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Pension changes
The provisions on members' and dependants' alternatively secured pensions are to be tightened up. The changes:
- introduce a minimum income requirement of 65% of the annual amount of a comparable annuity (for a 75 year old) that could be purchased with the sums and assets in the fund. Failing to comply with this requirement will mean that the scheme administrator will become liable to a 40% charge on the difference between the minimum income limit and the amount paid as pension income in the year;
- increase the maximum annual withdrawal of income that is permitted from an ASP fund to 90% of the annual amount of a comparable annuity (for a 75 year old) that could be purchased with the sums and assets in the fund;
- remove from the authorised payment rules the transfer lump sum death benefit option; this will impose an unauthorised payment charge of up to 70% where, on the death of a member or on the death of a dependant of the member, any remaining ASP funds are transferred to the pension funds of other scheme members;
- remove the facility to make payments under a guarantee from an ASP fund; and
- allow charity lump sum death benefits to be paid at the nomination of the scheme administrator, where there is no member nomination.
A tax charge will be imposed on those aiming to use other benefit options (for example, scheme pensions) as a means of passing on tax-favoured funds on or before the death of a member. These changes will have effect on and after 6 April 2007.
HMRC is undertaking consultation to confirm that members of registered pension schemes who either already have ASP funds, or will shortly be in that position, will on and after 6 December 2006 be able to reorganise their affairs to prevent them becoming liable to the tax charges imposed by the removal of the transfer lump sum death benefit facility as an authorised lump sum death benefit and by the removal of the guarantee facility for alternatively secured pensions.
The aim of these changes is to prevent wealthy individuals using the rules as part of their financial planning arrangements. In this respect, Stuart Davies of Deloitte says that 'there is no continuing benefit to retain capital in a pension past age 75 if it is to be taxed at such high rates. From a planning perspective, it might be better for wealthy individuals to maximise their income and give it away as a regular gift out of income, if the objective is to reduce IHT liability'.
The Government is also concerned about life insurance policies that provide lump sum death benefits alone being offered as personal pension arrangements eligible for pensions tax relief. The Government says that it will work with the pensions industry to explore, in time for the Budget, how to stop this. Any changes the Government decides to make will not effect either personal arrangements entered into before 6 December 2006 or existing types of employer arrangements. The Treasury was unable to supply figures of the sums involved. Peter Vipond of the ABI says that customers have bought products in good faith following the introduction of the new pension rules in April this year, so 'any changes therefore should only apply to policies sold after the effective date'. The ABI is also asking the Government 'to proceed quickly, but fairly, in reaching a conclusion to limit uncertainty' and will be working closely with the Government on this matter.
Life companies will have to move fast and decisively to avoid the potential for mis-selling of pension term assurance say pension consultants Watson Wyatt.
The withdrawal of pension term assurance 'just eight months after its introduction, represents another cost burden for insurers and, in consequence, consumers', says Mike Williams of Watson Wyatt. He goes on to say that 'given the extent of consultation with the industry in advance of this pre Budget it is surprising that this issue was not covered. It was abundantly clear that there would be a major push on pension term assurance and its consumer benefits well in advance of A-Day. If the Government had any misgivings, as was the case with residential property in SIPPs, it should have acted before A-Day, not eight months later'.
Green smiles
Legislation in Finance Bill 2007 will confirm that where private householders install microgeneration technology in their home for the purpose of generating power for their personal use, any payments they receive from the sale of surplus power to an energy company is not subject to income tax. This exclusion does not apply to cases where surplus power is sold in the course of a trade.
Among others who will benefit from this green tax break are Tory leader David Cameron, say PKF. Along with other 'micro-generators' of electricity from wind-turbines and other generators, David Cameron will benefit from the exemption from income tax on any power he sells back to the national grid.
However, the Government's planned temporary exemption for new-build zero-carbon houses from stamp duty land tax from 2007 supporting the Government's plans and for all new houses to be zero-carbon by 2016 is particularly 'significant'. Although still the detail will be announced in the 2007 Budget, PKF's Peter Penneycard says that it 'is likely to create real change in the construction industry. The sector can clearly expect significant amendments to the building regulations to ensure houses become zero-carbon within the decade'. It will be interesting to see how or whether the Government intends to tackle environmental damage created during the construction process itself, muses Mr Penneycard.
Kevin Griffin of Ernst & Young thinks that the stamp duty measure is unlikely 'to advance the Government's green agenda very far'. He says the saving for the average house will be 1% or 3% of the price, but 'the additional construction costs to meet a “zero” carbon standard will surely be far greater than this'. Considerably greater incentives will be required to persuade the construction industry to make the necessary changes, so Mr Griffin concludes that 'this relief will probably be consigned to the dustbin of tax history as was the ill-fated disadvantaged areas relief before it'.
VAT
Partial exemption
Following consultation, the Government intends to make changes to the partial exemption method with effect on and after 1 April 2007.
The first change (the method declaration) will require a business to declare 'to the best of its knowledge and belief' that its proposed special method is fair and reasonable. HMRC will have the power to set aside a method if the person signing the declaration knew or ought reasonably to have known that is not fair and reasonable. The business would then have to recalculate past returns to ensure that it only recovered a fair and reasonable amount of VAT. The second change (the combined method) will give businesses the legal right to apply for a 'combined method' that caters for the recovery of VAT on overseas supplies that confer the right of input tax deduction, for example, supplies of finance and insurance made to customers outside the European Union.
TOGC
VAT record keeping requirements for businesses transferred as a going concern are to be brought into line with other tax and regulatory regimes so that the seller retains his records, except in the few cases where because the buyer retains the seller's VAT number it is essential for VAT compliance purposes that the records are passed over.
The change will have effect on and after the date on which Finance Bill 2007 receives Royal Assent.
These changes effectively 'close the door on manipulation of complex areas of VAT' says Neil Warren of Keens Shay Keens Ltd.
