How to stay ahead of Mr Brown's Budget trickery

Take action now to protect your assets and save money, advises David Prosser

Gordon Brown is facing one of his toughest challenges yet. The Budget, set for March 16, is widely expected to come just a few weeks ahead of an election. So while the Chancellor needs to raise cash to plug holes in the public finances, he can't afford to risk unpopular tax rises.

Gordon Brown is facing one of his toughest challenges yet. The Budget, set for March 16, is widely expected to come just a few weeks ahead of an election. So while the Chancellor needs to raise cash to plug holes in the public finances, he can't afford to risk unpopular tax rises.

"Increases in high-yielding taxes, such as National Insurance and VAT, are off limits before the election," says Steve Durman, a partner at accountant Moore Stephens. "Budget 2005 is set to be a pre-election sweetener but the Chancellor has an estimated £30 billion hole to fill, so how will he find the money?"

The answer could be a package of carefully costed populist measures, along with some more sneaky measures. Either way, be prepared: there are steps you can take now to beat the Budget blues or to take advantage of Brown's generosity.

THE BIG TAXES

Close to an election, the Chancellor is very unlikely to consider income tax rises. Expect rates to say the same and the thresholds at which people move into each tax band to increase in line with inflation. However, Mike Warburton, a partner at accountant Grant Thornton, says an increase in National Insurance contributions, particularly for higher earners, is an outside possibility.

Warburton also warns that another easy - though controversial - way to raise large sums would be an increase in VAT. Britain's VAT rate is lower than taxes on spending in much of Europe, so an increase could be justified this way.

Action point: "If you're due a bonus, try to persuade your employer to pay it before the Budget, to protect yourself from National Insurance rises," Warburton says. "And if you're planning a big ticket purchase, such as new car, think about buying it before the Budget, in case the VAT rate rises."

STAMP DUTY

Halifax Bank says this could be the Budget in which the Chancellor finally offers homebuyers some comfort on Stamp Duty, particularly first-timers. Currently, the tax is payable at 1 per cent on all property purchases worth more than £60,000, with the rate rising to 3 per cent at £250,000 and 4 per cent on deals of more than £500,000.

Not only has the starting threshold not been raised since 1993, but even worse, the tax is payable at the highest rate on the entire value. So while the bill on a property worth £250,000 is just £2,500, there is £7,500 to pay on a £250,001 purchase.

Martin Ellis, Halifax's chief economist, says: "We are very hopeful there will be some changes coming through from the Chancellor, especially in the run-up to the election."

It's possible the Chancellor could raise the lowest threshold, or raise all the thresholds while introducing a new higher rate. Alternatively, the tax could be made progressive, with duty only payable at the higher rates on portions of the value over each threshold.

Action point: Anyone in the process of buying a house should at least consider delaying completion until after the election, if doing so does not jeopardise the deal. "Any changes to Stamp Duty may not be introduced immediately, but it is worth waiting a week to complete in case they are," says Ellis. "If you complete on the Friday before the Budget, say, and rates are cut on the following Wednesday, you'll really be kicking yourself."

INHERITANCE TAX

"The Budget is not going to make your inheritance tax headache any easier," says John Whiting, a partner at accountant PriceWaterhouseCoopers. "If you have a problem, start doing some sensible planning as soon as possible."

Currently, it is possible to leave heirs an estate worth up to £263,000 free of inheritance tax. The tax is then payable at 40 per cent. But while Gordon Brown has generally increased this cap in line with inflation each year, the price of property, the biggest chunk of most people's estate, has risen much faster. If the inheritance tax threshold under Labour had been increased in line with property price inflation, it would now be around £350,000.

However, while Whiting believes the Chancellor may increase the tax-free threshold by marginally more than inflation, in an attempt to counter growing criticism over the issue, substantial reforms are unlikely.

Action point: Get your inheritance tax planning in place. Above all, this means reducing the value of your estate, usually by giving away assets. Gifts between spouses are always tax-free, plus you can make any number of gifts worth less than £250 each year, as well as other gifts worth up to £3,000 each year. There are other allowances, such as gifts to charity, which can also be useful.

Also ask a solicitor for advice on writing a will tax-efficiently. And set up life assurance policies in trust, using a simple form from insurers. Pay-outs then fall out of your estate for tax purposes - the money can then be used to pay an inheritance tax bill.

TAX ON TRAVEL

Air Passenger Duty, costing up to £40 a flight, is not an obvious tax because it is often buried in the overall cost of the ticket. That makes it an easy target for the Chancellor, Warburton warns. "Airlines use a lot of fuel, which damages the environment, so tax increases can be justified on environmental grounds," he says.

Action point: Planning a flight or summer holiday? Book your trip before the Budget.

PRE-OWNED ASSETS

One way to reduce the value of your estate for inheritance tax purposes always used to be to give away your home to relatives. But in this Budget, the Chancellor is set to crack down on families who have used this tactic in the past, despite furious claims that this is retrospective taxation.

Brown will use the Budget to announce when a new system he has already unveiled will begin. Under the new rules, anyone who has given their home away in the past, but continues to live in it, will now be treated as if they are getting a tax-free benefit. They'll have to pay income tax on the rent that would theoretically be charged if the property was let on a commercial basis.

Stephen Herring, a tax partner at accountant BDO Stoy Hayward, says: "What's really bizarre is that the Chancellor is also saying people will be allowed to say they still own the home for inheritance tax purposes, in which case it's this tax that will be payable rather than income tax."

Action point: "Take specialist advice if you are in any way affected," says Herring. "You need to work out whether it will cost less to pay an income tax bill than inheritance tax - it could even be cheaper in some circumstances to pay rent to the new owner of your home." Alternatively, it may be possible to beat this trap altogether, using plans such as equity release schemes to properly dispose of ownership of the home.

SAVING

In November's Pre-Budget Report, the chancellor won plaudits for announcing he would go back on previous plans to reduce the amount it is possible to save using tax-free individual savings accounts. But while Brown said the annual allowance would remain at £7,000, he remained tight-lipped about the future of the scheme.

Moore Stephens partner Steve Durman is concerned Brown believes Isas are a tax break enjoyed by those with decent incomes who would be saving anyway. He is worried the scheme could eventually be replaced by the Saving Gateway, a contribution-matching scheme that is being trialled with savers on low incomes.

"Any available tax break on savings for low income savers will usually be available to the wealthy too, but introducing means-tested benefits would stop this.

Action point: This year's Isa allowance will be safe, but you should put by as much as you can before the end of the tax year on 5 April, in case Isas disappear in the future.

SIN TAXES

Raising money by upping taxes on cigarettes and alcohol is no longer an easy option, because smuggling of untaxed products is an increasing problem. Even so, expect Brown to raise some so-called "sin" taxes, as well duties on petrol. This could add 7p to the price of a packet of cigarettes and 40p to the cost of filling up your car.

Action point: Look after the pennies and the pounds will take care of themselves. Fill your car up the night before Budget Day and stock up if you're a smoker.

WHAT NEXT?

If the election really is scheduled for April, it's possible Brown won't bother with a full Budget. There might not even be time to get it through Parliament. "We expect all the main changes Brown is planning to be announced after the election," says Anita Monteith, a tax consultant at the Institute of Chartered Accountants in England and Wales. "They could include an increase in the VAT rate, a rise in the top rate of National Insurance and a freeze on income tax personal allowances."

Action point: It's impossible for most people to avoid increases in income tax, National Insurance or VAT. But don't plan your finances for the year ahead on the basis of Brown's 16 March Budget - it may not be the full picture.

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