Taxing times for the Chancellor

The Chancellor’s last Budget before the general election can win or lose the contest, and Brown is expected to play the political card as strongly as the economic one. While he is expected to announce a series of measures to outwit Tory investment plans, he knows he has little room for manoeuvre.

As for immediate benefits, Brown has given no reason for commentators and financial advisers to expect much more than a few handouts, in what they believe will be a broadly neutral statement, designed to produce a ‘feelgood factor’.

Tax experts say he will be keen to avoid any nasty surprises in an attempt to keep his forecasts on track and satisfy his supporters. But with a deepening black hole in the Treasury’s coffers, he will find himself limited as to how much he can give away.

Chartered accountants MacIntyre Hudson predict the Budget is likely to contain only minor sweeteners, targeted on issues close to voters’ hearts.

Victor Dauppe, a partner at the firm, says: "Any increase in the most obvious taxes, such as National Insurance, income tax or VAT, is unthinkable. However, with an ever growing deficit, Brown has no scope for the usual pre-election handouts."

The Chancellor’s autumn statement traditionally sets the tone for what is likely to appear in the Budget, and while some of those proposals were positive, they did not go far enough to satisfy certain areas of concern for the vast majority of homeowners, investors, pensioners and those planning for retirement.

So what are the main areas of concern financial advisers hope the Chancellor will tackle?

Stamp duty

FIRST-TIME buyers are suffering from runaway house prices and also because of stamp duty. The 60,000 threshold for the duty was last increased in 1993. In 1997, 56% of residential purchases had no stamp duty charge. But as a result of house price increases, fewer than 25% of purchases are now exempt from this tax.

The Bank of Scotland has found that the proportion of constituencies in Scotland where the average house price paid by a first-time buyer is above the 1% stamp duty tax threshold of 60,000, has increased from none in 1994 to 87% in 2004.

The Prime Minister recently reiterated the government’s intention to help first-time property buyers - and according to calculations carried out by KPMG, stamp duty receipts will total nearly 400m higher than originally estimated by HM Treasury for 2005/06. This will give the Chancellor the option to increase the threshold.

"An increase to 120,000 would mean that about half of purchases would be exempt, which would mean that in the region of 300,000 transactions throughout the UK would be taken out of the tax, including many first-time buyers," says Russell Hills, Corporate Tax partner at KPMG.

The Council of Mortgage Lenders’ Budget submission urges Brown to reduce the burden of stamp duty on homebuyers. The council also calls on the government to commit to reforming this unfair tax over the life of the next parliament.

As the CML and a plethora of lenders and other commentators have pointed out, stamp duty is a stealth tax that now affects three quarters of first-time buyers, compared with around a quarter when Labour came to power in 1997.

Yet, as the council pointed out in research commissioned two years ago, it would be possible to change to a graduated structure with a starting threshold as high as 115,000 at 2001/02 prices - about 160,000 at today’s prices - and still maintain revenue levels for the Exchequer.

Inheritance tax

THIS is a tax that is paid on the death of the estate owner by the beneficiaries. At current levels, the first 263,000 is IHT-free, while any balance is taxed at 40%. On the face of it, an estate of more than 250,000 is substantial. But the heavy increases in house prices in recent years have pulled more and more people into the IHT net.

Many commentators feel the time has come to increase the threshold by more than the rate of inflation. The Bank of Scotland calculates that the threshold would now be 390,000 if it had been increased in line with house price inflation over the past 10 years.

It forecasts that the number of properties valued above the IHT threshold could rise to 4 million in 2015 and 6 million in 2025 if the government does not link the threshold to house price inflation, and if house prices rise in line with their long-term historical average in ‘real’ terms.

Income from IHT is expected to more than double between 1996/97 and 2005/06, from 1.6bn to a projected 3.3bn, according to the government’s own estimates in the latest pre-Budget report.

Property sales valued at above the inheritance tax threshold have risen from 3% of all sales in 1994 to 14% in 2004.

The number of properties in the UK valued at more than the threshold now stands at an estimated 2.4 million - a four-fold increase since 1994.

However, KPMG does not believe Brown will make any substantial changes to the tax. While it is unlikely there will be large changes to the current inheritance tax regime, it is possible the Chancellor could raise the nil rate limit of 263,000 by a small amount, to between 275,000 and 300,000.

Savings

IN HIS autumn statement, Brown announced that there would be discussions over his decision to cut the maximum investment limit in to individual savings accounts (Isas) from 7,000 to 5,000, and to mini cash Isas from 3,000 to 1,000.

Research from Invesco Perpetual reveals that nearly one in four investors (23%) is holding off investing in Isas this tax year until the Chancellor confirms his position. Tom Munro, an IFA at Ian L McLean, believes the current limits should not only be retained but even increased. A report recently produced by Intelligent Finance reveals that the Chancellor should harmonise Isa threshold levels, increasing the mini-cash Isa allowance from 3,000 to 7,000.

It shows that increasing the limit would have a significant impact on savings levels, with almost three-quarters of people who have opened a mini-cash Isa this year saying they would be certain to save more if this happened.

"It’s perverse that someone approaching retirement who opts for the security and flexibility of mini-cash Isas is presently denied the huge tax benefits that people who opt for maxi Isas enjoy," says Nick Robinson, managing director of Intelligent Finance.

"With such a huge savings gap, the government should be doing all it can to change this."

Smaller firms

WE CAN expect further talk about encouraging enterprise, according to John Whiting, tax partner with PricewaterhouseCoopers, who reckons this may take the form of incentives for training and skills.

Tax advisers at KPMG would like to see alignment of PAYE and National Insurance Contributions. Most businesses run one payroll system for their PAYE and National Insurance contributions.

However, the two ‘taxes’ are calculated on different bases and employers have to comply with two separate sets of tax legislation. By aligning the two sets of legislation such that income tax and NIC are charged on the same basis, business would benefit from reduced complexity and red tape.

The Chancellor is expected to announce the creation of small business units at the Revenue and Customs which will help to streamline services to small businesses.

KPMG is urging the government to extend the scope of this initiative to encompass a significant proportion of middle market companies.

Tax avoidance

TAX advisers from a number of firms expect a further tightening following the success of the Chancellor’s campaign to tackle avoidance and evasion.

Accountants at Johnston Carmichael believe the Chancellor will announce further substantial investment in the Inland Revenue’s investigation and compliance teams.

The last regional results published by the Inland Revenue to the end of March 2002 reveal that just more than 7,500 of Scotland’s 300,000 businesses were subject to a full inquiry during that year.

A similar number could be selected for a full enquiry or employer review during the current year.

Each corporate tax enquiry in Scotland yielded an average of 15,000, while an employer compliance review yielded an average of 4,000.

Personal taxes

NOBODY expects cuts to income tax rates, with the best bet being adjustments in the thresholds for inflation only. There may be tax cuts in the guise of enhancements to tax credits around childcare.

Tobacco and alcohol

UNLIKELY to be more than inflationary increases to cigarettes, beer and wine duties. Petrol is also tipped to remain be untouched.

Property

EXPECT firm proposals on Real Estate Investment Trusts (REITs) - a new form of investment vehicle to facilitate property investment.

Surprises?

With international poverty and pollution rising up the political agenda it is possible he could announce something to help both, though it would be business rather than the private individual who be most likely to meet the cost.

More likely is yet more ideas to stimulate enterprise and improve health and education.

'We should have an incentive to save rather than spend'

AT 58, Maria McKay is nearing retirement age. She has been investing in tax-efficient savings schemes for many years and currently trusts her money to an individual savings account with Intelligent Finance.

"Putting money into an ISA means there is always something there for retirement," she says, "and I am happy with the rate Intelligent Finance is offering."

While she is able to invest the maximum each year to help with her retirement income, McKay would like to see Gordon Brown do more for other people who do not see the need to put money away.

"I would hope that the Chancellor enhances pensions and makes it easier to save," she says.

"There needs to be an incentive to save rather than everybody spending their money."

With the relentless rise in house prices, McKay is also concerned about inheritance tax. Although the threshold before IHT is paid is currently set at 263,000, she believes Brown should consider whether it ought to be increased just by the rate of inflation.

"The threshold should be higher," she says. "People are trying to avoid paying the tax, but house values are making this difficult. But I don’t think it will be increased."

Finally, McKay feels the Chancellor should make it easier for first-time buyers to get on the housing ladder. "Stamp duty should be done away with," she says. "Something has to be done to help these people."