The Pre-Budget Report: What could it mean for you?

The Pre-Budget report is due to be announced on 9th December. Danny Cox, Head of Advice looks at what the Pre-Budget report is and what we might be able to expect. 

What is the Pre-Budget Report?

The Pre-Budget Report (PBR) is delivered by the Chancellor a few months before the Budget. Historically, it was when the Government announced how much they were going to spend and what on in the next tax year after a lot of inter-departmental wrangling. Then in the main Budget he announced how he was going to raise that money. With the advent of spin and generally improved news management the distinction has become rather more blurred. Spending plans now filter out over the course of the year in response to events and announcing tax rises well in advance is seen as an effective way of reducing the pain.

It now provides a progress report on what has been achieved so far since the previous Budget, gives an update of the state of the economy and public finances, and sets out the direction of Government policy leading up to the Budget in the spring. It also generally sets the tax limits and thresholds which are due to come in at the start of the following tax year.
 
In recent PBRs the Chancellor has announced major changes to taxation which normally come into effect from the following tax year. This gives him a few months to change his mind or revise his plans if he needs to, and indeed time for us to get used to them so they are less news worthy and painful when they actually happen. However, this new format does give wise investors more time to plan their affairs better.
 

Why is the Pre-Budget Report important?

The PBR can range from being a relatively dull affair, to being the platform for some key announcements including the changing of taxation.

In the next 6 months or so, Labour needs to revive their popularity if they have any chance of winning the next General Election, expected in May or June 2010. You would normally expect the Budget and its PBR to contain sweeteners to attract votes. However, the Government, awash with debt, has no room for manoeuvre or for tax incentives, without matching tax rises elsewhere.

Does this mean more tax rises?

Probably. The national debt is so huge that it is difficult to see anything different.

What taxes do you expect to rise this time around?

VAT: We are expecting VAT to return to 17.5% at the end of this year after the temporary reduction to 15%. That said, VAT would be an easy tax to raise as it is a tax on sales, originally of so called luxury goods. A rise in VAT to 20% could raise a further £12bn. This would seem a relatively easy target.

Inheritance tax: This could be a target. Some time ago the Conservatives announced they would be eliminating inheritance tax for all but the wealthiest; those with estates above £2m. Labour have used this as a political stick and given the Tories a good beating. It would be relatively easy to introduce a new rate of 50% to align with the new income tax rate. Alternatively a reintroduction of capital transfer tax, to reduce gifting, has been the subject of speculation for years.

Capital Gains Tax (CGT): In my view, the gap between the rate of CGT at 18% and the new super tax rate of 50% forms a huge open goal. Pushing CGT up to 30% or higher would be a popular move – CGT is paid by investors and therefore “the wealthy” in the public’s eyes.

Tax relief on pensions: Basic rate tax relief is unlikely to be under any threat. Higher rate tax relief is already under attack for those with income above £150,000. It would be easy to reduce that ceiling from £150,000 to £100,000 at the stroke of a pen. In my view, if we still have higher rate tax relief in 5 years time I will be surprised. 

Offshore funds and tax havens will continue to be under threat and we can expect a widening of anti avoidance actions.

Beer, Cigarettes and Petrol: It wouldn’t be a Budget without taxes rises on these usual suspects.

Corporation tax: Any increases in tax for companies would risk the fragile recovery we are in. No tax rises expected here.

Income tax: It is unlikely that we will see a rise in income tax. The new 50% income tax rate starts in April as does the reduction of personal allowance for those with taxable income of more than £100,000.

National Insurance: National insurance is already due to rise in April 2011. This was part of Budget 2009, so further rises are unlikely but they could be brought forward.

What should investors do?

1. Maximise tax efficient investments, exemptions and allowances as soon as possible. We don’t expect any further changes to ISA allowances or pension contributions however if you can afford to, it makes sense to “bank” these just in case they change.
2. Where you have gains, use your capital gains tax allowance (£10,100 for 2009/10). Bear in mind that the old process of Bed and Breakfasting is no longer allowed – if you repurchase the same holding within 30 days of the sale you will lose all the tax advantages of doing so. However this does not apply if you buy an alternative holding or repurchase the same holding within an ISA or a SIPP (otherwise known as a Bed and ISA or Bed and SIPP). Find out more about Bed and ISA or Bed and SIPP. 
3. Seriously consider realising capital gains as a part of your normal investment planning. By this I mean that if you were planning to sell a holding and realise a gain sometime in the next few months already, you should consider bringing this action forward. It is unlikely that tax changes will be retrospective and any gains realised at the current rate of 18% should still apply. However, we cannot be certain whether a change to this rate will occur.

Danny Cox
Head of Advice