End of tax year

The 5 April 2008 marks the end of another tax year ‑ and a busy year it has been too. We have seen a raft of changes introduced by last year's Finance Act and the October Pre-Budget Report, many of which come into force from April this year. So what are the key changes and how will these affect individuals and businesses going forward?

What changes are coming into force from April 2008?

Capital Gains Tax (CGT)

The March 2008 Budget confirmed the announcements in last year's Pre-Budget Report that from 6 April 2008 there would be an 18% flat rate of CGT for all individuals and existing entitlements to taper relief and indexation allowance would be lost.

For some (basically higher rate taxpayers who were not entitled to business asset taper relief or who have business assets owned for less than two years) the changes mean that they will pay less CGT on disposals on or after 6 April 2008. An example of this would be investments in buy-to-let properties. 

However, higher rate taxpayers with two or more years' business asset taper relief will see an 80% increase in their effective rate of CGT following the changes, as it moves from 10 to 18%. Some relief has been given in the form of the new 'entrepreneurs' relief' which will allow the first £1 million of lifetime gains to be taxed at an effective rate of 10%. This will provide some relief for those who qualify but will be less significant to taxpayers making very large gains or serial entrepreneurs. Individuals holding shares in their employer company (including shares acquired under a Government approved share scheme) will not qualify for entrepreneurs' relief unless the individual holds at least 5% of the ordinary share capital and voting rights of the company. This is unlikely to be the case for most employee shareholders.

Residence and Domicile

The 'days test' for determining whether someone is UK resident for tax purposes will change from 6 April to include any day where the individual is in the UK at midnight. The previous days test excluded days of arrival and departure from the UK. This tightening of the rules may affect individuals' travel and work plans. There is going to be an exemption for passengers who are in transit between two places outside the UK ‑ including those who have to change airports or terminals when transiting through the UK.

Under the current rules, individuals who are not domiciled in the UK for tax purposes have a number of tax advantages including being able to use the remittance basis of taxation, whereby foreign income and gains are only taxed in the UK when the funds are brought into the country. However, from 6 April 2008, if these individuals have been resident in the UK for more than seven out of the previous ten years, they will need to pay a £30,000 annual charge for the privilege of still using this basis of taxation. The alternative is that they will be taxed in the UK on their foreign income when it arises, regardless of whether or not it is remitted to the UK.

Individuals claiming the remittance basis will lose their entitlement to personal allowances in years in which the remittance basis is claimed. A de minimis limit will have effect so that remittance basis users who have unremitted foreign income and gains of less than £2,000 a year will be able to retain access to the personal allowances to which they are entitled and will not have to pay the £30,000 charge.

Changes have also been made to the tax treatment of non-resident trusts, which currently provide significant benefits for individuals who are not domiciled in the UK. These changes are complex and those affected should seek further advice from their professional adviser regarding their position post 5 April 2008.

Corporation tax and income tax rates

As announced in the 2007 Budget, the main rate of corporation tax reduces from 30% to 28% from 1 April 2008. At the same time the small companies' rate climbs a percentage point to 21% (this will rise to 22% from 1 April 2009).

Also as announced last year, from 6 April 2008 the basic rate of income tax falls to 20%. However at the same time the starting rate of 10% will disappear for earned income and pensions (although it remains for savings).

Capital Allowances

April 2008 sees a major overhaul of the capital allowances regime ‑ originally announced in the 2007 Budget. There will be a new annual investment allowance for the first £50,000 of expenditure (except on certain items such as cars) and the writing down allowances for plant and machinery in the general pool will be reduced from 25% to 20%. The rate of writing down allowances on long-life assets expenditure will increase from 6% to 10%.

For assets acquired from 2008/09 the rate of writing down allowances on certain features integral to a building will be set at 10%.

On top of this, from April 2008, the writing down allowances on industrial and agricultural buildings will gradually be phased out, with the final withdrawal of both regimes by 2010/11.

Francesca Lagerberg, Head of the National Tax Office at Grant Thornton says: "This April sees significant changes to a range of taxes. For many there have been only a few weeks between receiving the full details of these changes and having time to act. This has made it extremely difficult for taxpayers to make important decisions affecting their future." 

Please click here to contact us if you would like further information on any of the topics detailed above.