Pre-Budget 2007
A Brief Summary Prepared by The Old Mill Tax Team
Mr Darling’s first pre budget speech will not have won him many fans on either the political or business front. Claims that he is stealing the other parties ideas are posturing wordplay – however Accountants and Tax planners could claim that he is stealing some of theirs. The slight of hand he has introduced with IHT merely mimics the nil rate trust that many well advised people will already have in place. However as he effectively has left the thresholds at where they were before many people will still have to look very closely at the potential problems with Inheritance Tax.
The changes to Capital Gains Tax are even more of a shocker for owners of small businesses. After a number of years of being encouraged to invest in your business so you can sell it for retirement he has in effect imposed an 80% tax increase on the sale value. Owners will find this hard to stomach when the tax on capital gains on some other investments has effectively been reduced and larger businesses will have seen a reduction of 2% in the 30% band of Corporation Tax.
This summary covers the major changes in the pre budget report that Old Mill anticipates will affect most clients in some way. There are also many other changes in the budget that are not covered here. This summary is not intended to be comprehensive in any way, but more to give a flavour of the main changes that are likely to affect you. If you would like to discuss any of the changes, please do speak to your usual Old Mill Contact who will be able to advise on your specific circumstances.
Capital Gains Tax
A major reform of Capital Gains Tax has been announced, to take effect from April 2008. Taper Relief and Indexation will be abolished, and there will be a single rate for Capital Gains Tax of 18% for all. Annual Exemptions (currently £9,200) will continue to be available to offset against capital gains.
The complex share matching and pooling rules are also being abolished, and replaced from April 2008. All shares of the same class in the same company will form a single pool, although same day and bed and breakfasting rules continue.
This is a major simplification of Capital Gains Tax, and we have a window of opportunity until April 2008 to consider whether those that benefit more under the current regime should take any action.
Inheritance Tax
Inheritance Tax has been simplified for married couples and civil partners, in that any unused nil rate band on the death of the first spouse can be transferred to the surviving spouse to utilise on their death. This will effectively give couples a joint nil rate band of £600,000, and will avoid the need for discretionary nil rate band will planning. The Chancellor also announced that this limit will increase to £700,000 by 2010/11.
This new rule takes immediate effect, and is actually back-dated for widows and widowers, so any unused allowances from their deceased spouse can now be utilised without the need for a deed of variation. This will have effect no matter what the date of death of the first spouse.
National Insurance and Holiday Pay Schemes
Schemes that utilise the exemption from National Insurance Contributions on holiday pay where that pay comes from third parties will be closed from 30 October 2007.
These schemes were specifically set up to make use of this exemption, and the introduction of this rule will not affect the majority of employers and employees.
Non-Domiciled Individuals
Non-domiciled individuals have benefited from generous tax treatment in the past. Where income and capital gains have not been remitted to the UK, they have not had to pay UK tax. However new rules will have effect from 6 April 2008, and affect non-domicilaries once they have been resident in the UK for seven years. If they wish to retain the remittance basis they will be subject to an additional tax charge of £30,000 a year. Alternatively they will be subject to UK tax on their worldwide income and capital gains. From 6 April 2008, non-domiciled individuals who wish to benefit from the remittance basis (even those within the initial seven year period) will not be entitled to a personal allowance, which also includes married couples allowance and blind person’s allowance (subject to a £1,000 de minimis of unremitted foreign income).
Further changes involve the closing of loopholes utilised by individuals to bring foreign income and capital gains into the UK tax free, including the frequently used “ceased source” rule. Specific rules preventing the remittance basis being utilised on income from the Republic of Ireland are being removed. There will also be a consultation process to consider whether those who have been resident in the UK for more than 10 years should make a greater contribution.
Residence
Under current legislation, when deciding whether an individual is resident in the UK, days of arrival and departure in the UK are ignored. From 6 April 2008 these days of arrival and departure will now be included as days of presence in the UK for residence test purposes.
This rule is brought in to counteract those individuals claiming non-residence who live outside the UK, but commute to and work in the UK, for instance travelling in on the Monday, and leaving on the Thursday.
Stamp Duty and Stamp Duty Land Tax
Minor changes in Stamp Duty have been made to reduce the administrative burden for small value transactions. Any transaction that results in a Stamp Duty charge of £5 or less will now be exempt, and will not have to be presented for stamping. This will result in purchases of shares of less than £1,000 being exempt from Stamp Duty.
Land Transactions where the consideration exceeded £1,000 had to be declared, even though no Stamp Duty Land Tax was payable. This limit has now risen to £40,000.
This guide is intended for general guidance only at a time when details are still emerging. Please talk to a professional adviser before taking any action that may affect your business.
Errors and omissions excepted.
This is a preliminary analysis only and professional advice should be sought before relying on the above or undertaking any transactions. Please speak to your Old Mill contact or a member of the Tax Team.