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This article was first published on LexisLibrary on 19 March 2014. Click here for a free 24h trial of LexisLibrary.

The Budget 2014 for private client lawyers

Abstract Private Client analysis: With the Chancellor's speech still ringing in our ears, we bring together the most important features of the Budget 2014 for private client lawyers alongside expert analysis and industry comment. Analysis What was relevant in the Budget for private client lawyers? Budget 2014--TIIN: New ISA, Junior ISA and Child Trust Fund--Increasing the flexibility for savers and investors, LNB News 01/01/0001 715 Individual Savings Accounts (ISAs) are to be reformed into a simpler product from 1 July 2014. All existing ISAs will become New ISAs (NISAs) and will give account holders greater flexibility in relation to their accounts, as well as increasing the limit to 15,000. In addition, the limit for Junior ISAs and Child Trust Funds (CTFs) for 2014/15 will be increased to 4,000 from 1 July 2014. Budget 2014--TIIN: Changes to the taxation of high value UK residential property held by certain non-natural persons, LNB News 19/03/2014 155 An extension is made to the package of taxes which affect residential properties held by companies, partnerships with company members and collective investment schemes (collectively referred to as non-natural persons (NNPs)), other than genuine commercial businesses and other limited categories, to properties worth more than 500,000 up to 2m. Budget 2014: Consultation--Freedom and choice in pensions, LNB News 19/03/2014 169 Budget 2014 announced that from April 2015 people will be able to access their defined contribution (DC) pension savings as they wish during retirement, subject to their marginal rate of income tax. HM Treasury has issued a consultation seeking views on details of the government's plans to offer greater flexibility in accessing DC pension savings, and has announced some interim changes that come into effect on 27 March 2014 which will introduce significantly more flexibility into the existing system. The consultation closes on 11 June 2014. What does this mean for private client lawyers? What are the headlines for this year's Budget for private client lawyers and why? Sophie Dworetzsky, partner at Withers LLP: We were promised something big and got quite a few things. The 10p savings rate is no more. In more good news for savers, the individual savings account (ISA) limit goes to 15,000 and cash and stocks and shares ISAs are to be one. Probably biggest of all though, the pension drawdown is being massively loosened up and pensioners taking their pot early will only pay the marginal rate--potentially 20%, rather than 55%. While there are lots of good headline announcements for savers, most savers investing in property through a company will be less happy. The much publicised Annual Tax on Enveloped Dwellings (ATED) has raised

five times the amount expected for 2013/14 and, encouraged by this, the Chancellor today announced that anyone holding residential property worth 500,000 or more through a company will now be exposed to ATED. Previously this only applied to homes worth 2m or more. It will be key to monitor any impact this has on the housing market especially for foreign investors. As announced in the Autumn Statement, all taxpayers with existing tax disputes arising from planning which is within the disclosure of tax and avoidance scheme (DOTAS) rules or which falls under the new general anti-abuse rule (GAAR) will have to pay the amount of tax HMRC say is under contention upfront. That could be interesting, given it extends to old open enquiries and given that what is said to be in dispute and any tax actually due are not always the same. This is clearly a massive cash flow issue for taxpayers, who may also need advice on their position. And potentially a human rights issue? HMRC is also going to have powers to dip into the bank accounts of taxpayers who owe more than 1,000 of tax, and this may be a nasty surprise for anyone with an open enquiry, who may not have an actual liability but faces either paying the tax in dispute or having their bank account debited. Andrew Goodman, partner at Taylor Wessing: The top story of the day was the reduction of the threshold for ATED, related capital gains tax and the penalty 15% rate of stamp duty land tax (SDLT) from 2m to 500,000. This was again sold as an attack on wealthy individuals avoiding SDLT, although nobody in government has yet come up with any reliable figures for the number of properties actually sold while 'enveloped'. Most estimates were wildly inaccurate. The private client industry has long pointed out that buyers simply don't want to buy 'used' companies and that 80% of such companies were used to mitigate inheritance tax, the other 20% generally for asset protection and anonymity. This measure is likely to produce the most work over the coming year--we now have considerable experience in 'de-enveloping', although with an ATED rate of 3,500 per annum on properties of up to 1m, and 7,000 for the next 1m, many clients might choose to leave their structures in place. The majority of instructions could well be the completion of forms to claim the many and varied forms of relief. Are there any surprises? Andrew Goodman: The big surprise was the unveiling of yet another overhaul of pension schemes. Most such announcements are more trouble than they are worth--the A Day simplification in 2006 gave way to annual changes that sowed utter confusion--but the removal of the obligation to buy an annuity could prove to be the most positive development in a generation. The other surprise was that the Chancellor has added a new section to the Budget--a list of charitable donations. The first two recipients had a lucky break--the cynical might claim that they were only included to shield the fact that the third--to the Magna Carta Committee--enabled him to make a joke about Ed Miliband. What actions should private client lawyers be taking as the dust settles? Andrew Goodman: The first step must be to review structures for any clients who are still holding their residential properties in companies--particularly those who previously fell under the 2m threshold. Given the relatively low level of the annual charge, there is a balance to be struck between the value of sheltering the property from inheritance tax and the alternatives such as insurance, debt planning or maximising the use of the spousal exemption. Other than that, the Budget introduced very little in the way of significant changes to the tax or tax avoidance regime. The increase in the ISA limit to 15,000 per annum and 'Pensioners Bonds' will be welcome, but few will require legal advice on how to use them. The detailed Budget Notes usually conceal a few barbs not mentioned in the speech but this year these have all be pre-announced, in particular the reduction in the final period of PPR relief from three years to 18 months. What has been the reaction from the private client sector? John Low, chief executive, Charities Aid Foundation: 'We are pleased the government is committed to promoting and modernising Gift Aid, but we urgently need to see the detail. Changes must be far-sighted and ambitious, so that Gift Aid is truly fit for the digital age and charities can benefit from this generous tax relief on millions of text, online and mobile donations. It is also good news that the government has confirmed a

30% tax relief on social investment, the first time there has been a tax relief specifically for those who invest to produce social benefits. This has the potential to bring in millions of pounds in investment for charities and social enterprises.' 'We need to use this new tax relief to promote social investment as an everyday part of the financial services industry so we can grow the charities and social enterprises that can make such a huge difference to people across the country.' Gary Heynes, head of private client, Baker Tilly: 'Pensioners will have the ability to draw down on their pension funds at a much quicker rate and many will appreciate the quicker access to their savings, but there is a worry that without careful planning this could lead to them running out of money as they age. However, for those who are happy to save, there are many new attractive incentives, such as the New Individual Savings Account which provides a more flexible savings opportunity, which could now be a strong competitor to pensions savings, the new premium bond limits, increase in personal allowances and the new 0% savings band. There is a balance to be struck here in an economy currently driven by consumer spending.' John Hawksworth, chief economist, PwC: 'The reforms to pensions may be the biggest change in the Budget, but in the short term this actually raises money for the Chancellor. There are also increases in public service pension contributions that help to fund the above inflation rise in the income tax personal allowance, which is the biggest single tax cut in the Budget. Raising the national insurance contribution threshold might, however, have been a more effective way to help lower paid workers. Ed Wilson, pensions director, PwC: 'The changes present new challenges for providers. The increased flexibility in retirement should encourage greater innovation in the sector and create scope for new products, but equally it appears providers may be on the hook for the provision of the government's promised face-to-face independent financial guidance. This could place a big demand on the financial services sector. The questions of who will deliver this guidance, and how quality will be assured, need to be answered. We need more information about the knock-on effect for defined benefit schemes.' Tony Clare, pensions advisory partner, Deloitte: 'Reforming income drawdown rules is long overdue. It will make pensions more flexible and attractive. Income drawdown accounts for about 15% of the UK's 11bn annuity market and these changes will make it much more widespread. About 400,000 people buy an annuity every year and many could increase their retirement income by about 15% a year using income drawdown. Giving people free advice at the point they make retirement decisions is an excellent idea.' Joanne Segars, chief executive, National Association of Pension Funds: 'Today's announcement is perplexing. Automatic enrolment, one of the largest and most successful reforms of workplace pensions ever seen, was introduced to encourage people to make good financial decisions about their retirement, because experience tells us that people are often ill-informed and make poor decisions about financial planning for old age.' 'On the one hand the idea that savers can take their pension as a lump sum, albeit subject to tax, may be an incentive to save. However, this choice brings with it a significant burden of responsibility for individuals to understand the choices they are making. We know this is not always the case as people often underestimate how long they will live and overestimate how long their pot will last. There is a recognised problem with the lack of financial literacy in the UK and there is a distinct lack of detail in today's announcement on how the government will ensure people have access to good impartial advice so they make the right decisions about their income for retirement.' Mike Smedley, pensions partner, KPMG: 'The Budget turns the world of pension savings upside down. With almost unrestricted access to pension pots in future, this will radically affect the way today's workforce saves for tomorrow. From previously limited choices, individuals now have greater flexibility to decide how they save for the future, but with more decisions to be made comes more responsibility and greater risk.' Want to know more? A full overview of the Budget 2014 can be found here: Budget 2014: Tax Information and Impact Notes and related documents, LNB News 20/03/2014 2. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.