Budget analysis: Inoffensive measures for locking in stability

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The Independent Online

It has been variously described as fiendishly clever or mind-numbingly boring, but Gordon Brown's eighth Budget managed to keep the maximum number of people happy. He cut headline taxes and raised public expenditure while sacking civil servants and further increasing stealth taxes.

The expected tax plundering of homes did not materialise. But by doing nothing about stamp duty, Mr Brown will drag yet more first-time buyers into the net as they find it impossible to avoid paying more than the £60,000 house price at which the duty begins. This probably raises more revenue than hitting the better-off with a five per cent stamp duty band on property worth more than £1m, and makes less sense in terms of currying votes ahead of next year's expected general election.

Despite earlier claims to reduce red tape, partnerships and small businesses will bear the brunt of the stealth taxes, which is hardly designed to encourage enterprise. The new zero corporation tax rate on profits of less than £10,000 a year, so loudly trumpeted when it was introduced two years ago, has had a door shut on it by taxing dividend payments from those profits. Family businesses that own property will be hit, as will businesses in which one marital partner owns a large shareholding but the dividends are split evenly to take advantage of the other partner's lower tax band. The dividends will be taxed pro rata to the pair's shareholdings.

For individuals the main emphasis was on jobs, public spending and handouts for the elderly. Mr Brown is sacking more than 40,000 civil servants and merging the Inland Revenue and Customs & Excise to release money for hospitals, schools, transport and defence.

Mr Brown did nothing to slow the rate of consumer spending or individual debt, although his forecasts suggest he expects consumers to start running out of steam next year. This is mainly due to the interest rate increases expected to flow from the Bank of England over the next nine months or so.

Equally, however, he did nothing to encourage saving. The Association of Private Client Investment Managers and Stockbrokers was prominent among those reminding the Chancellor that he has not mentioned the word "saving" since 2001. But putting some money aside should become more attractive as interest rates rise.

Mr Brown emphasised that this was a Budget to lock in stability. Some of his initiatives, such as Sandler-friendly stakeholder savings products and the depolarisation reform of how financial services are sold, will appear in the next year.

For the more sophisticated saver, the Chancellor confirmed that Venture Capital Trusts (VCTs) are to be made more attractive. The income tax relief is to double from 20 per cent to 40 per cent, and the limit for VCTs and the one-company Enterprise Investment Schemes rises to £200,000 a year.

Those who do not use smart financial advisers will not see much change from this Budget. But those who do should be able to take advantage of the latest round of incentives.

PAY AND SPENDING: Most tax frozen or kept to inflation

Most income and spending taxes and allowances were either frozen or increased in line with inflation.

Income tax personal allowances will rise from £4,615 to £4,745 from 6 April. Then the 10 per cent income tax band goes up to earnings of £2,020 a year instead of £1,960. The 22 per cent basic rate will run from £2,021 to £31,400 instead of £30,500. After that the 40 per cent higher rate applies. Most earners will be about £13 a head better off per month, but pensioners will also benefit from the £100-a-year payment towards their council tax.

Child benefit rises from £16.05 to £16.50 for the first child, and from £10.75 to £11.05 for each subsequent child. Child tax credits have been improved only for those families earning less than £20,000. If they have two children under 16 they gain £470 a year. With one child under 16, there is a £290-a-year increase for families earning under £10,000.

On the spending side, VAT is unchanged. Cigarettes go up 9p a pack of 20, beer 1p a pint and wine 4p a bottle.

PENSIONS: Complicated saving rules finally simplified

The Budget confirmed the Government's plans to simplify pensions. The controversial £1.4m lifetime pension pot limit has been raised to £1.5m when it starts in two years, and will rise to £1.8m by 2010, after which there will be five-yearly reviews of the limit. From April 2006, the eight sets of complex tax rules that govern how much can be paid into and out of pensions will be cut to one set of rules for all schemes. Everyone will be subject to an annual limit on contributions of £215,000 and the lifetime limit. Pension savings above £1.5m will be subject to a marginal tax of about 55 per cent.

Savers will for the first time be allowed to buy and sell residential property using their pension fund. New measures include allowing people in company schemes to work part-time after they are drawing a pension. The various rules on how much tax-free cash can be taken out of a pension fund on retirement are replaced by one rule of 25 per cent.

MOTORING: Fuel price increases deferred

The Budget deferred increases in fuel prices for six months and imposed a freeze on car tax. A 1.9p-per-litre rise in the duty on low-sulphur unleaded petrol and diesel will be deferred until September. The increase will take the average price of a litre of unleaded petrol to around 79p, adding about £30 a year to the annual fuel bill for a motorist.

An increase of 1.4p a litre on sulphur-free fuel will also be postponed for six months. Mr Brown said the diesel version of the more environmentally-friendly fuel will be on sale nationwide from September, although sulphur-free petrol is unlikely to be widely available until the end of the year. The fuel, which can be used in most cars without the need for conversion, is expected gradually to replace the more toxic low-sulphur version.

There was widespread disappointment at an immediate 2.4p-a-litre increase in liquid petroleum gas (LPG), used by around 100,000 motorists. The Retail Motor Industry Federation said the increase "could be the beginning of the end for the fuel in the UK" and was an anti-green measure.

INHERITANCE TAX

The threshold at which 40 per cent inheritance tax (IHT) is payable was raised in line with the Retail Prices Index, by £8,000 to £263,000. This is far behind last year's increase in most house prices, but Mr Brown insisted that only 5 per cent of estates would be liable to the tax.

However, wealthy individuals who give away their homes to avoid inheritance tax (IHT) but continue to live in them free of charge will pay income tax.

This is because there has been a rise in the number of special trust arrangements that allow people to give away assets, usually their home to their children, to avoid an IHT bill. From April 2005, anyone who has done so since March 1986 (when rules were brought in to keep within IHT calculations assets that are given away) and still uses the asset free of charge will start to pay income tax on it. This will be based on the rent they should pay for living there.

But legitimate transactions between family members will not be hit, nor will cases where someone has moved back in to their home following a change in circumstances, such as age or infirmity.

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