Tax experts John Battersby of KPMG and Mike Warburton of Grant Thornton answer your questions about the Budget...

Question from Andy Smith, andy_smith@bigfoot.com

What will happen to my TESSA taken out a year ago when this new personal savings account comes out in 1999? Will I have to transfer to a PSA or will I be able to take the money out without losing tax free interest?

The new Individual Savings Accounts will not start until 1999 and there are no details available as yet. You may be able to transfer your TESSA to the new ISA or keep it, but in either case I expect you will have to leave your money invested for the full 5 years to obtain tax free interest.

John Battersby

I would be very grateful if you would let me know if there are any changes to, or any hint of changes to taxattion for non resident UK expatriates. I live and work in Hong Kong as an airline pilot and live and die by the 90 day rule.

No changes have been made in the Budget to the tax treatment of UK citizens living overseas. However, it is expected that changes will be made in future to the legislation regarding residence and domicile. If you continue to spend no more than 90 days a year in the UK, you will probably remain non-resident.

John Battersby

To what extent do you expect interest rates to rise? By the end of the year and over the next 12 months. Do you think that these rises are what the Chancellor hopes will dampen consumer spending?

The Budget tax increases are concentrated mainly on companies and consumer spending is predicted to continue to rise. Thus further interest rate rises are likely as the Bank of England seeks to hit its inflation target.

Rises of perhaps 1% over the next 12 months are likely, but the overall effect of the Budget has been to reduce the expected rise in interest rates a little.

John Battersby

Dear John and Mike, I don't live in the UK but I am a British citizen. I caught the highlights of the budget this year. One thing which concerned me is the possibility that the UK government may introduce similar citizen taxation scheme to that employed by the United States and Danish government. That UK citizens would be, in principle, taxed on their world wide income where ever they live. Or as in the Danish system that a citizen continues to pay Danish taxes for three years after they leave the country. Do you think that such a move is on the cards for a future budget or legislation ? Kind regards, Neil

There is nothing in the Budget which affects the UK tax treatment of UK citizens living overseas, but that is something where changes are likely to be made in future.

I do not think that the changes will be linked to a person's citizenship. However, it is likely that some system will be introduced whereby there will be a continuing liability for individuals to pay UK tax on their income and particularly capital gains if they have moved overseas on a temporary basis. Under present rules it is possible to avoid Capital Gains Tax by working abroad for only one complete tax year even if the asset has been owned for many years.

John Battersby

I am a self-employed computer contractor, trading under a 'one-man' limited company. How will I be affected by the changes to ACT and Corporation Tax?

The reduction in the small companies' rate of corporation tax to 21% applies from 1 April 1997. The ACT changes will not affect the taxation of dividends you receive. While it is cheaper in tax terms to take out profits as dividends, if you wish to fund a pension you need some salary.

John Battersby

I have been trawling the news etc to see if there have been any changes made to taxation on company cars - can you please advise what, if anything, has been done?

There are no changes to company car taxation.

John Battersby

Do the changes in Stamp Duty, which were mentioned by Mr. Brown as applying to housing property sales, also apply to other property transfers, in particular Intellectual Property assignments?

Yes, the new rates will apply to such transfers from July 8.

John Battersby

1) It appears that the abolition of tax credits does not affect PEPs - at least until 1999. Please confirm 2) My particular concern is my shareholding in BT, and the extra dividend of 35p payable in September. Please confirm that by bed-and-PEPing £6,000 of BT shares, whether I would receive a tax credit of about 8.7p in addition to the 35 p dividend ? many thanks Nigel Wall

I can confirm that PEPs will still be able to recover their 20% tax credits up to April 1999. Shares transfered into PEPs will likewise be treated this way and your PEP manager should be able to recover the 8.75p on the anticipated 35p dividend.

Mike Warburton

I am interested in two similar issues regarding personal taxation. 1) Is there any indication that ordinarily resident but non-domiciled persons are included in Mr. Brown's reference to "evaders"? 2) Is there any reason to be concerned about the existing status of British citizens who are not resident with respect to their world-wide outside of UK generated income? Are they "evaders"? Thanks for any insigt you have.

There is nothing in the list of initial proposals on tax leakage to affect either non-domiciled individuals (usually foreign nationals) or UK citizens resident abroad.

Having said this, there is a clear signal that the Chancellor intends to curb tax leakage in other ways and that future Budgets will address this. Evasion is not the same as tax avoidance. Evasion is illegal and existing rules can be applied. The concern is that planning for the individuals you mention which is now perfectly legal could become outlawed in the future.

Non-domiciled individuals in the UK and UK nationals overseas might do well to review their financial affairs before spring next year while opportunities still exist legally to protect their financial position.

Mike Warburton

Will the extra 1.2 billion pounds allocated to the health service be year on year additional funding or is this just a one off. As a General Practitioner Im concerned this money is spent not just on waiting lists and fancy scanners but at the coalface of medicine ..General Practice

At the moment, the Chancellor has only made the extra £1.2bn available for 1998-99. However, we are hopeful that further resources will flow to the NHS when the results are known of the comprehensive spending review now underway.

Mr Brown has also made it clear that he is looking for administrative savings in the NHS to concentrate resources into patient care, or as you put it, the coal face of medicine.

Mike Warburton

I currently pay £56.46 per month into a private Insurance Company Pension scheme as an Additional Voluntary Contribution A.V.C. to help boost my company pension scheme. As a Civil Servant my "company pension" is the Civil Service Pension Scheme which is "non-contributory" but I pay 1.5% of my monthly salary to cover widow and orphan benefits. I get income tax relief on my earnings on this 1.5% deduction. I also pay £56.46 per month into a private Insurance Company A.V.C. fund to top up my occupational scheme.Owing to this change in abolishing income tax credits on payments into private schemes, how does this change effect me personally? Will I have to contribute more to my private scheme to get the same benefit? if so how much? and does this change effect my income tax relief on the 1.5% I pay on my salary into my "company scheme"?

The good news is that Mr Brown is not planning to change the tax relief on pension contributions paid by either employers or employees. Nevertheless, pension funds have been hit hard by the changes. It is estimated that their total income will fall by 5% to 10% through the change.

How this affects your own pension will depend on a range of other factors - is your scheme final salary or money purchase, does the fund currently have a surplus, and will the lower corporation tax rates flow through as bigger dividend payments in future. It also depends how the pension fund managers react in their investment strategy.

The best answer is to let the changes settle down for a few weeks and then ask your pension company to provide you with an estimate of your expected benefits. It may be that you will need to increase your payments to preserve your benefits, but it is still too early to be sure about this or how much the increase might have to be.

Mike Warburton

What does the change in tax credits on dividends mean for individuals who receive dividends? How does its affect small owner manged companies?

For indiviuals there will be no immediate change in the treatment of dividends. This is the case whether you pay tax at 20%, 23% or 40%. If your income is less than your personal allowances and relief, you will still be able to recover the 20% tax credit.

From April 199 the position will change. Nevertheless, individuals who pay tax will still not have to pay any extra because the 10% credit will be treated as sufficient to satisfy the lower and basic rate liability, and higher rate taxpayers will pay a reduced rate on dividends to leave them no worse off. The only individuals who will suffer are those who pay no tax and who lose their tax credit.

Working shareholders in family companies have the choice of extracting profits in dividends, remuneration or pension contributions. This will still be the case. It is only shareholders who are non-taxpayers (typically spouses) for whom the position will change from April 1999.

Mike Warburton

Simply put: For those working outside Britain, earning in the local currency, what will be the effect of the budget on the strength of the pound and exchange rates in the immediate future and over the next few months?

There are no direct tax changes for those working overseas. However, economists believe that the Chancellor has not done enough to dampen down consumer spending and that the Bank of England will have to do so through higher interest rates. That is why the pound has been rising in value.

If the Bank acts quickly, coupled with the tough Budget overall, it should help to keep down long term interest rates and hopefully the pound will also settle down at more realistic levels.

The key is inflation. Mr Brown is determined to hold down inflation and will take any necessary steps to do so. Since you earn in currency overseas, you will have to decide whether to save in your local currency or sterling.

Mike Warburton

Does this budget match Labour's pre-election promises regarding taxes?

The Government has kept its promises. We were promised a windfall tax, a reductions in VAT on fuel and a welfare-to-work programme. All of these have come in Labour's first Budget. Mr Brown has also kept his promise not to raise income tax rates.

The bad news is on lower mortgage interest tax relief (MIRAS) for homeowners and the large cost to pension funds - and ultimately pensioners - in the loss of tax credits on dividends. Even so, this was expected and we were given no election promises to the contrary.

Small businesses should be particularly grateful with lower company tax rates and higher capital allowances, provided higher interest rates do not take away much of the saving.

Mike Warburton

Are there any measures or trends in the budget that I should take into consideration when choosing a new car: I am particularly thinking of the trens to environmental taxation. Thanks for your help.

This Government, like the last, wants to help the environment. The only specific measures were to raise fuel duties by an extra 1% above the planned 5% above inflation, lower vehicle excise duties for low emission lorries (tax disc) and a general comment about aggregate extraction.

Nevertheless your choice of car should recognise that small and clean for the environment is likely to be cheaper in future. We have seen no measures on direct tax for cars in this Budget.

Mike Warburton