Pre-Budget Report 2007 - Inheritance Tax, CGT Changes

Alistair Darling's Pre-Budget report, no doubt spurred on by the Conservative announcements on Inheritance Tax last week, produced some interesting changes for personal and corporate taxpayers alike. We've provided a brief summary of those changes below. You can also read business reaction to the Pre-Budget report.

Inheritance Tax (IHT)

Usage of the nil rate band for inheritance tax (IHT) has been relaxed. Up to now, if a spouse dies there is no IHT payable if the assets are left to the surviving spouse or civil partner. When the survivor dies, only one nil rate band is available. Thus the nil rate band of the first of the couple to die is lost unless the couple have enough assets to leave some of them to, for example, children, on the first death.

The new measure allows for a transferable allowance for married couples and civil partners. This means that any unused allowance on the first death can be used on the second.

The allowances themselves, according to the 2007 Budget, are set to rise to £350,000 by 2010/11.

For a couple with a combined estate of £600,000, where all the assets are left to the surviving spouse on the first death, this would mean a saving of £120,000, based on current rates.

This measure will be welcomed by taxpayers whose main asset is the family home and do not have sufficient assets to make gifts to children on the first death. The measure will apply to couples where the first death was before October 2007 and the second death is on or after 9 October.

The Treasury anticipates that this measure will cost £1bn in 2008/09, although it is worth noting that there has been a certain amount of planning in this area, which will no longer be needed.

Capital Gains Tax (CGT)

A new flat rate of capital gains tax has been introduced at 18%, to apply from 6 April 2008. This is coupled with simplification measures around the calculation process, which has become increasingly complex over the years, and this aspect will be welcomed, particularly by unrepresented taxpayers.

On the change in rates, there will be winners and losers. The flat rate of 18% replaces the gradual reduction of the gain through taper relief. General investors in shares and those with buy-to-let or second properties, who achieve a minimum rate of 24% after 10 years ownership will find their position improved, although accumulated indexation allowance will no longer be available (which applied to assets owned before 1998). There will be no holding period required to benefit from this new rate.

However, entrepreneurs and taxpayers who hold shares in their employer will find a 10% rate replaced by one of 18%. The changes are bound to mean a flurry of sales in the period up to 5 April 2008, as people make sales to lock into current rates if this is to their advantage.

Non Domicile Regime Changes

The Chancellor has proposed a flat rate charge for non domiciles of £30,000, which will apply after they have been UK resident for seven years. In his speech and in calculating the yield from the measure, the Chancellor suggested that 15,000 taxpayers would find it beneficial to pay the levy.

The new rules will apply from 6 April 2008 onwards, and to people who have already clocked up 7 years of UK residence on that day. There is a suggestion that higher charges will apply to those who have been here for more than 10 years.

Coupled with the change is a tightening up of loopholes and anomalies, which have allowed people to manipulate the rules. We will need to wait for the legislation to assess the precise impact, but it seems that overseas structures such as trusts and companies will be affected. There will be a consultation process on the details of the change.

Family Businesses

Following the "family tax" Arctic Systems case (which HMRC lost), the Government will be moving to limit "income splitting" of small company profits. The exact measures have yet to be announced, and are expected to involve a consultation period.

Many thanks to the team at Deloitte & Touche LLP for their analysis.