Overview

The Chancellor's Budget announced a number of welcome changes clearly designed to rejuvenate investment in the UK. Entrepreneurs in particular are set to benefit, with significant positive changes in relation to Enterprise Investment Scheme (EIS) and entrepreneurs' relief. Furthermore the reduction of the rates of corporation tax should make the UK more competitive.

Changes announced to the taxation of non-UK domiciled individuals were less draconian than many had feared, with an attractive new exemption introduced for those who claim the remittance basis and make commercial investments in UK businesses.

We set out below a brief summary of the key changes announced in the Budget.

Corporation Tax Rates

Changes have been announced to make further reductions to corporation tax rates as follows:

• the main rate of corporation tax will be 26% for the year commencing 1 April 2011;
• the main rate of corporation tax will be 25% for the year commencing 1 April 2012; and
• the small profits rate of corporation tax will be 20% from the year commencing 1 April 2011.

EIS and Venture Capital Trusts (VCTs)

With effect from 6 April 2011 the rate of income tax relief given under EIS will be increased from 20% to 30%.
With effect from 6 April 2012 there will be the following increases:

• the thresholds for the size of qualifying company for both EIS and VCTs to fewer than 250 employees and to the company having no more than £15million of gross assets before the investment;
• the annual amount that can be invested though both EIS and VCTs in an individual company to £10million; and
• the annual amount that an individual can invest through EIS to £1million.

These changes are both subject to State aid approval, but will be a welcome incentive for investors. Furthermore, the Government will consult on additional changes to the schemes, including proposals to give greater support through EIS for seed investment.

Entrepreneurs' Relief

The lifetime limit on capital gains qualifying for entrepreneurs' relief will be increased from £5 million to £10 million with effect from 6 April 2011. Subject to satisfying certain conditions gains on disposals of entrepreneurial businesses by individuals and certain trustees qualify for entrepreneurs' relief and are taxed at a rate of 10% rather than 28%. It had been hoped that the limit would be lifted completely from the perspective of investors but at least the move is in the right direction.

Income Tax and NICs Reform

The Government has announced that it will consult on the possible integration of the operation of income tax and National Insurance contributions (NICs). The aim is for simplification but there will inevitably be a wide range of policy and implementation hurdles to get across. A consultation document will be published later this year setting out the differences in the current income tax and National Insurance systems, and options to address these.

SDLT Anti-Avoidance

Legislation will be introduced in the Finance Bill 2011 to clarify that certain SDLT avoidance schemes do not work. The changes will clarify the relationship between the rules for 'sub-sales' and alternative finance, narrow the definition of 'financial institution' for the purposes of alternative finance and counter the effect of an engineered reduction in market value when properties are exchanged. They are effective on or after 24 March 2011.

Taxation of UK Resident and Non-UK Domiciliaries ("Res Non Doms")

• The remittance basis charge will increase to £50,000 for Res Non Doms who have been resident in the UK for 12 or more years. The £30,000 charge will be retained for those who have been resident for at least seven years but less than twelve years.
• Res Non Doms will not be taxed on remittances to the UK where such remittances are for the purpose of commercial investment in UK businesses.

The Government will consult on these proposed changes in June, ahead of publishing draft legislation in the Finance Bill 2012.

The Government has stated it is aware of the contribution Res Non Doms make to the economy. Furthermore, the Chancellor announced that apart from the changes listed above, there will be no further changes (from this Government) on the taxation of Res Non Doms. In light of this statement, the increase to £50,000 for individuals who have been resident for 12 or more years is perhaps more palatable. However, Res Non Doms who are affected by this change will need to consider whether it is still worthwhile claiming the remittance basis.

Statutory Residence Test

The current rules that determine tax residence for individuals are unclear and complicated. In addition to limited statutory rules, taxpayers are obliged to follow relevant caselaw and HMRC's own published guidance (that can be changed or withdrawn at any time). The Government will issue a consultation document in June and intends to implement the new test from April 2012. The greater certainty that this should result in is to be welcomed.

Charity Changes

The maximum value of the benefits that individuals and companies may receive as a result of making a donation to a charity of more than £10,000 under Gift Aid will be increased from £500 to £2,500. The new limit will still be subject to the existing rule that the benefit must not exceed 5% of the gift.

From April 2013 charities that receive small donations of £10 or less will be able to apply for a Gift Aid style repayment without the need to obtain Gift Aid declarations for those donations. The amount of small donations on which the new repayment can be claimed will be capped at £5,000 per year. In order to qualify for this new repayment, charities will need to have been recognised by HMRC for gift aid purposes for at least three years, have been operating Gift Aid successfully throughout that time and have a good tax compliance record.

The Government is considering introducing a tax reduction for taxpayers who give a work of art or historical object of national importance to the State. A consultation on the proposal will take place over the summer.

For deaths occurring on or after 6 April 2012, a reduced rate of inheritance tax will apply where 10% or more of a deceased's net estate (after deducting IHT exemptions, reliefs and the nil rate band) is left to charity. In those cases the current 40% rate will be reduced to 36%.

23 March 2011