April 3rd, 2014 / Insight posted in Articles

Savers, doers and makers celebrate

The Chancellor of the Exchequer’s latest Budget was, he said, ‘one for savers, doers and makers’. The intention was to encourage growth in businesses, particularly small but fast-growing companies, and to reward savers who have seen their returns cut sharply as interest rates remain low. Unusually for Budget Day, the speech contained one or two previously unannounced surprises.

One of the biggest was the Government’s plans to reform the pension regime, and particularly the removal of the limit on the amount that can be withdrawn from pensions as this effectively means that anyone over the age of 55 will be able, from April 2015, to withdraw their entire pension fund as cash. 

As before, only the first 25% will be tax free, but the remainder will be taxed only at the individual’s normal marginal rate rather at the current rate of 55%. ‘This creates a number of opportunities for individuals to draw the entire balance of their pension fund at normal tax rates and then invest their funds outside of the regulation of a pension fund and without the need to purchase an annuity,’ explained Kingston Smith tax partner Tim Stovold. 

While the move does allow people to take more responsibility for the money they have saved while working and makes pensions more attractive, it also increases the potential for confusion so it will become more important than ever to take good professional advice before and on retirement.

Business taxes 

The main announcements affecting businesses included an extension of the Annual Investment Allowance to include capital expenditure incurred on plant and machinery. For expenditure after 1 April 2014, the maximum annual amount will be increased from £250,000 to £500,000 until 31 December 2015. This is a welcome extension of the scheme and will be a boost for capital-intensive businesses. It should mean that most SMEs will be able to write off 100% of their capital expenditure on plant for tax purposes.

The Chancellor also announced changes to corporation tax relief for SMEs that invest in qualifying R&D. At the moment, SMEs can obtain a deduction in corporation tax for 225% of the amount they spend. If the company is making losses it is possible to surrender the R&D deductions (or the loss if smaller) for an 11% corporation tax repayment. This will be increased to 14.5% for qualifying expenditure from April 2014, increasing the rate of the cash credit payable to SMEs that carry out R&D but do not have corporation tax liabilities. Many SMEs find R&D tax credits very helpful and this change is a positive one. 

The Chancellor added that he also plans to extend the popular Seed Enterprise Investment Scheme. The SEIS was initially introduced for a temporary period and gives investors who buy shares in qualifying companies income tax relief at 50% of the amount invested. This will now become a permanent relief and should help smaller and early stage businesses who are looking for equity funding.

Individual taxation

The best news in the Chancellor’s speech was reserved for savers. Mr Osborne announced that the annual investment limit for ISAs will be increased from £11,520 to £15,000, and also announced that cash and stocks and shares ISAs will be merged, which means that all of the £15,000 can be invested in cash (previously, only half of the maximum allowance could be held in cash). The maximum holding limit for Premium Bonds will also be increased, to £40,000 in June 2014 and to £50,000 in 2015.

Pensioners looking for a better return on their savings welcomed the announcement that a new Pensioners’ Bond will be launched in January 2015, which will offer a competitive interest rate for the over-65s. The investment limit, though, will be set at £10,000.

Property taxes

There were a number of announcements relating to the property market, the most eye-catching of which were aimed at ‘non-natural persons’ who buy residential property through a company with the intention of avoiding the 15% Stamp Duty Land Tax rate payable on acquisition of a residential property will be extended to purchase of more than £500,000 (rather than the current £2 million). The Annual Charge for Enveloped Property (ATED) is also extended to properties valued at over £1 million at April 2015 and to properties valued at over £500,000 at April 2016.  

This is effectively a ‘mansion tax’ on foreign owners or those who choose to own a property through an “enveloped structure” i.e. not in their own names. As our head of property, Martin Muirhead, pointed out, the change will cause owners of residential properties worth more than £500,000 to think about how they structure their holdings for tax purposes: ‘Personal ownership will greatly increase their exposure to inheritance tax. Overseas buyers in particular should be aware of their increased exposure to this tax and plan accordingly.’

Anti-avoidance

The Chancellor continued his battle against tax avoidance with the announcement that anyone who is a participant in a scheme that has been ‘notified’ by HMRC will have to pay the disputed tax up front, and will only recover it (with interest) if and when the legal process is concluded in the taxpayer’s favour. This is intended to address HMRC’s belief that some taxpayers use marketed schemes to ‘park’ the eventual liability, in some cases for years.

If you have any questions about the 2014 Budget and how it may affect you, contact Mike Hayes, tax partner on 020 7566 3813. For full details on all the announcements, see our website, www.kingstonsmith.co.uk/budget-2014. 

Key points

  1. A change to the rules affecting cash withdrawals from pension funds is a significant shake-up to the industry
  2. Announcements affecting businesses included an increase in the Annual Investment Allowance
  3. Corporation tax relief for SMEs investing in R&D is extended
  4. The popular Seed Enterprise Investment Scheme becomes permanent
  5. ISA annual investment limit increased to £15,000
  6. New investments aimed at pensioners
  7. VAT registration threshold increased to £81,000