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Family Law Week’s Budget Briefing 2014

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 family lawyers.

Jan Ellis, chartered accountant, Ellis Foster

Jan Ellis, Chartered Accountant and Partner, Ellis Foster LLP

The 2014 budget had a focus on "if you're a maker, a doer or a saver, this Budget is for you".  Again, much of the content had been pre-announced, either in the Autumn Statement or in draft legislation published beforehand, although a dramatic change to money-purchase personal pension schemes was included at the end.

Income tax
There is no change in the main basic and higher rates of income tax.  As announced last year, personal allowances go up to £10,000 in 2014/15 and the basic rate band is £31,865 for 2014/15.  The top-rate of income tax remains at 45% (but is likely to increase again to 50% if there is a change of government in May 2015).  Personal allowances are lost when income reaches £100,000.  The complicated rules for the 10% savings rate are abolished.

Finance Bill 2014 will allow basic-rate married couples (only, including civil partners) to transfer up to £1,050 of their personal allowances to each other, with effect from April 2105.

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 £10,900 to £11,000 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.

Note a change in the CGT rules with effect from 6 April 2014 relating to the CGT position of properties which have been a main residence but are no longer occupied as such.  This is particularly relevant to divorced or separated couples who own a home jointly and one party has moved out – including properties dealt with under Martin orders or Mesher orders. 

The general rule is that a "main residence" is exempt from CGT on sale.  Married couples are allowed one tax-free main residence between them.  If a person changes their main residence, historically the last three years of ownership of property 1 continues to be tax-free, after the purchase of property 2, even if property 1 is not then occupied as the person's main residence.  This was to allow time in a slow housing market for the property to be sold (although perhaps abused by a number of MPs).

Under s225B TCGA (formerly ESC D6), a divorcing spouse (or civil partner but not unmarried separating couples) could continue to claim main residence relief on a property he owned or owned jointly with the other spouse, who continued to occupy it after he moved out, provided the spouse who leaves the property does not elect for a second property to be his tax-free residence. 

This meant that if a property was likely to be sold within 3 years – for example by reason of the children's ages – and the non-occupying spouse has bought a new home, and in particular if the property market was rising, it would make sense for the non-occupying spouse not to elect under s225B but to rely on the "last 3 years' relief".

With effect from 6 April 2014, the "last 3 years'" rule is to halve, so that tax is potentially due if the property is not occupied by its owner for more than 18 months before being sold.

This potentially changes the maths, and so clients not occupying the FMH should assess their position.

Inheritance tax
No change in the rates of the nil rate band, which remains at £325,000.  Remember that for IHT purposes a spouse is 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 is now £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"). 

The top corporation tax rate moves down to 21% in 2014 and aligns with the small companies' rate at 20% from April 2015. 

An exemption for the first £2,000 of employer's NIC comes into effect from April 2014.  Note this is not available to all employers: specifically excluded are employers of nannies, gardeners, chauffeurs etc. 

The Seed Enterprise Investment Relief scheme for investment into the smallest companies becomes permanent.

Various changes have been made to accelerate capital allowances and alleviate environmental taxes on manufacturing companies – the "maker" element of the budget headline.

Property taxes
Following on from 2012's increases in stamp duty land tax, new tax charges were introduced in 2013 on "non-natural persons" owning residential property costing more than £2m – namely an annual property tax and capital gains tax (at 28%) on the increase in value on sale of residential properties over the April 2013 value.  New bands have now been introduced, extending these taxes.  The £2m threshold for both taxes to apply is dropping to £1m in 2014 and a relatively modest £500,000 in April 2015.  These rules are complex and do not apply to rented property or development property, 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 was 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 £2,000 pa per child towards childcare costs for children under 12 (or disabled children under 16) in a new initiative (up from £1,200 when first announced last year).  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.

Anti-avoidance rules
The much-heralded "general anti-abuse rule" took effect in 2013 effect in an attempt to reduce "aggressive" but legal tax avoidance, but there has been no case law yet on its operation. 

Changes are introduced to LLPs where partners have historically been treated as self-employed, to move "employee partners" back into PAYE and to partnerships whose partners include both individuals and companies ("mixed partnerships") to counter perceived abuse.

New "false self-employment" rules are introduced to ensure people who should be employees are not treated as self-employed (although the consultation document showed overly-wide poorly-drafted rules).

People buying packaged tax schemes (which have generally failed when challenged in the Courts) will be required to pay the tax in the first instance as if the scheme had not been entered into, but will receive a repayment and interest if the scheme is later held to be effective.

Various other loopholes are closed.

Sin taxes
A mixed bag, with reductions to some long-haul air passenger duty rates and beer duty; freezing of duty on spirits and the usual increases to gaming duty, tobacco duty and the duty on wine and high-strength cider.  Vehicle excise duty, car benefit taxes and fuel taxes all go up.

Savings and pensions
Two surprises.  First, a simplification of ISAs.  The old Cash Isa and Shares ISA are merged into a New Isa, with a £15,000 annual investment limit from July 2014 and the ability to move existing ISA investments in and out of cash without restrictions.

Second, a simplification of money-purchase pension schemes, broadly eliminating the requirement to buy an annuity and simplifying the draw-down rules for those not wanting an annuity.  This initiative comprises a range of measures in response to various newspapers' campaigns against sleep-walking into an annuity with the historic pension adviser.

Finally, a new NS&I savings scheme of the over-65s, and increases to premium bond limits and re-instatement of two monthly £1m prizes.

Note that this is the last full budget speech before the 2015 election – the extent to which promises made in next year's speech become law will be dependent on the result at the polls.  Perhaps because of this, a number of measures in this year's speech have a long reach: various things have been announced which will come into effect in several years' time.  This is a trick learned from the previous government. 

Jan Ellis