivered for charities and those who want to support them.
“The changes announced today will revolutionise Gift Aid and hopefully put an end to the £750million that goes unclaimed each year. We are pleased to see they have implemented our recommendation to remove restrictions around thanking donors and raised the benefit limit to £2,500.
“Government support for promoting payroll giving will help realise the potential of this much under-used method of giving. It provides charities with a regular income and considerably boosts donations but currently only 2.4% of all UK PAYE employees give in this way. We look forward to working with the Government to develop a campaign.
“The new incentive to leave money for charity in your will is attractive and will go some way towards making this a norm. We had hoped to see the introduction of Lifetime Legacies which have generated over $107billion in the USA and would do more to encourage a link between donors and the charities they support but we still welcome this initiative.”<br />
Alan Banes, head of charities at Howard Kennedy: ‘Individuals will welcome this new tax relief at a time when demands on charities’ resources have been increasing. As a rough guide charities do not see the benefit of a legacy for approximately 5 years from the time that a legacy is included in a Will, but this will encourage donors to consider making charitable gifts by Will or Codicil. It should also focus the attention of donors in boosting income for charities by way of legacies.’
Simon Weil, partner, Bircham Dyson Bell: “The £500 Gift Aid benefit limit has caused large headaches for organisations within the arts and heritage sphere, as one of the main ways in which they are able to attract and maintain donors is by inviting them to events. It has meant that such organisations could easily jeopardise the Gift Aid status of donations if the value of the benefit given to a donor exceeds this limit. As a consequence, they have had to agonise about what they can and cannot do.
“The Government’s move to allow donors up to £2,500 in benefits is to be welcomed on the face of it. However, they are also seeking to draw up an exhaustive list of defined benefits. Such a list would be likely to ascribe values to benefits, thereby rendering it all too easy for a donor to run up a value in benefits that approaches the new upper limit. This is a potentially sinister move, which could entail the Government giving with one hand and taking away with another.
“The extension of the gifts in lieu arrangements to lifetime arrangements on inheritance tax could also be significant. The devil will be in the detail but it would be interesting to learn whether the proposed measures will involve a material modification of the reservation of benefit rule, i.e., will they contemplate allowing the tax payer to have lifetime use and enjoyment of a work of art or not? I await the results of this consultation, which is scheduled to take place over the summer, with a degree of optimism.”