The Spring Budget for individuals

Pensions limits

The government announced in the Spring Budget that certain measures regarding pension contributions will be adjusted to incentivise individuals back to work. Currently the Annual Allowance, being the amount an individual, their employer or any third party can pay into any person’s pension plans each tax year is set at £40,000. This will be increased to £60,000 from the 2023-24 tax year onward.

The threshold at which the Annual Allowance is restricted for high-income individuals is also increasing from £240,000 to £260,000, (again from 6 April 2023) and the minimum amount after taper is to be increased. From 6 April an individual will see their Annual Allowance reduced by £1 for every £2 their ‘adjusted income’ exceeds £260,000, to a minimum of £10,000 (up from the current £4,000). Adjusted income includes employer pension contributions, salary, pension receipts, interest, dividends and most other sources of income.

It is possible for individuals to carry forward unused Annual Allowances from the previous three years to make larger payments. Where this is done the smaller historical annual allowance rates and tapering thresholds will still need to be applied.

In addition, the government will be removing the Lifetime Allowance charge from 6 April 2023, and then legislating to remove the Lifetime Allowance altogether from April 2024. The Lifetime Allowance is the total amount an individual can have in all registered pension schemes without incurring additional tax charges and is currently set at £1,073,100. Previously a 55% tax charge applied where amounts above this threshold were withdrawn as a lump sum, or 25% if paid as a pension. There were a number of historical protective elections that preserved the older higher limits provided no further funds were added and these may now need to be reviewed.

Where the Lifetime Allowance has not been exceeded, an individual that starts drawing down from their pension can also choose to receive a tax-free lump sum payment of up to 25% of the pension fund’s capital value. Going forward, although the Lifetime Allowance itself will be abolished, the maximum for this tax-free lump sum will be set at the current level of £268,275 (25% of £1,073,100). This will be relevant for individuals with pension funds that exceed the previous lifetime limit as it will limit the amount they can receive as a lump sum tax-free. Individuals who have a protected right to take a higher amount due to historical elections will continue be able to do so. From 6 April 2023 amounts paid out as a lump sum in excess of the tax-free amount will be taxed at the individual’s marginal rate, not the 55% rate that previously applied.

Finally on pensions, once an individual starts drawing money down from a defined contribution pension, a separate limit (the Money Purchase Annual Allowance) that can apply to any further pension contributions they make has also been uplifted from £4,000 to £10,000, to match the minimum tapered Annual Allowance.

Elective accruals for carried interest

For UK tax purposes, capital gains on private equity carried interest are taxed when the underlying investment fund sells an asset. This means that tax only arises when the carried interest holder actually receives cash. However, in some countries, carried interest holders are subject to tax on unrealised gains. In some cases, this mismatch can restrict double tax relief, leading to double taxation.

Legislation will be introduced to allow a carried interest holder to make an irrevocable election for their carried interest to be taxed in the UK on an accruals basis. In other words, they would be taxed on unrealised gains of the underlying fund.

Although this would allow double tax relief to be claimed, it will also accelerate when UK tax arises. HMRC estimates that more tax will be raised as a result in each of the next five tax years – £120 million in total.

Taxation of environmental land management and ecosystem service markets

The government is exploring elements of the tax treatment of environmental land management and ecosystem service markets and are seeking views on the taxation treatment and the potential expansion of inheritance tax (IHT) Agricultural Property Relief (APR) – the consultation closes on 9 June 2023.

Brexit has led to the most significant reforms in agricultural policy in decades, as the UK moves towards the new Environmental Land Management Schemes. At the same time, the government is putting in place a framework to support higher private investment in nature (‘nature markets’), including existing schemes such as the UK Woodland Carbon Code. Nature markets enable farmers and land managers to attract private investment to increase the provision of ecosystem services such as carbon sequestration and biodiversity, but there is uncertainty around their tax treatment. The production and sale of units generated by these markets has consequences in multiple areas of tax, including VAT, income and corporation tax, IHT and stamp taxes, and the interaction with existing tax law, particularly the commercial operations of woodlands exemptions, is unclear. Consultation on this issue is welcome and will hopefully lead to less ambiguity for those operating in this area.

The second part of the consultation looks at the scope of APR and whether, in its current form, it could be seen as a barrier to landowners and farmers making long-term land use change from agricultural to environmental. In order to be eligible for APR, the property must have been owned and occupied for agricultural purposes for two years if occupied by the owner or seven years if occupied by someone else, such as a tenant farmer. Land that has been taken out of agricultural production over an extended period for an environmental scheme is unlikely to qualify for APR (although could still qualify for Business Property Relief). It seems clear from the consultation document that the government is minded to make changes to the relief to support its environmental objectives; these, however, will need to be balanced with the need to avoid unexpected Exchequer consequences.

The government is also considering restricting the 100% APR to farm business tenancies of at least eight or more years to encourage landlords to grant long-term tenancy agreements and encourage tenants to enter long term environmental agreements.

Changes to Business Property Relief (BPR) are not currently being considered.

Geographical scope of APR

In Finance Act 2009, there was an extension to APR to include agricultural land that was situated inside the European Economic Area (EEA). The extension will cease with effect from 6 April 2024, and the government will introduce legislation to restrict the scope of APR and woodlands relief to property in the UK. Property located in the EEA, the Channel Islands and the Isle of Man will be treated the same as other property located outside the UK.

Low income trusts and estates

A package of simplification measures has been announced to reduce reporting for trusts and deceased person’s estates. These will be effective from April 2024, with the exception of the technical amendments which will take place from April 2023. The package includes:

• Trusts and estates with income up to £500 will not pay tax on that income as it arises;
• The default basic rate and dividend ordinary rate of tax that applies to the first £1,000 slice of discretionary trust income will be removed;
• Beneficiaries of UK estates will not pay tax on income distributed to them within the £500 limit for personal representatives; and
• Technical amendments will be introduced to ensure beneficiaries of estates savings allowances and tax credits operate correctly.

Capital gains assessment time period

The government will legislate to change the assessment time period of chargeable gains or allowable losses on the disposal of an asset under an unconditional contract, ie contracts where there are no conditions attached to the sale.

Currently, the tax point for most disposals is the date of exchange of contract rather than the date of completion. Under the changes the relevant notification periods and assessment and claim time limits will operate by reference to the tax year or accounting period when a disposal is completed rather than the tax year or period in which the contract was exchanged.

The new rules will not apply where the completion or transfer of an asset takes place within six months of the end of the tax year or period in which the disposal is treated as taking place (for capital gains tax (CGT) purposes) or within 12 months of the end of the accounting period (for corporation tax purposes.)

The changes will apply in relation to contracts entered into on or after 1 April 2023 for corporation tax and 6 April 2023 for CGT.

Restriction of charitable reliefs to UK charities

The government has announced that they will restrict the availability of charitable reliefs to only UK charities or Community Amateur Sports Clubs (CASCs) by changing the tax definition of a charity.

Currently, any charity within the UK, the EU or the EEA can qualify for tax relief in the UK but from 15 March 2023 only those charities and CASCs that come within the jurisdiction of the High Court in England, Wales or Northern Ireland, or the Court of Session in Scotland will qualify.

This will impact Gift Aid claims on donations to non-UK charities, as well as potential inheritance tax planning where the beneficiary of a will is a non-UK charity.

For non-UK charities and CASCs that have asserted their status for charitable tax reliefs on 15 March 2023 there will be a transitional period until April 2024. From April 2024, all non-UK charities and CASCs will no longer be eligible to claim UK charitable tax reliefs.

Digitisation

Despite December’s announcement deferring the implementation of Making Tax Digital for income tax (MTD ITSA) to 2026 at the earliest, the government remains committed to increasing digitisation in the personal tax system. A discussion paper published alongside the Budget sets out plans to increase the level of digital interaction that taxpayers have with HMRC, with a consequential reduction in contact by post and phone. Work here is likely to be centred on the Single Customer Account (SCA), which will pull together information currently held in taxpayers’ Personal Tax Accounts and Business Tax Accounts into a single place. The SCA is intended to have significantly better functionality than the existing online accounts, allowing taxpayers to do more online, and HMRC are intending for the first phase of changes to be in place by 2025.

An improved online experience for taxpayers would mark a positive step towards realising some of the benefits envisaged by the original Making Tax Digital announcements back in 2015, and could help taxpayers and their agents interact more efficiently with HMRC. Given the very real pressures on HMRC service levels which we have seen since the pandemic, there are real gains here if HMRC can deliver an effective system. With no new funding for HMRC customer services included in this Budget, it is difficult to see how service levels will significantly improve in the interim, which means taxpayers should be prepared for continuing delays and backlogs.

The two-year delay to the main MTD ITSA programme will allow for further work to ensure that the reporting systems are robust and, we hope, designed in such a way that allows HMRC to access the information it needs with as little additional burden on the taxpayer as possible. Further consultation is expected on whether and how MTD ITSA can work effectively for those with relatively low (between £10,000 and £30,000) income from property or business. One of HMRC’s key aims from the MTD programme is to reduce the ‘Tax Gap’, and particularly tax lost as a result of errors and mistakes by small businesses. The latest government figures show that the deferral of MTD ITSA is expected to lead to a significant reduction in the projected tax take in the medium term: ultimately, therefore, whilst we may see the shape of MTD change for those with lower incomes, the direct incentive to move taxpayers to a more digital system remains.