- Inheritance tax change welcomed
- Capital gains tax taper relief to be abolished
- Additional Maternity and Paternity Pay and leave
- National Minimum Wage prosecutions
- Company car drivers and fuel
- Income ‘Shifting’
- Postal disputes
Chancellor Alistair Darling announced in his Pre-Budget speech a change to the way in which the inheritance tax (IHT) nil rate band of £300,000 can be used for married couples and civil partners.
In order to understand the implications of the change it is important to have an understanding of the principles of IHT. Transfers of property between spouses or civil partners are generally exempt from IHT. This means that if an individual dies and leaves some or all of their property to their spouse or civil partner, then this is not chargeable to IHT. If they do not have sufficient assets which they are willing or able to leave elsewhere then they may not fully use their nil rate band.
This problem with ‘wasting’ the nil rate band, combined with large increases in the value of many family homes, has meant than many families had been inadvertently drawn into the IHT net.
The Pre-Budget change means that any nil rate band unused on the first death may be used when the surviving spouse or civil partner dies.
This change is effectively backdated for widows or widowers whose spouse died before the announcement of the change, as long as the ‘surviving’ spouse or civil partner dies on or after 9 October 2007. The amount of the nil rate band available for transfer will be based on the proportion of the nil rate band which was unused when the first spouse or civil partner died.
The following gives an example of how the rules will work:
Mr Smith’s Will states that on his death he will leave his estate including his share of the family home to his wife. At the date of his death the nil rate band is £300,000.
On Mrs Smith’s death she will be able to make use of her own nil rate band of say £350,000 (which is the band proposed for 2010/11) together with the unused percentage of her late husband’s nil rate band being a further £350,000. Her total nil rate band will be £700,000.
This is a significant change that will affect many families. Please do contact us if you would like more information on this issue and how it will affect your circumstances.
Internet Link: HMRC notice
The Pre-Budget speech also included the shock announcement that taper relief for capital gains tax (CGT) will be abolished from 6 April 2008. This announcement took everyone by surprise and it is still unclear in some circumstances how these rules will be applied. There is also much speculation that the proposed changes may not be implemented or may be deferred.
HMRC have however issued several examples of how they envisage the rules working. At the same time as abolishing taper relief the government proposed to change the rate of CGT to a flat rate of 18%. Higher rate taxpayers currently pay CGT at 40%.
Taper relief was introduced in 1998 and can significantly reduce the amount of any gain chargeable to CGT by as much as 75%. The percentage of the relief available depends on whether the asset is classed as a ‘business’ or ‘non-business’ asset and, also, the period of ownership of the asset since 1998 (when the rules were introduced).
To give a straightforward example if you sold some shares that you have owned for two years that have always been a business asset then you would pay tax on the chargeable gain (proceeds less cost less 75% taper relief). The remaining gain would be taxed at your top rate of tax of say 40%.
If you sell the same shares on or after 6 April 2008 taper relief will no longer be available to reduce the amount of the taxable gain. The rate of tax applicable to taxable gains will be changed from 6 April 2008 to 18%.
The Chancellor confirmed that the annual exemption, which for the current tax year is £9,200, will continue to be available in the next tax year. The amount of the exemption has not yet been announced.
Another complication in current capital gains computations is that if you have assets which you acquired before April 1998 you are currently allowed to include an element of inflation in your capital gains tax computation. This inflation allowance, known as indexation, increases the cost of your asset and therefore reduces the amount of the taxable gain. This relief will also no longer be available in computations from 6 April 2008.
Will I have more tax to pay?
These rules will generally increase the amount of tax payable by individuals who own assets that currently qualify for full business asset taper relief. There are many conditions that have to apply for assets to qualify, and the definition of a business asset has changed since the introduction of the rules in 1998.
If you are planning to sell assets in the near future please do get in touch so we can advise you.
John Cridland, Deputy Director-General of the CBI, had this to say about the change in the rules:
“Changing the capital gains tax rate to a flat rate of 18% will adversely affect the balance between risk and reward, both for entrepreneurs and for the UK’s vital private equity industry. This move is disappointing and may lead to a reduction in investment in start-up and growing businesses.”
The government had previously announced their intention to extend Statutory Maternity Pay (SMP), Maternity Allowance and Statutory Adoption Pay from the current 39 weeks entitlement to 52 weeks.
They had also announced that to coincide with the increases mentioned above they would introduce Additional Paternity Leave and Pay (APL and APP). They had stated their intention to make all of these changes by the end of this Parliament.
The government has announced that it is still their intention to introduce these changes by the end of this Parliament. However the proposed implementation date of April 2009 has been deferred until at least April 2010. This means that the rules may be implemented at the earliest for babies due from April 2010.
What is the current entitlement?
The current entitlement to SMP generally gives mothers the right to 90% of their average weekly pay for the first six weeks reducing to £112.75 for the remaining 33 weeks. There is no intention to increase the amount of weeks paid at the earnings related rate.
What would be the entitlement to APL and APP?
The introduction of APL and APP would give employed fathers a right to take up to an additional 26 weeks off work with pay to care for their child in its first year. The 26 week period would in effect be transferred from the mother’s entitlement to SMP so would be conditional on her returning to work.
SMP and leave is a complex area. If you would like any help in this area please get in touch.
HMRC have issued a warning to employers about their programme of targeted enforcement of national minimum wage (NMW) procedures. The programme, which is now in its third year, was introduced to work with employers and workers to address issues and concerns around the NMW.
They are proposing to target the hotel sector which employs a large number of migrant workers. The programme is expected to run for 12 months from November 2007. They propose to target the hospitality sector more generally throughout 2008/09.
HMRC have reminded employers that failure to meet obligations under the National Minimum Wage Act constitutes a criminal offence and could result in a heavy fine.
It is a criminal offence to:
- refuse or wilfully neglect to pay the NMW
- fail to keep or preserve records
- cause or allow false entries in records
- produce or furnish false records or information
- delay or obstruct an HMRC compliance officer
- refuse or neglect to answer any questions or produce documents for an HMRC compliance officer.
HMRC are willing to use their powers under the NMW legislation as the following case illustrates.
Landmark NMW case
At the end of August, a children’s nursery owner was fined £2,500 and ordered to pay £500 costs in the first NMW criminal prosecution case.
The owner of the day nursery, which was based in Walthamstow, pleaded guilty to a charge of obstruction at the Magistrates’ Court. She had apparently prevented compliance officers from seeing employee records. The compliance officers were trying to find out whether nursery workers were being paid the correct amount under the NMW legislation.
Judge Gott commented that the owner had “demonstrated a clear and deliberate intent to obstruct officers and this was a scandalous breach of the National Minimum Wage legislation.”
Andy Millican, the Criminal Investigations team leader said:
“This prosecution sends a clear message to employers that we will actively pursue those we suspect of flouting National Minimum Wage law … We have a duty to ensure workers receive their salary entitlement. If employers obstruct us and refuse to comply with the law they could receive a fine and a criminal record.”
National Minimum Wage (NMW) rates rose with effect from 1 October 2007. The current rates are:
Adult rate (workers aged 22 and over) £5.52
Development rate for 18-21 year olds £4.60
Development rate for 16-17 year olds £3.40
The Pre-Budget report also contained an announcement which will affect some company car drivers.
The current rules for employees state that if a car is made available for an employee’s private use, a benefit in kind charge arises. This charge is calculated using the list price of the car and a percentage linked to its CO2 emissions. The percentages range from 15% to 35% for most cars. Discounts are available for certain environmentally friendly cars.
If the employee is also provided with free fuel for private motoring then a fuel benefit charge arises based on the percentage used for the car benefit and a ‘multiplier’, which is currently £14,400. For 2008/09 this figure will increase to £16,900.
The fuel scale charge figure has not changed since it was introduced in 2003. This rise, when combined with an increase in the car benefit percentages for 2008/09, will mean that many employees will see a substantial increase in their tax bills from next April. This change will initially make itself felt in the form of an increase in the benefits in kind included in their coding notices for the year, meaning that more tax will be deducted from their pay.
There will also be an additional cost to employers as the related Class 1A NI charge will also increase.
We have previously reported the case of Mr and Mrs Jones who finally won their case in the House of Lords in July this year. You may remember that the profits of Arctic Systems (their company) were paid equally to them by means of dividends. HMRC had tried to have the income assessed solely on Mr Jones rather than between them but failed in their attempt.
The government had stated that it believes it is unfair for one person to arrange their affairs so that their income is diverted to a second person, and therefore is subject to a lower tax rate, obtaining a tax advantage.
The government has announced that they propose to draft legislation which will take effect from 2008/09 to address income shifting. This legislation will be issued for consultation before being implemented. The government propose that the legislation will remove the tax advantage obtained from income shifting. The rules will only apply when the income is in the form of distributions from a company (dividends) or partnership profits.
HMRC have announced that they will provide ‘practical guidance’ on the legislation which will outline those circumstances which may not be caught by the legislation. The proposals are expected to consider that when establishing whether or not income shifting has taken place that:
- work done by the individuals in the business,
- investments made and
- risks to which the individuals are subject to through the business
may be taken into account as pertinent factors.
Income from employment, interest on savings and any other source will not be affected.
We will of course keep you informed of developments.
Internet Link: HMRC press notice
The postal workers union, the Communication Workers Union (CWU), may be planning more postal disputes. To keep abreast of planned disruptions use the link below.
Internet Link: CWU website