14 May 2010
During the election campaign a conspiracy of silence among the main parties surrounded measures required to address the UK’s fiscal deficit. The tax measures outlined within the Conservative-Liberal Democrat coalition agreement, which was published on 12 May 2010, provides some insight into how they will begin to address the problem. Being commendably brief, it does of course leave many unanswered questions for taxpayers and their advisers seeking to identify what action to take ahead of the expected tax increases.
Capital Gains Tax
Against a current top income tax rate of 50%, the existing CGT rate of 18% already looked unsustainably low, despite having remained unaltered in Labour’s March 2010 Budget.
The Lib Dem preference for the CGT rate to be combined with income tax rates (as was essentially the case between 1988 and 2008) is expected to be substantially realised but only for non-business capital gains. It is not clear whether any form of relief, such as indexation allowance, would be restored.
It appears that a distinction between non-business capital gains and those from entrepreneurial business activities will be reintroduced, with generous exemptions for the latter. However, there is as yet no indication as to how the lifetime cap on Entrepreneurs’ Relief for such gains (recently doubled to £2 million from 2010) might be affected, nor whether it is intended that the effective 10% CGT rate should be retained.
Although we have advanced warning of the CGT increase, the date from which it takes effect is still to be announced. Backdating to 6 April 2010 could be unexpectedly harsh and controversial, so the rise may commence from the date of the emergency budget which is expected to take place before the end of June. With this in mind, clients with significant unrealised capital gains might want to consider using trusts, partnerships or other appropriate vehicles as strategies to shelter them prior to any rate change.
In addition, trustees should consider if appointing assets to beneficiaries is advisable, taking into consideration the impact of any separate inheritance tax charges.
Inheritance Tax
The Conservatives’ plans for a £1m inheritance tax nil rate band have been dropped as part of the negotiations. It is not yet clear whether an annual inflationary increases will be introduced.
It would therefore appear that inheritance tax reform will not be high on the new Government’s priority list, so any planning that may have been delayed prior to the election can now proceed on the basis of no change.
Other tax measures
- The “mansion tax” on properties above £2 million proposed by the Lib Dems has also been dropped.
- The coalition has announced a long-term plan to increase the tax-free personal allowance to £10,000. However this is targeted at lower and middle incomes, so presumably there will be restrictions limiting the availability to higher rate taxpayers.