Budget 2008 - commentary

Please note that the details on this page reflect the contents of the 2008 Budget and its associated paperwork. Some points may therefore have been superseded by subsequent events.

"The commentaries below are written in general terms. Further information can be found in our Budget brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."

Overall comment from Richard Mannion

This was a rather boring speech with lots of micro-management. Nothing was really said about the disastrous development of new legislation for capital gains tax, residence and domicile or income shifting over recent months. However there was a large number of Budget Notices issued by HM Revenue & Customs and the following points emerged:

Income tax

As previously announced, the basic rate of income tax is being reduced from 22% to 20%. You would have thought the Chancellor would have made more of this. The reason he didn't was that the 10% starting rate band covering the first £2,230 of earned income was removed simultaneously and the thresholds for National Insurance Contributions were increased. This means that the reduction in the basic rate is not going to reduce taxes on most people's earnings and indeed those on lower incomes will see their tax bills increase.

Non Doms

The Chancellor is proceeding with the plan to charge long term UK residents who elect to pay taxes on a remittance basis, because they are not domiciled in the UK, £30,000 a year for this tax privilege. However, there are substantial changes announced to the proposals relating to offshore trusts in response to the wave of criticism that the draft rules attracted.

Income shifting

The Government has now announced that its income shifting proposals have been delayed for one year to allow further consultation to take place. This is really good news because it gives advisers more time to convince the Chancellor that his original proposals would have been totally unworkable on the ground.

The Government issued draft income shifting legislation following the Arctic Systems case. Arctic was a company whose profits came from computer consultancy services provided by Mr Jones, but a large part of those profits was paid to Mr and Mrs Jones equally as dividends. The House of Lords ruled that HMRC had no right to reallocate the dividends to Mr Jones.

Capital Gains Tax

Capital gains tax is due for massive changes on 6 April, and while the new rules are intended to simplify the system, there will be winners and losers. Generally, those who own buy to let residential property will be winners as the CGT rate falls to just 18% and will apply from the start of the new tax year. In contrast, the current CGT rate is up to 40%.

However, the regime change means that ‘taper relief' and ‘indexation allowance' on capital gains made on property, shares and other investments, will disappear on 6 April 2008. These tax breaks have helped to save tax for many long-term investors, so although the new headline tax rate sounds good, it will not help everyone.

Other comments

Mixed News for EMI Schemes in 2008 Budget

As from 6 April there will be the first increase in the individual grant limit for EMI options since their introduction in 2000. The limit rises from £100,000 to £120,000.

From Royal Assent, schemes will however be limited from that date to companies with fewer than 250 full-time employees, with part time employees counting proportionately.

In addition, shipbuilding, coal and steel production will be excluded activities from the date of Royal Assent meaning that companies in those areas will thereafter no longer qualify for EMI.

Existing awards which would otherwise be affected by the new qualifying company rules will be protected.

Nick Wallis comments:

"The increase in the individual grant limit is to be welcomed as the first increase for any HMRC tax-favoured scheme since 2000. On the other hand, the overall maximum level of awards (£3,000,000) remains unchanged, so it could not be characterised as over-generous.

The restriction to 250 employees is said to be required for EU State Aid purposes. It is unlikely to affect many schemes but will certainly affect some, particularly those with labour-intensive activities.

The exclusion of companies involved in shipbuilding, coal and steel production is also apparently EU-driven."

Dividends from non-UK companies

Comments on the revised tax treatment of personal dividends from non-UK companies:

From 6 April 2008, the tax treatment of dividends received from non-UK companies will be aligned with the UK, where an individual owns less than a 10% shareholding in the company. It was subsequently announced that this will not apply to dividends from "offshore funds".

It had previously been announced that this was conditional upon the individual receiving less than £5,000 of dividends a year from non-UK companies. However, this condition will now not be introduced.

"These changes, particularly the removal of the £5,000 threshold, are welcomed and will help reduce individuals' UK income tax liabilities, so for a basic rate taxpayer there will be no further liability arising, and for higher rate taxpayers the effective rate of tax will be just 25% ," said Richard Mannion.

Under current law, UK resident and non-resident Commonwealth and EEA individuals are entitled to a non-repayable dividend tax credit of one ninth of the distribution from UK resident companies against their UK tax liability.

From 6 April 2009, the eligibility of the non-repayable tax credit will be extended to individuals who own shareholdings of 10% or greater in the distributing non UK resident company.

The tax credit will not be available if the source country does not levy a tax on corporate profits similar to corporation tax. There will also be anti-avoidance measures to ensure that these new rules are not subject to abuse.