Summary of Changes Affecting Private Individuals
This may well be Chancellor Alistair Darling’s last Budget, no matter what the outcome of the election in May. You have to feel some sympathy for him. Knowing that a Budget which does not rein in public expenditure will be seen as a vote-buying exercise and one that does will be portrayed as endangering what is clearly a very fragile recovery, he deftly set the political agenda by delivering a Budget which will probably not be welcomed by high earners or big business, but which does contain significant sweeteners for the less well off and for small businesses.
This bulletin looks at the most important changes announced by the Chancellor which will affect individuals. Many of the changes were announced in the Chancellor’s Pre-Budget statement last autumn. Here we are concentrating on what is new and particularly on those changes which may affect clients adversely if action is not taken promptly.
Income Tax
There were few significant changes in the Budget which had not been announced in the Pre-Budget statement last autumn. The individual personal allowance has, as expected, been frozen.
The new 50 per cent tax band begins on 6 April. If your income for 2009/10 exceeds £150,000, you will pay 50 per cent in income tax on the excess. Personal allowances will be phased out gradually for those earning over £100,000. Pension tax relief was not affected, with the Chancellor sticking to his plans.
ISAs
The ISA limit is being raised from £7,200 to £10,200 for 2010/11 and will increase each year after that in line with inflation.
Offshore Tax Evasion
Following a series of ‘disclosure windows’ for offshore tax evaders, these have now slammed shut. The Chancellor has announced three new tax disclosure arrangements between HM Revenue and Customs (HMRC) and tax haven countries and tax penalties for offshore tax evasion are effectively being increased by 50 per cent. Tax evaders who get caught may now have to pay a penalty of up to 200 per cent of the tax avoided.
Use of Tax Losses
The temporary extension of trading loss carry-back from one to three years for losses up to £50,000 continues for the 2008/09 and 2009/10 tax years for unincorporated businesses.
Pensions
You are reminded that restriction of higher-rate tax relief comes in fully next tax year for high earners: a review of you pension arrangements may be in order.
Losses Due to Financial Services Act Regulated Products
Anomalies in tax treatment can arise where compensation is paid to policy holders etc. as a result of the operation of the Financial Services Compensation Scheme. Tax law is being altered to ensure that compensation scheme payments are treated as if they were the ‘normal return’ of the investment concerned.
Capital Losses on Insurance etc. Policies Held as Investments
The Government is to legislate to improve the availability of ‘life assurance deficiency relief’, the practical effect of which is that people who have lost money on policies held as investments will benefit from reduced tax at the higher and dividend rate.
Inheritance Tax (IHT)
Threshold Frozen
The IHT threshold, which was planned to be increased to £350,000, has been frozen – for four years – at £325,000. This is a rate which traps those with relatively modest estates: if you haven’t done an IHT planning exercise, now is the time to start.
Anti-Avoidance – DOTAS
For some years it has been necessary to inform HMRC, through the Disclosure of Tax Avoidance Schemes (DOTAS), if you are undertaking some forms of tax avoidance. Over the summer, the Government is to undertake a review to see how IHT tax planning can be brought into the DOTAS regime.
Miscellaneous
Tobacco Smuggling etc.
HMRC’s efforts to prevent tobacco smuggling have always been hampered by the fact that if they receive delivery of a packet from a postal carrier and this is suspected to contain smuggled goods, HMRC were required to write to the addressee inviting them to attend the opening of the packet. This requirement is being removed. It remains to be seen what the results of this will be.
Working Tax Credits for the Over 60s
From 6 April 2011, people aged 60 and over will qualify for Working Tax Credits if they work at least 16 hours a week. Currently, those aged 60 and over qualify for Working Tax Credits if:
- they work 30 hours or more a week;
- they work 16 hours or more a week and they have dependent children or qualify for the disability element; or
- they work 16 hours or more and they are returning to work after being on certain benefits for six months or more (only available to the over 50s).
Property
The Chancellor announced that he is to double the stamp duty threshold to £250,000 for first time buyers with immediate effect (from midnight tonight). In addition, the rate of stamp duty on homes over £1 million will increase from 4 to 5 per cent.
Benefits
Housing benefit is to be cut for those in expensive properties.
If any of the items in this bulletin apply to you, please get in touch. The end of the tax year is 5 April for individuals.