On 24th March 2010, the Chancellor of the Exchequer, Alistair Darling delivered his final budget before the General Election.

This year the budget delivered largely what had been anticipated. Headline issues such as the exemption for first time buyers from stamp duty on properties under £250K for the next two years will help regeneration of the housing market although the fact this will be paid for by a stamp duty increase (up to 5%) for property sales over £1 million, continues the theme of increased taxes for higher earners.

Following the introduction of the tax changes for those earning over £100,000 and those over £150,000 from 6th April 2010, the budget also includes a series of anti-avoidance measures to block tax avoidance loopholes.

Should you wish to discuss any of the implications of the budget, then please feel free to call us on 0845 463 0462.

---

INCOME TAX

Personal Allowances

Personal allowances will remain at their existing amounts.

This means that the personal allowance for those under 65 will remain at £6,475, the personal allowance for those aged 65 to 74 will remain at £9,490 and the personal allowance for those aged 75 and over will remain at £9,640.

The amount of the personal allowance will be gradually withdrawn for all individuals (regardless of age) with ‘adjusted net incomes' above £100,000 as provided for by section 35 of ITA. The rate of reduction will be £1 of personal allowance for every £2 of income above the £100,000 limit.

Rates

The main rates of income tax for the 2010/11 tax year will remain at 20% for basic rate taxpayers and 40% for higher rate taxpayers.

The 20% basic rate applies to taxable income up to the basic rate limit of £37,400 and the 40% higher rate applies to taxable income above £37,400.

The 10% starting rate for savings will remain at £2,440 but an additional top rate of 50% tax will apply to taxable income above £150,000.

There will be three rates of tax for dividends – 10%, 32.5% and a new higher 42.5% for dividends otherwise taxable at the new 50% rate.

There are therefore no changes to the previous announcements regarding income tax for the 2010/11 tax year.

---

NATIONAL INSURANCE

For 2010/11 the lower earnings limit (linked to the basic State pension) will increase by £2 to £97 per week.   All other National Insurance rates and thresholds will remain unchanged.

The Upper Earnings Limit (UEL) for primary Class 1 National Insurance contributions (NICs) has been aligned with the higher rate income tax level. For 2010/11, therefore, the threshold is £43,875.

From 2011/12 in addition to the 0.5% increases already announced at the Pre-Budget Report 2008:

•  The main rate of Class 1 and Class 4 NICs will be increased by a further 0.5% to 12% and 9% respectively.

•  The Class 1 employer rate of NICs will be increased by a further 0.5% to 13.8%.   This increased rate will also apply to Class 1A and Class 1B contributions.

•  The additional rate of Class 1 and Class 4 NICs will be increased by a further 0.5% to 2%.

•  The primary threshold and lower profits limit will be increased by £570 to compensate the lowest earners.

This should provide an added incentive for both employers and employees to take advantage of salary sacrifice / dividend income.

---

CAPITAL GAINS TAX

The Chancellor has announced that the Capital Gains Tax (CGT) rate of 18% will remain, with the annual exempt amount staying at £10,100.   There has been an increase in Entrepreneur's Relief lifetime limit from the first £1m to the first £2m of qualifying gains. This change has effect for disposals on or after 6th April 2010.

Many had predicted that the CGT rate could rise to prevent the introduction of schemes that turn income into ‘capital' to take advantage of the lower CGT rate.   It will be interesting to see the reaction to this announcement and if income-shifting methods are employed to take advantage of the lower CGT rate, and the Government's reaction to these in the future.

---

INHERITANCE TAX

The nil rate band has been frozen for four years.   It will therefore remain at £325,000 from the 2010/11 tax year up to and including the 2014/15 tax year.

---

CORPORATION TAX

The Budget did not bring any changes to corporation tax rates, with the small companies' rate remaining frozen at 21% and the main rate remaining frozen at 28% .

---

CAPITAL ALLOWANCES

There has been an increase in the threshold of the Annual Investment Allowance from £50,000 to £100,000.   The increase will have effect for expenditure incurred on or after 1st April 2010, for businesses within the charge to Corporation Tax and on or after 6th April 2010, for businesses within the charge to Income Tax.  

The temporary 40% first-year allowance (FYA) for expenditure on general plant and machinery (expenditure on plant and machinery that would normally be allocated to the main capital allowance pool) has now come to an end.   It applied to qualifying spending incurred in the 12-month period beginning on 1st April 2009 for the purpose of corporation tax, and on 6th April 2009 for the purpose of income tax.

The temporary FYA was available to:

•  any individual carrying on a qualifying activity (this includes trades, professions, vocations, ordinary property businesses and individuals having an employment or office);

•  any partnership; and

•  any company.

---

VAT

With effect from 1st January 2010, the VAT rate returned to 17.5% and it has been confirmed that this rate will not change.

Turnover threshold for registering increases from £68,000 to £70,000 and the threshold for deregistering increases from £66,000 to £68,000.

---

PENSIONS

It had already been announced that the levels of the Standard Lifetime Allowance and Annual Allowance have been frozen at the 2010/11 rates for a further five tax years i.e. until 2015/16.  

The Government has stated, however, that it remains open to proposals for further simplification of the trivial commutation rules and, in particular, is interested in proposals about:-

•  Extending rights to commute personal pension funds worth up to £2,000; and

•  Allowing couples to pool small pension pots in order to achieve better value by buying a joint life annuity.  

Limiting Relief for High Income Individuals

The Special Annual Allowance will remain in force for one more tax year and will continue to affect high income individuals with ‘relevant' income of £130,000 or more.

The Government has also reaffirmed its intention to restrict the tax relief available on pension savings, with effect from 6 April 2011, for people with taxable gross ‘income' of £150,000 or more.

Please see our separate analysis of the pension changes for further information.

---

TRUSTS

Discretionary and Accumulation and Maintenance trusts are entitled to a standard rate tax band of £1,000.   With effect from 6th April 2010, the 32.5%/40% trustee rate on discretionary and accumulation and maintenance trusts income above this band will increase to 42.5%/50%.

In respect of settlor interested trusts, Finance Bill 2010 will also extend the existing provisions regarding repayment of any income tax reclaimed by the settlor on trust income to the trustees.

This will create additional tax planning issues for certain trusts, especially those involving unit trusts etc.
Anti-Avoidance

HMRC are introducing a number of anti avoidance measure for the following areas

•  Revising the disclosure of tax avoidance schemes and increasing the penalties for non-disclosure

•  Increasing penalties for individuals and businesses with financial interests outside the UK and failing to declare the full extent of their tax liabilities

•  Corporate abuse of Share incentive plans

•  Abuse of CSOP(Company Share Option Schemes)

•  Individuals entering into transactions to obtain income tax advantages

---

ENTERPRISE INVESTMENT SCHEMES (EIS) AND VENTURE CAPITAL TRUSTS (VCT)

New legislation will come into effect relating to EIS and VCT schemes.   These changes will take effect on and after the date the legislation receives Royal Assent.

VCTs only

The current legislation requires the shares making up a VCT's ordinary share capital to be included in the official UK list throughout the relevant accounting period.   This will be replaced with a requirement that the shares instead be admitted for trading on any EU regulated market.   The effect is that VCTs will be able to be listed on markets throughout the EU/EEA.  

The current legislation requires that at least 30 per cent of the VCT's qualifying holdings is represented throughout the relevant accounting period by holdings of eligible shares. Section 285(3) of ITA defines “eligible shares” for this purpose. The new legislation will increase the eligible shares holdings requirement to 70 per cent, but will also change the definition of “eligible shares” to allow VCTs to include shares which may carry certain preferential rights to dividends

EIS & VCTs

The new legislation will exclude shares in a company from qualifying for the purposes of the EIS or VCT legislation if it is reasonable to assume that the company would be treated as an ‘enterprise in difficulty' for the purposes of the European Commission's Rescue and Restructuring Guidelines.  

The current legislation requires that there is a qualifying trade carried on wholly or mainly in the UK.   For shares issued on or after the commencement date of the legislation, the requirement will be that the company issuing the shares must simply have a permanent establishment in the UK.  

---

STAMP DUTY LAND TAX

In a widely predicted move, although with still some surprise, the Chancellor has today announced a two-year Stamp Duty Land Tax relief for first time buyers for residential property purchases up to £250,000.   First time buyers will be able to claim relief where the date of completion is on or after 25th March 2010 and before 25th March 2012.

Legislation in the Finance Bill 2010 will introduce a higher stamp duty land tax rate of 5% for purchases of residential property where the consideration exceeds £1m. The new higher rate will apply to purchases of residential property where completion is on or after 6th April 2011.

As a reminder, legislation was introduced in the Finance Bill 2009 to provide:

•  Relief from the provisions of stamp duty and the Taxation of Chargeable Gains Act 1992 for persons wishing to raise finance by issuing Alternative Finance Investment Bonds using land assets as securities.

•  An extension to the favourable stamp duty treatment to purchasers under shared ownership schemes operated by profit-making Registered Providers of Social Housing, where the scheme is assisted by public subsidy.  

Simplification of the stamp duty treatment of purchasers under rent to shared ownership schemes.

---

INDIVIDUAL SAVINGS ACCOUNTS

The ISA limit has increased to £10,200, up to £5,100 of which can be saved in cash. This increase has taken effect in two stages:

•  Savers aged 50 and over in the 2009-10 tax year can deposit £10,200 into their 2009-10 ISA, up to £5,100 of which can be in cash

•  For all other investors the increased limit takes effect from 6 April 2010. From this date all savers will be able to deposit £10,200 into their 2010-11 ISA, up to £5,100 of which can be in cash.

The Chancellor has announced that the investment limit for Individual Savings Accounts will increase in line with RPI on an annual basis.

---

CLOSE COMPANIES AND LOANS

In general a company is a close company if it is under the control of five or fewer participators.

When a close company makes a loan or advances money to a relevant person who is a participator in the company or an associate of a participator, section 455 of CTA imposes a charge equivalent to Corporation Tax (CT) on that company. A relevant person is either an individual, or a company receiving a loan or advance in a fiduciary or representative capacity.

Under the CT rules governing corporate debt (the “loan relationships” rules) the company may be entitled to a full deduction against its CT liability. Broadly, these rules provide that the taxable and relievable credits and debits brought into account arising to a company under its loan relationships are those arising under generally accepted accounting practice (GAAP). A loan released or written off will normally give rise to an expense recognised in the company's accounts under GAAP.

Legislation will be introduced in Finance Bill 2010 to deny a CT deduction for the amount of the release or write off of such a loan (in whole or in part) on or after 24 March 2010.

---

INSURANCE PREMIUM TAX

The provisions relating to Insurance Premium Tax (IPT) are contained within the Finance Act (FA) 1994. Section 72 of FA 1994 will be changed under primary legislation to exclude fees charged in connection with arrangements that meet the following conditions:

•  the insured is an individual who enters into the insurance contract in a personal capacity, i.e. the insured is not a limited company, charity or other organisation or an individual buying insurance for the purpose of their business;

•  the insured is required to enter into the relevant contract as a condition of entering into the taxable insurance contract, or would be unlikely to enter into the relevant contract without also entering into the insurance contract;

•  the terms and the price of the relevant contract are not negotiable by the insured; and

•  the amount charged to the insured under the taxable insurance contract is arrived at without a comprehensive assessment of the individual circumstances of the insured which might affect the level of risk.

This measure therefore affects businesses that charge fees to an insured person in connection with contracts of insurance.

It does not apply to insurance bought by businesses as avoidance has not been seen in this sector of the market

---

OTHER CHANGES

Tax

Furnished Holiday Lettings

As originally announced in the 2009 Budget, the Chancellor confirmed that the furnished holiday lettings (FHL) rules would be withdrawn from 6 April 2010, (or from 1 April 2010 for companies). The legislation for this is in the Finance Bill 2010. This will mean the tax treatment of furnished holiday lettings will be the same as for other property rental businesses.

Child Carers: Guardianship Orders - Tax relief changes

The Government intends to introduce a new income tax exemption for certain payments to special guardians, and to certain carers looking after children under a residence order. The changes will be effective for payments received on and after 6 April 2010.

Income Tax Relief for Shared Lives Carers

The Government intends to introduce a new income tax exemption for certain payments to special guardians, and to certain carers looking after children under a residence order. The changes will be effective on and after 6 April 2010. This exemption does not apply where the carer is the child's parents or step-parents.

Real Estate Investment Trusts (REITs)

A measure will be introduced to allow UK REITs to issue stock dividends in lieu of cash dividends in meeting the requirement to distribute 90% of the profits from the property rental business of the REIT. The Government intends to legislate this measure in a Finance Bill to be introduced as soon as possible in the next Parliament. The legislation will have effect for property income distributions made on or after the date that it receives Royal Assent.

The Economy

•  The Economy contracted by 6% during the recession
•  Predicted growth of 1 – 1.25% during 2010, which is in line with forecasts
•  The Chancellor has downgraded the growth forecast for 2011 to 3 – 3.5%

Company Car Tax – Changes from April 2012

This proposal introduces the new CO2 gms per kilometre emissions limits which set the appropriate percentage for computing company car tax benefit. These support the Government's commitments on reducing greenhouse gas emissions. The current graduated table of company car tax bands will be extended down to a new 10 per cent band, and all CO2 emissions thresholds will be moved down by 5gm/km on 6 April 2012 so that the 10 per cent band will apply to company cars with CO2 emissions up to 99gm/km.

Company Cars and Vans - Zero Emission vehicles and benefit charge

This measure introduces 2 changes effective for 5 years from 6 April 2010 to 5 April 2015 to the chargeable benefit in kind on company cars and vans:

•  the first change is full relief from the chargeable benefit in kind on company cars and vans which cannot produce more than 0gm per km CO2 engine emissions under any circumstances when driven.

•  the second change reduces the chargeable benefit in kind on company cars which have an approved CO2 emissions figure of exactly 75g per km or less.

Pensioners

From 6 April 2011, people aged 60 and over will qualify for Working Tax Credits if they work at least 16 hours a week.

Currently those aged 60 and over qualify for Working Tax Credits if:

•  they work 30 hours or more a week;

•  they work 16 hours or more a week and they have dependent children, or qualify for the disability element ; or

•  they work 16 hours or more and they are returning to work after being on certain benefits for six months or more (only available to the over 50s)

State Benefits

As announced at the 2009 Pre-Budget Report and confirmed in the Budget on 24 March 2010, from 6 April 2010:

•  the Child element in Child Tax Credit will increase by £20 above earnings indexation to £2300 per year; an increase of £65 per year overall;

•  the disabled elements of Child Tax Credit will increase by 1.5%;

•  the elements of the Working Tax Credit (except the childcare element) will increase by 1.5%;

•  maximum amounts for child care, family and baby element for Child Tax Credit, the income disregard, the first and second tax credit threshold and the withdrawal rates remain unchanged; and

•  the income threshold for those on child tax credit only rises to £16,190.

From 12 April 2010:

•  Child Benefit rates and Guardians Allowance will increase by 1.5%.

Cigarettes, alcohol, fuel

As usual, duty rates on alcohol will increase with the impact of the changes on retail prices for typical alcoholic drinks equivalent to:

•  36p on a 70cl bottle of spirits at 37.5% alcohol by volume

•  2p on a pint of beer

•  5p on a litre of still cider

•  9p on a 75cl bottle of sparkling cider

•  10p on a 75cl bottle of wine

•  12p on a 75cl bottle of sparkling wine

The increases will take effect on and after 29th March 2010.

The rate of duty on tobacco will increase by 1% and the increase will have effect on and after 6pm on 24th March 2010.

The 3p fuel duty rise is to be phased in, in three stages – an increase of 1p on 1st April 2010, a further 1p in October 2010 and a further 0.76p in January 2011.

Landline Duty

Legislation will be introduced in the Finance Bill 2010 to establish a new duty on landlines in the UK.   Accompanying secondary legislation will be laid after the Finance Bill 2010 has received Royal Assent.  

The duty has effect on and after the 1st October 2010 and will be set at 50p per line per month.

 

<< BACK

This news item is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at July 2008. No action must be taken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.

Burley Financial Services Ltd is a private limited company registered in England and Wales under company no. 121 7536.
Burley Financial Services Ltd is authorised and regulated by the Financial Services Authority.
We are entered on the FSA Register no 125891 at www.fsa.gov.uk/register