As outlined by the coalition Government, the tax rate on the disposal of non-business assets is expected to be increased in line with income tax rates in the forthcoming Emergency Budget on 22 June 2010, which could mean an effective tax rate on capital gains of up to 50%. According to tax experts at PricewaterhouseCoopers LLP (PwC) the incoming tax rates could vary for short or long term investments.

Barry Smith, head of tax at PricewaterhouseCoopers, Midlands, explains: "In an effort to discourage more speculative activity, we believe there may be differential capital gains tax rates depending on whether an asset has been owned for the short or long term.  It is possible that any new short-term rate, which could apply to assets held for less than two years, could take effect immediately from Budget Day. In its simplest form a long-term rate of, say, 30% could be applied to assets held for more than two years, and is likely to be introduced in April 2011.

"This could help increase revenue for the Chancellor as short-term gains are immediately taxed at a higher rate and individuals would then have the choice of keeping or disposing of assets.  A differential rate for longer term holdings would also deal with the problem of how to grant relief for purely inflationary gains."

In order to continue to encourage entrepreneurial activity, PwC is anticipating a lower CGT rate to apply to business assets which should include certain shareholding in private companies. The CGT rate on such assets could be set somewhere between 10 - 20%. 

Barry Smith, head of tax at PricewaterhouseCoopers, Midlands, said: "A lower rate for CGT on business assets would be welcomed by Midlands entrepreneurs. Again, the tax rate applied to such assets may vary so that assets held for the longer term enjoy the lowest tax rates. This would of course take us back to a similar position to taper relief."

Other PwC predictions for the forthcoming Budget on 22 June 2010 include:

Enterprise

R&D relief for larger companies could be withdrawn and tighter rules could be announced so that the relief more closely targets hi-tech businesses.

Personal tax

Plans are likely to be announced to implement an increase in the personal allowance (currently £6,475) to a £10,000 threshold, but this is unlikely to come into being all at once. There is a general expectation that this will be phased, with the first step from 6 April 2011.

With a focus on assisting those on lower and middle incomes, there may be a proposal to change the Tax Credit system, which could be capped at a set amount based on household income, which would have the benefit of doing away with some of the complexities with which the Tax Credits system has become synonymous. It is unlikely that we will see a proposal for Child Benefit that is based on means testing as this would add unnecessary complexity.

Yearly ISA subscription limits (currently £10,200) could be boosted, or there could be a statement of intent from the Chancellor to do this, as ISAs provide a tax efficient way to save in addition to being an alternative to pension planning.

Changes to inheritance tax (IHT) are not in the coalition agreement and therefore there is little likelihood of significant changes to IHT.

Non-domicile rules

No immediate changes are expected but the coalition has signalled a review and both parties had measures in their manifestos to increase the burden for non doms, so there will be some anxiety among those potentially affected until the nature and scope of this review is clear.

Corporate tax

There has been much discussion regarding the role the corporate tax system plays in attracting and retaining business in the UK. There is likely to be more detail about the coalitions' five year plan to revamp the competitiveness of the corporate tax system. While immediate measures are not expected and further consultation is likely to be sought, some of the items we may hear more about include:

·         The stated aim to bring the corporation tax rate down, possibly defined by a target rate to be achieved over a five-year timeframe, once it is affordable.

·         More positive detail on the Patent Box, already announced.

Barry Smith, head of tax at PricewaterhouseCoopers, Midlands, said: "While a dash for immediate change cannot be ruled out, it is important to take care and consultation is likely to be necessary before changes to corporate tax regimes go ahead. Some areas may also see new legislation in the future, including the controlled foreign companies regime, the taxation of overseas branches, and the tax treatment of debt."

VAT

A planned rise in VAT to at least 20% effective from April 2011 is expected. 

Barry Smith, head of tax at PricewaterhouseCoopers, Midlands, said: "Increasing VAT by 2.5% will have a significant impact on retailers as they would have to choose between losing the margin and reducing the cost of production elsewhere. In order to implement the change, retailers would need six months' notice and therefore we do not expect to see the change become effective until April 2011. Additionally delaying the rise could provide a further stimulus to the economy as people bring expenditure forward and would delay the inflationary impact of the increase." 

Green taxes

Plans have already been announced to replace air passenger duty (APD) with an aviation duty (per plane duty) in line with new Government proposals. 

The climate change levy is to be reformed to a carbon levy which could see receipts go up from £0.7 billion, possibly in the region of £3 billion. Should the new coalition Government introduce a carbon tax in line with the carbon tax introduced to Ireland, we could see projected receipts from this of circa £5.5 billion.

Pensions

The new Government has stated in its formal coalition agreement that it will simplify the rules and regulations in relation to pensions, although it remains uncertain whether the Government will make concessions to the higher earners tax, which affects all individuals earning more than £130K per annum. 

Bank Payroll tax

The Bank payroll tax ended at the end of the last tax year (2009/10) and there has been no announcement to extend it, but it is likely that there is more to come for banks. The Government has indicated its intention to introduce a banking levy, in addition to this there could be some new rules to come regarding banking remuneration. 

Barry Smith, head of tax at PricewaterhouseCoopers, Midlands, said: "The thinking here appears to be regulatory rather than a tax based approach. However there are currently concerns in the sector that some form of bank remuneration tax could be under consideration and perhaps announced on 22 June 2010." 

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