Alistair Darling has had the unenviable task of guiding the country’s economy through one of the most difficult periods since the war. With one eye on the forthcoming General Election, much of his speech was a justification of his record in handling the recent crises. Nigel Pickard, Head of Tax at Deloitte in Birmingham, gives his view on the tax changes announced in the Budget.
This Budget was overshadowed by the forthcoming General Election.
What it lacked in detailed economic and policy announcements, it more than made up for in political positioning. Mr Darling defended his Government’s approach in handling the banking crisis and the deepest recession in 60 years and where possible sought to highlight policy differences with the opposition.
To reassure the markets, he also restated his commitment to the challenging target, announced in December’s Pre-Budget Report, of halving the public sector deficit within four years. Politics, though, dictates that we will probably have to wait until after the Election before we see much detail on exactly how this is to be achieved.
There was some modest cheer in the form of lower than forecast public borrowing for the current year. The one-off Bankers’ Bonus tax was also raised £2 billion, which is double what was originally forecast. However, Mr Darling has not been tempted into a pre-Election giveaway on taxes.
His move to introduce a cut in stamp duty for first time buyers for properties up to £250,000 is welcome. In typically “Robin Hood” fashion, though, this will be paid for by a one per cent hike in the stamp duty land tax rate for homes worth more than £1 million from 2011/12.
This change will undoubtedly assist first time buyers keen to get that all-important foot on the property ladder in what is a challenging property market.
We expect this to benefit over 200,000 buyers a year. The measure will reinvigorate the housing market after Bank of England mortgage data shows the end of the £175,000 holiday earlier this held back the house price recovery. The other tax breaks announced were highly targeted. For example, the 12-month business rates holiday from October 2010 announced in the speech will only benefit very small properties.
The doubling of the Annual Investment Allowance for capital expenditure to £100,000 is worth up to £10,000 for small companies and the self-employed £20-25,000.
Whilst this is a step in the right direction it does not in reality provide a great deal more support for entrepreneurial and fast-growing businesses.
Before the Budget there was a lot of speculation that the Chancellor would increase the rate of capital gains tax from 18 per cent to something closer to the new 50 per cent top rate of income tax.
In the event, the CGT rate remained unchanged and he actually announced an increase in the lifetime entrepreneurs’ relief.
This means that many business owners will benefit from a reduced 10 per cent rate of CGT on gains of up to £2 million if they sell up. There is increased anti-avoidance, though, and consultation will take place in the summer on limiting the scope of employee shares that are taxed at capital gains tax rates.
The Chancellor’s announcement that inheritance tax thresholds will be frozen contrasts with the Conservatives’ policy proposals in this area. This may be one of the battlegrounds on tax in the forthcoming election. There are, of course, a number of pre-announced tax increases, affecting high earners in particular, due to come in from 6 April.
These include the new 50 per cent top rate of tax for earnings over £150,000, restrictions on higher rate tax relief for pension contributions and the phasing out of personal allowances for those with income over £100,000.
Overall, as pre-Election Budgets go, it was a cautious package with few dramatic announcements, except perhaps for the stamp duty help for first time buyers.
The imminent General Election means there is always the possibility of a further Budget later in the year in the event of a change of government. Even if Labour stay in power, much of the detail of how the budget deficit is to be reduced will not begin to emerge until the public spending round later in the year.