Grant Thornton personal tax Budget comment
21 March 2007
The Chancellor's 11th and what is surely his final Budget Report
focused on children, families and education. He also continued his
charge on green initiatives and lowered the Basic Rate of Income
Tax (BRIT).
Brown continues to clampdown on tax avoidance, this time making
changes which will affect Personal Service Companies (PSC)
structures many thousands of which have been set up in the rush to
escape the new rules for Managed Service Companies (MSCs), after
the crack down on MSCs announced in the Pre-Budget report last
year.
Francesca Lagerberg, partner and Head of the National Tax Office
at Grant Thornton, says, "Contrary to predictions, the Chancellor's
eleventh budget was anything but bland. There were a number of
large scale reforms such as lowering the basic rate of income tax
by 2% but this is almost exactly offset by the loss of the 10%
starting rate. Owner managed businesses will also be looking at the
rise in the small companies' rate and the changes to capital
allowances to see if they really are that much better off. "
Good news for income tax?
In what is sure
to regarded as a headline announcement, the Chancellor lowered BRIT
by 2p to 20p, scrapping the 10p lower rate of income tax and
aligning national insurance to a higher tax threshold. Funded
largely by the removal of the 10p starting rate of income tax
(£8.63bn in 2009-10), that the Chancellor himself introduced eight
years ago, the decrease in BRIT was sold as major help for lower
income families.
Francesca Lagerberg believes the reality is somewhat different.
She says, "The Chancellor has simplified the tax bandings for
income tax by removing the starting rate of 10%. But this, coupled
with aligning national insurance to a higher tax threshold will eat
away most, if not all of the savings generated from cutting the
basic rate of income tax by 2p to 20p from April 2008. The headline
announcement sounds good but don't crack open the champagne just
yet as for many there will be little change in their actual
take-home pay."
Good news for property
A welcome change has been made to an anomaly concerning gifting of
assets between family members. Previously, if for example an
elderly couple wanted to downsize into their children's home and
the children were to move into the parent's larger house both
parties would have to pay stamp duty land tax (SDLT) on the
combined value of the assets. It effectively meant that family
members were better placed purchasing the properties off each other
and paying SDLT on each asset.
Lagerberg says, "The Chancellor has obviously spotted this
problem and redressed the balance, effectively negating the charge
of SDLT on gifted properties. Previously it was extremely unfair,
we now have a situation where gifting makes sense."
In other property reforms, Gordon Brown announced the
retrospective abolition of the benefit in kind charge for UK
residents owning foreign property through foreign companies.
Lagerberg: "Historically those owning foreign property in Europe
have used corporate ownership structures, because that was the
recognised system, and have fallen unwittingly into a heavy UK tax
trap. By abolishing the benefit in kind charge Gordon Brown has
helped honest investors avoid unexpected tax charges. Economically
there is no real benefit from this move but it is certainly a
welcome relief to many with holiday homes in Europe purchased
through companies."
Continued support for savings
The Chancellor gave a nod to savings by increasing the cash
allowance for ISAs by 20% to £3,600, but all is not as it seems
with this reform.
Lagerberg comments: "Firstly, it is disappointing that these
changes are deferred to 2008 with the benefits only materialising
in 2008/2009. Secondly, restoring the cash element to £3,600 (in
line with inflation) and pushing the overall ISA allowance up by
only 3% (over 11 years) to £7,200 is hardly radical, long overdue
and does little to further incentivise a savings culture."
She continues, "If ISAs had increased by the retail price index
since introduction in 1999, the £3,000 would now be £3,660, the
£7,000 limit would now be £8,542. Obviously, he's pushed the limits
close but has not done enough."
IHT disappoints again
The nil rate band for inheritance tax (IHT) rises to £300,000 this
April and we now know it will reach £350,000 by 2010, but again,
IHT continues to disappoint as it is outstripped by property
values.
"If IHT kept up with the property market it would be today be
sitting at £492,000. Looking at a 2010 nil rate band of £350,000
would make anyone feel a little short changed. This is a tax that
was designed to tax the wealthy but it will continue to catch more
and more of middle Britain unless something drastic is done about
it."
Lagerberg continues: "It is a wonder the Treasury has not looked
at a private residence exemption for IHT like it does CGT, it would
make far more sense and relieve the worry for home owners whose
homes move unwillingly into IHT."
Sin Taxes treated lightly, but Chancellor targets smoking
Lagerberg believes so called 'sin taxes' continue to receive a
light treatment from the Chancellor.
She says, "The Treasury's treatment on alcohol duty increases
year-by-year at only a fraction in line with inflation, although
his push against cigarettes by reducing VAT to the lowest possible
rate of 5% (previously 17%) on over the counter smoking cessation
products and upping the price of a pack of 20 by 11p shows serious
support for increasing the health of those wanting to give up
smoking before the June 2006 ban hits."
Environment receives piecemeal
treatment
Chancellor Gordon Brown had the environment
in mind in his Budget speech when he confirmed that road tax for
the most polluting cars will increase to £400 next year and
announced a raft of measures to encourage green home development
and individual energy generation.
Francesca Lagerberg says, “Although there was a small hit on the
four by four 'gas-guzzlers’ the Chancellor's approach to reducing
the UK's carbon footprint seems a bit piecemeal. Perhaps he is
focusing more on EU and global carbon reduction agreements to
effect environmental change rather than relying on a number of
smaller measures closer to home. I'm sure more can be done.”
Lagerberg adds, "It seems the Chancellor is largely of the
belief that tax will not be an effective instrument in the fight
against global warming, which is contrary to our Grant Thornton
survey which found that 85% of individuals and business were in
favour of tax on polluting activities as long as they could see
that tax funneled directly into grants for green initiatives."
Changes to self assessment
The e-filing
agenda presses on with a push to move all tax returns eventually to
being sent on-line rather than sent in by post. There was
confirmation that the self assessment deadlines will change in 2008
so that paper returns will need to be filed by 31 October and
online by 31 January after the tax year end. Interestingly many of
the other e-filing changes have been pushed back by at least a
year.
Lagerberg notes:" The delays on the e-agenda are good news as it
means that when we are required to file on-line the systems will be
ready. This ties in with the Carter Principles outlined in last
year's Lord Carter report on on-line filing."