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The Emergency Budget

The Emergency Budget focused on fairness and ensuring "that every part of society makes a contribution to deficit reduction while supporting the most vulnerable" – while reaffirming that the UK is "open for business". This note focuses on how the Chancellor's announcements affect wealthy families, trustees, private banks and partnerships.

HIGHLIGHTS FOR FAMILIES, TRUSTEES AND FAMILY BUSINESSES

Capital Gains TaxThe Chancellor announced that, from midnight on 22 June, a new rate of CGT of 28 per cent will apply to higher rate taxpayers, and to trustees and personal representatives. For basic rate taxpayers, CGT remains charged at 18 per cent where total taxable gains and income are less than £43,875 (the basic rate upper limit). The 28 per cent rate applies to gains (or any parts of gains) above that limit. CGT remains a flat tax, without any allowance for inflation or the length of time an asset has been held.

The annual exempt amount for 2010-11 remains £10,100 (or half of that for UK resident trustees). Gains above that amount which arose before 23 June 2010 will continue to be liable to CGT at 18 per cent, and (for individuals) will not be taken into account in determining the rate at which gains after 23 June 2010 should be charged.

Crucially, there is no general distinction between disposals of business and non-business assets. However, gains qualifying for entrepreneurs' relief will still be taxed at 10 per cent, and the lifetime limit on gains qualifying for entrepreneurs' relief is increased from £2 million to £5 million.

Income tax

In line with the Liberal Democrats' commitment to raise the income tax threshold to £10,000 (from its current £6,475), the personal allowance is set to increase to £7,475 from April 2011. However, the thresholds for the different bands of income tax will be frozen until 2013-14. Taxpayers within the new 50 per cent tax bracket already lose their personal annual income tax allowance, and therefore will not be affected by this announcement.

Inheritance Tax

There were no surprises in relation to inheritance tax. The Government pledged to consult on bringing inheritance tax on trusts within the Disclosure of Tax Avoidance Schemes regime and confirmed that the inheritance tax allowance will be frozen at its 2010-11 level of £325,000 until 2014-15.

Non- UK domiciled individuals

For remittance basis users, there is an additional point to note regarding capital gains tax: if the taxpayer pays the £30,000 "remittance basis charge", he is not eligible to claim his annual exempt amount, and is deemed to have used up the entirety of his basic rate income tax band, so the effect is that all gains realised in the UK or remitted to the UK will be taxed at 28 per cent.

In addition, the Chancellor confirmed that, as announced in the Coalition Agreement, the Government would review the taxation of non-domiciled individuals, the aim being "to assess whether changes can be made to the current rules to ensure that non UK domiciled individuals make a fair contribution to reducing the deficit, in return for greater certainty and stability for those bringing skills and investment to the UK." Clearly, a consultation process does not necessarily imply that changes will be made, but we will of course keep you informed when the consultation is announced.

Trusts

As noted above, the gains of UK resident trustees and personal representatives will now be taxed at a flat rate of 28 per cent where they exceed £5,050. UK domiciled beneficiaries of offshore trusts will now face a maximum rate of 44.8 per cent (including the surcharge) on capital distributions which represent gains that were realised five or more years before. For many trustees, this will reinforce the importance of careful planning to ensure that old gains remain a stockpiled unless a beneficiary has an urgent need for funds which outweighs the tax disadvantage.

Family businesses and professional partnerships

The rate of corporation tax is to decrease from its current 28 per cent to 27 per cent from April 2011 and 1 per cent per annum thereafter until it reaches 24 per cent in 2014-15. The small business rate is cut from 21 per cent to 20 per cent from April 2011. Among other incentives for enterprise are a rise in the threshold for employers' National Insurance contributions (to £21,000); a partial National Insurance "holiday" for employers on the first ten employees of new businesses outside London; and an increase in the lifetimeallowance for Entrepreneurs' Relief (see under Capital Gains Tax, above).

For some businesses currently structured as partnerships, it may now be worth considering whether incorporation as a limited company holds advantages.

The Banking Levy

The Chancellor confirmed that, as well as restrictions on bankers' bonuses (yet to be announced in detail), it is understood that there will be a new "banking levy". This will be based on banks' balance sheets from 1 January 2011, and will permit deductions for Tier 1 and other 'safer' categories of capital, to encourage banks to move to less risky funding profiles. Final details of the levy will be published later this year, following consultation.

Whilst the Chancellor's stated aim in announcing the CGT increase was to reduce the attraction of 'converting' income into gains, there may still be scope for investment products targeting the gulf between the additional rate of income tax (50 per cent) and the higher rate of CGT (28 per cent).

VAT

The rate of VAT will be increased to 20 per cent with effect from 4 January 2011.

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