If the TV gadget 'king' Peter Snow was ever allowed to be in charge of graphically presenting the Budget speech he would probably find himself standing in front of a 'dullometer'. As the pendulum swings it would point to the increasing number of MPs gently sleeping as the speech progresses. However, behind that traditionally dull delivery is usually a mass of information and the 12 March 2008 Budget was no different. We also now have the Finance Bill and the enormous accompanying Explanatory Notes.

Income tax changes
The main changes to the income tax rates for 2008/09 were announced in the 2007 Budget and these have now been confirmed. The basic rate of income tax is reduced from 22% to 20% from 6 April 2008 and the 10% starting rate of income tax has been abolished. The higher rate tax rate remains at 40% and is chargeable on income over £36,000.

A new 10% starting rate of tax is to be introduced for savings income only (largely bank and building society interest). However, where non-savings income exceeds £2,320 in the tax year, none of the individuals' income will be chargeable at the 10% rate.

This gives rise to some strange effects as highlighted in the graph below. This shows the interaction of income tax and NIC changes, although it ignores tax credits. The reality is that many people on lower incomes will be worse off due to the tax changes but be left in a similar if not improved position depending on their entitlement to tax credits. It shows how important it is for people to claim tax credits where appropriate.

As usual, personal allowances rise in line with inflation, apart from those aged over 65, where the increase is £1,180 above inflation.

In a move to correct an anomaly in the legislation, the non-payable tax credit will now be taken into account on dividends received from non-UK resident companies. This will apply for UK resident and domiciled individuals from 6 April 2008 and will reduce the effective rate of tax from 32.5% to 25%.
Rules are also being brought in to limit the amount of foreign tax credit due on income from a trade or profession that is subject to foreign tax. The changes will apply to income arising, and foreign tax paid, on or after 6 April 2008 and will limit the amount of foreign tax credit so that it is no more than the UK income tax due on such earnings.

Changes to Residence and Domicile rules
As with the proposed changes to CGT, the draft legislation for the non-domicile and residence rules has provoked much debate in the press. The Chancellor has confirmed that changes will be made with effect from 6 April 2008. However, he has made a number of useful amendments to the proposals that were originally fleshed out in January 2008. A thumbnail sketch would say that the new rules do bring in an annual charge that will affect the long-term resident non-domiciliary, but offshore trust planning lives on.
The main plank of the new rules is a £30,000 annual charge for non-domiciled individuals who want to continue to use the remittance basis of taxation. This only applies to those who have been resident in the UK for more than seven of the past 10 years and who have unremitted foreign income and gains in excess of the £2,000 de minimis limit (see below). Individuals who elect for this charge to apply will no longer be eligible to claim the annual personal tax allowances for income tax or the annual CGT exemption. For the very wealthy this will be a relative small price to pay for a more advantageous tax regime. For the less well-off this will be quite a price to pay and may curtail some stays in the UK.
The £30,000 charge is in addition to any tax due on UK income and gains and on the foreign income and gains that are remitted to the UK. It does now appear that the charge will be creditable in other jurisdictions via double tax agreements, which was an issue that had received much publicity particularly in relation to US citizens.

In a small change to the draft legislation, the annual charge will only apply to individuals over the age of 18 (so it will not catch minor children) but it will catch a husband and wife if both fall within the new regime.

The charge will be payable via the self assessment system and, if it paid directly from an offshore source to HMRC by cheque or electronic transfer, it will not be treated as a remittance and so will not be subject to UK tax. Cynics have argued this is a ploy by HMRC to see what offshore bank accounts people hold! Of course, we may see individuals simply setting up an account for this purpose.
The charge will only be payable if the individual elects to claim the remittance basis - this decision can be made for each tax year. This means it will provide an annual planning opportunity.

The most notable exceptions to the draft legislation which was issued on 18 January 2008 are as follows:
• the method for counting days for UK residence purposes are to be amended - the draft legislation indicated that days of arrival and departure would count for the purposes of determining whether an individual was UK resident from 2008/09 onwards. This has been amended such that, on or after 6 April 2008, UK residence will be determined by reference to the number of days that the individual is present in the UK at midnight (the 'midnight test') rather than counting the days of arrival and departure.

In addition, days in transit in the UK (for example where waiting for travel connections) will not count for the purpose of the midnight test, unless the individual takes part in an activity that is not related to their transit, such as attending a business meeting while they are waiting for onward travel connections.

• the £30,000 charge that is payable if the individual wishes to claim the remittance basis (see above) will be treated as a tax charge on unremitted income or gains and the taxpayer will be able to choose which unremitted foreign income or gains it is being paid on. When that previously unremitted foreign income or gain is later remitted to the UK, it will not be taxed again, although this will be subject to ordering rules. This is helpful in some respects but will have an administrative burdensome nature to it to keep track of those events.

• the CGT regime for non-resident trusts will be subject to changes, with non-domiciled beneficiaries of non-resident trusts who claim the remittance basis being taxed on all UK and offshore assets from 6 April 2008. An irrevocable election can be made by the trustees (not the settlors or beneficiaries) to rebase assets held in an offshore trust at 6 April 2008 to exclude non-domiciled beneficiaries from being taxed on a chargeable gain that accrued prior to that date. This election is likely to be highly popular as it will effectively 'wash-out' gains before 6 April 2008.
  
  
• the de minimis limit for using the remittance basis has been increased to £2,000 - the draft legislation proposed that UK resident but non-domiciled individuals could use the remittance basis without making a claim or losing their personal allowances if their unremitted foreign income and gains amounted to less than £1,000 in the tax year. This will take a few more people out of the regime although it will not help those with more significant overseas income and gains which they do not wish to bring to the UK.

  A small anomaly has also been corrected in relation to the taxation of remitted foreign dividend income for those claiming the remittance basis and who pay tax at the higher rate Under the current rules, such dividends are taxed at a rate of 32.5% but, for remittances on or after 6 April 2008, this rate will be increased to 40%.

The proposal focussed on 'income shifting arrangements that make use of companies or partnerships to gain a tax advantage'. It was aimed at preventing the transfer of dividend income or partnership profits from a person who paid tax at 40% to an individual paying a lower rate of tax. However, the changes were so widely drafted and caught situations in which a range of connected parties had invested capital in a business (for example, businesses involving spouses, siblings and parents and children).

The main criticisms of the proposals were that they would give rise to great uncertainty in the minds of the owners of SMEs as to whether they were caught-up in these rules or not and create administrative burdens as people tried to set up time-consuming paper trails to prove they were not within the proposals.

It would appear that the Government has listened to the representations of the business community and professional advisers as the introduction of the income shifting legislation is to be delayed until Finance Bill 2009, giving time for further consultation and to 'ensure clarity and certainty' for businesses and their advisers. A small victory for common-sense and the taxpayer? Let us hope so. We still need to see if this is a resolution or just a deferral. If it is the latter let us hope it comes back in a better form rather than just a different equally ill-thought through form.

Inheritance Tax
As already announced, the nil-rate band for inheritance tax (IHT) is increased at a rate over and above inflation to £312,000 for 2008/09.

The proposals outlined in the October 2007 PBR are to be implemented in the Finance Bill 2008 to allow any unused IHT nil-rate band on a person's death to be transferred to the estate of a spouse or civil partner. These rules took effect on or after 9 October but are retrospective (in a good way) in that a surviving spouse can make a claim to have the unused proportion of their spouse's nil-rate band transferred to them whenever that spouse died.

Example
If, say, a husband left assets worth £150,000 to their children with everything else to his wife and the nil rate band on the first death was £300,000; one-half of his nil rate band (i.e. 50%) is unused and is available for transfer. If, when the wife dies, the nil rate band had increased to £325,000, the amount available for transfer would be 50% of £325,000 or £162,500, giving her estate a nil rate band of £325,000 + £162,500, i.e. £487,500 in total.

As a transfer of the nil-rate band may require assets from the first estate to be valued at the date of death of the second spouse to ascertain the amount of the nil-rate band available for transfer there was some concern that this might alter previous calculations. Announcements in the 2008 Budget Notes advise that this IHT valuation will not disturb any previously agreed valuations for CGT purposes.

Gift Aid
As outlined above, the basic rate of income tax falls to 20% from 6 April 2008. However, transitional relief is to be introduced to enable charities to continue to claim gift aid at the existing 22% rate for qualifying donations made on and after 6 April 2008 until 5 April 2011. For basic rate taxpayers making donations to charity in tax years on or after 2008/09, tax relief will only be given at 20%. Higher rate taxpayers will continue to be able to claim relief at 40%.

The legislation also introduces a number of administrative changes to the Gift Aid scheme including with immediate effect:

• a de minimis error level of 4% below which charities who claim a total of less than £2,500 in Gift Aid repayments each year and the amount of tax at stake is less than £100, will not be penalised for errors in their claims

• an adjustment is being made to the Gift Aid claim process to allow smaller donations of no more than £10 to be aggregated up to a total of £500, within claims.

HMRC is continuing to discuss other administrative savings with charities.

Trust modernisation - an update
After the seismic changes of the Finance Act 2006 in relation to trusts, the Budget changes this year were far more low-key. They broadly update and build on those earlier changes or extend transitional relief. Part of the Finance Act 2006 changes included IHT changes for interest in possession trusts that existed on or before 21 March 2006. A transitional period was put in place from 22 March 2006 to 5 April 2008 to enable planning to be undertaken to allow trustees to release the life interest to other beneficiaries and effectively roll-over the old regime into new trusts. These rules were called Transitional Serial Interests or TSIs. This transitional period has been extended by the Budget for six months to 5 October 2008.

In addition, the IHT position of such a TSI was unclear and legislation is to be introduced in the Finance Bill 2008 to clarify the position.

Individual Savings Accounts
In a measure designed to encourage people to save, the amount that can be invested in an individual savings account (ISA) rises to £7,200 from 6 April 2008, with the cash element being increased to £3,600. This may be attractive to individuals who are concerned about the recent turbulence of stock markets but wish to save in a tax-efficient vehicle.
Special rules are being made to allow those who withdrew cash from Northern Rock ISAs between 13 and 19 September 2007 (inclusive) to re-invest in a new ISA. This can be done anytime between 18 October 2007 and 5 April 2008 and will not count towards the annual ISA subscription or investment limits.

Pension
The annual allowance for tax free pension scheme contributions is increased to £235,000 (this covers both individual and employer's contributions) and the lifetime allowance rises to £1,650,000.
A move to close a loophole specific to small self administered schemes (SSAS), which may have allowed them to pass on pension funds tax-free at death, has been confirmed in the 2008 Budget. This charge will apply to people who die on or after 6 April 2008 and will treat any increase in the pension rights of one member following the death of another member as an unauthorised payment if the two parties are connected.

This effectively generates at 70% tax charge for the recipient, which is consistent with funds that are passed on via an alternatively secured pension. The funds that are transferred will also be subject to IHT, bringing the potential tax charge to 82%. These rules will not have effect for schemes where there are 20 or more members and all members have their rights increased at the same rate.