Chancellor George Osborne?s second budget came against an unfavourable economic backdrop so it was never going to be a give away, but he also had to take steps to encourage economic growth and hel
Chancellor George Osborne?s second budget came against an unfavourable economic backdrop so it was never going to be a give away, but he also had to take steps to encourage economic growth and help families being hit by the high cost of living. Most measures do not directly affect expatriates – although they are a sign of the times around Europe – while others can impact on those living abroad.
The economy
Economic growth has been revised down from 2.1% to 1.7% for this year as a result of high inflation, bad weather and global commodity prices.
Borrowing to fund the deficit is expected to be ?146 billion this year, an improvement on previous calculations. The government is aiming to reduce it right down to ?29 billion by 2016. Public sector debt will peak at 70.9% of gross domestic product – or ?1.25 trillion – in 2013-14.
Osborne said that the government had set out a credible, comprehensive plan to deal with the deficit and that the budget was about reforming the economy, and ensuring enduring growth and jobs in future.
Inflation is expected to remain between 4% and 5% this year, before falling to 2.5% next year and 2% in 2013.
This situation of high inflation and low economic growth continues to make interest rate decisions very hard for the Bank of England and quite when it will be able to raise its base rate is anyone?s guess at the moment.
Corporation and capital gains tax
In order to help British businesses, corporation tax will be reduced from 28% to 23% by 2014. The Business Rate Relief for small businesses which was scheduled to end in October has been extended by a year.
The Entrepreneurs? Relief was doubled so anyone selling a family business will be taxed at 10% on gains up to ?10 million.
These measures, along with any improvement in economic growth, could potentially boost UK shares and thus benefit expatriate investors.
Personal taxation
As unfortunately is often the case with budgets, what governments give away with one hand they take away with the other.
Osborne made the headline grabbing announcement that the personal allowance for income tax will increase to ?8,105 from 2012. He also confirmed that from 6th April this year the personal allowance increases by ?1,000 to ?7,475.
However, the threshold at which people start paying higher rate tax is also scheduled to be reduced from ?43,875 to ?42,475 so that higher rate taxpayers do not benefit from the increase in the personal allowance. It is estimated that 750,000 people will start paying higher rates.
The previously announced 1% increase to National Insurance contributions also starts in April. Households with a higher rate taxpayer will also no longer be eligible for child benefit.
The budget included a rather more subtle change which will benefit the Treasury rather than taxpayers.
In future, taxes and tax allowances will be increased in line with the Consumer Price Index (CPI) rather than the more generous Retail Price Index (RPI). The move is effectively a stealth tax and the Treasury expects to claw ?1 billion a year back by 2015-16 as a result. Some experts calculate the move could cost families close to ?30 billion.
This affects national insurance and the ISA and capital gains tax allowances. Once the inheritance tax threshold is unfrozen in 2015 it will result in your estate paying more tax.
Osborne announced that the 50% rate of income tax on higher earners is ?temporary? and he is consulting on how effective it has been at raising revenue. Comments made by Business Secretary Vince Cable and Deputy Prime Minister Nick Clegg after the budget suggest that it could be replaced by some sort of ?mansion tax? on more expensive properties.
The government will also raise ?200 million in the coming years by increasing the tax paid by non-domiciles from ?30,000 to ?50,000 for each year they live in the UK after 12 years. This measure is under consultation and if brought in will not go ahead until April 2012.
Inheritance tax (IHT)
If you give 10% or more of your estate to charity, your IHT rate will now be reduced from 40% to 36%. This does not actually benefit beneficiaries but you may feel better knowing some of your money is going to charity rather than the taxman.
Pensions
The previously announced pension reform proposals were finally confirmed. They are very beneficial for those over 75 years, but somewhat less so for those under 75 who see lower income limits and higher death charges.
The drop in lifetime allowance to ?1.5 million will go ahead from 6th April 2012. Those with larger funds have a one year window to take advantage of the current limit.
State pension age
Osborne said he wants pensions which are fair to workers and ?fair to the taxpayers who have to fund them? and announced that in future the state pension age could automatically rise along with life expectancy. This means people currently in their twenties could have to wait until they are 75 to receive state retirement benefits.
Other countries like Germany, Sweden and Norway have introduced a link between state retirement age and life expectancy.
Residence
Following a court case last year where HM Revenue & Customs successfully argued that its IR20 guidelines on residency were not binding, the government appears to be giving in to pressure to deliver a statutory definition of residence. The Treasury will consult in June to provide greater certainty for taxpayers. The aim is to create a test to determine what makes a person UK resident or non-resident for tax purposes, to be implemented from April 2012.
For advice on tax planning or residency issues, either in the UK or in countries like Spain, France, Portugal, Cyprus and Malta, contact an international tax advisory firm like Blevins Franks.
By Bill Blevins, Managing Director, Blevins Franks
30th March 2011
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.
