2005 UK Budget
(20/3/2005)
For most British expatriates, the UK Budget is only of interest in terms of its effect on their UK investments, such as property, and the ability to plan easily and efficiently for their repatriation.
This year the Chancellor announced no major changes affecting British expatriates. However, there were some announcements on closing down the use of double taxation agreements to avoid capital gains tax and these, together with the recent tightening of the qualification rules for section 739 friendly policies and changes to the taxation of discretionary trusts, mean that it is getting harder to plan efficiently for repatriation.
The following is a brief initial summary of the main points from the budget 2005 affecting financial planning:
Domicile & Residence
For several years, the government have said they are reviewing the rules of residency & domicile with changes likely to affect non-domicile UK residents.
The consultation period has been underway for so long now that one has to wonder whether any changes will ever be made. However, that is probably a prompt that big changes are around the corner.
Candours Recommendations
If you think that you have a claim to be not domiciled in the UK you should consider taking the opportunity to plan on that basis sooner rather than later.
Section 739 Friendly policies
Ever since the Sandler report recommended the abolition of the Section 739 friendly policies, the Chancellor has been threatening to remove the 5% deferred tax rule.
Under current legislation, expatriates can establish a tax-efficient investment wrapper from which withdrawals of up to 5% per annum of the initial investment can be taken for up to 20 years without incurring an immediate tax liability. For those who repatriate, this 5% is additional to their income tax allowances.
Though the Chancellor has not yet abolished section 739 friendly policies, over recent months the treasury has tighten the rules for qualifying policies. The new rules state that policies that hold individual shares or investment funds with a fixed maturity date will be deemed as ‘highly personalised’ investments and will qualify for section 739 friendly status.
Candours Recommendations
If you are planning to return to the UK at some point in the future and have over £50,000 from which you would like to receive a tax deferred income on your return, you should consider establishing a suitable policy before such policies are abolished.
Policies can initially hold a wide selection of asset classes including shares, fixed income funds, bonds and managed equity funds and, under current regulation, can be converted into a section 739 friendly policy up to any point prior to repatriation.
Income Tax Rates
The rates of tax for individuals remain unchanged. The lower rate is still 10%, the basic rate is 22% (for dividends and savings 10% & 20% respectively), while the higher rate remains at 40% (32.5% for dividends).
The level at which the basic rate starts has been increased to £2,090, while the level at which the higher rate of tax will be charged on income has been increased by exactly £1,000 to £32,400.
Tax Free Personal Allowance
Having frozen these in previous Budgets the Chancellor was able to confirm the rates announced in his pre Budget report.
The basic personal allowance will increase to £4,895. The age allowances have also been increased. Although the additional element is dependant on the level of income, those aged over 65 may be able to receive £7,090 of tax free income while for those aged over 74 the figure is £7,220.
Candours Recommendations
Expatriates with assets in the UK should attempt to keep their net UK income below £4,895. This can be achieved in a number of ways:
For those who have rental properties in the UK, the rental income can be offset against mortgage interest repayments. As such, it is worth expatriates releasing equity from their properties and moving this offshore where it can be invested tax-free. If the released equity is placed in trust this may also reduce an individuals IHT liability (see below).
For those who have UK domiciled shares, investments and cash deposits; these can be transferred to an offshore equivalent to remove the potential tax liability.
Lastly, those who are looking to return to the UK can transfer their assets into a section 739 qualifying policy (see above) to effectively increase their tax allowance.
Inheritance Tax
In the run up to the Budget there were many calls for either a substantial increase in the Nil Rate Band or for the family home to be taken out of charge.
Not surprisingly, the only change we saw was the nil rate band increasing slightly in excess of inflation to £275,000. Increases for the following year to £285,000 and £300,000 in 2007/08 were also announced.
However, given that the average house price in the UK is rapidly approaching this threshold, more and more expatriates.
Though not a change at this budget, it is also worth noting that the rules relating to the taxation of discretionary trusts has recently changed. UK domiciled individuals who wish to establish a discretionary trust will now be charged 20% inheritance tax on establishment (as a lifetime chargeable transfer) with the remaining 20% charged on the settlers death.
Candours Recommendations
Estate planning is a highly personalised process. If your estate (property, investments, cash and belongings) exceeds £275,000), speak to an independent advisor such as Candour Consultancy.
Capital Gains Tax
The annual exemption has increased with inflation but the rates remain the same.
Anti Avoidance
This is a favourite theme for the current government. The Chancellor made it clear that unacceptable avoidance will be pursued and in the process some amendments to the rules affecting the use of double taxation agreements to avoid tax liabilities were announced.
Also the situs of some investments such as bearer shares will be more strictly interpreted in order to ensure that they are treated as being UK based. This is to prevent individuals who may be resident and ordinarily resident but not domiciled from escaping tax on the disposal of some capital assets by “manufacturing” their location.
Stamp Duty
Although widely flagged in the lead up to Budget day, one of the major surprises was the doubling of the stamp duty threshold for property purchases. This has increased from £60,000 to £120,000 and is intended to help first time buyers enter the market.
However, given the current high in UK house prices and the latest reports which suggest that the market will continue to grow steadily over the next 12 months, the perceived benefit is substantially greater than reality.
Candours Recommendations
Property remains a staple of a balanced portfolio of investments. However, it should be remembered that (like any other investment) the value of property can fall as well as rise. Even though the stamp duty changes make UK property a more attractive investment, it should be carefully considered whether you will be buying this asset class at a high.
National Insurance
For the second year, apart from the thresholds being amended, there will be no change in the rates to be applied.
Candours Recommendations
See our article in the advice section on National Insurance Contributions
2005-2006 Allowances (£ per year unless stated)
| |
2004 - 2005 |
Change |
2005 - 2006 |
| Income tax: taxable bands £ per year |
| Starting rate: |
10% |
£0-£2,020 |
|
£0 - £2,090 |
| Basic rate: |
22% |
£2,020-£31,400 |
|
£2,090 - £32,400 |
| Higher rate: |
40% |
over £31,400 |
|
over £32,400 |
| |
|
| Income tax personal and age-related allowances |
| Personal allowance (age under 65) |
£4.75 |
£150 |
£4,895 |
| Personal allowance (age 65-74) |
£6,830 |
£260 |
£7,090 |
| Personal allowance (age 75 and over) |
£6,950 |
£270 |
£7,220 |
| |
| Married couple`s allowance aged less : |
| than 75 and born before 6th April 1935 |
£5,725 |
£180 |
£5,905 |
| Married couple`s allowance* (age 75 and over) |
£5,795 |
£180 |
£5,975 |
| Married couple`s allowance* - minimum amount |
£2,210 |
£70 |
£2,280 |
| |
| Income limit for age-related allowances |
£18,900 |
£600 |
£19,500 |
| |
| Blind person’s allowance |
£1,560 |
£50 |
£1,610 |
| |
|
| Capital gains tax annual exempt amount |
2004 - 2005 |
Change |
2005 - 2006 |
| |
| Individuals |
£8,200 |
£300 |
£8,500 |
| Most trustees |
£4,100 |
£150 |
£4,250 |
| |
| Inheritance tax threshold |
£263,000 |
£12,000 |
£275,000 |
| |
| Pension schemes earnings cap |
| Pension schemes earnings cap (1989 Cap) |
£102,000 |
£3,600 |
£105,600 |
* Married couple`s allowance is given at the rate of 10 per cent.
|
