The Pre-Budget Report/Comprehensive Spending Review

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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