Personal tax
The basic rate of income tax is reduced from 27% to 25%, with a single higher rate of 40%. Linked with this is the expansion of the basic rate band and increases in personal allowances at twice the rate of inflation. Wholesale changes are to be made to the taxation of married couples: from 1990 husband and wife will be taxed independently and all individuals will be entitled to the same personal allowances.
The exemption limit for inheritance tax is raised from £90,000 to £110,000; the existing scale of rates from 30% to 60% is replaced by a uniform 40%.
Corporate tax
The full rate of corporation tax remains at 35%, although the lower rate for companies having profits of up to £100,000 is reduced from 27% to 25%.
Entertaining overseas customers is no longer tax deductible. Capital duty, chargeable at 1% on the formation of a company or issue of shares, is abolished.
Company cars
The taxable benefit of a company car is to be doubled.
Capital gains tax
The Chancellor proposes a radical alteration to the current system, so that the only gains taxed are those relating to increases in value since March 1982. The new legislation will apply to disposals after April 5 1988 and will treat assets held in March 1982 as having been sold and reacquired at market value at that date. Only the subsequent gain, subject to indexation allowance, will be taxable. An exception will apply if the gain computed under the old system is smaller than that under the new system; only the lesser gain will be taxable.
Further, the CGT rates are to change. Henceforth, individual’s gains will be taxed as if they were income at the new income tax rates of 25% or 40% as appropriate. The annual exemption rate for individuals, beneath which gains are not chargeable, is presently £6,600; this is to be reduced to £5,000.
The maximum capital gains tax retirement relief is to be increased to £125,000; additional relief of 50% will be available on gains between £125,000 and £500,000.
Mortgage interest relief
At present individuals receive relief for interest on loans of up to £30,000 for purchase or improvement of their main residence. Thus, an unmarried couple may have qualifying loans of up to £60,000 on a single residence while a married couple are restricted to the basic £30,000. This inequity is to be remedied by imposing a limit of £30,000 per residence. The new legislation will apply to loans taken out after August 1 1988, and will not affect existing loans. In addition, the present relief on loans for purchase or improvement of a property used as the main residence of a dependent relative will be abolished.
Forestry
An effective tax saving, particularly for individual higher rate tax-payers, has been investment in forestry.
Currently, an investor in forestry is taxed under Schedule B on the annual value of the land. However, he may elect to be taxed under Schedule D, in which case the high initial costs create an income tax loss available for set-off against other income. When the trees are approaching sale, a new occupier takes over and is taxed under Schedule B, thus effectively avoiding liability upon sale.
It is proposed to remove commercial woodland from the scope of income and corporation tax. Thus no relief will be gained for planting trees, and the proceeds of sale will be tax free. Schedule B will be abolished.
Transitional relief will be available for those in occupation at March 15 1988, and those who become occupiers subsequently under commitments entered into before that date.
Business expansion schemes
The scheme is to be extended to companies letting residential properties under assured tenancy terms, a form of letting introduced by the current Housing Bill.
BES relief will be available in respect of shares issued by qualifying property companies once the Finance Bill is enacted, and will continue to December 31 1993. Qualifying companies must specialise in the provision of qualifying assured tenancies (to exclude shorthold tenancies) for at least four years after the issue of BES shares. The company may either acquire unlet existing properties or build new ones; the capital value of each house or flat must not exceed £85,000 (£125,000 in Greater London).
In the past there has been no limit to the BES investment which a company can raise. For shares issued after 15 March 1988 there is a new limit of £500,000; however, for assured tenancy letting companies and ship charterers a limit of £5m is substituted.
Top-slicing relief
Landlords are chargeable to income tax on premiums for leases of under fifty years. Tax becomes due when the lease is granted; the full amount is taxable if the duration is under two years, with a 2% reduction for each full year thereafter. Top-slicing relief may reduce the application of higher tax rates on premiums received by individuals.
In view of the substantial reductions in tax rates, top-slicing relief will be abolished with effect from April 6 1988.
Top-slicing relief also applies to certain lump sum redundancy payments, and certain amounts taxable upon merger of professional firms. As with lease premiums, these top-slicing reliefs are to be abolished.
