Capital Gain Tax & Pensions Impacts for Expats

George Osbourne’s first UK budget wasn’t as bad as expected. Downing Street news managers had prepared the ground well in particular the two main issues were:

1. The increase in Capital Gains Tax for higher rate tax payers is much lower than expected
2. A future reduction in the annual allowance for pensions, which may tempt high earners to invest in an offshore bond who might otherwise have invested money in their pension

It is also worth noting that the compulsory requirement to buy an annuity at 75 is to be scrapped from April 2011. Most feel this will impact the amount of QROPS transfers but at this stage it’s unclear as to what extent.

Main points from the UK budget:

• Capital Gains Tax is up to 28% for higher rate tax payers and the £10,000 exempt
• The Government appreciates that reducing pension tax relief for high earners will introduce unnecessary levels of complexity. They will therefore look at cleaner ways to bring in this revenue, perhaps by reducing the annual allowance. They will be working with the pensions industry and consulting on this matter before any further changes are made.
• VAT to rise from 17.5% to 20% effective from 4 January 2011
• Higher rate income tax threshold will remain frozen to the year 2013/2014 with a long term objective to increase the personal allowance to £10,000.
• The income tax personal allowance will be increased by £1,000 to £7,475 in April 2011

Other points worth noting:

• The child element of tax credit will rise by £150 above inflation next year.
• Next year with the exception of pension and pension credit, benefits, tax credits and public service pensions will rise in line with consumer prices rather than retail prices.
• Child Benefit frozen for next three years.
• Lone parents expected to look for work after first child goes to school.
• A new medical assessment will be applied to new disabilities living allowance claimants from 2013.
• Housing benefit limited to a maximum of £400 per week for a four bedroom house.
• Corporation tax cut by 1% per year for four years from next year – bringing it down to 24%.
• The employer’s NI threshold to rise.
• Small companies corporation tax rate will be cut to 20% next year.
• From January 2011, a levy will be imposed on UK banks and the UK operations of foreign banks which will generate more than £2bn in annual revenue.
• The link between basic state pension and earnings to be restored.
• 2 year pay freeze for public sector workers earning more than £21,000

And surprisingly, no new increases in duties on alcohol, tobacco or fuel! However Cider did not escape a 10% increase.

These tax changes will provide 23% of the deficit reduction plan. The remaining 77% of the debt reduction will come from public spending cuts which is to be discussed over the summer and to be announced in detail on 22nd October 2010. The key question now is: Will the private sector be able to create as many if not more jobs than those lost? Well, that will be the true measure of whether this budget is a success. However, in terms of the first objective, the UK’s government bonds look safe as does its AAA rating.