PBR 2007: At a glance guide

Did I actually hear the Chancellor say on this morning's Today (use Listen Again http://www.bbc.co.uk/radio4/today/listenagain/ram/today4_darling_20071010.ram) that it was only "fair" that couples should be able to transfer their allowances between them - oh sorry, that was for IHT.

Erm isn't the theshold for expensive motor cars for CAs and leasing £12,000 not £12,500?

[Addendum: the error has been amended: I'm not really daft - well not yet anyway!]

Is the availability of the 10% starting rate withdrawn?

The PBR states that they intend to bring in measures to prevent income splitting for 08/09 'after proper consultation'. There is no way that this gives time for proper consultation and we will be landed with yet another ill thought out tinkering mess to unravel.

The professional accountancy and tax bodies, FSB, etc must take this opportunity to make it plain to GB, AD, & HMRC that they have totally screwed up on IR35, nil rate corporation tax band, pursuing settlements legislation, etc etc and that to rush in another badly planned measure to penalise small businesses is not acceptable.

Such legislation is completely unneccesary; it has nothing to do with fairness but is simply a knee jerk reaction to them losing the Arctic Systems case.

I have just read PBRN 17 from the HMRC website concerning reform of CGT.

It seems to be saying that for disposals after 5 April 2008 that there will be NO TAPER RELIEF AND NO INDEXATION even if the asset is already owned, so it looks like these accrued reliefs will be lost.

This cannot be right. If so, there will be a stampede as people rush to incorporate, sell up and otherwise crystallise gains.

DON'T BELIEVE THE 18% HEADLINE FIGURE THIS IS A MASSIVE STEALTH TAX FOR THOSE WITH BUSINESS ASSETS AND THOSE WHO HAVE HELD ASSETS LONG TERM.

It looks like a double whammy for small businesses.

The CGT rate on sale is to be increased from 10% (after taper relief) to 18%.

Dividends or partner's profit shares to non working spouses are to be outlawed.

David

that someone paid LESS than the NMW can be classed as a higher paid employee.

Am I the only one that finds it bizarre that, on the one hand we are now allowed to use our deceased spouse's IHT nil rate band but on the other, in our lifetime, steps are being taken to stop us sharing our income with our spouses. Which one is the vote winner? Or am I being cynical?

The HMRC budget press release on the "Income shifting" consultation reads, "Income shifting runs counter to the principle of independent taxation". Isn't that just what the transfer of the Inheritance Tax Allowance between married/civil partnership couples does? And where is the fairness for those who are merely living together? It's all a load of b*ll*x from the PM's poodle if you ask me.

Is there actually any real change with the IHT announcement? Married couples have always been able to share their allowances - it has just involved a little bit of really simple tax advice.

Now they can share their allowances without the tax advice?

Or is there something that I'm not really getting?

There is going to be more than a mere stampede to incorporate and crystalise gains! One has to ask, have they really thought this one through?

Chris, yes, £12,000!

James, yes too, but only the ones that had nil rate bands to play with.

Besides the income-shifting anti-avoidance, perhaps we're facing even more draconian taxation of small company dividends etc. Perhaps then the CGT move is to make sure as many businesses as possible are lured into the incorporation 'trap' before the new measures are announced!

Cynical? Perhaps, but I feel there must be some motive behind such a hare-brained CGT measure.

(re CGT changes) that all the example cases in the goverrnment press release happen to give rise to very little additional tax or reduction in tax as a result of these changes, and yet every case in our office that we have looked at (selected at random) the changes will give rise to very substantial additional liabilities if brought about after 05 April 2008 (compared with before) (based on information currently available).

And the only business disposal included in the example is that of a chip shop on which (apparently) roll-over relief is to be claimed. Excuse me? What if he does not intend to reinvest in a qualifying asset?

If AD does not wish this CGT tax change to be retrospective, he might consider only applying it to assets acquired after Budget day - which would give rise to another sort of rush: to buy, but at least would not hammer existing asset holders.

Or maybe it will encourage people to hang on to their assets, until eventually at some point a Tory government gets in ;-)

I have not had time to work through the sums on my clients; does anyone agree with my initial thoughts that each client who has set up the old standard arrangement of the business premises being owned personally, ieoutside the company, should consider transferring to the company to crystallise the business asset taper & set up the company with an asset with a current market value base cost?

comment was made about "backdating" in order for the executors of the 2nd spouse to also utlise their deceased spouse allowance in calcualtion of IHT

** unable to determine what this backdating provision is / means

unfortunately i have a client [the surviving spouse ] who passed away at the weekend. his wife passed away several years prior, her estate basically being divided between children and surviving husband [ house to husband ]

nowone this morning i have contacted seems able to determine what his total Nil band is to be ? following yesterdays statement

any guidance

tia

After IHTA section 8 insert—
“8A Transfer of unused nil-rate band between spouses and civil partners

(2) For the purposes of this section a person has unused nil-rate band on death if—
M > VT

where—
M is the maximum that could be transferred by the chargeable transfer made (under section 4 above) on the person’s death if it were to be wholly chargeable to tax at the rate of nil per cent.; and
VT is the value actually transferred by that chargeable transfer (or nil if there is no such chargeable transfer).

(3) Where a claim is made under this section, the nil-rate band maximum at the time of the survivor’s death is to be treated for the purposes of the charge to tax on the death of the survivor as increased by the percentage specified in subsection (4) below (but subject to subsection (5) and section 8C below).

(4) That percentage is—
E
-----------------------× 100
NRBMD

where—
E is the amount by which M is greater than VT in the case of the deceased person; and
NRBMD is the nil-rate band maximum at the time of the deceased person’s death.

See http://www.hmrc.gov.uk/pbr2007/it-nil-rate-band.pdf

But see:
Section 8A of IHTA 1984 (as inserted by paragraph 2) has effect in relation to cases where the deceased person died before 18 March 1986 (and the survivor dies on or after 9 October 2007)

So it probably does not apply to your client anyway

It'll depend on the circumstances, but probably safer still to keep the property out of the company.

For example, property cost £100k, currently worth £500k and value expected to increase to £1m by tim eof eventual sale.

Under proposed changes, CGT of £162k (ignoring AE)

Sale to company now - CGT (ignoring AE and any indexation) £40k. Sale by company (assuming 22% CT) - CT £110k. CGT on winding-up £160.2k. Total tax £310.2k - almost double.

And don't forget SDLT!

The case might be different if a sale is being considered in the not-too-distant future. Taking the above property again, CGT now of £40k (no CT assuming no further uplift) as against £72k. But SDLT of perhaps £20k. Still a saving, though. As I say, each case will need to be looked at on its own merits.

tia you can find further information regarding the IHT change on the HMRC website at www.hmrc.gov.uk/pbr2007/pbrn16.pdf. It appears that the new rules will only apply to people who die on or after 9 October 2007 so your client who died last week end will not be eligible. The "back dating" refers to the fact that the post 9 October deceased's estate will be able to utilise the proportion of the nil rate band not used by the estate of their spouse who died before that date.

i qwote fromm ther treshury mikro sight............

"2007 Pre-Budget Report and Comprehensive Spending Review statement to the House of Commons, delivered by the Rt Hon Alistair Darling MP, Chancellor of the Excheque
Check against delivery"

As in so many things in life, perhaps the writer should should take their own advice?

I do think the oft-quoted and paraphrased comment in a recent 'Tax Adviser' is very relevant to these discussions. What we should really expect to see next year is a 2-section Taxes Act 2008:

Section 1 - Everyone will pay a fair amount of tax.

Section 2 - for the purposes of section 1, "fair amount of tax" will mean whatever HMRC thinks it means

Talk about tax simplification!

I am really annoyed with the PBR, so please excuse the rant.

I have just been speaking to a client who owns a pub and wants to sell up. He has owned it for 30 years jointly with wife. March 82 value 40K, Current value 400K. I was advising him to sell after 5 April 2008 when the draft CGT bill was 12K. Since PBR it will now be 61K. He now has to bust a gut to find a buyer before 6 April, or lose 50K from his nest egg.

I also told another client a few months ago to buy their industrial unit personally rather than via the company or pension fund on the basis that maximum BATR would be available after only 2 years. What do I tell him now?

I personally invested a substantial sum in shares in a small unquoted company with a view to making a nice gain once the business was built up and sold, my investment decision was partly made on the understanding that I would pay 10% tax, not 18%. How wrong I was to rely on the incentives introduced by the Government.

Is this how the hard working small business owner, the backbone of the economy deserves to be treated? What next? Is tax relief on ISA's, VCT's or EIS shares going to be whipped away in similar fashion? Or are pension schemes going to be taxed (again).

Problem with complaining that, on specific cases, a proposed measure gives rise to a massive tax hike is that all that the fact of the hike proves is that either the proposal is unfair or that the preceding rules were unfair. It does not prove which of the two was unfair. I have a personal opinion that this proposal is unfair, but it is not proven just by saying that in absolute terms one taxpayer is looking at a £50K increase from one day to the next.

What is a fraud on the public is the spin placed on the treasury press release that suggests that the winners and losers are modest, with the net movement in tax revenues being reasonably evenly spread across disposals. It is understandable that they should want to create that impression because they were (almost) as responsible for the preceding rules as they are for the proposal, so whichever regime is judged unfair they stand to lose face. It beggars belief that they reckon that anyone would be taken in by the press release. But presumably such releases generally get disseminated to the public by ill-informed journalists who just regurgitate the official line without involving any effort.

I will be interested to see if they introduce a windfall tax or antiavoidance measure to stem the tide of crystallised gains between now and April 2008, as feared in other messages in this thread. Any such measure will constitute an acknowledgement that, contrary to the impression in their own press release, there is a sufficient population of substantial "losers" under the proposal as to justify the legislative measure to trap them, thereby giving the lie to the impression in the press release.

Following Clint, there is always another side, maybe not today but a few years back or further on.

I have no hesitation is saying that I and my clients have benefited greatly from the small business rules over the past few years, but we didn’t stake our lives on it staying like that.

Get real Victims there is never any guarantee over this stuff and whilst this may seem heartless Jon, “tough” any advice has to be couched with “subject to the next budget”. There was no lifelong right to 10% CGT and go back far enough and a flat rate of 18% is good going, ditto current borrowing rates (yes I was a 15% mortgage slave).

So now, I and my clients will shrug their shoulders and others, who faced 40% on their let properties, will be exploring possibilities.

Following on from Clint and Paul it is not good enough to resign oneself to the fact and say 'tough'. Tax breaks do not last forever which is fair enough but what has happened here is that reliefs already granted, upon which long term investment decisions were made have now been whipped away. Over the long history of CGT I do not recall this happening before. Every time there was a change to the system (e.g. rebasing, indexation, taper), the refliefs accrued to date have been preserved. This is fair.

Put it another way, if Northern Rock went bust next week, and the Chancellor decided not to guarantee the deposits after all despite previous assurances then this is similarly unfair. Depositors beware!

Recommending to our clients a rush to incorporation to crystallise gains before next April might leave us with egg on our faces as the Treasury is so anxious to change the small business playing field in the wake of Arctic Systems. We do not want a re-run of the mass incorporation following the £10,000 CT nil rate band with a similar punishment to the dividend tax which followed there. The trouble is that the shifting sands caused by the HMRC's knee-jerk reactions rather than considered courses of action have made it so difficult to advise clients with any authority in so many areas.

The short time between "consultation" on draft legislation and the real thing make it almost certain that we will have another nightmare to unravel with some more unworkable nonsense on the statute books.

@Jon Stow

And in any case, I imagine there would follow a "windfall tax" to "close the loophole" of people selling assets prior to the Budget.

to say "OK, 18% from 6.4.08, but indexation and taper to 5.4.08, based on 5.4.08 values, will be preserved".

The fact is, a small element of the business community (our clients) will have bigger tax bills. Do many posters on here have much sympathy for private equity invester's tax increases? Probably not, and so it will be for our clients from the majority of voters.

I don't see how (but then anything is possible in light of recent announcements)

I can understand the idea of restricting losses, but increasing the tax charge on gains just because you've decided to realise some cash now rather than wait???

You realise a gain, you pay your tax in accordance with current legislation - I don't see how that could be described as avoidance of tax. So, you might time your disposal to minimise your tax bill - but that is (or at least it was) perfectly legitimate tax planning - you have two assets to sell, you sell them in different tax years to maximise annual exemption use. You might time the acquisition of fixed assets to maximise capital allowances. Are either of those avoidance? Of course not.

What seems to be suggested with fears of a windfall tax is that the Chancellor would be saying "the new rules apply from 6 April 2008, but if you sell assets now to crystallise gains then the rules will apply immediately" Hmmmmm

We should be perhaps be grateful that the Chancellor has given those who will lose out some time to do something about it. Remember, this PBR was a lot earlier than previously and indeed you don't have to go back too far to when there wasn't one. Just be thankful we weren't facing such an announcement on say 23 March, effective 14 days later!

Jon, I understand what you say and, on the face of it, based purely on the figures, this one aspect of the PBR does look unfair on one slice of our society. But, given how scatty and yo-yo like the government’s policies have been over a number of years now it just doesn’t seem sensible to have planned long term for this stuff.

I’d be interested to know how many people actually took advantage of the 10% CGT rate, ie is the upset merely because they has taken away something that might have been?

I’d also like to know how many just built up large cash balances or overdrew their directors’ current accounts merely to strike off their companies & restart every 2 years. Maybe the publicity of this abuse was enough to make the government recoil as they did after the rush to incorporate when they instigated IR35 and then withdrew the £10K nil rate band and now plan to curb the abuse (as some see it) of the ability to divert income to avoid all tax & NI.

Whether you see these actions as abuse or Dell-Boy tax planning they run against the grand plan to engender the creation of a healthy small business sector capable of supporting good levels of employment, services and goods, which was why the provisions were originally put in place.

Goodness knows but I still can't get worked up about it.

Generally, I have to agree with Paul, and he makes a vaild point about the "2-year companies".

Certainly, when advising clients on incorporation, both with and without the 0% tax band, the advice was always caveated with the warning that the tax-breaks may not be around for long. However, whilst there was an opportunity to make immediate savings on tax on annual profits incorporation remained a benefit.

However, the underlying principle of CGT is that gains tend to be realised on assets held for longer periods of time (not always, I grant) and therefore when planning for capital gains tax it is usually necessary to take a longer-term view. Remember, removal of the 0% band did nothing to affect the taxation of prior years' profits. What is disturbing so many, I gather, is not so much that the rules have changed (to something that is more or less fair than present is a moot point) but the fact that no relieving provision whatsoever is being given in respect of gains already accrued. In particular, those that have held assets since the early 80s will now be facing tax on gains due to the then high inflation rates. The explanation is that the 18% rate takes that into account, but I don't buy that.

Taking a slightly different angle on it, despite my previous rants, the idea in principal of major simplification of CGT is a good one, it's just the retrospective nature of it I don't like. A more just and I would suggest politically sensible solution would be for any gains on assets held as at PBR day to be taxed at 10%, and any later assets taxed at 18%.

However one problem is going to raise its head and cause the Govt and HMRC a headache, which nobody seems to have picked up on is that years ago (I recall) CGT was levied at the rate of 30% and at the time income tax was 40%+. This being the case there was no end of schemes whereby people tried to turn income (city bonuses) into capital and there was a procession of tax cases and anti avoidance legislation as a result. I recall it was Norman Lamont that resolved this by taxing gains as the top slice of income. All this nonsense is set to return with a vengeance. I therefore foresee that this blanket rate of 18% will not last long.

Does anyone know how this will work please?
Say you have a non UK but EU domicile individual, who has worked in the UK for a few years and continues to do so (and pays tax on earnings and assets in UK).
However also have modest assets in country of birth (and domicile).
What are the options? Presumably the only option isn't to pay a flat £30K pa?
Will the only other options be to declare the income in the UK as well, and claim double tax relief?

I haven't double checked this, but from my hazy recollection, pre Taper Relief there was Retirement Relief, and taper relief effectively replaced this. Now Taper Relief goes also,, so now those looking to retire have no capital gains tax reliefs. Was this ever the situation since CGT was introduced?

We also had Gordon Brown's 'raid' on pension funds, which coupled with a stock market downturn, resulted in quite a few business people saving for retirement via their business premises. Now this is hit with an extra 80% tax.

So we will have a situation where someone who has recently finished university, and earns £20,000 per annum, will be paying 21% tax plus 11% national insurance plus 9% student loan, on the top part of their earnings. So they are paying 41% in deductions.
A relatively (or very) wealthy individual, with sufficient funds to have a second home ...or indeed a portfolio of fifty properties, can pocket any gains at 18% tax.

Mmmm ... socialism in action?

David, on the non-doms, yes they can declare their overseas income instead of paying the £30K.

I don’t think it helps much to hark (or harp?) back to the “good old days” there were just as many moans then and I don’t think it makes a blind bit of difference which of the main parties is in power. Tax law by it’s nature has to cope with today’s & tomorrow’s world (including PR & Environment) and so what may have been welcomed at its demise N years ago (eg flat rate CGT or using public transport) may be what’s needed now, time will tell.

Having said, and following on from Jon’s reminiscences, it will be interesting to see whether we have a repeat of income to capital switching to take advantage of the lower 18%. When you think of it though that’s what the 2 year companies have been doing for several years now, and even though they will lose 8%, it’s still in their interest AND they can become 1 year companies now.

As the days go by it’s clear that there is no black & white on the CGT changes, I’ve looked at a client's 20 strong property portfolio which, as it happens, stretches from the 80s till today and it’s all pretty neutral. For small businesses the CGT changes may seem unfair for those in sight of selling their business to retire but for the majority I don’t think CGT is something that steers what they do day to day.