Emergency Budget = emergency action?

The new coalition government is due to announce tax changes in its 22 June emergency Budget. Is there anything you could or should do before to lessen the impact of any tax rises?.

Given we don’t know exactly what will be announced or when any changes will take effect, trying to base decisions on such woolly information seems a bit foolish.

Nevertheless, as there are only a few changes you can realistically plan for in advance we can guess enough to make some reasonably sensible judgements. Let’s take a look at the key areas:

Capital gains tax

Despite protests from some Tory backbenchers it seems likely that the tax on gains will rise from 18% to fall in line with income tax rates at 20%, 40% and 50% respectively. And there’s speculation the annual allowance will fall from £10,100 towards the £2,000 proposed by the LibDems, although I’m less convinced. We’ll also have to wait and see whether any taper relief (lower tax the longer an investment is held) is re-introduced, as per before when capital gains were taxed at marginal income tax rates.

As capital gains tax is calculated over a complete tax year it would be very unusual (and unpopular) to implement any changes from June. Backdating the changes to 6 April 2010 makes more sense logistically but would be very controversial and set a dangerous precedent, so the most likely option is for changes to commence from 6 April 2011.

If you’re sitting on investment gains then realising up to your annual £10,100 allowance before 22 June makes sense, as it’s highly unlikely there’ll be a retrospective reduction in the allowance. Remember, if you don’t hold investments jointly you can transfer some to your spouse, allowing them to use their allowance too.

Should you realise gains in excess of your allowance? i.e. take an 18% tax hit rather than a potential 40% or 50%? This is a high risk strategy, so be careful. If we assume the annual allowance will be more or less unchanged then consider whether you could strip out gains over several years, effectively tax-free. But if your gains are significant then there’s a plausible argument for paying tax now and hoping that any charges are not retrospective.

If you have a second home that you’re looking to sell at a profit then it’s probably too late to complete a sale before 22 June, but with any luck tax increases will be deferred until next tax year which buys you some time.

Pension Contribution tax relief

Under current proposals those earning £150,000 or more will no longer enjoy higher rate relief on pension contributions from 6 April 2011. And if you annual taxable income has exceeded £130,000 since April 2007 you could already lose higher rate relief if you increase regular contributions over £20,000 a year.

The danger is that higher rate tax relief on pensions might be abolished altogether. It would be unusual if this were introduced mid tax year, but never say never.

If you’re a higher rate taxpayer (not caught by the £130,000 rule) and want to make pension contributions this year then doing so before 22 June seems sensible. There is a chance of retrospective legislation, but I’d be surprised if this is the case.

VAT

This may well rise, so if you’re planning an expensive purchase then doing so before 22 June seems wise, provided you can afford it.

Finally, if you’re taking advantage of any tax loopholes (of which there seem to be very few left) then brace yourself for a further clampdown. There’s nothing like a whopping deficit to motivate a government to collect every last penny of tax it can.

Read this article at http://www.candidmoney.com/articles/article113.aspx