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Post-Election Budget Comment - 'Tough but fair' and a sensible approach to CGT

To download facts and figures relating to the Post-Election Budget 2010, please click here or on the pdf icon below. You can also view podcasts on Capital Gains Tax and Savings and Pensions by clicking on the images at the bottom of the page.

It was billed as being "tough but fair" aiming for a ratio of 80% spending cuts to 20% tax rises, but did today’s first Budget from the coalition Government deliver on that promise?

The Chancellor spent a considerable amount of time setting the scene before revealing his plans for the next five years. He repeatedly referred to the state of the nation’s finances which the coalition Government has inherited using emotive terms such as “the emergency that we face” and our “record debts”. He called this the “unavoidable” Budget where “everyone will be asked to contribute”. He announced that the ratio to which he plans to work has been amended slightly from 80:20 to 77:23 of spending cuts to tax rises, which he maintains will allow a balancing of the books within a five-year term.

After his preamble setting the macroeconomic context, came the first raft of figures:

* Growth in the UK economy for the coming five years estimated at 1.2% this year, 2.3% in 2011, 2.8% in 2012 followed by 2.9% in 2013 and finally 2.7% in both 2014 and in 2015;
 

* Public sector net borrowing to be slashed from its current position at £149bn to £20bn by 2015/16;
 

* Corporation Tax to be reduced by 1% each year for four years to take it to 24% in 2014 making it the lowest rate of any major Western economy, “one of the lowest rates in the G20, and the lowest rate this country has ever known”;
 

* The small companies tax rate to be reduced to 20p in the pound;
 

* Favourable tax rules for furnished holiday lettings to be reinstated to help the many small businesses in the tourism industry; and
 

* A bank levy applied to the balance sheets of UK banks and building societies, and to the UK operations of banks from abroad from January 2011.

The Chancellor called these measures “the most fundamental and far-reaching reform of our corporate tax regime in generations”.

Next the Chancellor turned his attention to VAT and announced the not unsurprising rise to 20%. However, this rate rise will not happen until 4th January 2011 and the usual items such as food and children’s clothing will remain zero rated. And following the recent Budget in March when there were “substantial” increases to duties on alcohol, tobacco or fuel, the Chancellor confirmed no further increases this year.

One of the most widely discussed subjects in advance of this Budget was the expected rise in the rate of Capital Gains Tax (CGT). The Chancellor dubbed this aspect of taxation as “one of the most chaotic areas of tax that the new Government inherited from its predecessor”. He then went on to say that from midnight tonight, the rate of CGT will increase to 28% for higher rate tax payers, while basic rate taxpayers will continue to pay CGT at 18%.

There was good news for entrepreneurs with the Government continuing its commitment to offer them the lowest rate of 10% on qualifying gains and increasing the lifetime limit from £2m to £5m but only with effect from midnight tonight.

We think that the new CGT rate of 28% represents a sensible position, narrowing the previous gap between the highest rates of income and capital gains taxes while still encouraging investment. The continued availability of lower CGT rates for non-higher rate tax payers is also welcome, as is the Annual Exempt Amount remaining at £10,100 this year.

We have long held the view that the complex pension legislation forcing either annuity purchase or the potential loss of up to 82% of private pension funds to tax on death after age 75 is an unjust reward for those who have diligently saved for their retirement. In its final days the Labour Government also launched an assault on higher earners to prevent them from gaining income tax relief on pension contributions and potentially taxing them on their employer’s contributions.

Although the full detail has yet to emerge, we welcome the measures announced today to bring some common sense to this area and we support both the removal of compulsory annuity purchase at age 75 and the proposal to have a simpler, reduced annual pension contributions allowance for all. We also welcome the return of an earnings-related increase to the state pension.

There were no changes to the rates of income tax but the Chancellor did announce that nearly 1 million people on lower incomes will be lifted out of the income tax bracket with an increase in the tax free allowance of £1000 from £6475 to £7475 with effect from April 2011.

In summing up, the Chancellor concluded that this Budget lays the foundations for a more prosperous future with the “richest paying the most and the vulnerable protected”. Whether this Budget was tough enough or fair enough remains to be seen.

If you have any queries about how any of the changes outlined in today’s speech may affect you or you wish to speak with one of our tax specialists, please call us on 0131 228 8111.

Post-Election Budget – Bob Hair and Ian McGowan discuss Capital Gains Tax

Post-Election Budget – Ian McGowan and Bob Hair discuss Savings and Pensions

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