Gordon Brown today held what is likely to be his last Budget which, true to form, included another pensions U-turn. It was a busier than usual Budget with plenty of wide sweeping announcements, although the most significant will not impact until at least April 2008.
| "Scrapping the 10% lower rate tax band and reducing the basic rate of tax from 22% to 20% from April 2008 are undoubtedly the headline grabbers." |
Scrapping the 10% lower rate tax band and reducing the basic rate of tax from 22% to 20% from April 2008 are undoubtedly the headline grabbers. There was some good news for higher rate taxpayers thanks to the higher rate band being lifted from its current £38,335 (including the personal allowance) to £43,000 by April 2009, although the National Insurance upper earnings limit will also be increased to this level, subjecting higher earning employees and self-employed individuals to more 11% and 8% NIC tax respectively.
Those over age 65 will also benefit from increased age-related personal income tax allowances. By 2011 the allowances will rise to £9,770 (currently £ 7,280) for those aged 65-74 and to £10,000 (currently £7.420) for those aged 75 and above.
Brown also plans to ease the Inheritance Tax (IHT) burden, a little, by raising the IHT nil rate band from its current level of £285,000 to £350,000 by April 2010. Nonetheless, the increase falls a long way short of compensating for the ravenous house price inflation of the last 10 years. Many owners of even modest properties, especially in the South East, will continue to be hit.
However, Brown may have set the wheels in motion for a valuable IHT perk (typically used by wealthier investors) to be scrapped. Currently, a number of shares quoted on the Alternative Investment Market (AiM) can, when held for two years, be entirely free from IHT and only subject to 10% tax on realised gains. This is because AiM is not a ‘Recognised Exchange’ for tax purposes. Once the 2007 Finance Bill receives Royal Assent (usually July), Brown will give HMRC the power to decide whether AiM is classed as a Recognised Exchange. HMRC could therefore remove the above benefits and also preclude AiM shares from being held in Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs).
There was little news for savers, except for the annual Individual Savings Account (ISA) allowance rising from £7,000 to £7,200 in April 2008. Within this, the cash component allowance will increase from £3,000 to £3,600, good news if you’re a fan of Cash ISAs. This change will coincide with the other changes already announced during last year’s Pre-Budget Report, notably the merging of PEPs into ISAs and the scrapping of the ‘Mini/Maxi’ ISA distinction.
Having already reduced the tax incentives enjoyed by VCTs, Brown has now heaped salt onto the wounds by tightening the qualification rules for the companies that may be held in both VCTs and Enterprise Investment Schemes (EIS). From 6 April 2007 ‘qualifying’ companies must have no more than 50 full-time employees and have raised no more than £2m via venture capital schemes in the 12 months ending on the date of the relevant investment. This will further dent VCT sales, which have already slumped from £775m during 2005/06 to just £110m over the current tax year to date. It is likely we will see future sales return to their 2003/04 levels of around £70 million.
| "A key announcement hidden away on the Budget small print is the abolition of Pension Term Assurance." |
A key announcement hidden away on the Budget small print is the abolition of Pension Term Assurance. In true Brown style this represents yet another pension U-turn. Tax relief will only continue to be available for those whose insurer had received the policy application before 14 December 2006 where the policy is in place before 6 April 2007. He also confirmed that while Alternatively Secured Pensions (ASP) will continue to be available for all, a penal tax will apply to those wishing to pass on their pension to future generations on death.
On a brighter note there’s potentially some good news if you own a ‘bricks & mortar’ property unit trust, such as New Star Property. Brown has suggested that these might enjoy a similar tax treatment to Real Estate Investment Trusts (REITs), which means you could benefit from tax-free income within pensions and ISAs. At present this income is taxed in a similar way to dividends. However, no news yet as to when these new rules might be introduced.
Finally, it was no surprise when brown announced that vehicle excise duty for the most polluting gas guzzlers will rise to £300 this year and £400 next. Expect second hand values of 4x4s to further soften.
In summary, although Brown has promised quite a lot, it’s only the bad news that is being implemented with haste.