Glazers Pre-Budget Summary 2007 Newswire

With Gordon Brown now in the top seat, the eyes of the nation were on Alistair Darling as he delivered his first pre-budget report. The will-they-won’t-they speculation surrounding the election, plus some tax cuts promises from the opposition meant that Darling had to deliver some potentially vote-winning changes.

Below is a summary of the key issues for you here to help you understand how the changes will affect your business, you and your family and what the Government’s spending plans are for 2008 and onwards.

Personal Tax

The Government’s modernisation of the tax system continues with several major announcements.

All married couples and civil partners automatically benefit from double the standard inheritance tax allowance, and capital gains tax is reformed with the introduction of a single rate of 18 per cent. More information can be found on these later in this report.

Other taxation measures include actions to protect tax revenues and further modernise the tax system. An emphasis was placed on tackling tax avoidance, including countering the exploitation of interest relief by individuals, amending the disguised interest rules to prevent abuse, and ensuring that scheme pensions and lifetime annuities are used solely to provide an income for life and not as a means of diverting tax-relieved pension savings into inheritance. The details of these measures have not yet been published.

Alongside reforms announced in Budget 2007, the new measures announced in this pre-budget mean that by April 2009 many individuals and families will be better off. Below are some examples of the effect these changes will have:

A single-earner family with two children on male mean earnings (£35,900) will be £320 a year better off, with the direct tax burden on the family falling to 20 per cent.

A single-earner family with two children on median earnings (£27,000), will be around £540 a year better off;

A single-earner couple without children on half median earnings (£13,500) and receiving the WTC will be £175 a year better off;

Around 600,000 fewer pensioners will pay income tax than would otherwise be the case, so that in total only 43 per cent of pensioners will be taxpayers. By April 2011, no pensioner aged 75 or over will pay any tax until their income reaches £10,000; and

The income tax personal allowances for under 65s and NICs thresholds and limits, except the upper earnings and profit limits, will be raised in line with the Retail Price Index from April 2008.

On the back of a suggestion from the opposition, the Chancellor plans to raise more money from wealthy individuals who classify themselves either as non-domiciled or non-resident. Many people in this category are domiciled in tax havens such as Monaco but operate their businesses or employment in the UK. People in this category who have lived here for more than seven years will pay a flat rate of £30,000.

Non Domicile Residents

The main being that UK residents who are non-domiciled, who wish to continue to be taxed on a ‘remittance basis’ rather than on their worldwide income and gains, will have to pay an annual charge of £30,000. This change is to ensure that these individuals contribute in respect of the foreign income and gains which they keep off shore and on which they do not pay UK tax. The charge will only apply if they have been resident in the UK for more than seven years.

Benefits and Working Families

The Government continues its theme of eradicating child poverty and proving a better deal for working and lone parents. An In-Work Credit, which has been piloted since 2004, will be rolled out nationally from April 2008. This £40 payment (£60 in London) is for lone parents who have been on Income Support for more than twelve months but are now returning to work, and will be paid for the first year of their employment.

The incapacity benefits system is being overhauled, with a simplified Employment and Support Allowance (ESA) taking its place from 2008. The intention is to focus on what a claimant can do, rather than what they cannot do.

Child tax credit will go up in April 2008 by £175 a year, rather than the £150 increase previously announced, with a further £25 increase in 2010.

All elements of the Working Tax Credit are to be uprated, in line with the Retail Prices Index (RPI), with the exception of the childcare element.

The Chancellor confirmed the Budget 2007 measures to increase the income threshold below which WTC can be claimed in full by £1,200 to £6,420 and the increase in the withdrawal rate for tax credits by two percentage points to 39 per cent.

In addition, from April 2008, the disregard of tax credits in Housing Benefit will increase in line with RPI.

Pensions and Retirement

In an effort to provides security for the poorest pensioners and rewards those with modest savings, the Government will increase the Pension Credit standard minimum guarantee to £124 for single pensioners and to £189 for couples in 2008-09, a rise of £5 a week for a single person and £7.65 a week for a couple.

Part of the newly-announced anti tax-avoidance measures will prevent the use of scheme pensions and annuities to enable inheritance of tax-relieved savings and ensure that UK tax-relieved pensions funds in overseas schemes continue to be protected from the Inheritance Tax Threshold.

Inheritance Tax

One of the biggest and most talked-about announcements was the change to the Inheritance Tax Threshold (IHT). Because there is no IHT paid on assets passing between married couples or civil partners, anyone leaving all their assets to their spouse does not make use of their individual tax-free allowance of £300,000. To address this imbalance, all married couples and civil partners will automatically benefit from double the standard inheritance tax allowance.

In real terms, this means that if a person’s tax-free allowance is not used on their death, it can be transferred to their surviving spouse or civil partner, enabling every married couple or civil partnership to benefit from double the tax-free allowance (£600,000 in 2007/08) in addition to spouse relief. The IHT allowance will rise by April 2010 to £350,000 for individuals and £700,000 for couples.

The Government has also extended this entitlement to the three million existing widows, widowers and bereaved civil partners.

Capital Gains

A major reform to capital gains tax will be introduced via a single rate of 18 per cent from 6th April 2008. The Government aims to ensure a more sustainable system that is straightforward and internationally competitive

As part of this new system the annual exempt amount (currently £9,200) will remain in place, but taper relief and indexation allowance will be withdrawn.

For some entrepreneurs, business creators and private equity chiefs, who now pay only 10 per cent tax, this reform represents a steep tax rise. However for many ordinary investors in the stock market or property who currently pay up to 40 per cent tax on their capital gains, this will be welcome news.

Companies

Changes to the tax system will have an impact on businesses, particularly in light of new anti tax-evasion measures and the new capital gains rules.

Other measures include an amendment to the regulations on the tax treatment of loans and derivatives that hedge a company’s currency risk from investment in foreign operations, to ensure only the “hedged” position is taxed, with effect from 1 January 2008, followed by more extensive changes in 2009.

The taxation of small unincorporated businesses will be reduced by £50 million in 2009-10, as the self-employed already pay income tax and national insurance contributions on their business profits.

A flaw in the legislation governing the sale of leasing companies, which is resulting in an unintended tax charge and could prevent genuine commercial restructuring, will be removed via legislation with retrospective effect from 5 December 2005.

The Government announced continued support for business and the promotion of enterprise, including the allocation of a total of three rounds of Enterprise Capital Funds at £50 million per year.

Company Cars

Where a car is provided for an employee’s private use, a taxable benefit arises which is based on the list price of the car and its CO2 emissions. The percentages range from 15% to 35% for most cars. There are currently discounts available for environmentally friendly cars and from 6 April 2008 there will be a 2% discount for cars that have been manufactured to run on E85 fuel.

If fuel is provided for private motoring then a fuel benefit tax charge arises based on the percentage used for the car benefit and a ‘multiplier’, which is currently £14,400. For 2008/09 the figure will increase to £16,900.

Flight Tax

From 1 November 2009, air passenger duty will be replaced with a duty payable per plane.

Other transport measures include free off-peak bus travel to all residents in England over the age of 60 and eligible disabled people from April 2008, and £15 billion of Government funding in the rail network over five years. The road pricing scheme is also being taken forward.

The Economy

The Chancellor warned that there will be more economic pain because of the world financial crisis.

UK economic growth is predicted to slow from 3 per cent in 2007 to 2-2.5per cent in 2008, a reduction from the previous forecast of 2.5-3per cent made in the Budget 2007.

The current instability is likely to slow growth in the US and EU, but the Chancellor is optimistic that the UK would grow faster in 2007 than any other major economy.

Public finances should still be in a strong position, especially if growth returns to its forecast level of 2.5 per cent to 2.75 per cent in future years, but the Government's public sector overall borrowing would increase by £4billion in 2008 to £38bn. The Chancellor seemed confident of long-term improvement, however, predicting a decline in Government public sector borrowing to £25bn by 2011/12.

Budget proposals may be subject to amendment in the Finance Act. You are advised to seek professional advice before taking any action as a result of the contents of this summary.