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Last Updated: Wednesday, 10 October 2007, 11:46 GMT 12:46 UK
Coping with the new tax changes
Money Talk
By Fiona Graham
Boodle Hatfield solicitors

Fiona Graham

The ramifications of Alistair Darling's pre-Budget report could be significant.

There are three immediate areas of interest - inheritance tax, capital gains tax, and the taxation of foreigners living in the UK.

Inheritance Tax

On death, the first 300,000 of assets are free of inheritance tax (IHT).

Until yesterday, without carefully-drafted wills, a married couple - or civil partners - often wasted one allowance.

This reform is long overdue

Now, widows and widowers can claim their spouses' unused nil-rate allowances on top of their own.

On current rates, the next generation can now inherit 600,000 of assets free of tax, rising to 700,000 by 2010.

This reform is long overdue.

The "doubling-up" has always been available to couples who carefully craft their wills to harness both allowances, but at the expense of legal fees, which can be significant.

So should people who already have complex wills in place be worried?

At this stage it appears no major re-draft is required.

Mr Darling has anticipated this and has specifically confirmed that instead the will can be rearranged within two years of the first death to get back to "square one".

For those people would prefer simplicity - after years of lawyers advocating long will documents incorporating trusts galore - a one page will leaving everything to the survivor may now be just as good an alternative.

It may still be good advice, however, for a couple to decide to use the first 300,000 allowance when one of them dies - for instance, by giving some property to a son or daughter.

That is because the likely increase in the value of the allowance in the future may not keep pace with the value of the couple's assets, such as their property.

Capital Gains Tax

Essentially, it is "all change" for capital gains tax (CGT).

Those who have held assets for a long time will suffer

Taper relief (introduced only in 1998 by the then Chancellor Gordon Brown) is withdrawn completely.

The proposal is that after 6 April next year, a flat rate of 18% on capital gains will apply - rather than the current rate of up to 40% (if you are a higher-rate tax payer) mitigated by various reducing factors.

Those who have held assets for a long time will suffer.

Previously, indexation gave some protection against inflation on assets.

This can generate quite a healthy discount on a gain for an asset held for, say, 20 years or more.

That relief is also withdrawn from next April.

Who will be affected?

The CGT changes will have an effect on a number of groups: people who sell investments making profits in excess of 9,200 per year, people with second properties and businesspeople.

For the investor who has adopted a short-term buy-and-sell strategy, the forthcoming changes are very good news

They should review their likely gain, and ascertain the CGT liability before and after April 2008.

For those with businesses, the position after April next year seems very much worse.

Those gains would currently be taxed at a maximum rate of 10%.

It appears that preferential rate will simply be abolished so that a taxpayer who sells his business on 6 April 2008 could end up paying tax of 18% even though, if he had managed to complete the transaction one day earlier, he would have paid only 10%.

Could the businessman "trigger" an artificial sale to crystallise that 10% rate, to straddle the end of the tax year?

That must now be at the forefront of any businessman's mind.

However, this will carry its own problems as it will of course involve paying tax up front on gains not commercially realised.

Second home owners or investors may be better off in deferring sales until after April next - at which point their tax bills fall overnight from 40% (if they are higher-rate taxpayers) to 18%.

People who have owned assets for a long time may find that the new CGT rate could exceed their current potential charge, which would have been reduced by indexation and taper relief.

However, for the investor who has adopted a short-term buy-and-sell strategy, the forthcoming changes are very good news.

Non-domiciliaries

It has long been known that for the likes of international footballers, shipping magnates and Russian oligarchs, the UK is a tax haven.

These changes may also impact on middle-range foreigners working in the UK

Our current basis of taxation allows them to pay minimal tax in the UK by retaining foreign assets abroad.

Under current rules, no UK tax is payable unless income or capital gains from the offshore assets is brought into the UK.

The PBR announced a wholesale new and restricted regime for non-domiciliaries with effect from 6 April 2008.

First of all, Mr Darling has stolen Tory Shadow Chancellor George Osborne's thunder by imposing a 30,000 annual tax charge on those wishing to continue to use this "remittance basis" regime, and who have lived in the UK for seven years in the past decade.

This is unlikely to be of much concern to the very high net worth individuals for whom this will represent little more than small change.

Banking arrangements

Of more concern is the announcement of anti-avoidance legislation to stop people "smuggling in" income and assets from abroad but not paying tax on them.

Many regular visitors will inadvertently become UK residents unless they urgently review their visiting arrangements

These changes may also impact on middle-range foreigners working in the UK, who use structures to ensure that their overseas funds escape the UK tax net.

They will need to review their foreign income and gains and decide whether to opt into the 30,000 "voluntary" tax or somehow re-organise matters, if that is achievable.

Up till now, non-domiciliaries could set up their banking arrangements cleverly to avoid UK tax on all but UK earnings.

That door now seems to have been firmly shut.

Draft legislation will not be available until the end of the year so, until the detail is scrutinised, it is impossible to work out with certainty what they should do.

But inactivity is - most likely - not a viable option.

Mr Darling also announced a policy change on how UK residence is ascertained.

Previously, days of arrival and departure were not counted in reaching the magic average of 90 days, after which a UK visitor became resident and subject to a strict UK tax regime.

Those days now count, which means many regular visitors will inadvertently become UK resident unless they urgently review their visiting arrangements.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.





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