UK: The 2006 Budget (Part 2 of 2)

Last Updated: 28 March 2006
This article is part of a series: Click The 2006 Budget (Part 1 of 2) for the previous article.

4 Pensions and investments

4.1 Pensions simplification

The new pensions simplification rules will finally be introduced on 6 April 2006. The first Consultative Document published in December 2002 anticipated that simplification would be on the statute books by 6 April 2004. However, the title pensions simplification has not been supported by a delay of two years before implementation. Following numerous previous revisions the Pre-Budget Report in December 2005 and this year’s Budget has introduced some further revisions as follows:

Prohibited assets

The tax advantages of pension schemes will not be extended to certain prohibited assets such as residential property, fine wines, classic cars, arts or antiques.

It was originally anticipated that such assets could be purchased by pension schemes and used by members, provided that they paid some tax for their use of the asset. Whilst it was not clear how the policing of this tax charge would work it was quite clear that large resources would have had to be utilised. As a result of this and other issues, notably the possible continued fuelling of the residential property prices by tax-exempt funds, it has been decided that they and certain other assets will be prohibited.

As a result ownership of such assets by pension schemes will lead to several possible tax charges. Firstly a 40% unauthorised payment charge will be made on the member as well as a 15% scheme sanction charge on the scheme administrator. In addition, if the prohibited asset or assets exceed 25% of the value of the total assets in the pension fund a further 15% unauthorised payment surcharge will be made on the member and the scheme may well be deregistered crystallising a 40% deregistration charge. A 110% tax is likely to be a good incentive not to invest in prohibited assets.

Comment: By introducing a list of prohibited assets HMRC will be able to add and delete investments it wishes in the future which means that the door has not been fully closed on residential property. Pension funds will, however, be able to invest in the new Real Estate Investment Trusts so their access to residential property will not be completely barred.

Recycling of pension contributions

From 6 April 2006 it will be possible to release tax-free cash from a pension scheme without taking an income. In anticipation of many individuals taking advantage of this provision and reinvesting their tax-free cash into a second pension scheme (recycling) and obtaining further tax relief HMRC has stated that any tax-free cash lump sums that are used in this way will be treated as unauthorised payments and subject to a 40% tax charge. The legislation states that the member must have envisaged using their tax-free cash to fund further pension contributions for the new rule to apply and that the amount recycled must be both greater than £15,000 and 30% of the lump sum released from the pension scheme.

Comment: There will clearly be some subjectivity to be applied however it is not entirely clear why HMRC needs 28 pages of guidance to accompany the clause which is being inserted into Schedule 29 of the Finance Act 2004 to introduce these new rules. Furthermore recycling would actually have helped those people who have limited resources to build up a higher pension pot. What seems to have been missed when these rules were considered is that the pension will eventually be taxed and tax-free cash can only be extracted once.

Inheritance Tax (IHT)

One of the welcome aspects of pensions simplification is that there will no longer be a requirement to purchase an annuity with one’s pension fund at age 75 as individuals will be able to enter into an Alternatively Secured Pension (ASP)

Under ASP, members will be able to draw an income from their remaining pension scheme and on the second of their own and their spouse’s deaths what is left can be allocated to the pension funds of their heirs, provided that they are members of the same pension scheme. With this in mind it is anticipated that individuals will introduce family members into their pension schemes so that they can receive their residuary pension fund.

HMRC was quite keen to ensure that pension funds should not be passed on without some form of IHT charge and with this in mind published a discussion document on the subject in July 2005. This was open for discussion until the end of September 2005 and it has been announced in the Budget that legislation will be introduced in the Finance Act 2006 to clarify how IHT will be charged on these new ASP benefits.

In simple terms an IHT charge will be payable on the full value of the fund on the second of the deaths of the pensioner and his or her spouse. In most cases this will be calculated with reference to the original member’s estate. There will be a recalculation of the tax charged which will be based on tax rates and the value of the nil rate band at that time.

Pension income which is subsequently drawn by the individuals to whom the residuary pension fund is allocated will form part of their income and be subject to income tax.

It was anticipated that HMRC might also seek to charge IHT on individuals who purposely did not draw their pension fund before age 75. However, these fears have been allayed and it seems that they will merely include the current rules in legislation whereas at present it is written in concessionary practice.

In simple terms the estates of those individuals who fail to exercise their right to take a pension in the knowledge that their life expectancy is seriously impaired will, potentially, be liable to IHT unless it is passed to a spouse, civil partner or financial dependant. Payments to charity will also be included in this exemption from IHT.

Where a scheme member chooses not to exercise his right to a pension when he is in good health the fund will remain exempt from IHT as it does now.

Comment: This clarification is welcomed as there was a real fear that a charge to IHT could be introduced for individuals before the age of 75 and common sense has prevailed. It is not unreasonable that an IHT charge should be made post the age of 75.

4.2 UK Real Estate Investment Trusts (REITs)

The outstanding details on the operation of UK-REITs have been announced. The conversion charge was the key unknown but some changes have also been made to other draft rules, in particular gearing, and minimum distribution level.

The maximum shareholding condition for being a UK-REIT is now a test leading to a tax consequence. The structure of UK-REITs has been well trailed. The main points, which have been honed through a considerable amount of consultation, are as follows:

  • UK-REITs will be UK resident quoted companies with special rules. They cannot be close companies or OEICs. The share capital can only be ordinary shares or non-participating fixed rate preference shares.
  • Existing quoted companies and groups that carry on a qualifying property rental business can elect to be a UK-REIT from 1st January 2007.
  • The conditions for a qualifying property rental business are that:

- at least 75% of the company’s assets must be property investments;

- at least 75% of the company’s income must derive from rents;

- gearing must be more than 1.25. This ratio is calculated by dividing profits after adding back the interest charge, by the interest charge.

  • The conversion charge has been set at 2% of the value of the company’s investment properties. The business of a UK-REIT will be divided into a tax-exempt qualifying part and a non-qualifying part.

The tax-exempt part will not pay corporation tax.

90% of the profits from the tax-exempt part must be distributed each year within 6 months of the end of the accounting period. These distributions will be paid net of basic rate tax. The recipient will treat them as Schedule A (rental) income.

Corporation tax will be payable on the profits of the non-qualifying part. Distributions will be treated as normal dividends.

Various further conditions apply to the tax-exempt business:

  • the company must have at least 3 single properties;
  • no single property must have a value exceeding 40% of all the properties in the tax-exempt business;
  • no property can be occupied by the UK-REIT or its associates;
  • the company must derive 75% of its income from the tax-exempt business;
  • the value of the assets in the tax-exempt part must be at least 75% of the value of the assets in the whole.

There are numerous details dealing with the application of the rules to groups, to the use of losses inside and outside the tax-exempt part, to the transfer of assets between parts and to the practical application of the rules.

Comment: At last, the final details appear!

The setting of the conversion charge at 2%, payable over four years, has the benefit of simplicity although some companies would have been able to shelter all their gains had the charge been treated as a deemed gain.

Gearing has been reduced from 2.5 to 1.25 which is a welcome relaxation, necessary since very few companies could comply with the previous proposed gearing restriction.

The restriction of the maximum individual shareholding remains at 10%, which is disappointing, but at least the UK-REIT will not fail to qualify in total if there are shareholders holding more than 10% and it will be able to show that it has taken reasonable measures to prevent larger shareholdings. The minimum distribution has been decreased from 95% to 90% which is another welcome change.

The rules are complicated and it will be necessary for advisers to actual and prospective UK-REITs to become expert in them. Undoubtedly, as with all new rules, there will be many areas of difficult interpretation but one would hope that HMRC would be helpful and compliance will be dealt with a soft touch in order to make UK-REITs viable.

UK-REITs will definitely be good news for shareholders. They will be able to offset other rental losses, perhaps made on their buy-to–let portfolio, and unlike dividends, they will be able to get a repayment of the income tax deducted in appropriate circumstances.

This will make UK-REITs attractive to non-taxpayers, like minor children, and also to discretionary trusts. On final point to note is that UK-REITs cannot be quoted on AIM because that is treated as unlisted.

4.3 Changes to the Venture Capital Schemes

Venture Capital Trusts (VCTs)

With effect from 6 April 2006 the rate of income tax relief applicable to investors in VCTs will be reduced from 40% to 30%. In addition, the minimum period for which qualifying investors in VCTs must hold their shares (in order to retain income tax relief) rises from three years to five.

There is also a change to the definition of ‘investment’ for the purpose of determining whether a VCT obtains and retains its qualifying status. In order for a VCT to retain its status, 70% by value of its investments must be represented by shares or securities in qualifying holdings. The revised rules mean that with effect from 6 April 2007 any money held by a VCT, or held on its behalf, is treated as an investment for the purpose of these tests.

Comment: A change in the rate was expected, as the 40% rate was only temporary for the two years ending 5 April 2006. However, the rate has not reverted to the original rate of 20%, but has been changed to 30% and can be seen as something of a compromise. The change to the definition of ‘investments’ held by VCTs has been introduced to prevent VCTs circumventing the qualifying holding rules in relation to cash deposits. The changes are likely to lead to a ‘dampening’ down of the currently buoyant VCT market. There is likely to be a lot of activity in VCTs up until the tax year end as investors try to take advantage before the rules change.

Enterprise Investment Schemes (EIS)

With effect from 6 April 2006 the annual investment limit in relation to EIS income tax relief rises from £200,000 to £400,000. In addition, where an investment is made before 6 October in tax years from 2006/2007 onwards, the maximum that can be carried back to the previous year is increased from £25,000 to £50,000 (or up to half of the subscription if lower).

Comment: This is a welcome change to the EIS rules and should attract further investment in EIS qualifying companies. EIS has always played a ‘cinderella’ role in tax shelter circles and certainly has been less high profile to VCTs in recent years. However, with appropriate investment advice it remains a useful tax shelter.

Gross asset test for VCT, EIS and Corporate Venturing Scheme (CVS)

The maximum limit in relation to the gross assets test used for the purpose of determining whether an investment qualifies for EIS, VCT or CVS purposes has been reduced from £15 million immediately before the relevant investment and £16 million immediately thereafter, to £7 million and £8 million respectively. For VCTs the new limits apply to investment of funds raised after 6 April 2006. For EIS and CVS the new limits apply to shares issued on or after 6 April 2006, but the old rules continue to apply in relation to shares issued after that date providing they were subscribed for before 22 March 2006.

Comment: This is an unexpected change and will significantly reduce the number of companies qualifying for EIS investment, but reinforces the Government’s original intention to boost investment in smaller companies only.

5 Trusts

Significant changes were announced to the ways in which trusts are taxed. The imposition of a new inheritance tax regime on Interest in Possession (IIP) and Accumulation & Maintenance (A&M) trusts will take effect. Most of the changes affecting income and capital gains tax will come into force on 6 April 2006 with the new uniform rules on trustees’ residence applying from 6 April 2007.

5.1 Inheritance Tax

Until Budget Day, gifts to either IIP or A&M trusts were regarded as potentially exempt transfers for inheritance tax purposes. This exemption will no longer apply unless the trust is set up for a disabled person. Additionally, the current regime of 10 year and exit charges, which previously only applied to discretionary trusts, will now also apply to all trusts other than those which are specifically exempt.

Exempt trusts will be those which are exclusively charitable or those in the following circumstances:

  • created on death by a parent for a minor child who will be fully entitled to the assets at age 18;
  • created on death for the benefit of one life tenant whose interest cannot be replaced (more than one such trust may be created on death as long as the trust capital vests absolutely when the life interest comes to an end);
  • created either in the settlor’s lifetime or on death for a disabled person.

Transitional arrangements will be introduced for existing IIP and A&M trusts.

Existing A&M trusts which provide that the assets in trust will pass to a beneficiary absolutely at 18, or where the terms on which they are held are modified before 6 April 2008 to provide for this, will continue under the old tax regime. If they do not, the trust assets will become relevant property from 6 April 2008 and the periodic and exit charges will apply.

However, whether it is advisable to give eighteen year olds substantial amounts of capital is highly debatable and only the brave or confident trustee will wish to avail themselves of this opportunity. Ten yearly anniversaries will arise by reference to the original date of the settlement. For the first ten years after 6 April 2008, the rate of charge will reflect the fact that the property has not been relevant property throughout a full ten year period e.g. if the first ten yearly anniversary charge falls in November 2008, it will be one twentieth of the normal charge.

The current rules for existing IIP trusts will run on until the interest in the trust property at 22 March 2006 comes to an end i.e. someone takes absolute ownership. This will be a transfer by the person with the interest in the property (either on death or a potentially exempt transfer if they are still living) and will receive the same inheritance tax treatment. The trust will have no further inheritance tax consequences.

If the interest comes to an end such that the property remains on trust, this will be treated as the creation of new settled property. If it comes to an end during the lifetime of the person beneficially entitled to it, this will be a transfer creating relevant property (unless the new trusts are for charitable purposes) and will therefore be immediately chargeable. If it comes to an end on death, it will form part of the person’s inheritance tax estate as now with the ‘settled property’ becoming ‘relevant property’. In both cases, the periodic and exit charges will apply.

Any new IIP that arises when an IIP created before 22 March 2006 comes to an end before 6 April 2008, whether on death or otherwise, will be treated as an IIP that was in place on 22 March 2006.

Comment: These are dramatic and unexpected changes which seem to fly in the face of previous Government statements supporting the use of trusts. These proposals suggest trusts are unacceptable tax avoidence devices and the only people smiling will be 18 year olds who find they receive sums of money early.

5.2 Income and Capital Gains Tax

Many of the changes were contained in draft legislation published for consultation purposes on 31 January 2006.

Common definitions

Common definitions of a settlor and settled property are to be introduced for income and capital gains tax purposes. There will also be new common rules to identify the settlor where transfers are made between settlements, or a will or intestacy is varied.

Settled property will comprise any property held in trust other than property held by a person.

  • as nominee for another;
  • as trustee for another person who is absolutely entitled as against the trustee;
  • as trustee for another person who would be absolutely entitled if he were not an infant or otherwise under a disability.

A settlor is anyone who:

  • has made or entered into the settlement directly or indirectly;
  • has provided property directly or indirectly for the purposes of the settlement;
  • has entered into reciprocal arrangements connected with the creation of the settlement.

Transfers between settlements

Where property is transferred from the trustees of one settlement to another, the settlor of the property disposed of by the trustees of the first settlement will be treated from the time of the disposal as having made the second. Property which was provided for the purposes of the first settlement or which is derived from it, will be treated from the time of the disposal as having been provided for the purposes of the second settlement.

Deeds of Variation

Where a disposition of property following a person’s death is varied, s62(6) TCGA1992 applies in respect of the variation and property becomes settled property in consequence of the variation:

  • the person who immediately before the variation was entitled to the property or to property from which it derives absolutely as legatee; or
  • would have become entitled to the property or property from which it derives absolutely as legatee but for the variation; or
  • who immediately before the variation would have been entitled to the property or to the property from which it derives absolutely as legatee but for being an infant or other person under a disability; or
  • could but for the variation become entitled to the property from which it derives absolutely as a legatee if he had not been an infant or other person under a disability; will be regarded as having made the settlement and as having provided the property for the purposes of the settlement.

The main impact of this change is that, for capital gains tax purposes, the deceased will not necessarily be deemed to be the settlor where the relevant assets are held in trust. The deceased will only be treated as the settlor for these purposes where the effect of the variation is to redirect assets which would otherwise be in one settlement, whether a will trust created on death or an existing trust, into a different settlement.

Hold-Over Relief

Following the imposition of the inheritance tax regime for discretionary trusts on other types of trust, hold-over relief for capital gains tax purposes will now apply to certain other types of transfer. Transfers into and out of trust that will now come within the relevant property rules, will automatically be eligible for hold-over relief under s260(2)A, TCGA92. It should be noted however, that changes to the hold-over regime generally will remove the ability to elect for this relief to apply where the settlement is created for the benefit of a settlor’s minor children.

Where assets remain in trust following the death of life tenant, there will be no capital gains tax free uplift on death unless a succeeding IIP meets the new inheritance tax rules.

5.3 Sub Fund Settlements

It will be possible to elect for a sub fund of a settlement to be treated as a separate settlement for both income and capital gains tax purposes. Such an election, however, will trigger a deemed disposal for capital gains tax purposes.

Trustees with funds held for disparate beneficiaries will have to balance the benefit of simplifying administration and compliance against the capital gains tax cost of entering into such an election.

5.4 Settlor Interested Trusts

The income of settlor interested settlements is to be treated as though it has arisen directly to the settlor. The existing practice of not taxing beneficiaries who receive discretionary income payments from the trustees of such trusts will be covered by legislation.

The most controversial change will be the extension of the capital gains definition of a settlor interested UK resident trust. This will now include trusts under which the settlor’s children can benefit in any way while they are under 18 unless they are married or have a civil partner. With effect from 5 April 2006, trust gains less losses will be taxed as those of the settlor personally.

As trustees pay capital gains tax at 40% which is the same rate as that for higher rate tax paying individuals, this may not be such an unpleasant change as it would have been some years ago. Currently, the trustees of settlor interested trusts are taken out of the charge to income tax at the special trust rates. With effect from 5 April 2006, the normal rules for income arising to the trustees of discretionary or A&M trusts will apply so that distributed income will be assessable at the dividend trust rate, which is currently 32.5% and all other income at the rate applicable to trusts, 40%.

5.5 Receipts of capital in trust law deemed to be income

For income tax purposes, a charging mechanism will be introduced for various types of capital receipt currently assessable to income tax in the trustees’ hands under a variety of charging mechanisms.

Comment: It is unfortunate that tax rules are to be changed at a time when the Law Commission is consulting on the classification of trust receipts and proposing that some of the existing rules governing distributions by corporate entities to trustee shareholders should be abolished.

5.6 Multiple Settlements and the standard rate band

The standard rate band is to be increased to £1,000, or where the settlor has made more than one settlement, £1,000 divided by the number of settlements subject to a minimum of £200.

5.7 Trustees’ Residence

With effect from 6 April 2007, common rules will determine the residence of trustees. Trustees shall together be treated as if they were a single person and the deemed person will be treated as resident and ordinarily resident in the United Kingdom when all of the trustees are resident; or at least one trustee is resident and at least one is not and the settlor is ordinarily resident or domiciled in the United Kingdom when the settlement was created.

6 Charities

6.1 Tax relief for trading activities undertaken by charities

Where a trade is undertaken for the primary (charitable) purpose of a charity or is mainly carried out by the beneficiaries of the charity, tax relief is given on the trading profits. With effect for chargeable periods commencing on or after 22 March 2006 this relief will be extended to charities where the trade is undertaken only partly for the primary (charitable) purpose or is only partly carried out by the beneficiaries of the charity. Relief will be given on the profits that can reasonably be attributed to the part of the trade carried on for the primary purpose or to the part carried out by the beneficiaries.

Comment: This relief is welcome and will particularly help charities where more than 10% of their trading activity is not attributable to their primary charitable purpose. Previously they may have had to persuade HMRC that they were carrying on two or more separate trades in order to get relief on the mainly charitable part. Where charities operate a small trade not for the primary purpose of the charity, they may continue to get relief under the exemption for small trades granted by s46, Finance Act 2000.

6.2 Charities: anti-avoidance measures

Extensions to existing restrictions on tax relief have been announced in three main areas.

Non-close companies

Payments to charities made on or after 1 April 2006 from non-close companies will be subject to the existing restrictions on tax relief in s339, ICTA 1988 that affect individuals and close companies in terms of:

  • limits on benefits received from the charity (donations not exceeding £100, 25% of the gift, for donations exceeding £100 but not exceeding £1000, £25, and for donations exceeding £1000, 2.5% of the gift up to a maximum of £250);
  • the rules that apply when loans are potentially repayable or are associated with the acquisition of property by the charity from the donor or connected persons.

Non-charitable expenditure

Tax relief granted to a charity is already restricted by virtue of s505, ICTA 1988 for charities with income of more than £10,000 and expenditure that does not equal or exceed income. Relief is restricted to the extent that non-qualifying expenditure is incurred. The remaining balance of nonqualifying expenditure can be carried back to the preceding 5 years.

In respect of non-charitable expenditure incurred in a chargeable period commencing on or after 22 March 2006, the de minimis income limit of £10,000 is removed and there will be a technical change to the way in which the restriction of income attracting relief is calculated. Where there is an excess of non-charitable expenditure over total income in the current year the excess can still be carried back to an earlier period.

Substantial donors

New rules will place additional restrictions on the transactions that can take place on or after 22 March 2006 (unless a contract has been entered into earlier) between a charity and its substantial donors without the charity’s tax relief being restricted. Broadly, an individual or a company will be a substantial donor if they give to a charity £25,000 or more in any 12-month period or £100,000 over a 6-year period both for the chargeable period in which they exceed these limits and the following 5 chargeable periods. The limits will apply only to amounts on which tax relief has been claimed.

The new rules will apply to various specified transactions unless the transaction is otherwise exempt or where HMRC is satisfied that a charity has engaged in it for genuine commercial reasons or on terms that are no less beneficial to the charity than those that might be expected of an identical arm’s length transaction, so long as the transaction is not part of an arrangement for the avoidance of tax.

The new rules will not apply to a disposal at less than market value by a substantial donor to a charity to which s587B ICTA 1988 (gifts of shares, securities and real property to charity) or section s257, TCGA 1992 (gifts to charities) applies.

Where a charity takes part in any one of these specified transactions that are not otherwise exempt, any payments made by the charity in connection with the transaction will be treated as noncharitable expenditure. Where the transaction is not on arm’s length terms any difference between the actual terms and arm’s length terms, so far as it favours the substantial donor, will be treated as non-charitable expenditure and the charity will have its tax relief restricted.

Comment: These measures do little more than tighten up existing rules. They do, however, signal HMRC’s determination to come down hard on what they perceive to be abuse, even where charities are involved.

7 Miscellaneous

7.1 Tax credits and childcare vouchers

As with many of the Chancellor’s previous Budgets he announced measures aimed at helping children and low income families. The tax credit regime rumbles on with the biggest uplifts in the child element of the Child Tax Credit (see the Appendix). Employer supported childcare, which can be delivered in childcare vouchers, is rising from £50 to £55 per week and there will be capital grants to help employers establish workplace nurseries.

Comment: Tax Credits are now firmly entrenched in our tax system and even those on above national average incomes are benefiting e.g. a family with income well in excess of £50,000 may be able to claim. However, worryingly measures such as childcare vouchers do not fit smoothly with tax credits and employees who wish to take up childcare vouchers need to consider carefully their tax credit position.

7.2 Child Trust Fund

This concept was introduced as a measure to encourage children to save. Any child born since 1 September 2002 will receive a voucher for £250 (£500 for families on low incomes) which has to be invested in a special long-term savings and investment account. Parents, family and friends can top this up each year to the value of £1,200. There is no tax to pay on any interest or gains made on this money.

The Budget announcement was that children eligible will receive a further £250 (or £500) at the age of 7.

Comment: It has already become clear that many who have received vouchers to put into a Child Trust Fund have not taken them out of the envelope and done anything purposeful with them, which suggests this idea hasn’t yet completely caught on. The other concern is that once a child reaches the age of 18 they can draw down from this account and take the funds out without limitation or restriction. Therefore rather than encouraging saving this may just end up being the down payment on a big 18th birthday bash!

7.3 Disclosure of tax avoidance scheme rules

In the unending drive of HMRC to close down tax avoidance schemes it has gone back to its original Finance Act 2004 disclosure rules and made some amendments. From 1 July 2006 the disclosure regime will be extended to cover not just financial products and employment products but all relevant income tax, corporation tax and capital gains tax schemes. To be disclosable the scheme must bear a ‘hallmark’ of avoidance. If it contains just one hallmark it will need to be reported to HMRC. The hallmarks are:

  • three ‘generic’ hallmarks which derive from the existing system of filters, which aim to sort out the disclosable from the non-disclosable (these will be confidentiality, premium fees and off-market terms);
  • two specific hallmarks which will be firstly schemes intended to create tax losses to offset income or capital gains tax; and secondly certain leasing schemes;
  • a hallmark that targets mass marketed tax products.

Comment: Despite signs that the disclosure of tax avoidance scheme rules have been hitting the mark, HMRC is convinced that some people are still finding ways of not disclosing plans which it wants to hear about. These new rules are an attempt to define the undefinable i.e. HMRC want us to tell it what it doesn’t know and that is often not easy to do, without knowing what it doesn’t know!

7.4 HMRC powers

HMRC is undertaking a major review of its powers which covers everything from a simple tax return enquiry, to serious fraud, powers of arrest and frontier work involving terrorism and smuggling. This review is likely to take a number of years. The Budget notes state that a consultation document will be issued shortly and this is likely to set out the timetable and framework for future change.

Comment: It is good to see no immediate changes to the powers of HMRC. It is only just celebrating its first anniversary of being one ‘big happy family’, joining together the Inland Revenue and Customs and Excise. The absence of any major statement in the Budget suggests that any proposals will feature in the Finance Bill 2007 cycle rather than the forthcoming Bill. This should give time for broad consultation on what could prove to be one of the significant tax issues of the future.

7.5 Reducing administrative burdens

Cutting administrative costs has been a major request from small businesses in particular. The Government announced in the Pre-Budget Report an initiative to try to reduce the administrative burdens of the tax system. The results of the project, which was undertaken by KPMG, have now been released. They show that the UK burden compares favourably with the Dutch and Danish equivalents, although it is admitted that the UK was coming from a different starting point when many burden-cutting measures had already been introduced.

Out of this derives two challenging targets which HMRC has committed itself to achieve. It will undertake to reduce the burden of dealing with forms and returns by at least 10% over five years. It will also undertake to reduce the time dealing with inspections by 10% over 3 years, with at least a 15% reduction in 5 years.

Comment: Any reduction in burdens on business can only be welcome and these two challenging targets are a step in the right direction. Cynics might argue that as HMRC has to reduce staff by over 12,500 it should be relatively easy to reduce the time spent on investigations!

However, another initiative was announced that will be potentially useful to small businesses. HMRC is launching a new Administrative Burdens Advisory Board. It will be an independent board chaired by the formidable de-regulation expert, Teresa Graham. This Board will be looking at all those issues which small businesses consistently explain take time and effort to deal with but are harder to quantify in terms of monetary cost.

Large businesses are not being forgotten though. There will be an initiative to improve the extent and collaboration of the relationship between large businesses and HMRC.

7.6 International Tax Enforcement Arrangements

The capacity of the UK’s powers has been extended to allow the UK to enter into international agreements for the exchange of information regarding both direct and indirect taxes. This will also stretch to mutual assistance in tax collection, again in respect of both direct and indirect taxes.

Comment: The arrangements do not increase the UK’s powers but do widen the scope in which they can be applied to include indirect, as well as direct, taxes.

7.7 Dormant Accounts of Holocaust Victims

Compensation payments made by foreign banks and building societies in relation to dormant accounts held by holocaust victims, or their heirs, will be exempt from tax. This exemption applies to payments made since 1996/1997 and covers payments of interest which should have been credited to the account and takes into account inflation during the period. In addition, any gain arising on the disposal of the right to receive payment will be exempt from CGT.

7.8 Olympic boost

In the run up to London hosting the Olympic Games in 2012, the company organising the Games is to be given exemption from corporation tax plus other tax-breaks.

The London Organising Committee of the Olympic Games Ltd will be exempt from corporation tax from 22 October 2004 (when it was incorporated). There will also be regulations enabling tax exemption from corporation tax, income tax and capital gains tax for the International Olympic Committee and non-UK resident competitors and support staff here temporarily for the Games.

Comment: It was no surprise to see the Chancellor jumping on the Olympic bandwagon and offering a further boost to the Games, this time in the form of tax-breaks. However, such incentives are not unusual from a country hosting the Games. 

Appendix – tax rates and allowances

Income tax personal and age-related allowances 2006/07 (£ per year)

2005/06

Change

2006/07

Personal allowance (age under 65)

4,895

(+140)

5,035

Personal allowance (age 65-74)

7,090

(+190)

7,280

Personal allowance (age 75 and over)

7,220

(+200)

7,420

Income limit for age-related allowances

19,500

(+600)

20,100

Married couple’s allowance* (aged less than 75 and born before 6 April 1935)

5,905

(+160)

6,065

Married couple’s allowance* (aged 75 and over)

5,975

(+160)

6,135

Married couple’s allowance* – minimum amount

2,280

(+70)

2,350

Blind person’s allowance

1,610

(+50)

1,660

*Married couple’s allowance given at the rate of 10 per cent

Income tax rates (£)

 

2005/06

Change

2006/07

Starting rate 10%

0 – 2,090

(+60)

0 - 2,150

Savings’ rate 20%*

2,091– 32,400

(+900)

2,151 - 33,300

Basic rate 22%

2,091 – 32,400

(+900)

2,151 - 33,300

Higher rate 40%**

32,401+

(+900)

33,301+

* Applies to non dividend investment income

** 32.5% for dividend income

National insurance contributions 2005/06

Item

2006/07

Lower earnings limit, primary Class 1

£84 per week

Upper earnings limit, primary Class 1

£645 per week

Primary threshold

£97 per week

Secondary threshold

£97 per week

Employees’ primary Class 1 rate

11% of £97.01 to £645 per week

1% above £645 per week

Employees’ contracted-out rebate

1.6%

Married women’s reduced rate

4.85% of £97.01 to £645 per week

1% above £645 per week

Employers’ secondary Class 1 rate

12.8% above £97 per week

Employers’ contracted-out rebate, salary-related schemes

3.5%

Employers’ contracted-out rebate, money-purchase schemes

1.0%

Class 2 rate

£2.10 per week

Class 2 small earnings exception

£4,465 per year

Item

2006/07

Special Class 2 rate for share fishermen

£2.75 per week

Special Class 2 rate for volunteer development workers

£4.20 per week

Class 3 rate

£7.55 per week

Class 4 lower profits limit

£5,035 per year

Class 4 upper profits limit

£33,540 per year

Class 4 rate

8% of £5,035 to £33,540 per year

1% above £33,540 per year

Capital gains tax annual exempt amount

 

2005/06

Change

2006/07

Individuals etc

8,500

(+300)

8,800

Most trustees:

4,250

(+150)

4,400

Inheritance tax threshold

275,000

(+10,000)

285,000

Pension scheme annual allowance

N/A

N/A

215,000

Pension scheme lifetime allowance

N/A

N/A

1,500,000

Working and child tax credits 2006/07

£ per year (unless stated)

2005/06

Change

2006/07

Working tax credit

     

Basic element

1,620

(+45)

1,665

Couple and lone parent element

1,595

(+45)

1,640

30 hour element

660

(+20)

680

Disabled worker element

2,165

(+60)

2,225

Severe disability element

920

(+25)

945

50+ return to work payment (16-29 hours)

1,110

(+30)

1,140

50+ return to work payment (30+ hours)

1,660

(+45)

1,705

Childcare element of the working tax credit

Maximum eligible cost for one child (per week)

175

(+0)

175

Maximum eligible cost for two or more children (per week)

300

(+0)

300

Percent of eligible costs covered

70

(+10)

80

Child tax credit

Family element

545

(+0)

545

Family element, baby addition

545

(+0)

545

£ per year (unless stated)

2005/06

Change

2006/07

Child element

1,690

(+75)

1,765

Disabled child element

2,285

(+65)

2,350

Severely disabled child element

920

(+25)

945

Income thresholds and withdrawal rates

First income threshold

5,220

(+0)

5,220

First withdrawal rate (percent)

37

(+0)

37

Second income threshold

50,000

(+0)

50,000

Second withdrawal rate (percent)

6.67

(+0)

6.67

First threshold for those entitled to child tax credit only

13,910

(+245)

14,115

Income disregard

2,500

(+22,500)

25,000

Child benefi t/guardian allowance rates 2006/07

£ per week

2005/06

Change

2006/07

Eldest/Only child

17.00

(+0.45)

17.45

Other children

11.40

(+0.30)

11.70

Eldest/Only child (lone parent rate)

17.55

(+0.00)

17.55

Guardian’s allowance

12.20

(+0.30)

12.50

Corporation tax on profi ts 2006/07

£ per week

2005/06

2006/07

Starting rate: zero

0 - 10,000

abolished

Marginal relief

10,001 - 50,000

N/A

Small companies’ rate: 19 per cent

50,001 - 300,000

0 - 300,000

Marginal relief

300,001 - 1,500,000

300,001 - 1,500,000

Main rate: 30 per cent

1,500,001 or more

1,500,001 or more

Non-corporate distribution rate

19%

N/A

The main rate of corporation tax for 2006–07 will be 30 per cent.

Stamp Taxes

Transfers of land and buildings (consideration paid) from 17 March 2005

Rate

Residential in disadvantaged areas

Residential outside disadvantaged areas

Non-residential

Value of total consideration

Zero

£0 - £150,000

£0 - £125,000

£0 - £150,000

1%

Over £150,000 - £250,000

Over £125,000 - £250,000

Over £150,000 - £250,000

3%

Over £250,000 - £500,000

Over £250,000 - £500,000

Over £250,000 - £500,000

4%

Over £500,000

Over £500,000

Over £500,000

New leases (lease duty)

Duty on the premium is the same as for transfers of land (except that special rules apply for premium where rent exceeds £600 annually). Duty on the rent is charged on the Net Present Value (NPV). A percent rate applies to the amount of NPV in excess of the threshold.

Rate

Net Present Value of rent

Residential

 

Non-residential

 

Slice of NPV

Zero

£0 - £125,000

 

£0 - £150,000

1%

Over £125,000

 

Over £150,000

The rate of stamp duty/stamp duty reserve tax on the transfer of shares and securities is unchanged at 0.5% for 2006/07.

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