The annual exempt amount rises, with indexation, from £7,500 to £7,700, with the trust exemption becoming £3,850. Rates are now tied completely to income and corporation tax rates, including the 34% rate applicable to trusts affecting all chargeable gains for trusts (not merely discretionary/accumulation trusts, as is the case for income).
But the big move in capital gains tax is in relation to taper relief for business assets.
A reminder of the general position here (bearing in mind that these rules do not affect disposals by companies).
Indexation relief was abolished with effect from 6 April 1998, although it continues to be available for assets owned on that date, up until April 1998. In exchange we get taper relief. Taper relief is available at different rates depending on whether we are dealing with business assets or non-business assets. The taper is applied to the amount of the gain, after indexation and other reliefs but before the annual exemption. The amount of taper depends on the length of the period of ownership, after 5 April 1998, when this was introduced (but see below).
Thus the tapering of gains for disposals after 6 April 2002 will now take place as follows:
- When these percentages are applied to the normal rate of capital gains tax (which tends to be, but is not always, 40%), the effective rate of tax comes down very rapidly to 10% for business assets; and to 24% very much less rapidly for non-business assets.
The change makes it even more important, if it can be achieved, that assets qualify as business assets. Extensions have already been announced, which means that most loan notes received in a company takeover will qualify (but of course the new rules mean that it is much more likely on an immediate disposal for cash that an owner will qualify for full relief in any event.) Information published during the last year makes it rather clearer what will qualify in terms of being a trading company - and it is fairly generous.
Employees will generally qualify in respect of shares in their own companies. But this will only apply for as long as they work for the company in question. This means that a decision on what to do with shares obtained from an employer is an important one on leaving, whether voluntarily or otherwise. Very broadly, the longer such shares are retained after the employment has come to an end, the lower the overall rate of taper relief which will eventually be obtained on a disposal. It may be possible to retain effective ownership, but the use of certain disposals which might also be useful in estate planning - such as to family trusts and the like.
There were in addition some changes to some technical rules, a welcome one being to allow some relief for personal losses against the gains attributed to some taxpayers from certain offshore trusts.
The nil rate band rises to £250,000, slightly ahead of inflation.
The usual threats of apocalyptic changes to IHT have produced the usual result - virtually nothing. There are two minor changes, one reducing the administrative requirements in relation to deeds of variation; and one reversing the effects of the decision in IRC v Melville, which opened up a large loophole in relation to capital gains tax on lifetime gifts to some trusts.
One other point to mention in this context relates to an announcement that the Government is to review the rules on residence and domicile. While this may have an impact beyond inheritance tax, it clearly will be important to all estate and other tax planning carried out in relation to individuals whose domicile is other than clearly in the United Kingdom.
Unlike inheritance tax, the threats in relation to some taxes were not empty. The attack on stamp duty avoidance is serious and may have severe effects. On the other hand, the avoidance in question can rarely be said to involve anything other than an attempt to avoid the tax which Parliament thought it was imposing. This is a huge subject, quite entitled to a separate article in its own right. The following are merely the highlights.
Perhaps surprisingly, there was no increase in stamp duty rates.
The main changes will come in two stages. The first is a virtually immediate assault on the most outright form of tax planning. This consists of a range of measures with virtually immediate effect, on which legislation will be included in Finance Act 2002. The measures are aimed at attempts to sell property-owning companies with the benefit of the 0.5% rate on shares after intra-group transfers; and at certain attempts to rely on transfers which, in English terms, “rest on contract”. There are also changes to the penalty regime affecting documents executed offshore but which are then brought into the UK.
The second raft of legislation is open for consultation and will (probably) lead to legislation in 2003. The Law Society Stamp Duty Sub-Committee is fully involved and a large number of meetings are to be held over this summer. Input from members would be especially welcome in connection with these proposed reforms - please send any comments to myself or to Stuart Drummond at the Law Society.
The apparent thrust of the second round of changes is to prevent entirely the use of company sales to reduce stamp duty on property. There are also to be reforms to the duty currently charged on leases and measures to anticipate electronic conveyancing. In effect, it seems that the tax will move from one on documents, capable of a wide range of perfectly legal avoidance, to one on transactions, in relation to which avoidance will at the very least be very much more difficult.
There are further changes - goodwill is removed from the charge to stamp duty with effect from 23 April 2002. This is very welcome - and with the retention of duty on shares may make the purchase of assets rather than shares more attractive in a number of cases where companies would otherwise be sold.
In a further relief that has been telegraphed in advance, stamp duty is to be abolished on non-residential properties in disadvantaged areas, as and when approval is gained for this as a state aid from the European Community. The areas are defined by postcode, but a new definition of “residential property” will be introduced.
The transfer of debts will also be removed from the charge, this time in “late 2003”. It is approaching the long-held aim of being restricted to shares and land.
It also seems that the current rules and practices on exchanges are to be revised again - so that duty will fall on both sides of the transaction, rather than on one only, if the transaction can be structured as a sale rather than an exchange.
Corporate and commercial matters
The Budget and Finance Bill contained a great deal of change in relation to corporate and commercial matters, quite apart from the “headline” changes to corporation tax dealt with under the basic changes above. As ever in the commercial field, the changes combine the very minor with the extremely important, but they involve a large amount of new legislation. The changes are so widespread that a mere list is probably appropriate:-
- A new regime for relief to companies for the costs of intellectual property, goodwill and other intangible assets. These complement the extending reliefs for this type of asset from stamp duty.
- Yet another reform of the regime for loan relationships, derivative contracts and FOREX gains and losses - a constant industry for some tax advisers and, I suspect, some civil servants!
- Restriction on individuals making deductions for certain manufactured payments;
- Relief for interest on certain asset-linked securities;
- An exemption for corporation tax on capital gains for the disposal of substantial shareholdings by companies. On the face of it, this looked to be an extremely important development. It may still be, but it is to be restricted to trading subsidiaries. Nevertheless, it may stimulate corporate activity in disposals held back by fear of extremely heavy tax charges.
- A rather obscure (at least at the moment) Community Investment Tax Credit, to encourage investment in so-called under-invested communities. This will apparently apply to both private and corporate investors
- New tax credits for research and development expenditure. This will be of more interest perhaps to accountants than ourselves, but it forms a new element in the purchase of companies to be assessed as having a tax value - and perhaps to be warranted or otherwise, depending on which side we are acting.
- Changes to the rules on stock valuation on the transfer of a business;
- Changes in the taxation of foreign companies operating in the UK through branches. This will bring such treatment more into line with that accorded to subsidiaries - and is expected to hit financial subsidiaries especially.
- Changes to the tax regime affecting British qualifying films. The reliefs are to be restricted to “films intended for theatrical release at the commercial cinema”. (presumably prior to this change, British films were intended for release straight to the front room via the video, or for release straight to the cutting room bin as being irredeemably awful;
- Changes to the fuel scale charge for employees, from 2003-04, in line with those now affecting the charge for employer-provided cars;
- Confirmation that employer-subsidised bus services will escape tax;
- Reforms to the rules on the change of accounting basis;
- Further potential extensions to the regime for controlled foreign companies;
- Further relaxations on the rules for deducting tax at source from interest and royalty payments. This will extend to payments to tax-exempt bodies and to foreign entities benefiting from double tax relief; and to certain financial dealers;
- Consultation on the offshore funds tax regime;
- Changes for life companies and friendly societies investing in venture capital partnerships;
- Moves towards compulsory electronic filing of employer PAYE returns;
- Changes to the operation of the Construction Industry Deduction Scheme, improving set-off of deductions against tax liabilities;
- Preservation of tax reliefs on the merger or winding up of Venture Capital Trusts;
- Preservation of relief on life insurance policies following assignation;
- Denial of tax relief for bribes. Sadly, this is nothing to do with Indian businessmen, Romanian steelworks or Formula 1 racing. It simply ensures that the payment of bribes abroad, if such would constitute a crime in the UK, will not qualify for tax relief against UK tax.
- Prevention of double tax relief on certain Lloyd’s losses;
- Extensions of mutual assistance in recovery of tax debts in relation to taxpayers who have debts elsewhere in the EU and assets in the UK, or vice versa.
Value added tax
The registration limit rises to £55,000, with deregistration possible at £53,000
There is to be an optional flat rate scheme, which may cut administration for a large number of businesses. The first turnover limit will be £100,000, but this will rise to £150,000. However, the flat rates have been set (in my opinion) at rather a greedy level and administrative convenience may be balanced by financial cost. The model of the flat rate scheme for farmers is not particularly encouraging. But it IS very simple and it may be that take-up.
Automatic penalties are removed from taxpayers who are late with their VAT payments. Customs will offer advice and encouragement instead, which may or may not be considered an improvement
There is to be simplification of the rules on bad debt relief. In particular the claimant will no longer have to write to his customers; and these customers will require to reverse their input tax claims whether or not bad debt relief is being claimed by the supplier - so the compliance burden is being shifted from the unfortunate creditor to the recalcitrant debtor.
There are also reforms to the annual accounting scheme and there is to be introduced a scheme to allow approved importers to delay accounting for VAT.
There are important extensions to the reliefs available for charities and supplies in relation to certain residential buildings, but also an extension to the anti-avoidance rules on partial exemption, which will particularly affect land transactions for exempt and partially exempt businesses.
A number of more or less modest changes were announced to the charities regime. Perhaps the most important is a new tax relief available for gifts of land or buildings to charities. There are also changes to the mechanism of obtaining relief; and provisions for taxpayers to direct their higher rate relief to the charity, to accompany the basic rate relief obtained direct from the Inland Revenue. Such taxpayers will also be able to carry back the 18% higher rate relief to the previous tax year.
There are changes to increase the availability of charity reliefs to community amateur sports clubs, which may have great relevance to organisations which are essentially akin to charities, but which until this change find it extremely difficult to obtain the tax advantages of charities.
As seems to be increasingly common, there were large numbers of other changes which at least appeared at the same time as the Budget. Some were of more importance than others to solicitors and their clients. Some dealt with the obscure backwaters of tax - or did not deal with tax at all. But in any event they include announcements and confirmations affecting:
- The training of employees;
- The Working Tax Credit;
- The National Minimum Wage;
- The New Deal and other measures affecting the unemployed;
- Extension of the childcare tax credit for those using childcare in their own homes;
- Pensions, including the forthcoming Pensions Credit, the basic state pension and the winter fuel payment;
- The abolition of Bingo duty;
- Freezing of duties on spirits, wines and beers, with the exception of “spirits-based coolers” (A kind of Aftershock from the Budget, but for those drinking the stuff, paying the tax should be a Breeze(r);
- Increase in tobacco duties and further moves on smuggling;
- Reduction in beer duty for small brewers; and a small reduction in duty on cider;
- Freezing of duties on road fuels, with planned exemptions for “cleaner” fuels;
- Favouring of “cleaner” vehicles in Vehicle Excise Duty;
- New moves to deal with trading in illicit spirits and rebated oils;
- Exemptions from the climate change levy for combined heat and power electricity and coal mine methane;
- Enhanced capital allowances for further energy-saving technologies;
- The world’s first emissions trading scheme;
- The introduction of Aggregates Levy from April 2002.
There are various changes to the original proposals, including an extension of exemptions for extractions from agricultural or farming land; an extension to uncrushed rock; and various technical changes;
- Consultation on recycled oils;
- Monitoring of pesticide use, with a threat of a pesticide tax lurking in the background;
- Warnings of further rises in Landfill Tax;
- Freezing of Air Passenger Duty;
- Threat of a tax on incineration - which might be a very difficult tax to freeze in future.
Alan Barr is a partner in Brodies WS and Director of the Legal Practice Unit at the University of Edinburgh
In this issue
- Substantial preparation can bring reward
- End of an era
- Benefits of referral system hold true
- Resolving parking disputes out of court
- Keeper’s corner
- Take care with standard phrases
- Scottish Solicitors’ Discipline Tribunal
- What price the core values?
- Releasing talent through solicitor advocacy
- No, Minister
- Website reviews
- Serious attack on stamp duty avoidance
- Plain speaking
- Family funded purchases
- In practice
- Book reviews