This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense
Firstly, sorry for the delay in your weekly MoneySense – I wanted to put it off until after the Pre-Budget Report. Was it worth the wait? Well, Chancellor Alistair Darling’s first big occasion in Gordon Brown’s shoes certainly wasn’t a non-event.
He and Mr Brown clearly noted the public’s reaction to the Conservative Party’s proposals to cut raise the inheritance tax threshold (IHT) to £1m. The big headline-grabbing initiative of this Pre-Budget Report was to raise the IHT threshold to £600,000 for married couples, with plans to raise it to £700,000 by 2010.
Sounds extremely generous. And it’s definitely good news for widows and widowers (not to mention their offspring) who will have the allowance backdated, meaning that they can now pass on up to £600,000 free of IHT to their heirs.
But in reality, this measure actually only formalises what smart couples are already doing, as Ian Maston of tax advisors Chiltern pointed out. “Prudent people would have already arranged their wills to achieve this anyway, so the Chancellor’s announcement won’t save them a penny.”
The reason for this is that the current IHT allowance is £300,000. Married couples (and those in civil partnerships) can pass on as much as they want to their spouse in their wills without incurring any IHT. So what well-organised couples do is arrange their affairs so that when the first partner dies, £300,000 in assets goes to their heirs, and the rest is passed onto the spouse. When they die, £300,000 more goes to the heirs tax-free and if there’s anything left, that’s when the taxman gets his 40%.
So in effect, couples already had an IHT allowance of £600,000. But as Maston says, the “change is welcome because it will save couples the need to jump through hoops when planning their wills.” After all, it does seem unfair to penalise people simply for being disorganised.
He’s also followed through with the other big potential vote winner announced by the Conservatives – the £25,000 levy on non-domiciled tax payers – only in Mr Darling’s case, it’ll be a £30,000 annual charge for any non-doms who have been resident in the UK for seven years, with the count starting from April 2001.
This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense
The credit crunch is also clearly on the Chancellor’s mind – in next year’s Budget he plans to include legislation to make it easier for mortgage lenders to offer 10-year fixed-rate mortgage deals.
However, the biggest change – and the one that we won’t immediately be able to work out the full ramifications of until we’ve seen the full details – is that Mr Darling has cut capital gains tax to a flat rate of 18%. Now, CGT is a complicated area with all sorts of allowances and reliefs. At its most basic, the change means that if you sell say an investment property, or a portfolio of shares, and make more than your CGT allowance (currently £9,200 a year) then you’ll only pay CGT of 18% rather than the 24% basic or 40% higher rate that is currently the case.
Good news, eh? But he’s also scrapped all those aforementioned allowances, which means that for example, private equity chiefs and entrepreneurs will be paying more – the taper relief that once allowed them to effectively pay 10% income tax is no longer available. The net impact, as Robert Peston on the BBC points out, is to raise £900m for the Treasury by 2010 – so this isn’t a giveaway by any manner of means.
Smaller points included a £5 a week rise in the pension credit for a single person from April, and £7.65 a week for a couple. The child tax credit is set to rise by £175 a year from next April, rather than the £150 previously announced.
As always, plenty more will emerge in the next few days as the analysts and tax experts get to look at the real details of the Pre-Budget Report. For a more in-depth analysis, see this week’s MoneyWeek, out on Friday.
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