Alastair Darling's first Budget contains few surprises and largely reprises measures we already knew about. A summary of some of the key measures announced on 12 March 2008 is set out below.
The corporation tax and capital gains tax rate changes are going ahead as is the £30,000 tax on non-doms. However, both the introduction of measures to prevent the shifting of income between spouses and "principles-based" legislation to counter avoidance on financial products is to be delayed for a year. A positive is the announcement of a review looking at how to simplify corporation tax returns and calculations for small companies.
Key items of interest to the property sector were: the introduction of tax transparent property authorised investment funds which offer an open ended alternative to REITS; details of the changes to capital allowances previously announced; closure of certain Stamp Duty Land Tax (SDLT) planning schemes using group relief or "Sharia lending"; relaxation of the SDLT provisions affecting property funds structured as partnership; and changes to the option to tax VAT regime.
Companies
In his 2007 Budget, Gordon Brown had announced a reduction in the main rate of corporation tax from 30% to 28%, but also a staged increase in the small companies' rate from 19% to 22%. Despite calls from the Shadow Chancellor, George Osborne, to cut the main rate of corporation tax even further and scrap the increases in the small companies' rate, the Chancellor confirmed that the original changes will be going ahead.
Capital Allowances
To fund these reductions, Gordon Brown had announced inroads into the capital allowances system. The new Chancellor has confirmed that industrial buildings allowances are to be phased out and plant and machinery allowances reduced from 25% to 20%, with items integral to a building only qualifying for a 10% rate. Items that are to be treated as integral to the building are electrical systems including lighting, cold water systems, heating and air conditioning systems (including hot water heating systems), lifts, escalators, moving walkways, external solar shading and active facades.
Partly to compensate for this chipping away at capital allowances, an annual investment allowance will apply to the first £50,000 of expenditure on plant and machinery from 01 April 2008, on which 100% allowances will be given. This will apply even to items which would only qualify for the 10% rate.
In line with the Government's green agenda, certain energy and water saving equipment can qualify for 100% allowances. Where such allowances create a loss in a company, it will be possible to claim a cash sum for the loss at a rate of 19%, subject to a maximum of £250,000 or the amount of the company's PAYE/NIC contributions, whichever is greater.
Capital Gains Tax (CGT)
The Chancellor confirmed that the major changes to CGT announced in his October 2007 Pre-Budget Report will go ahead. From 06 April 2008, there will be a flat rate of 18% and taper relief (which could reduce the effective rate of tax to 10%) will be abolished. However, the new entrepreneurs' relief preserves the 10% rate (up to a lifetime limit of £1 million) for individuals selling their businesses or selling shares in trading companies that they work for and in which they hold at least 5% of the shares.
Non-doms
Also going ahead is the £30,000 charge for non-doms who have been in the UK for more than seven years and want to continue to be taxed on foreign income and gains only when remitted to the UK. But, there are now exemptions for children and those with less than £2,000 of foreign income. What the government considered to be loopholes in the remittance basis allowing income and gains to be remitted without tax being paid will also be closed down and personal allowances will no longer be available to individuals taxed on this basis.
Residence
In the Pre-Budget Report, the Chancellor had announced that days of arrival and departure would be counted as days in the UK when determining whether an individual was resident in the UK for tax purposes. However, there has been something of a climbdown with only a day in which an individual is here at midnight counting. So, if an individual flies into the UK on Monday and arrives before midnight, Monday will count as a day in the UK while if an individual leaves the UK just before midnight on Monday, Monday will not count as a day in the UK.
Tax Incentives
The enterprise investment scheme offers tax incentives for investment in small, higher risk, trading companies and is to be made somewhat more attractive by raising the limit on an investment eligible for offset against an individual's income tax bill to £500,000. On a similar note, the limit on options that may be granted under the enterprise management incentive scheme will be raised to £120,000 – not that this will compensate for the increase in CGT. In both cases, companies involved in ship building coal and steel production will no longer qualify.
Property Authorised Investment Fund (PAIFs)
From 06 April an open ended investment company that meets certain criteria may elect to be treated as a PAIF, the income of which will be taxed at the investor level rather than within the fund (capital gains are already exempt). Conditions for PAIF treatment include genuine diversity of ownership – the shares must be publicly available; at least 60% of the business must be direct or indirect property investment (e.g. through a REIT); and there are restrictions on the holdings of corporate investors as well as on the type and amount of loan financing available. PAIFs will offer an open ended alternative to REITS and the criteria and restrictions which apply are similar to those applying to REITS. As with REITS they will not be suitable for smaller closely held funds.
International
The rules that enable non-residents to appoint UK investment managers without exposing the non-resident to UK tax will be simplified.
A gain on selling an interest in an offshore fund is taxed as income and not capital, unless the fund has distributed its income so that it can be certified as a "distributing fund". In future, a fund will be able to be certified as a distributing fund if it reports its income without actually distributing it and the UK investors then pay tax on the reported income. If UK funds invest in offshore funds, they will now be able to pass the income charge on disposals onto their investors.
For UK individuals investing in foreign shares, their tax treatment has up to now been taxed less favourably than an investment in UK shares. A tax credit against the income tax liability in respect of the dividends was available on UK shares but not foreign shares. This credit will now be available on foreign shares, subject to the condition for investors who own more than 10% of the shares in the foreign company that the foreign company pays tax equivalent to UK corporation tax on its profits.
SDLT
Two more SDLT loopholes have been closed. First, a further condition has been added to the relief for alternative finance (Sharia lending). There must be no arrangements for a change in control of the bank's subsidiary which acquires the property. This is to prevent the perceived abuse of the relief in normal commercial property transactions. Secondly, a further circumstance in which group relief will be clawed back is where, within three years, both the vendor leaves the group and there is a change of control of the original group. If only the vendor leaves the group, group relief will continue to be available.
As previously announced there will be a retrospective change to the partnership rules negating the effect of some of last years changes for property investment partnerships. This will remove the charge which would have arisen on a change in partnership shares even when no consideration passed and there was no connection between the partners. This change is to benefit property funds structured as partnerships who were unintentionally hit by last year's changes.
On the plus side, alternative finance investment bonds ("sukuk") will be tradeable free of stamp duty.
VAT
The turnover threshold for registration is increased from £64,000 to £67,000 from 01 April 2008. A number of changes to the option to tax provisions will be introduced effective from 01 June. The most significant will be the ability to revoke an option to tax after twenty years. The earliest date this will be possible is 01 August 2008, being the twentieth anniversary of the introduction of the option to tax. A number of further minor changes to "improve practical administration" will be made.
Anti-Avoidance
The customary list of anti-avoidance announcements includes measures against leasing schemes; schemes diverting income to a foreign partnership comprising offshore trustees which seek to rely on a double tax treaty to prevent the UK taxing the income; schemes converting taxable interest into a non-taxable returns; and schemes to circumvent the UK anti-tax haven rules.
www.mishcon.comThis article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.
