Seven predictions for where the emergency Budget will hit your wealth

Friday, June 11, 2010 | Posted by: Fiona Cullinan
Categories: Business, Protecting your wealth | Tags: HNWIs, property, capital gains tax, CGT, pensions, IHT, tax avoidance, NIC, budget, planning, domicile, residence, private residence relief, PPR, NICs, National Insurance Contributions

How are your revenues, assets and tax planning likely to be affected in Chancellor George Osborne’s Budget on 22 June? We look at seven areas that will affect high net worth individuals…

1. National insurance (NI) and income tax – rise in personal allowance confirmed
A rise in personal allowance has already been confirmed, from £6,475 to £10,000 over the lifetime of this Parliament. Higher earners will feel little benefit, however, as those with incomes of more than £100,000 will no longer receive full personal allowances due to the changes introduced in April this year.

2. Capital gains tax (CGT) increase
CGT is due to increase on ‘non-business’ activities, hitting investors with share portfolios and those with a second home. The new CGT rate is to move in line with income tax, so it could go up to 40%, but the option of taxing up to the highest rate of 50% has not been ruled out.

We predict that the CGT rise will be introduced from April 2011, although a retrospective date (eg, backdated to 6 April 2010) or a change from 22 June is possible.

3. Property taxes
When it comes to property, the CGT increases mentioned above will be the main area of concern. The emergency Budget may also introduce changes to Private Residence Relief, which enables people to sell their only or main residence free of CGT. It is expected that George Osborne will look to tighten up the definition of a ‘main residence’ and reduce the opportunities to vary what counts as the main residence, therefore exposing second homeowners to a greater chance of a CGT charge.

The speculated VAT increase could hit the property sector hard, especially as it is expected to apply to both renovations and new builds.

In addition, the Chancellor may choose to reduce capital allowances in order to fund a possible corporation tax cut. If this goes ahead, property investors will not be able to recoup as much of their costs, therefore hitting their bottom line.

4. Non-domiciled (non-dom) individuals
Residence and domicile status can have a significant impact on an individual’s liability to UK income and CGT. This area gained widespread media coverage during the election campaign and the coalition has stated that it will review the taxation of non-doms.

Progress here will not be easy, however. Major changes were made to the taxation of non-domiciled individuals in the Finance Act 2008, introducing some of the most complex rules the UK tax legislation has seen to date, but the UK still lacks a statutory residence test to provide certainty on an individual’s status.

5. Inheritance tax
It is unlikely that there will be any change to the current inheritance tax (IHT) threshold of £325,000, much to the disappointment of many Tory backbenchers and their supporters who enthusiastically supported an earlier proposal to increase the nil rate band to £1 million.

We may see some restrictions to IHT. The current deemed domiciled rules bring a non-dom under the IHT net if they have been resident in the UK for 17 of the past 20 years. This could be shortened to the last seven out of nine years to align it with the test that is used for the remittance basis charge.

6. Tax avoidance and anti-avoidance measures
The Liberal Democrats’ manifesto had a clear message that they believe large revenues could be raised from clamping down on tax loopholes and tax avoidance schemes, so we predict that the Chancellor will set out quite clear messages on anti-avoidance measures. However, with detailed rules restricting aggressive tax planning already in place, there may not be a ‘pot of gold’ here to help bridge the deficit gap. Furthermore, HMRC is already operating on limited resources and thought will need to be given as to how it can enforce any new proposals.

7. Pensions
The coalition government has agreed to restore the link between the basic state pension and earnings. This was initially suggested in the Turner Commission 2005 and would be welcomed.

The coalition government could go further. It could look to implement many of the other reforms set out in this report, including increasing the state retirement age for men and women. It is also likely that the further pension reliefs will be taken away from high income earners, perhaps lowering the proposed threshold for tapering of higher rate relief, which is set at £150,000 of income and is due to apply from next April.

There are also already signs that the government will remove the rule to buy annuities at the age of 75.

Grant Thornton’s Head of Tax, Francesca Lagerberg, added:

‘The coalition government has been making substantial noises on fairness, so it is likely that this Budget will focus on families and low-income earners. So far, the government has not shown much sympathy for middle income or high earners and this Budget does not look to offer them any small respite. On the basis of election manifesto pledges, it’s Lib Dems 1 - Tories 0.’

The Emergency Budget will be announced at 12.30pm on 22 June. Bookmark this page to keep up to date with Grant Thornton’s analysis.

*Also, check out our Budget predictions for companies