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WFW Tax Alert - Budget Report 2008
13 March 2008
Introduction
The Chancellor of the Exchequer delivered his Budget Report 2008 on Wednesday 12 March at 12.30pm. The main headlines of the Budget were old news, most having been previously announced either in last year’s Budget, or in October’s pre-Budget Report. This Update will briefly recap those headlines, highlighting aspects that have changed since their original announcement.
Capital Gains Tax
A number of capital gains tax reliefs, including the valuable taper relief, are to be withdrawn from 6 April 2008. Taper relief meant that the effective rate of capital gains tax on a sale of certain “business” assets could be as low as 10%. A new flat 18% rate of capital gains tax will now apply to all disposals made on or after 6 April. This is good news for those disposing of non-business assets, which would otherwise have been subject to capital gains tax at 40%, but not so good for those whose effective rate of tax would have been below 18%, due to the availability of reliefs. In order to soften the blow, a new relief, referred to as “entrepreneurs’ relief”, will also be introduced on 6 April. Broadly, the relief will be available on a disposal by an individual of a qualifying business, or shares in a trading company (where the individual is an officer or employee of the company, or owns at least 5% of the ordinary share capital). The relief operates such that capital gains tax on an individual’s first £1m of gains (a lifetime maximum) will be reduced from 18% to an effective rate of 10%.
Inheritance Tax Nil Rate Band Transfers
Transfers of unused inheritance tax nil-rate bands on a person’s death to the estate of their surviving spouse or civil partner are now possible (regardless of when the first person died). This will effectively end the need for nil rate band discretionary trusts, which were previously used to achieve the same result. The amount of nil rate band that may be transferred is the proportion of the nil rate band unused on the first person's death, but calculated on the basis of the band applicable when the surviving spouse or civil partner dies. For example, if a person dies now when the nil rate band is £300,000, and their entire estate passes to their surviving spouse or civil partner, 100% of the nil rate band is unused. Therefore, if their surviving spouse or civil partner dies during the 2010/11 tax year when the nil rate band is £350,000, their estate will be entitled to a 100% increase in the nil rate band applicable at that time, i.e. £700,000.
Residence - Day Count Test
UK tax residence often turns on the number of days that an individual is present in the UK. The Government announced in the pre-Budget Report that days of arrival and days of departure would, from 6 April, be treated as days present in the UK for these purposes. Since then there has been some back-tracking, and a new rule will now provide that in order to be present in the UK on any particular day, an individual must be here at midnight on that day. This is a welcome concession, and one that will be particularly important to individuals who are at risk of breaching the 91 day rule (i.e. the rule that an individual will become tax resident in the UK if they spend on average 91 days or more in the UK per tax year over any four tax years). A further relief will be available to individuals who are in transit through the UK, provided certain criteria are satisfied.
The Remittance Basis of Tax
The remittance basis of taxation, pursuant to which a UK tax resident but non-domiciled individual is only subject to UK tax on foreign income and gains to the extent that they are remitted to the UK, is to be restricted after such an individual has been resident in the UK for broadly seven years, unless an additional tax charge of £30,000 per year is paid. Any individual claiming the remittance basis of taxation will also lose their entitlement to various income tax allowances and the annual exempt amount for capital gains tax purposes. The de minimis limit for annual foreign income or gains, under which the remittance basis will automatically apply without payment of the additional tax or loss of allowances, has been increased from £1,000 to £2,000. As a concession, the £30,000 additional tax charge will now only apply to individuals aged 18 or over. The Government has announced that it is confident that the additional tax will be creditable against foreign tax under the terms of the UK’s double tax treaties.
The definition of a remittance has been greatly extended, in order to close a number of perceived loopholes in the previous regime. Concerns as to the width of the definition have been somewhat allayed by the announcement of several exceptions. The exceptions ensure that bringing the following items into the UK will not constitute a taxable remittance: personal effects (such as clothes, shoes, jewellery and watches), assets costing less than £1,000, assets brought into the UK for repair or restoration, assets brought into the UK for less than nine months, works of art for public display, and assets purchased on or before March 11 2008. Under the rules as first announced, a taxable remittance could have arisen if assets were brought into the UK by a wide range of people connected to the individual in question. This has now been largely restricted to the individual’s immediate family. Existing foreign mortgages used to finance property in the UK have also been specifically carved out of the definition of a remittance.
Far-reaching measures that would have brought income and gains of many offshore trusts and companies of non-UK domiciled individuals within the UK tax net have been significantly pared back. Provided the individual claims the remittance basis of taxation (and pays the £30,000 of additional tax where applicable), foreign income and gains of such entities should only be subject to tax to the extent that they are remitted to the UK. Trustees of offshore trusts will be able to make a re-basing election, which should ensure that trust gains arising prior to 6 April 2008 will not become taxable after that date. Proposals that individuals must provide HM Revenue & Customs with details of offshore trusts have been dropped. New rules will also be introduced which will enable foreign capital losses to be utilised in the UK in certain instances.
Venture Capital Schemes
A number of changes have been announced in respect of the various venture capital schemes, most importantly an increase in the amount of relief available under the enterprise investment scheme, and an increase in the value of enterprise management incentive options which may be granted. Individuals investing in a qualifying enterprise investment scheme company can, from 6 April 2008, claim tax relief on £500,000, up from £400,000. Officers and employees of enterprise management incentive qualifying companies may be granted share options up to a value of £120,000, up from £100,000. This increase will not take effect until the Finance Bill 2008 has received Royal Assent. Due to European state aid restrictions, companies carrying on shipbuilding, or coal or steel production will be excluded from all of the venture capital schemes, and companies with more than 250 employees will no longer be entitled to grant enterprise management incentive options.
Tax Rates
The basic rate of income tax will be reduced from 22% to 20% from 6 April 2008. The starting rate of income tax (10%) will be removed for earned income and pensions, but will remain for savings income and capital gains. The non-payable tax credit currently available to individual recipients of dividends from UK resident companies is to be extended to dividends received from non-UK resident companies from 6 April 2008, subject to certain limitations.
The main rate of corporation tax for companies with profits over £1.5m will decrease from 30% to 28% from 1 April 2008. The small companies’ rate of corporation tax will increase from 20% to 21% in 2008/09, and to 22% in 2009/10. A restriction on the entitlement to the small companies’ rate of tax where certain individuals in partnership own shares in such companies will be removed.
Capital Allowances
Writing-down allowances for plant and machinery in the general pool will be reduced from 25% to 20%, and writing down allowances on long life assets will be increased from 6% to 10%, in each case from 2008/09. The rate of writing-down allowances on certain fixtures integral to a building will be set at 10% from 2008/09. The definition of such fixtures will be extended to include certain environmentally beneficial items that would not otherwise have qualified for allowances. Companies with small pools of unrelieved expenditure of up to £1,000 will be able to write those amounts off for tax purposes. A new 100% annual investment allowance for the first £50,000 of expenditure on plant and machinery in the general pool will be introduced for all businesses from 2008/09. Special 100% allowances for environmentally beneficial technologies are generally being extended and expanded, and a payable tax credit is being introduced from 1 April 2008 for companies that cannot utilise those allowances. Industrial building allowances, agricultural building allowances, and enterprise zone allowances are to be withdrawn by 2010/11.
Anti-Avoidance
As usual, a raft of new anti-avoidance measures have been announced in the Budget, mostly as a response to disclosures made under the disclosure regime. Very briefly, the more relevant targeted schemes relate to disguised interest, leased plant and machinery, assignments of lease rentals, capital allowance buying, controlled foreign companies, the intangibles regime, sideways loss relief, double tax treaty abuse, employment-related securities, and stamp duty land tax group relief.
Conclusion
A number of the above measures have far-reaching consequences, particularly those relating to capital gains tax and non-domiciled individuals. If you require any further information regarding any of these matters, please speak to your usual contact at Watson, Farley & Williams.
Chris Comyn, London
Michael L'Estrange, London
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