Taxing times ahead

AS THE solicitors PROFESSION PREPARES FOR LIMITED LIABILITY PARTNERSHIPS, THE BUDGET ANNOUNCED DETAILS OF The tax implications.

report BY RON DOWNHILL AND LIZ SCORER The...AS THE solicitors PROFESSION PREPARES FOR LIMITED LIABILITY PARTNERSHIPS, THE BUDGET ANNOUNCED DETAILS OF The tax implications.

report BY RON DOWNHILL AND LIZ SCORER The chancellors Budget Statement was a steady as you go affair and, in Gordon Browns own words, one for long-term stability.

There was not a lot of innovation.

Furthermore, unlike previous Budgets from this chancellor, there were no new stealth or otherwise taxes or large increases to existing ones.

This was not a big election giveaway Budget, but it did contain something for the average family, especially those with children.

There were some quite interesting proposed reforms to business taxation, many of which have previously been announced in earlier Treasury statements.

This was the first Budget for sometime where there was no increase in rates of stamp duty.

Whether this indicates an end to stamp duty rises on property, or whether it is simply a respite, we will have to wait and see.

The chancellor has been under pressure to reduce the 0.5% stamp duty rate on sales of stocks and shares to encourage use of the London Stock Exchange, but there was no change in this area.

There was much speculation prior to the Budget that anti-avoidance legislation would be introduced to counter stamp duty saving schemes on property sales through the use of special purpose companies.

Again, the Budget contains nothing in this area, but there is undoubtedly scope for change in future years.

The chancellor announced a number of tax incentives to encourage regeneration in urban areas.

Property owners and occupiers, who spend on renovation or conversion of vacant flats over shops and other commercial premises for rent, will qualify for 100% capital allowances.

The VAT rate on the cost of converting residential properties into a different number of dwellings is to be reduced to 5%, and the sale of renovated houses which have been empty for ten years or more will be zero-rated for VAT.

In addition, a complete stamp duty exemption for all property transactions in the most disadvantaged parts of the UK is aimed to encourage inner-city development.

A list of qualifying areas is to be published.

Inheritance tax is the only tax which this chancellor has not reformed.

This Budget again saw no substantial changes in this area, with only a modest increase in the nil rate band from 234,000 to 242,000.

At least the chancellor has not felt it appropriate to revert back to the old system of capital transfer tax, with a tax on lifetime transfers.

The option to vary wills post-death through the use of deeds of variation and disclaimer, with associated potential for inheritance tax savings, still exists.

The Budget included a number of taxation incentives to employee share ownership.

There is an interesting extension to the definition of business assets for capital gains tax taper-relief purposes.

Business assets qualify for taper-relief such as that for a higher-rate taxpayer, who has held business assets for just four years, the effective rate of capital gains tax falls to 10%.

Previously, all employee shares, held by employees in the companies for which they worked, qualified for business asset taper-relief.

However, this was subject to an overriding qualification that the company had to be a trading company or holding company of a trading group.

The trading company requirement is now to be removed (as from 6 April 2001).

Such an employee will be eligible for business asset taper-relief on shares in a non-trading company for which he works, provided that he and his associates do not have more than a 10% interest in that company.

There has also been a significant extension to the enterprise management incentive scheme (EMI).

The scheme was introduced in last years Finance Act and enables companies to grant share options to each of 15 key employees, worth up to 100,000 per employee, those options being free of income tax and national insurance contributions on grant and exercise, provided other conditions are satisfied.

Going beyond his announcements in the November pre-Budget report, the value of share options capable of grant under EMI will be doubled to 3 million, and there will be no limit on the number of employees in each company who can benefit from EMI options.

Improvements will also be made to the new all employee share ownership plan, which will be made easier to administer.

There will be a new exemption from stamp duty when employees purchase shares from an all employee share ownership plan.

In the arena of business taxation, the Budget contained no major structural changes.

However, it builds on previously announced initiatives.

Draft legislation is published, giving details of the relief to companies for the costs of intellectual property, goodwill and other intangible assets.

A consultation paper is to be published, developing the proposals for a relief on gains arising to firms on the disposal of substantial shareholdings.

As announced in the pre-Budget report, withholding tax on payments of interest or royalties between companies will be abolished from 1 April 2001.

Similarly, the chancellor has also now decided that the new rules will be extended to cover annuities and annual payments made between companies.

Payments to individuals will continue to be paid net of tax.

There is to be a consultation concerning the tax treatment of small businesses.

This is aimed at reducing regulatory burdens through aligning their profits for tax purposes broadly with those reported in their accounts.

This seems too good to be taken at face value.

No doubt there would continue to be provisions disallowing certain types of business expenditure, such as the cost of entertaining customers.

Of particular interest to the solicitors profession, the Budget included further details on the taxation of Limited Liability Partnerships.

A tightening up on the usage of LLPs was announced to avoid tax avoidance through use of LLPs for investment and property investment.

LLPs will, in general, be treated as partnerships for tax purposes.

The tax proposals take effect from 6 April 2001, when LLPs become available.

Ron Downhill is a partner and Liz Scorer an assistant solicitor in the tax department of Berwin Leighton Solicitors.

Mr Downhill is also a past chairman of the Law Societys revenue law committee.Committee watch For details on the work of the Law Societys revenue law committee, contact Louise Speke on 020 7320 5674.