Spring Finance Bill 2023 – key points for private clients

Over the last year, the UK has had four Chancellors of the Exchequer and, with so much back and forth (particularly in the immediate aftermath of the economic turmoil sparked by Kwasi Kwarteng’s “Growth Plan” in September 2022), private clients (and their advisors) would be forgiven for losing track of where we have ended up on tax rates and thresholds.

Income tax

Proposals by Mr Kwarteng to abolish the 45% additional rate of income tax from April 2023, to bring forward an already planned 1% cut to the basic rate of income tax (from 20% to 19%) and to reverse the 1.25% increase to dividend tax rates (which took effect in April 2022) have all been scrapped.

Accordingly, the Spring Finance Bill now confirms that income tax rates for the 2023/24 tax year will remain at 20% (basic rate), 40% (higher rate) and 45% (additional rate). Dividend tax rates will also remain at 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate).

Much needed revenue will instead be raised through various “stealth tax” measures. In his Autumn Statement in November 2022, Mr Hunt announced the freezing or reduction of certain income tax thresholds and allowances. The Office for Budget Responsibility estimates that these measures (summarised below and already brought into force through the Finance Act 2023, which received royal assent in January of this year) will increase tax receipts by around 1% of GDP a year through fiscal drag.

The income tax personal allowance (the amount of income an individual can receive free of tax – tapered for individuals with income above £100,000 and not available for non-UK domiciled individuals claiming the remittance basis of taxation) is fixed at its current level of £12,570 until April 2028.
The higher rate threshold (the level of income above which the higher rate of 40% is charged – currently £37,700 plus the personal allowance, if available) is also fixed at its current level until April 2028.
The additional rate threshold (the level of income at which the 45% rate starts to apply) is being lowered from £150,000 to £125,140 from 6 April 2023.
The dividend allowance (the tax-free allowance for dividend income) will be reduced from £2,000 to £1,000 from 6 April 2023 and halved again to £500 from April 2024.

Capital gains tax

The Spring Budget and Spring Finance Bill make no changes to existing rates of CGT.

However, it was announced in the Autumn Statement (and enacted through the Finance Act 2023) that the CGT annual exempt amount (the level of chargeable gains which can be received free of tax in a tax year – currently £12,300 for individuals and personal representatives, £6,150 for trusts, and not available to non-UK domiciled individuals claiming the remittance basis) will be reduced to:

£6,000 (for individuals and personal representatives), or £3,000 (for trustees) from April 2023; and
£3,000 (for individuals and personal representatives), or £1,500 (for trustees) from April 2024.

Inheritance tax

No changes are being made to current IHT rates; however, Mr Hunt confirmed in his Autumn Statement that the IHT nil rate band amount (last increased on 6 April 2009) will remain at £325,000 until April 2028. This 19-year freeze will continue to have a significant stealth tax impact, dragging more people into the IHT net on death.

Corporation tax

Mr Kwarteng’s proposal to cancel a planned increase to the main corporation tax rate has also been dropped. Accordingly, the Spring Finance Bill confirms that the main rate of corporation tax increased to 25% from 1 April 2023.

The significant changes to pension tax allowances which were announced by Mr Hunt in his Budget on 15 March will be brought into force by the Spring Finance Bill. In particular:

the lifetime allowance (currently set at £1.07 million) will be abolished – this will take effect from April 2024 but the lifetime allowance charge is to be disapplied from 6 April 2023;
the annual allowance will increase from £40,000 to £60,000 from 6 April 2023; and
the tapered annual allowance for high earners will be raised from 6 April 2023 so that tapering commences at £260,000 and tapers to a minimum of £10,000 (rather than the current £4,000).

These changes will increase opportunities for taxpayers, particularly high earners, to benefit from the tax advantages associated with pensions; however, it should be noted that the Labour Party has already pledged to reverse these reforms if it wins power in the next election.

Our pensions team have provided further commentary on these announcements.

It is well known that spouses or civil partners are able to transfer assets freely between each other without triggering an immediate CGT charge on the disposal of the asset (known as a “no gain no loss” transfer). However, couples who are separating or divorcing can be caught out by existing rules which extend this treatment only for the remainder of the tax year in which they separate. Transfers made from the following tax year are deemed to take place at market value and taxed accordingly.

In a May 2021 report on CGT, the Office of Tax Simplification (OTS) noted that “it is unrealistic to expect separating couples to have resolved their affairs by the end of the tax year of their separation” and recommended that the window for no gain no loss transfers be extended to allow separating couples at least two tax years after the separation event to make transfers, or an even longer period provided it is reasonable and in accordance with a financial agreement approved by a court.

The provisions set out in the Spring Finance Bill (which had already been published in draft last July) are more generous than the OTS’ recommendations. Under the new rules, applying to disposals made on or after 6 April 2023, separating spouses or civil partners will be able to continue to make transfers between each other on a no gain no loss basis for:

up to three tax years after the tax year in which the couple cease to live together (although this period would end earlier if the divorce is finalised before then); or
an unlimited period where the transfers are made in accordance with a formal divorce agreement or court order.

Special rules are also introduced for individuals who maintain a financial interest in their former family home following separation, including the ability for the non-occupying former spouse or civil partner to claim principal private residence relief on a future sale of the property.

This is positive news for separating couples, giving them more time to reach an agreement on the division of their assets without running the risk of an unwelcome tax bill adding to the stress of separation.

In April 2012, the availability of UK charitable tax reliefs was expanded so that charities established in the EU, Norway or Iceland (and, from 2014, the Principality of Liechtenstein) could also benefit from them, provided that such charities had exclusively charitable purposes under English law and that various other conditions were satisfied by the non-UK charity.

However, following announcements made in the recent Budget, the Spring Finance Bill amends the relevant legislative provisions so that, going forwards, only UK charities will be able to access UK charitable tax reliefs. These restrictions have effect from the date of the Budget (15 March) unless the non-UK charity in question has already “asserted its status as a charity” with HMRC, in which case the availability of UK charitable tax reliefs is extended until April 2024.

It should be noted that, in 2019, the Supreme Court held in Routier and another v HMRC [2019] UKSC 43 that HMRC’s refusal to grant IHT relief on a gift of UK assets to a Jersey charity (with exclusively charitable purposes under English law) under the deceased’s will was incompatible with EU law principles on the free movement of capital. Despite the UK’s withdrawal from the EU, the treaty rights relied upon in Routier currently continue to apply in the UK so, notwithstanding the restrictions introduced by the Spring Finance Bill, it could be argued that the principles set out in the Routier decision remain relevant for non-UK charities (although we would not expect HMRC to accept this). However, legislation currently making its way through Parliament in relation to the revocation of EU law post-Brexit may affect the application of the Routier decision.

Accordingly, taxpayers hoping to benefit from UK charitable tax reliefs on gifts to non-UK charities ought to consider other options for their cross-border giving. One solution would be to make the gift indirectly, via a UK charity (such as a “donor advised fund”) which is able and willing to give the money to the non-UK charity. A UK charity can make a payment to a non-UK body provided that the UK charity takes adequate steps to ensure that the money will be used for purposes which are charitable, as a matter of UK law, and provided that those purposes fall within the objects for which the UK charity was established.

Following a consultation conducted by HMRC last year, the Spring Finance Bill sets out various technical amendments intended to simplify tax administration for trusts and estates. For example, from April 2024, trusts and estates with income up to a £500 “de minimis amount” will not be required to pay tax on that income as it arises. These tweaks will be welcome news for trustees and administrators.

Tax avoidance on share exchanges

Following announcements made in the Autumn Statement, the Spring Finance Bill contains anti-avoidance measures which apply where an individual with a degree of control in a UK company exchanges their securities for securities in a new non-UK holding company, in circumstances where specific share reorganisation rules apply (such that the exchange of securities does not give rise to an immediate charge to CGT).

Under current rules, if the individual described above is non-UK domiciled, they would be able to claim the remittance basis on any gain or dividend arising in respect of the non-UK securities, meaning that UK tax on the profits would be deferred until those funds are remitted to the UK (if at all). However, once the Spring Finance Bill comes into force, this will no longer be possible – instead, the non-UK securities will be deemed to be located in the UK, so the non-UK domiciled taxpayer will pay tax on gains or dividends received in respect of those securities in the same way as they would if the securities were in a UK company. These measures have effect in respect of exchanges carried out on or after the date of the Autumn Statement (i.e. 17 November 2022).

Note, however, that these measures are likely to be of limited application in practice. The share reorganisation rules mentioned above (which prevent the exchange of securities from giving rise to an immediate charge to CGT) apply only where the transaction is effected for bona fide commercial reasons. Accordingly, transactions implemented for the sole purpose of gaining a UK tax advantage will continue to be dealt with by existing anti-avoidance legislation.

Capital gains assessment time period for unconditional contracts

For CGT purposes, the date of disposal of an asset is the date on which a contract is entered into or becomes unconditional, rather than the date on which the asset itself is conveyed or transferred. Deadlines for the taxpayer to notify HMRC of their tax liability or make a claim for losses and for HMRC to assess the tax due are currently set by reference to the date of disposal (i.e. the date of the contract). This means that where there is a long gap between the date of the contract and the date of completion, HMRC and taxpayers may have little or no time in which to make a tax assessment or a claim for losses.

Accordingly, the Spring Finance Bill adjusts these deadlines where there is a delay between exchange and completion (for CGT purposes, more than six months after the end of the tax year in which the contract was entered into (or became unconditional) and for corporation tax purposes, more than one year after the end of the accounting period in which the contract was entered into (or became unconditional)). In these circumstances, the relevant time limits are calculated by reference to the completion date rather than the date of the contract.

These amendments take effect in respect of contracts entered into on or after 1 April 2023 (for corporation tax) or 6 April 2023 (for CGT).

Although the Spring Finance Bill contained no measures relating to IHT reliefs, it should be noted that the Budget documentation confirmed that reforms to agricultural property relief (APR) and woodlands relief are in the pipeline. From April 2024, the scope of these reliefs will be restricted to property in the UK (another decision triggered by Brexit). Furthermore, the Government has published a consultation which explores other possible reforms to APR. Suggestions made include:

expanding the relief to cover certain types of environmental land management; and
introducing restrictions so that, where a farm business tenancy exists, 100% relief will apply only if the tenancy is for more than eight years.

Private clients whose IHT planning involves the application of APR should watch this space for further developments in this regard.

At the Spring Budget, the Government announced its intention to introduce an election for UK resident carried interest holders to accelerate their UK tax liability. The details of the election have now been published in the Spring Finance Bill. The election will, in certain circumstances, enable the individual to claim double tax relief in another jurisdiction by accelerating the UK tax charge.

The election is voluntary, but once made, it is irrevocable for that scheme; individuals will therefore want to think carefully about whether and when they elect into the regime. The new rules come into effect for the 2022-23 tax year, with the rules backdated to 6 April 2022.

Overall, aside from the headline-grabbing announcements relating to pensions, the Budget and Spring Finance Bill contained no major surprises for private clients; indeed, many of the measures had been well-trailed. Despite speculation about possible reforms to the taxation of non-UK domiciled individuals, no new announcements were made in this regard. However, it should be noted that the Budget documentation states that a further set of “tax administration and maintenance” announcements will be made later in the spring so it remains to be seen whether any of these measures will affect private clients.