Rawlison Butler LLP's Tax, Trust and Probate Team, looks at the possible tax implications following the General Election.
The General Election is over, the dealing done, and we now have our first coalition Government in some 70 years. So, what does this all mean for the taxes that we all have to pay? Whatever the promises made in their party manifestos, David Cameron has made it clear that the future direction of his Government will involve compromise. We were also warned prior to the election that the inevitable spending cuts would be painful for many.
It seems clear that more wealthy persons are going to pay a heavy price as the new administration attempts to deal with Britain’s public finances; from the announcements so far, it is they who will bear the brunt of tax rises. We have an emergency Budget very soon, so we will not have long to wait to find out the details.
The first, and perhaps most headline-grabbing tax rise being commented upon is that the 1p National Insurance increase will still apply for workers, although it is being scrapped for employers. Despite this clear tax hit for all workers, the Government has also made it clear that an income tax threshold of £10,000 before income tax becomes payable is also a target.
It is likely that the first Budget will include a significant increase in the lower threshold at which Income Tax becomes payable (currently £6,475). This will help lower and middle income tax payers significantly, although this will be offset to some extent by the National Insurance increase. It is also likely that some form of tax break for married couples will also be brought in, but to what extent this is watered down from the original proposals, or when it is brought in, remains to be seen.
Business owners, however, will be pleased that the Conservative pledge to cancel the National Insurance rise for employers (called the “jobs tax” by the Conservatives during the Election campaign) has survived the coalition negotiations.
During the election campaign, none of the three main political parties would be drawn on the question of an increase in the rate of VAT from its current 17.5%. Even today, following the announcements about the coalition plans and proposals, perhaps worryingly, there appears to be no mention of VAT whatsoever. We shall have to wait and see whether an increase arises in the Budget, but if it does, whilst the printed and broadcast media will no doubt be very animated over the issue, it really should come as no surprise.
The pledge from the new Government is to cut £6billion from non-front line services, However, given the size of the country’s financial deficit, this really is a drop in the ocean, and, if as they say “tough times are ahead”, an increase in VAT may well be on the cards.
Capital Gains Tax rates are certainly going to see a large increase. Currently at a low rate of 18% (10% Entrepreneurs Relief), the Government has already indicated that a “substantial increase” is going to follow. This could see the CGT rate increase in line with the Inheritance Tax rate of 40%, or even to the top rate of tax of 50%. Under the previous Conservative government, CGT was payable at an individual’s top rate of income tax – it is not beyond belief that the same could happen again now. It is likely that some level of Entrepreneurs Relief will remain, but at what tax rate is for now unknown. The increase will hit hard those with so-called “non business” assets such as second homes and shares.
Early planning should start now – ordinarily, increases in personal taxes such as Income Tax and Capital Gains Tax have taken effect from the start of the following tax year (ie from 6th April 2011), but in this new age of politics, nobody can be certain this historical approach will prevail.
On Inheritance Tax, the Conservatives had indicated originally a plan to increase the threshold (currently £325,000 for individuals) to £1million for individuals, doubled for couples. As the election campaign progressed, David Cameron indicated this was not a key pledge, and would be something that a Conservative Government would only do when the economic conditions allowed it. It is not surprising that this tax relief, seen by many as favouring only the wealthiest in the country, has been a casualty of the coalition agreement. For the life of the current Parliament, widely expected to be fixed at 5 years, the current IHT threshold will not increase.
Of some comfort against this freezing of the IHT threshold is that the Liberal-Democrats’ planned “mansion house” tax, which would have seen a 1% levy on all homes worth in excess of £2million, has been abandoned.
As the economy starts to recover, and in particular as house prices recover, the fact that the IHT threshold will not increase for five years will bring more and more people into the IHT net over the next few years. This is all the more reason to start IHT planning sooner rather than later, to find out what options are available, and to take action now.
The coalition has also put tackling tax avoidance at the centre of its tax regime, although no details have been put forward so far. HM Revenue and Customs have always taken a very dim view of tax avoidance measures, challenging legitimate and legal tax planning wherever possible. It is clear that in the future, very careful and details tax planning will be required to ensure maximum tax savings can be obtained.
We are all, as a nation, likely to face tax increases over the next few years – the nation’s financial deficit has to be tackled and paid for. However, tax planning opportunities will always exist. The most crucial thing is to take independent professional advice. Here at Rawlison Butler we are committed to working with you to find the best and most effective ways to help you plan for your future, and to help you preserve your wealth for yourself and your family.
For more information on this or any other similar issue, please contact Digby Armstrong by emailing Digby or by calling him on 08450 990045, or speak to your usual contact in the Tax, Trust and Probate Team.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.