Budget 2010 Expert Reaction & Analysis - Spear's Magazine

Budget 2010 Expert Reaction & Analysis

Watch this space for expert reaction to the Budget and analysis

Headlines: CGT up to 28% for higher-rate tax payers. Income tax allowance up by £1,000 for basic rate payers. VAT up to 20%. Bank levy with France and Germany too, amount unspecified. Corporation tax down to 24% in four years.

Deficit: £149bn 2010-11, £20bn 2015-16. Deficit percentage: 10.1% now, 1.1% in 2015-16. OBR on growth: 1.2% 2010-11, 2.3% 2011-12, 2.8% 2012-13, 2.9% 2013-14, 2.7% 2014-15 and 2015-16. 25% cut in unprotected departments.

Spear's Exclusive:

Sophie Dworetzsky of Withers tells Spear's that the Government will introduce an anti-avoidance rule, to replace the 'piecemeal measures' currently in effect. This would clearly show what was within and without the system, allowing clearer tax planning, a great boon for Spear's readers, and creating 'a different tax-planning landscape'.

Sophie also notes that in the fine print of the Budget's Red Book is a document called 'Tax Policy-Making: A new approach', which aims to give transparency and stability by potentially publishing a finance bill for three months before it comes into effect. This would give a long period for advisors to adjust tax plans.

Chris Groves, Withers

Flanked by Nick Clegg and Danny Alexander, George Osborne took to the Dispatch Box today to deliver the coalition’s ‘austerity budget’, but who was calling the shots, the Conservatives or the Lib-Dems?  The spending cuts announced would seem to say the Conservatives and that was born out in the tax increases, with only a modest increase in CGT rates to 28% compared to the 40 or 50% rates that had been speculated.

The quote that “I pay less tax than my cleaner” has come back to haunt higher rate taxpayers, with a new top rate of 28% of capital gains tax taking effect from midnight.  Most surprising is that the increase is only 28% and not the 35%, 40% or even 50% that had been anticipated.  a mid year increase in CGT rates is unprecedented and how the Government will approach the complex transitional provisions for such a change remains to be seen.

The Chancellor has stolen a march on the rest of the G20 by announcing a bank levy estimated to raise up to £2bn per annum from next year.  However, it remains to be seen whether the UK will be leading the way or stuck out on its own.

Sophie Dworetzsky, Withers

No great shocks apart from CGT going up with effect from today – that's unprecendented. Where has the figure of 28% come from? I can only assume they thought that 10% didn't sound so bad. Entrepreneurs' relief has been raised from £2m to £5m, so at least there's some quid pro quo.

Josh Spero, Spear's

The increase of CGT to 28% is not exactly welcome, but it's better than an increase to 50% – or is it? As David Davis suggested, a higher increase with sharper taper relief to prevent taking income as capital gains would not penalise those who bought houses or shares or other assets several years ago. It's the switching that people hate, and a broad rate of 28% on higher-rate tax-payers while simpler is perhaps not quite as targeted. Still, it won't frighten people away from Britain.

The VAT increase – 17.5% to 20% – was widely trailed, although the FT pooh-poohed it this morning. It won't apply to some current exempt items, tho' the Chancellor by no means indicated all of them, which means the poor won't be hit as hard (unless they buy junk food, which is rated).

The main good news, if it is achievable through growth, tax increases and welfare and spending reductions, is the steep drop in the budget deficit: from 10.1% this year to 1.1% in 2015-16, which would mean we were almost at balance. The benefit this has, obviously, is in reducing debt-servicing payments, freeing up more money to be spent on useful things, rather than interest. It would represent a Herculean effort on the part of the Government and the country.

Finally, we should note the increase in the allowance for the 10% tax rate for entrepreneurs, from £2m to £5m over a lifetime. This is exactly the sort of thing we need to encourage entrepreneurs, who will return the country to growth. </p>

Stephen Hill, Economics Editor, Spear's

Osborne's gone wrong with the VAT increase: he's shifted people off of income tax and onto VAT. It didn't occur to him or the Treasury to have two rates, as I recommended this morning. It's devastating for the economy. The Lib Dems said lower income tax, so the Tories raised VAT. Despite that, overall it was a good Budget, cutting £40bn and benefits, but VAT was the essential flaw.

Tim Gregory and Ronnie Ludwig, Saffery Champness:

OVERVIEW
Tim Gregory, partner at Saffery Champness says:

With a deficit of £155 billion, more than 10% of national income, it was widely anticipated that the UK's new Chancellor would be delivering a highly austere Emergency Budget.  Cuts, cuts and more cuts are now firmly on the agenda, with actions to address the budget deficit expected to save four times as much as tax increases are expected to raise.

With some commentators already having taken the view that “Alastair Darling soaked the rich more than any Chancellor since Dennis Healey”, it was daunting to contemplate what further measures might be taken in taxing either the rich or the poor, and the Chancellor's announcements in his speech today will hit everyone's finances, although much more for some than others and, whilst many of the measures were anticipated, there were one or two surprises.

Ronnie Ludwig adds:

Other than savage cuts to public sector spending, which had been widely trailed, the Emergency Budget was short on shock factor. Perhaps the biggest surprise was the decision to raise Capital Gains Tax to 28%, rather than the widely expected 40%, or even 50%.

CAPITAL GAINS TAX
Tim Gregory continues:

CGT was the most widely-trailed topic in advance of the Budget, and so there was no surprise that an increase was going to be announced.  For higher rate taxpayers (40% or 50%), the flat rate of CGT has been increased to 28% immediately, but will remain at 18% for basic rate taxpayers.  The substantial exemptions for business assets that the Coalition Government trailed before the Budget come in the form of an extension of Entrepreneur's Relief (at 10%) to be extended to the first £5 million of lifetime gains – a generous exemption indeed.

Ronnie Ludwig says:

“For higher-rate tax payers, the news that the Chancellor has increased CGT to 28%, rather than the widely expected 40% will be greeted with a mixture of surprise and relief. However, the differential between the top rate of CGT and the top rate of income tax is now 22%, meaning that there is still a strong incentive for higher-rate tax payers to convert income into gains – a practice the government had wanted to stamp out.

Many who expected CGT to rise to 40% or 50% rushed through sales of second homes or share portfolios. Those individuals may now rue that decision.

VAT
Tim Gregory adds:

From 4 January 2011, the main rate of VAT will increase to 20%, though VAT-exempt items will remain so.  This is expected to increase annual tax revenues of over £13 billion, and should clearly make a substantial contribution to addressing the overall deficit.  Indeed, some economists believed that an increase of this size might not be necessary and so, whilst it may be painful, this increase in tax on largely discretionary spending might be the key to the country's recovery.  However, it is a risky strategy as it could lead to inflation and early increases to interest rates.

INCOME TAX
Tim Gregory continues

Another heavily-anticipated measure was an increase to the main income tax Personal Allowance: it will be increased to £7,475 from 5 April 2011, and the intention remains to increase this to £10,000 when possible.  This is intended to help those on low incomes, and adjustments will be made to ensure that it does not benefit higher rate income taxpayers.

Whilst not directly related to income tax, families earning over £40,000 will have eligibility for welfare tax credits substantially reduced, but increased for the lower-paid.  The Chancellor did not take the same view on Child Benefit, leaving that available for all but freezing it at the current level for the next three years.  It seems likely that this strategy is more to do with preventing the need for a whole new system to means-test Child Benefit rather than any true idealistic desire to keep this benefit universal.

Ronnie Ludwig says:

The Government says it believes that the rise in CGT will raise an extra £1bn in income tax. It is hard to imagine how this will happen in practice.

NATIONAL INSURANCE
Tim Gregory highlights:

Employers' National Insurance Contributions will take effect from a higher level of wages, preventing a fiscal brake on job creation for salaries up to around £20,000. There will also be a £5,000 exemption from employers' National Insurance for new businesses outside the South East of England, which is intended to drive economic growth in some of the areas that most need it.

CORPORATION TAX
Tim Gregory states:

The main Corporation Tax rate (currently 28%) will be reduced by 1% each year to lead to a rate of 24% in 2014/15, though this will be paid for in part by cutting Capital Allowances by 2% and the Annual Investment Allowance from £50,000 to £25,000. The rate for small companies will be cut to 20% (from 21%) from 1 April 2011, rather than being increased to 22% as proposed by the previous Government.

FURNISHED HOLIDAY LETTINGS
Tim Gregory concludes:

The proposals by the previous Government to remove the tax benefits of furnished holiday accommodation are to be scrapped, presumably allowing the extension of the tax advantages to properties outside the UK but within the EU. This, along with the lower than expected rise in CGT will be a great relief to those who own such properties.

Louise Somerset, RBC Wealth Management

Over the last two weeks, the new Government has done such a good PR job in raising everyone’s expectations of a severely harsh Budget, that today’s announcements, while plentiful, seemed reasonable by comparison.  Many higher earners will be breathing a sigh of relief.

There are some unexpected presents from the Chancellor hidden away in the Budget.  Investors in particular will heave a sigh of relief at the lower than anticipated increase in CGT rates.  The question is how many people will feel confident enough to take advantage of it with markets as volatile as they currently are.

The decision to increase CGT rates with immediate effect is very unusual.  Normally, changes in direct tax rates apply from the beginning of a tax year, which makes life easier for taxpayers and for HMRC.

For many investors who were anticipating a possible increase in CGT rates to 40%, or even 50%, the increase for higher rate taxpayers to 28% only will come as very welcome relief and indicates the strength of lobbying from those who were arguing against any increase at all.

It’s hard to see the merit of changing the rate of CGT immediately.  Many people who were in the process of selling assets will have taken steps to trigger a disposal before the Budget anyway, so they won’t be affected.  Bearing in mind the fact that CGT raises relatively little tax overall, the extra 9 months of revenue is not likely to be significant in the face of the total deficit, whereas the amount of confusion likely to be caused is substantial.

Many of my clients have taken a hard look at their investments already, and a number have taken steps to lock in the 18% CGT rate by making disposals before the Budget.  The immediate rise in CGT rates has vindicated that decision.

At first glance, the proposal for increasing the relief to owners of business assets to 10% on the first £5 million (up from £2 million) look encouraging.  The key to reliefs of this sort is to keep things simple so that people don’t have to spend hours poring over legal definitions to work out how they apply, and the decision not to reintroduce taper or indexation relief is very welcome.

We did not expect the Lib Dem proposal to reduce CGT annual exemptions to £2,000 to be adopted, and it is good that it has not been. Dropping the level of tax free capital gains to that extent would have hit small investors the hardest, and could have forced many thousands of people to prepare a tax return without raising much extra revenue.

There was some talk before the Budget that landlords should not suffer from the increase in CGT rates, but this was always wishful thinking. There is no good reason why an investor in property should be taxed differently to an investor in quoted shares, and the Chancellor clearly recognised this. Of course, this is going to leave a lot of buy-to-let investors who were relying on making a profit on the sale of their properties with a big headache when it comes to paying off interest only mortgages in the future.

A recent report has highlighted the success of HMRC’s new approach to tax avoidance. Enquiries to tax returns have produced 23% more capital gains tax over the last two years than in the previous two. It will be interesting to see whether the increased rate will impact on this at all.

I am not surprised that there were no announcements about domicile in the Budget, as the new Government has already announced that a Commission will be appointed to review this whole area.  This is a familiar tactic of Governments of all colours when it comes to dealing with domicile in particular, and we will need to wait and see whether it amounts to anything more positive than kicking the problem into the long grass and hoping that it goes away.

It was disappointing, although not perhaps surprising that no announcements were made about the introduction of a statutory residence rule. The problem with residence rules at the moment is not so much that a few super rich entrepreneurs may have to pay UK tax after they have moved overseas, but that many ordinary workers with connections to the UK no longer know where they stand.

Glen Atchison, Harbottle & Lewis

CGT Rate Rise – The Thin End of the Wedge?
I've got a feeling that the increase in the rate of CGT from 18% to 28% announced by the Chancellor in the Budget and effective from 23 June 2010 is only the beginning of the attack on CGT, and that there will be another hike in rates in April 2011.

The detailed notes that accompany the Budget certainly do little to alleviate this concern. Those that have taken steps to realise gains early will no doubt be feeling that they did the right thing, and the uncertainty that seems to remain may mean that many more taxpayers take planning steps before April 2011.

Entrepreneurs' Relief – A Welcome Increase
A surprising, but welcome increase in the lifetime limit of gains qualifying for entrepreneurs' relief from £2m to £5m.

Non-Doms – Wait and see…
The Chancellor has simply announced that the Government will “review the taxation of non-domiciled individuals”. This merely reiterates a statement made previously in the Coalition Agreement, so its still a case of “watch this space” for non-doms.



 

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