Budgets, Budgets, Budgets
Well it’s come and gone and we are none the wiser. The predictions that the Pre Budget Report on the 9 December 2009 would introduce draconian Capital Gains Tax (CGT) anti-avoidance rules in advance of an increase in the rate of CGT in the Budget in March did not happen; the abolition of Business Property Relief did not happen and where were the spending cuts? Certainly they were not announced in detail in the PBR.
Instead we got the following:
Tax rates & thresholds
For the tax year 2010/11 all tax allowances and thresholds are to remain the same as this tax year but from 2012/13 the higher rate threshold will be frozen at the 2011/12 amount. The personal allowance will be increased and the basic rate limit will be reduced by the same amount.
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From 6 April 2011 the National Insurance rates will increase by 1% instead of the planned 0.5% so it will cost us more to employ staff.
The Inheritance Tax (IHT) threshold will not rise as originally planned in April but will remain at the current £325,000 level beyond 6 April 2010.
The special rules introduced in the 2009 Budget to stop people from making large additional contributions to their pensions before 6 April 2011 have been extended to those with incomes of £130,000 or more from 9 December 2009.
Furnished Holiday Lettings
The PBR note 24 confirms that legislation will be introduced in the Finance Bill 2010 to withdraw the furnished holiday lettings (FHL) rules for income tax and CGT from 6 April 2010. If this becomes law from this date those who let furnished holiday accommodation will no longer be treated as trading for tax purposes. Instead it will depend for all taxes, including IHT, whether or not the FHL business is actually trading. Those which are not actually trading will be taxed under the normal rules for property businesses.
There is a theme to the PBR – bearing down on avoidance schemes and tightening up the legislation for reporting and penalising such schemes.
Regulations will be made to come into force on 1 April 2010 to extend the Tax Avoidance & Disclosure regime in relation to the disclosure of certain schemes involving residential property with a value of at least £1 million.
Also, in the Finance Bill 2010 legislation will be introduced to counter two IHT avoidance schemes involving trusts:
(i) A scheme which reduces the value on which the IHT charge on assets being transferred during lifetime into trust by exploiting the rules relating to future interests in trusts – there will in future be a chargeable event for IHT when the future interest comes to an end and the person becomes absolutely entitled to an actual interest under the trust. If that future interest is given away before the person becomes entitled to the actual interest it is likely to be immediately chargeable to IHT; and
(ii) A scheme which involves the purchase of an interest in a trust rather than putting funds directly into trust and so avoiding the charge on transferring assets into trust – if a person purchases an interest in possession in a trust for full value the interest will be treated as part of the purchaser’s estate for IHT purposes. If the interest comes to an end during the purchaser’s lifetime there may be an immediate charge to IHT.
HMRC are concerned about the use of trusts for tax avoidance purposes and plan to meet with professional bodies in the New Year to discuss further anti avoidance issues.
However, is any of the above likely to stick? Under the Code for Fiscal Stability the Government is obliged to publish the annual Budget not less than three months following the PBR. This means that the earliest we can expect the Budget is 10 March 2010. Tax changes and continuations can come into effect immediately by virtue of the Provisional Collection of Taxes Act 1968 but this does not permit new tax to be introduced in the same way. Perhaps this explains the lack of anything too dramatic in the PBR.
The Finance Bill is published about two weeks after the Budget usually and must get Royal Assent by 5 August but the latest possible date for the general election is 3 June 2010 so it is highly likely that the Finance Bill would not get Royal Assent before the election and would fail.
The effect of this must be to assume either an early election before 10 March 2010 and therefore a new Budget from the new government a few months later with the continuation provisions being called in to ensure collection of tax; or a failed Budget and an election at the last possible minute in early June with yet another Budget by the autumn from whoever wins the election.
I therefore predict a bumpy ride for tax professionals in the next nine months or so as we could have to pour over two budgets and even two Finance Bills before we know where we are.
Clients who are worried about the new 50% income tax rate that comes into force for individuals and certain trusts on 6 April 2010 (introduced by FA 2009) will be anxious to convert to generating capital gains and realise those whilst the rate is still so favourable at 18%. You are in for a busy time!
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