While Chancellor Alistair Darling?s last Budget under the current administration contained few direct tax increases, it was nonetheless a budget designed to increase tax revenue. Considering Brit
While Chancellor Alistair Darling?s last Budget under the current administration contained few direct tax increases, it was nonetheless a budget designed to increase tax revenue. Considering Britain?s record debt levels, it is hardly surprising that the Chancellor is seeking to improve Treasury coffers. He was not in a position to offer tax breaks as the government would normally like to do just before a general election.
By not increasing income tax, social insurance or VAT this time around, he may have hoped to appease voters, but the papers were quick to describe this as a ??19 billion tax raid on the middle classes?.
In his Budget speech, Darling said that he will find ?57 billion over the next four years to reduce the deficit by half. Besides the ?19 billion to be raised from tax, he highlighted ?9 billion in spending cuts. Britons will apparently need to wait until after the elections to find out how measures to raise the remaining ?37 billion will affect them.
Income tax and personal allowances
Darling pointed out that 60% of the tax increases will be paid by the top 5% of earners, saying that those who are better off should pay their ?fair share?.
Although he failed to mention personal income tax allowances in his speech, they have been frozen, a move described in the press as ?classic stealth tax?, one which, according to The Telegraph, is far greater than previously attempted.
The freezing of allowances means that lower earners are not spared from tax rises. Anyone earning over ?43,875 will pay more tax and 75,000 taxpayers will find themselves paying a higher rate for the first time.
Shadow Chancellor George Osborne pointed out that failure to increase allowances will hit 30 million taxpayers with higher bills.
Thanks to measures from the previous Budget and Pre-Budget Report, higher earners already face a series of tax rises, starting this April. Some will pay an effective income tax rate of 60% due to the tapering down of the personal allowance on income over ?100,000, with anyone earning over ?150,000 paying tax at 50% on income in excess of this. Higher-rate pension tax relief for those earning over ?130,000 was also previously restricted and starting April 2011, anyone earning over ?20,000 will have higher National Insurance contributions.
According to The Telegraph, senior Tory sources have confirmed that a Conservative Government would keep Labour?s tax rises targeting the wealthy. Instead, it would repeal at least part of the National Insurance rises scheduled for April 2011.
Inheritance tax (IHT)
Although he had been widely expected to increase the IHT rate from its current 40%, Darling instead froze the nil rate band threshold at ?325,000 (?650,000 for couples) for a further four years. The move is to help meet the cost of care for older people.
It will cost families an extra ?37,000 in IHT in real terms. While increasing the rate would have been a more obvious tax rise, with inflation at 3%, this method will increase the amount of IHT paid as more families get caught out over time. An estimated 650,000 more estates will fall into the IHT net and the amount collected will increase as a greater proportion of estates could be subject to the charge.
Darling doubled the stamp duty ?holiday? for first time buyers to ?250,000 for two years, a move which was welcomed. However, to fund it, he also increased the duty on properties valued at over ?1 million, from 4% to 5%. It has been widely noted in the press that whilst there is a limited period to the holiday, it appears that the increase on higher value properties is permanent.
It is calculated that this will cost affected buyers a minimum ?10,000 extra on their property.
According to estate agent Frank Knight, 26% of properties nationwide will pay the higher rate, while in London this figure increases to 56%.
Capital Gains Tax
One widely expected change which did not materialise was an increase in the rate of capital gains tax, which is currently levied at a rate of 18%. This was a surprise to many commentators, particularly as the top rate of income tax will be 50% in just two weeks, a differential of 32%.
However, Darling did increase the lifetime Entrepreneur?s Relief to ?2,000,000. Those selling out of qualifying businesses will be able to pay just 10% tax on up to this amount of gain.
In anther move to improve tax revenue, Darling confirmed severe penalties for deliberate and concealed tax evasion. The penalty for those who fail to declare income earned in countries which do not share tax records with the UK is doubling to 200% of the unpaid tax.
The government has also signed new tax information exchange agreements with the Dominican Republic, Grenada and Belize, resulting in even fewer places where to hide money away from the taxman.
Darling stood by his forecast that the economy will grow by 1-1.5% this year, but slightly reduced that for next year to between 3-3.5%.
With the help of tax revenue from bankers? bonuses, Darling estimates the amount the government will borrow this year has reduced from ?178 billion to ?167 billion. This will fall to ?110 billion for 2012-13.
The total budget deficit will be 11.8% of gross domestic product (GDP) this fiscal year; 11.1% next year then falling to 4% in 2014/15. Public sector debt will reach 54% of GPD this year, increasing to 75% by the end of 2014-15, when it will start to fall.
Independent analysts believe Darling is being too optimistic with his forecasts. Using the independent figures, the deficit will take much longer to half and will peak at 100% of GDP by 2018 ? which would be its highest since the early 1960s. Jonathon Loynes of Capital Economics warned, ?further decisive action to put the public finances back into a sustainable position will be needed after the election?.
While British expatriates may have been relieved to have escaped the UK tax regime, the situation is not much better in other European countries and we could see more tax rises or stealth taxes coming our way. The UK budget and its ?tax raid on the middle classes? is a good example of why it is worth reviewing your financial planning to see what steps you can take to legitimately lower your tax bill.
The IHT measures will hit thousands of expatriates as it extends beyond residency and is charged on worldwide assets. As an expatriate you may however be able to use one of the new QNUPS pension arrangements to free your investable wealth from this tax, as well as some local taxes. Seek advice from a wealth management and international tax adviser such as Blevins Franks.
By Bill Blevins, Managing Director, Blevins Franks
25th March 2010