June 21, 2010 1:43 pm

What the emergency budget report means for you

Q&A: John Whiting, UK Budget 2010

Chancellor Rt Hon. George Osborne delivered one of the harshest and most controversial budgets in history this week, with UK taxpayers feeling the pain of increased taxes as the government focused on dealing with the deficit.

Measures announced in the Budget:

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* Income tax personal allowance to rise £1,000 for under-65s to £7,475 in 2011-12

*40 per cent tax threshold to be reduced to about £42,375 for 2011-12, clawing back the benfit of the tax-free allowance increase fro higher-rate taxpayers

*Individuals earning below £20,000 protected from NIC increase by a rise int he lower threshold at which contributions become payable to about £7,195

*Capital gains tax stays at 18 per cent for basic rate taxpayers, but new 28 per cent rate introduced for higher-rate taxpayers. Annual CGT allowance remains at £10,100.

*Basic state pension to be linked to earnings from April 2011, with a minimum increase of 2.5 per cent

*Age by which pension fund-holders must buy an annuity to rise from 75 to 77

To explain the details of the Budget and what it will mean for you and your pocket, John Whiting, tax policy director at the Chartered Institute of Taxation, answers your questions.

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How will the Budget effect pensioners living abroad within the European community. Ie Receiving other benefits other than their state pension? Like the WFA and disablement benefits. Gilleland, Spain

JW: As far as I can tell there are no immediate changes that will affect you, though indexing the state pension to earnings from next year may help. In due course there may be some issues over ‘objective medical assessments for disability living allowance’, scheduled to come in from 2013/14. But it is possible that there will be examination of the position of people living abroad of course.

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I run my own business – can you tell me when the new VAT rate will come in? Are there any exemptions for small businesses? Stuart Rogers, London

JW: The new rate applies from 4 January 2011. So any sales/services on or after that date will carry VAT at the new 20 per cent rate. Almost all businesses are going to need to take some care over supplies made that straddle this date; for example:

-Deposit for goods in December, goods supplied after 4 January means VAT at 17.5 per cent on the deposit, but at 20 per cent on the balance

-Repairs done in December, invoice issued in January: VAT at 17.5 per cent

As in many cases the invoice date fixes the VAT rate, there are also some anti-avoidance rules that stop an invoice being issued way in advance of the actual sale/supply – in general the supply has to take place within six months, otherwise the 20 per cent rate will apply.

HMRC have published a lengthy guide for businesses which has a lot of useful material – see http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf .

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I’m a potential homebuyer and had thought they were planning to abolish stamp duty on properties worth less than £250,000 – was there anything mentioned about this in the Budget? And if so, what? Alison Smith, Ealing

JW: You are referring to the temporary relief for first time buyers which covers properties up to £250,000 and is due to run until 25 March 2012. There is a commitment in the Budget package to ‘review the effectiveness [of the relief]’; it may be made permanent but I had always thought there would be no rush to make a decision – better to wait and, as the commitment says, see whether it is having the desired impact.

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I own a second home which I bought as an investment, I am also in the process of seeking buyers for one of my businesses, what do the changes in the Budget mean for me? A. Benson, UK

JW: The changes to CGT applied from midnight on Budget day. So if you now sell your second property then it is potentially taxed at the new 28 per cent rate on the full gain (assuming you have never lived there). There is no tapering or indexation – the 28 per cent rate is presumably a pragmatic figure to avoid having to put tapering or inflation protection in.

Someone who is a basic rate taxpayer would pay tax on their gains at 18 per cent to the extent that the gains mop up the rest of their basic rate tax band.

As for selling your business, assuming you qualify for the entrepreneurs’ relief, you now have a lifetime allowance of £5m at the lower 10 per cent rate to utilise.

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Is it a good time to buy a property now in London? How would I be affected by the new taxes? Thanos, Athens

JW: I can’t comment on the plus and minus points of UK property as an investment. From a tax point of view, the existing rule that means someone non-resident UK (which I assume you are from your address) is outside capital gains tax was not changed. It has to be possible that the rule will come under scrutiny in the future, however.

Someone who leaves the UK temporarily and sells whilst away is taxed to CGT when they return.

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Dear sirs, I have owned a UK Property since 1987 which has been rented out since 1998.How does the budget affect my tax liability if I sell the property? Thomas Maher, Germany

JW: Assuming you are non-resident in the UK, the answer is not at all. Capital Gains Tax would arise on sales of a UK property – but a non-resident is not caught. It has to be possible that the rule will come under scrutiny in the future, however.

As I mentioned in my previous answer, someone who leaves the UK temporarily and sells whilst away is taxed to CGT when they return.

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Has the budget made any changes to the Enterprise Investment Scheme? Graham Miller, Bath

There were no new changes. Some detailed points announced in the March Budget, which did not appear in the pre-election Finance Bill, we re-announced. These are fairly technical points effecting changes agreed with the EU Commission to make sure EIS (and VCT schemes) satisfy EU rules. Companies will be excluded from EIS & VCT “...if it is reasonable to conclude that the company would be treated as an ‘enterprise in difficulty’...” . The legislation is to appear in a Finance Bill in the autumn.

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The benefit of the £1000 increase in personal allowances is quoted as worth £170. I would have expected 200. Has the 10 per cent tax band been reduced by 300?. The FT quotes it as unchanged @ 2440. Richard Killer, Ascot, Berks And Can you explain to me, please, how an increase of £1,000 in the personal allowance equates to a benefit to a basic rate tax-payer, paying tax at 20 per cent, of £170? (My maths makes the benefit £200.) Many thanks. Graham Greenwood, West Yorkshire

JW: (Answer to both questions) It does seem odd that £1,000 @ 20 per cent = £170, doesn’t it! The reason is that the benefit mentioned by the Chancellor is excluding the inflationary increase that will apply to the personal allowance. So at the moment we anticipate a rise of about 2.3 per cent to the current £6,475, ie about £150; the balance of the £1,000 increase will thus be £850 – worth the £170 stated.

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I am an old age pensioner of 72, how will the increase in the tax allowance affect my allowance as it is already above the normal rate due to my age? Anthony Allen, Shrewsbury And The income tax personal allowance is to rise by £1000 to £7475 in 2011-12 for under-65s. (FT report) Can you please advise me what happens to the personal allowance for 65s and over? Eric Watt, Edinburgh

JW: (Answer to both above questions) The honest answer is that we don’t know for sure – nothing has been mentioned about the higher allowances for those aged 65+/75+. However, the Budget papers focus squarely on the standard allowance and don’t say anything about increases for the higher’ allowances. The working assumption has to be that these will therefore only go up in line with inflation next April – thus by some £220 or so on the current £9,490 for those aged 65+.

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My wife and I are on state pensions, and I have a private company pension - how will the budget affect us? Neither of us smoke, nor do we fly anywhere! Derek Ewell. Derek Ewell, Gillingham, Dorset

It’s a bit of a curate’s egg. The promise to link state pensions to earnings is presumably welcome (even though some people are a little cynical about whether the timing is ideal) and the various restrictions on tax credits and various benefits won’t affect you. VAT and Insurance Premium Tax going up in the New Year will affect a number of the things you buy/insure of course. The promise to increase income tax personal allowances probably won’t help as it seems that the increase is targeted at those aged under 65 – the 65+ higher allowance looks likely to go up only in line with inflation. At least the NIC increases won’t affect you. The CGT rise could affect you if you make any significant disposals.

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Will the inheritance tax threshold go up or down from the current £325,000 following the Budget? Peter Earnshaw, Swanage, Dorset

JW: There was confirmation in the Budget ‘Red Book’ that the freezing of the IHT threshold announced in the March Budget remains in place – so it will be £325,000 until 2014/15. The prospect of a £1m threshold seems a distant one!

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How will Working Tax Credits be affected? I am 67 yrs old, working hard to get a new business up and running after being negatively affected by the ‘downturn’ in 2008-09 and I rely on WTC to boost my state pension until my business gets going. Judy Adamson, Monmouthshire

JW: Changes to the WTC seem limited. The 50+ ‘return to work’ allowance – which pays out for 12 months to some people aged over 50 getting back to work – is to be abolished but only from April 2012. So if that is relevant to you now, you’ll have used up your 12m by then! Otherwise it’s child tax credits that are changed around and really only recipients of CTCs that will be affected by the faster withdrawal rates as incomes rise.

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Any change on the £30 000 levy for non doms? N Pistolesi, London

Not so far. There is a commitment to ‘...review the taxation of non-domiciled individuals.’ We interpret this as looking to see how effective the £30,000 levy has been and a willingness to look at some of the practical issues and difficulties that arise with the rules introduced a couple of years ago. It is also possible we will see a review of the whole question of the definition of domiciled/non-domiciled.

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I am aged 56 and receive no employment income as I have retired. I am reliant on share trading to support my lifestyle. Under the new proposed budget rules if I make a future gain of circa 100,000 and have no losses, what tax will I be liable to pay. Thank you , Joe Connolly, London

Assuming you have no income chargeable to income tax at all, you’ll pay CGT at the 18%rate on the first tranche of your gains (after using your CGT annual exempt amount, £10,100) and that tranche will be whatever the basic income tax rate band will be – some £37,400 this year but it will reduce next year as the personal allowances change. The rest of your gains will be taxed at the new 28% CGT rate. It’s not clear whether you would be able to utilise your income tax personal allowance against your gains but on past experience with the previous CGT system, it’s unlikely that you’ll be able to.

Of course it’s always possible HMRC might start to query whether you should be paying income tax on your gains, but that’s another question!

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I bought a small house in late 1988 for two elderly disabled relatives to live in for £12,500. I’ve never charged them any rent. Because of deteriorating health they’ve now had to move in to a sheltered accommodation flat which I’ve just bought them for £115,000. The vacant house is now worth around £190k and I need to sell it to finance the purchase of the flat. Will I have to pay CGT on this sale? Seems a little unfair for keeping them out of the hands of the state for all these years...Jan wood, Wales

JW: I’m afraid that CGT will be due, however unfair that seems! There was a relief for houses that someone bought to be occupied by a ‘dependent relative’ but it had to be occupied by 5 April 1988 so it sounds as if you will not qualify.

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Dear sirs, I have owned a UK Property since 1987 which has been rented out since 1998.How does the budget affect my tax liability if I sell the property? Thomas Maher, Germany

Assuming you are non-resident in the UK, the answer is not at all. Capital Gains Tax would arise on sales of a UK property – but a non-resident is not caught. It has to be possible that the rule will come under scrutiny in the future, however.

Someone who leaves the UK temporarily and sells whilst away is taxed to CGT when they return.

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I’m pregnant at the moment with my first child and will have my baby at the end of the year. I’m a single parent and earn £42,000. How am I affected by changes to tax credits? Sarah Levy, Oxford

I fear you will be affected as you are in firing line for some curtailment of tax credits. At your level of income and the fact that this is just your first child means that the main elements of tax credits would all have been clawed back in any event, even before the Budget changes. You would be left with the £545pa ‘family element’, which is doubled for the first year that you have your baby. From next April, these elements start to be withdrawn once family income is over £40,000 rather than £50,000 and are withdrawn much more rapidly – your potential £1,090 would be gone by the time your income was about £42,650. Bear in mind that these income figures are for the tax year – I assume your income may be lower when you have your baby?)

As far as I know there are no changes to maternity benefits that will affect you.

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