The PBR was delivered much earlier than usual this year, quite likely due to the anticipated early election. The items dealt with in the PBR will all be the subject of ongoing review regardless of the political climate as this is a dynamic area of law. The publication of detailed draft legislation suggests that many items were likely already to have been under consideration.
This release gives an overview of some of the main points.
Inheritance Tax Nil Rate Band
The Chancellor has introduced legislation that will be effective from 9 October 2007 that finally provides a statutory mechanism for the use of two nil rate bands against the combined estates of spouses and civil partners. The relief is generous on two fronts
- It applies to all cases where the second to die dies after 9 October regardless of when the first spouse died.
- It allows the unused nil rate band of the first spouse to die to be altered in value to the value of the nil rate band applicable on the second death.
The relief is proportionate so that no more than two nil rate bands can ever be claimed. There are mechanisms for families where the last to die was widowed more than once.
Although this has been reported as stealing the ideas of the opposition, it seems a quite different approach. The opposition proposed a simple increase in the nil rate band to £1m. Had no other changes been introduced, this would have allowed combined nil rate bands totalling £2m to be set against a family’s estate. Whether that would have been the case we shall never know.
As a mechanism already exists for the use of two nil rate bands against the combined estates of husbands and wives, one could argue that this new relief will cost the Treasury very little in the short term, as it simply codifies existing practice. It will, however, save families having to enter into complex arrangements to ensure that the nil rate band is used on the first death.
In the longer term, particularly where deaths occur some time apart, the new arrangements will be of greater benefit to the taxpayer provided that the nil rate band threshold remains the same or continues to increase.
The Chancellor also announced that in future years he will take both house prices and inflation into account when setting inheritance tax thresholds, though did not specify the precise way he would do this.
Many clients will be concerned as to whether or not they will have to alter an existing will containing a discretionary trust of the nil rate band. The answer is ‘no’ if your arrangements are properly drawn. This is because properly drawn trusts of this nature are permissive rather than prescriptive and allow a wide range of activity, including an absolute payment of the assets to the surviving spouse that is compatible with the new relief.
Nil rate band discretionary trust wills will continue to be of importance where
- people financially dependent on one another are unmarried – this applies not only to cohabitees, but also to people such as siblings living together
- there is a restriction on the spouse relief in mixed domicile marriages
- the assets being placed in the trust are likely to increase in value beyond the increase in the nil rate band after taking into account the costs of running such a trust
- the trust is likely to be used for wider family purposes rather than straightforward IHT planning
- couples are likely to want to use the new relief but also wish to retain flexibility in case their family circumstances change.
- families wish to protect assets against claims against the survivor.
Capital Gains Tax
Over recent years there has been a harmonisation of tax rates for income, capital gains and inheritance tax so that all are payable at 40% albeit with varying reliefs that can alter the real rate.
Reforms to CGT have often been heralded with sentiments such as ‘the most complicated tax has been made more complicated’. At last it seems to have been made simpler; there will be a single rate of CGT of 18% for individuals, trusts and personal representatives.
The new rate will apply to disposals on or after 6 April 2008.
After years of tinkering with indexation relief and taper relief to the point where the rules have become very complicated, the Chancellor has announced at a stroke that these reliefs will no longer apply.
For those in the course of making a disposal, great care will have to be taken to see whether or not it will be better to make the disposal now or in the new tax year.
Taxpayers qualifying for a mix of
- full taper relief
- a generous measure of indexation relief
- business assets
- latent gains having taken loan notes on the sale of a business
may well presently have an effective rate of tax below 18%, and could be disadvantaged by realising gains in the next tax year. The new rules will adversely affect Private Equity investors who have been able to take advantage of business assets taper relief to reduce their effective rate of tax to 10%.
Those with short term gains of non business assets will likely presently have a higher effective rate than 18% and could benefit from postponing a disposal.
As ever, disposals will be driven by commercial imperatives and taxpayers may not be able to take advantage of the changes. Others will be subject to market variations in the disposal price that will make it very hard to know whether to dispose of assets now or later.
Further, the proposed changes will now be consulted upon and their form might change.
Non-domiciled but resident individuals
Changes are to be introduced (again after consultation) with effect from 6 April 2008, to bring into the UK tax net those individuals who are not domiciled here but are resident here. Presently such individuals are liable to UK income tax and CGT only on income and gains remitted here.
The reporting requirements for many individuals will increase and this will be a burden for them. The very wealthy will be able to buy a passport to continue to use the remittance basis if they pay a flat fee of £30,000 per annum.
The rules will apply to people who have been resident here for 7 years or more; the aim being not to hit the mobile workforce of secondees who may be in the country on a specific assignment for only a few years.
The rules for counting days in the country will change to include the days of arrival and departure – hitherto these were not counted.
For further information please contact
Nigel Roots, head of private client department, 01865 781000, nigel.roots@henmansllp.co.uk.