Budget 2010

In brief

The savings industry has given a mixed reaction to news announced in Budget 2010 that from April next year Individual Savings Account (ISA) limits will automatically increase in line with inflation.

Since October last year savers aged over 50 have been able to put up to £10,200 a year in the tax-free savings wrapper, £5,100 of which can be held in cash, and, as announced in last year’s Budget, this will come into effect for everybody from 5 April this year.

From 6 April 2010 the annual ISA is £10,200. Investors can put all of this money into a stocks and shares ISA. Alternatively they can put up to £5,100 (previously £3,600) into a cash ISA, with the remainder available for stocks and shares.

The main rate of capital gains tax (CGT) remained unchanged at 18 per cent. However, the CGT exemption allowance is being frozen at £10,100 for 2010/11. In addition, the Chancellor said that he was doubling the level of Entrepreneurs’ Relief from £1 to £2 million.

Entrepreneurs’ Relief allows those selling businesses they started up to have up to £1 million of gains over a lifetime taxed at a lower rate of 10 per cent.

The Chancellor announced he was freezing the threshold for inheritance tax (IHT) at £325,000 for another four years.

Close companies

New measures announced

The widely utilised area of loans written off by close companies for the purpose of obtaining a corporation tax deduction for a dividend is being closed following new measures announced in Budget 2010.

Prior to the Budget announcement, where a close company (under the control of five or fewer individuals) makes a loan to a ‘participator’ (very broadly a shareholder) or to an associate of a participator, and subsequently releases or writes off that loan, under the loan relationship provisions the company may be entitled to a corporation tax deduction on the amount released or written off. In the hands of the participator the release is taxed in the same way as a dividend.

These rules broadly provide that the taxable and relievable credits and debits brought into account arising to a company under its loan relationships are those arising under generally accepted accounting practice (GAAP). A loan released or written off will normally give rise to an expense recognised in the company’s accounts under GAAP.

The new rules, which will be introduced in the Finance Bill 2010, will prohibit any deduction being brought in by the company for loan relationship purposes if the loan is wholly or partly released or written off. The income tax treatment of the person to whom the loan was made is unaffected by the measure.

Inheritance tax

Threshold frozen for a further four years

The inheritance tax (IHT) threshold has been frozen for a further four years at £325,000, rather than rising in line with inflation. This could mean that more households are caught by this tax. In addition, the amount collected from estates that pay these “death duties” will inevitably increase, as a greater proportion of estates are likely to become subject to this charge.

Prior to Budget 2010 many people had expected this allowance to rise in line with the higher values of suburban houses that are in the ownership of many elderly people. This announcement will mean that many more people could fall into the IHT net in the next few years. The value of any estate over the nil-rate band
value of £325,000 is charged at 40 per cent.

Over the past 10 years this “nil-rate band”, along with other tax allowances has risen in line with inflation. The Chancellor has frozen a number of tax allowances for the this year, and announced the inheritance tax threshold will remain static for the life of the next parliament in order to raise funds to help meet social care costs.

The Chancellor had previously made concessions on this tax. Since November 2007, married couples have been able to transfer this allowance, effectively allowing them to pass on assets worth £650,000 to their children (or other beneficiaries) before any IHT is due.

But the Chancellor signalled that he will be clamping down on complex tax avoidance schemes, used by many wealthier families to minimise future IHT bills. In his Budget 2010 speech he indicated that for the first time IHT schemes will soon fall under the Disclosure of Tax Avoidance Scheme rules, which previously have only covered income tax, corporation tax and capital gains tax.

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Stamp duty

A boost for first-time home buyers

For the next two years, first-time homebuyers will be able to buy properties worth up to 250,000 pounds without paying stamp duty, the Chancellor, Alistair Darling announced during his Budget 2010 speech.

“I can announce I will double the stamp duty limit for first time buyers from midnight tonight for this year and next,” the Chancellor told parliament. “This means 9 in 10 first-time buyers will pay no stamp duty at all.”

The Chancellor said the relief would be funded through an increase in stamp duty to 5 per cent on residential property selling for over one million pounds, but not until April 2011.

New Stamp Duty Property Rules
Property value up to £125,000 zero (up to £250,000 at zero for first-time buyers)
£125,001 to £250,000 1 per cent
£250,001 to £500,000 3 per cent
£500,001 to £1,000,000 4 per cent
Over £1,000,000 5 per cent (from April 2011)

A Budget for business

The highlights at a glance

At the centre of Budget 2010 is the £2.5bn package for small and medium – sized businesses. The Chancellor used this Budget to announce a number of new measures intending to improve the cash flow situation of SMEs, but many won’t actually come into force until next year.

The Chancellor’s speech addressed the issues facing SMEs recognising the value they contribute to the UK economy. The main bank lenders into the SME sector (RBS and Lloyds) have been mandated to lend £94 billion to struggling small businesses.
Other government support was offered in the form of a new venture capital fund with £200 million committed to providing additional capital to SMEs and he also introduced some specific tax measures to help with cash flow with the extension of the ‘Time to pay’ scheme, throughout the life of the next parliament.

Business highlights

RBS and Lloyds must provide £94 billion in new business loans, half of which must be provided to small to medium-sized businesses.

A credit adjudicator service to be set up to help SMEs to deal with complaints and examine lending decisions to determine whether they are fair.

The government will set UK Finance for Growth to help to expand the financial sector. The FSA to speed up the licensing process for new banks.

Commitment to G20-approved levy on banks.

Business rates will be cut for one year from October.

The computer games sector in Britain will receive investment. Will also set up a £35 million University Enterprise Capital Fund.

To introduce a 50p tax on landlines to fund superfast broadband rollout for 90 per cent of the country by 2017.

To double the annual investment allowance to £100,000. The main rate of capital gains tax will not increase.

Entrepreneurs’ relief for capital gains tax to be increased to £2 million.

15 per cent more of government contracts will go to small to medium-sized businesses, many of which count the central government as one of their key clients.

The ‘Time to Pay’ scheme for tax payments from SMEs will be extended for the whole of the next parliament.

Pledges that the government will pay 80 per cent of invoices from small business within five days.

Budget 2010 at a glance

Were you a winner or a loser?

Take a look at our guide and see how your finances may have been affected by Budget 2010.

Budget 2010 highlights

Economy
– Net government borrowing estimate this year will fall from the £178 billion target by
£11 billion this year, to £167 billion or 11.8 per cent of GDP.
– Borrowing will fall to £163 billion next year, which is equal to 11.1 per cent of GDP. It will then fall to £131 billion in 2011/12, or 8.5 per cent of GDP. Borrowing will then decline to £110 billion, or 6.8 per cent of GDP, to £89 billion in 2013/14, equal to 5.2 per cent of GDP and to £74 billion in 2014/15 at 4 per cent of GDP.
– Growth forecast for 2011 revised down to between 3 per cent and 3.5 per cent. Predicted growth of 1.0 – 1.5 per cent in 2010 in line with forecasts.
– Net debt as a share of GDP will reach 54 per cent this year. It will then increase to 75 per cent by the end of the forecast period in 2014/15 and will then begin to fall.

Jobs and education
– The number of civil servants in London is to be reduced by one third over the long term, with 15,000 posts relocated within the next five years to help to save £11 billion. One thousand civil servants in the Ministry of Justice will be moved out of London, saving £41 million.
– Consultation on reform of employers’ right to make people retire at 65, which examines options including scrapping the default retirement age, raising it or giving employees stronger rights.
– Guarantee to provide a job or training to 18 to 24-year-olds out of work for more than six months will run until March 2012, instead of ending in March 2011.
– Government to set up a £35 million University Enterprise Capital Fund to support “innovation and spin-out companies”.
– To make available £270 million in 2010/11 to fund an extra 20,000 university places in areas such as science, technology, engineering and maths as part of a University Modernisation Fund.
– The £2.5 billion cost of training young people and extra university places will be partly funded from the tax on bankers’ bonuses.

Housing
– A new stamp duty holiday introduced for properties of up to £250,000, from 25 April 2010, to be funded through an increase in stamp duty from 4 per cent to 5 per cent on properties worth £1 million or more from April next year.
– From October 2011, the most expensive properties across the country will be excluded from the Housing Benefit calculation in each area to save £250 million a year.
Family finances and pensions
– One million people will be provided with bank accounts over the next five years.
– Higher winter fuel payment will be guaranteed for another year, to be paid by closing tax loopholes.
– Inheritance tax threshold will be frozen for four years.
– Extension of the tax credit system for people aged over 60. People will have to work less minimum hours to qualify for tax credits.
– Parents of one and two-year-olds to receive £4-a-week increase in child tax credit from 2012.

Environment
– Government to set up a new green investment bank, which will control £2 billion of equity, to fund a low-carbon economy. Half the cost will come from asset sales, including the Channel Tunnel Rail Link, with the rest matched by private investment.
– To provide an extra £60 million to fund offshore wind farms.

Taxes
– 2.5p rise in fuel duty to be staggered. Will increase by 1p in April, 1p in October with the remainder in January, at which point the government expects inflation to be in line with the Bank of England’s target of 2 per cent.
– Confirmation that the 50 per cent rate of income tax will commence in April for people earning more than £150,000.
– To continue the drive to prevent tax evasion and avoidance. Will sign tax information agreements with Dominica, Grenada and Belize.
– Duty on cider will rise 10 per cent above inflation.
– Duty on alcohol and tobacco will rise by 1 per cent above inflation, then 2 per cent above inflation for two years from 2013.
-Tobacco duty will increase by 1 per cent above inflation and by 2 per cent each year until 2014.
-Confirmed 0.5 per cent increase in National Insurance for people earning more than £20,000, which will come into effect from April next year.

Public finances
– Public sector pay rises will be held at 1 per cent for two years from 2011.
– Budget plans will raise an extra £19 billion to reduce borrowing.
– The government will provide £100 million to repair roads and a further £285 million to fix motorways.
– The government will go ahead with plans to sell the Tote as part of plans to pull in £16 billion from asset sales.
– Government finalising options on the sale of the Dartford Crossing.
– An extra £4 billion will be used to fund operations in Afghanistan.

Pension savings

Restricting higher rate relief

The government issued on 24 March 2010 a summary of the responses to last December’s consultation document on how to implement the restriction of higher rate relief on the pension savings of high income individuals from 6 April 2011. The summary outlines what they have decided on each of the points under discussion and what the next steps in the process are going to be.

Where the restrictions apply, higher rate relief will be reduced by 1 per cent for each additional £1,000 of income between £150,000 and £180,000, so that at incomes of £180,000 and above relief will be restricted to the basic rate. This will work by imposing a tax charge to recover the excess higher rate relief that the individual will claim through their tax return as normal.

The value of an employer’s contribution to a defined benefit scheme will be determined using age-related factors which will take into account both the age of the individual and their normal retirement age under their pension scheme. This will result in a significantly higher deemed value for older scheme members compared with younger members. Members taking early retirement could be particularly affected. The factors will be reviewed at least every five years.

The government will consider the options for recognising ‘negative’ deemed contributions to a defined benefit scheme, for example, where the deemed employer contribution is valued at less than the amount actually contributed by the employee.

These measures could affect employees with a salary substantially less than £150,000 who receive exceptional payments, for example termination payments. However, only the first £30,000 of any redundancy payments will be excluded from the income test. Respondents to the consultation suggested the exclusion should be much higher.

The charges will apply in the year in which pension benefits are drawn by using the income of the previous year, although there will be an exemption where the member retires through serious ill health or dies.

The tax relief restriction will apply equally to high income members of overseas schemes that benefit from UK tax relief, although it is recognised that some members may have difficulty meeting the self-assessment deadline for reporting any charge payable by them, and further consultation will take place on this point.

There will be an obligation on employers, in conjunction with pension scheme administrators, to provide information to employees to enable them to be able to self assess their position. Further discussion will take place on this.

Where an individual’s recovery charge exceeds £15,000 they can spread the payment (plus interest) over three years if their pension scheme is not able to pay it on their behalf.

From 6 April 2011 the special annual allowance will have no further relevance, and normal ongoing regular pension savings will no longer be protected. High income individuals will be affected whose annual taxable income is at least £150,000 before deducting personal pension contributions and payments to charity, but including any employer pension contributions made on their behalf. Individuals whose income on this basis is less than £130,000, ignoring any employer pension contributions, are not affected.

What’s the outlook?

The economy and public finances

The Treasury kept its forecast for growth in 2010 unchanged from the Pre-Budget Report 2009 (PBR) in December at 1.0 -1.5 per cent. However, the forecast for 2011 was reduced slightly from 3.25 – 3.75 per cent to 3 – 3.5 per cent. This moves the Treasury forecast for 2011 closer to that of the Bank of England, but still leaves it well above the average independent forecast for that year of 2.1 per cent.

The Treasury’s medium term economic forecasts remain unchanged at around 3.25 – 3.75 per cent on average for 2012 to 2014.

Public sector net borrowing forecasts were revised downwards relative to the PBR, although the level of borrowing remains high in absolute terms. The previous expectation of £177.6 billion borrowing in 2009/10 (12.6 per cent of GDP) has been reduced to £166.5 billion (11.8 per cent of GDP), while the PBR forecast of a £176 billion deficit in 2010/11 (12 per cent of GDP) has been reduced to £163 billion (11.1 per cent of GDP).

Securing the recovery

The Chancellor, Alistair Darling’s delivered his third Budget speech on 24 March 2010. He described the UK economy as being ‘at a crossroads’ and was delivering a Budget to ‘secure the recovery’ and provide ‘targeted support’ where it is needed. The Treasury produced 71 specific Budget Notes detailing the changes set out across 161 pages.

At the centre of this Budget is the £2.5bn package for small and medium – sized businesses, funded primarily by better than expected receipts from the one-off tax on bankers’ bonuses. Banks will still face the one-off 50 per cent payroll tax on bonuses that was announced in the Pre-Budget Report, which is now expected to raise £2 billion. More measures were announced for small businesses, particularly aimed at assisting cash flow. There was also the extension of HMRC’s ‘Time to pay’ scheme. This scheme supports companies in distress struggling to pay their tax bills.

The Chancellor also expressed support for a ‘Bank Levy’ but stressed that international co-ordinated action is required on this so as not to damage the UK as a financial centre. Britain’s record budget deficit remains front and centre for investors after some ratings agencies have suggested the UK’s credit rating could be under threat without a clear plan to cut debt.

The Chancellor said he was able to revise down his forecasts for the budget deficit in the current and next fiscal year. Public sector net borrowing in 2009/10, he said, would come in at 166.5 billion pounds, or 11.8 percent of GDP, compared with a December Pre-Budget report forecast of 177.6 billion pounds.

In 2010/11, borrowing is expected to come in at 163 billion pounds versus 176 billion previously forecast. Future years have also been revised down. Despite the need for the government to reduce its borrowing, the Chancellor did not announce any dramatic tax increases, there was no radical programme of large scale transformation for the public sector and he froze inheritance tax thresholds for four years.

As well as moving to lower borrowing, the Chancellor also found some measures to target the better off. He said he would scrap duty on house purchases of less than 250,000 pounds for first-time buyers and pay for this with a one percentage point rise in duty to 5 per cent for houses worth more than 1 million pounds.
“Those who have benefited the most from the strong growth in incomes in past years should now pay their fair share of tax,” the Chancellor said.

“The recovery has begun, unemployment is falling and borrowing is better than expected. The choice before the country now is whether to support those whose policies will suffocate our recovery,” the Chancellor told parliament. For a more detailed summary of the Chancellors Budget statement, including his intention to continue to help people through the global recession, and secure the recovery.