Predictions from Birkett Long ahead of Emergency Budget

1. Capital Gains Tax
Q: What is Capital Gains Tax?
A: A tax payable on the difference between the value of an asset when you acquire it and the value when you dispose of it. Even if you give it away and make no profit at all. It is particularly important for capital assets like stocks and shares, or property.

Q: What is likely to happen?
A: We’re likely to see the 18% flat rate for Capital Gains Tax jump to 40% or 50%. There has been much speculation already, fuelled by hints published in the Government’s coalition agreement.

I think we’ll see Osborne return to the old way of taxing individuals on Capital Gains - adding gains to overall income. This means that any Capital Gains made in a financial year are taxed at your highest income tax rate.

Currently, the first £10,100 of gain is free of tax. This is quite generous and there has been speculation that it will be reduced. A freeze is more likely though.

Q: Any good news?
A: Osborne might sweeten the pill for individual tax payers and business owners by introducing “taper relief”. This means the longer you’ve owned an asset, the less Capital Gains Tax you pay. This sliding scale approach is common in other European countries. In France, for example, if you’ve owned a property for long enough you pay no tax at all.

Q: When are changes likely to take effect?
A: In normal circumstances, the Chancellor would wait until the next financial year – so April 2011. But as the UK is desperately short of money, and the Government must claw back the deficit, we could see new CGT rules introduced immediately on 22 June - an unusual move.

Q: Who are the winners and losers in our region?
A: It’s pretty bad news for second homeowners, those people who’ve snapped up properties in the region to enjoy our beautiful coastline and countryside. Potentially, business people and farmers could be hit hard too. Any CGT changes could deter elderly people who want to give away investment assets such as shares, as part of their Inheritance Tax Planning. All these groups will be taxed heavily if predicted changes go ahead.

2. VAT
Q: What is VAT?
A: Value Added Tax (VAT) is a tax that's charged on most goods and services that VAT-registered businesses provide in the UK. Everyday items and services like clothing or getting a haircut include VAT in the price.

Q: What is likely to happen?
A: Several European countries have a higher rate of VAT than us, the average being around 20%.
It’s possible that VAT will increase to 20% on June 22. Raising VAT is a quick fire way of generating the Government a lot of money, and paying off some of that £156bn deficit.

Q: Any good news?
A: Not really. A VAT increase will hit everyone’s pocket. A small number of items are currently VAT-exempt in the UK, things like books, newspapers and children’s clothes. The Government could choose to widen the net and add VAT to these items too. However, this would be unpopular. Adding tax to necessary, everyday items for children will make the Government appear anti-family and adding VAT to newspapers will not get a good press!

Q: When are the changes likely to take affect?
A: Businesses need time to prepare for a VAT change, so any changes are not likely to be immediate – expect the change, if it happens, to be effective from next year.

Q: Who are the winners and losers in our region?
A: The ultimate winner would be the country’s economy. With a £156bn budget deficit, we require drastic, quick measures to reduce the debt. Increasing VAT is one way of raising a lot of money quickly. Unfortunately, it’s something that will hit everyone’s pocket and could stifle high street spending. The Liberal Democrats oppose a VAT increase, because of the effect on the poorest members of society but the Treasury needs everyone to play their part.

3. Income tax
Q: What is income tax?
A: Income tax is a tax paid on income. It is paid by employees and people who are self-employed. It may also be payable if you aren't working if, for example, you have an income from a pension or savings. At the moment, if you earn more than £6,475 in a year, you have to pay income tax.

Q: What is likely to happen?
A: Pre-election, the Lib Dems promised to raise the personal income allowance to £10,000, meaning you could earn anything up to £10,000 before having to pay income tax. Meanwhile the Tories promised a new income tax break for married couples.

Now we have a coalition controlling the purse strings, neither measure is likely to happen straight away. But it is a high priority to introduce them both in the longer term.

Q: When are the changes likely to take effect?
A: By next April, we’re likely to see the first increase in personal allowances towards the target of £10,000. We won’t get it all in the first year though. The married couple’s tax break, which amounts to around £200 per year, will probably come into force next April too.

Q: Who are the winners and the losers?
A: People on low incomes and married couples will get a helping hand, but the money will have to be found from increases in Capital Gains Tax, Inheritance Tax or VAT and Income Tax on higher earners.

4. Inheritance tax
Q: What is Inheritance Tax?
A: Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone’s lifetime. It is only applicable to estates which are valued at more than the current threshold, which for 2010-11 is £325,000, but is at the painful flat rate of 40%.

Q: What is likely to happen?
A: The Tory party promised to increase the threshold to £1,000,000. That is now not going to happen, at least for a few years. And the £325,000 limit is frozen at that level for several years – a classic bit of “Fiscal Creep” to raise more tax. This could affect many people who have nice houses and some savings. There’s also a particular threat to the important farming community in our region. Currently, if an individual who owns a share of a farming estate passes away then the relatives inheriting it receive 100% tax relief – ‘Agricultural Property Relief’. The Government has been making noises for some time that they want to get tougher on this. Expect angry eruptions throughout the farming community if this special inheritance tax relief is removed.

Q: When are the changes likely to take effect?
A: Farmers may not lose their exemption immediately but should start looking now at how they can benefit from the more general Business Property Relief instead, in the years to come.

Q: Who are the winners and losers?
A: Many better off people in East Anglia and the South East will start falling into the Inheritance Tax net again. Farming families who live on valuable farming land – though they may not have a very high income – will also be hit hard, as will ‘lifestyle farmers’, if Agricultural Property Relief gets the chop.

Public spending cuts - prediction
We’re all anticipating announcements about where the axe is going to fall in terms of public spending. Ongoing hype and rhetoric about ‘the age of austerity’ is simply Cameron preparing the population for harsh cuts. There’s been an intense pre-budget campaign of expectation management, with talks of the cuts affecting our whole way of life. This is simply setting the mood for frugality. Expect more talk of efficiency and cutting back on June 22, but don’t expect much detail. I think we’ll be forced to wait until the pre-budget review in the autumn before we fully understand where the savings are going to be made.

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