Personal and trust taxation

Income tax rates and personal allowances

The main allowances, starting rate savings band and basic rate band for 2010/11 are unchanged from 2009/10. Furthermore, as enacted in the Finance Act 2009, from 2010/11:

• A 50% ‘additional rate’ will apply to taxable income over £150,000;
• The corresponding rate for dividends will be 42.5%;
• The basic personal allowance will be gradually reduced to nil for individuals with ‘total income’ of over £100,000. The reduction will be £1 for each £2 of income over £100,000, so that those with ‘total income’ above £112,950 will not receive any personal allowance.

Individual savings accounts (ISAs)

From 6 April 2011 and over the course of the next Parliament, the annual ISA limits will increase each year in line with the RPI. The new annual limits will be rounded to the nearest multiple of £120, with the revised amounts published at least four months before the start of the new tax year. The subscription limit from 6 April 2010 is increased to £10,200, of which up to £5,100 can be saved in cash.

Real estate investment trusts (REITs)

At present, a UK REIT must pay cash dividends (property income distributions) to meet the requirement under the REIT tax rules to distribute 90% of the profits from its property rental business. From the date of Royal Assent, a UK REIT will be able to issue stock dividends instead of making a property income distribution.

Life assurance policy deficiency relief

Deficiency relief, which can arise when a loss occurs under a life assurance policy, will be available to reduce income tax due at the new additional rates of 50% (and 42.5% for dividends). The relief will be restricted for arrangements made after 21 April 2009 and policy surrenders after 5 April 2010, where the aim is to secure a tax reduction greater than the income tax due on earlier chargeable events.

Financial compensation

Legislation will be introduced to ensure that if the Financial Services Compensation Scheme (FSCS) acts to protect policyholders, there will be broadly the same tax treatment as if the FSCS had not intervened. The measure will have effect from the date of Royal Assent.

Venture capital schemes

A venture capital trust (VCT) is currently required to hold at least 30% of its ‘qualifying holdings’ in ‘eligible shares’. This minimum is to increase to 70%. The definition of ‘eligible shares’ will be amended to include shares that carry certain preferential dividend rights. The requirement for VCTs to be UK listed will be replaced by a requirement that they should be admitted to trading on any EU regulated market.

Company shares will be excluded from qualifying for enterprise investment schemes (EISs) and investment by VCTs if the company is an ‘enterprise in difficulty’ under EU guidelines. The current rule that a company must have a qualifying trade carried on wholly or mainly in the UK will be replaced with a requirement that the company must have a permanent establishment in the UK.

The changes will be included in a Finance Bill to be introduced as soon as possible in the next Parliament and generally will have effect from the date of Royal Assent. The revised definition of eligible shares for VCTs will not affect funds raised by the VCT before then.

Pensions tax relief

From 2011/12 tax relief on pension contributions will be restricted for:

• Employees with total annual income of £130,000 or over before deduction or relief for pension contributions and charitable donations and whose income (before such deductions or relief) together with the value of any employer pension contributions is £150,000 or over; and
• Other individuals with total income of £150,000 or over before deduction or relief for pension contributions and charitable donations.

Pension schemes: lifetime allowance and annual allowance

It was confirmed that the lifetime allowance will be frozen at £1.8 million and the annual allowance will be frozen at £255,000 from 2011/12 to 2015/16 inclusive.

Pension taxation

A number of technical changes to pension tax legislation will be made to cater for the launch of the National Employment Savings Trust (NEST), which is due to begin in 2012.

Income tax adjustments between settlors and trustees

From 6 April 2010, settlors who receive repayments of tax on trust income because their personal tax rate is lower than the trustees’ rate will be required to pass such repayments to the trustees. These payments to trustees will be disregarded for inheritance tax purposes.

Remittance basis

The remittance basis of taxation can apply to individuals who are either not domiciled or not ordinarily resident in the UK. Legislation will clarify that the definition of a ‘relevant person’ for remittance basis purposes includes subsidiaries of non-resident companies which would be close companies if they were resident in the UK. The change will take effect from 6 April 2010.

Guardianship orders

Payments made to individuals who care for children under special guardianship orders or residence orders will be free from income tax with effect from 6 April 2010.

Company cars and vans

Cars and vans that cannot produce CO₂ emissions (eg electric-only vehicles) will be subject to a 0% scale charge. For cars with CO₂ emissions of 75g/km or less, the appropriate percentage scale charge will be 5% (8% for diesels). Both new charges will last for five years from 6 April 2010.