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Turcan Connell responds to the Budget 2008

Few surprises and a focus on stability in Chancellor's first Budget

Alastair Darling’s first Budget speech today has, as predicted, brought few surprises. His focus, he said, was on building stability for Britain against a global backdrop of uncertainty. The expected rises in taxes on alcohol and high-polluting cars were announced alongside increases in winter fuel payments and child benefit payments. The Chancellor gave his predictions for growth for the economy as being between 1¾ and 2¼% in 2008 rising to between 2¼ and 2¾% in 2009 and to between 2½ and 3% by 2010.

Tax saving and simplification measures for small businesses were announced and there was also welcome news for first time buyers in the residential property market with proposals to introduce long-term fixed-rate mortgages and make shared equity arrangements more accessible.

Our tax experts have analysed the Chancellor’s speech to draw out the key points with the most relevance for our clients, which we have outlined below. A detailed summary of all the key points of this year’s Budget will be available to download from our website from tomorrow.

Income Tax

The basic rate of Income Tax will fall by 2 pence in April. The downside to this, however, is the loss of the 10% starting rate band on earnings.

Individual Savings Accounts (ISAs)

The annual Individual Savings Accounts investment limit was confirmed to rise to £7,200 with the amount that can be held in cash rising to £3,600.

Capital Gains Tax (CGT)

The Capital Gains Tax reforms announced in last year’s Pre Budget Report (PBR) and in the Chancellor’s statement in January this year about the introduction of the new ‘Entrepreneurs’ Relief’ were both confirmed today. The Entrepreneurs’ Relief will go some way towards bridging the gap between the existing 10% Capital Gains Tax taper rate for certain business assets and the new flat rate of 18%, effective from 6 April. The new relief will effectively retain the 10% on lifetime gains of up to £1m on qualifying trading businesses and certain shares.

Inheritance Tax

The Inheritance Tax Allowance for the tax year 2008/9 will be £312,000 for individuals and potentially £624,000 for married couples and civil partners where the maximum amount of Nil-Rate Band unused on a person’s death is (under new provisions contained in the PBR) to be transferred to the estate of their spouse or civil partner who dies on or after 9 October 2007; for 2009/10 it will be £325,000 for individuals and potentially £650,000 for married couples and civil partners (on the basis described above); and for 2010/11 it will be £350,000 for individuals and potentially £700,000 for married couples and civil partners (on the basis described above).

The value of estates above the available Nil-Rate Band will be taxed at 40%.

The IHT rules for interest in possession trusts (IIP) changed in 2006 so that they became subject to rules which previously only applied to discretionary trusts.  The key effect of those changes is that an IHT charge arises to an individual on creation of such trusts during lifetime and the trust is charged to IHT on distributions and every 10th anniversary of the creation of the trust.    Previously the IIP was not charged to IHT but on the death of the beneficiary it was included in the their IHT chargeable estate.

The implementation of the 2006 changes was delayed for a transitional period for IIP trusts in existence before 22 March 2006 to enable trustees to recognise such trusts without incurring charges under the new rules.  The deadline for this transitional period has been extended to 5th October 2008.  It is also confirmed that the ‘transitional serial interest’ provision will apply where the holder of an interest in possession trust at 22 March 2006 becomes entitled to a new interest within the transitional period.

Residence and domicile

Implementation of the package of reforms announced in the PBR has also been confirmed, subject to some welcome modifications. For example:

• The existing basis of taxing non-domiciles’ foreign income or gains only if it is remitted (brought) to the UK will continue where the foreign income and gains are less than £2,000 in the tax year (this is an improvement on the original proposal to apply the remittance basis for foreign income and gains less than £1,000).

• The Chancellor has said that there will be no further substantial changes to the rules for non-domiciles in the lifetime of this Parliament.

• In counting the number of days physically present in the UK for the purpose of establishing tax residence, days of arrival will only count if the individual is present in the UK at midnight. Days spent in the UK in transit will generally not count as a day of presence in the UK for this purpose.

Tax reclaims for charities

The Chancellor commented on the vital role that charities play and announced the implementation of a transitional tax rate of 22%, to allow them to continue to claim tax on Gift Aid donations at the current rate, delivering £300 million worth of relief and giving charities the certainty they need for the next three years.
 
Asset Management
 
To enhance the competitiveness of the UK asset management sector, remove tax as a barrier to commercial developments and make the tax system fairer for investors, a series of measures was announced which include launching a new tax regime for Property Authorised Investment Funds to commence on 6 April 2008.

Following a ruling by the European Court of Justice, the VAT exemption for investment management will be extended to all collective investment funds available for direct investment by the public from 1 October 2008.

Enterprise Investment Scheme (EIS)

Entrepreneurs investing in companies through the Enterprise Investment Scheme (EIS) will also benefit from income tax relief on investments of up to £500,000 per annum from 6 April 2008, up from the previous limit of £400,000.

Venture Capital Trusts (VCTs) and EIS

The list of qualifying investments has now been further restricted and will now exclude shipbuilders and coal and steel producers.

Tax simplification

Following discussions with business and tax professionals, the next stage in the Government’s rolling programme of tax simplification to further enhance UK productivity and competitiveness was announced, including the initial outcomes on the three tax simplification reviews launched at the 2007 Pre-Budget Report:

• VAT rules and administration: consulting on ideas to simplify operation of the partial exemption regime and capital goods scheme, and exploring the continuing need for businesses to seek permission from HM Revenue & Customs (HMRC) before taxing otherwise VAT-exempt supplies of land and property;

• Anti-avoidance legislation: repealing outdated and complex anti-avoidance provisions on bond washing, employment securities and other transactions in securities; and

• Corporation Tax rules for related companies: simplifying the associated companies rules relating to the small companies rate of Corporation Tax.

Building on the significant reforms to the business tax system announced in the 2007 Budget, due to take effect from April 2008, and responding to representations from business, the Budget further simplifies Business Tax by:

• Reforming capital allowances to allow 500,000 businesses to write off pools of £1,000 or less; and
 
• Announcing a new review in which HM Treasury and HMRC, working in partnership with business, will look at how to simplify the Corporation Tax calculations and returns for smaller companies.
 
The Government has also said that over 20 further tax simplification measures, which will help sectors across the UK economy, including further modernising the tax system for financial services and the charitable sector, will be brought forward.

For further information on any of the points raised above, please contact your Turcan Connell Partner or speak to a member of our tax team on 0131 228 8111.

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