Chancellor Gordon Brown's budget speech may have appeared to be a tax-cutting budget but tucked away in the deeper recesses of the Budget Notes were some increases in tax which will require some thought for taxpayers seeking to minimise their liabilities.
This bulletin looks at some of the more interesting and less well-reported changes announced by the Chancellor which will affect private individuals.
Personal allowances have been increased in line with price inflation as is normal. However, the Finance Bill 2008 will increase the amount of the higher levels of personal allowance available to pensioners by more than the indexation figure. The personal allowance for those aged 75 and over will increase to £10,000 in 2011/12.
Mr Brown has announced that the threshold at which higher-rate (40%) tax is payable will be increased in stages from the current limit of £33,300 to £43,000 by 2009. However, the 10% band, which currently applies to the first £2,150 of taxable income, is being abolished from April 2008. In addition, the basic rate of income tax is being cut from the current 22p to 20p in the pound from April 2008.
The 10% tax rate will continue to apply to income from savings and capital gains.
The limit for investment in tax-free Individual Savings Accounts is being increased from April 2008 to £3,600 (up from £3,000) for cash and shares.
In addition, there have been increases announced in the pension credit guarantee, which will rise to £130 per week by 2010, and in child benefits and child tax credits.
Owners of most foreign properties held in companies, to avoid local IHT, will no longer be subject to a potential benefit in kind charge when they use the property.
Capital Gains Tax (CGT)
The ‘CGT free’ limit has been increased by £400 per annum from £8,800 to £9,200 and will be £18,400 for married couples.
Inheritance Tax (IHT)
The IHT zero-rate band (currently £285,000) will be increased to £350,000 by 2010. This measure will (provided property prices do not continue to rise at the same rate as in recent years) reduce the number of estates which attract IHT. Under this Chancellor the number of estates subject to IHT has nearly doubled, so IHT planning should still be on your agenda.
One plus point is that HM Revenue and Customs (HMRC) will be allowed to accept late elections for ‘pre-owned’ assets to be treated as part of the donor’s estate. This election prevents an income tax charge arising on the asset concerned.
The Government is clamping down on certain pension scheme arrangements which ‘are designed to allow part of a member’s tax-relieved funds to be inherited by their survivors’, by creating a tax charge if a minimum amount of pension is not drawn once the pensioner reaches 75. The facility to pass assets in a pension fund on death, IHT-free, has also been attacked, with a tax charge of up to 70%. Tax relief is also being axed on the life assurance element of some pension arrangements.
Importing Dutiable Goods
All alcohol and tobacco sent via the postal system from abroad will be liable to UK excise duty. This measure is designed to prevent the evasion of UK duty and VAT on small importations of goods and to crack down on Internet sites offering ‘tax- free’ buying. In practice this will make the receipt of small packages containing tobacco or alcohol from abroad completely uneconomic.
The Chancellor has announced substantial increases in road tax for ‘gas guzzlers’ and cuts for the most fuel-efficient cars. The top rate of road tax for cars with carbon dioxide emissions of 226g and above will increase to £300 from April this year and to £400 from 2008. The rate for cars with emissions below 120g will drop to £35. Biofuel (E85) and biogas fuel discounts will be extended and a discounted rate of employers’ NI will be payable on the benefit in kind for biofuel cars from 2008. This may encourage the wider availability of E85, which currently is available from fewer than 20 petrol stations nationwide.
Tax Enquiries and Penalties
Changes to ‘enquiry windows’ (the period after a return is submitted during which HMRC is allowed to commence a tax enquiry) will link the period during which HMRC can enquire into Income Tax self assessment tax returns to the date the return is received by HMRC. These changes to enquiry windows will apply to Income Tax self assessment tax returns for 2007/08 and subsequent tax years.
Legislation will be introduced in the Finance Bill 2007 to provide a single new penalty regime for incorrect tax returns whereby the penalty will be determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer.
For taxpayers filing ‘paper’ returns, from 2007/8 the final filing date is being moved from 31 January following the end of the tax year to 31 October following the end of the tax year.
Please contact us if you would like any more information.