Emergency Budget Summary
Budget Summary 2010 22 June 2010
Summary of Changes Affecting Private Individuals
They promised we wouldn't like it and they were right. Other than freezing Council Tax, there was precious little to cheer in the Budget other than the hope that it may have the desired effect of reducing the yawning deficit in the public finances: time will tell regarding that.
However, there were some plums to be picked among the thorns. In particular, the tax regime affecting carers has been improved significantly. Also, the changes to National Insurance Contributions and the increase in the tax-free personal allowance will benefit the lower-paid. Adjustments will be made once the Retail Prices Index (RPI) for September is known in order to adjust the tax thresholds to prevent the change from benefiting higher-rate taxpayers.
Income Tax
Tax Thresholds
Although the increase by a further £1,000 from April 2011 in the tax-free allowance for Income Tax (IT) purposes will attract the headlines, the higher-rate limits are being frozen until at least 2014.
Furnished Holiday Lettings
The Government is cancelling the proposed changes relating to the taxation of those operating furnished holiday lettings businesses, but measures governing the 'actual days let' rules are being tightened up.
Investments
From 6 April 2011, the ISA limits will be increased in line with the RPI on an annual basis. One nice touch by the Chancellor is that the increases are to be rounded to the nearest £120, so that individuals who save monthly will be able to calculate their monthly savings more easily.
There are detailed changes to the legislation on Venture Capital Trusts (VCTs), which have the practical effect that a wider range of investments can now attract VCT status, and other changes, one of which is that Enterprise Investment Scheme and VCT companies no longer have to trade in the UK but need only have a 'permanent establishment' here.
Pensions
The Government is deferring by two years (to age 77) the age by which a pension must be vested by the pension holder. This applies now, but only to those who have not reached the age of 75. The detailed changes will take effect in 2011, so there will be a limited window of opportunity to take any necessary action.
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Capital Gains Tax
The changes to the Capital Gains Tax (CGT) regime below all have immediate effect from midnight on 22 June.
Legislation will be included in the Finance Bill 2010 to introduce a new top rate of CGT of 28 per cent, which will apply to disposals after Budget day. For individuals, the rate of CGT remains at 18 per cent where total taxable gains and income are less than the upper limit of the IT basic-rate band. The 28 per cent rate applies to gains (or any parts of gains) above that limit. The annual exempt amount remains unchanged.
The biggest change is the increase in the lifetime limit for Entrepreneurs' Relief to £5 million (up from £2 million) for qualifying capital gains. These will continue to qualify for a reduced rate of CGT of 10 per cent.
The CGT regime is being amended so that 'deferred gains' where prior gains have been rolled over into new assets will be taxed at the new rates of CGT when the gain is realised, not the rate of CGT applicable when the gain was deferred.
General
Guardians and Carers
People who care for one or more children placed with them under either a special guardianship order (i.e. special guardians) or a residence order, where that individual is not the children's parent or step-parent, will not pay tax on the sums they receive under the order from 6 April 2010.
The regulations applicable to 'shared-life carers' have also been simplified, based on a scale of tax-free allowances which increase with the number of persons cared for. This will affect foster families and other shared-life carers.
Special guardians and kinship carers providing care for a child who has not been placed with them under a residence order will not be considered qualifying carers for the purposes of this IT relief. However, they will be entitled to claim the new IT exemption for payments to qualifying guardians.
The CGT exemption applicable to private residences is being preserved where an adult placement carer uses part of their home exclusively for the purposes of their business as a carer.
Asbestos Compensation Trusts
Asbestos compensation trusts established before the budget are to be exempted from the Inheritance Tax 'periodic charge' and CGT on disposals of certain assets. The practical effect of this will be to benefit those who receive income from such trusts, established by employers to compensate those who have suffered ill-health because of exposure to asbestos.
Summary of Changes Affecting Business Clients
During the election campaign, George Osborne nailed his colours firmly to the mast of a deficit reduction strategy. He has not disappointed in that, but questions remain over whether the effect of the expenditure cuts and the mixture of tax increases and decreases in the Budget will be to depress growth and to stymie the desired effect in the medium term. Time will tell.
Corporation Tax
The main rate of Corporation Tax (CT), applicable to companies with taxable profits over £1.5 million, will be reduced from 28 per cent to 27 per cent on 1 April 2011. Thereafter, it will fall a further 1 per cent each year until reaching 24 per cent on 1 April 2014.
The CT rate for small companies (those with taxable profits below £300,000) will decrease from 21 per cent to 20 per cent from 1 April 2011.
The general thrust of the changes is to make trading by means of a limited company, and basing a company in the UK, more attractive. With the recent Companies Act (2006) now fully implemented, the UK now has a much more attractive legislative and tax regime than previously.
A small change has also been made to the rules for consortium relief, whereby control and voting rights are a factor in determining the percentage of a loss that can be claimed from a consortium company. However, a company will no longer have to be UK resident to transfer its share of the consortium's losses to another consortium member.
Further CT reforms are expected to be announced this autumn.
Capital Allowances
From 1 April 2012 for companies, and 6 April 2012 for unincorporated businesses, the rate at which capital expenditure attracts CT relief will be reduced, from 20 per cent to 18 per cent annually in the case of items allocated to the 'main rate pool' and from 10 per cent to 8 per cent in the case of items in the 'special rate pool' (such as long-life assets, integral features etc.)
The annual investment allowance will also be reduced from April 2012, from £100,000 to £25,000.
Businesses considering major capital investments should consider the implications of the changes carefully.
General
From 23 June, the rate of Capital Gains Tax (CGT) applying to any gains above the basic rate Income Tax band (£37,400 for 2010-11) increases from 18 per cent to 28 per cent. However, business investors will be cheered by the fact that the lifetime limit for Entrepreneurs' Relief has been increased from £2m to £5m. The rate of CGT on gains qualifying for Entrepreneurs' Relief remains at 10 per cent.
Many new businesses located in most regions of the UK will benefit from a 'National Insurance Contributions (NICs) Holiday', whereby qualifying employers will not have to pay the first £5,000 of Class 1 employer NICs due in respect of the first 52 weeks of employment of each employee (up to a maximum of 10) hired in the first year of business. The scheme is expected to run for three years and will cover any Class 1 employer NICs that fall due during this time.
The scheme is due to start in September 2010, although this is yet to be confirmed. Businesses that commence trading on or after 22 June will be able to enjoy the benefits of the scheme: they will have to pay Class 1 employer NICs until the scheme is introduced but will receive a holiday of equal duration once the scheme commences.
The scheme is intended to promote private enterprise in areas where there are currently a large number of public sector employees. It will therefore not cover London, the South East and the East.
Full details of the scheme will be published before its introduction. There will be restrictions on the types of eligible businesses: the Government intends to restrict the scheme to 'businesses which undertake a sufficient degree of new economic activity'. What this will mean in practice will be revealed when full details of the scheme are published.
VAT
The standard rate of VAT is set to rise from 17.5 per cent to 20 per cent on 4 January 2011. Items which are exempt or zero-rated for VAT purposes, or upon which VAT is charged at the reduced rate of 5 per cent, are unaffected.
The rates applicable to businesses using the flat-rate scheme for VAT will also change, and can be found at http://www.hmrc.gov.uk/budget2010/bn45.pdf. The turnover threshold above which businesses must leave the flat-rate scheme will be increased from £225,000 to £230,000, inclusive of VAT. This change is designed to help businesses which would otherwise no longer be eligible to participate in the flat-rate scheme.
Anti-avoidance legislation has been introduced to combat schemes which attempt to apply the current VAT rate to goods or services which will be delivered on or after 4 January 2011.
For further information, see http://www.hmrc.gov.uk/budget2010/supplementary.htm#technotes.
The information contained in this newsletter is intended for general guidance only. It provides useful information in a concise form and is not a substitute for obtaining professional advice.