Budget 2012 – What can we expect?

The Budget takes place on Wednesday 21 March and the draft Finance Bill will be published a week later on Thursday 29 March.

50% income tax rate

The government has commissioned HMRC to produce a report on the amount of money collected from the 50% top rate of income tax introduced by the previous government and effective for the first time in respect of the 2010/11 tax year. Receipts in January 2012 will provide a first indication as to whether the increase in the top rate has been a tax raiser.

The Chancellor has said on several occasions that he proposes to get rid of this top rate of tax but for political reasons, even if not for public finance reasons, now is almost certainly not going to be that time.

Child Benefit withdrawal

The current proposal is to withdraw Child Benefit from 1 January 2013 from all families where at least once member is a higher rate taxpayer. This will create rather perverse incentives to keep income below the threshold and will mean that families with two taxpayers who each have income just below the higher rate threshold could have income in excess of £80,000 and retain the Child Benefit while if there is only a single earner then the Child Benefit is withdrawn when income is in the mid £40,000s.

Pensions tax relief

There is inevitably speculation, at Budget time, that the Chancellor is going to remove or reduce the tax benefit from pension contributions, perhaps fuelled by the pension providers who want people to ‘buy now while stocks last’. This year has been no exception. We shall have to wait and see.

Land taxation

Taxing the value of land has had its fanatical supporters ever since Henry George propounded his theories in the mid 19th century. The LibDems have proposed a Mansion Tax and there may be moves to prevent avoidance of stamp duty in relation to very expensive properties by owning the properties via companies and other intermediaries.

But any comprehensive change to the taxation of land is likely to require comprehensive revaluation of properties and that hasn’t been carried out for 20 years since a poll tax was mooted by Margaret Thatcher’s administration in the early 1990s.

The Growth Strategy

There are likely to be a lot more announcements on Budget Day as to what the government intends to do to kick start growth in the economy. The Cabinet has had some fiery discussions on this topic in recent weeks but the silver bullet remains elusive.

Taxation of micro business

The Office of Tax Simplification (OTS) published its final report on the taxation of micro business on 28 February.  The Chancellor will announce the next steps in the Budget which is likely to be a full scale consultation on the proposals.

Disincorporation Relief

This was the subject of another report from the OTS suggesting that trading companies could distribute certain assets including internally generated goodwill to shareholders without charge on the company or the shareholders. The Chancellor may announce a consultation on this at the time of the Budget.

Administration of small business tax

This was the third of the OTS February reports in this area of small business. This one was designed to make the system more efficient and effective for small business and there may be further announcements in the Budget on this.

Share schemes

The OTS will be publishing its first report on the taxation of share schemes in the week beginning 5 March, after the present report has been published.

Statutory residence test

We should find out what the government intends to do about a statutory residence test. Ordinary residence is also going to be reformed but we do not yet know which of the two options consulted on, abolition except for the purposes of overseas workday relief or retention with a statutory definition, will be adopted. SP 1/09 – employees with duties in the UK and overseas – is going to be put on a statutory footing. All these issues are for further consultation with legislation in 2013.

Taxation of non-domiciles

Finance Bill 2012 will include legislation to increase the remittance basis charge to £50,000 for long term residents, defined as those who have been resident in the UK for 12 or more of the 14 years prior to the claim.

It will also include the proposals to encourage business investment in the UK, allowing non-domiciles to remit foreign income and capital gains to the UK for the purpose of commercial investment without incurring a tax charge.

As part of the simplification of the remittance basis rules there will be legislation on the relief for the sale of exempt property and the amendment to the nominated income rules to permit an individual to remit the first £10 of income or capital gains which they nominate free of tax and without becoming subject to the identification rules.

Foreign currency bank accounts

With effect from 6 April 2012 all sums within a foreign currency bank account held by an individual, trustees or personal representatives of deceased persons will be outside the scope of CGT.

Cultural Gifts Scheme

After widespread consultation last summer draft legislation was issued in December on the proposals to encourage donations of pre-eminent objects to the nation in return for a tax reduction. The scheme encourages lifetime giving and the reduction in the donor’s tax liability is based on a set percentage of the value of the object being donated.

IHT: 10% reduction for estates leaving 10% or more to charity

Legislation will be introduced in Finance Bill 2012 to provide for a reduction in the rate of IHT from 40% to 36% where 10% or more of a deceased person’s net estate or component(s) of their net estate after deducting IHT exemptions, reliefs and the nil-rate band is left to charity. The measure will apply to deaths on or after 6 April 2012. It will apply equally whether the legacy is included in the will, under an intestacy or by way of deed of variation. The reduced rate of IHT will apply automatically if the estate or component passes the 10% test, but the executors can elect for it not to apply.

For the purpose of this relief the different components of an estate comprise the free estate, assets owned jointly (not as tenants in common), and settled assets in which the deceased had an interest.

The aim of the policy is to act as an incentive for people to make charitable legacies, or to increase existing legacies, and so increase the amount that charities receive from estates.

Rates and allowances for 2012/13

We already know what the rates and allowances are going to be as they were announced in the Autumn Statement in November 2011.