The pre-budget con trick

Plagiarism is frowned upon in most areas of life but on the political stage it’s perfectly acceptable. That appears to be the main lesson from Tuesday’s Pre-Budget Report.

The Chancellor pinched policies from both the Tories and Liberal Democrats, but watered them down a little. So, despite a number of headline announcements about tax cuts, the net effect of Alistair Darling’s speech will be to raise taxes by £1.4b a year. That’s because our budget deficit has been getting steadily worse than had been forecast. In addition, the government is planning a big increase in spending over the next few years from £589b to £678b by 2010. That’s an increase of 15% in three years, so taxes will have to follow suit.

So how will the Pre-Budget report affect us? There were no announcements on beer, fags and spirits - news on these will come in March. Petrol was left untouched too, the last increase of 2p having only come into force last week. A major disappointment was the lack of any announcement on stamp duty for homebuyers. This was seemingly the only policy mentioned recently by the opposition parties which the Chancellor didn’t copy!

Inheritance tax

The popularity of the Tories proposal to raise the inheritance tax limit from £300,000 to £1m has been cited by many people as the main reason an election has not been called. So the Chancellor has cashed in on its popularity.

At the moment, any assets passed to a spouse on death are free from inheritance tax. With immediate effect though, the Chancellor will also allow married people and civil partners to use any unused allowance from when their partners die, effectively raising the level when tax is paid for a couple from £300,000 to £600,000. This relief is also available for those who are already widows and widowers.

This is good news for people whose assets are between £300,000 and £600,000 and mainly consist of the family home. Slightly richer couples will be largely unaffected as they could already replicate this relief by giving away their first £300,000 of assets to other people and the remainder to their spouse.

It was welcome to see the Chancellor acknowledge that house price increases would be borne in mind when setting future inheritance tax levels. It’s a shame that this policy wasn’t enacted before the recent house price boom though!

Capital gains

Capital gains tax has been radically simplified swapping a complex system of rates that reduce with the length of time an asset is held to a single rate of 18%. This seems mainly designed to increase the tax paid by the now notorious private equity brigade but will affect many other people too.

It’s good news for buy-to-letters, as it will reduce the tax most of them they pay from between 24% and 40% to just 18%.

But it’s bad news for many people who hold shares in their employers. They will see a big rise in the tax bill they pay on gains over the current annual limit of £9,200 from 10% to 18%. Small business owners face a similar hike in the rate they pay, only a few months after the rate of corporation tax they pay was increased to 19% to 22%. Investors in shares on AIM, the popular junior market, will also see the amount of tax they pay move higher as a result of this move.

Taxes on flights

Another pinched policy was the shift of the green tax on flights from passengers to airlines. It will still get passed on in terms of higher prices of course, but as the new tax will be charged per flight it could lead to some heavy discounts late in the day for planes that are relatively empty. Don’t start packing yet though, as this change won’t take effect for another two years.

Pensions and long-term care

The State Second Pension is one of the least understood benefits around. It’s an earnings-based top-up to our state pension and it’s already been announced that its value is going to be reduced in future years relative to its current level. Most people won’t even realise it’s happened anyway, but the date for this is being brought forward a year to 2009.

Offsetting this was a glimmer of hope regarding long-term care costs. A consultation will look at the current means-tested system but it may fall short of proposing extending the practice of free long-term personal and nursing care in Scotland to the rest of the UK.

Council tax

Council tax usually vies with inheritance tax for the title of the most hated tax. There were no specific announcements about it this time round but local councils are already bemoaning the lack of funds they have been promised, so it seems very likely that council tax will be going up next year at somewhere between the rate of inflation and 5%.

All in all it was a mixed bag of news. Owners of small businesses came off worst by a wide margin however, which seems a daft approach given their importance to the economy.