Lower pension contribution limits, restrictions on holiday-home tax breaks and a crackdown on inheritance tax avoidance are among the measures proposed in nine consultation documents published by the Treasury on Tuesday.
These proposals, published by David Gauke, exchequer secretary to the Treasury, follow commitments made in the emergency Budget in June.
Mr Gauke said the consultation should help the government to ”become more open and transparent in its approach to policy making” and is asking for responses to the planned changes by September. He said: “We want to make the tax system simpler and work better for the taxpayer. By reducing burdens, making the right choices and involving taxpayers, we are sending a very clear signal that Britain is open for business.”
Pension contributions are to be cut from the current ‘annual allowance’ of £255,000 with limited tax relief, to a lower limit of £30,000-£45,000 with full tax relief.
This change would replace the Labour government’s proposals to taper down higher-rate pension tax relief for high earners. The pensions industry has been lobbying for a simpler system the measures were first proposed last year, on the grounds that lower rates of tax relief were difficult to calculate and too complicated for savers to understand.
Pension consultants welcomed the proposals, which should make it tax-efficient for higher earners to pay into a pension. However, a flat-rate contribution allowance of around £40,000 is likely to affect more people than the Labour proposals, which were targeted at those earning over £130,000 a year.
PricewaterhouseCoopers said that twice as many people in final-salary pension schemes could be caught by the new proposals. It warned that an “unintended consequence” could be a continued shift of employers away from final-salary schemes and towards defined contribution pension plans – which typically result in lower pension payouts.
Owners of furnished holiday lets also face a less generous tax regime from next April, now that the Treasury proposes to restrict the use of loss relief – one of the most favourable tax breaks for holiday rentals.
The consultation document on furnished holiday lettings suggests that trading losses should only be set against future profits from the same business. Under the existing rules, owners can offset trading losses from a holiday home against any other sources of income.
The Treasury has also proposed increasing the number of days for which a property must be available and let, in order to qualify for tax breaks. It suggests increasing the minimum period for which a property is available to let to the public from 140 to 210 days each year, and the days which it is actually let from 70 days to 105 days.
Vincent Oratore, president of the Chartered Institute of Taxation, said that while the proposal to amend rather than abolish the holiday-let rules will be welcomed by many property owners, the ending of loss relief will hit some owners.
Transfers of property into trusts, to avoid inheritance tax (IHT), will also be subject to greater scrutiny under proposed new disclose rules. In last December’s pre-Budget Report, the Labour government published legislation to close two IHT avoidance schemes involving the use of trusts. However, HM Revenue & Customs (HMRC) has reported that new schemes are being used to avoid the 20 per cent tax charge that should arise when a property is transferred into trust.
Paula Higgleton, tax partner at Deloitte, said: “There must be a fear out there that people are coming up with schemes to avoid that tax charge – with property values being suppressed down to the £325,000 nil-rate band. There are ways of doing it with exemptions, such as business property relief and agricultural property relief.”
HMRC is therefore proposing to extend the existing Disclosure of Tax Avoidance Schemes regime (DOTAS) to IHT, to provide early warning of tax avoidance schemes and their users.
Consultation on these measures will run over the next few months, allowing changes to be implemented in the 2011 Finance Act, to take effect next April.
The nine areas that the government is consulting on are:
Reporting by Alice Ross, Tanya Powley, Matthew Vincent and Lucy Warwick-Ching