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The UK Budget 2012 and its Effect on QROPS Pension Transfers

The new UK budget 2012 has numerous effects on people born in the UK, but now living abroad with respect to both taxes and QROPS pension transfers.

uk budget 2012
UK Budget 2012 and QROPS Pension Transfers for British Expats

UK Budget 2012 Summary

Middle income earners get slammed in the new UK budget 2012. 325,000 more workers will pay the higher rate of tax of 40% as the income tax threshold will be lowered. The UK budget 2012 says the higher-rate threshold will be frozen at £42,475 in 2012-13. The next year, it will be reduced to £41,450. Further reductions mean that this could possibly affect 5 million people by 2014.

One of the main effects of the UK Budget 2012 is top rate tax payers will have their UK rates slashed from 50% to 45%. But, seeing as you can transfer your pension to a country abroad and effectively pay ZERO income tax as well as avoid the 55% death tax, a transfer of an existing private or company pension to a QROPS is still desirable in many cases.

More worrying for high net worth individuals, the maximum annual allowance going into a pension scheme is £50,000 per year. However, we can help high net worth individuals put their pensions into a QNUPS (Qualifying Non-UK Pension Scheme) for tax efficiency.

Furthermore, the lifetime allowance for transferring their UK pensions into a QROPS is now £1,500,000, a reduction of £300,000 from last year.

As a further hit in the UK Budget 2012, the personal allowance on income tax will be gradually withdrawn for income over £100,000 at a rate of £1 of allowance lost for every £2 over £100,000 until it is completely removed. So, if you leave your pension in a UK scheme, you would be taxed 45% on the entire amount.

So, the new UK budget 2012 strengthens the argument for QROPS in many cases for higher rate tax payers.

Contact me at info@qropsspecialists.com for more information and a free guide regarding the transfers.

UK Budget 2012 Report and QROPS Rules Changes. Full Summary

UK BUDGET REPORT 2012: 21st March

Below is a summary of the main UK budget 2012 announcements applicable to personal wealth and finance.

Life Insurance Policies: Time Apportionment Relief

A consultation on the reform of time apportionment relief will take place, reflecting a policyholder’s period of residence outside the UK. The consultation will focus on matters including an extension of the rules to onshore bonds and to reflect the residence position of previous owners of a policy. It is intended that this consultation will result in legislation for inclusion in Finance Bill 2013

Life Insurance Policies: Income Tax Avoidance

Avoidance measures will be introduced where:

1. There have been gains earlier in the life of the policy or contract but the gains were not chargeable to UK income tax. (An example of this is where earlier gains were attributable to a person who was not UK resident).

2. Individuals who have entered into certain “cluster policy” arrangements that defer any income tax until the final policy in the cluster comes to an end.

These measures will amend the rules for calculating the amount of gains from the relevant policies and contracts and puts beyond doubt that the gains liable to income tax are not reduced by the fact that there are untaxed earlier gains in the policy or contracts, or by the use of certain cluster

The measures have effect for relevant policies and contracts made on or after 21 March 2012 and for pre-existing policies where certain events arise after this date.

UK Budget 2012 Life insurance: Qualifying Policies

The premiums that can be paid into qualifying life insurance policies each year will be limited with effect from 6 April 2013. Policies issued on or after this date will only be Qualifying Policies where the premiums payable for an individual into a policy or policies do not exceed £3,600 each year.
Transitional provisions will also apply to qualifying policies issued on or after 21 March 2012 and before 6 April 2013, and before 21 March 2012 where certain variations are made after this date.

These provisions will ensure that income tax relief continues to apply to benefits from these policies but only in respect of the premiums paid before 6 April 2013 and premiums paid up to the limit on or after this date. This measure will be the subject of formal consultation with legislation to be
introduced in Finance Bill 2013.

UK Budget 2012 General Anti-Avoidance Rule (GAAR)

The Government has accepted the recommendation of the Aaronson Report, published on 11 November 2011, that a GAAR targeted at artificial and abusive tax avoidance schemes would improve the UK’s ability to tackle tax avoidance whilst maintaining the attractiveness of the UK economy as a location for genuine business investment.

The Government will consult on: new draft legislation which will be based on the recommendations of the Aaronson Report; establishment of the Advisory Panel; and the development of full explanatory guidance. In addition it will extend the GAAR to SDLT. The consultation will be issued in summer 2012 with a view to introducing legislation in Finance Bill 2013. The Government stated that it is committed to ensuring that this legislation effectively tackles abusive tax avoidance and that the supporting guidance is practical both for taxpayers and for HMRC.

UK Budget 2012 Cap on Unlimited Tax Reliefs

Legislation will be introduced in Finance Bill 2013 to apply a cap on income tax reliefs claimed by individuals from 6 April 2013. The cap will apply only to reliefs which are currently unlimited. For anyone seeking to claim more than £50,000 in reliefs, a cap will be set at 25 per cent of income (or £50,000, whichever is greater). Draft legislation will be published for consultation later this year.

Contributions to Registered Pension Schemes, Enterprise Investment Schemes and Venture Capital Trusts are all capped and are not affected.

Registered Pension Schemes Legislation will be introduced in Finance Bill 2013 to amend the rules which currently allow employers to pay pension contributions into their employees’ family members’ pensions as part of their employees’ remuneration package to remove the tax and NICs advantages from these arrangements. A regulation making power will also be introduced to allow changes to be made to the lifetime allowance fixed protection legislation. Technical improvements will also be made to the annual allowance rules through secondary legislation. Contracting out through a defined contribution scheme will be abolished from 6 April 2012.

UK Budget 2012 and QROPS Rules. Changes to Qualifying Recognised Overseas Pension Schemes (QROPS) Pension Transfers for British Expats 2012

Last December the Government published proposals changing the regulations governing the operation of QROPS. Due to be effective from 6th April 2012 legislation has now been released. A QROPS scheme is an overseas pension scheme to which a person with preserved pension rights in the UK can make an authorised transfer.

The Government is seeking to address certain aspects of the QROPS market which it views as being used solely to gain a tax advantage as opposed for true retirement planning. These new rules have made some amendments to the tests an overseas pension scheme must pass in order to be recognised as a QROPS.

To be a QROPS, a scheme must pass a number of tests which the Government has sought to tighten up. These include being an overseas pension scheme as defined; being a recognised pension scheme and lastly adhering to the various reporting and information requirements to be considered a QROPS. The change that caused the most reaction was the introduction of “Condition 4”, now referred to as the “Benefits exemption test”.

Jurisdictions including Guernsey and the Isle of Man are looking to address the difference in taxation between a resident and a non-resident member in order to bring parity to the way they are treated. The Government has introduced changes to the reporting obligations for members and trustees including a ten year period from the date of the transfer during which any benefit payment must be reported to HMRC by the trustee. This does not replace the 5 year period from when the member ceases to be UK resident and during which any benefit payment should remain within UK limits otherwise unauthorised payment charges will result.

UK Budget 2012 Reform of the Taxation of Non-Domiciled Individuals

Following consultation in summer 2011, legislation will be introduced in Finance Bill 2012 to make changes to the taxation of non-domiciled individuals to: allow such individuals to bring their overseas income and gains to the UK tax-free in order to make a commercial investment in a qualifying business; increase the existing £30,000 annual charge to £50,000 for those resident in the UK in 12 or more of the last 14 tax years; and reduce the complexity of some aspects of the existing remittance basis rules.
These changes will be introduced with effect from 6 April 2012.

UK Budget 2012 and the Statutory Residence Test

At the UK Budget 2011, the Government announced its intention to introduce a statutory residence test with effect from April 2012. On 6 December 2011, following public consultation over the summer, the Government announced that the test would be legislated in Finance Bill 2013 and take effect from 6 April 2013, to allow further time to finalise the detail of the test.

The UK Budget 2012 and the new Inheritance Tax (IHT) Rules

As announced in the 2011 budget, from April 2012 a reduced rate of IHT of 36% will be introduced where 10 per cent or more of a deceased’s net estate is left to charity. The new rate will apply where death occurs on or after 6 April 2012.

UK Domicile with spouse / civil partner domiciled outside the UK – The Government will consult on legislation to increase the IHT-exempt amount that a UK domiciled individual can transfer to their non UK domiciled spouse or civil partner. The exemption is currently £55,000. The Government similarly proposes to allow individuals who are domiciled outside the UK and who have a UK domiciled spouse or civil partner to elect to be treated as domiciled in the UK for the purposes of IHT.

Inheritance tax: periodic charges on trusts – The Government will consult on simplifying the calculation of IHT periodic and exit charges for trusts. Legislation will be in Finance Bill 2013.

Avoidance Using Offshore Trusts by UK domiciled individuals – The measure will amend the IHT excluded property and settled property provisions where a UK domiciled individual purchases an interest an offshore trust. The anti avoidance provisions will mean that if person enters into an arrangement through which they acquire an interest in excluded property such that the value of their estate is reduced, the reduction will be charged to IHT as if that person had transferred assets of that value directly to a relevant property trust. The assets settled in the offshore trust will cease to be treated as excluded property and will instead become subject to the relevant property regime.

The provisions will apply to new schemes entered into on or after 21 March 2012. They will also apply to existing schemes or arrangements entered into before that date but only in relation to periodic charges and exit charges that arise on or after 21 March 2012.

UK Budget 2012 and Stamp Duty Land Tax (SDLT) Changes

UK Budget 2012 The 7% Mansion Tax

SDLT on the purchase of a residential property will be charged at 7% of chargeable consideration where this is more than £2 million. This new rate will have effect for transactions where the effective date (normally the date of completion) is on or after 22 March 2012.

In addition, certain types of non-natural persons (eg offshore companies) acquiring residential property in the UK costing more than £2 million will be subject to a higher rate of 15%.

Enveloping annual charge for high-value residential properties – The Government will also consult on the introduction of an annual charge on properties over £2 million owned by certain non-natural persons. Legislation will be introduced in Finance Bill 2013 with the measure coming into effect in April 2013.

UK Budget 2012 National Insurance Contributions

Following the announcement in the 2011 budget, the Government has published a response and timetable following its consultation on the reforms to integrate the operation of income tax and NICs. Further consultation is expected following the Budget.

UK Budget 2012 Corporation Tax

In addition to the reductions announced in the 2011 Budget, the main rate of corporation tax will be reduced by a further 1%. This will take the main rate to 24% in April 2012. This rate will be reduced further by 1% pa over the next 2 years. The small profits rate remains at 20%.

UK Budget 2012 Income tax rules on interest

The Government will consult on changes to the income tax rules on the taxation of interest and interest-like returns, and the rules on the deduction of tax at source from such amounts. Following the consultation period there will be further opportunities to contribute to the development of policy. Any legislation will be in Finance Bill 2013.

UK Budget 2012 Child Benefit income tax charge

Following the announcement to withdraw Child Benefit from higher rate taxpayers in the 2010 spending review, legislation will be introduced in Finance Bill 2012 that imposes a new charge on a taxpayer who has adjusted net income over £50,000 in a tax year, where either they, or their partner, are in receipt of Child Benefit for the year. This will have effect from 7 January 2013.

The income tax charge will apply at a rate of one per cent of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.

UK Budget 2012 Income Tax rates and allowances

Income tax rates will be unchanged for the tax year 2012-13. For 2013-14, the additional rate of tax will fall from 50% to 45% for non-dividend income and from 42.5% to 37.5% for dividend income. The personal allowance for 2012-13 has been set at £8,105.

The Chancellor has already announced that the personal allowance for 2013-14 will be £9,205 which represents the largest ever increase and is the next step towards the Government’s commitment to a £10,000 allowance.

Age related allowance: From 2013-14, the age-related personal allowances will not be increased and their availability will be restricted to people born on or before:

• 5 April 1948 for the allowance worth £10,500; and
• 5 April 1938 for the allowance worth £10,660.
The objective of the measure is to work towards a single personal allowance for all taxpayers regardless of age, and simplify the system.

UK Budget 2012 Allowances

UK Budget 2012 income tax, capital gains tax, and inheritance tax allowances 2012

£ per year                                                             2011-2012     Change    2012-2013

Personal Allowance (under 65)                         £7,475           £630         £8,105
Personal Allowance (65-74)                              £9,940           £560         £10,500
Personal Allowance (75+)                                 £10,090         £570         £10,660
Married couple’s allowance** (age 75+)        £7,295            £410         £7,705
Married couple’s allowance** (min amount)£2,800          £160          £2,960
Income limit for age-related allowances        £24,000        £1,400      £25,400
Blind Person’s Allowance                                  £1,980           £120          £2,100

Capital gains tax annual exempt amount
Individuals                                                            £10,600          £0             £10,600
Most Trustees                                                       £5,300            £0             £5,300
IHT Allowance***                                                £325,000       £0            £325,000

UK Budget 2012 Pension Schemes Allowances
Annual Allowance                                                £50,000          £0             £50,000
Lifetime Allowance                                        £1,800,000  -£300,000 £1,500,000

* The personal allowance will be gradually withdrawn for income over £100,000 at a rate of £1 of allowance lost for every £2 over £100,000 until it is completely removed.

**Married couple’s allowance is given at the rate of 10 per cent.

***IHT rate on death is 40%, however for deaths on or after 6 April 2012, a lower rate of Inheritance tax of 36% will be introduced where 10% or more of
the deceased person’s net estate is left to charity.

UK Budget 2012 Income tax: taxable bands

2011-12                       2012-13
Starting rate:       10%***     £0-£2,560                 £0-£2,710
Basic rate:            20%          £0-£35,000               £0-£34,370
Higher rate:        40%           £35,001-£150,000  £34,371-£150,000
Additional Rate: 50%          £150,000+                £150,000+

***The 10% starting rate is for savings income only. If an individual’s taxable non-savings income is above the threshold then the 10% savings rate
will not be applicable.

The above information is based on the 2012 Budget released on 21 March 2012 and is not guaranteed to become law.

Please contact info@qropsspecialists.com for more info as well as a free guide to QROPS pension transfers and the impact of the UK Budget 2012 on your pension and your assets.

The UK Budget 2012 and its Effect on QROPS Pension Transfers by

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