Kingston Smith's emergency Budget predictions

IHT: The government has shelved Tory plans to increase the inheritance tax (IHT) threshold from £325,000 to £1m as part of the coalition negotiation agreements, blaming the u-turn on the Liberal Democrats’ promise to increase the personal allowance. Andrew Shaw, a partner at Kingston Smith LLP, says: “The decision to freeze the IHT nil-rate band for the next five years is regrettable and will result in thousands of people being dragged into the IHT net – rather more than just the ‘3,000 richest families in the land’ referred to throughout the election campaign.”

SDLT: In the March Budget, Labour sought to stimulate the housing market by removing Stamp Duty Land Tax (SDLT) for first-time buyers on properties worth £250,000 or less. Andrew says: “Withdrawing this measure could be seen as another nail in the coffin for the property market, particularly if property owners deluge the market with second homes and buy-to-let properties ahead of a rise in the capital gains tax (CGT) rate.”

Domicile: A late surprise in ‘The Coalition: Our Programme for Government’ document is that the non-domicile regime will be reviewed again. “Gordon Brown attempted this in late 2007 and met with fierce resistance, eventually having to water down the changes that were originally proposed at a very late stage,” says Tim Stovold, a partner at Kingston Smith LLP. “We can only speculate on what the changes will be as the review process has not yet started but it could be an increase to the remittance basis charge from £30,000 to £50,000 per annum or it could mean that after a certain number of years of tax residence, say seven, non-domicile status may no longer be claimed.”

CGT: The coalition government has already announced plans to charge CGT on non-business assets at rates similar or close to those applied to income. “The disparity between CGT and income tax rates means the Chancellor may raise CGT from 18% to 25% or 30%, says Andrew. “Raising CGT to 40% or 50% risks upsetting traditional Tory voters, but an uplift to 30% is in line with the CGT rate as it was prior to the introduction of taper relief and may be more palatable – especially if the CGT exemption is reduced from £10,100 to £2,000 as the Liberal Democrats proposed.” Exactly when the government will introduce the new CGT rate is unclear although, historically, a new rate has never been introduced part way through the tax year. Instead, 6 April 2011 is more likely.

In 2003 an understanding was reached between the British Venture Capital Association (BVCA) and HM Revenue & Customs (HMRC) over the income tax treatment of managers’ equity investments in venture capital and private equity backed companies. The agreement allowed managers of hedge funds to have their carried interests in the underlying investments taxed as capital gains and not as income. This meant that they paid tax at just 10% on their carried interest. In 2007 this favourable treatment looked to be coming to an end after the famous quote from one City worker that he paid “less tax than his cleaner” sparked the reform of the CGT system so that carried interest was taxed at 18% instead of 10% but, importantly, it was still treated as a capital gain and not income.
Tim says: “CGT makes up a small percentage of total revenues for HMRC and is only payable when the capital gain is crystallised. This suggests that by hiking up the CGT rate the government may really be targeting the profits of hedge funds and similar businesses that continue to rely on the BVCA agreement. However, rather than penalising everyone, HMRC should consider revisiting the understanding reached with the BVCA, although this would inevitably lead to more of these businesses leaving the UK.”

Income tax and National Insurance: The coalition government has agreed that the personal allowance for income tax will rise from April 2011 to help lower and middle-income earners. “The allowance is expected to increase for all taxpayers but will only reach the target personal allowance of £10,000 after a few years, while the threshold for the personal allowance being tapered down may be reduced from £100,000 to a lower earnings limit so that the benefit of the full allowance only goes to the lower paid,” says Tim. “To help fund the increase the National Insurance (NI) rate for higher earners is predicted to rise by 1%. The Conservatives have abandoned plans to increase employers’ NI from 12.8% to 13.8% calling it a tax on jobs and anxious that it will increase unemployment.”

Banks: The coalition government has made it clear that reform of the banking system is essential to avoid a repeat of the banking crisis. “A banking levy is expected to be introduced in time although, similar to the Labour government’s one-off bankers’ bonus tax introduced in the pre-Budget report 2009, this is likely to be paid by the banks or added to bankers’ salary,” says Tim.

Anti-avoidance: A continuing assault on tax avoidance in all its forms is expected in the emergency Budget. “Promoters of tax-avoidance schemes are required to disclose them to HMRC, giving the tax authorities an early opportunity to identify and shut down those schemes that they think might work,” explains Graham Morgan, a partner at Kingston Smith LLP. “A raft of tax avoidance measures against which the Labour government failed to legislate is expected to be scooped up in the emergency Budget.”

‘The Coalition: Our Programme for Government’ document refers to a “detailed development of Liberal Democrat proposals” in relation to tax avoidance. These include a proposed general anti-avoidance provision for companies, a crackdown on perceived NI avoidance on benefits-in-kind and a change to the SDLT rules where shares in a company owning a property are sold instead of the property itself. “The most worrying of these proposals is the suggestion of a general anti-avoidance rule as this will mean that any planning which HMRC views as having a tax avoidance motive would fail. This brings a great deal of uncertainty to companies at a time when one of the key reasons given by companies for leaving the UK is the uncertainty of the UK tax system,” says Graham.

Corporation tax: The Chancellor’s aspiration is to reduce the main headline rate from its current 28% to 25% in order to improve the international competitiveness of the UK, and to reverse the trends whereby multinational companies headquartered here seek to relocate to more favourable jurisdictions. Any such provision would almost certainly be accompanied by restrictions to reliefs available to render it ‘revenue neutral’. “The government can’t afford to lower the headline rate of corporation tax – which has remained at 28% since 2008 – without securing additional tax via reductions in reliefs and allowances,” says Graham. Plans to raise the small companies’ rate by 1% to 22% have been shelved since the pre-Budget report 2008 due to the economic situation.

VAT: “With recent VAT increases to 21 % announced by Greece and Portugal and to 18% by Spain, it would not come as a surprise to see the main rate of UK VAT increased from 17.5% to 20%,” says Adrian Houstoun, a partner at Kingston Smith LLP. “However, if the new government follows the last one the change may not be effective immediately. It seems unlikely that a 5% rate will be imposed on zero-rated items such as books and food, although the Liberal Democrats were keen on bringing in a 5% rate for certain domestic property that is currently zero-rated. With the coalition this might still happen, but probably not in this Budget.”

For further information, contact:

Andrew Shaw, Personal Tax
020 7566 3807
ashaw@kingstonsmith.co.uk

Tim Stovold, Employment Tax
020 7566 3579
tstovold@kingstonsmith.co.uk

Chris Lane, Entrepreneurial Businesses
020 7566 3805
clane@kingstonsmith.co.uk

Graham Morgan, Corporate Tax
020 7566 5689
gmorgan@kingstonsmith.co.uk

Adrian Houstoun, VAT
020 566 3802
ahoustoun@kingstonsmith.co.uk

PR enquiries:
Layisha Laypang
Tel: 020 7566 3574
llaypang@kingstonsmith.co.uk