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Budget Comment March 2006

Trusts ambushed!

Trusts have been around since the 1500s but could this last remnant of the feudal system be on its way out? The ability to have cake and eat it has taken a battering over the recent past with a variety of anti-avoidance measures, but this time Gordon Brown has really stuck the boot in.

In March 2004 he increased the rate of tax paid by Trusts from 34% to 40%. Now he has had a major swipe at the Inheritance Tax friendly Interest in Possession and Accumulation & Maintenance Trusts.

All Trusts (subject to exemptions eg those with disabled or charity beneficiaries) will be treated as Discretionary for Inheritance Tax purposes. It may sound innocuous but additional tax charges will flow and this will have far-reaching estate planning implications, particularly for grand parents gifting to grandchildren and for parents wanting to hand down substantial assets (more than the exempt band of £285,000) whilst maintaining an element of control.

The Government review of Trusts has been underway for a while, but there was minimal consultation and no warning on the scale of these changes. They came into force overnight, a classic Gordon Brown sting, and probably aimed as much at his Trust laden Cabinet colleagues as at the rest of us.

We have all seen before that Gordon does not worry too much about repercussions, but we expect the stunned silence in the professions to be replaced by fierce criticism and there may even be changes before the Finance Act is published in the summer.

Either way, all existing Trusts will need to be reviewed (there is a transitional period up to 5 April 2008) and future family tax planning will need a major rethink.

Pensions

‘A’ Day is upon us (6 April 2006). The 2006 Budget introduced some technical changes in the small print, but the basics were set out in our 2005 Budget Comment:

‘The rules will be much softer on the underlying investments and we will see a growth in SIPPs (Self Invested Personal Pensions) to facilitate this. The rules will also be much softer on how much we can put in each year (100% of earnings up to £215,000), but much harder on the maximum allowable in the pot (£1,500,000).’

Remember pensions are simple, don’t be overawed or allow the sceptics to cloud the issue. You do need to be confident of your retirement income and pensions represent a really good option to ensure that you will have money to spend. See our tried and trusted comments: Pensions – Why Have One? and Pensions – Do Something.

Tax Return submission deadlines

Your 2008 Tax Return will have to be submitted by 30 November 2008 rather than 31 January 2009. For those used to submitting in December and January, why not practice on your 2006 Tax Return?

Other areas

There was a lot of technical tinkering elsewhere but not much to affect the man in the street. Contact us if you’d like to know more about changes to:

  • Inheritance Tax treatment for pensions
  • Research & Development
  • UK Real Estate Investment Trusts
  • Capital Allowances for small companies
  • VAT on contraceptives
  • General tax avoidance
Rates and Allowances for 2006 and 2007

Rates and allowances for income tax, corporation tax, capital gains tax, inheritance tax and the pension schemes earnings cap are set out below.

2005-06 (£)

2006-07 (£)

Increase (£)

Income tax allowances

Personal allowance
Personal allowance for people aged 65-74
Personal allowance for people aged 75 and over

4,895
7,090
7,220

5,035
7,280
7,420

140
190
200

Income limit for age-related allowances

19,500

20,100

600

Married couple’s allowance for people born before 6 April 1935
Married couple’s allowance –aged 75 or more
Minimum amount of married couple’s allowance
Blind person's allowance

5,905

5,975

2,280

1,610

6,065

6,135

2,350

1,660

160

160

70

50

Capital gains tax annual exempt amount:
Individuals etc
Other trustees

 

8,500
4,250

 

8,8500
4,400

 

300
150

Inheritance tax threshold

275,000

285,000

10,000

Pension schemes earnings cap

105,600

N/A

 


Taxable bands 2005-06 (£)

Taxable bands 2006-07 (£)

Starting rate 10%

0 – 2,090

Starting rate 10%

0 – 2,150

Basic rate 22%

2,090 – 32,400

Basic rate 22%

2,150– 33,300

Higher rate 40%

Over 32,400

Higher rate 40%

Over 33,000


Corporation tax profits 2006-07 (£)

 

Small companies' rate 19%

0 – 300,000

Marginal relief

300,001 – 1,500,000

Main rate 30%

1,500,001or more

The main rate of corporation tax for 2006-07 will be 30 per cent.

National Insurance changes from 6 April 2006

2005/2006

2006/2007

 Class 1 Employees

On first

£94 pw

Nil

£97 pw

Nil

Between

£94 - £630 pw

11%

£97 - £645 pw

11%

Over

£630 pw

1%

£645 pw

1%

Employee's contracted-out rate 1.6%   1.6%
Married womans
reduced rate
4.85% of £94.01 to £630 pw, 1% above £630 4.85% of £97.01 to £645 pw, 1% above £645

 Class 1 Employers

On first

£94 pw

Nil

£97 pw

Nil

Over

£94 pw

12.8%

£97 pw

12.8%

Employers' contracted-out rebate, salary related schemes 3.5%   3.5%
Employers' contracted-out rebate, money purchase schemes 1%   1%

Class 2 Self employed

Flat rate £2.10 pw   £2.10 pw
Small earnings exception 4,345 pa   4,465 pa
Special Class 2 rate for share fisherman £2.75 pw   £2.75 pw
Special Class 2 rate for volunteer development workers £4.10 pw   £4.20 pw

Class 3 Voluntary

 Flat rate

£7.35 pw

£7.55 pw

 Class 4 Self employed

On profits between

£4,895 - £32,760 pa

8%

£4,895 - £32,760 pa

8%

 

above £32,760

1%

above £32,760

1%

Stamp Taxes

Transfers of property (consideration paid)

Rate
All land in the UK
Land in disadvantaged areas
  Residential Non-residential Residential Non-residential
Zero £0-125,000 £0-150,000 £0-150,000 All
1% Over £125,000 – 250,000 Over £150,000 – 250,000 Over £150,000 – 250,000  N/A
3% Over £250,000 – 500,000 Over £250,000 – 500,000 Over £250,000 – 500,000  N/A
4% Over £500,000 Over £500,000 Over £500,000  N/A
New leases (lease duty)

Duty on the premium is the same as for transfers of land (except that special rules apply for premium where rent exceeds £600 annually). Duty on the rent is charged on the Net Present Value (NPV). The rates indicated apply to the amount of NPV in the slice, not to the whole value.

Rate
Net Present Value of Rent Rate
  Residential Non-residential
 
Slice of NPV
Zero £0 - £125,000 £0 - £150,000
1% Over £125,000 Over £150,000

The rate of stamp duty / stamp duty reserve tax on the transfer of shares and securities is unchanged at 0.5% for 2006-07.