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You and Personal Changes

Changes to inheritance tax

Currently most transfers of property between spouses or civil partners are exempt from IHT. This means that when one partner dies leaving some or all of their property to their spouse/civil partner they may not make full use of their nil-rate band (currently £300,000).

It will now be possible to transfer unused nil-rate band allowances between spouses or civil partners. The new rules apply to allow a claim to be made to transfer any unused IHT nil-rate band on a person's death to the estate of their surviving spouse/civil partner where death occurs on or after 9 October 2007.

The amount of the nil rate-band potentially available for transfer will be based on the proportion of the nil-rate band unused when the first spouse or civil partner died. If on the first death the chargeable estate is £150,000 and the nil-rate band is £300,000, then 50% of the original nil-rate band is unused. If the nil rate band when the surviving spouse dies is £350,000, then that would be increased by 50% to £525,000.

Any claims for transfer of unused nil-rate band amounts can be made by the personal representatives of the estate of the second spouse or civil partner to die when they make an IHT return. The change will apply to all surviving spouse estates from 9 October 2007, including those when the death of the first spouse occurred prior to that date.

Capital gains tax reform

For disposals made on or after 6 April 2008 there is to be a new single rate of capital gains tax (CGT) of 18%. This reduces the CGT liability by up to 22% but for some taxpayers the linked change to taper relief will mean an increase of 8% in the tax payable on disposal of business assets - which almost doubles their tax liability.

This change will apply to all chargeable persons except limited companies.

However, the change and simplification of the CGT system also includes major changes to some of the existing reliefs and allowances.

Taper relief for business and non business assets will cease to exist. This will materially affect the tax on the disposal of business assets after 5 April 2008, leading to a potential 80% increase in tax payable. It is possible that this will prompt business owners to consider the possible disposal of their business prior to 5 April 2008 rather than wait until the higher tax regime commences. For those owning pure investment assets, this is mainly good news, as after 10 years ownership they would be facing a tax charge of between 12% and 24%, as opposed to the 18% which will apply in future.

Indexation allowance will be scrapped for non corporate bodies. Where assets were held at 31 March 1982 there will continue to be a need to value them at that date although there will be amendments to the legislation which will result in the original cost no longer be taken into account. In practice, this means that tax will be calculated on the rise in value between 1982 (or date of acquisition if later) and the date of disposal. Taxpayers will lose the benefit of indexation allowance between 1982 and 1998, which would otherwise produce an allowance of up to 105% of the 1982 value. Once again, disposals before 6 April 2008 would enable taxpayers to take advantage of the old rules.

All individual and trustee taxpayers will continue to be have an annual exempt amount (AEA). The individual rate for 2007/08 for individuals is £9,200. The new rate for 2008/09 will be announced in Budget 2008.

Chargeable gains will be computed by deducting the AEA from the total gains (proceeds less costs or 31 March 1982 market value if the asset was acquired before that date) and then charged at the single rate of 18%. The current link between the rate of income tax and capital gains will therefore no longer apply.

This is a major change to the CGT legislation and there will undoubtedly be those who gain and those who lose. Careful consideration should be given to the timing of potential disposals prior to 6 April 2008 as there may be opportunity to make tax savings prior to the new legislation taking effect.

Fuel benefit charge multiplier increase

The fuel benefit multiplier which has remained unchanged since April 2003 is to increase from the current level of £14,400 to £16,900 from 6 April 2008.

This change will affect employees with company cars and who receive free fuel for private use from their employer. An increase in cost will also be incurred by the employer who will have to pay Class 1A national insurance contributions.

How will this affect you?

The cost in tax of this increase at the higher rate could be as great as £350, while the company faces a cost increase of up to £112.

Income tax self assessment

The de minimis level for making payments on account of the annual income tax liability is to be raised from £500 to £1,000 This will take effect from 2009/10 and thus the first payment on account to which this applies will be in January 2010.

Residence and domicile

UK residents who are UK domiciled are liable to tax on their income or capital gains wherever in the world that income or gain arises.

A non-UK domiciled resident can currently use the 'remittance basis' of taxation. This allows them to only pay UK tax if and when the income or gain is brought (remitted) into the UK.

Draft legislation will be published before the end of the year and this will be followed by a process of consultation. It is intended that the new rules will come into effect on or after 6 April 2008.

A non-domiciled individual will only be able to use the remittance basis after seven years of residence on payment of an additional tax charge of £30,000 per annum.The Government intends to consult on whether those who have been resident in the UK for longer than 10 years should pay more. In determining the seven year period of residence all previous years of residence will be brought into account.

There will also be changes to the automatic entitlement to certain personal allowances for individuals resident in the UK using the remittance basis.

Irish investment and employment income

These changes will affect individuals who are resident but not domiciled or not ordinarily resident in the UK. This changes the basis of the system used to tax Irish investment and employment income in order to ensure that the same rules apply to all such income regardless of the country of origin.

VAT and housing

Renovations and alterations to residential properties that have been previously empty for two rather than three years will qualify for the reduced 5% VAT rate. This will take effect on or after 1 January 2008.

State second pension and contracting out

Further plans have been announced for the harmonisation of the national insurance contributions upper earnings limit (UEL) with the threshold at which higher rate income tax becomes payable. Legislation will be introduced to bring forward the introduction of the upper accrual point (UAP) as prescribed in the Pensions Act 2007 to 6 April 2009. From that date updated forms P11 and P14 will need to be used.

On 6 April 2009 the UAP will be introduced at a level that will be cash fixed from the point that it is introduced and will be below the level of the UEL from 6 April 2009 to 6 April 2012, but above the level the UEL would have been prior to the announcements on personal tax made at the time of the 2007 Budget in March 2007.

Reduction of up to £5 in stamp duty in shares and securities

From Budget Day 2008 transfers that currently attract stamp duty, not exceeding £5 (fixed or ad valorem) will be exempt and not have to be presented for stamping. The principal reason for this is to reduce administration for smaller transactions.

Stamp duty land tax - Reduced notification to HM Revenue & Customs

Another change introduced to reduce administration will be introduced in the 2008 Finance Act. For transactions involving residential and non residential property where the consideration is less than £40,000 there shall no longer be a requirement to notify HM Revenue & Customs. Leases will require to be notified when the lease is for a term of seven years or greater and where the chargeable consideration is more than £40,000 and the annual rent is more than £1,000.

Air passenger duty (APD)

Currently carriers who offer a single class level of service to passengers qualify for the lower rate of APD. The current definition is to be amended in relation to any carriage of passenger which begins on or after 1 November 2008 so that single class flights offering a business class service will attract the standard rate of APD.

The effect? This will result in an increase of £10 for all flights within EEA (European Economic Area) destinations and certain other European countries and for flights to other destinations the increase will be £40.

Inheriting tax-relieved pension savings - anti avoidance measures

With effect from 10 October 2007 the anti avoidance rules designed to prevent the abuse of pension tax reliefs are extended. The changes are to ensure that tax relieved pension savings diverted into inheritance using scheme pensions and lifetime annuities are subject to unauthorised payment tax charges (tax charge of up to 70%) and, where appropriate, inheritance tax (IHT).

This change will affect surrenders made on or after 10 October 2007 and for increases in pension rights attributable to the death of a member when the member dies on or after 6 April 2008. The IHT provisions will also apply when the member dies on or after 6 April 2008.