The Budget

This summary consists of notes on the Budget presented to Parliament on 16 March 2005 (as expanded by government press releases) together with other information relating to the fiscal year 2005/06. The information in the summary reflects our understanding of the Chancellor's proposals. No action should be taken without obtaining appropriate professional advice.

The starting and basic rate limits will be increased in line with statutory indexation and there will be no changes to the income tax rates. The personal allowance for those age 65 and over will increase by more than statutory indexation. Other allowances, including the personal allowance for those under 65, will be increased by statutory indexation. Most of these changes were announced in the 2004 Pre-Budget Report. The maximum earnings for which pension provision may be made with tax relief (the 'earnings cap') will be increased in line with statutory indexation.

Individual Savings Accounts and Child Trust Funds
The current individual savings account (ISA) limits of £7,000 for the overall maximum and £3,000 for the cash component will continue until 5 April 2010.

From 6 April 2006 at the latest, the ISA and child trust fund investment rules will be extended to permit investment in all retail collective investment schemes authorised by the FSA, provided the schemes do not restrict investors' access to their funds. For ISAs, any collective investment scheme that promises 'cash-like' returns will be limited to the cash component. One of the main effects of the change will be to allow ISAs to hold collective funds that invest in property.

Modernising Trust Taxation
A new tax regime for certain trusts with vulnerable beneficiaries will retrospectively have effect from 6 April 2004. Trustees will be taxed at the beneficiary's tax rate(s). For trusts subject to the rate applicable to trusts (RAT - currently 40%), a £500 standard rate band will apply from 6 April 2005.

Further amendments to trust taxation, including revised definitions and streaming of income, will be made in next year's Finance Bill.

Income Tax Charge on 'Pre-Owned Assets'
An income tax charge will be imposed from 2005/06 on the annual benefit of using or enjoying an asset that was once owned by the user (and has not been sold at an arm's length price for cash), where such use is enjoyed free of charge or at below market rent. The charge will also apply to assets which the user did not formerly own but which were purchased with funds provided by the user. Both tangible and intangible assets will be within the charge. The rules will quantify an annual taxable value for the benefit modelled on the existing rules for taxing benefits in kind provided to employees (precise details are still to be finalised), with relief given for any amount paid by the taxpayer for the benefit (e.g. rent).

No income tax charge will apply where the total taxable value for any tax year is less than £2,500. If the asset in question still forms part of the taxpayer's estate for inheritance tax purposes, under the gifts with reservation rules, the asset will not fall within the income tax charge. In addition, the charge will not apply where:

Pre-existing arrangements will escape the new charge if they are dismantled, or the user begins paying full market rent, before the start date of 6 April 2005. Alternatively, a taxpayer may elect, by 31 January 2007, to remain outside the income tax charge (in relation to the asset(s) specified in the election), but in that case the asset in question will be treated as part of their estate for inheritance tax purposes while they continue to enjoy it.

Tax and Same Sex Civil Partners
Civil partnerships formed under the Civil Partnership Act 2004 will be treated in the same way as married couples for all tax purposes, including inheritance tax and capital gains tax. The changes will take effect from 5 December 2005, when the Act comes into force.

Company Car and Fuel Benefit
The figure for the company car and fuel benefit charge will remain unchanged at £14,400 for2005/06. The CO2 emissions level qualifying for the minimum petrol percentage charge (15%)will be 140g/km for 2005/06, 2006/07 and 2007/08.

Reform of Company Vans re: Private Use
A major deregulation of the company van rules was announced in the 2004 Budget. From 6 April 2005, a nil charge will apply to employees who have to take their van home (for example, who are on call) and are not allowed other private use.

As a transitional measure, the benefit in kind charge of £500 (and £350 for older vans) will be continued for all vans where private use is unrestricted. From 6 April 2007, the scale charge for unrestricted private use will increase to £3000 and if an employer provides fuel for unrestricted private use an additional fuel charge of £500 will apply, taking 85% of those who currently pay a charge out of the system. This will not apply to the self-employed.

Maternity Leave
The Government announced that paid maternity leave will be extended from six to nine months with effect from April 2007 with the aim of increasing it to 12 months by the end of the new Parliament. It is also intended to allow the transfer of part of the allowable paid maternity leave from the mother to the father before the end of the next Parliament.

Nursery Vouchers
Nursery vouchers given to employees will be free of tax and NICs from April 2005 as long as they are worth no more than £50 a week. Employers will have to record the name of the person caring for the child - i.e. the recipient of the voucher, and ensure that this person has been approved as a carer.
Staff will have to keep their employers up to date with their childcare arrangements, and if they fail to do this, or the employer does not notice that a carer's approval has expired, then there will be extra tax and NICs to pay.

Computer and Bicycle Exemptions
From 6 April 2005, there will be no income tax charge if an employee pays the market value to buy computers or bicycles previously loaned to them by their employer. The change reverses existing legislation that can give rise to a tax charge where assets are transferred to an employee and have previously been provided as benefits in kind.

Film Tax Relief
Tax relief for low budget qualifying British films (s48 relief), which was due to expire on 1 July 2005, will be extended until 31 March 2006. This extension will enable films to qualify form current tax relief, where the first day of principal photography is before 1 April 2006 and the film is completed before 1 January 2007. Acquisition relief will continue to be available for films that meet these conditions and are acquired before 1 October 2007.

Renovation of Business Premises
A new Business Premises Renovation Allowance scheme will provide 100% first-year allowances for capital expenditure on renovating or converting vacant business properties in designated disadvantaged areas. The scheme will apply if the EU grants state aid approval.

Inheritance Tax Nil Rate Band
The inheritance tax nil rate band will increase to £275,000 from 6 April 2005. The nil rate bands have been set for the following two years, at £285,000 for 2006/07 and £300,000 for 2007/08.

Capital Gains Tax Annual Exemption
The annual capital gains tax exemption for individuals will rise to £8,500 from 6 April 2005. The maximum annual exemption for most trusts will be £4,250.

Stamp Duty Land Tax - Residential
The threshold for stamp duty land tax on residential transactions is raised from £60,000 to £120,000 with effect from 17 March 2005. Tax will be payable at 1% on the whole of the consideration if it is more than £120,000 but not more than £250,000. There is no change to the higher threshold of £150,000 for residential transactions in designated disadvantaged areas. The other rates and bands are unchanged.

Stamp Duty Land Tax - Commercial
Disadvantaged areas relief ends for non-residential land transactions from 17 March 2005, unless the contract was entered into before that date. For relief to be preserved, there must be no variation or assignment of the contract or sub-sale, and the transaction must not be the exercise of an option or pre-emption right.

Turnover Limits
The VAT registration turnover limit rises to £60,000 from 1 April 2005. The deregistration limit increases to £58,000. There are no changes to the turnover limits for the cash accounting, annual accounting and flat rate schemes.

Disclosure Rules
The disclosure rules are extended to schemes that give a tax advantage that does not appear on a VAT return. For example, the advantage might involve VAT that cannot be deducted because it relates to exempt supplies or non-business activity. Currently, businesses need only disclose use of a scheme when it has made a difference to the figures on their VAT return.

Partial Exemption
Some changes are made to the partial exemption rules from 1 April 2005 to address weaknesses in the calculation methods. In future, approval or direction of a special method will have to be in writing. Customs will be able to override special methods more often.

VAT Fuel Scale Charges
New scales apply from the start of the first accounting period beginning after 30 April 2005.

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