Will Alistair Darling Make You Pay More Tax?

Those of you eagerly awaiting (!?!) the recent pre-budget report will have been few in number but well rewarded with a few sweeping changes altering Inheritance Tax, Capital Gains Tax and some Husband and Wife arrangements. For those without a full understanding of tax legislation and are a little more sceptical of the announcements, what does that mean in the real world .

Inheritance Tax

First the good news - much noise has been made about a relaxation in Inheritance Tax rules. This measure is of course in no-way influenced by the Conservative's announcement the week before that they would raise the nil-rate band to £1m.

So it avoids the need for a will then? No, not really . use of my 'anti-propaganda spectacles' quickly shows that there has not really been a relaxation but more of a change. The reality is it may assist those who have no formal will, but if your estate is anywhere near £300,000 there really is no substitute for smart inheritance tax planning to ensure your hard-earned assets are better passed to other intended beneficiaries such as grandchildren etc.

Leading on from the . errrm, good news; the bad news.

Clinic Freehold, Goodwill and other Business Assets

If you are selling a 'business asset' (e.g. your clinic freehold, the goodwill in your business or another premises you are letting out to a business) you could end up paying 8% more tax. (It doesn't really matter whether you are a higher-rate or basic-rate taxpayer). For a clinic worth, say, £400,000, that is around £32,000 in additional tax! Under intended rules (and I'll come on to 'intended' in a minute) the legislation changes for any assets sold on or after 6th April 2008. I suspect any tax adviser worth his salt is currently attempting to concoct schemes that artificially crystallise a capital gain before that date. However there are obstacles to such a plan and in my opinion should only be considered as an acceleration to a plan you were already thinking of, such as placing your clinic into a Self Invested Personal Pension. It seems to me to be a further move to extract a few more percentage points of tax out of the entrepreneur.
 
One word of warning. As you can see there are particularly significant tax opportunities to realise capital gains on business assets before 6th April 2008. The trouble is, the pre-budget report announces the Chancellor's intentions only, and the rules will not actually be written into the Finance Act until mid-2008. So any action should be undertaken with the awareness that legislation may be subject to delay and/or amendment. 

Incorporation

The above proposed changes naturally switch our perception of Limited Companies. Suffice to say the amount of tax you will pay over the life of your business, from inception up to and including the sale, will be more than before! At the same time, one of the major adverse factors to incorporating (being the appreciation of goodwill over a number of years) and one of the major advantages (sale of your goodwill to the company) have been largely removed by the intended revision of the rules. So, on the whole, we are now left with modest tax advantages to incorporating. We may however, see an increase in incorporations before 5th April as a last gasp effort to obtain some of the advantages before they are removed.

'Buy-to-Let' Properties and other Personal Assets

If you have some buy-to let properties and are a little disillusioned with their current financial performance, the story is a little rosier (. just for a moment though!). You have just been given an incentive to sell your portfolio as you no longer have to wait until you have owned the property for ten years to obtain maximum taxation reliefs. Instead of an effective tax rate of 24% after ten years you can now obtain a flat-rate of 18% after 6th April. Can you think of anyone who might be interested in this.? Without scaremongering, one can only surmise what might happen to the UK property economy should a number of buy-to-let properties appear on the market around April/May 2008. Nice one guys.

 
Who the Hell are Arctic Systems?
 
Back many moons ago when Normant Lamont was chancellor he introduced the principles of independent taxation such that a husband and wife were no longer taxed as one. Move forward 20-odd years and double the number of pages in the Finance Act, and the taxpayer now spends much time and money getting his advisers to minimise his or her tax liability down to the kind of levels it was at before Norman Lamont. The basics of one such scheme is to take the income of one fee-earner and share it between two by using a tax favourable limited company.

Such income shifting "runs counter to the principle of independent taxation" said some representative of the Treasury. Accountants say shrewd tax planning is being outlawed.

So what does this mean for you? Recently the House of Lords have deemed a specific case to be legal (and specific circumstances are crucial), however, if you are in an arrangement where a non fee-earner extracts income you may be affected. Speak to your accountant about this issue and I suspect you will receive the standard non-committal opinion to 'be careful'. The truth is the Revenue have not issued much resulting guidance on the above and it is all a bit sketchy at the moment. Not doubt it will become apparent with time and the more sceptical may believe that legislation will be re-written to suit their intentions.

.and finally,
 
a little gem to leave you feeling warm inside. After 10 years of sweeping the treatment of non-domiciled individuals under the carpet - would you be surprised to know that only a handful of individuals declare income greater than £1m on their tax returns?! Legislation will be introduced next year to charge non-domiciled individuals residing in the UK, such that once they have been here for 7 years they will be obliged to pay an additional annual tax charge of £30k. This measure is of course in no-way influenced by the Conservative's announcement the week before that they would charge £25,000 to such individuals.

I cannot even begin to think how Roman Abramovich will budget for this!