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Family Law Week’s Budget Briefing 2013

Jan Ellis, chartered accountant, of Ellis Foster LLP, a firm which specialises in advising family lawyers on tax-related family law issues, explains the budget changes of most relevance to practitioners.

Jan Ellis, Chartered Accountant, Ellis Foster LLP





Jan Ellis
, Chartered Accountant, Ellis Foster LLP

The 2013 budget had a focus on "people who aspire to work hard and get on".  Much of the content had been pre-announced, either in the Autumn Statement or in draft legislation published before-hand.  Additionally, it seems sensible to look now at the impact of other changes due later in the year.

Income tax
There is no change in the basic and higher rates of income tax, but from the start of the new tax year, employees who were previously "contracted out" of the higher rates of NIC will now be paying more.  Personal allowances go up to £9,440 for 2013/14 and to £10,000 in 2014/15. 

The basic rate band is £32,010 for 2013/14 and £31,865 for 2014/15.  The top-rate of income tax will drop to 45% from 50% in April 2013.  Personal allowances are lost when income reaches £100,000.  The complicated rules for the 10% savings rate are abolished.

Capital gains tax
There are no changes in the rates of CGT: these are 10% with entrepreneurs' relief (up to a lifetime total of £10m-worth of gains); 18% for gains made by a basic-rate taxpayer; and 28% for a higher or top-rate taxpayer, or who is brought into higher rates when taxable income and gains are aggregated.  The CGT annual exemption goes up from £10,600 to £10,900 for 2013/14. 

Remember that assets transferred between husband and wife or civil partners are on a no gain/ no loss basis while married and in the tax year of separation, and are deemed to be at market value after this.

Inheritance tax
No change in the rates of the nil rate band, which remains at £325,000.  This is intended to help fund the cap on care home costs that will be introduced in 2016.  Remember that for IHT purposes you are treated as married until the date of the decree absolute. 

Assets transferred between spouses or civil partners are not PETs for IHT purposes, provided that both partners are UK domiciled or deemed domiciled, or neither partner is, but from April 2013, where there is a domicile "mis-match" the amount of tax-free gift permitted by a UK spouse to a non-UK spouse will increase from £55,000 (where it has languished for many years) to £325,000, or the non-UK domiciled recipient may elect to be treated as UK domiciled (so that they can receive their spouse's estate tax-free on "first death" but a full UK IHT charge arises on "second death"). 

Residence rules
The UK introduces a new statutory tax residence test for individuals with effect from 6 April 2013.  This has been well-publicised, with draft rules, a consultation exercise, revisions and draft legislation.  The new rules work on a tick-box basis, by reference to the number of days spent in the UK in a tax year, and the number of "factors" you satisfy if your days in the UK are too many for you to be definitely not UK resident and too few for you otherwise to be definitely UK resident.  The new rules seem quite sensible: we shall see how they work in practice. 

These rules are important for international clients: you only pay CGT if you are UK resident (with anti-avoidance rules for people who move in and out of the UK within five years) and you tend to pay UK income tax only on UK source-income if you are not UK resident.  The rules on residence are different from those on domicile, except that for IHT purposes, you are "deemed" to have a UK domicile if you have been UK resident for 17 out of the last 20 years.

Companies, owner-managed businesses and share incentives
The top corporation tax rate moves down to 21% in 2013 and aligns with the small companies' rate at 20% from April 2015.  A new tax relief will cover the first £2,000 of employer's NIC from April 2014.  Small unincorporated businesses will be able to prepare accounts on a cash basis from April 2013.

Welcome improvements to EMI schemes: if you hold an EMI option for more than 12 months, you will be eligible for entrepreneurs' relief regardless of how many shares you have or when the option was exercised.  This, combined with the increases in the amount of entrepreneurs' relief, makes EMI options in a company which is likely to sell in the future more valuable.  Remember that these options can only be held by an employee in the business and may not be transferred, so that there is no scope to "equalise" options between separating spouses.  Note though that if the options may only be exercised on a sale and this does not happen, or happens outside the 10-year maximum "life" of an EMI option, an employee's EMI options may never be exercisable or worth anything.

Fiddling to the edges of the new "employee shareholder" regime, due to come into effect in September 2013, including a new CGT relief announced for 2014 on the sale of a controlling shareholding into an employee-ownership structure.

Property taxes
Following on from last year's increases in stamp duty land tax, "non-natural persons" will be within a new regime for annual property tax on residential properties worth more than £2m and within capital gains tax (at 28%) on the increase in value on sale of residential properties over the April 2013 value.  These rules are complex, but may be relevant in "big money" divorces and Schedule 1 cases where a non-UK father/husband provides UK property via a non-UK company.  Specialist advice will be essential here.

Child benefits and childcare
From 7 January 2013, child benefit is effectively withdrawn for households where an earner has income of £60,000 or more and starts to be withdrawn if their income is over £50,000.  This rule applies to married couples and civil partners, but also – importantly – unmarried couples living together.  Child benefit is usually paid to the mother; if she continues to claim it but her husband earns more than £60,000, she receives the benefit but he pays additional tax so that it is clawed-back.   This gives the potential for added difficulty on divorce.  If the mother moves in with a new partner, she should stop claiming the benefit if she knows that his earnings are more than £60,000, otherwise he will face the tax claw-back.  If parents live apart, the benefit will usually be paid to the parent where the child lives, but may be paid to the parent who supports the child.

From autumn 2015, working families will receive up to £1,200pa per child towards childcare costs in a new initiative.  This will operate as a voucher scheme, whereby the family opens an on-line "voucher account" and for every 80p they put in the Government adds 20p.  To be eligible "all parents in the household must be working, not receiving tax credits or universal credit, and neither earning over £150,000pa".  This has already faced heavy criticism in the press for not being available for stay-at-home mothers and hence anti-traditional family.

Universal credit
Note that universal credit will replace child tax credits, working tax credits, income-based job-seekers' allowance, income-related employment and support allowance, income support and housing benefit. It will be rolled out initially in Greater Manchester and Cheshire in April 2013 and nationwide from October 2013. 

Anti-avoidance rules
The much-heralded "general anti-abuse rule" takes effect in an attempt to reduce "aggressive" but legal tax avoidance. A number of specific tax loopholes are closed.

'Sin' taxes
Index-linked increases also to fuel duty, vehicle excise duty and air passenger duty. 

We have the usual increases to gaming duty, tobacco duty and the duty on wine and spirits, but a bit of good news for brewers and beer-drinkers, as beer duty is reduced. Cheers!