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How honest and brave will Alastair Darling be?

Speculation is rife as to whether Gordon Brown will go to the country in March this year rather than wait until the last possible date in June. If he does there is not likely to be a Spring Budget.  If however Alistair Darling does have to present a Budget in March or April, and I feel sure that he will not relish this, it is difficult to predict what the ‘red box’ might hold this time around;  it would certainly be surprising to see significant tax changes which would surely hand the initiative to the opposition parties.

Given that the Chancellor has already announced a range of significant tax increases for those with high incomes - including the loss of personal income tax allowances, a new 50% higher rate of income tax, the restriction in higher rate tax relief on pension contributions and a 1% increase in National Insurance contributions from 6 April 2011 -  there is no obvious scope for further tax tightening for the individual.

That said there are three areas where additional tax revenues could be generated:

  1. Increasing the rate of capital gains tax from 18% to bring it more into line with income tax rates, perhaps on a progressive basis
  2. Restricting certain Inheritance Tax reliefs, even though the nil rate band has only just been frozen just as house prices start to rise
  3. Continuing to target what the Government sees as unacceptable tax avoidance

Politically, these measures are unlikely to lose too many votes as they would be seen by most voters as affecting only those who can afford it.  In commercial terms however they might prove to be counter-productive given the Government’s stated objective of generating a culture of aspiration.

On the business side, the rate of VAT might be increased but it is hoped that the Government will find some money in the coffers to help stimulate innovation and recovery by:

  1. Committing to retain the lowest rate of corporation tax payable by companies at 21% beyond April 2011
  2. Further increase the level of tax relief offered for research and development

Of course one could take the view that whilst it is not very exciting, no news is good news. The absence of change would mean that the following tax planning opportunities would still be available:

  • Higher rate tax relief on pension contributions made by most people to prepare for retirement
  • Exemptions from IHT on lifetime gifts without limit, assuming that the person making the gift survives for seven years
  • Capital gains tax relief transfers of assets into trust for the family as a mechanism for wealth protection
  • A capital gains tax rate of just 10% on up to a £1m of capital gain when disposing of business assets

In summary, a pre-election budget is unlikely to include many major tax-raising proposals, though in some ways that would not be a bad thing.  Given the current state of the economy one would expect the emphasis to be on public spending cuts.  The Chancellor himself is recently quoted as saying that cutting borrowing was never negotiable and that some departments and programmes will be facing cuts.

That said, how honest and brave will Alastair Darling be? All-in-all one can expect the Budget to be short on major announcements and whether or not one takes place, it could well be remembered as ‘the Budget that never was’.

Stephen Barratt, Private Client Tax Director, James Cowper LLP, Tel 01635 35255 or email: sbarratt@jamescowper.co.uk