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Client Memorandum Finance
Act 2005
The announcement of the General Election has wrought havoc with the normal budgetary process, whereby the Budget is followed by the publication of a Finance Bill (usually within two weeks) and this is enacted (subject to debate and amendments) around three months later.
We give below the chronology of events so far this
spring:
- 16 March Chancellor delivers Budget speech
- 22 March Publication of Finance Bill 2005
- 5 April Prime Minister announces General Election for 5 May
- 6 April Finance (No 2) Bill 2005 is published
- 7 April This bill receives Royal Assent (Finance Act 2005)
- 11 April Parliament is dissolved
The second Finance Bill mentioned above had to be agreed with the opposition parties in order to ensure that it passed through Parliament at high speed - ahead of the dissolution of Parliament.
In order to achieve this, it was necessary for the Government to agree to drop some of the more controversial elements of the Bill. The 'truncated' version still runs to over 200 pages! It seems that the parties agreed that whichever party is in government post-Election will bring back the 'deleted' legislation and that it will (where appropriate) have retrospective effect to 16 March 2005 (Budget Day).
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Overview of Current Position
Personal Taxation
All the various proposals have now gone through and are in the Finance Act 2005.
Capital Gains Tax
All the main changes have gone through but the anti-avoidance measures have been held over. These relate to certain UK assets held by non-domiciled persons and also to a number of situations where it was possible for an individual to escape UK CGT on asset sales by becoming temporarily non-resident.
Inheritance Tax and Trusts
The increase in zero rate threshold has been enacted. In addition, the Government's further guidance on the pre-owned assets regime, introduced by the Finance Act 2004 to take effect on 6 April 2005, has been published. This is now a complex area and affected clients should contact us to discuss their position.
In 2004, the HMRC issued a consultation document on proposals to modernise and simplify the tax treatment of trusts to take effect in April 2005. Following its consultation process, a number of problems have been identified and these are still being considered so that the wholesale reform has not, in events, been enacted this year.
The two new proposals that come into effect on 6 April 2005 mitigate the harshness of the higher uniform 40% rate of income tax and CGT that was applied to all trusts from 6 April 2004.
The main change is that trusts for the vulnerable, defined as disabled or infants who have lost a parent, would be taxed, if the trustees and the relevant beneficiaries elect, on the basis of the individual's circumstances for income tax and CGT purposes, i.e. any incremental income from the trust would be taxed at the marginal rate for the individual.
The second change in the 2005 Finance Act is that any trust that has taxable income of £500 per annum or less will pay tax at the basic rate of income tax.
Taxation of Companies and Businesses
The proposal in the Budget to retain the existing rates of Corporation Tax for the year ending 31 March 2006 has now been enacted. The 30% standard rate of Corporation Tax for the year ending 31 March 2007 has also been confirmed. The Budget contained some proposals for anti-avoidance measures to counteract some complex tax-saving arrangements. These arrangements involve such measures as sale and repurchase of loan relationships, stock lending, bond-stripping and rent factoring. These anti-avoidance provisions have been dropped for the time being.
Stamp duty
The change in the threshold to a starting point of £120,000 for duty on residential properties has been enacted. Also, the removal of the exemption for acquisitions of commercial properties in enterprise areas has been confirmed.
There were also some complex proposals in the Budget in connection with Stamp Duty Land Tax on property transactions. One of these arrangements involves the sale of a property by an individual to a financial institution combined with a lease-back to the individual and the granting of a right for the individual to re-acquire the original (usually freehold) interest. This kind of arrangement is sometimes entered into by individuals for religious reasons. New legislation has now been enacted to prevent multiple charges to Duty in circumstances of this kind. However, the proposal to legislate against the avoidance of Stamp Duty Land Tax by companies in cases involving artificial grouping arrangements has been put on hold pending the outcome of the Election.
VAT
The changes have been confirmed. These relate to increases in the thresholds for registration to £60,000 and deregistration to £58,000, as well as the new fuel scale charges where a business provides free or subsidised fuel for private use of a motor vehicle.
Savings
The continuation of the existing limits for investing in Individual Savings Accounts (ISAs) has been confirmed. The earnings 'cap' for personal pension scheme contributions has also been confirmed at £105,600 for 2005-06.
Miscellaneous Proposals
The important changes in the taxation of same-sex couples have been confirmed, but these do not take effect until 5 December 2005.
Charities
The proposal to deal with an 'abuse' of the gift aid system in relation to admission to historic properties has been dropped for the time being. (This was not going to take effect until 6 April 2006).
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Status of Memorandum
This Memorandum summarises our understanding of the main changes which have occurred following the announcement of the date of the General Election.
The next few months are likely to be a very hectic period for tax advisors and their clients, and it will be necessary to monitor changes very carefully.
This memorandum is not intended to cover every aspect of the new and proposed legislation, nor is it intended to provide exhaustive coverage of the aspects included. It is written for information purposes only. No decision should be taken based on the information contained herein without first seeking professional advice. The memorandum must be viewed as general comment rather than specific advice.
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