(FIRST) BUDGET 2010 – A Personal Reaction

26 March 2010

On Wednesday evening, 24 March, I sat down to watch a recording of the Budget speech. I doubt that many people spent their evening in that way. What I saw, however, was more of an extended party political broadcast, with one or two interesting announcements.

Perhaps the headline proposal relates to stamp duty land tax.  The Chancellor announced that first time buyers of residential property would not pay stamp duty land tax on properties valued at up to £250,000.  Being responsible, and in the principles of fairness, the Chancellor then announced that the measure would be paid for by a new 5% rate of stamp duty land tax on residential properties worth more than £1 million. What was not made clear, however, was that the removal of stamp duty land tax for first time buyers would last for two years from 25 March, whereas the new 5% rate of stamp duty land tax would apply from 6 April 2011 and be permanent.  

Both in the Budget speech itself and in the accompanying notes there are references to preventing tax avoidance and evasion.  I think the blurring of the distinction between the two is very worrying.  To my mind, tax avoidance (i.e. legally arranging to avoid or reduce a tax bill) is very different to tax evasion (which is acting illegally and deliberately not paying to the Revenue tax that is due to be paid).  

One potentially political aspect of the Budget speech was the statement that the inheritance tax threshold would be frozen at £325,000 for four more tax years, in addition to the freeze for the next tax year (2010/2011) already announced in the Pre-Budget Report.  This will put pressure on the Conservative Party either to accept the measure or to oppose it. Opposing it will, in turn, allow the Labour Party to argue even more strongly, in the run up to the General Election, that the Conservative Party is more in favour of protecting the rich than acting in the wider interests of the population as a whole.

Prior to the Budget, there was a lot of speculation about capital gains tax rates.  Given that the maximum capital gains tax rate is 18% and the maximum income tax rate is rising to 50% on 6 April, the expectation was that the capital gains tax rate would increase (perhaps to 25% or 30%).  In the event, however, not only did the capital gains tax rate stay unchanged, but there was an improvement in what is known as entrepreneurs’ relief.  When it applies, entrepreneurs’ relief reduces the effective rate of tax to 10% on the disposal of qualifying business assets (hence the reference to entrepreneurs).  Previously, there was a lifetime limit of £1 million of an individual’s gains that could qualify for the relief and, therefore, a saving of up to £80,000 (the difference between the rate of 18% and 10% on £1 million).  In the Budget, and with effect from 6 April, that limit has been doubled to £2 million.  

Overall, it will be interesting to see how many of the proposals in the Budget become law before the General Election and to see how differently matters are dealt with in the first Budget after the General Election.  

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