Budget Comment March 2008
- Inheritance Tax
- Capital Gains Tax
- Non-Domiciles
- Income sharing (for owner managed companies)
- Tax Rates
Much of this repeats the October 2007 Pre Budget Report Commentary (we have updated where applicable).
Inheritance Tax (no change to the October commentary)
Since 9 October 2007 the ‘Nil Rate Band’ for Inheritance Tax is transferable between married couples.
Comment: This is the first genuinely effective simplification measure in what is meant to be the simplification era. We have long been complaining to Government about the classic situation where an elderly widow is forced to share her house with a Trust. It was complicated, uncertain and expensive. There is now no need for Nil Rate Band Discretionary Trusts on first death. Thank you – well done Darling!
Planning: On first death don’t use the ‘Nil Rate Band’. If there are surplus assets ensure that they pass to the survivor and from there make Lifetime Gifts, keeping the Nil Rate Band both in reserve and growing (remember it will be £350,000 by 6 April 2010). So the standard advice to ‘make sure you use it’ is now likely to be ‘make sure you don’t use it’. It is a welcome U turn!
Capital Gains Tax (updated from the October commentary)
After much lobbying from interested parties, the Chancellor announced in January 2008 that he will introduce ‘Entrepreneurs Relief’ to cushion the withdrawal of the Business Asset Taper. Otherwise from 6 April 2008 we have a new Capital Gains Tax across the board rate of 18%. No more indexation, no more Taper Relief, no more split periods, just a plain 18% on the gain after deducting the exempt amount (currently £9,200).
Comment: In October we said ‘This is the second genuinely effective simplification measure in what is meant to be the simplification era. But that is where the good news ends. At a stroke he has removed one of Brown’s flagship measures for entrepreneurs – the effective Capital Gains Tax rate of 10%. So this is an increase of 80% – unprecedented and ludicrous. Darling; what are you thinking of?’
Now he has introduced the ‘Entrepreneurs Relief’. This means that everyone has a lifetime allowance whereby (roughly) gains of £1,000,000 will enjoy the 10% rate on ‘Business Assets’ (but watch out here – the definition of Business Assets is more tightly drawn, principally that you have to own at least 5% and work for a trading company (hence the name ‘entrepreneurs’ relief).
Planning: There will be winners and losers depending on the type of asset, how long it has been owned and the gain. Please consider the Capital Gains Tax position carefully before selling – if you don’t want any surprises.
Non Domiciles (updated from the October commentary)
The Chancellor made no significant changes to the October announcement. We have added some clarification to the Commentary:
From the 6 April 2008 there is an annual tax charge of £30,000 for Non Domiciles who have been resident in the UK for 7 years. It is a voluntary tax charge – it is like a club membership. If you join and pay the £30,000 you will be able to treat offshore unremitted income and gains as you have done to date (ie not reported) but as well as the charge you would also lose your Personal Allowance. Subject to a de-minimus the alternative is not to join and be taxed on your offshore income and gains regardless of whether remitted.
Comment: Whole books are written on Non Domicile and residency, put simply this only affects foreigners living in the UK.
As far as joining the ‘club’ is concerned, you do so (or not) through the Self-Assessment Tax Return so there is plenty of time to consider the circumstances and calculate the cost/benefit. In addition it is a decision that you take each year – you can be in one year and out the next.
Planning: All Non Domiciles will need to review their offshore assets and income to determine whether it is worth registering for the £30,000 tax or alternatively paying UK taxes on worldwide assets and income. We recommend an early 2008 Tax Return to enable a timely review.
Also consider reordering offshore investments. For example cash, equities, bonds (etc) could be transferred into an Offshore Life Bond that don’t have taxable events until you want them to (potentially in the future when you may be non-resident) – if there are substantial capital gains then it may be worth realising them prior to 6 April 2008.
Income sharing (for owner managed companies) (not in the October commentary)
The Chancellor announced that the expected legislation to prevent ‘spousal income sharing’ (principally in owner managed companies) is delayed for at least another year for further consultation.
Comment: This relates to small companies were the principal profit earner shares the spoils with a non-working spouse to reduce the overall tax charge. Truth is they can’t find an easy solution – they should never have taken on the ‘Arctic Systems’ case as we are now more relaxed about sharing the spoils for at least another year!
Planning: Although we are more relaxed, we still don’t advocate taking the mickey when sharing profits (usually by dividends) with a non-working spouse. We need to maintain a working relationship with HM Revenue & Customs and as my (Yorkshire) maths teacher used to say: ‘eh lad, you scratch my back & I’ll scratch yours’.
Tax Rates
We set out below the tables of Tax Rates and Allowances. Note in particular the back door tax rise that is disguised as a significant National Insurance increase!
These are our general views this is not advice. If you would like advice on how any of the points we have mentioned (or any that we haven’t) affect you, please do not hesitate to contact us.
Rates and Allowances for 2008 and 2009
Rates and allowances for income tax, corporation tax, capital gains tax, inheritance tax and the pension schemes earnings cap are set out below.
|
|
2007-08 (£) |
2008-09 (£) |
Increase (£) |
| Income tax allowances |
|
|
|
| Personal
allowance |
5,225 |
5,435 |
210 |
| Income limit for age-related allowances |
20,900 |
21,800 |
900 |
| Married
couple's allowance for people born before 6 April
1935 |
6,285 6,365 2,440 |
6,535 6,625 2,540 1,800 |
250 260 100 |
| Capital gains tax annual
exempt amount: |
9,200 |
9,600 |
400 |
| Inheritance tax threshold |
300,000 |
312,000 |
12,000 |
| Taxable bands 2007-08 (£) |
Taxable bands 2008-09 (£) |
||
| Starting rate 10% |
0 – 2,230 |
Starting rate 10% |
– |
| Basic rate 22% |
2,230– 34,600 |
Basic rate 20% |
0 – 36,000 |
| Higher rate 40% |
Over 34,600 |
Higher rate 40% |
Over 36,000 |
| Corporation tax profits 2008-09 (£) |
|
| Small companies' rate 21% |
0 – 300,000 |
| Marginal relief |
300,001 – 1,500,000 |
| Main rate 30% |
1,500,001 or more |
National Insurance changes from 6 April 2008
|
|
2007/2008 |
2008/2009 |
||
| Class 1 Employees |
||||
| On first |
£100 pw |
Nil |
£105 pw |
Nil |
| Between |
£100 - £670 pw |
11% |
£105 - £770 pw |
11% |
| Over |
£670 pw |
1% |
£770 pw |
1% |
| Employee's contracted-out rate | 1.6% | 1.6% | ||
| Married
womans reduced rate |
4.85% of £100.01 to £670 pw, 1% above £670 | 4.85% of £105 to £770 pw, 1% above £770 | ||
| Class 1 Employers |
||||
| On first |
£100 pw |
Nil |
£105 pw |
Nil |
| Over |
£100 pw |
12.8% |
£105 pw |
12.8% |
| Employers' contracted-out rebate, salary related schemes | 3.7% | 3.7% | ||
| Employers' contracted-out rebate, money purchase schemes | 1.4% | 1.4% | ||
| Class 2 Self employed |
||||
| Flat rate | £2.20 pw | £2.30 pw | ||
| Small earnings exception | 4,635 pa | 4,825 pa | ||
| Special Class 2 rate for share fisherman | £2.85 pw | £2.95 pw | ||
| Special Class 2 rate for volunteer development workers | £4.35 pw | £4.50 pw | ||
| Class 3 Voluntary |
||||
| Flat rate |
|
£7.80 pw |
|
£8.10 pw |
| Class 4 Self employed |
||||
| On profits between |
£5,225 - £34,840 pa |
8% |
£5,435 - £40,040 pa |
8% |
|
|
above £34,840 | 1% |
above £40,040 |
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 non-residential land and property premium where rent exceeds £1,000 annually. The rules no longer apply to residential property from 12 March 2008). Duty on the rent is charged on any part of the net present value (NPV) which exceeds the threshold.
| 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 |