emergency budget

Tax measures in the coalition government agreement – what might they mean for you?

  • Personal allowance to be increased to help lower and middle income earners. The Coalition has agreed that there will be a substantial increase in the personal allowance from April 2011. The amount for those under 65 is currently £6,475.
  • The increase in the Employers’ National Insurance thresholds proposed by the Conservatives will go ahead, reducing the impact of the rate rise for employers. But the rise in the rate for employees of 1% from April 2011 introduced by the Labour government is expected to remain.
  • In the long-term the intention is that the personal allowance will be £10,000. This will be reached over several years.
  • The increase in the personal allowance is to take priority over cuts to Inheritance tax. The Conservatives in their manifesto stated that they wanted to increase the Inheritance Tax threshold to £1 million. The Liberal Democrats were against this, saying it would only benefit a minority.
  • The Conservative party wanted the personal allowance to be transferable between married couples. The Liberal Democrats have been given the opportunity to abstain from voting on resolutions on this matter which may arise in the Budget.
  • The two parties are looking at taxing non-business capital gains at rates similar or close to income tax rates, with exemptions for entrepreneurial business activities. The current rate is 18%, so a jump to 40% is more than double and some could face CGT at the new higher rate of 50%.
  • In addition, it is rumoured that the tax-free amount for capital gains before any tax is payable may be cut from £10,100. The Telegraph was suggesting the new tax-free amount would be £2,000.
  • There is speculation that the rate of VAT will increase from 17.5% to 20% to fund the tax breaks.
  • It was said in the Agreement that the earnings link for the basic state pension would be restored from April 2011 with a ‘triple guarantee’ that pensions would rise by the higher of earnings, prices or 2.5%.
  • The parties agreed that reductions could be made to the Child Trust Fund and tax credits for higher earners.
  • The Conservative party said that Stamp Duty Land Tax would be scrapped indefinitely for purchases up to £250,000 by first-time buyers.
  • The Home Information Packs are to be scrapped but energy performance certificates will still be required.
  • The coalition has agreed to end the rules which make it compulsory to buy an annuity on reaching 75.
  • The Liberal Democrats said that they would give only basic rate relief on pension contributions. The Conservatives did not give any promises on pensions’ tax relief.
  • On corporation tax the Agreement is silent. However the Conservative manifesto states the intention to cut the main rate of corporation tax to 25p (from 28p) and the small companies’ rate to 20p (from 21p). This is to be funded by reducing complex reliefs and allowances [we should hear more on this in tonight’s CBI speech given by the Chancellor, George Osborne.]

What might this mean for you?

There are fears that some of the changes (e.g. the capital gains tax (CGT) hike) will be introduced with effect from the Emergency Budget Day (22 June 2010) – changes to CGT are usually left until 6 April of the following tax year but it could be that this will not happen in this case :(

Action:

You should review whether any non-business assets that you own (e.g. listed shares – not AIM) stand at an unrealised gain and therefore whether they could be sold before 22 June 2010. The shares could be re-purchased by a spouse the same day e.g. if they are a long term investment (you can’t repurchase the shares yourself until 30 days after selling them). Alternatively, you could consider selling into an ISA if you’ve yet to max out your £10,200 allowance for the 2010/11 tax year.

Second properties are more difficult to plan for as even if they stand at a current unrealised gain (doubtful in most cases!), the chances of offloading for a decent price pre-22 June 2010 is minimal, without risking taking a huge cut in price (which kinda defeats the object if the loss suffered outweighs the tax saving!). There is more complex tax planning that can be undertaken to overcome this practical issue with professional advice (from the likes of us).

Other areas at risk:

  • Higher rate relief on pensions could be withdrawn and replaced with basic rate tax relief for all.
  • Higher rate tax relief on Gift Aid payments.
  • Capital allowances….?

The above is based largely on speculation and could be proved wildly incorrect come 22 June 2010. Take professional advice specific to your circumstances before you take the plunge and do anything you weren’t otherwise planning to do in advance of the Budget Day – you shouldn’t allow tax to drive your investment decisions in any case. You have been warned…