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Pre-Budget Report - A Summary

Alistair Darling’s first Pre Budget Report contained a number of policy issues that will have great effect on many people.  In particular:

 

• the tax rules for non-domiciled individuals;
• the need to follow up with some action the Ministerial statement following the Arctic Systems decision;
• how private equity should be taxed; and
• how he should address the Conservative’s tax proposals set out at their conference, particularly in respect of the proposed increase in the inheritance tax nil rate band to £1m.

For non-domiciled taxpayers, the proposals are very similar to the Conservatives’ proposals and so when the details are issued in the Finance Bill, they should receive all party support.

 

On Arctic Systems, the Government is proposing a wide-ranging anti-avoidance provision to counter income splitting that will affect both dividends from companies and the division of profits in a partnership.

 

Private Equity appears to have escaped rather lightly, with the solution to the problem being approached from the Capital Gains Tax angle, with the charging of CGT at one flat rate of 18% and scrapping of all indexation and taper reliefs.  This will certainly simplify CGT, but the impact will affect all those who pay CGT and there will be winners and losers – but most certainly more of the latter!

 

On inheritance tax, the proposed “doubling“ of the nil rate band could of course be achieved through the use of trusts, nevertheless, the proposal will help many couples (and widows and widowers) pass on their assets intact to their children.

 

Rates and Allowances 2008/09

 

Usually, the tax allowances and rates of National Insurance and tax credits for the following year are announced at the PRB time.  However, this time they will be published after the September Retail Price Index becomes available – sometime in the next few weeks.

 

Some points are already known from previous budgets:

 

• The age-related personal allowances will be increased by £1,180 over inflation.
• The 10% starting rate of income tax will be abolished for earnings and pension income, and basic rate will become 20%.
• The basic rate tax band will be increased by indexation only.
• The upper earnings limit for Class 1 NICs will increase by £75 per week above inflation.
• The income threshold for Working Tax Credit will increase to £6,420 but the taper rate for tax credits about the lower thresholds will increase to 39%.
• The IHT nil rate band will be £312,000
• The main corporation tax rate from 1 April 2008 will be 28%.
• The small companies’ rate will be 21%.
• There will be a package of changes to capital allowances (see previous reports).
• R&D tax credit increases to 175% and 130% for small and large companies respectively!

Self Assessment payments on account threshold

 

The threshold for taxpayers to make payments on account under the Income Tax Self Assessment (ITSA) system is to be doubled.  This means that no payments on account will be due if:

 

• The income tax bill for the previous year was less than £1,000 (currently £500).
• 80% or more of the tax due was deducted at source.

Three line account threshold

 

The three-line account threshold for filling in the Self-Employment pages of the tax return is being doubled to £30,000.

 

Also, there will be shorter Self-Employment pages for businesses with turnover below the VAT registration threshold.

 

Capital Gains Tax reform

 

The radical reform of capital gains in this PBR is also likely to have unwelcome consequences for businesses.  Currently, business assets held for over two years can benefit from a 10% rate (5% where the gain is in the basic rate tax band).  With effect from 6 April 2008, there will be one CGT rate of 18%.  One effect of the changes is to remove the much-publicised 10% CGT rate for private equity investors, but clearly their impact will be far wider than that. 

 

The main proposals are:

 

• Changes will apply to disposals on or after 6 April 2008.
• They will apply to individuals, trustees and personal representatives – but not affect companies.
• The rate of CGT will be reduced to 18% for all disposals.  The rates will no longer vary depending on the top slice of income and will be a single rate of 18%.
• Taper relief will no longer be available for disposals or in respect of held over gains coming into charge on or after 6 April 2008.
• Indexation relief will no longer be available in respect of assets owned before 6 April 1998.
• For assets owned before 31 March 1982 it was possible to elect for the original value to be used in calculating the gain instead of the value at 31 March 1982.  This option will not be available on or after 6 April 2008 and the 31 March 1982 value must be used.
• Reliefs were available in respect of deferred gains arising before 31 March 1982, called ‘halving relief’.  These reliefs will be removed with effect from 6 April 2008.
• For disposals of shares the identification rules will be simplified.  After identifying shares using the same day rules for bed and breakfasting, shares will be identified with shares in a share pool.
• Capital losses brought forward and arising in the current year will still be available to offset against gains.
• The CGT annual exemption will still be available.
• Other capital gains tax reliefs will still apply, including Principal Private Residence Relief, business assets roll over relief, business asset hold over relief, Enterprise Investment Scheme relief and Venture Capital Trust relief.

This change is radical in the extreme but it is highly controversial.  It is a complete reversal of the CGT policy introduced in 1997 which provided incentives for holding business assets and encouraging (at least to begin with) the holding of assets for the longer term.  The proposals will simplify CGT, but the winners look to be those who hold non-business assets, such as share portfolios and second homes.

 

Fuel benefit charge

 

Since it was introduced in April 2003, the multiplier for calculating the benefit in kind charge for providing employees who have company cars with free fuel for private use has been set at £14,400.  This figure is then multiplied by a percentage which is calculated by reference to the CO₂ emissions of the car, and tax and Class 1A NICs are calculated accordingly.

 

From 6 April 2008, the fixed multiplier will increase from £14,400 to £16,900.