HOW TO SAVE IT, HOW TO SPEND IT, HOW TO MAKE IT GROW

Wait until the Budget's over before you rearrange your tax affairs, says Steve Lodge

Tax experts warn against being panicked into rearranging your finances to try to save tax before the Budget next week (26 November).

While the safe money reckons Kenneth Clarke will be looking to grab the headlines with a penny or two off the basic rate of income tax, there may also be new give-aways elsewhere - and people should be no worse off for waiting with their tax planning.

Traditionally, the run-up to the Budget has been treated as a sales opportunity by some financial companies - often the less scrupulous. But attempts to get savers to "buy now while stocks last" have come to sound less and less plausible as successive Chancellors have closed the more obvious loopholes.

"I don't see [existing] tax breaks that have been hijacked for the wrong purposes," says Maurice Parry-Wingfield, tax consultant at the accountancy firm Deloitte & Touche.

It has been suggested by some that the Chancellor might reduce tax breaks on personal equity plans (PEPs) and pensions. But PEP buyers particularly should note that if they chose to invest now to try to beat any restriction, they would be doing so at a time when the UK stock market (and many others around the world) is at an historic high and could be due for a setback. True, there are PEPs which offer guarantees for the value of your savings if the market should fall, but you pay dearly for this security in reduced investment potential.

Also worth noting is that any proposed cuts might not come into force until the end of the tax year, or at all if the government changes as a result of the forthcoming general election.

But moves to limit the tax breaks on PEPs and pensions are not seen as likely - they do not even feature on the Budget Racecard we reproduce from the accountancy firm Coopers & Lybrand, for example. Instead, experts suggest the Chancellor may well improve the tax breaks available in a number of areas, hence the advice to hold fire.

In particular:

Capital gains tax (CGT). The Government says it wants to abolish this complicated tax, which is levied on profits from sales of assets like shares and second properties. That said, many people who make such profits escape this tax at the moment. Your first pounds 6,300 of crystallised profits each year are free of CGT. And there are other wheezes for shrinking your liability further - in particular the rule which says only returns over inflation count.

Abolition might be a long shot for this Budget, but the Chancellor could look to lighten the burden further and/or reduce some of the complications of calculating CGT liabilities.

He might reduce its rate (currently you pay the same as your rate of income tax), wipe the slate clean for gains prior to a particular date or otherwise give more relief in assets held for longer periods. Whatever he does, most experts believe the CGT burden will get no heavier and might well be lighter. So investors who can should probably hold off crystallising profits until the Budget.

Inheritance tax (IHT). John Major has said he wants to abolish this tax too. At the moment the first pounds 200,000 - including the value of any property - left by a dead person is free of IHT. But given the range of devices and rules that can be used by people while they are still alive to reduce their potential bill, IHT has been dubbed a "voluntary tax".

Any further lightening of the burden - and Coopers & Lybrand reckons the most likely Budget move is a raising of the pounds 200,000 tax-free band by more than inflation - would further reduce the need for such planning, which can involve complex devices such as trusts.

As with capital gains, it might be a little ambitious to hope for abolition of inheritance tax this Budget, but raising the so-called "nil-rate band" to pounds 250,000 is not inconceivable.

Venture capital trusts (VCTs) and Enterprise Investment Schemes (EIS). These are higher-risk investments that offer a number of tax breaks to encourage savers to put money into smaller firms. But they haven't proved particularly popular, and some experts believe the Government may look to improve take-up by raising the rate of upfront tax relief from 20 per cent to 40 per cent. So for higher-rate taxpayers at least, every pound invested would in effect cost just 60p, instead of 80p as at present. Again, therefore, if you were thinking of taking advantage of these tax- efficient investments, it might well be worth waiting.

Elsewhere, many of the big mortgage providers have already said they are holding off rises in their headline rates - expected after the 0.25 per cent increase in base rates last month - until they have heard what the Chancellor has to say in the Budget. Changes to mortgage tax relief (Miras) are not expected, and with the housing market now on the upturn, there seems little reason to announce new measures to boost it. Many fixed-rate deals have already gone up and lenders in general have been cutting back on their discounts. But if you think the Chancellor will announce the biggest give-away Budget in pre-election history, you could lock into the fixed or capped-rate mortgages around now given fears of yet higher longer-term rates.

Equally, though, if these rates were to go up then so too would the deals offered on fixed-rate Tessa accounts and bonds offered by building societies.

Another possibility is a rise in insurance premium tax, a measure that would increase insurers' costs but that wouldn't necessarily be passed on to consumers, given the continuing competition in many insurance markets.

And the longest shot for the Budget? Price Waterhouse confidently predicts that whatever give-aways the Chancellor might dream up, free National Lottery tickets for all taxpayers will not be one of them.

Over to you, Mr Clarke.

Budget Racecard 1996

Source: Coopers & Lybrand

Favourites

1/4 Rise in petrol and tobacco duties by more than inflation

1/4 No change to mortgage interest tax relief

1/3 No change to lower rate (20%) of income tax

1/3 No change to higher rate of income tax

1/3 Rise in capital gains tax annual exemption by inflation

1/3 Rise in inheritance tax nil-rate band by more than inflation

1/2 Reduction of basic rate of income tax by 1% to 23%

1/2 Rise in personal tax allowances by more than inflation

1/2 Lower & basic-rate thresholds raised by more than inflation

1/2 No change in employees' National Insurance

Evens

Reduction of basic rate of income tax by 2% to 22%

Rise in personal tax allowances by inflation

Lower and basic-rate thresholds raised by inflation

Outsiders

2/1 Rise in gains tax annual exemption by more than inflation

2/1 Rise in inheritance tax nil-rate band by inflation

5/1 Increased capital gains tax reliefs

5/1 Increased inheritance tax reliefs

10/1 40% income tax relief for investment in the Enterprise Investment Scheme and venture capital trusts

10/1 Reduction in capital gains tax rate

10/1 Reduction in inheritance tax rate

20/1 Reduction in basic rate of tax to 20%, funded by restriction on relief for personal allowances to 20%

25/1 Abolition of stamp duty on house purchases

25/1 Abolition of inheritance tax or capital gains tax

50/1 Abolition of income tax exemption on first pounds 30,000 of redundancy payments

100/1Insurance premium tax to double to 5 per cent