Pre-Budget Highlights: What They Mean for You
Capital Gains Tax: Gordon’s relief abolished
The changes to CGT and abolition of taper relief, ostensibly to close “loopholes” currently available to those in the Private Equity industry, could have far reaching effects on entrepreneurial businesses and their owners. This relief had originally been introduced by Gordon Brown to encourage investment in small businesses.
The Chancellor’s announcement that he will introduce a flat rate of Capital Gains Tax at 18% and withdraw taper relief from 6 April 2008, means that many smaller businesses and individuals currently benefiting from taper relief and paying CGT at 10% will be worse off. Hardest hit are likely to be shareholders of owner managed businesses, sole traders, partnerships and those who own and let out commercial properties.
Adding insult to injury is the loss of indexation which means larger increases in the calculation of a capital gain and hence a substantially higher tax liability.
Planning tip: it may be worthwhile to realise gains now before the start of the new tax year on 6 April 2008, possibly by transferring assets into trust.
Inheritance Tax: A gold digger’s charter?
The IHT threshold for married couples and civil partners increases from £300,000 to £600 000 and then £700,000 by 2010. The £600,000 threshold will be back dated indefinitely for widows, widowers and civil partners whose partner has died. It would appear that if an individual has been widowed more than once, he or she can claim an additional tax free band for each occasion that he or she has been bereaved.
Planning tip: while the increase in the IHT threshold may mean fewer nil rate discretionary trusts being set up under Wills, it does not negate the need for planning in some circumstances, particularly in the case of family businesses where succession and inheritance are not always straight forward.
Non-domiciles: the countdown has started
At present, UK residents who are not domiciled or not ordinarily resident within the UK can use the remittance basis of taxation. In other words, any income and capital gains arising overseas are only taxed here when that income or gain is remitted into the UK.
The pre-budget report states that with effect from 6 April 2008, once a non-domiciled individual has been resident in the UK for seven years they will only be able to use the remittance basis of taxation of they pay an additional annual tax charge of £30,000. Where an individual elects not to use the remittance basis, they will be taxed on their worldwide income and gains whether or not these are remitted to the UK.
The new rules come into force on and after 6 April 2008. All previous years of residence will count from that day.
Planning tip: For those who have been resident for 7 years or more by 6 April 2008, it is essential for a review to be undertaken before 6 April to determine the best approach under the new regime. Non-domiciles may be able to structure their affairs to minimise the impact. However, planning will be subject to the outcome of the consultation on the proposed changes.
When calculating how long you have been resident in the UK, it is worth noting that the days you arrive in and depart from the UK will now count as days in the UK whereas previously they did not.
Arctic Systems and the Settlements legislation:
The Chancellor confirmed that a formal consultation on income shifting will take place. The tests that are to be applied will take into account:
- the nature of the work done by each party
- the investment made by each party
- the risk taken by each party
Planning tip: review your working arrangements with your spouse or other partners and shareholders before April next year
VAT
With effect from 1 January 2008 it is proposed that the reduced rate of VAT (5%) will apply to the renovation of residential property empty for 2 years or more, currently this is 3 years.
A full Pre-Budget Report will be available on our website on 10 October 2007.
