With the Chancellor free from the constraints of coalition government when he makes his Budget speech on July 8, what can we expect in terms of tax announcements and how could these affect individuals and businesses?
Campbell Reith, Tax Partner at Baker Tilly in Aberdeen said: ‘With the backing of a Conservative Parliamentary majority, the Chancellor would dearly love to be able to lower taxes to appeal to the party faithful, but with a stubborn deficit and a growing debt, his options are limited. Public spending cuts will only go so far meaning taxes will have to rise. The question then is where? With pre-election promises ruling out any rise in income tax, VAT and national insurance, and with any change to the corporation tax regime very unlikely, we will need to keep a close eye on which groups of individuals stand to lose out.’
Listed below are some of the measures which Baker Tilly’s tax experts think could be announced by the Chancellor next Wednesday.
Individuals
While the Conservatives have ruled out an increase in the top rate of income tax, one option could be the abolition of the 45% tax rate but this could be politically difficult and risk alienating lower earners. A more subtle, less controversial way of easing the burden on the “squeezed middle” would be to raise the threshold at which the 40% rate kicks in to £50,000 as well as the threshold at which the 45% rate starts, from its current £150,000 point to, say, £175,000. This would benefit a broader section of society without seeming to favour only the wealthy.
Changes to Capital Gains Tax (CGT) could also be on the cards with the introduction of a two tier system with a higher rate of CGT applying to “short term” capital gains, perhaps those held for less than a year. Alternatively, there could be a form of taper relief, whereby a lower rate of tax applies the longer you hold an asset, or aligning CGT rates with income tax rates.
Main Residence Relief - the ability to sell your main residence completely free of CGT – could also be reviewed. The Government could decide to adopt a system similar to the US, where only a fixed amount of gain made on the disposal of a main residence is free of CGT, with the balance liable to tax in a similar way to other gains. Alternatively, the UK could adopt a roll-over system, whereby if the entire sale proceeds from one main residence are invested into another, the gain is rolled over until the next property is disposed of, and so on. Such a system works while an individual is trading up but will hit those who downsize, and may therefore encourage people to remain in larger properties rather than downsizing, say, in retirement.
Entrepreneur’s Relief could also be in line for reform as it is considered to be very generous, given that an individual has to satisfy the qualifying conditions for only 12 months prior to disposal of a business asset to pay only 10% tax on gains of up to £10m. The Chancellor could announce a tightening of the conditions, perhaps an extension of the qualifying period to 24 months or longer, rather than a change in the rate.
The Conservatives could also go further on Inheritance Tax. There is now the prospect of an “additional” Nil Rate Band of £175,000 per person to set against the value of the family home in certain circumstances, and there could be a further increase in the IHT Nil Rate Band announced, probably with the proviso that this can only be used against the value of the family home where it passes to a close relative.
Businesses
With the corporation tax rates now set firmly at 20%, the scope for a further rate for reduction is slim to non-existent. The introduction of any new tax reliefs to encourage particular economic effects is also unlikely.
Two aspects of business taxes are more likely to be mentioned on Budget day. The first is Patent Box which is designed to enable companies to apply a lower rate of corporation tax to profits earned from patented inventions. This has come in for criticism in Europe which wants stricter rules applied to preferential tax regimes. As part of that, the UK’s patent box regime is almost certain to come under scrutiny and we are likely to hear more about this in the Chancellor’s Budget Statement.
Second is the annual investment allowance (AIA). The AIA is a generous form of capital allowance which enables businesses to deduct the full value of a qualifying item from profits before tax. The AIA, currently £500,000 has changed four times since 2008. Without specific action by the Chancellor, it will revert to £25,000 on January 1 2016.