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UK emergency budget implications

Neil Chadwick provides a summary of new Chancellor George Osbourne's 2010 Emergency Budget

Like a newly appointed CEO of a failing multinational company, George Osborne delivered what many were expecting to be the most hard-hitting budget in recent times as the coalition Government attempts to reduce the mounting debt of UK PLC. In truth, the budget was not that bad but we are yet to see where the axe is going to fall in respect of cutting costs.


The pre-budget headlines were dominated by expectations that Capital Gains Tax (CGT) would fall in line with the higher rates of Income Tax and, once again, bring parity between assets taxed on either basis. This didn’t quite happen, although the new higher rate of 28% for CGT is significant all the same.


When CGT was reduced to 18% in 2008, some commentators said Offshore Bonds were finished and that direct ownership of collectives was the only way forward. Thankfully, not everyone was suffering from ‘tunnel vision’ and Offshore Bonds continued to be used where it was appropriate. By ‘appropriate’ I mean that, having taken into account an investor’s personal circumstances and objectives, an Offshore Bond was the most suitable investment.


Of course, now that we have two rates of CGT, both of which are lower than the comparative rates of Income Tax, the old ‘chestnut’ is bound to be raised again. Therefore it is worth looking at a few points to highlight that it is not simply a case of selecting a particular investment strategy based on current headline tax rates alone.


Firstly, the CEO of UK PLC resisted pressure to reintroduce indexation and taper relief on capital gains. This, when combined with the new higher rate of CGT, creates conundrums for those undertaking ‘buy to hold’ strategies and those actively managing a portfolio of assets. In the first instance, there is little incentive for holding on to a particular asset and, in the second, those actively trading a portfolio could now incur significantly higher tax liabilities.


Secondly, unlike Income Tax in respect of Offshore Bond gains, there is no CGT ‘top slicing calculation’ to establish an average rate of tax where the gain pushes the tax payer into the higher rate threshold. It will either be 18% or 28%.


Finally, as trustees will now pay a flat rate of CGT at 28%, whilst this is much lower than the Trustee Income Tax rate of 50%, it does not bode well for trustees who require an actively managed portfolio unless they want to be taxed each time an asset is sold. Also, whilst the rate of Income Tax is higher, it can be mitigated by assigning an asset, such as an Offshore Bond, to a basic rate beneficiary.


So what else of note happened in the emergency budget?


Changes to the Personal Allowance

The personal allowance for those aged under 65 will be increased by £1,000, to £7,475, with the basic rate limit being reduced so that higher rate taxpayers do not benefit from the increase in the personal allowance. The exact figure will be confirmed when September’s Retail Price Index is known. Whilst this may appear good news for basic rate taxpayers, those currently earning close to the limit may well find themselves falling into the higher rate tax band and paying 40% on some of their income.


Capital Gains Tax

As previously mentioned, capital gains tax for individuals will rise to 28% where the relevant individual’s income and gains exceed the income tax basic rate band. For individuals whose income and gains are equal to or below the income tax basic rate band, the rate remains at 18%. The rate that applies to trustees and personal representatives of deceased persons is increased to 28%. The lifetime limit on qualifying gains for entrepreneur’s relief, which was recently raised to £2 million, is increased to £5 million. Capital gains qualifying for entrepreneur’s relief remain taxable at 10%. The changes relating to the increase in capital gains tax and the raising of the lifetime limit in qualifying gains for entrepreneur’s relief apply to gains made on or after 23 June 2010.


Non-domiciliaries

The taxation of non-domiciled individuals will be reviewed with consideration to be given, once again, to a General Anti-Avoidance Rule.


Pensions

The Government is considering restricting pensions tax relief from 6 April 2011 by reforming the existing pension savings allowances, principally by significantly reducing the annual allowance currently at £255,000.


Change to the standard rate of VAT

VAT will increase to 20% on 4 January 2011.


Anti-forestalling legislation will be included in the enabling legislation to prevent the 17.5% rate applying to supplies of goods or services that are provided on or after 4 January 2011. Zero, exempt and reduced rate are not affected by this change.


Whilst this is going to result in things getting more expensive for most, it is good news for the Isle of Man Government as it will go some way to replacing lost income following the UK Government’s decision to change the VAT sharing agreement last year.


Bank levy

The levy is to apply to total liabilities calculated by reference to the consolidated balance sheets of the UK banking groups and building societies, the aggregated subsidiary and branch balance sheets of foreign banks and banking groups operating in the UK, and the balance sheets of UK banks in nonbanking groups. These institutions and groups will only be liable for the levy where their relevant aggregate liabilities amount to £20 billion or more. The levy will be based on total liabilities excluding Tier 1 capital, insured retail deposits, repos secured on sovereign debt and finally policyholder liabilities of retail insurance businesses within banking groups. The levy is to be set at 0.04% for 2011, rising to 0.07% in the following year, and is expected to raise over £2 billion annually. The levy will not be deductable for corporation tax purposes.


Corporation tax and taxation of business income

Companies with profits below £300,000 will pay corporation tax at a rate of 20% on and after 1 April 2011, a reduction of 1% from the current 21%. Companies with profits above £1.5 million will pay corporation tax at a rate of 27% on and after 1 April 2011, with further annual reductions of 1% every year until the rate reaches 24%. The intention here is to make the UK more internationally competitive than it is at present. Companies with profits between £300,000 and £1.5 million will pay corporate tax at an effective rate which is between the two rates applying at the material time.


Employer national insurance contributions

The employer national insurance contribution threshold, the point at which employers start to pay national insurance contributions, is to be increased by an extra £21 per week above indexation. The exact quantum will be known after the publication of indexation figures in September 2010 and the changes will come into effect from 6 April 2011.


The Government is also using employer national insurance contributions to encourage employment in certain parts of the UK. The countries and regions that will benefit will be Scotland, Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East Midlands, the West Midlands and the South West. Employers will not have to pay the first £5,000 of Class 1 employer national insurance contributions due in the first twelve months of employment. This will apply for each of the first 10 employees hired in the first year of business, and operate in selected countries and regions. The scheme is intended to start no later than September 2010. Any new business set up from 22 June that meets the criteria set out in the legislation to be enacted will benefit from the measure.


Consortium relief

Consortium relief rules allow, in certain circumstances, a member of a consortium to transfer its share of the consortium’s unused losses to another member of its group. This is commonly known as the ‘link company rule’, and the member that makes the transfer is known as the ‘link company’. Under current rules, the link company must be a UK resident. This particular rule is to be extended to allow any company established within the European Economic Area to be a link company. A restriction is to be added to the maximum amount of losses that may be claimed from a consortium company. A fourth test based on the proportion of voting rights and the extent of control the member holds in the consortium is to be added to the current three, which are the percentage of ordinary share capital held, the percentage of profits to which the company is entitled, and the percentage of assets to which the company would be entitled to on winding up. These changes will come into effect for accounting periods commencing on or after the relevant legislation is published.


Enterprise Management Incentive Schemes

Currently, one of the conditions that applies to Enterprise Management Incentives Schemes is that the company or, in the case of a parent company, at least one company in the group must be carrying on a qualifying trade ‘wholly or mainly’ in the UK. To ensure that the Scheme rules comply with the EU State Aid rules, that requirement is changed to there being a ‘permanent establishment’ in the UK. The change is to have effect in respect of Enterprise Management Scheme options granted on or after the enacting legislation receives Royal Assent.


UK REITs and stock dividends

Legislation relating to UK REITs is to be amended to allow the issue of stock dividends in lieu of cash dividends, so that the requirement to distribute 90% of the profits from the property rental business of the REIT is met. This measure will have effect for property income distributions made on or after the date that the legislation receives Royal Assent.


Furnished holiday lettings

The furnished holiday lettings rules are not to be abolished as previously announced. The rules will remain in place and the Government will publish a public consultation over the summer about plans to change the tax treatment of furnished holiday lettings from April 2011. The consultation will specifically look at a proposal that would (i) ensure the furnished holiday lettings rules apply equally to properties in the EEA, (ii) increase the number of days that qualifying properties have to be available for, and actually let as, commercial holiday lettings, and (iii) change the way in which furnished holiday lettings loss relief is given. Draft legislation will be published in the autumn, with a view to inclusion within the Finance Bill 2011.


Venture capital schemes

The current legislation requires the shares making up a VCTs ordinary share capital to be included in the official UK list throughout the relevant accounting period. This will be replaced with a requirement that the shares instead be admitted for trading on any EU regulated market. The effect is that VCTs will be able to be listed on markets throughout the EU/European Economic Area (EEA).


Furthermore the current legislation requires that at least 30% of the VCTs qualifying holdings is represented throughout the relevant accounting period by holdings of eligible shares. New legislation will increase the eligible shares holdings requirement to 70%, but will also change the definition of ‘eligible shares’ to allow VCTs to include shares which may carry certain preferential rights to dividends.


General Anti–Avoidance Rule

It looks like this is back on the radar, with more information to follow in due course about how the government plans to deal with tax avoidance.


A government press notice published alongside the Budget states that ‘the Government intends to examine whether the option of a General Anti- Avoidance Rule should form one element of strengthened defences’


Finally...


Company expenditure incurred on new zeroemissions goods vehicles will qualify for the new 100% First Year Allowance, whereby the company can deduct the cost of the vehicle from its taxable income. The main criteria for this is that the vehicle cannot under any circumstances produce CO2 emissions when driven. It’s a good job it does extend to gases produced by the drivers, otherwise sales of burgers and bacon and egg sandwiches from road-side caravans would plummet overnight!