The proposed 50% tax rate for 2010/11 and beyond is now well-known, but the headlines often hide the detail. The effect of the various recently-announced tax changes will be much more costly, and affect many more people, than might first be apparent.

Boosting the higher tax rate, and then boosting it a little more

Those who are fortunate enough to have income of £150,000 or more will have the new additional rate of tax to contend with. For 2010/11 onwards 50% will be levied on income, other than dividend income, above £150,000.

For dividend income otherwise taxable at the new 50% rate, the rate will be 42.5%. This means that dividend income above the threshold which is currently taxed at an effective rate of 25% after the notional tax credit will be taxed at an effective rate of just over 36%. This is an increase of more than 44% in the effective tax rate on dividends.

For trustees, the impact is even worse, since they will have to pay the 50% tax rate (42.5% on dividends) on virtually all trust income. Whilst this is mitigated where a beneficiary can reclaim tax in relation to distributions made, retained funds in trusts will suffer a huge additional tax burden.

The personal allowance – now you see it…

From 6 April 2010 the full personal allowance will be restricted for those with income of more than £100,000, by £1 for every £2 that the income exceeds £100,000.

This means that an individual with income of £112,950 or more (based on the 2009/10 personal allowance) will not receive any personal allowance in 2010/11. The consequence of this is income between £100,000 and £112,950 will be taxed at a marginal rate of 60% in 2010/11.

Not just the rich

The future tax landscape has been portrayed by many parts of the media as an attack on the wealthy, and the two changes above can certainly be seen as that. However, the changes to National Insurance contributions (NICs) have been underplayed by both the media and the Government, but these will hit everyone, from the highest to the lowest of earners.

It is proposed that from 6 April 2011, the main rates of Class 1 and Class 4 NICs will be increased by 0.5% to 11.5% and 8.5% respectively. The additional rate (payable on income over the Upper Earnings Limit, £43,875 for 2009/10) will also increase from 1% to 1.5%.

The Class 1 employer rate of NICs will be increased by 0.5 per cent to 13.3% and this increased rate will also apply to Class 1A and Class 1B contributions on benefits in kind and PAYE settlement agreements.

A half of one percent may not sound very much, but for those struggling on a low income, any reduction in their take home pay will clearly have an impact.

Perhaps more crucially, the extra half percent on employers at a time when it seems likely the economy will still be struggling could have serious implications for reducing unemployment levels.

In addition to the proposed increase in rates, the Upper Earnings Limit for NICs has already been amended. For 2009/10 the point at which an employed higher earner starts to pay 1% Class 1 NICs as opposed to 11% Class 1 NICs was aligned with the level at which people started to pay higher rate income tax.

This means that a higher rate taxpayer will pay £383.50 more in Class 1 NICs in 2009/10 than they would have done in 2008/09. For people who pay Class 4 NI, the increase is £268.45.

These amounts are the same for any higher rate taxpayer, regardless of how much more than the threshold their income is, and so clearly has a greater impact for those with incomes nearer the bottom end of the scale.

It is clear that the UK Government has a big financial hole to fill, and is seeking to do so in any way it can. However, it is interesting that the Treasury itself has forecast that most people will find a way in due course to reduce the impact on them of the new 50% income tax rate.

This article first appeared in the September edition of Saffery Champness’s ‘Private Client’ newsletter.

In a groundbreaking deal, HM Revenue and Customs (HMRC) has this week signed an agreement with Liechtenstein, so the Alpine principality will try to force UK citizens with money hidden in its banks to come clean with the UK’s tax authorities.

This is a significant breakthrough in the negotiations, which have been continuing since the G20 Summit in early April where an international co-ordinated approach was adopted in pressuring tax havens such as Liechtenstein to provide information to the tax authorities.

If they did not co-operate they would be put on a “black list” which could have caused them certain difficulties in terms of international cooperation, trade, and so on.

As a result of the agreement Liechtenstein will be the first of the offshore tax havens to offer transparency on UK individuals holding bank accounts there.

Next in line?

It remains to be seen whether other tax havens will follow suit. However, this is the first breach in the wall of secrecy surrounding tax havens and there is no doubt that it spells the beginning of the end for tax dodgers operating offshore accounts.

HMRC estimates that approximately 5,000 British investors own bank accounts in Liechtenstein and estimates of the unpaid tax due to the Exchequer range up to £3bn.

To that figure may be added interest and penalties, so the potential return to the Exchequer could be very substantial indeed.

If these figures are reliable, the sums recoverable on a worldwide basis should all other tax havens follow Liechtenstein’s example will be eye watering.

Under the recently announced second amnesty to holders of offshore bank accounts, HMRC has offered relatively generous terms by capping penalties at 10% of the tax due whereas, in the most serious cases, these could be as high as 100% of the tax due.

The interest chargeable on unpaid tax is however non-negotiable and given that the Revenue will be looking back at the previous 10 years, the interest sums alone could be very substantial.

The Revenue is adopting a stick and carrot approach to this initiative and for those who decide not to avail themselves of it, the stick could be very hard indeed because the Liechtenstein bank accounts risk being frozen.

Movement

No doubt many tax evaders will attempt to move their cash out of Liechtenstein in the short term.

However, it would be naive of them to expect that HMRC will not pay very close attention to those who do.

A Revenue spokesman said it had many sources of information on tax dodgers and that these people could not hope to slip away undetected by simply closing their accounts in Liechtenstein and moving their money elsewhere.

The Revenue’s counter-evasion tactics have proven hugely successful, particularly in the period since the introduction of self-assessment when many Revenue staff have been retrained to look at investigatory work.

To put this into context, the yield from the Revenue’s counter evasion work has increased dramatically over the past 15 years, having gone from £1.13bn in 1991/92 to more than £12.8bn in 2007/08.

Encouraged by this success, the Revenue has now announced that it intends to spend £1bn, equal to 25% of its entire budget, on enforcement and compliance this year.

The world is becoming a very much smaller place for tax evaders and time is running out. They would be well advised to come clean with the Revenue and prepare a full disclosure report.

This article first appeared on the BBC’s website on 12 August 2009

Ronnie Ludwig

Partner, Saffery Champness

OWNERS of overseas holiday properties have been given a window of opportunity in which to claim valuable tax perks.

In the 2009 Budget the Chancellor announced that the tax treatment of qualifying furnished holiday lettings (FHL) is to be extended to all properties in the European Economic Area until 2010. After that date this treatment will be abolished for all properties, whether in the UK or elsewhere, and so clearly this represents an opportunity for owners of qualifying foreign property.

Property qualifies as an FHL if it is available for holiday letting on a commercial basis for at least 140 days a year, and is actually let commercially for at least 70 days in a twelve month period. It must not be let continuously to the same person for more than 31 days in a seven month period.

The extension of the rules means that owners of qualifying properties will be treated for UK tax purposes in exactly the same way as those who own qualifying properties in the UK, and gives owners the chance to claim capital allowances and loss relief against other income or capital gains.

It also means that UK taxpayers who have sold overseas properties in recent years may be able to claim reliefs such as business asset rollover relief. This is where the gain arising on the disposal of a property may be rolled over into the acquisition of a new qualifying property or other business asset if the new property is acquired within three years of the disposal of the old one.

Assuming that the property qualifies as a FHL, it should be possible to offset any losses arising on the foreign property against general UK tax liabilities, but only up to 6 April 2010. The earliest year which can be opened up to claim FHL tax treatment is 2006/07 or, for corporation tax, accounting periods ending on or after 31 December 2006. However the deadline for lodging an amendment to the 2006/07 tax returns expires on 31 July, so prompt action is necessary.

Other tax reliefs which may be claimed include relief for pension fund contributions, entrepreneurs’ relief (which means that on sale any UK capital gains tax will be limited to 10 per cent on the first £1 million of gains), loss relief carried forward to set against future profits, and terminal loss relief where losses on termination of the trade may be carried back to set off against profits up to three years earlier. Unfortunately, if the foreign property would not qualify as an FHL, it will not be possible to offset any losses arising against general UK tax liabilities, or indeed to claim many of their reliefs referred to above.

Professional advice should be taken however, especially where the ownership has been structured through a foreign company.

Ronnie Ludwig is a Partner in the Private Wealth Group at Saffery Champness.

This article first appeared in The Scotsman