End in sight for VAT and stamp duty breaks
VAT and stamp duty will both return to normal levels on 1 January 2010, Alistair Darling confirmed in his pre-Budget report.
The chancellor announced the VAT rate will return to its standard level of 17.5% on 1 January after it was temporarily reduced to 15% on 1 December last year.
He also confirmed that there will be no further extension to the stamp duty holiday, which came into effect in September last year. The incentive, which temporarily increased the stamp duty threshold from £125,000 to £175,000, will end as planned on 1 January next year.
Darling also announced that the inheritance tax (IHT) threshold will remain the same over the next tax year. Raising the IHT threshold is not “a priority”, he said, so the government has decided to freeze this allowance at £325,000 in 2010/11.
He pointed to the fact that in 2009/10 just 2.5% of estates left on death are expected to be liable to IHT.
Commenting on the end of the stamp duty exemption, David Whittaker, managing director of Mortgages for Business, says: “Darling has seen house prices rising over the course of 2009 and feels the market no longer needs the support."
He adds that the stamp duty holiday didn’t do a great deal to support the market: "Cash-rich investors and those lucky enough to have large deposits have been propping up the market for much of the last six months."
With this type of buyer fast becoming thin on the ground, and lenders continuing to impose tough criteria, Whittaker says 2010 is unlikely to see much improvement in the property market.
"In fact we’ll see a reversal,” he warns.
James Thomas, head of residential investment and development at Jones Lang LaSalle, is also disappointed that the chancellor will not be extending the stamp duty holiday into 2010 - given the struggles faced by first-time buyers trying to get onto the property ladder.
“This incentive has provided a stimulus to the bottom end of the property market during a time when access to debt has, and continues to be, very restricted and expensive. This in turn has supported other buyers looking to upscale through the market,” he says.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.