Budget Announcement March 2008

We have seen very little change to that communicated in the Pre-Budget Report in October 2007.

Darling's Budget report did confirm that the flat capital gains tax (CGT) rate of 18% for individuals will be introduced along with a entrepreneur rate of 10% as previously announced. Additionally the report stated that 'The Government does not see the need for any change to the taxation of life insurance bonds as a result of CGT reform'.

There were 107 Budget Notices issued today and these can be reviewed via the HMRC website or HM Treasury website.

Budget 2008 summary

Chancellor Darling’s first Budget Speech was something of a marathon, lasting 50 minutes.  Content was sadly lacking once the history lessons and re-announcement of previous measures were removed.

Mr Darling introduced the Budget as a responsible one designed to maintain stability in the world economic slowdown.  More than a decade of growth underpins the current strong position of the UK economy and the Treasury predicts lower but continuing growth for 2008-10.

The inflation target remains set at 2%.

The absence of detail in the speech was more than made up for by the publication of 107 Budget Notes – the previous 21st Century record was last year’s relatively insignificant 81.  And the excess wasn’t just clearing up the mess left by the Pre-Budget Report.

The speech itself did tell us of significant Alcohol Duty increases ranging from 3p on a pint of cider to 55p on a bottle of spirits and the deferment of the planned 2p a litre increase in petrol tax from April to October.

INCOME TAX

Rate Changes

As announced in the 2007 budget, for 2008/09 and subsequent years the basic rate of income tax will be reduced from 22% to 20%.

At the same time, the starting rate of income tax of 10% will be abolished.

A new 10% starting rate, applicable only to savings income, will be introduced from 6 April 2008.  This starting rate will apply to the first £2,320 of savings income.

The starting rate band for savings will be reduced by any non-savings income of the taxpayer.

There are no changes to the rates applicable to dividends.

Age related Personal allowances for those aged 65 to 74 and 75 and over will be increased by £1,180 in addition to the indexation increase. The personal allowance for those aged 75 and over will increase to £10,000 in 2011-12.

The full list of rates is available as an attachment on the website.

Residence and Domicile: Annual £30,000 charge for some users of the remittance basis - BN107

Legislation will be introduced in Finance Bill 2008 to ensure that adult non-domiciled or not ordinarily resident individuals (who have been in the UK more than seven of the past ten tax years) will continue to be able to access the remittance basis of taxation on payment of an annual charge of £30,000. This charge applies to their foreign income and gains they leave outside the UK, unless their unremitted foreign income and gains are less than £2,000.

Currently, UK residents who are either non-domiciled or not ordinarily resident in the UK, can access the remittance basis of taxation without any UK tax being charged on the foreign income and gains they leave outside the UK. The remittance basis means that income and gains arising overseas are only taxed in the UK when they are brought into the UK.

On and after 6 April 2008, non-UK domiciled and/or not ordinarily resident adults who claim the remittance basis of taxation (who have been resident in the UK more than seven of the past ten tax years) will have to pay a £30,000 annual tax charge in respect of the foreign income and gains they leave outside the UK. This £30,000 charge is in addition to any tax due on UK income and gains or foreign income and gains remitted to the UK.

Following consultation there are three main changes to the draft legislation published on 18 January 2008, as follows:

in the draft legislation the charge did not have effect for remittance basis users who have unremitted foreign income and gains of less than £1,000 in the year of assessment. This has been raised to £2,000

the charge will apply only to adults so that individuals under the age of 18 will not have to pay the £30,000 charge until the year they turn 18

the tax charge will take a different form from the one set out in the draft legislation. It will be a tax charge on unremitted income and gains rather than a standalone charge.

The £30,000 annual tax charge will be payable through the self assessment system. If the adult pays the £30,000 tax charge from an offshore source directly to HMRC by cheque or electronic transfer, the £30,000 will not itself be taxed as a remittance.

Individuals who have access to the remittance basis of taxation can choose each year whether they wish to claim the remittance basis of taxation or pay tax on their worldwide income and gains. Adults will not have to pay the £30,000 minimum tax charge for a particular year if they do not claim the remittance basis for that year.

The tax charge to be introduced from April 2008 will take a different form from the one set out in the draft legislation published on 18 January 2008. It will be a tax charge on unremitted income and gains (or a combination of the two) rather than a standalone charge. Individuals paying the charge will choose the foreign unremitted income or gains on which the £30,000 is paid.

As a result the tax paid will either be income tax or CGT. The unremitted income or gains upon which the £30,000 tax has been paid will not be taxed again when and if it is eventually remitted to the UK. There will be ordering rules that determine that untaxed unremitted foreign income or gains will be treated as remitted before income or gains upon which the £30,000 has been paid.

The £30,000 charge will be income tax or CGT and should be treated as such for the purpose of Double Taxation Agreements. The tax will also be available to cover Gift Aid donations.

Residence and Domicile: The Residence Test and Day Counting Rules - BN102
Legislation will be introduced in Finance Bill 2008 to change the way days are counted for residence test purposes. This change will have effect on and after 6 April 2008.

Under the current rules, when deciding if an individual is resident in the UK for tax purposes, all days spent in the UK are normally counted, except for days on which the individual arrives in, or departs from, the UK. The Pre-Budget Report proposed that days of arrival and departure should count as a day of presence in the UK, subject to an exemption for transit passengers.

The changes announced mean that on and after 6 April 2008, any day where the individual is present in the UK at midnight will be counted as a day of presence in the UK for residence test purposes.

There will be an additional exemption for passengers who are in transit between two places outside the UK. The exemption is wider than that proposed at the Pre-Budget Report as it caters for people who have to change airports or terminals when transiting through the UK. It will also allow people to switch between modes of transport so, for example, they could fly in but leave by ferry or train. Days spent in transit, which could involve being in the UK at midnight, will not be counted as days of presence in the UK for residence test purposes so long as during transit the individual does not engage in activities that are to a substantial extent unrelated to their passage through the UK. So, for example, if they take time out to attend a business meeting then the transit exemption will not have effect.

Residence and Domicile: Personal Allowances and the Remittance Basis - BN103

Legislation will be introduced in Finance Bill 2008 to end entitlement to certain personal allowances and reliefs on income tax for individuals who:

have unremitted foreign income and gains in excess of £2,000 a year,

are resident in the UK, and

who claim the remittance basis of taxation.

These individuals will similarly lose access to the annual exempt amount (AEA) for CGT.
All UK residents are entitled to a personal tax allowance and reliefs for income tax and the AEA for capital gains. The majority also pay tax on their worldwide income and gains even if those income and gains remain offshore. UK residents who are either not domiciled or not ordinarily resident in the UK can pay tax on the remittance basis which means that income and gains arising overseas are taxed in the UK only when, and if, they are brought into the UK.

On and after 6 April 2008, individuals who claim use of the remittance basis will not be entitled to any of the personal income tax allowances. This includes the basic personal allowance and age-related allowances, blind person's allowance, tax reductions for married couples and civil partners* and relief for life insurance payments. Remittance basis users will also lose access to the AEA for capital gains.

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 any of the personal income tax allowances to which they are entitled and the AEA for capital gains. This £2,000 limit is instead of the £1,000 limit proposed in the Pre-Budget Report.
Individuals who have access to the remittance basis of taxation can choose each year whether they wish to claim the remittance basis of taxation or pay tax on their worldwide income and gains. Individuals will be entitled to the personal income tax allowances and the AEA for capital gains in a particular year if they do not claim the remittance basis in that year.

INHERITANCE TAX

Transitional Serial Interests

The Chancellor has proposed amendments to the rules on Transitional Serial Interests (TSIs) introduced in the Finance Act 2006.

Finance Act 2006 included a transitional period from 22 March 2006 to 5 April 2008 to enable trustees of flexible interest in possession trusts to reorganise the trust without making it subject to the new rules.

The proposed change to the rules ensures that a change to the trust resulting in the creation of a TSI for the existing beneficiary will not bring the trust into the new rules.

In addition, the transitional period is to be extended so that it will now end on 5 October 2008.

CAPITAL GAINS TAX

A new single rate of CGT of 18% for individuals, trustees and personal representatives on disposals made on or after 6 April 2008, that exceed the annual allowance, has been introduced.

Disposals made on or after 6 April 2008 will not benefit from taper relief or indexation relief.  However, other CGT reliefs will continue to be available:

• Private Residence Relief
• Business Asset roll-over relief
• Current reliefs related with ‘The Enterprise Investment Schemes’ (EIS) and ‘Venture Capital Trusts’ (VCT) – with the exception taper relief as above.
• Unused allowable losses from past years will continue to be allowed to be brought forward in order to reduce any gains.

There will be a new Entrepreneurs’ relief, which will give an individual a ‘lifetime’ total of £1 million of qualifying gains at a reduced CGT rate of 10%.  Gains in excess of £1m will be charged at 18%.   This new relief will be effective for qualifying disposals on or after 6 April 2008 – disposals on or before 5 April do not affect the lifetime limit.

CORPORATION TAX

Profits limits are unchanged.

Small Companies’ Rates

From 1 April 2008 the small companies’ rate of Corporation Tax will increase from 20% to 21% (ring fence profits remain liable at 19%).

The fraction for smoothing between the main and small companies’ rates will be 7/400 (11/400 for ring fence profits).

Main Rates

The main rate of Corporation Tax will be 28% (30% for ring fence profits) from 1 April 2008.

The Budget Notes for the Main Rate are contradictory with some showing a start date of 1 April 2009.  This conflicts with other announcements and we believe 1 April 2008 to be the correct date.  This will be clarified in next week’s Round Up.

VAT THRESHOLDS

From 1 April 2008 the taxable turnover threshold which determines whether someone must be registered for VAT will increase from £64,000 to £67,000 and the threshold for deregistration will increase from £62,000 to £65,000.  The limits for relevant acquisitions from other European Union member states will also be increased from £64,000 to £67,000.

CAPITAL ALLOWANCES: INDUSTRIAL BUILDINGS ALLOWANCES, ENTERPRISE ZONE ALLOWANCES AND AGRICULTURAL BUILDINGS ALLOWANCES

The phased withdrawal of Industrial and Agricultural Buildings writing down allowances announced in Budget 2007 commences for chargeable periods ending on or after 1 April (Corporate Tax) or 6 April (Income Tax).

The removal of Enterprise Zone Allowances will have effect, with no phasing out period, from 1 April 2011 (Corporate Tax) or 6 April 2011 (Income Tax).

ENTERPRISE INVESTMENT SCHEME (EIS), VENTURE CAPITAL TRUSTS (VCT) AND CORPORATE VENTURING SCHEME (CVS)

As part of the Chancellor’s drive to support small and medium sized businesses, he has proposed an increase in the amount of investment on which an investor can claim EIS relief in a tax year from £400,000 to £500,000.

This increase requires approval by the European Commission but will be effective from 6 April 2008.

The activities of shipbuilding and coal and steel production will be removed from all 3 schemes.

PENSIONS

Legislation in Finance Bill 2008 will exempt small annual increases in pensions in payment (£250 per annum or less) and rounding up to the nearest whole number for pension increases already awarded from the lifetime allowance test.  There will also be more flexibility in the choice of RPI reference month that schemes can use – any month within 12 months before a pension increase will be permitted.

There will be provisions in Finance Bill 2008 to simplify the administration of some trivial commutation payments.  It will be possible to commute some small ‘stranded’ benefits, along with pension savings below £2,000 in occupational schemes.  This will be in addition to the current overall limit of 1% of the lifetime allowance.

Corporation tax on pension contributions

Legislation will be included in Finance Bill 2008 to confirm that retrospectively, for the period between 1 April 2004 and 5 April 2006 tax relief on employer contributions to registered pension schemes will be restricted to actual cash contributions made in the relevant accounting year = rather than amounts shown by company accounts (where ‘accruals’ are sometimes included for contributions not yet made, for example)

Pensions and Inheritance tax

With effect from death on or after 6April 2008, where tax-relieved pension savings are passed on to other family members besides dependants, via a lifetime annuity or a scheme pension, the funds will be subject to an unauthorized tax charge and possibly inheritance tax.  This rule does not apply where a scheme has more than 20 members, whose own pension rights all increase at the same rate following another member’s death.

In addition, where a scheme member over 75 – in receipt of a scheme pension or an annuity – dies (on or after 6 April 2008), and an unauthorized lump sum is subsequently paid out, an IHT charge will arise.  Any nil rate band not already set against the deceased’s estate may be set against this charge.

The same applies to ASP funds passed down.

With regard to overseas schemes, IHT protection will be given to UK tax-relieved pension funds in overseas pension schemes, provided they are tax-recognized and regulated in the country where they are established – or, alternatively, provided the funds are used to provide a pension for life.

* This newsletter has been prepared with all possible care to ensure its accuracy. It is based on our current understanding of legislation and HMRC practice. 

* Neither Aisa Direct Ltd nor any of its employees can accept responsibility for any errors or omissions. You should seek further professional advice prior to action.

This should not be deemed as individual advice and you should seek further information particular to your individual circumstances. For further information, contact AisaProfessional on (01672) 569111.