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The 2007 pre-budget report
Alistair Darling delivered his first Pre-Budget statement yesterday making headline news in regard to certain tax changes for private clients. While the Conservative Party are taking credit for drawing public attention to contentious tax rules and placing these firmly on the political agenda, the Chancellor has stolen their thunder with some surprise announcements.
The new rules to be introduced have been met with mixed reviews, because as usual with all changes in tax law there will be winners and losers.
Inheritance tax changes - transferable nil rate bands
The Chancellor’s announcement on increasing the inheritance tax (“IHT”) nil rate band threshold for married couples and civil partners comes, somewhat unsurprisingly, hot on the heels of the Conservatives’ recent poll-swinging proposal of increasing everyone’s IHT nil rate band to £1 million. The key points raised in the announcement were:
- The available IHT nil rate band on the death of a surviving spouse or civil partner will be increased by the unused proportion of their predeceasing partner’s IHT nil rate band.
- The increased IHT threshold will apply to the estates of surviving spouses or civil partners who die on or after 9 October 2007.
- The transfer of the threshold will apply no matter when the first spouse or civil partner died.
- A claim would be made on the death of the surviving spouse or civil partner.
- Individuals and cohabiting couples will not benefit.
- The changes do not make the terms of your current will ineffective for IHT.
What will be the future impact for you of the changes to the IHT nil rate band effective from 9 October 2007?
[Click here for more detailed guidance and examples]
Capital gains tax reform
In what marks a complete u-turn on legislation previously introduced by Mr Darling’s predecessor at the Treasury, disposals made after 6 April 2008 will no longer benefit from capital gains tax (“CGT”) taper relief. This important relief, arguably the most significant concession to CGT since its introduction in 1965, has been axed with one fell swoop. It allowed capital gains on certain qualifying business assets to be taxed at an effective rate of only 10% after 2 years’ ownership and on all other assets at 24% if held for 10 years – representing significant reductions against the normal CGT rate of 40%.
Instead, a flat rate of 18% CGT will be introduced for disposals after 6 April 2008, irrespective of the asset owned being business or non-business in nature. And, as a final sting in the tail, what remains of the indexation allowance for inflation (which currently applies to assets held before 6 April 1998) has also been withdrawn, again from next April.
How will the withdrawal of CGT taper relief and the introduction of a single CGT rate of 18% from 5 April 2008 affect you?
[Click here for more detailed guidance]
Other changes
As well as these main changes, a range of other amendments have been announced, including:
Residence and domicile
In a reverse of a long-established practice, when deciding if an individual is resident in the UK for tax purposes, days of arrival and departure will now be counted as days of presence in the UK.
For ‘non-doms’, that is foreign nationals with a legal connection abroad who have resided here for 7 years, and have previously only paid tax on income and gains either arising here or remitted from abroad, they will only be able to continue with this basis of taxation if they pay £30,000 a year.
Husband and wife companies and partnerships
After a high profile defeat in a case heard by the House of Lords on the taxation of spouses in business together, the Government is introducing legislation to reverse the decision. The case involved a company owned a husband and wife team, which allowed them to draw dividends despite the fact the husband, was the income earner. The Revenue failed in their argument that the income should all be taxed on the husband. The new rules will seek to impose tax charges on the spouse who has a greater involvement in the running of the business.
Income tax payments on account
The threshold for making payments on account towards annual tax liabilities is being raised from £500 to £1000 from April 2009.
Further information
The information set out in this ezine is based on the documents released by the Treasury on the Pre Budget Report and is intended only for guidance. We would strongly recommend you should seek proper professional advice before taking any action.
Typically with legislative changes, when one opportunity closes another opens and this year’s announcements are no different. For further advice in relation to how these and any other changes will impact, please speak to your usual Anderson Strathern contact or call Colin Henderson on 0131 625 7206 or e-mail colin.henderson@andersonstrathern.co.uk
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