We all knew that Chancellor George Osborne was going to announce an increase in Capital Gains Tax (CGT) today, but we didn't expect the rate to rise immediately. Other surprises included reductions in the rates of corporation tax for both small and large companies and in the rates of capital allowances for all businesses.
A rise in the standard rate of VAT to 20% was widely expected, but this increase has been delayed until 4 January 2011, which is the first working day after the Christmas break.
The 1% point increase in NI rates from 6 April 2011 is already planned, but we are assured by George that through some manipulation of thresholds this increase will not be felt by most people. However, we won't know the exact starting points for employers and employees NI until the Autumn Budget statement on 20 October 2010.
Basic rate taxpayers aged under 65 will benefit from a £1,000 increase in their personal allowance from 6 April 2011. Those aged over 65 already receive a higher personal allowance, if their total income is below £28,930.
Capital Gains Tax
The rate of CGT is to increase from 18% to 28% from 23 June 2010, but taxpayers with taxable income and gains below £37,400 will continue to pay CGT at 18%.
All trustees and personal representatives with any level of income and gains will also rise to 28% from 23 June 2010.
We thought the Government would not increase the rate of CGT in the middle of a tax year, as that would cause so many complications when calculating the tax due for 2010/11. However, that is exactly what George plans to do. The increase in CGT is not as high as many feared, as it is still well below the highest income tax rates of 40% and 50%. Although trusts are particularly badly hit as they will pay the higher rate of CGT on all gains and only have half the annual exemption of individuals. There are special rules for trusts for the disabled.
The annual exemption remains at £10,100 for individuals and £5,050 for most trusts.
All gains that qualify for entrepreneur's relief will continue to be taxed at 10%, whether the disposal is made before or after the changes on 23 June. There will be an increase from £2 million to £5 million in the lifetime limit on gains that can qualify for entrepreneurs' relief from 23 June 2010 and this is very welcome, but many gains will never qualify for that relief. For example, the sale of a commercial property, which is not associated with the disposal of a trading business, will not qualify for the relief. Letting of commercial property does not count as a trading business for entrepreneurs' relief.
If you are in the middle of arranging a large sale, you could escape the CGT rise if you have already exchanged contracts. This is because the disposal date for CGT is the date that unconditional contracts are exchanged, not the completion date for the deal. If the contract is conditional, the disposal date is the date those conditions are satisfied. The disposal date for a gift is the date the beneficial ownership passes.
The personal allowance for those under 65 will rise by £1,000 to £7,475 for 2011/12. However, this generous increase in tax free income will be limited to those who pay income tax at 20%, as the threshold at which 40% tax starts will be reduced to take into account the increased allowance. We won't know the exact tax thresholds until the Autumn Budget statement, as the increases in threshold for 2011/12 will be based on the RPI to September 2010.
Child Benefit and Tax Credits
Child benefit is available to all parents of children under 16, and is not means tested. This benefit will be frozen at current levels until April 2014, and the money saved will be transferred to child tax credits.
Working and Child Tax Credits are to be withdrawn gradually from families with total income of £40,000 or more from April 2011. The special baby rate will be withdrawn at the same time, but the child element for less well-off families will increase by £150. There are a number of other changes planned for later years including a reduction in the period for which claims can be back-dated.
Child Trust Fund
Child Trust funds are special tax free savings accounts that are set up with Government funds for children born after 31 August 2002. Additional savings of up to £1,200 per year can be contributed to each account by anyone. Reductions in the funding for these accounts will be made from August 2010 and no further funding will be provided for new accounts from 1 January 2011. The accounts that are already open will remain in place until the child reaches age 18.
Retirement and Pensions
The state pension age (SPA), from which individuals can receive the state pension, is currently 65 for men and is rising to 65 for women. Legislation is already in place to increase the SPA to age 66 for everyone from 2026, but the Government wishes to bring this date forward.
From April 2011 the state pension will be increased by the greater of: the annual increase in earnings or prices, or 2.5%. The standard minimum income guarantee given under the Pension Credit will be increased by the same amount as the state pension.
When a member of a money purchase pension scheme reaches age 75 they are required to purchase an annuity to provide their future pension, or heavy charges can apply. This requirement to purchase annuity at age 75 is to be scrapped from April 2011. In the meantime if the scheme member has not reached age 75 by 22 June 2010, they can defer purchasing an annuity until age 77.
Tax relief for pension contributions is expected to be limited to around £35,000 per year per person from April 2011. This cap will replace the complex tapering of tax relief that was due to apply to individuals with total income of £180,000 or more.
Currently employees can be required to retire when they reach the default retirement age of 65. The Government is going to consult on how to remove this default retirement age.
Furnished Holiday Lettings
The changes that were announced by the previous Government will not be taking effect, although new measures will be considered to ensure the rules apply equally to properties in the EEA as well as increasing the number of days that properties have to be available for let and actually let as commercial holiday lets.
The small profits rate of corporation tax will be cut from 21% to 20% from 1 April 2011, when it was previously expected to increase to 22%. The small profits rate applies to profits of up to £300,000 if there are no associated companies. The corporation tax rates for large companies will reduce from 28% to 27% from next April and then fall by 1% per year eventually down to 24%.
The previous Government was always messing with capital allowances in an attempt to incentivise businesses to invest in this or that type of equipment. The new policy is to cut back on capital allowances with effect from 1 April 2012.
The main pool rate is reducing from 20% to 18% from that date and the special pool rate from 10% to 8%. The Annual Investment Allowance (AIA) Limit is also reducing from £100,000 to £25,000 from 1 April 2012.
Small businesses will not be affected if all of their expenditure on equipment is within the annual investment allowance, which gives 100% deduction for costs in the year of purchase. Unfortunately expenditure on cars cannot be covered by the AIA. However, expenditure on new (not second-hand) low emissions cars and vans can be covered by a separate 100% allowance.
Although we know the rates of NI that will apply from 6 April 2011, (2010/11 rates + 1%), we don't know the new thresholds, so we cannot construct a meaningful table for 2011/12. We know the employer's secondary threshold for class 1 NICs will increase by £21 per week above the RPI increase. The RPI increase is based on the RPI to September 2010. We will provide a full NIC rates and thresholds table when we have the full details in October.
The Treasury are feeling guilty about cutting loads of public sector jobs in the less prosperous regions of the UK, so they have come up with the idea of an 'NICs holiday'. A business will be exempt from paying the employer's class 1 NICs for 12 months for up to 10 employees, capped at £5,000 per employee.
This scheme will start in September 2010 but will apply to new businesses set up on and after 22 June 2010. It will only apply in Scotland, Wales, Northern Ireland, the North of England, Yorkshire, the Midlands and the South West regions. Certain businesses are excluded, such as those under the IR35 or Managed Service Company rules, and businesses in grant-supported sectors such as agriculture, fisheries and coal. More details are expected to be made available shortly.
Change of Standard Rate
The standard rate of VAT will increase from 17.5% to 20% from 4 January 2011. Goods and services that are currently exempt from VAT or are subject to VAT at the zero, or 5% rates will not be affected by this change.
If you are planning to invoice or pay in advance to avoid the VAT rise, think again. There will be a special 2.5% VAT charge on such advance sales where the customer cannot recover all the VAT on the supply, and one or more of the following applies:
- the supplier and customer are connected,
- the supplier funds the purchase,
- the payment is not due for at least six months;
- the value of the supply is £100,000 or more, unless the prepayment or advance invoice is normal commercial practice.
Flat Rate Scheme
Small businesses can start to use the flat rate scheme if their VAT exclusive turnover is no more than £150,000, but must leave the scheme if their VAT inclusive turnover exceeds £225,000. This exit turnover figure will rise to £230,000 on 4 January 2011.
The flat rates that are applied to gross sales under the flat rate scheme will increase on 4 January 2011 to reflect the increase in the standard rate of VAT. If your business will no longer benefit from using the flat rate scheme you can leave scheme at any time.
Payments on Account
Businesses who have annual VAT due of £2 million or more must make monthly VAT payments on account. This threshold will be increased in 2011.
A corporate tax avoidance schemes has been blocked from 22 June 2010 that uses financial instruments to remove profits from UK tax or is used to create an artificial tax credit.
The Government is to consider whether a General Anti-Avoidance Rule would be effective in reducing tax avoidance. It will also examine the following anti-avoidance measures:
- Expand the disclosure of tax avoidance schemes regime to include schemes involving IHT on trusts.
- Block the manipulation of consortium relief.
- Restrict the use of employee trusts, including employer finance retirement benefit schemes (EFRBS).
- Amend Stamp Duty Land Tax due on high value property transactions.
- Landline duty of £6 per year will not go ahead from 1 October 2010.
- Alcoholic duties rates on strong cider will reduce from 30 June 2010, back to the levels which were in place before the March 2010 Budget.
- A bank levy on bank's balance sheet values will be introduced from 1 January 2011 at 0.04% , which will rise to 0.07%.