Reevy's Budget Special
Joe Reevy’s Budget Summary 23 March 2006
Introduction
With his sights fixed firmly on number 10 Downing Street, not number 11, Chancellor Gordon Brown's budget features a number of measures designed to create popular support, whilst preserving his reputation as a ‘no-risk’ Chancellor by keeping most changes at the levels required by inflation only. The budget features a large number of anti-avoidance provisions, which include the extension of the powers of HM Revenue and Customs (HMRC) to exchange information with foreign tax authorities regarding indirect as well as direct taxes and a general extension of the types of tax avoidance measures that must be notified to HMRC. However, hidden in the depths of the HMRC budget notes are a couple of bombshells.
Personal Tax
General
Tax bands, entitlement to benefits limits and national insurance contributions and limits stay essentially the same in real terms.Income Tax Rates
The personal income tax threshold rises in line with inflation from £4,745 to £5,035, with higher-rate tax coming in at a taxable income of £33,300 – up from £32,400 in 2005/06.Capital Gains Tax (CGT)
There were no changes to CGT rates. Investors (including trustees) who ‘bed and breakfast’ shares to use their annual allowance for CGT or to create a tax loss will find that such transactions are ineffective with immediate effect. With the FTSE index having risen substantially this year, the Chancellor is effectively increasing his future CGT yield.Motoring
Vehicle Excise Duty (the tax disk) is being reduced for the two lowest bands of vehicles (by up to £35) and increased by £25 for the highest band, with the two middle bands unchanged. The bands are based on how much pollution a vehicle creates. The very ‘greenest’ vehicles will be exempt from tax altogether. Set against this, the increase in fuel duty (postponed from September because of the spiralling cost of fuel) is being reintroduced, adding 1.5p per litre to petrol, but again deferred until September. The benefit in kind charge for the lowest band car is also being reduced by the introduction, from 2008/09, of a new 10 per cent rate for company cars with CO emissions of 120g/km or less.Venture Capital Trusts (VCTs)
Although the amount which can be contributed to a VCT is doubled to £400,000 from 6 April, the tax relief is to be limited to 30 per cent. The time such shares have to be held to be CGT free is lengthened to 5 years (from 3) and the size of the ‘gross asset value’ for a company which can obtain VCT status is reduced from £8m to £7m. These changes apply to VCT shares issued after 5 April 2006.Anti-Avoidance
As well as new measures to prevent avoidance of tax and national insurance through the use of financial instruments such as share options, the Chancellor has hit hard at the abuse of charitable donations, by restricting the benefits which charities can provide to companies which donate to them, restricting charitable tax relief where the charity uses donations for non-charitable purposes and preventing abuses whereby a donation is made and then withdrawn when tax relief has been obtained.Pensions
Measures designed to prevent abuses which allow the use of pensions to pass on assets free of IHT are being introduced.Trusts – Chancellor Declares War
The Chancellor has declared war on the use of tax advantaged Accumulation and Maintenance (A&M) and Interest in Possession (IIP) trusts by making them subject, with immediate effect, to an ‘entry’ tax charge of 20 per cent on lifetime transfers that exceed the Inheritance Tax threshold. By deeming them to be ‘relevant property’ trusts, the 6 per cent ‘periodic’ charge and the ‘exit’ charge when trust assets vest will also apply, except where specific conditions are met. The main exceptions will be trusts arising on death where the beneficiary receives the assets at age eighteen or trusts which are created for the benefit of a disabled person.Existing A&M and IIP trusts which provide that the assets in trust will go to a beneficiary absolutely at 18 – or where the terms on which they are held are modified before 6 April 2008 to provide this – will continue to have the current exemptions. Where they do not, the trust assets will become relevant property from 6 April 2008 and the periodic and exit charges will apply.
Property Taxes
The threshold for Stamp Duty Land Tax (SDLT) has been increased from £120,000 to £125,000 for residential properties. The threshold for the higher rate of duty has been frozen at £250,000, a move which will be unpopular with all residential property owners.Inheritance Tax (IHT)
Recent polls indicating that a large majority of the public think that IHT is inherently unfair may account for the decision to raise the IHT threshold to £285,000 immediately, with further increases to £300,000 in 2007/08, £312,000 in 2008/09 and £325,000 in 2009/10.Business Tax
General
The theme is again one of most changes being only what is necessary to keep pace with inflation, with an emphasis on fighting tax avoidance and the introduction of a number of measures aimed at reducing various pernicious VAT frauds, typically involving mobile phones and computer chips. The proposal to create ‘summer schools for entrepreneurs’ is a novelty.VAT
The registration threshold for VAT is increased from £60,000 to £61,000 and the deregistration limit is increased from £58,000 to £59,000 from 1 April 2006. There are a number of changes introduced to help HMRC fight ‘missing trader’ VAT fraud. One ‘interesting’ change is that HMRC are to be given the explicit right to enter any premises connected with any supply of goods, including premises used for storing goods for others, and to mark or stamp goods. In addition, HMRC will be permitted to specify additional records that must be kept if they suspect that ‘the additional records might assist in identifying supplies on which VAT might go unpaid’.One ominous note is that HMRC are to ‘fundamentally re-write’ the option to tax buildings and land for VAT rules, contained in Schedule 10 of the Value Added Tax (VAT) Act 1994, but no details are given as to what those changes will be. Property owners and developers take note!
Corporation Tax Rates
The abolition of the 10 per cent rate of corporation tax on the first £10,000 of profits not paid out in dividends by small companies was announced in the 2005 pre-budget report: this is abolished from 31 March 2006.Land Development Tax
Strangely, the budget contained nothing on Land Development Tax (also known as Planning Gain Supplement), which was expected to be introduced to tax windfall gains arising on land and properties as a result of planning permission being granted. Whether this suggests a change of heart on the part of Mr Brown is anyone’s guess. Watch this space!Capital Allowances
Small businesses will welcome the increase in first-year allowances for the purchase of new equipment from 40 per cent to 50 per cent. Research and development allowances are also being increased for some companies.Mobile Phones Blow
The exemption from a benefit in kind charge on mobile phones and computers that are supplied to employees or family members of employees and which can be used for private purposes has always been anomalous and it has now been abolished insofar as it applies to computers. A limit of one per employee has also been placed on the number of mobile phones which can be provided without a benefit in kind charge being payable.Landlords – Energy Saving Allowance
The tax relief available for landlords to insulate their tenanted properties is being further enhanced from 6 April 2006 to include draught proofing and insulation for hot water systems.Landfill Tax
The standard rate of landfill tax will be increased from £18 per tonne to £21 per tonne. This will probably cause a sharp rise in the cost of skip hire.Stamp Duty Land Tax (SDLT)
The replacement for the old Stamp Duty, this tax has spawned a plethora of problems since its introduction in 2003. In order to ease these, a number of common transactions will be taken out of the scope of SDLT. These are:
· a gift of property where the donee or beneficiary agrees, or is required, to pay capital gains tax or inheritance tax arising on the gift;
· the payment of a landlord’s reasonable costs on the grant, variation or termination of a lease; and
· a covenant by an agricultural tenant to assign entitlement to the Single Farm Payment to the landlord on termination of the tenancy.
The threshold for Stamp Duty Land Tax (SDLT) has been frozen at £150,000 for commercial properties and the threshold for the higher rate of duty has been frozen at £250,000.
Summary
The Chancellor has announced a budget which increases the effective powers of the Customs side of HMRC in particular and is firmly aimed at reducing tax avoidance and fraud. The tax bite on small companies and those supplying mobile phones to family members will also increase sharply.
We recommend that when considering any of the issues mentioned here, you take professional advice before taking any action.
For press releases outlining the budget measures, see the Inland Revenue website at http://www.inlandrevenue.gov.uk/.
The information contained in this newsletter is intended for general guidance only. It provides useful information in a concise form and is not a substitute for obtaining professional advice
The information contained in this newsletter is intended for general guidance only. It provides useful information in a concise form and is not a substitute for obtaining professional advice