A New Dawn!!

The new Conservative/Liberal Democrat coalition released a short document setting out their main tax proposals.  It included a clear statement that they are planning to use increased capital gains tax revenues to part-fund the Liberal Democrat election proposal to raise the personal income tax allowance threshold to £10,000.

There are no details at this stage and the statement simply reads, “We further agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities”.  An emergency budget is planned for 22 June. However, early indications are that some decisions have already been made in the following areas,  more details of which can be found by clicking one of the topic names:-

May 2010

• National Insurance
  
• Income Tax
  
• Capital Gains Tax
  
• Environmental Tax
  
• Corporate Tax
  
• VAT
  
• Inheritance Tax

So........... 

• What Happens Next?
  
• What Can Be Done?
  
• Future Strategies

National Insurance:  A key Conservative pledge was that the employer National Insurance Contribution increase would not proceed.  It is not expected that the first Coalition budget will announce National Insurance contribution increases for employers but the 1% rise for employees is expected to go ahead.  Business will welcome this but it will clearly have an impact on employees.

Income tax: The key Lib Dem pledge was to raise the income tax threshold to £10,000 and the Government have agreed to announce a "substantial increase” in the personal allowance from April 2011 in the next budget, with a longer term policy objective of reaching a £10,000 threshold. Whether this will apply to all taxpayers regardless of income, or be clawed back in the case of high earners, remains to be seen.

Capital gains tax: One of the most radical proposals is to increase CGT significantly from 18% to rates, "similar, or close, to those applied to income”, for non-business assets.  The revenue from the tax rise will be used to fund the significant increase in the income tax threshold to help the low-paid.

Environmental tax: There is an agreement to switch to a per-plane duty, rather than a per-passenger duty, with a proportion of any increased revenues again destined to help fund increases in personal allowances.

Corporate tax: This is the area with the least clarity.  The Conservatives pledged to reduce the headline rate of 28%, funded by changes to the capital allowance regime and, perhaps, to the rules around the taxation of debt.  This runs the risk of creating distinct winners and losers and will cause much debate between now and the budget.

VAT:  No announcement yet so VAT remains “the elephant in the room”.  Any increase is a tempting option as a quick revenue raiser and it had been widely expected post-election, whoever got in, and it still could be.  A rise from 17.5% to 20%, the average EU rate, would raise around £12 billion a year while still keeping the UK competitive.

Inheritance tax: The ‘mansion tax’ proposals have been abandoned but balanced by a change of heart on proposals to increase the inheritance tax threshold to £1 million.

So............
What happens next?
A more detailed announcement is expected in the near future. However, it is not known when the tax changes will come into effect and what they will be. The likelihood is these will come into force from 6 April 2011 but alternatively may be effective from Budget Day. The reasoning behind a Budget Day change is to prevent people having several months to re-organise their affairs to mitigate the impact of any rate rise. A counter argument is that a delay until April 2011 will result in people bringing forward tax liabilities so there will be an accelerated flow of tax into the Treasury coffers.

The biggest concern is likely to be the details of the forthcoming capital gains tax changes. One way forward would be to simply add any gain to the top slice of an individual’s income, resulting in a potential top rate of 50% for individuals with taxable income over £150,000 and also result in trustees being liable to tax at 50% on very low levels of gains. The other option is to fix rates at a particular level, say 30% or 40%. This is a major issue for entrepreneurs and business owners.  Individuals considering the sale of assets and those who are fortunate enough to have a capital gain could be facing a doubling in the tax to be paid.  They may consider planning to bring forward, or trigger a capital gain in order to secure the current rate of 18%.
The annual exemption (currently £10,100 for individuals) may also be reduced.

What Can Be Done?
It is very early days but some people with non-business assets may wish to act before the Budget to avoid the risk of being caught out by a mid-year tax change. An obvious idea is to simply bring forward a disposal, but in many cases this will not be possible and/or desirable. There are a number of ways gains can be triggered immediately and there are also some “wait and see” ideas which provide people with some flexibility.
This can be quite complicated as there are likely to be a series of options available to individuals and trustees.

Future Strategies
More details are awaited, but there will, apparently, be generous exemptions for gains related to business assets which, together with the reversal in the rise of employer’s national insurance contributions, will be welcome news to the business community.

The changes are likely to significantly alter the tax effectiveness of certain investment strategies. The new Government intends to tackle tax avoidance, including a detailed development of the Lib Dem proposals, so care needs to be taken and professional advice should always be sought.

All in all we are heading for a period of change but with uncertainty come opportunities.  Now is the time for businesses to be thinking about what they want from tax and how to engage in, and influence, the debate in the coming weeks and months.

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