International Tax - May 2010

SPECIAL ELECTION EDITION - ROLL UP, ROLL UP!!

Well, wasn't that fun! I must say that I was actually enjoying the prospect of a losers coalition led by Labour, just for the sheer comedy value of watching them trying to herd all the cats into the parliamentary pen. But, reality dawned and we now have a Lib-Con coalition to contend with. So, what does it mean for the poor old taxpayer? Unfortunately, it seems that, as far as taxation is concerned, we have replaced one gruff old socialist with two rather more fresh faced new ones.

Income tax and national insurance contributions

If you are unable to view this e-bulletin, please click this link: Thomas the tax engine e-bulletin Well, wasn't that fun! I must say that I was actually enjoying the prospect of a losers coalition led by Labour, just for the sheer comedy value of watching them trying to herd all the cats into the parliamentary pen. But, reality dawned and we now have a Lib-Con coalition to contend with. So, what does it mean for the poor old taxpayer? Unfortunately, it seems that, as far as taxation is concerned, we have replaced one gruff old socialist with two rather more fresh faced new ones. Income tax and national insurance contributions I don't think we will be seeing increases in the basic or higher rates from their current 20% and 40% levels. I really can't see either the Conservatives playing ball with any plans to tax those earning over £150,000 more than the current eye-watering 50% (unless you are a banker, of course!).

The main innovation has been the agreement to raise, in time, the personal allowance to £10,000. This will cost the Exchequer about £16bn so I think it unlikely that the phasing out of the allowance for those earning over £100,000 will be reversed either. This means that high earners will not be able to participate in any of the savings other tax payers will enjoy.

What about the 50% band? Had it been a Conservative government I would have expected this to be reduced within two or three years. But the Lib Dems are old fashioned redistributionists at heart and their constant bleating about 'fairness' in taxation is just code for 'more taxes for rich people'. Unfortunately, the economics 'genius' Vince Cable clearly hasn't grasped the arithmetic of our progressive rates of taxation. Vince, my old mucker, the top 5% of earners are already responsible for nearly half of the income tax received. How much more do you want?

The 'tax on jobs' (NIC) rises will not go ahead now for employers - but employees will still have to pay an additional 1%. That means an effective rate of tax of 42% or 52% for many people. Vince, is that all right for you?

Capital Gains Tax (CGT)

You're not going to like this at all. The entrepreneurs relief (ER) of 10% on the first £2m of gain should be preserved but expect a new higher general rate of CGT from either 6th April 2011 or, more likely, from Budget Day (sometime in July). As for the actual rate, I expect this to be pegged at the income tax rates, but perhaps falling short of a higher rate of 50%.

This means that if you have gains on non-business assets you really ought to consider realising those gains now. The current rate of 18% does now look very attractive. If you have accumulated offshore trust gains then you ought to consider taking distributions now as the effect of the new rates and the existing supplemental charge could see us back up to rates of 64% (or more) in the future.

Inheritance tax

Increasing the threshold is still an aim for this government but its been kicked into the long grass for the time being.

Stamp duty land tax

Curiously, silence on this issue. Will the increase to 5% go ahead from April 2011? I think so as they will find the additional revenue irresistible. Whether there will be a property market left is another matter - I expect the buy to let market to suffer as a consequence of the higher CGT rates.

Anti avoidance

Lots more anti-avoidance promised and closing down of 'loopholes' etc. However, this is easy and popular for politicians to promise and more difficult to deliver. We already have a highly sophisticated (read complex) tax system with detailed and extensive anti-avoidance measures. There is very little low hanging fruit left. The Lib Dems are fixated with the use of offshore companies to avoid SDLT, for instance, but I think that's because they read something in the Guardian about it and then turned it into policy without any research. Avoidance of SDLT using offshore companies is really quite insignificant. There has been talk of a general anti avoidance rule (GAAR) but, again, when we already have detailed specific anti-avoidance rules its difficult to see how an over-arching GAAR would work.

Best wishes

James Quarmby

Partner, International Tax

for and on behalf of Thomas Eggar LLP

Tel: 01293 742723

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