St James's Place Tax Guide, 2009-2010, 38th Edition

TAX GUIDE 2009–2010

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TAX GUIDE 2009–2010 WA LT E R S I N C L A I R ,

FCA

with B A R RY L I P K I N ,

L L B F C A AT I I T E P

© Fiscal Services Ltd 2009 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. The authors, the publishers, St. James’s Place, their assigns, their licensees and printers cannot accept responsibility for any loss to any person acting or refraining from action as a result of the material in this work. The views and opinions expressed herein are solely those of the authors and no endorsement of them by St. James’s Place should be inferred. Crown Copyright material is reproduced with the permission of the Controller of Her Majesty’s Stationery Office. The Lion logo is a Registered Trademark of St. James’s Place. First published 2009 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 13: 978–0–230 –57345–1 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. 10 9 8 7 6 5 4 3 2 1 18 17 16 15 14 13 12 11 10 09 Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

CONTENTS Preface by Sir Mark Weinberg

xv

Abbreviations used in the Guide

xvi xviii

Introduction

1

2

This year’s tax changes

1

1.1 1.2 1.3 1.4 1.5  1.7 1.8 1.9 1.10 1.11  1.13 1.14 1.15 1.16

1 1 2 2 2  3 3 3 4 4  5 5 5 6

The basis of your tax liability 2.1 2.2 2.3 2.4  2.6 2.7 2.8 2.9 

3

4

Introduction Income tax Tax on employments Business taxation Capital gains tax 7D[HIÀFLHQWLQYHVWPHQWV Trusts Pensions taxation Inheritance tax Anti-avoidance etc. International matters /DQGÀOOWD[ Value added tax Stamp duty National Insurance contributions Key rates and allowances 2009–10

Who is taxable? The taxes payable What income is taxable? Deduction of tax at source and tax credits 7KHGLVWLQFWLRQEHWZHHQFDSLWDODQGUHYHQXHSURÀWV Revenue and capital expenses Bank and building society interest Year of assessment Period of assessment less than full year :KHUHWRÀQGWKHODZ

7 7 7 7 8  9 10 11 11 

Personal reliefs

13

3.0 3.1 3.2 3.3 3.4

13 13 14 17 18

Personal reliefs at a glance 2009–10 Earned and unearned income Personal allowances Indexation of personal reliefs Working tax credit and child tax credit etc.

Annual payments and interest

20

4.1 4.2 4.3

20 21 21

Annual payments apart from interest What are annual payments? Interest payments

CONTENTS

vi 4.4 4.5 4.6 4.7

5

6

7

8

Interest paid for business purposes Tax relief for interest payments Loans for purchase and improvement of buildings and land Deduction of tax from mortgage interest payments

22 22 23 24

Computing your income tax bill

25

5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9

25 25 26 27 28 28 29 30 31 31

Income tax rates for 2009–10 Indexation of income tax bands What is total income? Total income – deductions Charges on income Deductions from tax payable Investment income The assessment and payment of your income tax Interest on overdue tax Fluctuating income

Husband, wife, civil partners and children

32

6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9

32 33 33 33 33 34 36 37 38

Independent taxation of husband, wife and civil partners When you marry or form a civil partnership Separate assessment Separate taxation of wife’s earnings Deeds of covenant The income of your children Death of husband or wife Divorce or separation Civil partners

Income from land and property

39

7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13  7.15 7.16

39 40 42 42 43 44 44 45 45 46 46 46 47 47 48 48

The current property income tax system Income from land and property Losses Assessment of land and property income Furnished lettings ‘Rent a room’ Holiday lettings The taxation of lease premiums Woodlands Dealing in property Transactions in land Agricultural land etc. Land sold and leased back /DQGÀOOWD[ Aggregates levy Real estate investment trusts (REITs)

Income from dividends and interest

49

8.0

49

Introduction

CONTENTS

8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 8.12 8.13

9

How dividends are taxed Interest paid on government securities etc. Bond washing – accrued income Interest not taxed at source Basis of charge for interest etc. not taxed at source Building society interest Bank interest Deep discount and deep gain securities Scrip dividend options Personal equity plan (PEP) Tax exempt special savings accounts (TESSAs) Individual savings account (ISA) Venture capital trusts (VCTs)

vii 49 52 53 54 54 55 55 56 57 57 58 58 59

Life assurance

61

9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12 9.13 9.14 9.15 9.16 9.17 9.18 9.19

61 61 61 62 62 63 64 65 65 66 66 67 68 68 68 69 69 70 70

Introduction Types of life assurance Qualifying policies Life assurance relief The taxation of life assurance policy proceeds How the gains on chargeable events are computed and taxed Top slicing relief Example: Top slicing Partial surrenders and excesses Example: Partial surrenders – excesses Inheritance tax ‘Key man’ policies Permanent health insurance Purchased life annuities Guaranteed income bonds European insurance policies Miscellaneous aspects Policies held by charities Policies effected by non-residents with UK companies

10 Income from employments and PAYE 10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 

Income Tax (Earnings and Pensions) Act 2003 (ITEPA) Former Schedule E Case I Former Schedule E Case II Former Schedule E Case III The distinction between self-employment and employment Employment outside the UK Amounts included in your income Expense payments for directors and others (form P11D) Deductions you may claim Share option and share incentive schemes Employee share ownership trusts (ESOTs) Retirement pension schemes &RPSHQVDWLRQIRUORVVRIRIÀFH

71 71 71 72 72 72 72 72 87 88 89 96 97 

CONTENTS

viii 10.13 10.14  10.16

The assessment basis The PAYE system 3URÀWUHODWHGSD\ Service companies etc. providing personal services

11 Income from businesses and professions 11.1 11.2 11.3  11.5 11.6 11.7 11.8 11.9 11.10 11.11 11.12 11.13 11.14 11.15 11.16 11.17 11.18 11.19 11.20 11.21 11.22 11.23 11.24 11.25 11.26 11.27 11.28 11.29 11.30 11.31 

Trades, professions and vocations What is trading? What business expenses are allowed? 7KHFRPSXWDWLRQRI\RXUDVVHVVDEOHSURÀWV Stock valuation Stock relief Basis of assessment Capital allowances Capital allowances on plant and machinery Fixtures – entitlement to capital allowances – integral features Industrial buildings Enterprise Zones Agricultural buildings allowance Phasing out of industrial buildings and agricultural buildings allowances Hotel buildings Assured tenancies Research and development (R&D) relief Patent rights and ‘know-how’ Dredging Mineral extraction Films etc. Relief for losses Loss in new business Terminal losses Business expansion scheme (BES) Enterprise investment scheme Earnings basis and cash basis Post-cessation receipts Class 4 National Insurance contributions Remediation of contaminated land Foster carers $OWHUQDWLYHÀQDQFHDUUDQJHPHQWV

12 Partnerships 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8

What is a partnership? Partnerships under the current year system Partnership losses Changes of partners Partnership capital gains Overseas partnerships European economic interest groupings Limited liability partnerships (LLPs)

99 100  105

108 108 108 109  114 114 115 116 117 127 128 130 130 131 131 131 132 133 133 133 134 135 137 137 137 137 139 140 140 141 141 

142 142 142 144 144 145 145 146 146

CONTENTS

13 Companies 13.1                             

Introduction &RUSRUDWLRQWD[RQSURÀWVHWF &RPSDQ\GLYLGHQGSD\PHQWV $FFRXQWLQJSHULRGVIRUFRUSRUDWLRQWD[ 5HSD\PHQWVXSSOHPHQWDQGLQWHUHVWRQRYHUSDLGFRUSRUDWLRQWD[ 6PDOOFRPSDQLHVUDWH 6WDUWLQJUDWHRIFRUSRUDWLRQWD[ $VVRFLDWHGFRPSDQLHV 7KHFRPSXWDWLRQRIDVVHVVDEOHSURÀWV 6SHFLDOFDSLWDODOORZDQFHVUXOHVIRUFRPSDQLHV /RVVHV 5HFRQVWUXFWLRQV *URXSORVVUHOLHI 7HUPLQDOORVVHV &RPSDQLHV·FDSLWDOJDLQVDQGFDSLWDOORVVHV *URXSVRIFRPSDQLHV $&7RQGLYLGHQGVGLVWULEXWLRQVHWF &ORVHFRPSDQLHV &ORVHLQYHVWPHQWKROGLQJFRPSDQLHV&,&V  1RQUHVLGHQWFRPSDQLHVWUDGLQJLQWKH8. 8.FRPSDQLHVZLWKRYHUVHDVLQFRPH &RQWUROOHGIRUHLJQFRPSDQLHV&)&V  'HPHUJHUV 8QTXRWHGFRPSDQ\SXUFKDVLQJLWVRZQVKDUHV )RUHLJQH[FKDQJHJDLQVDQGORVVHV ,QWHUHVWUDWHDQGFXUUHQF\FRQWUDFWVDQGRSWLRQV /RDQUHODWLRQVKLSV &RUSRUDWHYHQWXULQJVFKHPH&96  ,QWDQJLEOHÀ[HGDVVHWV ,QWHUQDWLRQDO$FFRXQWLQJ6WDQGDUGV,$6 

ix

147 147                             

14 Pensions

174

14.1            

174            

Introduction 7KHVWDWHVFKHPH 5HJLVWHUHGSHQVLRQVFKHPHV ,QSXWDOORZDQFHV %HQHÀWDOORZDQFHV $XWKRULVHGDQGXQDXWKRULVHGSD\PHQWV 5HWLUHPHQWEHQHÀWV 'HDWKEHQHÀWV 7UDQVLWLRQDOSURWHFWLRQVIRUSUH$'D\SHQVLRQULJKWV 'LYRUFH )XQGHGQRQUHJLVWHUHGVFKHPHV )XWXUHFKDQJHV 6SHFLDODQQXDODOORZDQFHFKDUJH

15 Miscellaneous aspects 

0LVFHOODQHRXVSURÀWV²SUHYLRXVO\6FKHGXOH'&DVH9,

199 

CONTENTS

x 15.2 15.3 15.4 15.5 15.6 15.7 15.8 15.9 15.10 15.11

Tax-free organisations Patent holders Authors’ copyright sales and royalties Sub-contractors Farming Building society arrangements Insolvents Lloyd’s underwriters Anti-avoidance provisions Tax defaulters

16 Returns, assessments and repayment claims 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9

Self-assessment – an overview Your tax return HM Revenue and Customs Appeals against assessments Tax appeal tribunals Investigatory powers of HMRC Repayment claims The collection of tax Back duty investigations and enquiries

17 Domicile and residence 17.1 17.2 17.3 17.4

The importance of domicile and residence What is domicile? What is residence? How to change your domicile and residence

18 Tax on foreign income 18.0 18.1 18.2 18.3 18.4 18.5 18.6 18.7

Remittance basis from 6 April 2008 Overseas income from investments and businesses The basis of assessment under Schedule D Cases IV and V (and subsequently) Professions conducted partly abroad Relief for overseas trading by individuals Earnings from employment overseas Double taxation relief Disclosure facilities for unreported offshore accounts etc.

19 Non-residents, visitors and immigrants 19.1 19.2 19.3 19.4 19.5 19.6 19.7 19.8

On what income are non-residents liable to UK tax? Interest paid to non-residents in respect of certain UK government securities Rules for taxation of visitors’ income When does a habitual visitor become a UK resident? The position of visiting diplomats Visiting entertainers and sportsmen The entitlement of certain non-residents to UK tax reliefs Immigrants

199 203 203 204 206 207 207 207 209 218

220 220 222 224 226 227 229 231 234 236

240 240 241 242 245

248 248 250 253 254 254 254 257 258

260 260 262 262 262 263 263 264 264

CONTENTS

20 Capital gains tax 20.1 20.2 20.3 20.4 20.5 20.6 20.7 20.8 20.9 20.10 20.11 20.12 20.13 20.14 20.15 20.16 20.17 20.18 20.19 20.20 20.21 20.22 20.23 20.24 20.25 20.26 20.27 20.28 20.29 20.30 20.31 20.32 20.33  20.35

Introduction What is a chargeable gain? Who is liable? Capital gains tax rates from 6 April 1988 Annual exemptions What assets are liable? What assets are exempted? What constitutes a disposal? How your chargeable gains are computed Re-basing to 31 March 1982 values Indexation allowance Taper relief Capital losses Losses on unquoted shares in trading companies Assessment and payment of capital gains tax Valuations Relief on sales of assets owned on 6 April 1965 Quoted shares and securities Exemption for corporate bonds (QCBs) Unquoted shares Part disposals A series of disposals Private residences Chattels sold for £6,000 or less Replacement of business assets – rollover relief Gifts of business assets General relief for gifts Gifts relief from 14 March 1989 Business retirement relief Entrepreneurs’ relief Charities Leases and other wasting assets Traded options &RPPRGLW\DQGÀQDQFLDOIXWXUHV Overseas aspects

21 The taxation of trusts and estates 21.1 21.2 21.3  21.5 21.6 21.7 21.8 21.9 21.10

Trusts Trusts – new tax system Trusts where the settlor is still living $FFXPXODWLRQVHWWOHPHQWVIRUWKHEHQHÀWRIWKHVHWWORU·VFKLOGUHQ Income of discretionary trusts etc. Trusts’ capital gains tax Trusts’ capital gains tax – business assets, gifts etc. Trusts’ capital gains tax – disposals of interests and distributions Foreign trusts Estates of deceased persons

xi

266 266 266 266 267 268 269 269 271 271 272 273 276 278 280 280 281 282 283 288 289 289 290 290 292 292 294 295 295 296 297 297 297 298  298

301 301 301 304  306 307 308 309 309 313

CONTENTS

xii

22 Inheritance tax 22.1 22.2 22.3 22.4 22.5 22.6 22.7 22.8 22.9 22.10 22.11 22.12 22.13 22.14 22.15 22.16 22.17 22.18 22.19 22.20 22.21 22.22 22.23 22.24 22.25 22.26 22.27 22.28 22.29 22.30 22.31 22.32

Introduction Property chargeable Potentially exempt transfers Deemed domicile Rate scale Tapering relief The former ten-year cumulation period The current seven-year cumulation period Indexation of rate bands Valuation Quoted securities passing on death Valuation of related property Land sold within four years of death Inheritance tax on death Excluded property Double taxation relief Exempt transfers Relief for business property Waivers of dividends and remuneration Conditional exemption for certain objects and buildings etc. Relief for agricultural property Woodlands Quick succession relief Administration and collection Payment by instalments of tax on death Payment of tax on lifetime gifts by instalments Inheritance tax and life assurance Property outside Great Britain Miscellaneous points Settled property Avoiding double charges Example: Calculation of inheritance tax payable

23 An outline of VAT 23.1 23.2 23.3 23.4 23.5 23.6 23.7 23.8 23.9 23.10 23.11 23.12 23.13 23.14 23.15

Introduction VAT in practice Zero-rating and exemption Business Small traders Zero-rated supplies Groups and divisions of companies Local authorities Charities Retailers Special cases Documentation Appeals Zero-rating Reduced rate

316 316 316 317 317 317 319 319 319 320 320 320 320 321 321 323 323 324 326 327 328 328 329 330 330 332 332 332 333 334 336 340 340

341 341 342 345 347 347 348 348 349 349 349 350 353 354 355 357

CONTENTS

23.16 23.17 23.18 23.19 23.20

Exemptions Trading within the EU Optional rate for farmers Renovations and conversions of residential properties Avoidance schemes – disclosure

24 Stamp duty 24.1 24.2 24.3 24.4 24.5 24.6 24.7

Introduction Exemptions Relief for takeovers and within groups Ad valorem duties Stamp duty reserve tax Abolition of stamp duty on shares etc. Administrative changes

25 Social security 25.1 25.2  25.4 25.5

Introduction National Insurance contributions 6RFLDOVHFXULW\EHQHÀWV Statutory sick pay (SSP) Class 4 National Insurance contributions

26 Tax-saving hints 26.1 26.2 26.3 26.4 26.5 26.6 26.7 26.8

Tax planning Income tax saving Capital gains tax saving Inheritance tax planning Change of residence and domicile Year-end planning The seven ages of tax planning The way ahead

27 Tax tables 27.1 27.2 27.3 27.4

Income tax table for 2009–10 Tax rates and allowances for 1997–98 to 2008–09 Income tax rates for 1991–92 and subsequent years Inheritance tax rates from 9 March 1992 onwards

xiii 358 359 360 360 360

362 362 363 364 364 367 367 368

369 369 369  373 373

375 375 376 385 388 394 395 395 399

401 401 402 403 404

Glossary

406

Index

408

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PREFACE

6LQFH WKH YHU\ ÀUVW HGLWLRQ RI WKH St. James’s Place Tax Guide was published, I have been involved with people UHVSRQVLEOH IRU SURYLGLQJ KLJKTXDOLW\ ORQJWHUP ÀQDQcial advice. Each year the Guide has proved invaluable, as it continues to be a handy and reliable source of reference for our advisors, as well as a valuable gift for our clients. Being a wealth management business it is no surprise that for most clients of St. James’s Place, tax management is a YLWDO SDUW RI DQ\ ÀQDQFLDO SODQQLQJ$V D WD[SD\HU P\VHOI KRZHYHU , DOVR DSSUHFLDWHDQGEHQHÀWIURPWKHLQIRUPDWLRQWKDW:DOWHU6LQFODLUWRJHWKHUZLWK Barry Lipkin, provides – and I am sure that you will too. I cannot be sure which areas will be most relevant to you, but I am sure that \RXZLOOÀQG&KDSWHUVDQGRILQWHUHVW(DFKSURYLGHVVRPHGHWDLORQWKH proposals that were announced this year, to introduce a 50 per cent income tax band for those with earnings exceeding £150,000, the reduced personal allowances for those earning over £100,000 and an increased tax rate to be levied against dividends. Furthermore, Chapter 8 refers to the increase of the annual ISA allowance, which becomes effective in October of this year for those aged 50 and over and from April 2010 for everybody else. Of course, in an ideal world, the Guide would be very much shorter, because our tax system would be very much simpler. If we all paid a pound less tax for HYHU\WLPHD*RYHUQPHQWPLQLVWHURU7UHDVXU\RIÀFLDOGHSORUHGWKHV\VWHP·V complexity, our tax liabilities would be a good deal lower. But for as long as our system remains as complicated as it is, dealing with its implications will continue to be a critically important challenge for millions of individuals looking for advice. The information contained within this Guide, and the St. James’s Place Partnership, is therefore more important than ever in helping you take the necessary steps to preserve and grow your wealth.

SIR MARK WEINBERG President St. James’s Place Wealth Management

ABBREVIATIONS USED IN THE GUIDE A&M ACT AEI ASP AVC %&( BES CAA CASC CDFI CFE CGT CGTA CIC COMP CPA CRCA CSOP CTC CVS DLTA DPTC ECU EEA EEIG EIS EMI ESOP ESOT F2A FA FID

accumulation and maintenance advance corporation tax average earnings index alternatively secured pension additional voluntary contribution EHQHÀWFU\VWDOOLVDWLRQHYHQW business expansion scheme Capital Allowances Act 2001 community amateur sports club community development ÀQDQFHLQVWLWXWLRQ controlled foreign company capital gains tax Capital Gains Tax Act 1979 close investment holding company contracted out money purchase Civil Partnership Act 2004 Commissioners for Revenue and Customs Act 2005 company share option plan child tax credit corporate venturing scheme Development Land Tax Act 1976 disabled person’s tax credit European currency unit European economic area European economic interest grouping enterprise investment scheme enterprise management incentive employee share option plan employee share ownership trust Finance (No 2) Act Finance Act foreign income dividend

),)2 FOREX FOTRA )3&6 FSAVC

ÀUVWLQÀUVWRXW foreign exchange free of tax to residents abroad À[HGSURÀWFDUVFKHPH free standing additional voluntary contribution HMRC Her Majesty’s Revenue and Customs HMSO Her Majesty’s Stationery 2IÀFH IAS international accounting standards IHTA Inheritance Tax Act 1984 IIP interest in possession ISA Individual savings account ITA Income Tax Act 2007 ITEPA Income Tax (Earnings and Pensions) Act 2003 ITTOIA Income Tax (Trading and Other Income) Act 2005 LAPR life assurance premium relief LEL lower earnings limit LLP limited liability partnership MIRAS mortgage interest relief at source MSC managed service company NCDR non-corporate distribution rate NRE net relevant earnings PAYE pay as you earn PEP personal equity plan PET potentially exempt transfer PHI permanent health insurance PIBS permanent interest bearing share PPP personal pension plan PRAS pension relief at source PRO protected rights only 353 SURÀWUHODWHGSD\ 362 3HQVLRQ6FKHPHV2IÀFH QCB qualifying corporate bond REIT real estate investment trust RPI retail prices index

A B B R E V I AT I O N S U S E D I N T H E G U I D E

S (Ss) SAYE Sch/s SDLT SERPS SFO SI SIP SIPP SME SSAS SSP

section (sections) of an Act save as you earn schedule/s of an Act stamp duty land tax state earnings related pension scheme Superannuation Funds 2IÀFH Statutory Instrument share incentive plan self-invested personal pension small or medium enterprise small self-administered scheme statutory sick pay

TA TCEA TCGA TESSA TMA UEL USM VAT VATA VCT WFTC WTC

xvii Income and Corporation Taxes Act 1988 Tribunals Courts and Enforcement Act 2007 Taxation of Chargeable Gains Act 1992 tax exempt special savings account Taxes Management Act 1970 upper earnings limit Unlisted Securities Market value added tax Value Added Tax Act 1994 venture capital trusts working families tax credit working tax credit

INTRODUCTION

Originally establishing itself as the Hambro Tax Guide 37 years ago, this book has appeared annually ever since, more recently being called the J. Rothschild Assurance Tax Guide. The book has been designed to be used both by the professional and non-professional. Solicitors, accountants and FRPSDQ\VHFUHWDULHVZLOOÀQGLWHVSHFLDOO\XVHIXODVDFRQFLVHUHDG\UHIHUHQFH Many others, company directors and executives, partners and sole-traders, HPSOR\HUVDQGHPSOR\HHVZLOOÀQGLQLWPXFKKHOSIXOLQIRUPDWLRQDQGDGYLFH when dealing with problems of personal and company taxation. It illustrates the working of income tax, capital gains tax, corporation tax, inheritance tax and VAT in the UK. It is intended to continue revising the book annually in order to keep it up to date in accordance with the annual changes to the law. This, the 38th edition, deals with the tax system at the time of writing for the ²ÀVFDO\HDUDQGLQVRPHFDVHVIRUVXEVHTXHQW\HDUV(YHU\FKDSWHUKDV EHHQDPHQGHGWRUHÁHFWWKHPDQ\WD[FKDQJHVZKLFKKDYHEHHQPDGHVLQFH the previous edition, including those relating to income tax and personal reliefs, investments, pensions, National Insurance, capital gains tax, corporation tax, inheritance tax, VAT, stamp duty and many, many others. To help keep track of the changes, Chapter 1 summarises this year’s tax changes and is referenced to the relevant paragraphs in the Guide. In addition, tax planning pointers relative to this year’s tax changes are included in this chapter. This book has been appearing since 1972–73 and it is interesting to consider some of the tax changes over its life, comparing that year with 2009–10.

Income tax

Standard/Basic rate Top rate – at taxable income £15,000 including surtax £37,400 Single personal relief

Capital gains tax rates (individuals) Estate duty/inheritance tax threshold Top rate at £500,001

1972–73

2009–10

38.75%

20%

88.75% £460

40% £6,475

30%

normally 18%

£15,000

£325,000

75%

Only rate in most cases VAT from 1 April 1973

40% 10%

15%/17.5%

INTRODUCTION

xix

Thus successive editions of the book have recorded falling rates for most taxes, apart from National Insurance contributions. What is more, many reliefs and taxes have come and/or gone, such as: 䉴 䉴 䉴 䉴 䉴 䉴 䉴 䉴 䉴 䉴 䉴 䉴 䉴

Capital transfer tax. Development gains tax and development land tax. Surtax. Earned income relief. Investment income surcharge. Stock relief. Life assurance relief on new policies. Mortgage interest relief. Married couples allowance (unless born before 6 April 1935). Stakeholder pensions. Advance corporation tax and the imputation system. Working tax credits and child tax credits. Income tax starting rate going from 6 April 2008.

But what of the future? We already know about the introduction of an additional rate from 6 April 2010 and the reduction of pension relief for high earners from 6 April 2011. But of one thing we can be sure, there will be very many tax changes to include in the pages of subsequent editions. Furthermore, other tax increases have been indicated in view of the poor economic climate. Due to the volume of changes, it is not possible to retain in each new edition full information for previous years. Thus for the tax rules for previous years, reference to past editions is occasionally necessary. %HFDXVHWKHERRNFRQFLVHO\FRYHUVDYHU\ZLGHÀHOGLWKDVEHHQQHFHVVDU\WR RPLWVRPHRIWKHH[HPSWLRQVDQGTXDOLÀFDWLRQVZLWKZKLFKWD[ODZDERXQGV to adopt a familiar saying, ‘When I say never, I mean hardly ever and when I say always, I mean almost always.’ The book is intended to be only a general tax guide. If it cannot solve a problem, the time has come to look at one of the multi-volume tax textbooks or to consult a tax specialist. Ideas on tax saving appear throughout the book. However, Chapter 26 deals with tax-saving hints and has many references to the other chapters for easy location of topics. Furthermore, this chapter contains particular reference to future tax planning in a section entitled ‘The way ahead’ (26.8). A particular feature to note is that all indexing and cross-referencing uses chapter and topic numbers. Thus 7.6 means the sixth-numbered topic in Chapter 7. Similarly 7.6.3 would mean the third subsidiary topic within that main heading. Cross-references to related chapter and topic numbers appear throughout the GuideLQEUDFNHWVDQG\RXZLOODOVRÀQGUHIHUHQFHVWRWD[OHJLVlation where relevant under the appropriate topic title. Also, a glossary to help with the meanings of certain terms appears at the end of this book.

xx

INTRODUCTION

Since its inception, the Guide has included references to the tax legislation. Over the years, this has been consolidated into a number of Acts such as the Inheritance Tax Act 1984 (IHTA), Value Added Tax Act 1994 (VATA), Capital Allowances Act 2001 (CAA), Income and Corporation Taxes Act 1988 (TA), Income Tax (Trading and Other Income) Act 2005 (ITTOIA) and Income Tax Act 2007 (ITA). The book is now referenced mainly to the consolidating Acts, using the abbreviations shown above and following the Preface. The St. James’s Place Tax Guide 2009–2010 brings together in a single volume all of the main taxes which are operating at present, enabling their total effect to be borne in mind. In planning for the future, however, account should be taken of the various avenues for short-term reform, as well as the longer term possibilities for capital gains tax, inheritance tax, income tax etc. As new developments are crystallised, they will be covered in the future annual editions of this book. We are most grateful to all those who have written to us with kind and helpful comments concerning the previous editions, some of which have been taken into account in the preparation of this volume. We gratefully acknowledge the help given to us on this edition by Malcolm Cooper-Smith of St. James’s Place and Rob Gaines LLB.

WALTER SINCLAIR and BARRY LIPKIN

Chapter 1

THIS YEAR’S TAX CHANGES 1.1 Introduction This chapter summarises many of the changes to the tax rules and rates which take effect for 2009–10. Also included are some important changes announced for future years. Some were introduced by this year’s Budget and Finance Bill, whilst others were announced and enacted previously. Tax planning pointers KDYHEHHQLQFOXGHGLQLWDOLFVDQGWKHVHDUHDPSOLÀHGLQ&KDSWHU$WWKHHQG RIWKLVFKDSWHU\RXZLOOÀQGDWDEOHRINH\UDWHVDQGDOORZDQFHVIRU² You should remember that not all the changes included in the 2009 Budget take effect for 2009–10, which gives a planning interval in some cases.

1.2 Income tax The rate bands have been widened and some of the personal allowances have increased.

1.2.1 Income tax rates (5.0)




The basic rate ceiling has increased to £37,400. The basic rate is 20 per cent from 2008–09. The 10 per cent starting rate for savings income now applies to any that you have within your top slice of income but below £2,440.
A new 50 per cent additional rate applies to taxable income over £150,000 from 2010–11.

1.2.2 Allowances and reliefs


Allowances such as personal allowance and age allowance have been increased (3.3).
For 2010–11 and subsequently, personal allowance for those with taxable ‘adjusted’ net income over £100,000 will be reduced by £1 for every £2 of the excess, down to nil.
The pensions relief annual earnings cap goes up to £245,000 under the new V\VWHP  
 &KLOGWD[FUHGLW LQFUHDVHVIRU²
 :RUNLQJ7D[&UHGLW:7& LQFUHDVHVIRU² 
 &KLOGEHQHÀW LQFUHDVHV

1.2.3 Transitional gift aid relief for charities For 2008–09, 2009–10 and 2010–11 only, charities are enabled to reclaim tax on gift aid donations corresponding to the previous 22 per cent basic rate instead of the current 20 per cent (15.2.1).

2

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From 2010–11, the tax saved by husbands and wives making their shares of income more equal, will be increased for the wealthy. Also, there is some scope for bringing income into 2009–10, from later years, subject to the rules.

1.3 Tax on employments


The company car tax scheme will be altered from 2011–12 including the abolition of the £80,000 cost cap and the discounts for alternative fuels.
Legislation operating from 22 April 2009 is to counter tax avoidance WKURXJKWKHEHQHÀWRIOLYLQJDFFRPPRGDWLRQZKHUHDSUHPLXPLVSDLGIRUD lease of no more than 10 years.

1.4 Business taxation
 )RU²WKH\HDUWR0DUFKIRUDOOFRPSDQLHV DWHPSRUDU\ÀUVW

year allowance of 40 per cent applies for expenditure on general plant and machinery.
A 3 year carry back comes in for trading losses in the period from 24 November 2008 to 23 November 2010 for companies and 2008–09 and 2009–10 for other businesses. An unlimited amount can be carried back one year, as before and then up to £50,000 to the 2 previous years.
 )URP$SULO$SULOIRUFRPSDQLHV ZULWLQJGRZQDOORZDQFHIRUFDUV is reduced to 10 per cent but only where the carbon dioxide emissions exceed JUDPVSHUNLORPHWUH 6LPLODUUXOHVDSSO\IRUFDUOHDVHSD\PHQWV
 $ QHZ SDFNHW RI PHDVXUHV FRQFHUQLQJ WKH WD[DWLRQ RI IRUHLJQ SURÀWV LV introduced in the 2009 Finance Bill. This mainly affects UK companies which are members of groups. Also, dividends etc. received from foreign and UK companies will largely be exempt from corporation tax unless caught by anti-avoidance rules.

1.4.1 Corporation tax rates (13.2 & 13.6)



The main companies rate is 28 per cent from 1 April 2008 (13.2). The small companies rate is 21 per cent from 1 April 2008.

1.5 Capital gains tax 1.5.1 Rates and exemptions



The capital gains tax rate remains at 18 per cent. The main annual exemption for 2009–10 becomes £10,000 and £5,050 for many trusts.

1.6 Tax-efficient investments


The ISA limit that those aged 50 and over in 2009–10 will be able to invest is £10,200, of which up to £5,100 can be in cash. These new limits take HIIHFWIURP2FWREHU

T H I S Y E A R ’ S TA X C H A N G E S



3

For younger investors, the same new ISA limits take effect from 2010–11. Generally from 22 April 2009, various improvements take effect for venture capital schemes (EIS, CVS, and VCT) such as relaxing the time limit for using money invested and carrying back relief.

1.7 Trusts For 2009–10, the tax rates for trusts remain at 40 per cent, with a dividend rate of 32.5 per cent. However, from 2010–11, these become 50 per cent and 42.5 per cent.

1.8 Pensions taxation


For 2009–10 there is a single lifetime allowance and an annual allowance, set at £1.75m and £245,000 respectively (14.4.4 and 14.5.2).
From 2011–12 relief for pensions contributions will be reduced if your taxable income is £150,000 or more, being tapered down until it is the basic rate (20 per cent) (14.13).
If your taxable income is at least £150,000, anti-forestalling rules are likely to restrict your relief for contributions from 22 April 2009 to 5 April 2011 if you change your normal pattern of regular contributions; or pensions savings and your total contributions/pension savings exceed £20,000 (more in some cases) a year (14.13). The original proposals have been slightly relaxed during passage of the Finance Bill. There is some scope for steering clear of the anti-forestalling rules, such as by contributing no more than £20,000 (in some cases up to £30,000) each year RUNHHSLQJ\RXULQFRPHOHYHOEHORZ…EXWWKLVLVDÀHOGWRVHHNDGYLFH

1.9 Inheritance tax 1.9.1 Rates The nil rate band increases to £325,000 for 2009–10 and £350,000 for 2010– 11 (22.5). The extra amounts of nil rate band provide scope for additional tax free gifts by will and during your lifetime.

1.9.2 Civil partners The tax exemptions covering civil partners in accordance with the CPA (from 'HFHPEHU DUHSDUWLFXODUO\YDOXDEOHLQWKHÀHOGRILQKHULWDQFHWD[,Q the same way that married couples normally are free from inheritance tax on assets passing between them, so are single-sex partners under the new rules. Partners within the CPA should take full advantage of the scope for passing on assets free of inheritance tax to the surviving partner. However, as with married couples, the nil rate band should not be wasted.

4

S T. J A M E S ’ S P L A C E T A X G U I D E 2 0 0 9 – 1 0

1.9.3 Agricultural property and woodlands Agricultural property and woodlands reliefs are extended to land in the European Economic Area with effect from 22 April 2009, subject to the rules. 3URSHUW\TXDOLI\LQJIRUWKHH[WHQGHGUHOLHIVZLOODOVRTXDOLI\IRUFDSLWDOJDLQV tax hold over relief.

1.9.4 Unused nil rate band ,IDVXUYLYLQJVSRXVHRUFLYLOSDUWQHUGLHVDIWHU2FWREHUDQ\QLOUDWH EDQGZKLFKZDVXQXVHGDWWKHÀUVWGHDWKFDQEHWUDQVIHUUHGWRWKHHVWDWHRIWKH survivor (22.5.2). In order to preserve the second nil rate band, it is no longer necessary to leave it to others than the surviving spouse or civil partner.

1.10 Anti-avoidance etc.


New measures cover tax avoidance including selling lessor companies, plant and machinery leasing, pensions (anti-forestalling), life insurance policies, employment income legislation and double taxation relief.
Serious defaulters (incurring a penalty of at least £5,000 for deliberate tax evasion) will be required to submit special detailed tax returns for 5 years. Also the names of those deliberately defaulting on more than £25,000 tax ZLOOEHSXEOLVKHGRQWKH+05&ZHEVLWHLQFHUWDLQFLUFXPVWDQFHV
A new disclosure opportunity is announced for unpaid tax on offshore bank accounts. $UWLÀFLDOWD[DYRLGDQFHVFKHPHVVKRXOGDOZD\VEHDSSURDFKHGZLWKWKHXWPRVW caution, but if you effect one, remember your responsibility to report it to the Revenue. If you are considering such a scheme, require the promoters to provide you with full information about the results of previous reports by them to the Revenue relevant to that scheme including the scheme reference number.

1.11 International matters 1.11.1 Offshore funds 7KHGHÀQLWLRQRIDQGWD[DWLRQRIRIIVKRUHIXQGVLVFKDQJLQJLQYDULRXVUHVSHFWV including restoring the non-repayable tax credit for dividends for holders of less than 10 per cent of the shares in certain cases and capital gains.

1.11.2 UK personal allowances etc. for non-residents )URP $SULO  QRQUHVLGHQWV ZLOO QRW EH DEOH WR FODLP 8. UHOLHIV DQG allowances solely on account of being UK citizens. However, they may qualify under other categories such as being an EEA national or under a double tax treaty.

T H I S Y E A R ’ S TA X C H A N G E S

5

1.11.3 The remittance basis – minor amendments The rules in FA 2008, regarding the remittance basis are being changed in UHODWLYHO\PLQRUZD\V*LIWDLGUHOLHILVFRQÀUPHGDVDSSO\LQJ,I\RXKDYH unmerited foreign income and gains under £2,000 you will be on the remitWDQFHEDVLVHYHQLI\RXPDNHQRHOHFWLRQIURP$SULO\RXPD\QRW QHHGWRÀOHD8.WD[UHWXUQLI\RXDUHHPSOR\HGLQWKH8.DQGKDYHOHVVWKDQ £10,000 of foreign employment income and £100 bank interest both taxed abroad. If you are non-UK domiciled, you should carefully consider no longer claiming the remittance basis or perhaps ceasing to be UK resident.

1.12 Landfill tax (7.14)
 7KHVWDQGDUGUDWHRIODQGÀOOWD[LQFUHDVHVWR…IURP$SULO
 )URP6HSWHPEHUFHUWDLQXVHVRIPDWHULDORQDODQGÀOOVLWHZLOOEH

taxable.

1.13 Value added tax &KDQJHVLQFOXGHWKHIROORZLQJ
 7KHUHJLVWUDWLRQWKUHVKROGLQFUHDVHVWR…IURP0D\ 
 $UHGXFHG9$7UDWHRISHUFHQWDSSOLHVIURP'HFHPEHU
From 1 January 2010 the rate reverts to 17.5 per cent.
Anti-forestalling rules apply.

1.14 Stamp duty There are various new provisions including an extended stamp duty land tax threshold which applies on acquisitions of residential property of no more than £175,000 between 3 September 2008 and 31 December 2009. After that, the threshold reverts to £125,000.

1.15 National Insurance contributions The changes include the following:
&ODVV²WKHZHHNO\HDUQLQJVOHYHOEHORZZKLFK\RXSD\QRFRQWULEXWLRQVDV

an employee becomes £110.
 &ODVVVHOIHPSOR\HGÁDWUDWH ²WKHZHHNO\UDWHEHFRPHV…
 &ODVVYROXQWDU\ ²WKHZHHNO\UDWHEHFRPHV…
 &ODVVFRQWULEXWLRQVVWDUWDWDQDQQXDOHDUQLQJVOHYHORI…DQGWKH

charge at 8 per cent applies up to £43,875.
 )URP²&ODVVHPSOR\HHDQGHPSOR\HUDQG&ODVVFRQWULEXWLRQV

each increased by 1 per cent. The 1 per cent charge extends above the respective main rate limits.

6

S T. J A M E S ’ S P L A C E T A X G U I D E 2 0 0 9 – 1 0

1.16 Key rates and allowances 2009–10 See table below. Reference INCOME TAX

5.0

Taxable income £ 37,400 Remainder

Slice £

Rate %

Tax on slice £

0–37,400

20 40

7,480.00

Note: Savings income in your £0–2,440 band is taxed at 10 per cent. Dividends within your £0–37,400 band carry a 10 per cent tax credit (non-refundable) and attract no further tax.

Income tax allowances

£

Personal allowance

6,475

Age allowance

9,490

Age 75 or over Income limit

9,640 22,900

Married couple’s allowance* 75 and over Minimum amount

6,965 2,670

Life assurance premium relief – only on pre-14 March 1984 policies

12.5%

3.0

* relief restricted to 10 per cent.

COMPANIES (Year to 31 March 2010)

%

Corporation tax – small companies rate full rate

21 28

13.6 13.7.1

CAPITAL GAINS TAX Rate (individuals) Annual exemption (individuals etc.) INHERITANCE TAX Band £

18% 10,100

20.1 20.5

Death rate %

22.5

0–325,000 325,000 upwards Annual exemption

Nil 40 3,000

22.17

15% 17.5% 68,000

23.1 23.5

VAT Main rate from 1 January 2010 Registration threshold from 1 April 2009

Chapter 2

THE BASIS OF YOUR TAX LIABILITY 2.1 Who is taxable? Individuals, partnerships, estates, trusts, companies, and certain other organisations that are resident in the UK are taxable on their income arising here. They are also liable on income arising abroad subject to the rules outlined ODWHULQWKLVERRN7KHWD[DWLRQRIWKHLQFRPHRILQGLYLGXDOVLVFRYHUHGÀUVW partnerships, estates, trusts and companies being dealt with in later chapters. The UK income of non-resident individuals, companies and other entities may also be subject to tax here (19.1). 6LPLODUO\FDSLWDOJDLQVWD[LVSD\DEOHRQFHUWDLQFDSLWDOSURÀWVPDGHE\8. residents anywhere in the world (20.3). Non-residents, however, are not always liable to UK capital gains tax.

2.2 The taxes payable (ITA Ss6–9) $ XQLÀHG V\VWHP RI SHUVRQDO WD[DWLRQ RSHUDWHV XQGHU ZKLFK WKHUH LV IRU 2009–10, a basic rate of 20 per cent and a higher rate of 40 per cent (5.0). Your savings income falling within your basic rate band generally attracts 20 per cent (8.7). Certain different rates apply for previous years (26.2). The capital gains tax rate for individuals is generally 18 per cent. However, WKHÀUVW…RI\RXUQHWFDSLWDOJDLQVLVQRWWD[HG  Special rules apply to companies which are taxed on both income and capital gains at corporation tax rates (13.2). Inheritance tax applies to wealth passing on death and in some other circumstances (Chapter 22).

2.3 What income is taxable? (TA 1988 Ss1 & 15–20) The table below summarises the classes of income that are subject to income tax, or corporation tax for companies. Prior to 6 April 2005, when ITTOIA (2.10) was introduced, a schedular system applied although the basic tax rules remain.

2.3.1 Classes of income (from 6 April 2005) Trading income including: Trades (11.1) Professions (11.1)

S T. J A M E S ’ S P L A C E T A X G U I D E 2 0 0 9 – 1 0

8

Employments (including directorships). There are normally three classes: 䉴 䉴 䉴

The employee is resident in the UK and the work is done here (10.1) Work done here by a non-resident (10.2) Work done wholly abroad by a UK resident whose salary is sent here during the overseas employment excluding income taxed as above (10.3).

Property income – from land and buildings including rents and certain premiums from leases (7.1). Savings and investment income (8.4 etc.). Miscellaneous income (15.1).

2.4 Deduction of tax at source and tax credits Tax at now 20 per cent is frequently deducted at source from savings income by the payers and the recipients get the net amount. The former pay the tax over to the Revenue. Company dividend payments, however, are made without any tax deductions although the recipients are ‘imputed’ with a credit of 1¼ 9 of the dividend. 7KXVVXSSRVHWKDWIRU²\RXUHFHLYHDGLYLGHQGRI…\RXZLOOJHWD WD[FUHGLWRI……ð 1¼ 9) which is not reclaimable even if your income is low (16.7). If your income is high enough, however, you may be taxed at KLJKHUUDWHVDQG RQ…  Tax is also deducted at source in the case of certain annual payments (4.1) and income from wages and salaries (see 2.3.1). In the former case the payer of the income is entitled in certain circumstances to retain the tax deducted and need not pay it over to the Revenue.

2.5 The distinction between capital and revenue profits Most of your income is subjected to income tax at the basic and perhaps KLJKHUUDWHZKHUHDVQRUPDOO\FDSLWDOSURÀWVDUHOLDEOHWRFDSLWDOJDLQVWD[RU are tax free. The tax rates borne by income and capital gains are now broadly VLPLODU+RZHYHUWKHUXOHVDQGUHOLHIVDUHYHU\GLIIHUHQW7KHTXHVWLRQLVWKHQ :KDWLVDFDSLWDOSURÀW" *HQHUDOO\VSHDNLQJDFDSLWDOSURÀWLVDSURÀWZKLFK\RXUHDOLVHRQWKHVDOHRI an asset where it is clear that you are not making it your business to buy and sell assets of that type. On the other hand, if you conduct a business in such DVVHWV\RXUSURÀWVZLOOEHLQFRPH

2.5.1 Examples of capital transactions 䉴

The sale of the house in which you live (also normally free of capital gains tax unless used for business) (20.23).

T H E B A S I S O F Y O U R TA X L I A B I L I T Y 䉴 䉴 䉴 䉴 䉴 䉴 䉴 䉴

9

The sale of your private motor car (also free of capital gains tax). The sale of shares you held as investments. The sale of a plot of land you inherited. The sale of the goodwill of your business. The receipt of an inheritance (also free of capital gains tax). The sale of a property which you had bought for investment purposes. The sale of a picture unless you are the artist or a picture dealer. The receipt of the proceeds of a ‘qualifying’ life assurance policy (9.3). (This is also normally free of capital gains tax.)

2.5.2 Examples of revenue transactions 䉴 䉴 䉴 䉴 䉴

The sale of houses and land if you are a property dealer. The sale of motor cars if you are a car dealer. The sale of shares if you are a share dealer. The sale of pictures if you created them or are a picture dealer. The receipt of salaries, commissions, interest, dividends, rent, royalties etc.

2.6 Revenue and capital expenses ,QWKHVDPHZD\WKDWLQFRPHDQGFDSLWDOSURÀWVPXVWEHGLVWLQJXLVKHG\RX must separate revenue and capital expenses for tax purposes. The latter can RQO\ EH FKDUJHG DJDLQVW FDSLWDO SURÀWV DQG WKH IRUPHU DJDLQVW LQFRPH )RU example, the commission on the sale of shares acquired for investment is deducted in calculating your capital gains but if you are a share dealer then it is a revenue expense. $OVRLQGHWHUPLQLQJWKHDVVHVVDEOHSURÀWVRIDEXVLQHVVRQO\UHYHQXHH[SHQVHV may be deducted and capital expenses are prohibited as a deduction (11.3.2).

2.6.1 Tax-free income Certain items in your income may be entirely free of tax. These are listed below. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Casual gambling profits (for example pools, horse racing etc.). Premium Bond winnings. Lottery prizes. Interest on authorised holdings of National Savings Certificates (TA 1988 S46). Bonuses paid at the end of ‘save as you earn’ contracts. Maturity bonuses payable on Defence Bonds, British Savings Bonds and National Development Bonds. Interest on Post-war Credits. Wedding and certain other presents from your employer that are in truth not given in return for your services as an employee. Certain retirement gratuities and redundancy monies paid by your employer (10.12). Any scholarship or other educational grant that you receive if you are a full-time student at school, college etc. War widows’ pensions; also comparable payments overseas (TA 1988 S318).

10

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(12) Certain social security benefits (25.3.1) including: (a) earnings-related supplement of unemployment benefit (but not unemployment benefit itself) (b) sickness benefit (but not statutory sick pay) (c) maternity allowance and grant (but not maternity pay) (d) attendance allowance (e) child benefit (f) family income supplement (but retirement pensions under the National Insurance Scheme and family allowances are assessable) (g) mobility allowance (h) certain payments of income support, family credit or housing benefit; but taxable up to given limits if related to trade disputes or conditional upon availability for employment (TA 1988 S617) (i) short-term incapacity benefit paid during the first 28 weeks of incapacity (FA 1995 S141). (13) Housing grants paid by local authorities etc. (14) German compensation payments to victims of National-Socialist persecution. This now includes payments made by foreign and UK banks and building societies. Also Austrian and German state pensions paid to such victims. (15) Wound and disability pensions. (16) Allowances, bounties and gratuities paid for additional service in the armed forces. (17) The capital part of a purchased life annuity (but not the interest portion). (18) Your first £70 of interest each year from National Savings Bank Ordinary Deposits. This exemption from tax applies separately to husband and wife (TA 1988 S325). (19) Certain allowances paid under job release schemes, as described in the Job Release Act 1977, within a year of pensionable age. (20) Additional pensions and annuities paid to the holders of certain gallantry awards by virtue of those awards (TA 1988 S317). (21) Compensation for mis-sold personal pensions (FA 1996 S148). (22) Jobfinder’s grant, generally before 2003–04 (FA 1996 S152). (23) Income from PEPs (8.10) and ISAs (8.12). (24) Financial support to adopters by local authorities and adoption agencies (TA S327A). (25) In-work credit, in-work emergency discretion fund and in-work emergency fund from 6 April 2008. (26) The provision for employees of one health-screening and one medical check-up each year including through non-cash vouchers.

2.7 Bank and building society interest Any bank or building society interest which you receive normally has 20 per FHQWLQFRPHWD[GHGXFWHGIURPLWDWVRXUFH ,I\RXULQFRPHLVVXIÀFLHQWO\ high, however, you will be charged an additional tax on the grossed up equivalent of the interest as if you had suffered tax on it at 20 per cent. The additional tax payable consists of higher rate income tax on the grossed up equivalent of the income, less tax on it at 20 per cent. Thus if you receive EXLOGLQJVRFLHW\LQWHUHVWRI…LQWKH\HDUWKHQ…WKHJURVVHGXSHTXLY alent) will be included in your total taxable income. The grossed up equivaOHQWLVGHWHUPLQHGE\WKHIRUPXOD Interest received × 100 (that is, 100 less 20 per cent). 80

T H E B A S I S O F Y O U R TA X L I A B I L I T Y

11

2.8 Year of assessment ,QFRPHWD[LVDQDQQXDOWD[WKXVLWLV\RXUWRWDOLQFRPHRYHUHDFKPRQWK period that is assessed to tax. The year of assessment runs from 6 April to the following 5 April and so the tax year 2009–10 means the year ending 5 April 2010. The income chargeable to tax for each year of assessment is computed according to the rules relevant to the various classes (see 2.3.1) as described later in this book. In general, an ‘actual’ basis is now required in which the income received during a particular year is assessable for that year. )RUWD[\HDUVSULRUWR²LWZDVVRPHWLPHVWKHLQFRPHRIWKHSUHFHGLQJ year of assessment or of the accounting year ending in the preceding year of assessment, that was assessed. This ‘preceding year basis’ was normally used IRUWKHSURÀWVIURPWUDGHVDQGYRFDWLRQVDVZHOODVLQWHUHVWDVVHVVHGXQGHU 6FKHGXOH')RUGHWDLOVSOHDVHVHHODWHUHWF  The year to 5 April also forms the year of assessment for capital gains tax.

2.9 Period of assessment less than full year It is possible for a taxpayer to have a period of assessment of less than 12 PRQWKV)RUH[DPSOHDEDE\ERUQGXULQJDQ\\HDUKDVDSHULRGRIDVVHVVPHQW running from the date of its birth until the next 5 April. If a taxpayer dies, his period of assessment runs from 6 April to the date of his death. Notwithstanding that the period of assessment may be less than a year, the taxpayer receives the personal reliefs applicable to a whole year of assessment.

2.10 Where to find the law Tax law is to be found in certain Acts of Parliament, case decisions, regulDWLRQVDQGVWDWXWRU\LQVWUXPHQWV7KHIRUPHUDUHWKHQRUPDOO\DQQXDO)LQDQFH Acts and so called Taxes Acts, such as the Inheritance Tax Act 1984, the Taxation of Chargeable Gains Act 1992 and the Income and Corporation Taxes Act 1988 (ICTA). Originally, ICTA consolidated the existing legislation regarding income tax and tax on companies, including that from trading, investment, land and employments. However, starting with the Capital Allowances Act 2001, areas of the legislation have been removed from ICTA and transferred to new legislation, where it is rewritten in a clearer style, generally without changing the meaning. A major step in this process took place with the Income Tax (Earnings and Pensions) Act 2003 (10.0) which is described in Chapter 10. An even more sweeping consolidation and rewriting of ICTA took place from 6 April 2005. Its

S T. J A M E S ’ S P L A C E T A X G U I D E 2 0 0 9 – 1 0

12

scope includes trading, property, savings and miscellaneous income, hence its lengthy title – the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). A summary of ITTOIA follows, so as to provide a broad outline of its contents. Since the old references are likely to prove helpful for the present, some are retained in this edition, together with some references to ITTOIA. Note that WKHFODVVLÀFDWLRQRILQFRPHLQWR6FKHGXOHVQRORQJHUDSSOLHV

2.10.1 Income Tax (Trading and Other Income) Act 2005 (ITTOIA) Part 1 2

3 4 5 6 7 8 9 10

Overview Trading overview Income taxed as trading profits Trading profits – basic rules rules restricting deductions rules allowing deductions receipts gifts to charities herd basis films and recordings etc. other specific trades Valuation of stock and work in progress Unremittable amounts Disposals and acquisitions of know-how Basis periods Averaging and adjustment income Post-cessation receipts Supplementary (trustees and insolvency) Property income Savings and investment income Miscellaneous income Exempt income Rent a room and foster care reliefs Foreign income – special rules Partnerships Supplementary and general

Sections

Schedules

1–2 3–4 5–23 24–31 32–55 56–94 95–106 107–110 111–129 130–148 149–172 173–186 187–191 192–195 196–220 221–240 241–257 258–259 260–364 365–573 574–689 690–783 784–828 829–845 846–863 864–886

1 2 (Parts 1–2) 2 (Part 3)

2 (Part 4) 2 (Parts 5–7) 2 (Part 8) 2 (Part 9) 2 (Part 10) 2 (Part 11) 3 and 4

2.10.2 Income Tax Act 2007 (ITA) Most of the remaining income tax provisions from ICTA have been consolidated into the new Act (ITA) with effect from 6 April 2007. Exceptions are double tax relief, capital allowances (CAA) and pension schemes.

Chapter 3

PERSONAL RELIEFS

According to your circumstances you can claim certain personal tax reliefs which are deducted from your total income in arriving at the amount on which you pay income tax.

3.0 Personal reliefs at a glance 2009–10 Type

Circumstances

Relief

Policy effected before 14 March 1984 on your own or wife’s life – deduction from premium

12½% of premiums

Personal allowance Life assurance relief (3.2.5)

£6,475*

Blind person’s allowance (3.2.6) Age allowance (3.2.7)

£1,890* Age 65–74 – Single Age 75 or over – Single

£9,490* £9,640*

Reduced by £1 for every £2 of excess income over £22,900 down to personal reliefs level † Married couple’s allowance (3.2.1)

Age under 75 Age 75 and over Minimum amount

NIL £6,965* £2,670

* These allowances will be increased for future years in line with the retail price index (unless the Treasury otherwise orders). † These allowances are restricted to 10% and only apply to those born before 6 April 1935.

3.1 Earned and unearned income )RUWD[SXUSRVHVLQFRPHLVFODVVLÀHGDVEHLQJHLWKHU¶HDUQHG·RU¶XQHDUQHG· Earned income includes the following:   7KHVDODU\RUZDJHVIURP\RXUMRELQFOXGLQJDQ\WD[DEOHEHQHÀWV (2) Certain pensions or retirement annuities paid to you, including those under a Revenue approved scheme (10.11). (3) Any income from a trade or profession in which you engage. (4) Any income from a partnership provided that you work in it and are not merely a sleeping partner.   2OG DJH SHQVLRQV DQG ZLGRZ·V SHQVLRQV UHFHLYHG XQGHU WKH 1DWLRQDO Insurance Act.   ,QFRPHIURPDSDWHQWRUFRS\ULJKWLI\RXDFWXDOO\FUHDWHGWKHVXEMHFWPDWWHU   $IWHUOHDYLQJ\RXUHPSOR\PHQWWUDGHRUSURIHVVLRQDQ\WD[DEOHDPRXQWV that you receive from that source.

14

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  ,QFRPHIURPKROLGD\OHWWLQJVDVGHÀQHG  7KHUHVWRI\RXULQFRPHLV¶XQHDUQHG·DQGLQFOXGHV (1) (2) (3) (4) (5) (6)

Dividends. Bank deposit interest. Building society interest received. Rents from property investments. Income from trusts. Interest from government or local authority stock.

3.2 Personal allowances (ITA Ss33–58) For 2009–10 there is a personal allowance of £6,475 (previously £6,035). 7KLVLVDYDLODEOHWRLQGLYLGXDOVJHQHUDOO\+RZHYHUDKLJKHUDOORZD QFHPD\ DSSO\WRWKRVHZKRKDYHDWWDLQHGWKHLUWKELUWKGD\ 

3.2.1 Married couple’s allowance (ITA Ss42–55) )URP $SULO  DFFRUGLQJ WR WKH UXOHV HDFK PDUULHG FRXSOH REWDLQHG D PDUULHGFRXSOH·VDOORZDQFHGHSHQGLQJRQWKHLUDJHVDWWDLQHGGXULQJWKHWD[ year. The following apply from 2005–06 to 2009–10: 2005–06 2006–07 2007–08 2008–09 2009–10 £ £ £ £ £ Husband and wife both aged under 65

Nil

Nil

Nil

Nil

Husband or wife aged 65–74

5,905

6,065

6,285

6,535

Nil

Husband or wife aged 75 and over

5,975

6,135

6,365

6,625

6,965

19,500

20,100

20,900

21,800

22,900

Income limit

Nil

)RU²UHOLHIIRUPDUULHGFRXSOH·VDOORZDQFHZDVUHVWULFWHGWRWKHORZHU UDWHSHUFHQW DQGWRSHUFHQWVXEVHTXHQWO\)URP²WKHUDWH is 10 per cent. 7KHKLJKHUDOORZDQFHVIRUROGHUSHRSOHDUHUHGXFHGLIWKHKXVEDQG·VDQQXDO income exceeds a set limit, currently £22,900. For every £2 of income UHFHLYHGLQH[FHVVRI…WKHKLJKHUDOORZDQFHVDUHUHGXFHGE\…XQWLO the minimum allowance (£2,670) is reached. $IWHU$SULOPDUULHGFRXSOH·VDOORZDQFHLVRQO\DYDLODEOHZKHUHDWOHDVW RQHRI\RXZDVERUQRQRUEHIRUH$SULO,WZDVZLWKGUDZQIRU\RXQJHU couples.