Budget _ Taxing the Aspirations of the People

Pre Budget Report 2007 - 09 October 2007 - Entitled "Meeting the aspirations of the British people" -

Delivered by Chancellor - Alistair Darling

We think it would be better titled "Taxing the aspirations of the British people"

Overview of contents:

Economy:

• Economy is expected to grow by 3 per cent in 2007 and by 2 to 2½ per cent in 2008
• Inflation is set to remain low and stable at around 2 per cent
• Public borrowing forecast to be £38 billion in 2007-08 and set to fall in every year for the next 5 years

Finance

• Inheritance tax allowances transferrable between married couples and civil partners – £600,000 threshold immediately, rising to £700,000 by 2010-11
• Raising the child element of the Child Tax Credit by a further £25 in April 2008 and a further £25 in April 2010
• NHS spending will increase by 4 per cent per year in real terms from £90 billion in 2007-08 to £110 billion by 2010-11
• Education spending will increase from £77.7 billion to £92 billion plus higher education and skills spending from £14.2 billion in 2007-08 to £16.4 billion by 2010-11
• Increases in the taxation of air travel to better reflect environmental costs and a £1.2 billion new Environmental Transformation Fund
• Increase in funding for flood and coastal erosion risk management from £600 million in 2007-08 to £800 million in 2010-11
• Capital gains tax to be amended to a flat by single rate of 18 per cent from 2008-09
• Great Public Investment in science from £5.4 billion in 2007-08 to £6.3 billion by 2010-11
• Range of tax simplification reviews and a package of over 20 tax simplification measures
• £15 billion of Government funding in the rail network over five years
• £500 million over three years for a new Housing and Planning Delivery Grant, to help deliver the
• Government’s target of 2 million new homes by 2016

Our view

This was a 'nothing given away' pre budget report.  

Inheritance Tax IHT

The inheritance tax threshold of £600,000 for couples has always been available provided you take adequate financial or legal advice and gift assets on first death.  

Capital Gains Tax CGT

The capital gains tax change actually brings the UK into line with a number of our European partners.  What we expect it to mean though is that we lose taper relief and we will lose indexation allowance.  

Charging a flat rate of 18% on all gains is likely to be much more profitable for the Government than inflation adjusted gains with huge taper relief discounts and many people holding assets for longer until the maximum taper relief starts at 10 years.  

Let us demonstrate:

Current Rules: After 10 years of ownership of an asset and then selling at a profit, Business Taper Relief means 25% of the gain is taxable and for non business assets and private individuals private Taper Relief means 60% of gain is taxable.  Tax is paid at your highest rate.  

E.g.  Gain £100,000 on the sale of a property, owned for 10 years.  

Current Rules:

If Business Asset: 25% of gain is taxable.  25% X 100,000 = £25,000 is taxable.  E.g.  at 20% = £5,000 tax or at 40% = £10,000 tax. 

If Non Business Asset: 60% of gain is taxable.  50% X £100,000 = £60,000 is taxable.  E.g.  at 20% = £12,000 tax or at 40% = £24,000 tax.  

New Rules: 18% flat rate on gain.  18% X £100,000.  = £18,000 tax payable.  Higher Rate tax payers will be better off, business and basic rate tax payers will not.  

We will need to see the full explanation of the rules before we are convinced but, in simple terms, we believe that the majority of people making capital gains up to now are basic rate payers, hence the change!

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