Concluding part of survey of Budget and Finance Act rounds up important changes affecting trusts, charities, business taxation and the disclosure requirements

Previous articles have dealt with what were described as the “basics” of the Budget/Finance Act (July); and the very much more than basic changes made to trusts, in relation to inheritance tax and (consequentially) capital gains tax (August). As is all too typical of the recent past, the result of the Budget was a very large Finance Act (180 sections and 26 schedules, over a mind-numbing 504 pages). There was a great deal more of concern to solicitors within these changes; and the following paragraphs summarise some of the more important developments.

More on trusts

Even without the inheritance tax bombshell, there would have been quite sufficient to occupy trust practitioners, with a range of changes in relation to income tax and capital gains tax as they affect trusts. HMRC tried to claim, somewhat disingenuously, that they had consulted on at least some of the IHT changes to trusts, notably the reduction from 25 to 18 in the age of vesting for accumulation and maintenance trusts. Although there was no consultation in relation to inheritance tax, there was some consultation in relation to these changes, and draft legislation was available from January. Whether the end result represents a consensus view is of course another matter!

The changes build on a process started in Finance Act 2005, which included a “standard rate band” for discretionary trusts. The new legislation is found in Finance Act 2006, schedules 12 and 13, amending all of ICTA 1988, TCGA1992, and the Income Tax (Trading and Other Income) Act 2005, over many pages.

Drawing from the relevant press release, the changes include:

(a) an increase of the standard rate band from £500 to £1,000;

(b) a common meaning of “settled property”, leading to a common meaning of “settlement”;

(c) a common meaning of “settlor”;

(d) provision for the trustees of a settlement to be treated as a single person;

(e) a common test to determine whether the trustees of a settlement are resident in the United Kingdom;

(f) provision for the trustees of a settlement to elect that a sub-fund of the settlement be treated as a separate settlement in certain circumstances;

(g) the income of settlor-interested settlements is to be treated as though it had arisen directly to the settlor;

(h) a measure to legislate the existing practice of not taxing beneficiaries who receive discretionary income payments from the trustees of settlor-interested trusts; and

(i) modifications to some of the provisions in the TCGA which determine whether a person who is a settlor in relation to a settlement has an interest in the settlement, so that account is taken of dependent minor children.

The last change mentioned is an extremely serious one and, taken with the IHT changes, is a further strike against the use of lifetime trusts for young children. And as is seemingly always the case, the increased complications are considerable.


There are a number of new restrictions placed on charities. These are described and intended as anti-avoidance measures, but as ever with such measures, it is possible that they will catch innocent transactions. The details are in FA 2006, ss 54-58.

The first set of measures is intended to restrict the relief available to a charity where it engages in certain transactions with a substantial donor. These are designed to stop the exploitation of what might be thought of as “circular” transactions, whereby a donor gets tax relief, but a charity then directs funds or assets back to the donor.

There are also more basic restrictions where a charity incurs non-charitable expenditure, so that again the charity’s tax relief is restricted.

The next set of measures further restrict the benefits that can be returned to companies (and not just close companies) where such companies make donations to charities.

Finally, there is a relaxation of the rules in relation to trading by charities, so that tax relief is available where a charity carries on a trade only part of which is for a primary purpose of the charity.

Inheritance tax and pensions

Pension A-day has come and gone, totally changing the scheme of tax relief for pensions and much else besides. The government continues to worry that the reliefs will be exploited in ways which were not intended.

This has led to extensive legislation in relation to inheritance tax (see FA 2006, schedule 22). This includes the statutory enactment of a practice first announced in 1992, whereby certain failures of a pension scheme member to take up rights available to them will not attract IHT, where that failure leads to enhanced benefits being paid elsewhere.

The bulk of the new legislation relates to the situation where a pension scheme member dies over the age of 75, having secured their income by an alternatively secured pension rather than an annuity. This could lead to funds unused at the member’s death passing to his beneficiaries. The rule is therefore to be that after use by a spouse, civil partner or dependant, such funds as remain will be taxed as if they were part of the deceased person’s estate. This could lead to a charge some time after the death. It is a new problem which may delay the final completion of executry administration. The government seems determined to stop pension arrangements being used as any form of estate planning.

There is a further IHT anti-avoidance provision, bringing back in from the category of excluded property certain purchased interests in foreign trusts (FA 2006, s 157).

There are also substantial other changes in the pensions regime, with more than 40 pages devoted to implementing the restriction on self-directed pension funds investing in residential or tangible moveable property, which caused such rage among pensions and other advisers (as well as their clients) who felt that they had been misled (FA 2006, schedule 21).

Taxation of savings and investment

Perhaps the most important change in relation to investment in this year’s Finance Act will turn out to be the introduction of the framework for real estate investment trusts. This is of particular importance for the property industry; the subject will not be discussed further here as it has been dealt with by James Aitken,

“The Chancellor gets this REIT”, Journal, July, 24.

Nowhere is the hokey-cokey Chancellor more evident than in changes to the tax reliefs for venture capital (FA 2006, s 91  and schedule 14).

Thus with regard to venture capital trusts, the new rate of income tax relief for investors will be 30%. (This was 40% for the previous two years, and 20% before that.) The minimum period for which VCT investors must hold their shares will rise to five years – which is where that period was when reliefs of this sort started.

In relation to the enterprise investment scheme, the annual investment limit for income tax relief is doubled to £400,000.

The limit in the maximum size of companies able to raise money under both schemes (“the gross assets test”) is reduced to £7 million before investment and £8 million afterwards (from £16 million and £15 million respectively).

It seems that the previous system of tax relief for investment in films produced what was regarded as unjustified tax relief, as well as some very bad films. A very large part of FA 2006 (ss 31-53 and schedules 4-5) is devoted to the details of a new scheme, directed towards film production companies.

The further extension of stamp duty reliefs for alternative finance arrangements (Islamic mortgages) was noted in an earlier article (July). There have also been doubtless less welcome extensions of special arrangements in relation to other taxes, so that the alternative finance equivalent of interest is charged to income tax on the same basis as if it was interest. In addition, it is put beyond doubt that the alternative finance equivalent of free or cheap loans from employers is to be taxed on employees in the same way as such loans themselves. HMRC have paved the way for extending such arrangements to be taxed as if interest actually existed, by way of future regulations, as and when they perceive the need arising (FA 2006, ss 95-98). It remains to be seen whether these rules will be used either by taxpayers or by HMRC in situations where religious sensibilities to interest are non-existent.

More on company/business tax

The changes in the corporation tax rates, telegraphed in the pre-Budget report and dealt with in the July part of this survey, represent the most important business tax change in this Budget – certainly for the vast majority of companies. There were in addition a number of other changes.

The rate of first-year capital allowances for small business spending on most plant and machinery will be increased from 40% to 50% for a period of one year. (This is a traditional area of fluctuation.) The increased allowance will apply to spending incurred on or after 1 April 2006 for businesses in the charge to corporation tax, and on or after 6 April for businesses in the charge to income tax (FA 2006, s 30).

In a more specialised area there are changes to the capital allowance position for those leasing and those hiring plant and machinery, basically meaning that the right to claim allowances will more often be available to the hirer as opposed to the lessor. Further restrictions are made in relation to the disposal of leased plant and machinery. Moving up a level, there are new rules when leasing companies themselves are the subject of sale on the availability of unexpired allowances (FA 2006,ss 81-84 and schedules 8-10).

There are further developments in the important economic instrument of research and development tax credits (FA 2006, ss 28-29 and schedules 2-3).

There is confirmation of, but changes to, a previously announced restriction to the use of losses in the sale of companies. The new rules are aimed at deterring the contrived creation of corporate capital losses and the buying of capital gains and losses (FA 2006, ss 69-70).

There is a limited extension to corporation tax group relief, to take limited account of the ECJ decision in favour of the taxpayer in Marks & Spencer plc v Halsey. The new relief will only apply where all other possibilities of utilising the losses made abroad have been used up elsewhere – this may not be enough to satisfy EU law on this area.

In relation to employment, in another classic hokey-cokey change, the very recently introduced relief on the benefit of computers made available for private use is removed (FA 2006, s 61). The tax-free provision of mobile telephones to employees is to be restricted to one “apparatus” per employee, no doubt in fear of heavy use by employees’ children; but this benefit can now be provided by the use of tokens (FA 2006, s 60). Where cars are provided to employees, there is increased emphasis on those with low CO2 emissions (FA 2006, s 59).

Moving to VAT, the registration threshold increases to £61,000, and the deregistration threshold to £59,000. There are a number of increased regulatory requirements affecting deemed “at-risk” areas, such as mobile phones and computer chips. As if often the case, these requirements will affect the innocent as well as the guilty and purchasers of such items will require to be careful to comply with new requirements put on them. There are also increased record-keeping requirements in relation to certain products.

Disclosure and administration

This year’s Finance Act, like its recent predecessors, is peppered with anti-avoidance provisions, some of which are very complex indeed. A number of those at least derive from disclosures made by professional advisers and their clients under the existing law on this issue. In relation to direct taxes, the requirements initially related to financial products and employment schemes. So pleased are HMRC with their clypes’ charter that it is to be extended to all aspects of income tax, corporation tax and capital gains tax.

This has been done in two sets of regulations – the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006

(SI  2006/1543), and the Tax Avoidance Schemes (Information) (Amendment) Regulations 2006

(SI 2006/1544). The substantive rules are in the first set of regulations, which lay down a range of “hallmarks”, or descriptions of the type of scheme that must be notified to HMRC. These descriptions are exceptionally broad. Even if in many cases a lawyer may be protected from disclosure by duties of confidentiality, the client may have to make a disclosure. Of particular relevance may be situations where there are elements which a taxpayer may wish to keep confidential from HMRC, where a premium fee is involved (and this includes a fee contingent on the tax advantage being obtained), and where “standardised tax products” are used. Extreme care will be required in tax planning in relation to these regulations.

Another Budget announcement which did not lead to direct legislation in the Finance Act was the bringing forward of the dates by which self-assessment tax returns would be required. These were originally announced as going to be, from 2007-08, 30 September after the end of the tax year (paper returns), and 30 November (electronic). Another huge fuss ensued, again with the hokey-cokey result that the due date for electronic returns will remain at 31 January, while that for paper returns will come forward only to31 October.

Coming, going and getting back to where we started is now such an endemic part of our tax system that perhaps it should be an Olympic sport. Then it would fit in with the special arrangements (mainly reliefs) that are now provided for the 2012 games, in FA 2006 ss 65-68. There really is something for everyone in our dynamic system of tax changes.

    Alan R Barr, Brodies LLP and the University of Edinburgh

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