The Budget 2008 - Individuals

Modernising the Personal Tax System

The only headlines here are a reminder of the changes in the basic rate of income tax, previously announced in last year's budget. Accordingly, from 6 April 2008 the 10% starting rate will be abolished, whilst basic rate tax drops from 22% to 20%, and applies up to the limit of £36,000 (increased from £34,600). Higher rate tax remains the same at 40%, as does the 10% dividend ordinary rate and the 32.5% dividend upper rate.

The personal allowance for 2008 – 2009 is £5,435 for those under 65. Those between 65 and 74 have an increased personal allowance of £9,030; for those aged over 75 it rises to £9,180.

A new 10% starting rate (and associated starting rate limit for savings of £2,320) for savings has been introduced. Where an individual's non-savings income (broadly earnings, pensions, trading profits and income from property) falls below the £2,320 limit that individual's savings will be taxable at 10% for savings up to the limit.

Modernising the Personal Tax System – budget notice

Taxation of personal dividends

From 6 April 2008, individuals who hold less than a 10% shareholding in non-UK resident companies will be treated for income tax purposes on receipt of dividends in the same way as if their shareholding was in a UK resident company.

This means the effective rate of tax will be 0 per cent for basic rate taxpayers and 25 per cent for higher rate taxpayers.

The condition (that receipts must be less than £5,000) previously announced will not be introduced.

From 6 April 2009, the above change will apply to holdings of more than 10%, subject to the distributing company paying an equivalent of UK corporation tax and anti-avoidance rules will be introduced to avoid abuse.

Taxation of personal dividends – budget notice

Inheritance tax Nil-Rate Band

Following the announcement in the 2007 Pre-Budget Report that, on the death of an individual with any inheritance tax (IHT) nil-rate band unused, the unused portion could be transferred to a spouse or civil partner, a minor change to capital gains tax (CGT) has been announced.

The change stipulates that the value of an asset ascertained for IHT purposes will also apply for CGT purposes. In certain circumstances, before it is possible to calculate how much of the nil-rate band of the first deceased spouse's estate can be transferred, the value of the assets needs to be determined when the second spouse dies. Currently, if this differs from any amount already agreed for CGT purposes the rules require CGT to be recalculated using the IHT value.

This measure means that, where the IHT valuation of an asset does not need to be ascertained until the death of the second spouse, that IHT value does not need to be used for CGT purposes.

Inheritance tax Nil-Rate Band – budget notice

Capital Gains Tax and Entrepreneurs' Relief

As announced in the Pre-Budget Report, the headline rate of capital gains tax will be reduced from 40 per cent to 18 per cent. Taper relief will be abolished for disposals made on or after 6 April 2008.

A new entrepreneurs' relief will be introduced to reduce the effective tax rate from 18 per cent to 10 per cent for the first £1m of qualifying gains realised on or after 6 April 2008. The £1m is a lifetime limit and may be claimed (in part) on more than one occasion.

Relief is available for gains on the disposal of:

• all or part of a trading business carried on alone or in partnership
• assets on the cessation of a trading business
• shares in and securities of a personal trading company or holding company of a trading group or
• assets owned by an individual and used by his/her "personal" trading company, trading group or trading partnership.

A disposal of shares in or securities of a company will qualify for relief where the company concerned is a trading company, or the holding company of a trading group, and throughout a one year qualifying period the selling shareholder:

• is an officer or employee of a company in the same group; and
• owns at least 5 per cent of the ordinary share capital and is able to exercise at least 5 percent of the voting rights in that company as a result.

Capital Gains Tax and Entrepreneurs' Relief – budget notice

Restrictions on Trade Loss Relief for Individuals

Individuals (other than partners) who carry on a trade in a non active capacity but spend an average of less than 10 hours a week on commercial activities of that trade will suffer restrictions on the extent to which they may set off trading losses against other income and gains (sideways loss relief).

Provisions will prohibit sideways loss relief where a loss arises as a result of tax avoidance arrangements made on or after 12 March 2008.

An annual limit of £25,000 is introduced on the total amount of sideways loss relief that an individual may claim from trades carried on in a non active capacity.

Restrictions on Trade Loss Relief for Individuals – budget notice

Avoidance of Income Tax – Manufactured Payments

Finance Bill 2008 will introduce legislation to stop individuals avoiding income tax be making manufactured payments.

What are manufactured payments? They are payments representative of interest or dividends payable on certain securities which have been used in a range of avoidance schemes.

The legislation will deny relief for any manufactured payment paid as part of a scheme or arrangement where one of the main purposes is to secure a tax advantage.

Avoidance of Income Tax – Manufactured Payments – budget notice

Pensions – A Summary of Minor Changes

Overseas Pension Schemes

From Budget Day (for non UK money purchase schemes) and from 6 April 2008 (for non UK final salary schemes), the amount of an employer's contribution which has the benefit of tax relief in the UK will not (as it currently does) affect the calculation of the proportion of the fund that is subject to UK tax rules.

Technical Changes

From Royal Assent of Finance Bill 2008, enabling legislation which allows regulations to deem certain payments to be 'authorised' payments will also ensure those payments are subject to the authorised payments tax regime for registered pension schemes.

Following consultation, some minor relaxations as to how the lifetime allowance (the total amount an individual can hold in a pension scheme tax efficiently) is calculated have been introduced, without diluting the integrity of the test.

Retrospective legislation will be introduced in Finance Bill 2008 to clarify/confirm that employers making payments into approved occupational pension schemes will obtain tax relief only on the cash contributions made, not the amount shown in the company accounts.

Pension Savings and Inheritance Tax

This is confirmation of a previous announcement in the Pre-Budget Report that legislation will be introduced in Finance Bill 2008 to ensure that tax relieved pension savings diverted into inheritance tax using scheme pensions and lifetime annuities will be subject to unauthorised payment charges and inheritance tax where appropriate.

Pensions - budget notice part one
Pensions - budget notice part two
Pensions - budget notice part three
Pensions - budget notice part four
Pensions - budget notice part five

Gift Aid

Under the Gift Aid regime charities and Community Amateur Sports Clubs that receive a donation can reclaim a sum equal to the basic rate income tax paid on that donation by the donor.

The basic rate of income tax is to reduce from 22% to 20%. However for the next three years the Government will continue to allow charities to make reclaims as if the basic rate remained at 22%. So for those three years, charities will not be out-of-pocket as a result of the change in the tax rates.

This transitional relief will apply to all Gift Aid-qualifying donations made between 6 April 2008 and 5 April 2011.

Gift Aid – budget notice