Tax & Accounting News

Budget summary

22/03/2006

In what may be his last Budget, the Chancellor focused on investment in education and industry, and targeted support for families and new homeowners, rather than major taxation measures. The large scale anti-avoidance measures feared by some commentators did not materialise. We summarise below the main points which will affect personal and company taxation.

Income tax, national insurance, Working and Child Tax Credit rates and allowances

Most allowances and rate bands are increased by the normal inflationary amounts. Click here for full details.

Company Cars

The car fuel benefit charge for 2006/07 is frozen at the 2005/06 level of £14,400.

Computers and mobile phones

From 6 April 2006, it will no longer be possible for employers to loan a computer or more than one mobile phone tax-free to an employee for private use. Click here for full details.

Corporation Tax

As announced in the Pre-Budget Report, the starting rate and non-corporate distribution rate will be abolished from 1 April 2006, and companies will pay tax at the main rate or small companies rate, with marginal relief for companies with profits between the limits.

Capital Allowances

The First Year Allowance for expenditure on plant and machinery by small businesses will be increased from 40% to 50% for one year from April 2006. The rate for medium-sized businesses remains at 40%.

Film Production

As previously announced, a new tax relief will be directly available for UK production expenditure after 1 April 2006. Click here for full details.

Leasing of plant and machinery

As previously announced, tax changes will apply from 1 April 2006 to leases of at least 5 years in length. Lessors will be taxed on the proportion of the rental income that reflects the financing charges, and lessees will be able to claim capital allowances much as if they had bought the asset, and receive a deduction for that part of the rentals on which they cannot claim capital allowances. Click here for full details.

Inheritance Tax

As previously announced, the nil rate band will be increased from £275,000 to £285,000 from 5 April 2006.

Inheritance Tax and Trusts

In a significant and unheralded measure, the inheritance tax treatment of accumulation and maintenance and interest in possession trusts will be brought into line with that for discretionary trusts. With immediate effect, except for trusts for the disabled and trusts set up on death for minor children or one life tenant, transfers to such trusts will be chargeable rather than potentially exempt. The ten-yearly and exit charges will also apply, except for existing A & M trusts where property will go absolutely to a beneficiary at age 18 or where the trust is amended to provide for this by 5 April 2008, and except for existing IIP trusts whichend when the life interest terminates. As a consequence of this change, capital gains tax holdover relief will now be available for transfers of non-business assets to such trusts. Click here for further details.

Modernising the tax system for Trusts

Several changes take effect from 6 April 2006, the most significant of which is that the settlor of a trust for a dependent child will, for capital gains tax purposes, be treated as having an interest in the settlement. This will mean that it will not be possible to transfer assets into such a trust and hold over a gain, so urgent action is required for anyone wishing to make such a transfer. Some changes have been deferred, including the abolition of the tax pool and a reduced 20% capital gains tax rate for personal representatives of deceased persons. Click here for further details.

Pensions

The long-awaited 'A-Day' arrives on 6 April 2006, when the substantial pensions simplification changes take effect, sadly without the residential property investment facility which was originally proposed. Click here for a summary.

Enterprise Investment Scheme

For shares issued after 5 April 2006, the annual investment limit for income tax relief will be doubled to £400,000, and where the taxpayer elects to carry back to the previous year up to half of the amount subscribed in the first 6 months of the year, the overall limit is also doubled to £50,000. For EIS qualifying companies, for shares subscribed for after 21 March 2006 and issued after 5 April 2006, relevant assets must not exceed £7 million immediately before the issue of the shares and £8 million immediately after the issue (reduced from £15 million and £16 million.) Click here for further details.

Venture Capital Trusts

From 5 April 2006, the rate of income tax relief for investors will be reduced from 40% to 30%, and the minimum qualifying period for which shares must be held is increased from 3 years to 5 years. For each company (or group) in which a VCT invests after 5 April 2006, gross assets must not exceed £7 million immediately before the investment and £8 million immediately after the investment (reduced from £15 million and £16 million.) Click here for further details.

Corporate Venturing Scheme

For qualifying issuing companies, for shares subscribed for after 21 March 2006 and issued after 5 April 2006, gross assets must not exceed £7 million immediately before the investment and £8 million immediately after the investment (reduced from £15 million and £16 million.) For further details click here.

UK Real Investment Trusts

Draft legislation has been produced, which will enable qualifying companies to elect for REIT treatment from 1 January 2007. The advantages are that rental income and gains on sale of investment properties will be tax-free, and distributions can be paid to shareholders with a basic rate tax credit. For further details click here.

Stamp Duty

The threshold for residential property purchases is to be increased by £5,000 to £125,000, with effect from 23 March 2006.

VAT registration

The taxable turnover level for VAT registration purposes will be increased from
£60,000 to £61,000 with effect from 1 April 2006.

Alternative Finance Arrangements

From April 2006, two additional arrangements are to be included in the legislation under which amounts payable under Sharia law are treated as interest for tax purposes, and from 22 March 2006, alternative finance arrangements provided by employers to employees are to be treated in the same way as conventional low-cost loans for benefit in kind purposes. Click here for full details.

Car tax

New rates are being introduced based on C02 emissions. Click here for full details.

Car fuel duty

The normal inflationary increase will once again be deferred until 1 September 2006.

Alcohol and tobacco duties

There will be a 1p per pint increase for beer and a 4p per bottle increase for wine, but no increase for cider, spirits, champagne or British sparkling wines. There will be a 9p per packet increase for cigarettes.

 

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