Financial Monitor (October 2007)
Chancellor’s Pre Budget Report Special
Capital Gains Tax
It is proposed that taper relief and indexation allowance be abolished and that the rate of capital gains tax applying from 6 April 2008 will be 18%. This is no doubt a simplification of the current rules but creates an unfairness for those who have business assets on which they expected to have an effective maximum tax rate of 10% and those who have held non-business assets, eg. rented property for many years and had expected their gain to be reduced by indexation allowance and taper relief. From 1982 to 1998 it was only gains above inflation that were subject to capital gains tax because of the impact of indexation allowance. Those who have retained assets for the long term now find that they are to be taxed on these gains caused by inflation albeit at 18%. This rate is obviously much lower than the 40% some would pay on gains but a number of taxpayers with smaller gains would only currently pay tax at 20% because the gain would be within their basic rate tax band. The 18% they now have to pay is a small reduction given the loss of taper relief and indexation allowance.
Such a major change in taxation gives rise to winners and losers and those who are considering realising gains in the next year or two should review the position to see if disposals should be brought forward to before 6 April 2008 or delayed until after that date. Whilst it is clear that from a tax point of view it would be advantageous to bring forward disposals of business assets including shares in unquoted companies held for more than two years, the position regarding other assets needs to be reviewed on an individual basis.
One welcome simplification is the treatment of quoted shares. From 6 April 2008 all shares of the same class in the same company will be treated as forming a single asset. However the same day rules and bed and breakfasting rules remain unchanged. This will reduce the time taken to calculate gains on disposals of quoted shares which for many clients was becoming unnecessarily complex and expensive to administer.
If you wish to discuss the capital gains tax changes and in particular need advice on the timing of any disposals please contact Peter Newsam.
Inheritance Tax
The inheritance tax nil rate band which is effectively the exemption (currently £300,000) was available to both spouses or civil partners but any unused amount on the first death was lost. This was overcome by having a clause in the Will which created a nil rate band discretionary trust on the first spouse’s death so that the benefit of the unused nil rate band could be retained. The need for this clause in the Will has now been removed by allowing the unused percentage of the nil rate band from the estate of the first spouse to die to be carried forward and added to the nil rate band available to the second spouse on their death. This applies from 8 October 2007 but more importantly is back-dated indefinitely for anyone who is currently a widow or widower. Once the legislation has been confirmed those with nil rate band discretionary trusts in their Wills should have them redrafted to remove the trust.
Car Fuel Benefit
For those provided with a company car there is a benefit in kind charge if they are also provided with fuel for private purposes. This is currently calculated as £14,400 multiplied by the percentage applicable to the car’s emissions which can vary from 12% to 35%. The multiplier will be increased to £16,900 from 6 April 2008.
Income Shifting
Following the widely publicised decision in the Arctic Systems husband-and-wife tax case, the Government has confirmed that it believes it is unfair for one person to arrange their affairs so that their income is diverted to a second person, subject to a lower tax rate to obtain a tax advantage (income shifting). The vast majority of individuals cannot shift their income and income shifting is considered to run counter to the principle of independent taxation.
The Government will be consulting on draft legislation to take effect from 2008/09 to address income shifting. The legislation will work alongside the existing rules on business tax deductions and settlements, and will seek to remove the tax advantage obtained from income shifting. It would only apply when the income is in the form of distributions from a company (dividends) or partnership profits. Income from employment, interest on savings and any other source will not be affected.
HM Revenue & Customs will draw on the wide range of commercial experience available across the advisory community in framing practical guidance that minimises burdens, and makes it as easy as possible for individuals to understand their position. Relevant factors to consider when establishing whether or not income shifting has taken place could include the work done by the individuals in the business, the investments made and the risks to which they are subject through the business.
National Insurance Contributions exemption for holiday pay
The exemption from national insurance contributions (NICs) of holiday pay paid via a third party is to be removed for all sectors outside the construction industry. The exemption was aimed at addressing problems of high mobility and turnover of the labour force in the construction industry, but working time regulations now ensure holiday entitlement is preserved in all sectors and therefore an ongoing exemption for construction is no longer appropriate. However, given the longstanding nature and wide range of benefits typically provided by the schemes, the exemption will be maintained for the construction industry for five years to give it sufficient time to adjust.
Air Passenger Duty
From 1 November 2009 duty will be payable per flight, not per passenger, under a new aviation tax.
VAT on renovations and alterations of residential property
Works of renovation or alteration to residential properties that have been empty for at least three years are subject to VAT at the reduced rate of 5%. From 1 January 2008 that qualifying period will be reduced to two years.
Changes to the remittance basis
Individuals not domiciled or not ordinarily resident in the UK are only taxed on their overseas income to the extent that it is remitted to the UK.
From April 2008 such individuals who have been resident in the UK for seven years can either pay tax on their worldwide income and gains or alternatively pay tax on the remittance basis plus £30,000 additional tax.
In addition from April 2008 days of arrival in and departure from the UK will be included as days in the UK (rather than not as at present) in establishing whether or not an individual is resident in the UK for tax purposes.
Whilst every care has been taken in the preparation of these notes we can accept no responsibility for errors or omissions contained in them or for any loss arising from their use unless we have been consulted professionally prior to any action being taken.
UHY Wingfield Slater
Wellington House, 39 Wellington Street, Sheffield S1 1XB
Tel: 0114 275 1544 Facsimile: 0114 275 1366 Email: info@uhy-wingfieldslater.com Web Site: www.uhy-wingfieldslater.com
Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales
A member of the UHY Hacker Young Group of independent UK partnerships. A member of UHY, an international association of independent accounting and consulting firms.
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