Personal Finance: Chancellor's taxing riddle

Does the Chancellor really want to bring back all Middle England's fears about the politics of envy

ONE THING is certain. Gordon Brown will not go down in history as the great reforming Chancellor who simplified capital gains tax. Last year's Budget made things more diffcult to calculate not less, without even the compensation of making the tax more productive.

So where will he turn in 1999 in the quest for reform? The hot tip from financial advisers is an overhaul of inheritance tax, and especially potentially exempt transfers, the concession which allows individuals to escape IHT completely on assets given away more than seven years before death (and to qualify for reduced rates of tax if they live for at least three years and then five years but less than seven years after making the gift).

Inheritance tax has always been a voluntary tax which can actually be avoided either by giving assets away before death or putting them into a trust if you can afford the fancy legal advice. But it is potentially a very lucrative tax because of the rapid increase in personal wealth, fuelled by fat cat salaries and soaring share and property values. Although the starting point was raised sharply by the Tories and currently exempts estates worth less than pounds 223,000, getting on for half a million homes in the UK are now liable to IHT quite apart from other assets.

Without another leap in the threshold an increasing number of estates will start paying IHT over the next few years with beneficial effects to the Exchequer and very negative effects on Middle England. If potentially exempt transfers are abolished or the qualifying period is increased to 10 years or more the impact will be even greater.

Alternatively the Chancellor might go back to the old-style Capital Transfer Tax (CTT) introduced by Denis Healey in 1974 which effectively taxed lifetime gifts above a certain size and for good measure triggered a potential capital gains tax liability on gifts. That was replaced by IHT back in 1986 in one of the Nigel Lawson budgets, and one reason was to minimise the punitive impact of the tax on voters. Bringing CTT back would be unpopular and even if individuals could be forced to police themselves under the self-assessment system with threats of heavy sanctions for anyone caught breaking the rules, it would create a widespread culture of evasion, as well as hostility to the government.

Gordon Brown may have a reputation for having a hair shirt mentality, but does the Chancellor really want to sacrifice the Government's enviable reputation for having a Teflon coating, bring back all the fears that Middle England harbours about the politics of envy, and give the opposition the weapon they are desperately seeking to attack the Government with.

By all means block the Lady Ingram loophole which allows individuals to give away their home and carry on living in it. But taxing more people's assets when they die will take the Government right back into the emotive tangle the Tories got itself into when it allowed local authorities to start taking old people's houses to pay for long term care. The Chancellor would be on safer ground abolishing MIRAS while mortgage rates are low.

My bet is that the Chancellor will stick to increasing the threshold for IHT to pounds 230,000 and concentrate on getting the maximum mileage out of introducing a 10p income tax band. In a perfect world he would substitute a 10p rate for the existing 20p rate to avoid re-introducing a fourth income tax band. If that proves too costly he could and should tinker with the width of the tax bands to fine-tune his fiscal give-away.