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Family Law Week's Budget Briefing

Changes to CGT and VAT impact on family lawyers

Image of Vanessa Hamer, Tax Partner, RSM Tenon

Vanessa Hamer, Tax Director, RSM Tenon

Chancellor George Osborne's emergency Budget lived up to expectation, in that the main emphases were reductions in public spending, together with a general increase in taxes. 

Family lawyers will be concerned by the increase to clients' fees resulting from a 20% VAT rate. They will also be braced for cuts in children's services as a result of the proposed reduction of the public sector budget. This is also likely to have an impact on Government IT projects including preparations for the introduction of the Family Procedure Rules. An increase to the rate of CGT will also be factored into calculations on divorce if assets need to be sold in order to fund a settlement. The detail is set out below.

VAT and IPT 
Although widely predicted, the increase in the standard rate of VAT from 17.5 - 20% was probably the most unwelcome change in the current Budget. Whilst it was expected that the increase would take immediate effect, the Chancellor announced that the increase would be delayed until 4 January 2011, although anti-forestalling measures will apply to transactions occurring between 22 June 2010 and 4 January 2011. 

In addition, the Chancellor announced that the standard and higher rates of IPT would also increase from 4 January 2011. The new rates would therefore be 6% and 20% for standard and higher rate IPT respectively. 

Capital Gains Tax 
The increase to the rate of capital gains tax for higher rate taxpayers, whilst expected, still held the surprise of taking effect from 23 June 2010. Any gains realised by a higher rate taxpayer after Budget day will therefore be taxed at the rate of 28%, rather than the pre-budget rate of 18%. For basic rate taxpayers, the new 28% rate will only apply if the total taxable income and gains after allowable deductions exceed the basic rate income tax band. In this instance a basic rate taxpayer will pay tax at 28% on the element of the gain that exceeds the basic rate threshold. The Chancellor further announced that the capital gains annual exemption would remain at £10,100 for the current year. 

Better news was available for entrepreneurs, with the announcement that the lifetime limit on gains qualifying for entrepreneurs' relief will increase from £2 Million to £5 Million with effect from 23 June 2010 and the 10% effective tax rate will be maintained for both basic rate and higher rate taxpayers. 

Capital Allowances 
Whilst the Chancellor was keen to emphasise the support for businesses in the budget, one policy change where this was not seen was in relation to capital allowances, where both the Annual Investment Allowance and rate of Writing Down Allowance will decrease. Currently businesses are eligible to claim 100% tax relief on qualifying capital expenditure of up to £100,000 per annum. This allowance, known as the Annual Investment Allowance, will decrease to £25,000 of qualifying capital expenditure per annum with effect from April 2012. With effect from the same date, the standard rate of writing down allowance will reduce from 20% to 18% per annum and the writing down allowance applicable to long life assets will reduce from 10% to 8% per annum, thereby delaying the tax relief available on the purchase of qualifying capital equipment. 

Although the Budget contained significant tax increases, there were also a number of significant tax decreases announced including a reduction in the standard and small companies' rates of corporation tax, an increase in the personal allowance to benefit basic rate taxpayers and an increase in the secondary National Insurance threshold for employers National Insurance contributions. 

Corporation Tax 
The Chancellor announced that it was his intention to make the UK more attractive to inward investment and he believes the key to this is through lower corporate tax rates. With effect from 1 April 2011, the main rate of corporation tax will decrease by 1% to 27% and, for each of the following three years, the rate would be reduced by a further 1% giving a mainstream corporation tax rate of 24% by 1 April 2014. 

For small companies, where annual taxable profits are less than £300,000, the rate of corporation tax applicable on their profits will decrease from 21% to 20% on 1 April 2011. 

Personal Allowance 
With the emphasis on benefitting those most in need, the personal allowance will increase from the current rate of £6,475 - £7,475 from 6 April 2011. However the Chancellor was keen to state that the increase would only benefit basic rate taxpayers, with a corresponding reduction being applied to the basic rate limit to ensure that higher rate taxpayers do not also receive the benefit of this uplift in the personal allowance. 

National Insurance 
To encourage job creation, the Budget contained a number of National Insurance savings for employers. This includes an increase to the secondary threshold, which is the point at which employers start to pay Class 1 National Insurance by an extra £21 per week above indexation from April 2011 and a reduction in employers' National Insurance contributions of up to £5,000 per employee for new employers in targeted regions for the first 10 jobs that they create in their first year of business. 

Other Measures 
The Chancellor was keen to announce that tax increases were only part of his strategy for the five year life of this parliament and the country's economic recovery. In addition to the increased tax revenues, George Osborne announced that there will be spending reductions of £31.9 Billion a year by 2014 - 15. Of this saving, £29.8 Billion will be derived from cuts in the public sector current expenditure, with the remainder coming from public sector gross investment. 

Public Sector  
For public sector employees, the Chancellor announced that there would be a two year pay freeze for all employees with income in excess of £21,000 per annum. Those employees on less than £21,000 per annum would receive modest increases of £250 per year. 

Welfare Reform 

Pensions
The measures announced for welfare reform included good news for pensioners, where the basic state pension will increase by at least 2.5% from April 2011.

Tax credits
However middle income families will be hit by the reduction in tax credit eligibility for families with income in excess of £40,000 (down from £50,000) from April 2011. Several further changes were announced in respect of the tax credit system that will have an impact on low income families. These included an increase in the child element of the Child Tax Credit of £150 above the Consumer Price Index (CPI) from April 2011 and the removal of the baby element of the Child Tax Credit on that date. 

Child benefit
Families were also targeted by the freezing of the rates of Child Benefit for three years from 2011-12. Although this measure would affect low income families, the Chancellor considered that a freezing of the current rates for all families was the simplest method of maintaining the current cost of Child Benefit. 

Housing benefit
Housing Benefit is also to be reviewed, with the Chancellor proposing the introduction of payment caps based on the number of bedrooms of the property. For the largest properties, with four or more bedrooms, a cap of £400 per week will be introduced to ensure that the escalating cost of housing benefit is curtailed. 

Pensions 
Further changes were announced to the tax relief available on pension contributions made by the highest earners (income in excess of £150,000 per annum). These changes will take effect from April 2011, where the restriction on relief will be achieved through a reduction in the Annual Allowance rather than the current proposal of a claw back of the higher rate income tax relief. 
 
The Chancellor has also announced the Government's intention to end the effective requirement to buy an annuity by the age of 75 from 2011 / 12. Legislation will also be introduced in the Finance Bill to increase the age from 75 to 77 by which members of registered pension schemes have to buy an annuity or otherwise secure pension income.