A jump ahead of Clarke

YOUR MONEY What's in the Budget and how will it affect your finances? Anthony Bailey predicts ...
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The Independent Online
THE Budget is just 10 days away and that means we are well into the forecasting season. Normally staid accountants and others don the mantle of Mystic Meg to tell us what the Chancellor has in store for us.

There is one safe prediction that can be made. Few of the prophets will see more than a handful of their forecasts realised. Furthermore, the Chancellor, Kenneth Clarke, is likely to have some surprises that no one foresees.

The coming Budget is said to be crucial to the fortunes of the Conservative Party. Mr Clarke has to create the conditions for sustainable economic growth, low inflation and steady, low interest rates. He has to make voters "feel good" by lightening the tax burden, without cutting the public services they want and without letting public borrowing get out of control. So what might he do? And is there any pre-emptive action to take?

o Reduce income tax: 2p off the basic rate would be good for headlines and the feelgood factor. But it could be accompanied by an increase in National Insurance, or the abolition of the ceiling on National Insurance deductions.

Forecast: The Chancellor may greatly increase the 20p lower rate tax band and rename it basic rate tax. Also, he could limit certain tax relief, such as that on pension contributions, to basic rate tax only - hitting the tax perks of high earners.

Action: If you're planning to make extra pension contributions before the Budget, there should be nothing to lose.

o Increase mortgage tax relief: The Chancellor could restore Miras relief to 20 or 25 per cent of interest on the first pounds 30,000 of a loan. It is currently 15 per cent. Alternatively, he could raise the pounds 30,000 limit.

Forecast: No change is likely on Miras. It's hard to believe that more Miras relief would stimulate the housing market. Nor is it likely the Chancellor will introduce tax relief for those with negative equity.

Action: Grin and bear the pain of the dire housing market.

o Abolish stamp duty: Stamp duty is an irritating tax which hits, in particular, share investment and house sales.

Forecast: Abolition of stamp duty on share investment has been promised for years and has been linked to a new "paperless" share trading system.

Action: Delay the exchange of contracts on a house purchase until after the Budget.

o Abolish inheritance tax: John Major claims that abolition of inheritance tax is high on his wish list. In electoral terms, abolition would be a double-edged sword. It might appeal to the elderly middle classes, who live in high-value homes. But it could be seen as another tax concession to the rich.

Forecast: Abolition is unlikely, but the Chancellor may raise significantly the pounds 154,000 threshold at which the tax starts to bite. More likely, he may exempt the main home from the tax.

Action: Any inheritance tax planning should be put on hold until after the Budget.

o Abolish capital gains tax: Here's another item on the Prime Minister's wish list but, for this year at least, he may have more chance of winning the National Lottery jackpot.

Forecast: The Chancellor is most likely to raise the annual CGT exemption (currently pounds 6,000) well in excess of inflation, but at the same time abolish the indexation allowance, which means that only gains above inflation risk falling into the net. Another possibility is a rise in the annual PEP investment limits.

Action: If you believe indexation will be abolished, consider selling (and buying back if wanted) any investments on which you want to claim the allowance.

o Increase insurance premium tax: A 2.5 per cent tax on general insurance premiums was introduced two years ago. In other European countries the equivalent tax is much higher.

Forecast: This tax could well be raised to 5 per cent.

Action: Anyone about to buy car or household insurance should do so before the Budget.

o New tax relief for self-help welfare: The Chancellor may counteract the effects of a shrinking welfare state by introducing tax relief for things like long-term care insurance. Or he may introduce greater flexibility into what you can do with existing pension plans.

Forecast: There's a 50/50 chance of some new package.

Action: Wait and see. Any changes won't affect what insurance companies offer until well into next year.

o Change the tax regime on share options: The Chancellor got into a terrible muddle over this issue earlier in the year.

Forecast: Some change is a dead cert, but no one is yet quite sure what the Chancellor will do.

Action: Fat cats will have their own accountants to advise them. The rest of us will have to wait and see.

o No increase in duty on alcohol: The cross-Channel booze run is said to be having a serious impact on pubs and off-licences in the UK.

Forecast: Duty is unlikely to be increased.

Action: Don't get your Christmas drinks in before the Budget.

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