October 2007 Archives

A few days ago, I wrote a post on this blog entitled 'Abolition of taper relief - will there be a U-turn?'

The answer, from reading today's Telegraph, appears to be 'yes'. That in itself is not surprising; the surprising thing is that the U-turn has come so soon. I was expecting that we would have to wait until the 2008 Budget to find out that the Government had changed its mind in some way or the other.

Apparently, the U-turn consists of reviving some aspects of the old retirement relief rules. Retirement relief was a capital gains tax relief available to taxpayers who were disposing of their businesses after attaining a certain age, or retiring earlier due to ill health. The way the relief worked was that a certain amount of the gain was exempted from capital gains tax, and any amount in excess of that threshold would attract the tax at the normal rates. The relief could only be claimed once in a taxpayer's lifetime.

The U-turn being proposed now is that taxpayers disposing of their businesses would be entitled to the first £100,000 free of capital gains tax, with the 18 per cent rate to apply to any gains in excess of that threshold. Like retirement relief, the £100,000 can only be claimed once in a taxpayer's lifetime. In effect, it is a 'retirement relief', because if the taxpayer went off and started another business, the relief would not be available to him when he came to dispose of it.

As usual, I will wait until I see the actual detail of the proposal before I comment fully on it.

Turns out this blog was right to be sceptical about the news that the proposed bin tax was to be shelved.

The charge hasn't been shelved after all. It has reappeared in the Climate Change Bill, which gives local authorities the power to levy the charge.

This means that the Government will be able to distance itself if or when a local authority actually introduces the charge. The Government can claim that the decision to levy the charge was an 'independent' one made by that council.

But will it really be an 'independent' decision? A squeeze on local authority funding by the Government could very well lead to a local council introducing the charge. I wouldn't call that an 'independent' decision by the council.

So forget last week's spin by the Government. The threat of bin taxes still remains.

Given the outcry about the proposed changes to capital gains tax taper relief, don't be surprised if the Government performs a U-turn in next year's Budget.

Here are my predictions:

1. They may decide to 'phase in' the abolition of the relief, in order to take some of the sting away. Maybe by tinkering with the rates somewhat. You can trust this Government to make things more complicated than they need to be.
2. They may decide to exclude certain assets from the 18 per cent rate. I'm thinking of things that would currently qualify as 'non-business assets' under the taper relief rules. Things like second homes, shares held for investment purposes, etc. They may decide that these should continue to be taxed at their current (higher) rates.
3. Instead of (2) above, they may create a 'special exemption' from the 18 per cent rate for assets that currently qualify as 'business assets' for taper relief purposes. Those can continue to be taxed at the current effective rate for higher rate taxpayers of 10 per cent. There will, of course, be stringent conditions to be met before an asset can take advantage of the special exemption.
4. Or they can just quietly shelve the whole abolition of taper relief thing, and pretend it never happened. This should be the easiest way out. Of course there would be taunting and jeering from the Opposition benches, but if the Government is brave enough to weather that (which I doubt), then this would be the best thing all round for everybody. Don't bank on it, though.

Good news. The Government has come to its senses and abandoned plans for a pay-as-you-throw domestic waste tax.

I discussed the lunacy of such a bin tax some time ago. There are all sorts of reasons why this tax was such a bad idea, not least the public health reasons: taxing people for throwing out rubbish will simply lead to fly-tipping and all the hazards that would follow.

Anyway, according to the Telegraph, Gordon Brown has intervened to scrap the plans, out of fear that they could cost the Labour Party dear in next year's local government elections.

Hmm. So does this mean that the plans could be revived once the danger of the local elections is past? We will find out soon enough.

I mentioned earlier that I would be taking another look at today's announcement on inheritance tax, to see how it might work in practice. I have looked into it a bit more, and can report that the tax benefits purported to be conveyed by this relief, are already available, without the need for today's announcement. It is currently possible for spouses and civil partners to draw up their wills using nil band discretionary trusts to achieve exactly what Alistair Darling has so generously given us today. So a little bit of tax planning from a high street practitioner would achieve the same result. People who are worried about inheritance tax would have taken these steps, anyway, as one would assume that their lawyer would have advised them to draw up appropriate wills. Therefore, all that Darling would have saved them by today's announcement, is the lawyer's bill - approximately £1,000.

I mentioned in yesterday's post that, in typical Gordon Brown style, any inheritance tax relief would be 'stingy, complex and extremely difficult and wasteful to administer'.

Stingy: check.
Complex: let's wait and see the paperwork claimants have to fill.
Extremely difficult and wasteful to administer: it shouldn't be too hard to administer this tax allowance, but I will wait until I see the paperwork before I give my conclusion. This, remember, is a Government that never does things the simple way.

Inheritance tax - transferability of allowances between spouses and civil partners.
A cunning move to unsettle the Tories, but let us see how this tax break works in practice.

Capital gains tax - abolition of taper relief.
Yes, you heard correctly. Taper relief, which was introduced by Gordon Brown in 1998 to replace the indexation allowance, is now to be abolished. Another example of a tax u-turn by this Government. Remember the zero per cent rate on corporation tax?

The abolition of taper relief is being spun as a necessary measure to deal with the private equity issue. However, they are not the only people affected. Taper relief is available to every taxpayer who disposes of chargeable assets, so they are all affected. See Bel for an interesting piece on the effects of the abolition.

Also with the abolition of taper relief is the 'withdrawal' of indexation allowance. What does this mean? Does it mean that any indexation allowance accrued to date, is lost? When selling a capital asset, allowance is normally made for inflation from the date the asset was acquired, or March 1982, whichever is earlier. This inflation is calculated as an 'indexation allowance', and deducted from any gain on sale. Indexation allowance is abolished for sales by individuals with effect from 1998, and replaced by taper relief. So what would happen would be that, on a sale after that date, indexation allowance is calculated from the date the asset was acquired until April 1998, and then taper relief would be calculated from that period onwards. So the indexation allowance that was built up was preserved.

I assume that, when the April 2008 changes take effect, any indexation allowance accrued until April 1998 will be preserved - there will be a huge outcry otherwise.

Indexation allowance still continues for companies, and I assume that this remains the case even after April 2008.

£30,000 levy on non-domiciles.
Well, you know where they got that idea from. They just added an extra £5,000 to the Conservative Party's proposal.

To read the Pre-Budget Report notes in full, click here.

As you probably heard over the weekend, Gordon Brown decided not to call an election after all. He arrived at this decision after studying polling data that suggested a huge swing to the Conservative Party as a result of their promise to raise the inheritance tax threshold to £1m.

Wow. So tax cuts are popular, after all? Who's have thought it?

The Pre-Budget Report is being delivered tomorrow. Expect Gordon Brown to come up with a copycat inheritance tax cut. But expect it to be, in typical Brown style, stingy, complex and extremely difficult and wasteful to administer.

There might not be any detailed inheritance tax relief in the Pre-Budget Report, but listen out for a statement about wanting to ensure 'fairness' in the inheritance tax system.

But what does it matter if Brown nicks the Tory policy? If he does, everyone would know that that was what he did, and that can only be good for the Conservatives, and the taxpayers who will benefit. If, on the other hand, he introduces a less generous relief than that being promised by the Conservatives, everyone will see that, too.

Arguments about the Conservative Party's promise being 'uncosted' and 'unaffordable' won't work, either. Even if Brown manages to put out figures to claim that the expected tax from 'non-doms' won't be enough to pay for the Conservative tax promise, all the Conservative Party has to do is point to the almost £2bn mistakenly overpaid every year within the tax credits scheme. Those wasted funds should go a long way to paying for the inheritance tax promise. Somehow I doubt that Brown would much welcome attention being drawn to the annual £2bn tax credits overpayments, seeing as he was the Chancellor who presided over the whole shambles.

The Chancellor will deliver the Pre-Budget Report next Tuesday (9 October 2007). Speculation is rife that there is a General Election on the cards. If so, the Report will be all the more interesting for what it leaves out, rather than what it says.

Gordon Brown may have handed over nominal control of the Treasury to Alistair Darling, the Chancellor, but only the very naive would assume that the latter has any real control over what goes into the Pre-Budget Report.

The Conservative Party's tax proposals so far, as announced by George Osborne today:

• abolition of stamp duty land tax for first-time buyers of property costing below £250,000; and
• raising of the inheritance tax nil rate threshold to £1m.

The current stamp duty land tax rates for residential property are as follows:

• 0 per cent for properties costing £125,000 or less (good luck finding a house at this price in the South of England!)
• 1 per cent for properties costing more than £125,000 but not more than £250,000;
• 3 per cent for properties costing more than £250,000 but not more than £500,000; and
• 4 per cent for properties costing more than £500,000.

So the proposal will benefit first-time buyers in what is currently the 1 per cent range. Let's hope the limits will be revised upwards in line with movements in house prices, but perhaps that's too much to ask. In any case, the Telegraph today reveals research indicating that house prices are are set to fall next year.

The proposal to raise the inheritance tax nil rate band is very welcome, and is something that has been argued for in the past here on this blog.

The Conservative Party leadership has committed itself (what were they thinking!) to Labour's spending plans for the first three years of a Conservative Government. This means that the tax cuts being proposed cannot be funded by a cut in spending, not even by a cut in wasteful spending - tax credits are overpaid by about £2bn a year, surely they could have targeted that. Rather the tax cuts will be funded by an annual levy of £25,000 on non-UK domiciled individuals, living in the UK, and currently enjoying favourable tax status.

I am happy with the plans - not ecstatic, but you can't have everything. I would have preferred for the taxes to be funded by savings identified through eliminating wasteful public spending. However, I appreciate that saying that would cause jitters up and down the land, as Labour would seize upon it to claim that the Conservatives would like to 'cut vital public services'. So I am happy. Let's just hope the green tax proposals are as just as sensible.