The Coalition Government delivered its much anticipated first Budget yesterday and, as widely expected, it announced a combination of expenditure cuts and tax rises in an attempt to fill the gaping hole in the country’s finances over the lifetime of this Parliament. Chancellor George Osborne stated that he believes in the virtues of lower taxation but as a result of tax rises already in force for 2010/11 and announcements made yesterday this has been put on the back burner. A progressive Budget under which the better-off pay proportionately more than the less well-off had been promised - it will be a question of time to see if that’s what has been delivered.

The almost immediate introduction of a new capital gains tax (“CGT”) rate of 28% for higher rate taxpayers and the increase in the standard VAT rate to 20% from 4 January 2011 will inevitably steal all the headlines. There are, however, a number of other changes and it is important that you also consider their impact on you, your family and/or your business. All taxpayers shall be worse-off and should assess the effect of lower post-tax spendable incomes.

The announcement of further consultation on a range of issues that could affect private clients might also mean more changes to come.

The initial reaction to the Budget has been generally mixed because, as is normally the case, there will always be winners and losers with any changes to tax rules.

Capital gains tax (“CGT”)

28% CGT rate for higher rate tax payers

The Government has decided to keep it simple by introducing a new CGT rate of 28% for higher rate tax payers for disposals taking place on or after 23 June 2010. Lower and basic rate taxpayers will continue to pay CGT at 18% on any capital gains falling within their basic rate income tax band. All gains of executors and trustees will now also be taxed at 28%. The maximum rate for tax paid on gains of non-UK resident trusts will be 44.8%.

The rate paid by individuals will depend upon the amount of their total taxable income (taking into account personal allowances, losses, etc..) with any capital gains being taxed effectively as the top slice of their income. This basically means in practice that anyone with taxable income over £43,875 (£37,400, being the higher rate threshold plus £6,475 income tax personal allowance) in the current tax year will be subject to 28% on any capital gains arising on or after 23 June 2010.

The gain will be taxed at this rate after deduction of the annual exempt amount, which remains at £10,100 for individuals for 2010/11 (£5,050 for trustees). Perhaps surprisingly, the annual exempt amount has not been reduced and will, in fact, continue to be linked to inflation.

The rate of 28% will be less than many feared but we will have to wait and see if this measure properly addresses the Government’s main target i.e. higher rate income taxpayers (40%/50%) converting income into capital. A number of strategies remain available to taxpayers to maximise their post-tax investment returns.

Increase of CGT entrepreneurs’ relief lifetime limit from £2 to £5 million

In an attempt to reward wealth creation, the first £5 million of lifetime qualifying gains will now be charged to CGT at an effective rate of 10%. This could now potentially result in CGT savings of up to £900,000 (£5 million @ (28% - 10%)). This relief will be available, subject to certain qualifying conditions being satisfied, for those who realise capital gains on the disposal of all or part of their business (e.g. sole-traders, those in partnership), of business assets following the cessation of a business and also of certain shares in “qualifying” trading companies. Any increase in the reliefs offered to entrepreneurs should always be welcomed.

Income tax

The personal income tax rate for those under 65 is to be increased from the 2011/12 tax year by £1,000 to £7,475. This is part of the Coalition Government’s stated aim of increasing the personal income tax allowance to £10,000 over the course of the current Parliament. This is expected to take nearly 900,000 people out of the income tax regime. The basic rate income tax threshold will be reduced so that higher rate taxpayers do not benefit from this increased personal allowance.

The other piece of bad news for higher rate taxpayers is that the higher rate threshold will be frozen until 2013.

Some planning for married couples and civil partners is possible to take advantage of the increase in the personal allowance.

Other changes - individuals

• The furnished holiday lets (FHLs) rules are no longer to be withdrawn from 6 April 2010. FHL owners currently enjoy income tax and CGT benefits and the Conservatives had previously estimated that the withdrawal of these tax benefits would have an impact on more than 120,000 businesses, costing the owners an average of £4,000 each year. The Government is still, however, considering changes to the tax treatment of FHL’s from April 2011.
   
• The rate of tax paid on insurance premiums is set to increase from 4 January 2011. The standard rate insurance premium tax (e.g. on all general insurances including homes, cars, etc..) will be increased from 5% to 6%. The higher rate insurance premium tax (e.g. on travel, car breakdown, domestic/electrical appliances, etc..) will increase from 17.5% to 20%.
   
• The Government will be reviewing the taxation of non-domiciled individuals again as part of the coalition agreement.
   
• There is to be a consultation on inheritance tax on trusts to be brought within the tax avoidance disclosure regime.
   
• The Government will also be considering whether any changes are required to the stamp duty land tax legislation to prevent tax avoidance on high value property transactions.

Other changes - businesses

• The standard rate of VAT will be increased from 17.5% to 20% for supplies made on or after 4 January 2011. The British Retail Consortium had recently warned against an increase in the VAT rate to 20% by stating that it could lead to 160,000 job losses and £4 billion loss in High Street sales.
   
• The main rate of corporation tax will be reduced by 1% per year over the next four financial years (commencing on 1 April 2011) from 28% to 24% by 2014. The small companies rate is also to be reduced by 1% to 20% from 1 April 2011.
   
• The loss of tax revenue from the reductions in corporation tax will be met, at least to an extent, by reductions in capital allowances which will come into effect from April 2012.
   
• From April 2011, the threshold at which employers start to pay national insurance will rise by £21 per week above indexation. Individuals setting up businesses outside London, the south east and east of England will also be exempt from £5,000 of employers’ NIC’s for the first 10 workers.

Further Information

The information set out in this briefing note is based on the documents released by the Treasury and HM Revenue & Customs on the Emergency Budget and is therefore intended only for guidance.

We would strongly recommend you seek specialist advice tailored to your own circumstances before taking any action.

For further advice on what these tax changes mean to you, please contact Colin Henderson or Martin Campbell or speak to your usual Anderson Strathern contact.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.