Private clients
The Budget contained few surprises and the expected disappointments for private clients. Predictions of major hikes in capital gains tax had largely been discounted before the event.
The doubling of entrepreneurs’ relief was welcome news for business owners but of no benefit to private investors generally.
The other big 'new news' was the increase in the Individual Savings Account limit from £7,200 to £10,200 and the subsequent increase in this limit, in-line with inflation, which will enable increased tax-free investment portfolios to be built up, especially over the long term.
Elsewhere the story was of the expected increases in taxation on higher earners and disappointing failures to address problems created by ill-considered legislation.
The problems do not stem from the policy decisions in themselves, rather the badly thought through way in which they are being implemented.
The 50% additional rate will apply, as previously announced, as from 6 April. It is simply another rate of tax whose effectiveness will depend on how well it is enforced but with ever more stringent anti-avoidance rules in effect it will be an unfortunate fact of life for higher income earners with no indication today of how long this rate will be in place.
The phasing out of personal allowances for higher earners does not look like a feature of an integrated tax system: it applies at a threshold of £100,000, rather than £150,000 and introduces a marginal 'spike' tax rate of 60%.
But the greatest disappointment lies in the continuing failure to address the problems created by the pension anti-forestalling rules relating to the abolition of higher rate income tax relief for higher income individuals. The restriction itself will not take effect until 2011 but in the meantime the anti forestalling rules designed to prevent taxpayers affected by the new rules pre-loading their pension funds before 6 April 2011 go too far and are too inconsistent in their application. They have been tinkered with but remain fundamentally flawed, preventing many pension contributors from even maintaining their established pattern of pension contribution.
Overall, there is little to benefit private clients as we head into a period of higher taxes, lower reliefs and allowances. Alongside the upbeat talk of a growing economy we may have expected a view on then the stringent tax increases will end.
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The Budget left us with very little that had not already been announced before, if not in the pre-Budget Report, then as far back as last year’s Budget. High and low lights included
- a new top rate tax rate of 50%;
- increased limits on Individual Savings Account investment;
- restrictions on higher rate income tax relief for pensions for the highest earners;
- the retention unchanged of the farcical anti-forestalling provisions related to the restriction on higher rate income tax relief for pensions; and
- the erosion of tax allowances.
The 50% tax rate payable by banks paying bonuses over £25,000 brought in much more than the Chancellor had previously expected, estimated at £2 billion instead of £1 billion. Although it does seem to have been a short-term money spinner there is no sign of the bonus tax being extended.
The Individual Savings Account (ISA) investment limits actually were meaningfully increased, from £7,200 to £10,200 with the long overdue addition of automatic updating for inflation by reference to the Retail Price Index.
The pensions anti-forestalling rules remain confusing and totally out of step with the principles governing the new pensions regime that was introduced in 2006. A small change was made in December to ensure that employer contributions are fully within the new restricted tax reliefs and there has since been a slight relaxation for some changes of pension provider but the rules remain disappointingly complex, confused and confusing.
The freezing of the inheritance tax nil-rate band will, if the Chancellor’s announcement is followed through, be extended until 2014, effectively restoring IHT to its former status as a tax on inflation.
Capital gains tax was not increased: it remains at 18% providing a wide gulf between it and the prospective top rate of income tax (50%). The increase in the entrepreneurs’ relief for owners of trading businesses was a welcome relief but for those businesses still struggling to survive as the recession slowly fades, survival remains the greater concern.
Overall the Chancellor largely avoided the customary pre-election gimmicks and giveaways and set out a stall based on 'steady as she goes'.
In detail
Freezing of Inheritance Tax thresholds
The Chancellor has announced that the £325,000 nil-rate band threshold – the amount up to which no inheritance tax is payable, either on lifetime or death transfers – is to be frozen for the next four years, effectively this is until 5 April 2015.
Individual Savings Accounts (ISAs) made more attractive
The amount that can be invested in an ISA is to be increased from the present £7,200 to £10,200 for 2010/2011 and will be index-linked in future.
Stamp Duty Land Tax rates
From 25 March 2010, first-time buyers will benefit from an exemption from Stamp Duty Land Tax (SDLT) on the purchase of a property worth up to £250,000 if it is to be used as their only or main home. This relief will apply for two years from 25 March 2010.
Additional taxes on top earners confirmed
Three measures that will increase the income tax burden on the highest earners are 50% income tax on incomes over £150,000; no personal allowances for people with incomes over £100,000
and the withdrawal of higher rate income tax relief for pension contributions once income exceeds £150,000 were all confirmed, as expected.
Tax rates
The Chancellor announced that there would be no change to the rate of capital gains tax, corporation tax or VAT and that previously announced increases to income tax and national insurance would proceed.
Loans released by close companies
This measure is designed to prevent a close company claiming a corporation tax deduction when it releases a debt due from a shareholder.
Tackling the hidden economy
The Government seeks to support HMRC in the department’s efforts to bring those within the 'informal' economy within the 'formal' tax net. The recently formed 'Hidden Economy Advisory Group' has now set out some preliminary thoughts.
Offshore tax evasion
The Government seeks to strengthen HMRC’s ability to pursue offshore tax evaders. The Chancellor now proposes significantly higher new penalties for tax evasion involving income and capital gains arising in overseas jurisdictions with limited and low tax transparency.
Share plans
Perhaps the only significant announcement for employers in the Budget was for those businesses operating as limited companies who wish to offer share options to their employees under Enterprise Management Incentives