12 March 2010

In anticipation…What will the next six months hold for personal taxation in the UK?

As we move towards the UK Government’s last Budget before the General Election we thought that we would take a look at what the next six months might hold for individual taxpayers.

In recent years, pre-election budgets have been rather light in content, with the political parties preferring to save the larger policy issues for their manifestos. This year in particular, given the paucity of Parliamentary time before the election, we are likely to see a slimline budget, with any substantive measures held over for after the election.

What is clear is that in the short term at least, the government will need to spend less and tax more, and while as Mark Twain noted “the art of prophecy is very difficult, especially with respect to the future” we thought that it might be appropriate to offer some uninformed speculation as to what our future may hold.

What might change in the UK?

1. Increase in the top rate of income tax to 50%

Not only possible, but also inevitable. This has already been confirmed by the 2009 Pre-Budget Report and will come into effect on 6 April 2010. The only question is how long will it last? Our view is that any hope for a quick repeal after the election is probably unfounded.

2. A future reduction in the 50% rate of income tax

The Conservatives have shied away from any promise to reduce the 50% rate immediately, but both they and Labour have indicated that they do not see it as a permanent fixture. Any reduction would be most likely to happen closer to the end of the next Parliament than the beginning.

3. Increase in the basic and higher rates of income tax

Both the main parties are wary of any suggestion of an increase in the headline rates of tax. Labour’s preferred alternative is to freeze the thresholds at which the tax currently applies or raise them at a lower rate than the rise in average earnings, pushing more earners into the higher bracket and this is likely to continue.

Further increases in NICs, which are of course entirely different from income tax, are also possible.

4. The “recognition of marriage”

The tax system already gives married couples and civil partners a preferred status (exemptions from inheritance tax and capital gains tax), but the Conservatives have promised to implement further proposals, to be announced in their manifesto.

5. An increase in the rate of VAT

The two taxes that raise significant revenue for the Exchequer are income tax and VAT. We believe it is likely that VAT will be increased to 19% or 20% after the election.

6. Increase/decrease in the rate of inheritance tax or abolition

While it is something of a political football, the net revenue raised by inheritance tax is not significant in the context of the public finances (although it has increased in the past few years) and therefore it is unlikely to be increased as a revenue raising measure.

However, a decease in the rate of inheritance tax or its abolition would also seem to be unlikely in the short term as a new Government will focus on raising additional revenue and will not wish to be seen to reduce taxation for the most well off.

A wholesale review (leading possibly to a new tax on death) is possible in the medium term.

7. Anti-avoidance rules

HMRC/HMT have made no secret of the fact that they are frustrated with the constant creation of tax saving schemes, particularly schemes that avoid the inheritance tax entry charge on gifts into trust. We can expect to see measures to tackle this perceived abuse.

8. Increase/reduction in the nil rate band

While this is more likely than a change in the inheritance tax rate, for the reasons referred to above, it is unlikely that there will be any change in the short term, although in the longer term, the Conservatives remain committed to a £1 million nil rate band.

9. Restriction in or abolition of agricultural and/or business property relief for inheritance tax

Rumours suggested that this might have been introduced in the 2009 Pre-Budget Report.

However, this would not raise significant revenue and would place considerable stress on family businesses and in many cases force sales and so is very unlikely.

10. An increase in the rate of the ten year charge applied to discretionary trusts

While there has been speculation that this rate may be increased from its current maximum of 6%, no party has announced this as policy.

11. Increase in the rate of capital gains tax

This has been widely mooted and is certainly possible. However, we believe that it is only likely from the beginning of a tax year and so likely to be seen in this (March 2010) budget or delayed until March 2011, rather than being included in a post election budget.

Increases in the capital gains tax rate can have a negative effect on revenue as taxpayers delay making disposals, so change may be unlikely. However, the differential between the top rate of income tax and capital gains tax will be 32% after 6 April 2010 and therefore we may see a higher marginal rate of capital gains tax for top rate taxpayers to reduce the incentive to convert income into capital gains.

10. Statutory residence test

There has been much speculation regarding the introduction of a statutory residence test in the wake of the case of Robert Gaines-Cooper to reduce the uncertainty in this area.

However, HMRC have confirmed that it will not be included in the 2010 Finance Bill although taxpayers will need to look carefully as any statutory rules are likely to be more rather than less restrictive than the current position.

11. Increases in stamp duty land tax

This would seem unlikely as it may prejudice the recovery in the property market.

12. Changes to the taxation of UK resident non-domicilaries

The past three years have already seen a substantial tightening of the rules relating to non-domicilaries and the current Government committed itself to no further substantial changes during “this Parliament or the next”. While such commitments are written in sand rather than carved in stone, any further change to the remittance basis seems unlikely in the short-term.

13. A reduction in the ‘deemed domicile period’

One long mooted change is a possible reduction in the number of years before an individual is deemed to be domiciled in the UK from the current 17 out of 20. However, given the limited revenues raised by inheritance tax and the straightforward planning that can remove assets from the scope of UK IHT for non-domicilaries, any change seems unlikely.

14. An extension to the Bank Payroll Tax

The Bank Payroll Tax is due to expire on 5 April 2010. However, there have been suggestions that it will be extended through the summer to catch banks with later year-ends, who have not declared their bonuses and this is still likely.

There remains a concern that it may be extended still further, due to the greater than expected revenues that have resulted and the ongoing vilification of bankers in the public press could make this a popular measure. However, the long-term impact on the competitiveness of the UK and the City of London in particular, would militate against this and is likely to carry more weight (at least for economists).

Further regulation of banks and increasing the tax take on financial transactions on a worldwide basis (for example the Tobin tax or the “Robin Hood” tax) remains a possibility, but unlikely while the USA remains opposed.


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