Budget 2012

Main points:

Company taxes

Main corporation tax rate cut to 24% was announced, with effect from 1 April 2012. Main corporation tax rate to be 23% from 1 April 2013, dropping eventually to 20%, unifying the income tax basic rate and two corporation tax rates. Small companies rate remains 20%.

(Comment: good move to make the UK more competitive and attractive for investment from abroad).

Income tax rates

• Increase in the income tax personal allowance for the under-65 to £8,105 but the basic rate limit will be reduced to £34,370. For 2013/14 the personal allowance will be increased by £1,100 to £9,205 but the basic rate limit will be reduced by £2,125 to £32,245. 

(Comment: the forthcoming reductions in basic rate limits will place many thousands into the higher rate of income tax band).

• In 2012/13 an age-related allowance  for people aged 65 and over to be £10,500  and £10,660 for people aged 75 and over. Freeze in age-related allowance from 2013/14 for those receiving them by then and abolition for those reaching 65 thereafter. From 2013/14 the allowance of £10,500 wil be restricted to people born after 5 April 1938 but before 6 April 1948. The allowance of £10,660 will be restricted to people born before 6 April 1938.

• Reduction in the top rate of income tax from April 2013 from 50% to 45%. 

(Comment: Apparently, the rate is going because it did not raise the amounts that was hoped for. Barely mentioned that this is not happening until another whole year. Also, remains the fact that there will still be an effective 60% income tax on income between £100k ans £118,200 as the personal allowance is reduced by £1 for every £2 of income).

• Announcement of legislation from April 2013 to cap tax reliefs claimed by individuals where reliefs are currently unlimited; reliefs will be limited to the higher of 25% of taxable income and £50,000 p.a. 

(Comment: it is feared that the rule may restrict relief in areas where not recommended, e.g. restriction is relief for for trading losses might discourage investment and harm business at a time where more investment is needed).

Small Businesses

• Announcement that the Government intend to consult on allowing businesses with turnover up to  £77,000 to move to the cash basis for calculating taxable profits. 

• Lending incentives: 
• On 20 March 2012 the Government launched the National Loan Guarantee Scheme, which allows Small and Medium Sized Enterprises (SMEs) with an annual turnover of not more than £50 million to obtain finance (loans, hire purchase and leases) from participating banks at a 1% discount. 
• Increase in the size of Government guarantees under the Enterprise Finance Guarantee Scheme from 13% to 20%.
• Increase in funds available to SME's through the Business Finance Partnership to £1.2 billion.
• Enterprise Investment Scheme (EIS): The 30% tax relief on investment up to £500k has been doubled to £1 million. New SEIS offers 50% tax relief on investment up to £100k in  start-up companies. (Comment: good move to encourage new business).

• Personal service companies: (once again) the Government announced a package of measure to tackle avoidance through personal service companies and to make the IR35 legislation easier to understand.  (Comment: in other words, standby for another attack on personal service companies?)

• Research & Development: 
  

  Tax deductions available to SME's for R & D expenses are increased from 100% to 125% from 1 April 2012. This will result in increased tax credits.
  
  

Stamp Duty Land Tax

• New rate of charge 7% on the purchase of residential property where the purchase price exceeds £2 million from 22 March 2012.

• Purchases of residential property through a company  (and other non-natural persons) from 22 March 2012  for £2m or more will be taxed at 15%.

• Announced that the Government will extend after consultation from April 2013, the capital gains tax regime on the disposal of UK residential property and shares by non-resident, non-natural persons.

Parents

Means test child benefit from 7 January 2013. 

(Comment: reducing income of both parents under £50k each can avoid child benefit reduction).

Tax avoidance

Government to issue a consultation document in summer 2012 (based on the Aaronson Report) with the intention of introducing  in the Finance Bill 2013 a General Anti-Abuse Rule(GAAR),  targeted at abusive and artificial tax avoidance schemes . 

(Comment: the rule is likely to add more confusion to an already complex tax system). 

The gifts that were never gifts for inheritance tax!

If you gift an asset (e.g. a house) but you continue living in it (or have some benefit from it or you don't pay for the use of the asset), the taxman says, you never gave it away for inheritance tax! So, it will be part of the death estate on the donee's death, even though the donee survives for longer than 7 years.


However, if you die within 7 years of the gift, there is a problem: is the gift to be taxed as a lifetime gift or as part of the deathe estate? The answer is, the taxman will prepare two tax computations and the one with the highest tax will apply. 


If the donee gives up any benefit from the asset just before he/she dies, the asset will not come back into the death estate! But, the taxman will treat it as a lifetime gift - with inheritance tax implications of course if death happened in less than 7 years from the date the benefit was given up! At least that way there is some hope!

Of course, having a gift being taxed as lifetime gift as opposed to being in the death estate has certain advanatages: The amount taxed is often lower for appreciating assets (e.g. houses) and the lifetime gift will attract annual exemptions and taper relief.


So, did you think you were the clever one?

How to minimise inheritance tax if assets in the death estate stand at a loss after the death!

If during the estate administration period, any losses arising from the sale by the personal representatives of death estate assets (within 1 year for quoted shares and 3 years for land & buildings), will reduce the value of the estate and hence the inheritance tax due on death - thus resulting in practice in inheritance tax repayment.

However, once the administration of the estate has ended and assets have been distributed to the beneficiaries, there will be no IHT repayments should the beneficiaries sell their assets at a loss. So, where there are assets in the estate that have depreciated in value post death, PR's should move quickly in realizing any assets if they have to, in order to have the IHT bill reduced and hence protect the beneficiaries!

And another thing: there anti-avoidance provisions in place to ensure that PR's do not deliberately sell quoted shares at a loss in order to generate an inheritance tax refund. According to those, all purchases of shares up until 2 months after the last sale in the 12 months period after the death, are taken into account for the loss calculation. In the case of land & buildings, we need to look at purchases up to 4 months after the last sale in the 3 years period after the death.

As we can see, the way the law has been designed acknowledges the fact that in practice it is not so unusual for administration periods to drag for way too long periods!

Inheritance tax valuation of similar assets owned collectively

The default position for valuing gifts is NOT open market values (i.e. how much the assets would fetch to the donee if sold on the open market.

Instead, we measure the value of gifts by how much the donor has lost as a result of the gift, i.e. by how much the donor's estate has gone down ("loss to the donor principle").

For the purpose of valuing similar assets owned jointly by spouses (e.g. shares), we look at them as one - doing so increases the value of shares when together spouses have control in the company (more than 50%) but individual shareholdings looked in isolation do not.

However, when similar assets are held jointly by individuals who are not married, the position is different. We value gifts of those assets using the loss to donor principle as explained above. But, there are special rules for real property (land and buildings) to take account of market realities.