Budget 2006

Tax Rates and Allowances

Rates and allowances for income tax, corporation tax, capital gains tax, inheritance tax and stamp taxes are set out below:

Income Tax Personal and Age-related Allowances 2006-07

£ per year (unless stated)
Personal allowance (age under 65) £5,035
Personal allowance (age 65-74) £7,280
Personal allowance (age 75 and over) £7,420
Married couple's allowance* (age 75 and over) £6,135
Married couple's allowance* - minimum amount £2,350
Income limit for age-related allowances £20,100
Blind Person's Allowance £1,660

* Tax relief for the married couple's allowance is given at the rate of 10 per cent.

Income tax: taxable bands 2006-7

Starting rate: 10 per cent £0-2,150
Basic rate: 22 per cent £2,151-33,300
Higher rate: 40 per cent Over £33,300

* The rate of tax applicable to savings income remains at 20 per cent f or income between the starting and basic rate limits. The rates applicable to dividends are 10 per cent for income up to the basic rate limit and 32.5 per cent above that.

The income tax starting rate limit and basic rate limit are to increase in line with indexation.

From 6 April 2006 the new simplified pensions tax regime comes into effect. This means that the pension schemes earnings cap ceases to exist.

Capital Gains Tax (CGT)

The capital gains tax (CGT) annual exempt amount is increased in line with statutory indexation.

The amount chargeable to CGT is added to the individual's income liable to income tax and treated as the top part of that total. For 2006-2007, CGT up to the starting rate limit will be charged at 10 per cent, between the starting rate and basic rate limits at 20 per cent, and above the basic rate limit at 40 per cent.

Inheritance Tax

The inheritance tax threshold is increased by more than statutory indexation to £285,000 for the tax year 2006-07. The estimated number of taxpaying estates in 2006-07 will be about 37,000 - this is around 6 in 100 deaths.

The threshold will be £300,000 in 2007-08. The Government will now increase the threshold by more than expected statutory indexation for the remainder of the Parliament, to £312,000 in 2008-09 and £325,000 in 2009-10.

Stamp Taxes and duties on transfers of land and buildings (consideration paid)

For properties up to £125,000 no stamp duty will be paid. Up to £250,000 the rate will be 1%. Up to £500,000 it will be 3% and anything over will be charged at 4%. There are exemptions for properties with areas designated as disadvantaged.

Real Estate Investment Trusts (REITs)

The Budget introduces a regime that exempts property income and gains from tax, provided the company or group holding the property meets certain conditions.

Companies and groups can elect to join the regime with effect from 1 January 2007.

Where a company owns property, it is chargeable to corporation tax at 30%, on the net rents received and any gains made when property is sold. When a company distributes these profits to investors, they are treated as normal dividends for tax purposes. Higher rate taxpayers pay additional tax of 25% on the dividend.

For companies or groups that meet the necessary conditions for the REITs (Real Estate Investment Trusts) regime, the measure will allow them to elect for special rules to apply to their property business and to their distributions. The regime will be known as UK-REITs. UK-REITs' qualifying rental income and gains on disposals of investment properties will be exempt from corporation tax. Distributions paid out by a UK-REIT, out of tax-exempt property income or gains, will be treated as UK property income. They will be chargeable to tax and paid out to investors after deduction of basic rate income tax (22%). Dividends paid out of other profits will be treated as normal dividends for UK tax purposes.

Conditions that have to be met to come within the UK-REIT regime

The company
it must be UK resident for tax purposes,
its shares must be listed on a recognised stock exchange, and
no one investor may be beneficially entitled to 10% or more of distributions or control directly or indirectly 10% or more of the share capital or voting rights.

The business
75% or more of its assets must be investment property,
75% or more of its income must be rental income, and
the ratio of interest on loans to fund the tax-exempt business to rental income of that business must be less than 1.25:1.

There is a requirement to distribute at least 90% of the tax-exempt profits each year. Companies or groups wanting to become UK-REITs will pay an entry charge of 2% of the market value of their investment properties at the date the company or group joins the regime.

Venture Capital Trust Schemes (VCTs)

For VCTs:

The new rate of income tax relief for investors in VCTs will be 30%.
The minimum period for which VCT investors must hold their shares will rise to 5 years.
A change to the meaning of "investment".

For the EIS:
The annual investment limit for income tax relief is doubled to £400,000.

Regarding both:
The limit in the maximum size of companies able to raise money under the schemes ("the gross assets test") is reduced to £7million before investment and £8 million afterwards.