George Osborne has confirmed that the much anticipated emergency Budget will be on Tuesday 22 June 2010 and is expected at the later time of 3.30 p.m.. The manifestos of both the Conservatives and Liberal parties gave us a flavour of what is likely to happen but recent comments lead us to believe that the tax changes are going to be far more significant than initially anticipated.
It’s probable (but not guaranteed) that the earliest date on which any of these changes will take effect will be on Budget day itself so this article also considers what planning steps you might take now if you consider you may be affected by the changes.
KEY THINGS TO DO NOW BEFORE BUDGET DAY
With the possible VAT increase consider buying significant items now if you are not registered for VAT.
For VAT registered businesses it still might be prudent to bring forward existing capital expenditure plans to before the budget in the event that capital allowances are cut.
Ongoing investment property sales should be brought forward to before budget day just in case landlords are caught.
If you are sitting on fat gains on non business assets consider disposal or transfer into a trust.
Value Added Tax (VAT)
Speculation is growing that an increase in the VAT rate from 17.5% to 20% is on the cards perhaps as early as Budget day, although this has to date been denied by the new Prime Minister.
Leading think-tank, the Institute for Fiscal Studies (IFS), has already suggested that VAT may the most viable choice of tax increase.
A rise in VAT to 20 per cent would generate an extra £11.5 billion of government income but would add an average of £425 to each household bill, a new report by Kelkoo, the shopping comparison website, has calculated.
In real terms the hike would push up the price of everyday goods by 2.1 per cent.
VAT planning tip
Take advantage of the current 17.5% rate by accelerating your spend (on major items) ahead of Budget day.
Corporation tax
The coalition has yet to make specific references to the future of corporation tax although Liberal Democrat MP, Vince Cable, is known to favour the introduction of a general anti-avoidance provision for Corporation Tax.
The Conservatives previously announced their intention to reduce the headline rate of Corporation tax from 28% to 25% with the smaller company rate reduced to 20%. At the same time to, in order to finance this, they also previously announced that they would scrap/reduce a number of allowances for the purchase of capital equipment. There have been no further announcements in this area but it may still be an issue.
Corporation tax planning tip
Consider advancing capital expenditure and significant employer pension scheme payments.
Business
The government is to focus on improving the flow of credit to smaller firms. This will include the possibility of establishing a loan guarantee scheme to replace the Enterprise Finance Guarantee programme and the use of net lending targets for nationalised banks.
Some backdated demands for business rates will be cancelled.
Income tax
The new top rate of Income Tax of 50% is already a reality for some and this will not be abolished any time soon.
The new Government has agreed to an increase in the minimum threshold for income tax, with the personal allowance expected to increase in stages from its current level of £6,475 to £10,000 by 2015. The first increase is anticipated in April 2011 although it is unlikely that anyone earning over £40,000 p.a. will be able to benefit from this and subsequent increases.
Another Conservative manifesto commitment to introduce transferable tax allowances for married couples stays in place.
Some Income Tax planning tips
Maximise use of your spouse’s tax bands; consider paying your 2010/11 pension contributions eligible for top rate relief now; consider tax incentivised investments such as VCTs.
National Insurance Contributions (NIC)
A partial reduction in the further NIC increase promised for April 2011 is anticipated with the main
beneficiaries being employers. In contrast, employees and the self employed are still expected to face an increase of 1% in their National Insurance Contributions.
NIC planning tip
Dividends are still NIC free for family businesses.
Stamp Duty
The Conservative manifesto has pledged to scrap stamp duty for first time buyers on homes up to the value of £250,000. Currently this exemption is set to expire on 24 March 2012.
Tax credits
The coalition has agreed that steps will be taken to reduce the availability of Child Trust funds and tax credits for higher earners.
Capital Gains Tax (CGT)
Capital Gains Tax is predicted to see a large increase from the current rate of 18% for non-business capital gains (such as those realised on the sale of shares and second homes).
The expectation is that CGT will once again be linked to an individual’s marginal income tax rate with a new maximum CGT rate of 40% (compared with a top income tax rate of 50%).
There is speculation that some measure of indexation might be reintroduced to avoid CGT being levied on purely inflationary gains.
We are promised generous exemptions for entrepreneurial business activities which might be enough to protect the current lower rate of 10% applied to such gains at present although these reliefs may be amended.
As yet what is termed an “entrepreneurial business” is unclear. The National Landlords Association (NLA) is clear in stating that sales of residential property should be included in the exemptions to avoid a significant disincentive for landlords. However at present this remains unclear.
It is also possible that the annual CGT exemption (£10,100 per individual for this year) will be reduced to perhaps as low as £2,000 only.
Some CGT planning tips
Consider accelerating disposal of assets ahead of Budget day (perhaps by transfer into a trust); invest in EIS and VCT investments; hold shares in an ISA; sell assets into a SIPP; maximise use of your spouse to utilize lower tax bands and exemptions.
Inheritance Tax (IHT)
The coalition agreement confirms that income tax cuts will be given priority over IHT cuts. This means that the Conservative’s plans to increase the IHT nil rate band to £1million have been shelved for the duration of this Parliament.
Some IHT planning tips
Are you comfortable that your will is tax-efficient?
The most effective IHT planning is always started early; maximise your gifts out of income; consider life insurance to cover IHT liability; make use of annual exemptions; consider discounted gift scheme.
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