The Budget 2005

• Introduction

• Personal tax

• Employment issues

• Corporate & Business Tax

• Capital taxes and Trusts

• Stamp duty land tax

• VAT, Excise & other duties

Personal Tax

Tax rates

For the sixth consecutive tax year, income tax rates remain at 10%, 22% and 40%. The special rules for savings income and dividends continue to apply.

Comment
It seems likely that Labour will fight the forthcoming General Election with a promise not to raise the basic and top rates of income tax. Time will tell but undoubtedly it raises the spectre of further national insurance rises instead.

Allowances

The 2005/06 personal allowances were announced in last December’s Pre-Budget Report. The personal allowance for the under 65s is increased in line with inflation to £4,895. Personal allowances for those aged 65 and over are increased in line with earnings.

Child Tax Credit

The Child Tax Credit which is means tested is potentially available to families who have responsibility for one or more children. The credit is paid direct to the main carer. There are several elements to the credit but broadly the maximum is an annual amount for 2005/06 of £1,690 per child together with a family element (one per family) of £545 per annum. The amount per child will increase at least in line with earnings up to and including 2007/08. The family element has been frozen since the introduction of the credit.

Working Tax Credit (WTC)

The WTC was introduced to reward the work of people on low incomes whether or not they have children. It also provides working families with assistance to meet the costs of childcare. The annual income threshold for 2005/06 is £5,220 (up from £5,060 in 2004/05) with a reduction of 37p for every extra £1 of income. The basic maximum benefit is increased to £1,620 for 2005/06.

Childcare costs continue to form part of the WTC calculation at a rate of 70% of eligible costs up to a maximum of £175 per week (£300 if two or more children). This element is paid with Child Tax Credit. Although the limits were frozen for 2004/05 they have been significantly increased for 2005/06.

Comment
In his Pre-Budget Report speech last December, the Chancellor referred to the percentage of childcare costs covered by the WTC rising from 70% to 80%. However this change is not intended to take effect until April 2006.

Child Trust Fund (CTF)

The CTF was originally announced in the 2003 Budget and is about to become a reality. It is described by the government as a ‘new long-term savings and investment account for children’. A child born since September 2002 is eligible for a CTF account if Child Benefit has been awarded for them and they are living in the UK.

The CTF was officially launched in January 2005 with an announcement of the official providers and an advertising campaign. The government will provide an initial endowment of £250 (£500 for low income families).

Vouchers have been sent out and should be used to open a CTF account when they become fully operational in April 2005.

Comment
The government is also considering, subject to consultation, further payments at secondary school age.

Child Benefit

Child Benefit is currently payable to children up to the age of 16. It is also payable for children between the ages of 16 and 19 if they are in full-time non-advanced education. It will be extended under provisions in the Child Benefit Bill to the families of 16-19 year olds in unwaged work-based training and 19 year olds completing a course of education or training. From April 2005 the weekly rate of Child Benefit will be £17.00 for the first child and £11.40 for subsequent children.

Pensions

The maximum earnings for which tax allowable pension contributions can be made is increased from £102,000 to £105,600 from 6 April 2005.

Action Point
Under the current pensions regime, individuals can contribute £3,600 (gross) per year with no link to earnings. This makes it possible for non-earning spouses and children to make substantial contributions to pension schemes.

The new pensions regime, originally announced in December 2002, will finally take effect in April 2006. From that date there will be a single set of tax rules for all registered pension schemes. A further package of measures has recently been announced, many of which arise as a result of further liaison with the pensions industry. The new measures fall into four main areas:

• benefits and contributions

• lifetime allowance

• unauthorised payments

• transitional issues.

They are intended to provide additional flexibility, clarify certain points in the legislation, smooth the transition to the new regime and introduce further anti-abuse and compliance rules. The new measures do not alter the key points of the new regime which remain as follows:

• a single, lifetime limit on the amount of pension saving that can benefit from tax relief, initially to be set at £1.5 million and rising to £1.8 million by 2010

• any excess over the lifetime limit to be subject to a 25% ‘recovery’ charge

• pension funds in excess of the lifetime limit may be withdrawn entirely as a lump sum subject to a higher recovery charge of 55%

• an annual allowance (the maximum contribution qualifying for tax relief in a tax year) of £215,000 rising to £255,000 by 2010

• individuals will be entitled to tax relief on personal contributions in any given tax year up to the higher of 100% of relevant earnings or £3,600

• an increase in the age at which pensions can be drawn to 55 by 2010.

Action Point
Where an individual has pension rights valued in excess of £1.5 million when the new rules are introduced, this value can be protected together with any growth up to the RPI. Alternatively individuals who plan to cease contributions to all pension schemes by April 2006 can register for ‘enhanced’ protection thereby avoiding the recovery charge altogether. Therefore consider boosting contributions over the next year if you are a high earner or already have a valuable pension fund.

Pension Protection Fund (PPF)

The Pensions Act 2004 legislated for the PPF which will come into being from 6 April 2005. The fund will assume responsibility for defined benefit schemes whose sponsoring employers have become insolvent. The PPF will pay compensation to scheme members in lieu of the benefits they would have received from the scheme. The PPF is not a pension scheme but will be given the same tax treatment as the pension scheme it protects.

Pre-owned assets

Back in December 2003 the government announced its intention to legislate against what it saw as inheritance tax (IHT) avoidance.

New measures effective from 6 April 2005 introduce an annual income tax charge in circumstances where an individual has been able to remove an asset from their estate for IHT purposes but still continues to be able to enjoy the use of it or to benefit from it. These new rules come as the Inland Revenue’s response to the successful use of IHT saving schemes particularly in relation to the family home. The new rules apply to land, chattels and certain interests in trusts.

The annual income tax charge is based on the value of the benefit from using the asset, ie its rental value. Logically there will be a deduction for any rent actually paid and a de minimis threshold of £5,000. Other exclusions cover situations where:

• the asset still counts as part of the taxpayer’s estate for IHT purposes or

• the asset was sold at an arm’s length price, paid in cash.

In addition individuals who have already entered into a scheme now caught by the new rules can elect to avoid the income tax charge and accept instead that the asset is still in their estate for IHT purposes.

Action Point
Despite the fact that the new regime is only effective from 6 April 2005, it can apply to arrangements that may have been put in place at any time since March 1986. Existing schemes need to be reviewed to see if the new charge will apply.

Comment
Although the start date for the new rules is almost upon us, there are still questions as to how the regime will operate in practice, in particular the question of valuing assets, which will always be subjective. This raises concerns that practical issues relating to the application of the regime will not be addressed until after it becomes fully operational in April.

Individual Savings Accounts (ISAs)

The ISA rules are changing on 6 April 2005. From that date it will still be possible to hold an insurance policy in an ISA but the separate mini insurance ISA will end and instead, depending on the type of insurance policy, it will now qualify for either the:

• mini ISA cash component with an unchanged limit of £3,000

• mini ISA stocks and shares component with an increased limit of £4,000

• maxi ISA with a limit of £7,000.

Comment
When ISAs were introduced in 1999 they were guaranteed to run for ten years to 2009. Currently the overall annual investment limit is £7,000 with a maximum of £3,000 in cash and this was guaranteed to run until the end of 2005/06. The government now plans to further extend the existing limits until 2009/10.

Gift Aid

To encourage additional Gift Aid donations, the scope of the exemption which allows for the right of free admission to donors to be disregarded as a benefit will be expanded to allow more types of charities to benefit. In addition, the exemption will be amended, so Gift Aid will apply where a donation is at least 10% more than the normal admission charge or where a donation results in the unlimited right of admission for a period of not less than 12 months.

These changes will be introduced in April 2006 to allow time for charities to make any necessary changes.

Civil Partnership Act (CPA)

The CPA which gives legal recognition to same-sex couples became law in November 2004. However the Act does not come into effect until 5 December 2005. The Act will allow same-sex couples to make a formal legal commitment to each other by entering into a civil partnership through a registration process. A range of important rights and responsibilities will flow from this including legal rights and protections.

With effect from 5 December 2005 registered same-sex couples will be treated in the same way as married couples for tax purposes. 

Comment
One of the key areas affected will be inheritance tax where transfers between partners will be exempt.

Residence and domicile

The government is continuing to review the residence and domicile rules as they affect the taxation of individuals and is considering various aspects of this issue in light of the responses to the background paper published in Budget 2003. The government would welcome further contributions to the debate, which will then be taken forward by the publication of a consultation paper setting out possible approaches to reform.

Comment
It does seem as though the government has rather lost its way on this issue. The background paper was originally published two years ago and to date there is no further detail or indication of the proposed way forward.

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Disclaimer - for information of users
This summary is published for the information of clients. It provides only an overview of the main proposals announced by the Chancellor of the Exchequer in his Budget Statement, and no action should be taken without seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.