In one of its first major policy announcements since coming to power, the new coalition government will present its ‘emergency’ Budget on 22 June.
The document, along with an outline of ‘efficiency savings’ due to be published next week, is expected to contain details of how the incoming administration intends to tackle the UK’s sizeable deficit. Although both the Conservatives and the Liberal Democrats have expressed a desire to fill the country’s financial black hole through spending cuts rather than tax increases, it seems all but certain that the Budget will contain some pretty bleak news for investors – and for many business owners.
Capital Gains Tax increase
It is all but certain that the rate of Capital Gains Tax (CGT) will rise. The coalition document, which outlines some of the new government’s policy intentions, states that CGT on non-business assets will be brought to a rate “similar or close to those applied to income.” This has very serious financial implications for buy-to-let investors, company directors and contractors.
A significant proportion of the properties bought by buy-to-let investors would be classed as non-business assets. This includes second homes and unfurnished holiday lets. As a result, buy-to-let landlords who were intending to sell up once their property had appreciated in value will now have to factor in CGT at perhaps 40 or even 50 per cent.
It is worth noting here that you can ‘flip’ your second home. If your own circumstances allow, you could designate another property as your main residence, and therefore avoid CGT on its sale; CGT is not levied on the disposal of a main residence. Furthermore, the government has promised “generous exemptions” for business activities. If you wish to sell your entire business, therefore, the transaction would likely be subject to CGT at a lower rate.
On a side note, landlords should pay close attention to how the Budget announcement may affect the buy-to-let mortgage market. Some banks are just beginning to open up the lending criteria and any changes forced on the banking sector may upset this positive trend.
Directors and contractors
A large number of directors and contractors choose to pay themselves in dividends. Company directors tend to do so in order to lessen their income tax burden, while contractors use dividends to ensure they don’t fall under IR35.
It is almost certain that company directors will have to pay far higher rates of CGT on dividend payments after the Budget – probably to the extent that it is no longer a viable tax avoidance strategy. Perhaps of more concern is that contractors may no longer be able to use this mechanism to reduce their tax bill. On the plus side, the new rules are intended to hit those with higher incomes; relief’s may be available for basic rate taxpayers. Similarly, the Conservatives have already suggested that IR35 may be scrapped – although this is unlikely to help contractors in the short term.
The new government intends to increase the income tax personal allowance to £10,000. It is expected that the forthcoming Budget will raise the personal allowance to around £7,500, with further increases at a later date. Once the full £10,000 target is reached, the average basic rate taxpayer will save around £700 per year.
The personal allowance increase is intended to put cash back in the pocket of those on low and medium incomes. As such, the new rules will likely be structured in such a way as to ensure that those already paying tax at 40 or 50 per cent do not benefit. There is already a tapered reduction in the personal allowance for those earning over £100,000, and this scheme could be extended.
The much-derided Tory proposals for a £150 annual married couples’ tax break are still on the agenda, although Lib Dem MPs will be allowed to abstain from any vote on this. As a result, it is likely that this will be abandoned.
National Insurance increase
The new government has already said that the planned increase in employers’ National Insurance Contributions (NICs) will no longer take place – bringing sighs of relief from across the small business community.
But employees will still be subject to the 1 per cent increase – and it has been suggested that thresholds for NICs may be frozen, rather than increasing with inflation. This would amount to a fairly significant real-terms increase in the average employee’s NIC liabilities. Employers may be able to reduce the burden on their employees by offering increased access to salary sacrifice benefit schemes.
Whichever way one looks at it, the average taxpayer is likely to be worse off as a result of next month’s Budget announcement. Although the coalition has suggested that it intends to cut corporation tax, perhaps by as much as 3 per cent, it is widely presumed that any such measures will be postponed until the country’s finances are in better shape.
Business owners and the self-employed should seek advice from their tax advisor in order to find personalised ways of reducing the impact of the announcement on their own wallet.