UK Spring Budget 2023: Comments on changes to corporation tax and the abolishment of the lifetime allowance
London, 15 March 2023 – Elliot Weston, tax partner, and Jill Clucas, pensions counsel, comment on the government raising the rate of corporation tax to 25% and abolishing the lifetime allowance.
Elliot Weston, head of tax in the UK: “The most striking announcement from a corporation tax perspective is the introduction of 100% capital allowances from April 2023. In the real estate sector, this will be a significant relief for both UK and non-UK investors. The 25% corporation tax rate is still going to be painful though.
“As with the super-deduction, the 100% allowances are to be available to landlords in respect of qualifying expenditure on new fixtures which are background plant and machinery for a building. However, the 100% allowances won’t be available to a purchaser of a building (under a s198 election) on the basis that there is a general exclusion for expenditure on second-hand assets.
“The REIT changes are helpful and in particular will support private REITs which are owned by a fund. The change to allow property income distributions by a REIT to a partnership to be paid gross to the extent that the partners would be entitled to gross payment reflects HMRC’s previous practice but is now to be included in the regulations. The widening of the genuine diversity of ownership test for funds should also make it easier for funds with parallel vehicles to be the owner of a private REIT.
“Other potential REIT changes will have to wait until next year. These include possibly fixing the close company test so that a REIT can meet the test by reference to an indirect participator that is an institutional investor and amending the 10% holder rule to cater for non-UK institutional investors.
“The government has thought better of trying to bring foreign sovereign entities into the charge to UK tax, including on UK property income and gains. The Budget document confirms that there will no change to the current exemption for sovereign immunes and welcomes the constructive engagement with sovereign investors. This may reflect a lot of lobbying behind the scenes, but it perhaps also recognises that there would have been a number of practical challenges. These would have included how to require sovereign entities to file UK tax returns and mitigating unintended effects for other investors investing alongside a sovereign.”
Jill Clucas, pensions counsel: “The abolition of the lifetime allowance (LTA) goes way beyond the anticipated increase to £1.8m (from its current level of just over £1m) and represents a revolution in pension taxation. Without the LTA, individuals who have yet to draw their pension benefits may contribute to their pensions for as long as they wish, without fear of market rises (or government intervention) resulting in a LTA charge. This is a very welcome aspect of the Chancellor’s strategy to encourage longer working lives.
“Until the start of the new tax year on 6 April 2023, the LTA will continue to apply. Anyone retiring between now and 6 April and who is likely to face an LTA charge may wish to consider deferring retirement by a few weeks.
“The current LTA increasingly catches not just the very well off but also those on middle incomes who have diligently saved for retirement throughout their working lives. Many working age individuals who stopped paying into their pension because of concerns of breaching the LTA may now decide to resume pension contributions. Employers who currently provide additional pay instead of pension contributions for staff at risk of exceeding the LTA will need to reconsider their approach to compensation for senior (or older) employees. Unregistered “top up” pension arrangements for senior staff subject to the LTA may also need revisiting.
“The position with the annual allowance (AA) is more complicated. The headline increase from £40,000 to £60,000 per year is helpful and will address some of the tax issues causing senior doctors and others to leave public service earlier than they might otherwise have done. This will be aided by technical changes to allow public sector workers to “link” their service in open and closed pension schemes.
“However, those who have already dipped into their pension pots using the “pension flexibilities” are subject to a “money purchase annual allowance” (MPAA) of only £4,000 per year. This will increase to £10,000 per year from 6 April 2023 – a welcome increase but still a far cry from the £60,000 per year available to individuals who have not yet drawn any pension. Individuals who stopped contributing to their pension because of LTA concerns may have decided to access their pension early, in the knowledge that the restrictive MPAA would not have any impact on someone who had ceased pension contributions. Undoubtedly some individuals subject to the MPAA may now regret drawing their pension when they did, rather than relying on funds from other sources (such as ISAs or property).
“Another group not benefitting to the full extent from the pension Budget announcements is individuals with an income (including the value of pension contributions) of £240,00 or more. Such individuals are subject to the “tapered annual allowance” – a gradual reduction in the AA, so that those with an adjusted income of £312,000 or more have an AA of only £4,000 per year. This will increase to £10,000 per year from 6 April 2023 and the threshold for the tapering to start will rise to £260,000. Again, this is a long way off the £60,000 per year allowed to those earning less than the tapering threshold.”