The Budget 2008
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Budget bulletin number 4
In the past couple of budget predictions we have considered the possibilities for business tax and personal taxes. Now we turn to capital taxes.
Given everything that was announced in the Pre-Budget Report in November, and the ensuing chaos whilst we waited for the legislation on capital gains tax (CGT) and non-doms, we would hope that there will be few, if any, further changes . But there probably will be.
What we can be sure of is that Taper Relief will die a death as at 5 April. If the Chancellor was going to change his mind on this one he surely would have by now. So we will have a basic CGT rate of 18% (on all assets both business and personal) with a lifetime Entrepreneurs’ Relief of £1million on which CGT will be payable at 10%. There will no doubt be some changes to the detail but nothing headline-grabbing. One of the quirks from the Entrepreneurs’ Relief legislation is that there will be a number of people currently holding loan instruments in respect of an earlier disposal, which mature after 5 April. It appears at the moment that in the absence of Entrepreneurs’ Relief these gains will be taxed at 18%, whereas the expectation would have been for a tax rate of 10%. Given that these gains have effectively crystallised already it would not seem unreasonable to expect some form of relieving mechanism here.
Years ago when the top rate of income tax was 60% and CGT was 40% there were a number of ideas around for effectively converting income into capital. With the alignment of CGT and income tax to the individual’s marginal rate of tax the distinction between the two was less important, unless of course there was a business asset involved. But with income now being at 40% for higher rate tax payers, and CGT at a maximum of 18% there is again a likelihood that ideas will be found for turning income into capital. We would therefore expect to see legislation announced in an attempt to counter and such ideas that may be developed.
We can also expect further tinkering with the legislation surrounding trusts, but this is unlikely to be headline-grabbing.
Which leaves us with Inheritance Tax (IHT). But the Chancellor told us in the PBR what his plans were here, so other than maybe some further anti-avoidance legislation and clarification in the areas of pre-owned assets, we do not predict any further changes.
Now, whilst this bulletin is concentrating on capital taxes, it would be remiss not to consider any changes to indirect taxes. VAT has been at its current rate of 17.5% for many years now, with the various lower rates of 5% and a zero rate. We have one of the lowest VAT rates in Europe. If the Chancellor wanted to do something radical, a rise in the rate of VAT would be a possibility. It’s easy to collect (the supplier does it), it’s instantaneous and improves the Exchequer’s cash flow almost overnight. And arguably for many retailers where “price points” are vital, it might be the retailer who bears the cost rather than pass it on. If you are selling a sofa for £799, and VAT goes up by 1%, do you really want to now advertise it at £805.80? It’s not a prediction, but our wild card thought is that this might just be the year when we see a VAT rate change.
In a week’s time we will know. We will, of course, be making immediate comment on our website (www.tenongroup.com), and will be producing a detailed summary again available on the website in the early hours of Thursday 13th, and in hard copy a day or so later.
Andrew Jupp
National Head of Tax
Andrew Hubbard
National Tax Technical Director
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