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Pre-budget report summary
By Jeff Salway and Hannah Ricci
As widely predicted, chancellor Alistair Darling responded to Tory inheritance tax pledges in his first pre-budget speech, increasing the tax-free threshold to £600,000 for married couples and those in civil partnerships, and to £700,000 in 2010.
While the IHT threshold for individuals will only increase to £350,000 by 2010, the new joint threshold will be backdated for all widows and widowers. The chancellor said the new allowance is worth more than the value of 97% of homes in the UK and in future years he will take both house prices and inflation into account when setting inheritance tax thresholds.
Neil Young, chief executive of Property Portfolio Managers, Young Group, said: "Raising the joint IHT threshold enables a higher proportion of one's estate to be handed down more efficiently. Previously, proactive tax planning could achieve the same ends, but this move simplifies the process and there is less disincentive to investing and building wealth."
CGT reform
A less unexpected announcement was wide-ranging reform of capital gains tax (CGT), with a new flat rate of 18% on all disposals on or after 6 April next year. This includes the withdrawal of business asset taper relief, which tax adviser Chiltern warned could cause serious damage to self-employed people and both small and large companies.
Bernard Sweet, director of corporate tax at Chiltern, said: "This will strike far beyond private equity. Many smaller companies, their staff and investors will suffer as this relief is withdrawn. This could backfire on the Government - it is a blow to hard-working entrepreneurs.'"
Those affected by the taper relief withdrawal include private equity firms - the subject of controversy in the summer over tax advantages - who often pay just 10% on capital gains after the second year of the investment.
"The changes we saw today to taper relief are clearly motivated by the heightened focus on private equity," claims Paul Davies, UK Head of Tax for Ernst & Young. "We are extremely disappointed with these proposals as they threaten to undermine the entrepreneur culture that has blossomed over the last decade." But private investors who currently pay 40% capital gains tax on disposals will benefit from the reform, particularly those investors who keep their holdings for a short period of time.
Tax loopholes closed for non-domiciles
Similarly, the rules for non-domiciles are to be reformed, who can expect find their tax loopholes closed after the chancellor announced a consultation with regards to introducing a charge after seven years, then a higher rate after ten. Also on his agenda was increased housing and secure home ownership. Darling aims to increase current home ownership of 70% by building 240,000 environmentally sustainable new homes a year between now and 2020.
The chancellor also announced plans to tackle properties that are left unrented, unsold or unavailable for people to live in by introducing measures to bring empty residential properties back onto the market. To further assist first-time buyers getting onto the property ladder through affordable housing, grants to local authorities for local services in England will increase to £26 billion by 2010.
"We welcome the Government's commitment to affordability and housing and we are pleased the chancellor has increased the level of funding assigned to social housing - we look forward to seeing more detailed proposals in due course. However, we are disappointed to see that he has decided not to reform stamp duty to reduce its burden on first-time buyers," said Graham Beale, chief executive of Nationwide Building Society.
Increased homeowner certainty
Darling also announced plans to increase the number of fixed-rate mortgages of up to 10 years or more to offer homeowners more certainty. "There is a key trade-off for borrowers in choosing a longer-term fix, relating to the potential costs of exiting the deal early, and this is the key feature that needs to be addressed to stimulate mainstream consumer appetite," said Michael Coogan, director of the Council for Mortgage Lenders (CML).
The budget for the Department for Environment, Food and Rural Affairs will be increased to £4 billion in by 2010 to help tackle climate change and protect the countryside - including provision of £800 million a year by 2010 for flood defences.
With regard to benefits and tax credits, the chancellor said the focus is on ensuring work pays and announced an extension to the top-up lone parents receive for the first 12 months they spend back in work. The amount of child maintenance a family can receive without affecting their family benefits will increase by £20 a week next year and then £40 a week in 2010.
The child tax credit will also increase by a total of £175 a year from next April, with a further increase in 2010 - so that for families on low incomes, children's benefits and tax credits will be worth at least £3,500 a year for the first child. Taken together, the chancellor claimed these measures will lift a further 100,000 children out of poverty.
The Pension Credit for older people with just a small pension of their own will rise by £5 a week from next April - £260 per year - for a single person; and by £7.65 per week and £397 per year for a couple - guaranteeing every person over 60 at least £6,450 a year.
Elsewhere, the chancellor mirrored Tory conference proposals to apply aviation duty to flight, rather than individual passengers, as of 1 November 2009, while he pledged a further £200 million next year to guarantee free off-peak national bus travel for every pensioner and disabled person in England.
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