Great Budget, But...

Philip Fisher
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The 2012 Budget has got some elements that will appeal to the masses, others that will appeal to the wealthy but several that seem to make very little sense to anybody.

There is a real concern that Mr Osborne takes disproportionate action where he perceives abuses. There are four areas that this column will focus on, all of which are likely to create more problems than they resolve.

1. EMI

Unsurprisingly, as the author of a book entitled Employee Share Schemes and member of the OTS Share Schemes Consultative Committee, your correspondent is delighted to see that the individual EMI limit is to rise to £250,000. This goes even further than OTS was able to recommend with its brief for fiscal neutrality. There is little doubt that this change will increase the popularity of the scheme and by extension employee share ownership.

Further, the announcement that entrepreneur's relief is to extend to allow more EMI option holders to benefit sounds like fantastic news. In fact, if the unofficial statements that have been leaking out are correct, it will only affect a tiny percentage of those who have options or get them in future. This is because the change is going to a very limited. It will mean that EMI option holders no longer need to have a 5% shareholding or 5% of the voting power in their employing company.

This is good but it does not go the extra step to exempt them from the requirements to hold actual shares and remain in employment for a 12 month period from the acquisition.

This will prove to be a stumbling block for many, particularly those on lower pay or unable to afford the money that it would cost to exercise their options until a time when they can immediately sell their shares.

At PKF's Budget presentation, I tested a sample of around 100 people to see how many thought that they or their colleagues would be able to benefit from the change to the entrepreneur's relief rule. A 0% response should, at least, prove encouraging to Mr Osborne in his quest for fiscal neutrality.

2. 45% Tax Rate

Mr Osborne is firmly of the belief that having a 50% tax rate makes virtually no difference to the Exchequer. This is hard to believe, unless some of those who should be paying it are failing to do so. Anyway, this is his logic for reducing the rate to 45% next year and, in principle, it might make more people pay tax, thereby costing very little.

The problem here is that the really big hitters have in many cases already skipped the country and it is difficult to imagine that reducing the top rate of income tax by 5% will bring them back. It is however associated with two other measures both of which are truly terrifying.

3. Stamp Duty Land Tax on Expensive Properties

This measure comes in two parts. The imposition of a 7% charge on the acquisition of any residential property costing more than £2 million may do little but depress the high end property market. In addition, to be fair, it will also depress anyone trying to buy an expensive property. However, at least it is egalitarian.

The second part of this legislative change is likely to leave even some rich people feeling destitute. George Osborne boldly used the word retrospection when he announced that anybody seeking to get round the new rules he was announcing would not be regarded favourably by the Government or HMRC.

In essence, with immediate effect, anyone who buys a residential property costing over £2 million through a company or other structure will face a penal 15% Stamp Duty Land Tax charge.

He has said that he will ensure that legitimate property investment companies do not suffer, and has confirmed that from 2013, an annual tax charge will be imposed on those that have already bought expensive properties through companies in addition to the entry charge for newly set up structures.

An example will demonstrate the potential impact. If somebody had acquired a £4 million property through a company on 29 February this year, in order to unwind the structure before the imposition of annual charges next year (and if they want to retain ownership) they will now have to find another £280,000 from somewhere to pay the SDLT. If they cannot do so, this would force the sale of the property (which may not be easy when buyers will have to pay at least 7% extra in order to get it).

If this isn't possible, the ongoing tax liabilities could be most uncomfortable for some wealthy people who legitimately (at the time) invested in their dream property using a structure recommended by their solicitor.

4 Charitable Donations Tax

Mr Osborne clearly has dodgy knees. They have a habit of jerking around every time he stands up in Parliament to make a major budgetary speech.

The new disguised remuneration for the 2012 generation is the rather random tax on tax relief. Probably very few people, including the Chancellor himself one would wager, fully understand the potential ramifications of his announcement that there will be a restriction on previously uncapped tax reliefs for individuals to the higher of £50,000 or 25% of income.

The good news is that this doesn’t affect EIS and VCT investments, or pensions, all of which are already capped. The bad news is that it will clobber sideways and carried forward loss reliefs (including film investment losses), interest relief on loans - for example to invest in close companies or partnerships - and worst of all, charitable donations.

This measure is clearly geared to attacking those who use certain exotic tax scams being dreamt up by very clever planners. These could involve the use of losses or donations to quasi-charitable bodies. While making the rich pay a fair amount of tax seems a laudable goal, there are other means to attack such abusive planning measures.

The only obvious consequence from this change in legislation is that real charities will suffer because rich people will stop making donations to them. The fact that the Government intends to “explore with wealthy philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations” is pretty cold comfort and will not please too many people - except for wealthy philanthropists.

Praise for Mr Osborne

Just to prove that I'm not entirely anti-Mr Osborne and the Lib-Con government, the acceleration of the personal allowance towards £10,000, taking many people out of income tax completely can only be commended and it would be nice to feel that Mr Osborne is remembered for this by posterity rather than for those ever-jerking knees. However, I am probably alone in this, as this measure is packaged with a move to freeze - and eventually remove - age-related allowances, on the basis that personal allowances will by then have reached the levels of the current enhanced reliefs. Elsewhere, disdain for the “Granny Tax” (Telegraph), or “Gran Theft Auto” (Metro) is pretty much universal.

The good news for those knees is that once the General Anti-Abuse Rule comes in next year (note the provocative change of title for the GAAR from General Anti-Avoidance Rule) it could well save Mr Osborne's cartilages from further damage as the likelihood is that several of the most drastic measures in his budgets to date would not have been necessary come 2013.


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