“Autumn winds blow chilly and cold” (Simon & Garfunkel) starting, it would seem, from 9th October and the Pre Budget Report (PBR) of the new Chancellor of the Exchequer, Alistair Darling. Fancy a Chancellor being called Darling! The PBR proposals are quite far-reaching and it will be no surprise that this issue of the Square Circular focuses on the PBR.
There are also a few brief words on VAT cash accounting which may be of interest to businesses with an annual turnover below £1,350,000.
If you want any further details about any of the matters we’ve mentioned in this issue, or indeed, about any matters we haven’t mentioned please do contact us on 0161 832 4841.
Late summer tends to be a time of change so we extend a warm welcome to the new graduate trainees in our accounts department: Tom Kirk, Caroline Cain and Mark Young.
Hopefully, you’ll soon get to know the newcomers.
INHERITANCE TAX – DOUBLE YOUR MONEY
The transfer of the unused nil rate band of Inheritance Tax (Ih.T) from a deceased spouse or same sex civil partner is what caught the headlines after the PBR. The generous giveaway!
Let’s give an example of how it might work. Suppose a man died a few years ago with an estate of £200k which he left entirely to his wife. Suppose she died on 8th October 2007 with an estate of £500k which included all the assets which had passed from him to her. The first £300k would suffer Ih.T at the rate of 0%. The remaining £200k would be taxed at 40% i.e. £80k.
Now let’s suppose that the life support machine kept her going until 9th October 2007. Her nil rate band would be extended by the unused percentage of his – in our example, all of it – so it would extend from £300k to £600k and her £500k estate would suffer not a penny in tax. Generous or what?
Cynics remain unconvinced. Any couple who anticipated such problems would only need to implement simple planning to ensure that they got the benefit of the two nil rate bands to which they were entitled. The move seems to be a reward for head in the sand inactivity. And what about bachelors, spinsters and couples who simply cohabit? It doesn’t help them much.
Don’t get us wrong. The new rules will be of help to many. But those with larger estates should not make the mistake of thinking that they don’t need to make a will and that they don’t need to do any Ih.T planning.
No time like the present!
TAPER VAPOUR – CAPITAL GAINS TAX
What did come as a shock was the withdrawal of CGT indexation allowance and taper relief and the substitution of a single 18% rate of charge to CGT. In 1998 when Gordon Brown, then Chancellor, introduced taper relief he said “The capital gains tax regime we inherited rewards the short term speculator as much as the long-term investor. So it is time also for a fundamental reform of capital gains tax.” Whilst it is true that over the years taper relief has made CGT extremely complicated, there is no doubt that it was biased towards long term and serial entrepreneurs at the expense of mere investors, particularly short term investors.
When the new rules are introduced next April for individuals and trustees there will be winners and losers. Higher rate taxpayers selling business assets which they’ve held for at least two years will see their effective rate of tax increased from 10% to 18%. It’s even more painful if they owned the assets before 1998 because indexation allowance would have made their effective rate less than 10% and they’ll be losing indexation allowance next April. Those who have held business assets less than 2 years should be better off. Those selling investment assets should be better off especially if they haven’t owned the assets very long. Those out to make a ‘fast buck’ dabbling in shares will be happy; and buy to let residential property investors will be laughing all the way to the bank when they go to negotiate their loans.
There are many implications. Should I sell now or wait until April? How can I accelerate a sale to make it before April or delay a sale until after April? What will be the effect on roll-over relief or hold-over relief? Should I now invest in residential property rather than commercial property and should I do it through a limited company? Will AIM shares be as popular as they have been recently? Has some of the shine been taken off employee share schemes?
Various groups have started to lobby against the proposed changes and there is speculation in the Press as to whether the Government might back down to some extent. Remember, also that the PBR is not actually legislation but more a statement of policy and the drafting of the legislation in due course may have unusual consequences, whether intended or unintended. On the basis of what is proposed and intended we can advise you if you have CGT issues, so please do feel free to contact us.
PAY TO NOT BE BRITISH
It’s a little outside the scope of a Square Circular to go into the complicated definitions of ‘ordinary residence’ and ‘domicile’. Take it from us that traditionally a UK resident who is not domiciled here (his home is here, but not his heart) does not pay tax on income and gains arising abroad if the income and gains are not remitted here. For example, suppose the Polish gentleman who came to mend your leaking sink (he’s the one who turned up when he said he would and actually fixed it) has interest on a bank account in Warsaw which he leaves to mount up until his return to Poland. The interest is not taxable in the UK. Only if the money is remitted here is it taxable.
The proposal for the future is that if a ‘non-dom’, as they’re called, has been resident in the UK for seven years the lucky fellow will have a choice! He can either choose to pay UK tax on his overseas income, whether remitted or not, or choose to pay a flat rate charge of £30,000. He would need to have rather a lot of income and gains abroad for the tax payable to be more than £30,000. For those who are not ultra wealthy and have been taking the benefit of benign tax laws it just means that such offshore income and gains now become taxable.
We obviously don’t yet know precisely what the new legislation will say and won’t know until next year’s Finance Bill, but if you want to check out the position as best you can for the moment please do contact us.
A BIT OF INFORMATION
Here are a few interesting bits of information:
– The Government will block a tax avoidance scheme whereby individuals seek to accelerate relief for certain interest payments. No surprise there, then.
– The Government will block a tax avoidance scheme that aims to convert what in substance is interest into non-taxable income for corporation tax purposes. No surprise there, either.
– After April 2008, legislation extending capital allowances to expenditure on building alterations made in response to a notice from a Fire Authority will be repealed. Ah well, another tax relief goes up in smoke!
– If your employer provides you with petrol for private use your benefit in kind charge will increase after April 2008. Adds fuel to the fire!
– The Government gave no details in the PBR but did say that, following consultation, legislation would be introduced for 2008/09 to counter ‘income shifting’ à la Arctic Systems case. Watch this space.
If you have concerns as to how any of the above may affect you, please feel free to give us a call.
CASH ACCOUNTING – HOW ABOUT VAT THEN?
Rates, limits and thresholds tend to change and vary slightly from time to time without causing too much excitement.
Last April the annual taxable supplies threshold below which cash accounting can be adopted rocketed from £660k to £1,350k. It means that many businesses with an annual turnover around the £1 million mark may now qualify for cash accounting whereas previously they may not have even considered it.
• make standard rated sales on extended payment terms
• pay your suppliers reasonably promptly
• have a higher than average exposure to bad debts
• wouldn’t mind having a more simplified accounting system
cash accounting could be just what the VATman ordered.
Contact us for further details but remember it applies only to businesses with annual turnover below £1,350k.
Apparently a letter from a taxpayer to a tax inspector read:
“I am a vermin destroyer but have not earned anything for a month. I shall be glad to call on you at any time.”