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Impact of Budget changes on family cases

Date:20 MAR 2015
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Whilst all eyes were anticipated to be on the Budget, George Osborne’s thunder was stolen, somewhat, by the activities of the Federal Reserve and attention turned to Washington as the Fed’s pledge to be 'patient' before raising interest rates, was dropped.

The March 2015 Budget might be seen as a political statement with Conservative strategists wanting Mr Osborne to set the tone for the general election campaign. So whilst it is the Chancellor’s sixth Budget, the objective might be said to be closely aligned with a political message and the focus appears to remain the state of Britain’s public finances and getting the deficit down. So perhaps this Budget should be viewed as one whose objective is political impact given the polls place the Conservatives and Labour neck and neck.

The headline issues which may have impact for family lawyers and financial remedy cases include:

(a) The pension pot lifetime allowance is cut from £1.25m to £1m from 6th April 2016 – a move predicted to generate £600 m for the Treasury. Significant why? The allowance was introduced in 2006. In 2011 it stood at £1.8m and the Budget announcement represents further disincentivisation on saving for retirement. Pension holders pay a 55% tax charge on any amount held over the lifetime limit. There is transitional protection created for those adversely affected. Form April 2018 the lifetime allowance will be indexed, rising in line with the annual increase in the CPI.

(b) In addition, people who have bought an annuity will be allowed to sell the income to a third party and the proceeds could be taken directly or drawn down over time although taxed at the holder’s marginal rate. Relevant to financial remedy proceedings includes the following considerations:

– Pension sharing might be a remedy to overfunding and a means to alleviate the 55% tax charge.

– Think about the client with commercial property currently worth £700,000 and equities and cash of some £200,000 but who is only 48 years of age – is he likely to exceed the allowance by retirement? What predictions can and should be made for growth on the commercial property and equities? Is it in his long term interests to share?

– Are the new reforms (see my March Family Law article, 'The most radical changes to pensions in almost a century') going to create greater flexibility in defeating past liquidity issues in allowing access to pension funds to provide capital for, say housing needs?

c) The personal tax allowance currently stands at £10,000 and rises to £10,600 this April but the Budget announced a further rise from April 2016 to £10,800 and then to £11,000 in April 2017. Frequently when looking at net effect considerations on the division of income at the time of divorce and incentivising divorcees to go back to work, the tax efficiency of a personal allowance is not lost in looking at utilising the earning capacity over time with, perhaps, a corresponding step down in quantum of periodical payments post the making of any order or agreement.

d) There are new and improved anti-avoidance measures with legislation to implement the previously announced changes to the DOTAS (Disclosure of Tax Avoidance Schemes) regime that will be included in the Finance Bill of 2015 due to be published next week. Amongst the proposed changes are:

– Removing the duty of confidentiality from persons who voluntarily disclose information to HMRC to assist HMRC in determining whether there has been a breach of the DOTAS rules. 

– Increasing penalties.

– Empowering HMRC to publish summary information about notified schemes and identify users of undisclosed schemes.

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The Government has confirmed that legislation will be introduced in a future Finance Bill to impose further sanctions on serial tax avoiders – increased financial penalties/increased reporting obligations/naming and shaming/restricting access to tax reliefs.

The relevance of this is that in family cases involving high net worth individuals it is not uncommon for there to be complex and sophisticated tax schemes and structures set up with the objective of tax efficient financial planning. Sometimes a case will feature an issue over contingent liabilities – what will be HMRC’s approach to a particular avoidance measure and how such contingent liability should be treated when factoring in the s 25 Matrimonial Causes Act 1973 criteria.

Practitioners be alert as yesterday (19 March 2015) the Government was also set to publish plans for new criminal offences for tax evasions and penalties for those professionals who assist tax evaders. Further information on this was not available at the time of compilation of this article.

In A v A; B v B [2000] 1 FLR 701 Mr Justice Charles spoke of the strong obligation of disclosure and the 'strong public interest that all tax, and Revenue penalties due, should be paid…'.

(e) Owner-managed businesses:
(i) Individuals wishing to claim entrepreneurs’ relief (ER) on the gain arising on the disposal of a personally held asset that has been used in their business or personal company must, at the same time, make a significant disposal of their share in the business or shareholding in the company. Prior to the budget statement, any disposal out of a material holding was sufficient to trigger ER on disposal.

(ii) Legislation will be amended to require a disposal of an interest representing at least 5% of the assets of the partnership or 5% of the of the ordinary shares or securities of a personal trading company. There must also be no arrangement to reacquire an increased share in the partnership or additional shares in the company.

It is frequently the case in a divorce that liquidity has to be generated by the sale of business assets and ER has been a useful method of minimising the tax hit.

(f) Other potential 'winners' amongst our client base are beer and cider drinkers – the duty on lower strength beer will be cut by 6% and lower strength cider by 2%!

The 2015 Budget can be downloaded here.