Spring 2008 – Current Issues

Welcome to our Spring 2008 newsletter, we are using this quarter’s newsletter to highlight some of the changes being implemented following the Budget announcement and some potential tax saving opportunities still available before the end of the 2007/08 tax year. This newsletter is only intended to be a brief summary of some of the main changes due to be implemented in April 2008, and is not a full review of all the changes due to take place.

Should you wish to discuss any potential tax planning areas further or discuss the potential impact of any of the changes being implemented in the 2008/09 tax year and how it will effect your business, please don’t hesitate to contact your relevant practice partner for further advice.

Personal Tax

A number of changes relating to personal taxation, due to come into effect from 6 April 2008 were announced in last year’s budget. The Chancellor confirmed the following changes will be implemented from 6 April 2008:-

• The 10% starting rate of income tax is to be abolished,
• The basic rate of income tax has been reduced from 22%, down to 20%,
• The personal allowances will increase from 6 April 2008. Basic individual personal allowances will increase to £5,435; the age-related personal allowances will rise to £9,030 for people aged between 65 and 74, and to £9,180 for those aged 75 and over.

Inheritance Tax

Inheritance Tax (IHT) may be payable on an estate when someone dies or when assets are transferred into a discretionary trust or to a company. In the Chancellor’s pre-budget report, it was announced that for deaths on or after 9 October 2007 it will be possible for spouses and civil partners to transfer their unused Inheritance Tax nil rate bands. For 2008/09, the allowance for individuals is £312,000 (2007/08 - £300,000) and £624,000 for married couples and civil partners.

ISA’s and Other Tax Efficient Investments

The overall annual investment limit for ISAs will rise to £7,200 (2007/08 - £7,000), of which £3,600 (2007/08 - £3,000) can be in cash, from 6 April 2008. If you have not made full use of your ISA for the 2007/08 tax year, then this should be done before 5 April 2008. Any income earned in ISA's is free from income tax. If you wish to make tax efficient investments beyond ISA’s, then you could also consider National Savings or Premium Bonds.

Capital Gains Tax (CGT)

From 6 April 2008 there will be a single rate of CGT of 18%. As part of this change, the tax-free annual exempt amount (currently £9,200) will remain, but taper relief and indexation allowance will be withdrawn.

Although this will simplify the calculation for CGT it would greatly increase the tax payable by individuals who have built up small businesses over many years and are now wishing to sell their businesses. In order to rectify this situation the Chancellor has announced a new relief called “Entrepreneurs’ Relief”. This relief will take effect from 6 April 2008 and will be available alongside the new CGT rules announced. Entrepreneurs’ Relief will be available in respect of:-

• Gains made on the disposal of all or part of a business,
• Gains made on disposals of assets following the cessation of a business, and
• By certain individuals who were involved in running the business

If you are eligible to qualify for Entrepreneurs’ Relief you will be charged CGT at an effective rate of 10%, rather than the 18% mentioned. An individual will be able to make claims for this relief on more than one occasion, but only up to a lifetime total of £1 million of gains which qualify. Any gains made in an individual’s lifetime in excess of the £1million limit will be charged at the normal 18% rate.

The Capital Gains Tax annual exempt amount will also be increased for individuals to £9,600 per annum for 2008/09 (2007/08 - £9,200).

Value Added Tax (VAT)

From 1 April 2008 VAT registration will be required where taxable supplies exceed £67,000 (£64,000 previously) for the previous 12 months or are expected to do so within the next 30 days. The deregistration threshold is also to be increased from 1 April 2008 to £65,000 (£62,000 previously).

Corporation Tax

From 1 April 2008 corporation tax rates will be changed, with the lower rate of corporation tax being increased and the upper rate of corporation tax being reduced. The table below shows the changes year on year.

Capital Allowances

Capital allowances allow the costs of capital assets to be written off against a business's taxable profits. The Chancellor has introduced new rules in relation to claiming capital allowances for the 2008/09 tax year. The first £50,000 of expenditure on plant and machinery per business or group of companies will be allowed 100% tax relief per tax year. Before April 2008 first year allowances are available to businesses with a turnover up to £5.6million at a rate of 50% of the cost of acquisition. Therefore, businesses considering spending more than £50,000 on plant and machinery in the 2008/09 tax year should consider bringing any amount in excess of this £50,000 limit into their acquisitions for the 2007/08 tax year to take advantage of the first year allowances currently available.

Due to the amount of changes being implemented in relation to capital allowances we have not been able to detail fully all the alterations being incorporated in the 2008/09 tax year. For details of the specific rates of tax relief available for any capital expenditure you may have in mind, please contact us for further details.

Pensions

Higher rate taxpayers looking to reduce their 2007/2008 tax liability should consider making contributions into their pension before the end of the current tax year. Any pension contribution paid will extend the amount of income taxable at the current basic rate of income tax of 22%, rather than the higher rate of 40%. Individuals aged 55 and over can also potentially have 25% of any contribution repaid to them as a tax-free lump sum.

To qualify for tax relief against 2007/2008 income, contributions must be paid by 5 April 2008. The annual pension allowance for the current tax year is £225,000, rising to £235,000 for the 2008/09 tax year. The lifetime allowance for pensions currently at £1,600,000 will also increase to £1,650,000 for the 2008/09 tax year.

Income Shifting

The Chancellor didn't mention income shifting in this years Budget but it appears that plans to go ahead with the so-called "family business tax" have been postponed until 2009. A treasury budget press release has been released stating the government now intends to introduce legislation through Finance Bill 2009 and will not enact legislation effective from 6 April 2008. Until then the full impact of this proposed change of legislation and how it will be controlled are unknown. The legislation is not intended to apply to genuine commercial arrangements, or transactions involving an unconnected party on an arm’s length basis.

KEY DATES

Whilst all due care and attention has been taken in the preparation of this review, we cannot accept responsibility for loss occasioned by any person acting or refraining from action as a result of material contained therein. There is no substitute for professional advice specifically tailored to your personal circumstances. We can give that advice and welcome the opportunity of assisting you. If you would like to discuss any of the issues raised further, or for us to arrange a review of any of your procedures, please contact Alan Cohen or Darren Swann as follows:-

Tel: 0161 249 5040 Fax: 0161 448 9287
Email - alanc@leonherman.co.uk or darrens@leonherman.co.uk