Steven Mugglestone

The more I learn, the less I know

Pop Pickers Top Ten Emergency Budget Prediction Countdown

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Pop Pickers Top Ten Emergency Budget Prediction Countdown

@ N 10. Inheritance tax

It is unlikely that there will be any change to the current inheritance tax (IHT) threshold of £325,000, when many Tory backbenchers and their supporters enthusiastically supported an earlier proposal to increase the nil rate band to £1 million.

  • We may see some restrictions to IHT.
  • The current deemed domiciled rules bring a non-dom under the IHT net if they have been resident in the UK for the last 17 out of 20 years. This could be shortened to the last 7 out of 9 years to align it with the test that is used for the remittance basis charge.

@ No 9. Pensions

There is agreement to restore the link between the basic state pension and earnings. This was initially suggested in the Turner Commission 2005.

  • This could go further to implement many of the other reforms set out in this report including increasing the state retirement age for men and women.
  • It is also likely that the further pension reliefs will be taken away from high income earners perhaps lowering the proposed threshold for tapering of higher rate relief, which is set at £150,000 of income and is due to apply from next April.
  • There are also already signs that the Government will remove the rule to buy annuities at the age of 75.

@ No 8. Non Domiciled (“non-dom”) individuals

Residence and domicile status can have a significant impact on an individual’s liability to UK income and capital gains tax. This area gained large media coverage during the election campaign and the Government has stated that it will review the taxation of non- doms.

  • History shows how hard it is to make progress on such issues.
  • Major changes were made to the taxation of non-domiciled individuals in the Finance Act 2008, introducing some of the most complex rules the UK tax legislation has seen to date.
  • The UK still lacks a statutory residence test to provide certainty on an individual’s status.
  • If cuts in the corporation tax rate are to be proposed to encourage inward investment, radical changes to the taxation of non-doms may keep away the very entrepreneurs we are looking to encourage to relocate to the UK.

@ No 7. Tax avoidance and anti-avoidance measures

There is a clear message and belief that large revenues could be raised from clamping down on tax loopholes and tax avoidance schemes.

  • There is a clear message on anti-avoidance measures.
  • There are already detailed rules in the UK restricting aggressive tax planning and there may not be a large tax revenues available here to help bridge the deficit gap.
  • HMRC are already operating on limited resources and this will need strengthening to be able to enforce any new proposals.

@ No 6. Banking levy

There has been an announcement that a banking levy will be introduced and in this Budget the Chancellor is likely to press ahead with his proposals aside from the European Union (EU) initiative on providing a regulatory framework for a pan-European banking levy.

  • There is clearly a desire to be able to apply the funds raised by a UK levy more widely as opposed to reserving in an EU fund to address potential future bank failures as envisaged by the EU.
  • There will be a clamp down on bonuses in the financial services sector. This may not be imposed on individuals but on the industry as a whole in order to influence corporate behaviour away from a short term bonus culture.
  • The Bank payroll tax ended at the end of the last tax year (2009/10) and there has been no announcement to extend it, but it is likely that there is more to come for banks.

@ No 5. Corporation Tax

The main message of the Coalition Government is that they want to reduce red tape for businesses and make the UK an attractive place to do business. The main headline rate of corporation tax will be reduced but it is not indicated as to what rate.

  • While the Conservative manifesto stated clearly it would cut the main rate from 28% to 25%, the new Government may seek not to go ahead with this full cut straight away.
  • A cut of this nature will make us more competitive against other OECD countries but we would still be nowhere near the top of the league for offering low corporation tax rates. Companies will however be concerned by what capital allowances or other reliefs and exemptions might be taken away to fund this cut. Any downward reduction in corporation tax rates would need to be part of a broader package if the UK is going to attract more inward investment and encourage companies to come to the UK to do business.
  • There will be a reform to the complex controlled foreign companies (CFC) rules which act as a deterrent for some companies from establishing themselves in the UK. This is unlikely to be in the Budget in any detail but he may announce when the draft CFC legislation will be published. This is part of an on-going review of UK law started under the previous Government.
  • It is likely to review whether to maintain the much disliked “IR35” rules as part of a review of all small business taxation. These rules impact on small companies which offer personal service eg computer consultants or many types of contractor. Despite ten years of existence, they still are perceived as being poorly thought through and unhelpful to business.
  • There will be considerable interest in any review on simplification for tax for smaller businesses and this will be much welcomed although it will also be useful to see a sensible timetable for detailed discussion of the issues.
  • We could see a withdrawal of R&D relief for larger companies and possibly an announcement of tightening the rules more closely targeted to purely hi-tech businesses.

@ No 4. Property taxes

When it comes to property, the CGT increases will be the main area of concern. The housing market is already in a delicate position and further tax changes will not help this position.

  • The Emergency Budget may also introduce changes to “Private Residence Relief” – which enables people to sell their only or main residence free of CGT.
  • It is expected that there will be a tightening up of the definition of a ‘main residence’ and reduce the opportunities to allow those with more than one property to vary what counts as their main residence, therefore exposing them to a greater chance of a CGT charge.
  • The wide spread speculation of VAT increases could hit the property sector hard. It is expected that this rise will also apply to renovations and new build properties. The property sector needs a level playing field in order to help it back onto its feet. A VAT hike and the many changes to the property tax system that are expected to come through are not helping.
  • In addition, potential reductions in capital allowances in order to fund a possible corporation tax cut may be considered. If this goes ahead, property investors will not be able to recoup as much of their costs, therefore hitting their bottom line.

@ No 3. VAT rise

There is growing speculation that the Chancellor will announce an increase in the standard rate of VAT.

  • The UK standard rate of 17.5% is relatively low when compared to other EU countries, and similar EU rates would mean a rise to 20% – a figure predicted by many leading economists. The dilemma is when to make the increase.
  • The rate of inflation in the UK is more than 1% above the last Government’s inflation target and the Bank of England may soon come under pressure to increase the base rate to stave off any further inflationary pressure. A VAT rate rise would make inroads into the public sector borrowing deficit but it would also be inherently inflationary. This rise may, therefore be deferred until early next year.
  • Another option is to review the scope of the VAT zero and reduced rates and tax certain items at a higher rate than at present.
  • Although there may be some uncertainty about when any VAT rate increase may occur, it is certain that when it happens it will have huge implications for both businesses and consumers alike. Although a transaction-based tax, in reality most common purchases are subject to VAT and increases do tend to hit those on lower incomes proportionately harder than the rest of the population.

@No 2. Capital gains tax (CGT)

We already know CGT is due to increase. This much talked about measure is likely to go down badly, in particular with investors with share portfolios and anyone with a second home that provides additional income, but may one day give a useful capital gain. Key points, though:

  • Confirmation that the rise will be a tax only on “non-business” activities but there is likely to be some “discussion” on what is deemed “business” and “non-business”. There was also discussion of “generous” relief for entrepreneurs and details will be expected on exactly what that means.
  • The actual tax rate is yet to be determined but we do know that it will be more in line with income tax so it could go up to 40% but the option of taxing up to the highest rate of 50% has not been ruled out.
  • Prediction that the capital gains tax increase will be introduced at the beginning of the new fiscal year (April 2011), but there is no guarantee at this stage that this will occur and they could introduce a retrospective date eg backdate to 6 April 2010) which would prove very unpopular. They could also make a change from 22 June !!
  • If the introduction date is April 2011 it will give entrepreneurs and other asset holders time to consider what the new rules will mean for them and whether they need to take action or not in full knowledge of what the rules are rather than having to take rushed decisions based on limited or no information.
  • There is, however, no real evidence to show that by raising the rate of capital gains tax that it necessarily results into higher tax revenue raised. When CGT was moved to a flat rate of 18 per cent, that rate was chosen because it accorded with global research that it was close to the most effective rate in terms of balancing revenue yield with encouraging investment.
  • The is an expectation the tax rate on the disposal of non-business assets will be increased in line with income tax rates, which could mean an effective tax rate on capital gains of up to 50%.  In an effort to discourage more speculative activity there may be differential tax rates depending on whether an assets has been owned for the short or long term.  It is likely that any new short-term rate, which could apply to assets held for less than two years, could take effect immediately from Budget Day.
  • In its simplest form a long-term rate of circa 30% could be applied to assets held for more than two years, and is likely to be introduced in April 2011.  This could help increase revenue for the Chancellor as short-term gains are immediately taxed at a higher rate and individuals would then have the choice of keeping or disposing of assets.  A differential rate for longer term holdings would also deal with the problem of how to grant relief for purely inflationary gains.
  • In order to continue to encourage entrepreneurial activity we are anticipating an extension to the existing definition of business asset, possibly to include shareholdings by employees in their employers, and predict that the CGT rate on such assets will be set somewhere between 10 – 20%.  Again there may be some differential so that assets held for the longer term enjoy the lowest tax rates.  This would of course take us back to a similar position to taper relief.
  • Although given the limits on cash available to the Treasury a simple extension of the less generous lifetime entrepreneur’s relief (currently limited to £2 million for 5% shareholdings and above) may be all that is on offer.
  • We would not expect any change to the individual allowance of £10,100 for tax free capital gains each year, as any change would raise relatively small sums proportionate to the extra resources that would be required to collect it.  In addition the change would disproportionately impact those taxpayers who made modest gains each year in order to supplement their incomes.

@No 1. Personal Tax and National Insurance

It is not likely that there will be any further announcement on headline income tax rates at this Budget.

  • They have confirmed that they will raise the personal tax-free allowance (currently £6,475) to £10,000 over the lifetime of this Parliament.
  • This is of course good news for low income earners as many of them will be removed from paying tax altogether.
  • Higher earners will feel little benefit as those with incomes over £100,000 no longer receive full personal allowances due to a change introduced in April this year.
  • Expected clarity on when the increased personal allowance will be introduced but it is likely that the allowance will be lifted between £700 and £1,000 immediately.
  • This measure aims to help modest income earners we will see readjustments of the threshold at the upper end of the basic rate band.
  • The 1 per cent rise in national insurance contributions (NIC) from next April for employees is likely to go ahead but the same uplift for employers NIC has been shelved.
  • It is possible that as part of a review of the tax and benefit system the Chancellor could announce a wider review of the interaction of the tax and NIC system, with a view to smoothing changes to marginal rates of tax as income levels rise across taxpayers but we do not expect any immediate changes.
  • With a focus on assisting those on lower and middle incomes we might see some proposal of changes to the Tax Credit system, which could be capped at a set amount based on household income, which would have the benefit of doing away with some of the complexities that Tax Credits has become synonymous with.  It is unlikely that we will see a proposal for Child Benefit that is based on means testing as this would add unnecessary complexity.
  • We could see a further boost to yearly ISA subscription limits (currently £10,200), or a statement of intent from the Chancellor, as ISAs provide a tax efficient way to save in addition to being an alternative to pension planning.
  • The Government could also look, or hint at, something more imaginative to encourage and assist individuals to save, such as tax incentivised bonds, which could be used towards a house purchase (this has been tried in Australia), or funding retirement.  After the second world war there was a partial rebate of the (admittedly much higher) taxes that had been levied in wartime, so perhaps the Chancellor could convert the 50% rate into compulsory purchase of gilts by affected taxpayers so that this becomes a timing cost until the deficit is reduced.
  • We may hear news of the consultation for tax treatment of interest.  Any changes to this will affect the current playing field between the tax treatment of dividends (not tax deductible but only taxable on the recipient at up to 36.1%) and interest (generally tax deductible and taxable on the recipient at up to 50%), and while we do not expect to hear something immediately at Budget, this is one to watch.


Written by Steven Mugglestone

June 17, 2010 at 8:55 am

Posted in Uncategorized

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