Friday, March 12, 2010
Wealthy individuals may have less than two weeks to put plans in place to reduce the tax impact of the Chancellor’s pre-election Budget warns PKF Accountants & business advisers.
In his speech on the economy on March 10, Prime Minister Gordon Brown suggested that it will be the better off who have pay to get the country out of recession, and he effectively ruled out spending cuts or tax rises that would hit those on low and middle incomes.
Matt Coward, Director of Private Client Tax Services at PKF says: “Although Gordon Brown and (Chancellor of the Exchequer) Alistair Darling may not always see eye to eye on tax issues, I expect the Chancellor to stick to the traditional Labour Party line with his Budget announcements – financial ‘fairness’ is likely to mean tax rises for the wealthy.”
Coward warns that there could be bad news on both capital gains tax (CGT) and inheritance tax (IHT) as well as yet more moves to restrict tax relief on pension contributions.
“With the 50% rate of income tax due to take effect from April 6, many are expecting the current rate of CGT – just 18% – to rise to counter tax avoidance by switching investments to generate capital gains instead of income," Coward noted. "A CGT rate as high as 25% or 40% could be announced so realising capital gains before the Budget could be a good idea. However, if the Chancellor takes a more subtle approach, he might phase out the annual CGT exemption for individuals on high incomes or introduce rules to tax gains made over a short period as income. This would make planning options much more complex and bringing forward assets sales could just bring forward your tax bill.”
Widespread negative comment on the Government’s moves to restrict tax relief on pension contributions may spark changes, according to PKF
“The transitional rules up to April 6, 2011 are bad enough, but the proposals for 2011/12 and later years are so complex that people will just turn away from pensions," Coward warns. "However, any move to simplify these rules is only likely to cut tax relief more for those who can afford to make large contributions up to the current GBP245,000 annual allowance.”
The Chancellor has already frozen the IHT nil rate band for 2010/11 at GBP325,000 and PKF says that more tax raising measures may emerge on March 24.
“Relatively simple rule changes could enable the Chancellor to raise more revenue in the future," Coward observed. "Tightening the rules on gifts could bring more funds into the IHT net and higher rates of tax on larger estates, perhaps a 50% rate on estates of over £5m, could raise significant amounts"
“The long term risk is that, given the need to raise revenue to cut the deficit, any future government may find it hard to reverse such changes once they have been put in place," Coward added, concluding: "Acting now before any such changes take effect may not always be straightforward, but could save you and your family a lot of tax in the long term.”