The Budget 2010

Key Announcements Affecting Private Clients

What were we expecting in the Budget this week? Was the Chancellor going to keep the status quo with taxes? Well, it seems that he has, for the most, However there were some surprising announcements, some of them good and some not so good.

It remains to be seen what will happen to the tax law after the Election – this year it is definitely a case of “watch this space”.

This is not an exhaustive list of the announcements made by the Chancellor that might affect individuals, but it gives a flavour of areas of tax law to look out for. It emphasises the need to keep a continuing review on your personal affairs. We can help you make sure that you are maximising the opportunities available to you for tax savings.

Inheritance Tax (IHT)

Nil Rate Band Allowance – the Chancellor’s Freeze

The Chancellor, in his Pre-Budget Speech, announced that the inheritance tax nil rate band allowance would be frozen at £325,000 for the next tax year 2010-2011. He has this week taken a bigger step in freezing it until 2014-2015.

Since the introduction of the transferable nil rate band allowance in October 2007 many married couples and civil partners have simplified their Wills by taking out nil rate band discretionary trust provisions.  A discretionary trust had previously been included in Wills to ensure the maximum IHT saving possible on the death of the survivor of them by making use of both nil rate band allowances (without the trust or outright gift of the allowance to someone other than the spouse/civil partner, one allowance could be wasted). Since the introduction of the transferable nil rate band allowance legislation they can instead leave everything to the survivor on the first death and still benefit from two nil rate band allowances (making a current maximum combined nil rate band of £650,000).  

Having said this, in some circumstances the trust provisions continued to provide a good tax saving vehicle, for example where couples own business or agricultural assets, for couples not married or in a civil partnership, or those owning assets likely to have a capital growth which will exceed the growth of the nil rate band allowance in the years between each death. We would pick up on this last example and ask whether the Chancellor’s freeze for the next five tax years means that couples should now be reviewing their Wills? We think so. By leaving assets up to the value of the nil rate band allowance on the first death to a discretionary trust, couples could ensure that the increase in capital value on those assets is kept out of the survivor’s estate, and so not chargeable to the 40% IHT death rate. Up until now that capital growth could have been covered by the gradual increase in the nil rate band allowance to the survivor’s death, but with the freeze on the allowance this is no longer the case, at least for the time being. 

It is “business as usual” for lifetime gifting. The annual exemption of £3,000 remains, as well as other exemptions such as in relation to gifts of excess income, gifts to parties to a marriage in contemplation of that marriage, and to charitable organisations. You can gift the nil rate band to trust every 7 years without triggering an immediate tax charge on the transfer.

The tax changes this year certainly do not pronounce the end of the benefits trusts can provide for estate and tax planning - they continue to be good planning vehicles if structured appropriately in each case.

Charitable Relief – Into the EU

The Government will legislate to extend UK tax reliefs for charities in the EU, Norway and Iceland. This would include the availability of inheritance tax relief on gifts to non-UK charitable organisations (scope to be defined in the Finance Bill). This is a welcomed change (made in light of an ECJ case in January 2009), in an era of an increasing number of people with overseas connections. Tax repayment claims may be available for transfers made back to January 2009.

Stamp Duty Land Tax (SDLT)

First time buyers of residential properties up to £250,000 will, until 25 March 2012, benefit from an extended 0% SDLT threshold.

A new 5% SDLT rate will apply on residential properties over £1million, from 6 April 2011.

For further details see Myfanwy McDonnagh’s blog Calling First Time Buyers.

Income Tax

We had already been warned of the changes here. Current rates and personal allowances are frozen, and a new 50% tax rate on income over £150,000 will start from 6 April (with a reducing personal allowance where income is over £100,000).

Capital Gains Tax (CGT)

Many tax practitioners were probably expecting the Chancellor to increase the 18% CGT rate, particularly after the announcement of the new income tax rate of 50%. However, the Chancellor in his speech confirmed the rate would remain. The annual exemption is also frozen at £10,100.

From 6 April the lifetime limit for Entrepreneurs’ Relief will be doubled, to £2 million. This gives an effective rate of tax of 10% on the first £2 million of chargeable gain on disposals of assets qualifying for the relief.

Other

Those able to make full use of their ISA allowances will have welcomed the recent increase in the allowance to £10,200 (from 6 April 2010). The Chancellor announced that for each year thereafter the allowance will increase in line with the RPI.

We had already been told that furnished holiday lettings relief with be withdrawn from April 2010.

We are to expect legislation to provide income tax relief for certain payments to special guardians and carers looking after children placed under a residence order. This will add to the current tax rules for foster carers, and those who have adopted a child.

For further information contact a member of our Tax Team on 01227 763939.