Extending the lifetime limit

As expected, the Chancellor of the Exchequer raised the rate of capital gains tax (CGT) in the Emergency Budget in June. CGT rose from 18% to 28% for higher rate taxpayers only, with immediate effect. However, the Chancellor also decided to alleviate the pain of higher CGT for small business owners by increasing Entrepreneurs’ Relief on business disposals. They now qualify for a reduced CGT rate of 10% on the first £5 million of lifetime gains made through the set up and disposal of small businesses, claiming Entrepreneurs’ Relief as many times as they like until this limit has been reached.

The coalition government used this as a way to demonstrate its support for smaller companies, and the new measures were broadly welcomed by their owners. However, some business groups were critical, believing the measures to be too limited; for example they did not extend to private-equity style investments, and general employees will not qualify for relief on any shareholdings they build in the companies they work for.
In order to qualify, entrepreneurs must have held the relevant assets for at least a year, must be an officer or employee of the company, and must have an equity ownership stake of 5% or more in the business. This means that, for some small companies, only the major stakeholders will benefit, and highly successful entrepreneurs who realise more than £5 million from the sale of businesses could actually end up worse off, as any excess will now be taxed at 28%.

Use your tax breaks

Benjamin Franklin's view that nothing is certain except death and taxes has yet to be disproved. However, using the tax allowances granted by the Government can at least help mitigate the tax side. At the basic level, there is a personal income tax allowance, an annual exemption from capital gains tax plus numerous tax credits dependent on your circumstances. Schemes like Gift Aid offer tax relief on donations to charity and there is also an Inheritance Tax (IHT) threshold below which nothing is due. Alongside, there are tax efficient investment products, such as Individual Savings Accounts and pensions, which provide relief from both income and capital gains tax (CGT) to differing extents. In addition, some individual assets are specifically exempt from CGT - your home, your car, certain personal jewellery, antiques and UK Government bonds (gilts). In terms of IHT, for the 2010/11 tax year, the threshold is £325,000 (£650,000 for married couples and civil partners) and the value of your estate above this is liable to tax. This can leave beneficiaries having to sell family heirlooms to pay the tax bill. However, there are exemptions available from this tax as well, and a little bit of planning can help you access the range of annual exemptions and allowances in advance. This can help you reduce the liability as far as is practical – or provide the means with which your beneficiaries can pay it without having to sell items of sentimental value.

A new political dawn

After a couple of nail-chewing weeks, the UK finally has a new government. It may not be quite what markets would have wished for - equally it is not as bad as they might have feared. But this is unchartered territory with the UK coping with an economic crisis and a political set-up not seen for a generation. Do investors need to prepare themselves for a bumpy ride? Or are the new government’s policies likely to bring stability? First, it must be said that some measure of certainty is welcome. Markets hate uncertainty and the mere fact that a government has been formed has allowed them to concentrate on other areas (like the crisis in the Eurozone). The pound has seen a small rally against the Euro since the election, though this may be more a function of the potential weakness across Continental Europe than a vote of confidence in the new government. More certainty of government is good for gilts, as is the fact that all the major rating agencies said that the outcome of the election had not changed their view on the outlook for the UK. That said, many other problems remain: Over-supply continues to be an issue and the rating agencies may not look so favourably if credible steps are not taking relatively quickly to deal with the deficit. All eyes will be on the new budget on 22nd June. Coalition is not a disaster. Markets had expected a hung parliament and the current compromise is probably as good as they could have hoped for. The true extent of the compromise is unlikely to be seen until the first budget. Watch this space.

What does it mean?

What does our new coalition Government mean for your financial plans? The UK economy is running an unprecedented deficit so we can be sure that somewhere, one or two taxes will rise. In the spirit of compromise, there will be no imminent rise in the Inheritance Tax threshold and the priority is instead a rise personal income tax allowances. Alongside, however, the Prime Minister has given indications that there maybe changes to Capital Gains Tax coming. Rumour also has it there will be rises in VAT. Until we see the Budget Statement on the 22 June, we will not know anything for sure. However, now may be a good time to start a review of your own plans so you are ready to make a change should that be required.

The Coalition Government making its presence felt

An increase in capital gains tax (CGT) will be at the heart of any package of reforms. Currently, at a rate of 18% on "non-business assets", this is likely to increase to close to 40%.

The income tax threshold is likely to rise to £10,000 from April 2011, with plans to ditch the employee part of the proposed National Insurance increases.

The £1 million threshold on inheritance tax was always unlikely, while the Lib Dems have had to give up on their "mansion tax" on properties worth more than £2 million.

Public sector pensions are to come under scrutiny, with a commission to assess their sustainability.

Victims of the Equitable Life scandal in 2000 will benefit from a new compensation scheme that goes beyond that devised by the Labour government.