As the summer wedding season is in full swing, the vision of Gordon Brown doing the hokey-cokey is perhaps a disturbing one. But that is what he is doing with the tax system. He puts the tax rates up, he puts the tax rates down; he changes tax reliefs and moves the rules around; he doubles legislation and we’re all confused; but that’s what it’s all about. Before my readers burst into the appropriate chorus, you should both be aware that this is serious.
One can find in this year’s Budget numerous examples of things being changed back to where they were; or more commonly, to nearly where they were, but with just enough difference to make it that bit more difficult to understand or explain. Examples include the rates of corporation tax; the rates of capital allowances for small and medium sized enterprises; the rates of relief for venture capital trusts; and tax relief on computers for home use.
However, the Chancellor was not content to do the hokey-cokey with tax measures from past years – he was able to shake it all about even within this year’s changes. The instant reaction to the Budget was that it was rather a dull affair, without much in the way of substantial or substantive changes. That was before the impact of the proposed changes to inheritance tax on trusts really sank in. These changes will have a very significant impact on a very wide range of solicitors and their clients.
Protests and results
The initial version of the proposed changes was summarised in “The Taxman Cometh (Again)”, Journal, May, 22. Rarely has there been such a concerted protest effort by such a wide range of professional bodies (in which the Law Society of Scotland played a full part). For once, the protests appear to have had some effect, and a number of amendments were introduced to the Finance Bill at committee stage. However, campaigning continues and it is by no means impossible that further changes will be introduced before the bill becomes law (albeit retrospective law in many cases, mostly backdated to Budget day). For this reason, the changes to trusts will be dealt with in a later issue.
Other words used about the Budget were “neutral” and “consolidating”. One might almost think that there was nothing there to be dealt with. This happy notion was soon removed by consideration of the additional Budget documentation (also known as the “small print”. This amounted to more than 1,000 pages; and lest anyone think that this verbiage consisted mainly of mere puffery and statistics (although there was plenty of both), it was soon followed by a Finance Bill of more than 400 pages, adding another 180 sections and 26 schedules to our groaning tax legislation table.
These days, Budgets deal with more than taxation. There is no space here to cover some of the non-tax measures mentioned, but one announcement is so beyond satire as to demand a mention. This was the establishment of the Administrative Burden Advisory Board – an administrative quango to advise on the reduction of administration. Given what is said above, it almost beggars belief that in direct relation to taxation there is a promise from the now combined Revenue and Customs of “measures to reduce further burdens on business, including new commitments… to reduce the administrative burden of the tax system”. A start should presumably be made in some imminent century.
The basics (and a bit beyond)
Rates and allowances for income tax, capital gains tax, inheritance tax, corporation tax and national insurance are set out in the tables on the right.
Most of these changes were telegraphed well in advance, in the pre-Budget report in December. Fiscal drag continues to exert its pressures – more and more taxpayers are going to be dragged into the 40% rate. This is perhaps particularly noticeable this year, as the rise in the basic rate band falls below £1,000 for the first time in a few years; but the basic personal allowance is now above £5,000 at long last (which is still well above the standard retirement pension, of course).
Those paying income and capital gains tax at 40% now include all trusts (unless they are truly “look-through” for the purposes of income tax).
The fundamental change to the pensions regime is worth mentioning again. The pensions cap has now been abolished and replaced with two controls on tax-efficient pension savings – the annual allowance (starting at £215,000 for 2006-07) and the lifetime allowance (starting at £1,500,000 for 2006-07).
Capital gains tax
The capital gains tax annual exempt amount is increased in line with statutory indexation to £8,800 for the tax year 2006-07 for individuals, personal representatives of deceased persons and trustees of certain settlements for the disabled, with half this amount available for other trusts. Planning is still available to maximise the use of this allowance, available to every individual – but there are restrictions in the settlements rules on attempts to exploit the allowance excessively.
The capital gains tax rules on trusts are changed quite significantly in two contexts – in relation to the rules on inheritance tax and in relation to the essentially anti-avoidance rules on settlements. Both will be dealt with in the next part of this article.
But yet again there were no fundamental changes to this complex tax. The only other change of significance was an anti-avoidance change to the “bed and breakfasting” rules (which identify shares sold with any acquired in the succeeding 30 days), to counter tax avoidance schemes which exploit these rules.
The tax remains a vital one to consider in relation to capital disposals. It raises relatively little money for the Government, but is presumably needed to prevent widespread attempts to convert income to capital.
The inheritance tax threshold is increased by more than statutory indexation to £285,000 for 2006-07 and the increases for the three succeeding years have now been fixed at £300,000 for 2007-08, the arithmetically unfriendly £312,000 for 2008-09 and £325,000 for 2009-10.
It is perhaps worth mentioning that the proportion of estates affected when the current Government came into office was nearer 3%; and the overall tax raised has quadrupled in the intervening years. This is a trend which may continue if the trust changes are anything to go by. The need for the Government to raise funds from other than the basic and higher rates of income tax continues.
As announced in the Pre-Budget Report in December 2005, the non-corporate distribution and starting rates will be replaced with a new single banding for small companies set at the existing small companies’ rate. The small companies’ rate will therefore apply to companies with taxable profits between £0 and £300,000, and will be 19% in 2006-07. The corporation tax main rate for 2007-08 has also been fixed at 30%. There is a marginal relief for companies with profits between £300,000 and £1,500,000. The small companies’ rate and marginal relief do not apply to close investment holding properties.
In effect, this represents a very large increase in corporation tax for many thousands of companies – and is also indicative of the incessant tinkering with the absolute basics of the system. The government seemed surprised that a large number of businesses moved to corporate form following the introduction of zero and starting rates; and the press release on this measure added insult to injury by suggesting that this change was a simplification measure. This is simplification in the same sense that the guillotine simplifies one’s choice of hats.
Stamp duty land tax
The starting threshold for residential stamp duty was increased to £125,000 from 23 March 2006. Other rates and thresholds remained unchanged, including the £150,000 residential threshold in disadvantaged areas.
Of course the basics of SDLT continue to cause enormous practical and administrative problems. Once one moves beyond basic purchases and some new leases (and even then, sometimes), there is great difficulty not only in working out what the tax should be, but also in completing the forms and especially in getting the certificate back.
However, the Budget included a range of possible improvements. These came under the general heading of deregulation.
The first set of reforms takes certain features of a number of transactions out of being treated as “chargeable consideration”. These include:
(a) a gift of property where the donee agrees or is required to pay CGT or IHT arising on the gift;
(b) the payment of landlord’s reasonable costs on the grant, variation or termination of a lease (but not in relation to similar costs on an assignation); and
(c) an agreement by an agricultural tenant to assign entitlement to the single farm payment to the landlord on termination of the tenancy. (This last does not make clear the general treatment of transfers of SFP, which remains a matter of some doubt.)
The next set of changes relate to partnerships.
(a) The charge on the transfers of interests in a partnership will be removed for all partnerships whose main activity is the carrying on of a trade (other than a trade of dealing in or developing land) or a profession. (This is an extremely welcome change, particularly for the agricultural sector.)
(b) Two potential double charges to SDLT on partnership transactions will be removed.
The rules on variations in rent will be simplified. Basically, charges on rent increases will be limited to the first five years of a lease, with increases beyond that only being caught by a much simplified (and less demanding) set of rules on “abnormal increases” in rent.
The treatment of leases which are “backdated” and expressed to commence immediately after the expiry of a former lease, will be simplified and clarified. This is particularly welcome and discussions continue between HMRC and the Law Society of Scotland to try to ensure that proper attention is paid to different rules and practices which apply in Scotland as compared to the rest of the UK.
The rules for notifying assignations of leases will be clarified and the requirement to notify removed in some cases.
There will also be changes to ensure that certain movements within a single trust fund do not attract a charge to SDLT.
Some changes are also being made to the SDLT treatment of so-called alternative finance arrangements (Islamic mortgages). These reliefs will be extended to all persons, allowing parity of stamp duty land tax treatment to companies, clubs, trustees etc who wish to use of such alternative financing products. (It now seems that such entities can be deemed to have religious sensibilities!)
With a transitional provision, “seeding relief” for new unit trusts will be withdrawn. There will now be a stamp duty land tax charge on the transfer of property into a unit trust in consideration of the issue of units, by reference to the market value of the land and buildings transferred.
This is certainly an anti-avoidance measure, which prevents a clear exploitation of a relief being used for purposes other than those for which it was intended. As is commonly the case, the withdrawal will also catch “innocent”, genuine unit trusts. But such movements to and from reliefs being available are all too typical of the constant battle between HMRC and tax advisers. As stamp taxes are now such significant providers of tax income, this battle can only continue for the foreseeable future.
Alan R Barr, Brodies LLP and the University of Edinburgh
NB. To view tables, please download the low resolution PDF of The Journal from our library.
In this issue
- Challenging times
- A block on service
- Revving up for debate
- LLB confidential
- Clean break under attack
- The hokey-cokey Chancellor
- Switching channels
- The Chancellor gets it REIT
- Executries sponsored feature
- The EU and the criminal
- Case for the defence
- To act or not to act... that is the question!
- A summary matter
- Ireland 4, Italy 0
- The route ahead
- Scottish Solicitors Discipline Tribunal
- Website reviews
- Book reviews
- Is that burden dead yet?