Oct 2007 09

The Pre-Budget Report/Comprehensive Spending Review6

Alistair Darling has finished speaking, we’ve taken a look at the Pre-Budget Report and Comprehensive Spending Review, and here are some key measures of interest to taxpayers:

1. The inheritance tax threshold for married couples has been doubled, from £300,000 to £600,000, rising to £700,000 by 2010.  This move will also benefit all widows/widowers.  The threshold will then be increased in line with house prices. 

It’s very good news for taxpayers that inheritance tax has been cut in this way, although single people will not benefit.  The TaxPayers’ Alliance has long been arguing that inheritance tax is unfair, unpopular and unnecessary.  Last week’s pledge from the Conservative Party to raise the inheritance tax threshold to £1 million was very welcome.  While the Government’s reform does not go as far as the Conservative plans, it is nevertheless also a very welcome move. 

We have also witnessed a huge political shift in the last two weeks.  Tax cuts are now seen as potential vote-winners by both main parties.  Taxpayers will benefit enormously from politicians of different parties trying to outbid each other on tax reductions – expect to see more inheritance tax-style battles in the months to come.

A note of caution on the inheritance tax announcement: it has been said this afternoon that the doubling of  the inheritance tax allowance as introduced today is already available to couples who take out a zero rate Discretionary Trust, which in practice pools their inheritance tax allowances.  Many couples, though, would probably not have been aware of this – another example of how complex inheritance tax is and how the very rich are, in practice, less likely to pay it.

2. Alistair Darling’s statement this afternoon increased taxes overall, by £1.2 billion in 2009-10 and £1.4 billion in 2010-11.

The benefit for the economy as a whole of the inheritance tax reduction will be wiped out by the fact that the Pre-Budget Report increases taxes overall.  This is absolutely the wrong direction in which to go.  The tax burden has already increased by around 3 per cent of GDP in the last decade while other countries have been cutting their tax burdens.  Britain’s hard-pressed families and businesses desperately need a cut in taxes overall.  It’s the best way to help Britain’s economy compete in the long-term.

(a) Air passenger duty will be replaced by a tax levied on flights.  The new tax is projected to raise £520 million more than air passenger duty by 2010-11. 

It is a sensible environmental move to tax planes rather than passengers, thereby incentivising aircraft to be full rather than half-empty.  It should not be, however, an excuse to raise extra revenue.  This change is yet another stealth tax increase.

(b) Capital gains tax will be overhauled.  Taper relief will be abolished, and a new 18 per cent flat rate on 100 per cent of all capital gains will be introduced.  The current individual capital gains tax allowance, and its transferability for married couples, will remain.

On the face of it, this is a major simplification, replacing a complex system of taper relief with a single low flat rate of capital gains tax to be applied to all gains.  Unfortunately, it is also a tax rise, bringing in a projected £900 million more than the current regime by 2010-11.  It will hugely increase costs for small businesses, who were hit earlier this year by the phased increase in the small companies’ rate of corporation tax from 19 per cent to 22 per cent.  In addition, it will almost double the rate of tax paid by private equity bosses, who are highly mobile internationally. 

(c) A consultation on the status of non-doms will be launched, with a suggested charge of £30,000 for non-doms after 7 years. 

Alistair Darling has already pencilled in extra revenue of £800 million in 2009-10 and £500 million in 2010-11 from changes to residence and domicile taxation. 

(d) Local authorities will be allowed to levy a supplementary business rate.

This measure, which was proposed in the Lyons Review of local government that reported in March, is yet another way for local councils to raise revenue.  Faced with a council tax cap of 5 per cent, many town halls have been raising charges in as many areas as possible and cutting back on frontline services, while increasing salaries and spending on publicity.  Expect to see many councils enthusiastically take up the opportunity to slap yet more taxes on local businesses.

3. Public spending will increase by £2 billion more than was projected in the Budget in March.  This extra money will be spent on education and health. 

It’s extremely disappointing to see that the new Chancellor is following his predecessor’s failing model of spending even more money without getting politicians out of the management of public services.  We can confidently predict that the extra spending will not deliver the promised results unless it is accompanied by genuine public service reform.

Matthew Elliott, Chief Executive of the TaxPayers’ Alliance, said: “It’s good news for taxpayers that the inheritance tax threshold for married couples has been doubled, but the benefit for the economy as a whole will be wiped out because Alistair Darling’s statement increases taxes overall. We need a cut in the overall burden of tax to give families some of their hard-earned money back. It’s also disappointing to see that the new Chancellor is following his predecessor’s failing model of spending even more money without getting politicians out of the management of public services, which is the only way we will see real improvements.”

  

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  • HF

    A pity that the TPA’s first comment on IHT was misleading.
    Just like Brown’s spring budget the TPA do not understand tax matters.

  • http://profile.typekey.com/politicorich/ politicorich

    HF, you are being extremely unfair. Any move towards flatter, simpler and lower taxes is to be welcomed. The change to IHT today will benefit those who have not taken advantage of expensive legal advice. The real significance of the spring announcement was that a Chancellor, a LABOUR Chancellor, was cutting taxes in order to boost his popularity – thereby flying in the face of 20+ years of Labour spin that tax cuts were both unpopular and that public services would have to be cut in order to pay for them. Sadly, too many otherwise sensible journalists, commentators and Conservative politicians began to believe them. It is good to see the terms of debate shifting, and shifting fast.

  • William Norton

    Politicorich: the trust planning in question isn’t especially complicated or expensive and anyone making a will would/should have had access to it – and if you haven’t reached the basic step of making a will then I doubt you’d be worrying about how to use a transferable spouse IHT exemption.
    The IHT change announced by Darling isn’t really a change. It’s a non-event.

  • HF

    The TPA need to up their game. They should be the trail blazers that slam into this awful Govt that is wasting OUR money. Yet instead it fails to recognise the tricks that Brown pulls and does not do a good job representing the tax payers.
    As to simpler taxes, back dating IHT for widows and the problems of intervening marriages and historical IHT tax rates has actually complicated the system.
    The implications for Council tax are very worrying for retired people.
    There is also a massive 80% increase in the tax owners of small businesses will pay when they sell.

  • Acorn

    Hold up a minute!!!!, the TPA is doing a good job, it is being quoted everywhere. The last week has shown that tax cuts will sell on voters’ doorsteps. The TPA has made a significant contribution to bringing this about. Please don’t start throwing bricks at its efforts. If the above posters know things that the rest of us don’t then tell us on these pages. That way we all can add strings to the TPA bow, please don’t start loosing arrows at it. I think I feel a donation coming on.

  • Gary Richmond

    Re Inheritance Tax: Nothing, absolutely nothing has changed.
    Darling’s magic show yesterday is only a trick performed with smoke and mirrors. He hasn’t stolen the Conservatives tax plans – he only appears to have stolen them. In reality he has simply pointed out that couples can do what they have always been able to do by enabling a discretionary trust. The only difference is that they will not have to be financially savvy or possess the financial knowledge or wealth to pay a financial advisor to do the work for them.
    The situation for single people like myself remains unchanged. I cannot avail of this “concession” and will be hit for IHT. It is unavoidable. Proof again, if proof were needed, that in the eyes of all the major parties a single, hetrosexual British male is regarded as a convenient, tethered financial milch cow.
    My position is compounded by the fact that I live in the political leper colony of the UK, which you might know better as Northern Ireland. I am subject to all the same laws and taxes as my fellow-citizens in England, Scotland and Wales but no one from the Labour, Conservative and Liberal Democratic parties will be calling at my front door to seek a democratic mandate from me. If you live in Northern Ireland you are barred from voting in the British general election to elect your government of choice. I have a “vote” which is worthless and consists of the useless right to elect a bunch of local sectarian idiots who think they are politically and economically autonomous because they have been given some pocket money by the Chancellor of the Exchequer!
    So, I am in the demeaning and humiliating position of some impoverished maiden aunt in a Charlotte Bronte novel having to rely on the charity of my fellow citizens in the rest of the UK to relieve me of this spiteful, class-hating Socialist tax.
    Politicians of all parties, especially the Conservatives, need to to think the unthinkable and start to dismantle the tyranny of the State which is gradually enslaving us all with laws and taxes which would make Charles 1 blush with envy.
    If the Labour party wins the next election (and unfortunately I will not be allowed to vote it out of office) the ratchet effect of its powers and laws will be almost irreversible and we will spend the entire tax year as healots of the state and it’s rotweiller, the Inland Revenue, which possesses powers sufficient to make the Catholic Inquisition verdant with envy. Dismantle the state before it makes economic slaves of free-born Britons!