The 2012 Budget “omnishambles” and forecasts of a triple-dip recession are the elephants in the room as the Chancellor draws up a 2013 speech expected to deliver bad tidings for those with large estates, middle income earners and possibly pension investors.
First-time buyers may get a timely boost, however, while we could also hear of changes to the taxation of capital gains and new measures to target tax evasion.
It’s the hardest Budget to forecast in some time, however, with the Chancellor having little room for manoeuvre but under pressure to unveil some material growth measures.
“Wiggle room is perhaps more limited than ever before,” said Neil Whyte, tax partner at PKF. “We’ve gone beyond the easy choices. This all points to a carefully targeted package of incentives paid for by yet another crackdown on tax avoidance.”
Few people predict with confidence what Wednesday’s Budget forecasts will bring but, with the help of some of Scotland’s leading tax experts we’ve picked out a few measures that could be in the pipeline.
Inheritance tax (IHT) returned to the headlines last month when the government revealed that the threshold above which it is charged at 40 per cent would remain frozen at the current level of £325,000 until at least 2019.
The threshold is to stay in place to help fund a proposed cap on elderly care costs south of the Border, yet affluent Scots will be caught in the net.
Bruce Saunderson, head of wealth management at PwC in Scotland, said: “While this may not seem to be a big hitter in Scotland, with only around 1,000 estates paying IHT in 2009-2010, we have to remember that revenues in excess of £148 million were raised by those impacted. So it’s a small pool with a very big splash.”
The freeze will almost certainly be confirmed in the Budget, perhaps with further tweaks.
Paula Fraser, tax director at Grant Thornton, said: “This move goes against his announcement in the Autumn Statement 2012 that the nil rate band would increase by 1 per cent for the 2015-16 tax year, so there are no guarantees that he won’t change his mind on other measures as well.”
One possibility is that we’ll find out how HM Revenue & Customs suggests reducing the complexity of IHT charges on trusts following its recent consultation.
Another trick up Osborne’s sleeve could be a reintroduction of the stamp duty holiday for first-time buyers. This may materialise out of a desire to capitalise on the success – in mortgage market terms at least – of the Bank of England’s funding for lending scheme (FLS).
The previous concession, temporarily doubling the threshold at which 1 per cent stamp duty land tax is charged to £250,000, expired last March.
Ronnie Ludwig, tax partner at Saffery Champness in Edinburgh, said: “The housing market is a good economic indicator, so the Government would do well to try and give it a leg up.”
There may also be an acceleration in the rise in the personal allowance, the amount an individual can earn before income tax. The allowance for under-65s is set to climb to £9,440 next month, on its way to the £10,000 threshold target.
That mark could be reached sooner than expected, Saunderson predicted: “It’s costly to implement, but the justification could be the potential to incentivise more people into the workplace, a move that could positively impact consumer confidence, stimulate demand and ultimately act as a stimulus for the economy.”
That would be funded with measures elsewhere, however. It would also draw renewed attention to the so-called “granny tax”, the freeze in the age-related allowance.
A further increase in the personal allowance could see it aligned with the starting threshold of national insurance contributions, according to Whyte at PKF.
“Not only will this increase the spending power of the lowest paid and part time workers by several hundred pounds a year, aligning the threshold will also make life much simpler for employers.”
One way of paying for it would be to raise the upper earnings limit on income tax – dragging more people into a higher tax band – or even creating a new rate of national insurance for the highest earners.
Investors could get a fillip with a cut in the capital gains tax (CGT) rate. Gains on disposals of assets such as shares are currently taxed at 18 and 28 per cent, depending on the individual’s marginal rate of tax. The higher figure could be lowered to 25 per cent in a bid to incentivise greater investment.
But Fraser at Grant Thornton believes CGT will stay where it is, despite calls from some on the right for it to be scrapped altogether.
“It’s unlikely that we will see significant change in this area until considerable research has been undertaken to see what impact it would make,” said Fraser.
We’re also likely to hear more about the general anti-abuse rule (Gaar). The government’s flagship tax avoidance strategy is too flimsy, critics say, and there’s political pressure on Osborne to balance the government’s attack on welfare claimants with a similarly aggressive campaign against individual and corporate tax dodgers.
Whyte believes the government may give HMRC greater resources to tackle tax avoidance and evasion.
“Supporting the government department that brings in the most money is almost certain to prove a wise investment in the current economic and political environment,” he said.
Chancellors love tinkering with pensions allowances and Osborne may be unable to resist yet more changes, despite a raft of measures in recent Budgets. The annual and lifetime tax allowances for pension contributions are already due to be cut to £40,000 and £1.25m respectively next April, as announced in December’s Autumn Statement.
Yet that could change again, with pensions considered a soft fundraising target despite the risk of disincentivising saving.
Osborne may impose a further reduction in the annual pension allowance, slashing it to £30,000 rather than £40,000. A cap on the 25 per cent tax-free lump sum that savers can take from their pension from the age of 55 has also been mooted.
Finally, there could be more tinkering to the top rate of tax, set to drop from 50 to 45 per cent next month under the controversial Budget 2012 measure. But which way could it go? Osborne is under pressure from some in his party to scrap the top rate altogether, leaving all high earners in the 40 per cent tax band. The opposite may yet be on the cards, some believe, as pressure piles on a leadership rapidly losing support for its austerity policies.
The 2013 Budget will unfold against a backdrop of rising anger at government austerity measures hitting vulnerable low income households while the economy continues to stutter.
Among the previously announced changes taking effect next month are a 1 per cent cap on working-age benefits, including jobseeker’s allowance, income support, maternity pay and a range of tax credits.
The state pension is to rise by just 2.5 per cent, below the current level of inflation, while thousands of Scots are set to lose up to £52 a month from their housing benefit, under the so-called bedroom tax.
The “granny tax” will also kick in. This refers to the fact that while the personal allowance for under-65s threshold will rise to £9,440 next month – subject to possible tweaks in the Budget – the age-related allowances will be frozen at the current levels of £10,500 and £10,600 for over-65s and over-75s respectively.
The effects of inflation will leave around 4.4 million pensioners worse off as a result.
Further ahead, around 400,000 middle-income earners will be dragged into the 40 per cent income tax band from April next year when the higher income tax threshold will rise by just 1 per cent.