Money Talk: Gordon's taxing questions

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The Independent Online
INDIVIDUAL investors are likely to find changes to inheritance tax and capital gains tax are potentially the most important parts of the Budget on 17 March. Although changes to national insurance rates, family credit, personal allowances, mortgage interest tax relief and even the introduction of a new 10p tax band would all affect more people, possible changes in CGT and IHT could individually have a much bigger impact.

The Chancellor for once does not actually need to raise more revenue for its own sake but the temptation to impose his own reforms on the tax system and to try to put a stop to what he sees as the widespread tax avoidance measures which flourished under the Tories is almost irresistible.

Anyone who sells assets to make a capital gain (net proceeds minus gross cost) of more than pounds 6,500 this year is liable to pay CGT (at the same rate as if it was tax on additional income), although the purchase price (plus any associated costs) can be increased in line with the rise in the retail price index since the date the asset was acquired and deducted from the net sale proceeds. If the asset was acquired before 31 March 1982 its value on that date is used as the base, something which is not always easy to calculate if the asset is, for example, a property rather than a share.

Arguably the tax should be abolished for assets held for longer than, say, five years but indexation might also be abolished and the permitted annual gain might be reduced to, say, pounds 5,000 in an attempt to recoup the revenue lost in the process. The outcome could be important for investors with "excess" PEP holdings which under existing proposals will lose their tax-free status after October 1999, and be valued for future capital gains tax as if they were bought at that point.

Potential changes create great uncertainty. Many experts think it is impractical to change the rules before the end of the tax year but you never know. Between now and the Budget, people with substantial capital gains on shares might well want to take profits up to the annual limit by selling shares and buying them back the next day to establish a new base for any future gains.

Attempts to stop wealthy people with clever tax lawyers avoiding inheritance tax by transferring money into trusts for the benefit of descendants are certain, and measures to hit the middle classes are also probable. The simplest reform would be to reduce the amount exempt from IHT on death which Tory Chancellors had pushed up to pounds 215,000 and some Tories wanted to abolish altogether.

To reinforce the change, the Chancellor might decide to tighten the rules on exempt transfers which at present allows assets up to pounds 3,000 a year to be given away tax-free and on "potentially exempt" transfers which allows anyone to reduce inheritance tax if they give away assets and live three years and avoid tax altogether if they survive for seven years. It would hit the middle-class voters who flocked last year to new Labour, but does he care?