October 2007 Pre-Budget Report

16 October 2007

The new Chancellor of the Exchequer, Alistair Darling, presented his first pre-budget report on 9 October 2007. He has announced a number of changes that are likely to affect many clients. The Government has announced it is aiming for a programme of tax simplification in general. The most noticeable changes are in relation to Inheritance Tax and Capital Gains Tax.

Inheritance Tax

There has been much talk for a number of years about the fact that the nil rate band allowance for individuals for Inheritance Tax (IHT) has failed to keep pace with the general increase in house prices. This in turn has led to vast numbers of individuals’ estates being chargeable to IHT on their death.

For the current tax year 2007/2008 the nil rate band allowance is £300,000 per individual. This has not been changed.

The Chancellor announced the following changes to IHT legislation:

• In his 2007 Budget Gordon Brown as the then Chancellor announced an increase in the nil rate band allowance to £325,000 by 2010/2011. Mr Darling has improved on this by announcing an increase to £350,000 by 2010/2011.
• From 9 October 2007, the nil-rate band allowance will be transferable between spouses and civil partners. This means that if a spouse or civil partner dies with any unused nil rate band allowance, it can be used to increase the allowance on the surviving spouse’s or civil partner’s subsequent death. Draft legislation has been published.
• Similar changes will be made to the IHT treatment of alternatively secured pensions, part of the new pensions scheme.
• This transferability of the nil rate band allowance will be allowed where one spouse or civil partner has died before 9 October 2007, provided the survivor’s death is on or after this date. There is no cut off date for the date of death of the first spouse or civil partner.

Here are some examples:

Jack died in 2002 and the whole of his estate (which exceeded the value of the then nil rate band allowance) passed to his wife, Jill. At the time, Jack’s nil rate band allowance was £250,000 and he did not use any of his allowance. Jill dies in 2010, when the nil rate band allowance is £350,000. She has her own allowance of £350,000 plus another 100% of this allowance (transfer of her husband’s allowance), meaning that the value of her estate for the purposes of calculating IHT on her death will have to exceed £700,000 for IHT to be payable.

If however Jack had used half of his allowance on gifts to his children, then Jill’s estate can only benefit from an uplift in her allowance of 50% (ie a total allowance for Jill’s estate of £525,000).

How will this affect Will drafting? Many people have made “tax-efficient” Wills (the most common option is using a discretionary trust) to use the nil rate band allowance of the first spouse or civil partner. From an IHT point of view, the new rules seem to put couples with basic Wills (eg everything passing to the survivor on the first death) and tax efficient Wills on a similar (but not always identical) footing.

We do not consider that those people with tax efficient Wills necessarily need to change them, although a review is recommended. Also, we do not consider that those who would have contemplated tax efficient Wills prior to 9 October 2007 should ignore other opportunities that trusts can provide.

The use of a trust in a Will can be advantageous for a number of other reasons:

• Assets held on trust, rather than passing outright to a surviving spouse or civil partner, can be protected from being exhausted on nursing fees. In many cases, an estate due to be left to children could be reduced to very little if the surviving parent has lived his/her last years in a nursing home.
• If a family comprises children from a previous relationship, the inheritance for those children could be better protected within a trust structure.
• Similarly, assets held on trust can be preserved for the children if the survivor re-marries and no new Will is made in favour of the children, for whatever reason (marriage automatically cancels your Will).
• The use of a trust structure, rather than an outright distribution to children, may improve the children’s own IHT position by keeping additional value out of their estates, thereby passing wealth to their own children with little or no IHT to pay. This provides generation tax planning.
• If you own agricultural or business property (such as agricultural land, or a shareholding in an unquoted company) the use of a trust in your Will can provide a useful tax saving opportunity by efficient use of the IHT relief available on such assets.

Capital Gains Tax

The Chancellor has announced a significant change in the taxation of capital gains. A liability to Capital Gains Tax (CGT) can arise when an individual, personal representative or trustee disposes of a taxable asset (for example shares, property or land). A disposal includes a gift as well as a sale of an asset. A CGT liability can also arise on a disposal by a company, but these rules are unaffected by the Pre-Budget Report.

Currently, a capital gain is added on top of your income and taxed at your highest rate of income tax (10%, 20% or 40%). Trustees and personal representatives pay CGT at a rate of 40%. The chargeable gain can be reduced – often very significantly - by a number of reliefs, including an indexation allowance for assets owned before 6 April 1998, and taper relief for assets owned after this date.

The following changes have been announced:

• The new proposals provide for a single rate of CGT of 18% for all disposals made by individuals, trustees and personal representatives on or after 6 April 2008.
• Taper relief and indexation allowance are to be abolished from 6 April 2008.
• When an asset has been owned prior to 31 March 1982, the taxpayer can currently opt to use in his CGT calculation either the market value of the asset when he acquired it or its market value as at 31 March 1982, whichever results in the lower gain. From 6 April 2008, all assets held on 31 March 1982 will be deemed to have had a cost equivalent to their market value on that date.
• The complicated rules for taxing the disposal of shares, when holdings have been acquired at different times, will also change, providing simplification.
• No changes are anticipated to other reliefs, such as principal private residence relief (available on the sale of a main residence), and reliefs on the disposal of business assets.

A higher rate taxpayer owning an asset could pay an effective rate of CGT of as little as 10% for a business asset held for at least two years, or 24% for an asset not qualifying as a business asset and held for at least two years. A disposal of an asset by him after 6 April 2008 will be taxed at the rate of 18%, regardless of the type of asset or his marginal rate of income tax, marking either an 80% increase or 25% decrease in the tax bill (depending on the type of asset).

Those who are contemplating a sale or gift of an asset in the near future should consider whether they would be better off making a disposal before or after 6 April 2008. This will be particularly important for disposals of business assets, such as AIM shares, unquoted shareholdings or assets used in a trading business. Comparative computations will help you to decide when would be the best time to make the disposal. We can assist with these calculations.

There may also be ways to save the indexation allowance that has been built up on an asset, before it is lost on 6 April 2008.

Residence and Domicile

A UK resident who is non UK domiciled (referred to by the press as a “non-dom”) or not ordinarily resident in the UK, does not pay income tax or CGT on income and gains arising on assets located outside the UK, unless they bring the income or sale proceeds into the UK. This is known as electing to be taxed on the “remittance basis”.

From 6 April 2008 new legislation will impose a tax charge of £30,000 per year on these individuals, once they have been resident in the UK for seven years. This charge will be payable by those who wish to continue using the remittance basis (ie not paying UK tax on foreign income or gains). The seven years start to run from the time the individual became UK resident, even if this is before 6 April 2008.

For example, an individual who is domiciled abroad, but who became UK resident in April 2003 will have to pay a charge of £30,000 each year from 6 April 2010 if he elects not to pay UK income tax and CGT on his foreign source income and gains.

Changes have also been announced to the rules used to determine whether or not a person is resident in the UK for a tax year, and this may affect his UK tax bill.

Stamp Duty

Various changes will be made to the administrative rules with regard to Stamp Duty and Stamp Duty Land Tax. They are likely to have very little impact on the amount of Stamp Duty payable.

The threshold at which a land transaction must be reported to HM Revenue and Customs is to be increased from Budget Day 2008. This does not affect the rates and thresholds of Stamp Duty Land Tax, but rather it will result in reduced paperwork on a number of relatively low value transactions.

New legislation will also be introduced in the Finance Bill 2008 to remove a Stamp Duty Land Tax charge on a transfer of an interest in a property investment partnership (for example when there is a change in the size of the partnership shares).

If you think that you might be affected by any of the changes announced, please contact your legal adviser at Furley Page.

For more information please contact Sarah Bogard, Associate & Chartered Tax Adviser.
 

‹ Back

• © Furley Page LLP 2008
• | LLP
• | Terms and Conditions
• | Privacy Policy
• | Site Map
• | Accessibility