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Family Law Week's Budget Briefing

Vanessa Hamer, Tax Director with RSM Tenon, reviews the Chancellor's 2011 Budget announcements

Vanessa Hamer, Tax Director, RSM Tenon

Vanessa Hamer, Tax Director, RSM Tenon

Chancellor George Osborne's second budget contained little of direct relevance to family law practitioners concerned with their clients' matrimonial or family difficulties though there are several measures of which they ought to be aware.

The extension of Entrepreneurs Relief (see below) will assist those where there is a need to sell the family business (or part of it) as, for instance, part of a divorce settlement. Practitioners will also need to factor in, in due course, the proposed changes to the pensions regime. The incentives for businesses include schemes from which solicitors' firms themselves might be able to benefit.

Economic Background
The Chancellor was keen to emphasise that the economic climate remained difficult, with the economic growth forecast for 2011 reducing to 1.7%, from the initial estimate of 2.1%. However he made it clear that his intention was to aid business, whilst continuing to control spending.

Of the measures announced, the main headline changes revolved around encouraging investment in the UK, obtaining the right amount of tax from UK resident individuals and minimising the tax liability on the sale of businesses by entrepreneurs.

Corporation Tax
To encourage overseas investment in the UK, the Chancellor announced that the mainstream rate of corporation tax would decrease from the current rate of 28% to 26% from 1 April 2011, with a further 1% decrease in each of the following three years. This would give the UK one of the lowest rates of corporation tax in Europe by 2014, at 23%. The small company's rate will also decrease by 1% to 20% from 1 April 2011.

Incentives to Businesses
As an incentive to invest in small businesses, the Chancellor announced an increase in the rate of income tax relief that would be available on qualifying investments in Enterprise Investment Schemes ("EIS"). Whilst the proposal is subject to European State aid approval, the rate of income tax relief will increase from 20% - 30% from 6 April 2011, making this a very generous relief for those willing to invest in small trading companies. The proposal also includes doubling the level of qualifying investment that can be made under EIS schemes from £500,000 to £1 million and an increase in the gross asset test for qualifying companies to £15 million. These two latter proposals are due to take effect from 6 April 2012.

Investment in infrastructure for businesses will increase through the previously alluded to reintroduction of Enterprise Zones. The Chancellor confirmed that 21 new Enterprise Zones will be created, which will offer up to 100% business rate discount for up to 5 years, superfast broadband connections and enhanced capital allowances. For small businesses located outside of the new Enterprise Zones the small business rates relief holiday is to be extended for a further 12 months from 1 October 2011.

The Chancellor confirmed his committment to developing technology in the UK with increased funding for certain research organisations. In addition, for companies that qualify as small or medium sized entities ("SME's") under the Research & Development ("R & D") tax relief scheme, the rate for qualifying expenditure will increase to 200% from 1 April 2011 and 225% from 1 April 2012. This increase is again subject to European State aid approval. The minimum spend criteria of £10,000 will also be removed from 1 April 2012, giving a welcome incentive for very small businesses that are investing modest amounts in R & D activity.

The Chancellor confirmed his commitment to reducing borrowing and funding tax cuts from new tax revenues by announcing that most of the above changes are to be funded from the increase in the Bank Levy. This increase will take effect from 1 January 2012.

Capital Gains Tax: Entrepreneurs Relief
Of the other announcements, the main surprise was the doubling of the Entrepreneurs Relief lifetime allowance from £5 million to £10 million. This relief was already generous in the current economic climate as it allowed entrepreneurs to pay capital gains tax at a rate of only 10% on the first £5 million of qualifying gain. With the doubling of this relief from 6 April 2011 the number of business sales wholly qualifying for Entrepreneurs Relief will undoubtedly increase, giving some welcome news for individuals who are looking to exit from their business.

Personal Allowance
For individuals, the previously announced increase of £1,000 in the personal allowance will take effect from 6 April 2011, taking the basic personal allowance to £7,475 with a further increase of £630 announced from 6 April 2012. The Chancellor also confirmed that his view was that the 50% income tax charge for individuals with income over £150,000 per annum was only a temporary charge and it was his intention to reduce this rate at a future date.

Fuel Allowance
Mileage rates for individuals who use their own cars for the purpose of their employers business will also increase for the first time since 2002 from the current rate of 40p per mile for the first 10,000 business miles to 45p per mile to recognise the increasing cost of using a private car for business purposes.

Non-domiciled Residents in the UK
For non-domiciled individuals who have been resident in the UK for more than 12 years, there was the unwelcome news that the remittance basis annual tax charge will increase from £30,000 to £50,000 per annum. However, as an incentive for non-domiciled individuals to invest in UK businesses, any tax on overseas remittances will be waived if the funds are used to invest in a UK business.

First Time Buyers
Other announcements made in the 2011 Budget included measures to help first time buyers get onto the property ladder with a £250 million commitment to a new joint ownership scheme. Although the details of the scheme are still to be announced, the Chancellor hopes that this measure will significantly help the first time buyer obtain their own home.

Pensions Reform 
The Chancellor has proposed to simplify the State Pension system into a new flat-rate pension based on contributions. The new system is estimated to be worth around £140 per week. It will not apply to current pensioners.

The government will seek to create a more automatic mechanism for future increases in the State Pension Age based on regular, independent reviews. The Budget announced no further changes to the State Pension Age, which is due to rise to 66 by April 2020.

In the autumn the Treasury will set out proposals for public sector pensions, based on Lord Hutton's recommendations.

Integration of National Insurance and Income Tax
Going forward, the Chancellor announced his intention to align increases in national insurance with the Consumer Prices Index (CPI), consult on the current systems of income tax and national insurance with the aim to integrate the two systems at a future date.

Inheritance Tax Developments
The Treasury will also look at reducing the rate of inheritance tax charged on an estate where the estate includes a donation of at least 10% of the value of the estate to charity.

High Value Properties
The Chancellor referred to the 'widespread' evasion and avoidance of tax on high value properties. He said that the Treasury would be redoubling its efforts to find ways of ensuring that owners of high value property cannot avoid paying their fair share. No further details were available concerning these plans.

Although this years Budget was limited in the number of tax cuts that were made, those that we have seen will be welcome news to businesses and the entrepreneur.

The tax changes, an overview of tax legislation and tables of tax rates, allowances and thresholds can be viewed on the Treasury website.