What will Budget 2005 bring?

BUDGET MONEY TALK
By George Bull
Partner, Baker Tilly accountants

George Bull of accountants Baker Tilly

Accountant George Bull looks ahead to Wednesday's Budget, Gordon Brown's ninth. He predicts gentle tinkering, with major changes delayed until after a general election.

Chancellor Gordon Brown's Budget statement on 16 March 2005 will be his last before the general election - widely expected to take place on 5 May.

The Conservative Party will inevitably raise concerns about a black hole in the public finances.

Meanwhile, the chancellor will be keen to prove that he has the resources to fund increased public expenditure as well as modest tax incentives designed to boost the feel-good factor.

As well as pre-election tax incentives, we anticipate another long, complex Finance Bill.

The chancellor will continue to maximise tax revenues by reducing the scope for tax planning, reforming some areas of UK taxation and responding to the increasingly pervasive European tax agenda.

Stamp duty

Stamp duty, which is charged on all residential sales above £60,000, is emerging as a key issue ahead of the election.

The tax rates are:

• £60,001 - £250,000: 1%
• £250,001 - £500,000: 3%
• Above £500,000: 4%

In 1997, only 25% of homebuyers paid the tax.

Since then, house prices have risen by 160% with the result that stamp duty is now paid by 75% of buyers.

This simple process of "fiscal drag", whereby the chancellor leaves thresholds unchanged while prices rise, is a form of stealth tax.

Stamp duty now costs homebuyers a total of £3.8bn each year and, predictably, the chancellor is under pressure to increase the tax bands in line with house inflation.

He is unlikely to go that far, but may introduce some form of concession for first-time buyers.

Inheritance Tax

This tax is in urgent need of overhaul.

Despite its name, it is not a tax on inheritances but on transfers.

Its impact increases annually as rising house prices bring more households within its scope - another example of fiscal drag.

If recent trends continue, by 2020 the average UK house price will exceed the inheritance tax threshold, so most families could face an IHT bill.

Despite these pressures, the chancellor is expected to do no more than raise the threshold in line with inflation, probably to £272,000 for 2005/06 (2004/05: £263,000).

Small companies and the self-employed

Following the fiasco of the 0% starting rate of corporation tax for small companies and the notorious "IR35", the taxation of small businesses is in a real mess.

Tax rules frequently run counter to commercial common sense, while husband and wife businesses may be taxed more harshly than unmarried couples.

The government started a consultation process in December 2004, so look out for announcements on Budget day.

Income Tax

Personal allowances and the starting point for the 40% top rate of income tax (currently on incomes above £36,145) will increase a little.

Don't expect to see the top rate rise, but more people will pay top rate tax as incomes continue to grow.

Pensions

It's important that we all make adequate provision for our old age, but the chancellor's stakeholder pensions have not proved to be winners.

WHAT IS A-DAY? A raft of new pension rules will be introduced on 6 April 2006 Small pension changes Annuity reform Changes to Sipps Pension lump sums

New pension rules, due to come in on 6 April, 2006 - dubbed A-day by advisers - should also make Self-Invested Personal Pensions (Sipps) more attractive. Sipps let pension savers make their own investment choices. People who save into the plans will be able to obtain full tax relief on annual contributions of up to £215,000 in 2006-7.

The new regime will also open the way for investors to hold residential property within their pension funds.

On A-Day the complex existing pension scheme rules will be simplified. Ahead of that, we can expect more tinkering from the chancellor so keep an eye open for detailed changes.

And don't forget to check how A-Day will affect you.

Child Trust Funds

The government's payments into these new savings and investment accounts for children are welcome. However, the investment companies have to be persuaded that it's worth their while to offer the accounts.

Alcohol, petrol and tobacco

Will he or won't he?

Ahead of an election, there must be a huge temptation for the chancellor not to increase duty rates on alcohol, petrol and tobacco.

After all, he can always push rates up in a summer Budget which we expect to see after the election.

The summer Budget

Only a little of what is announced on 16 March is likely to find its way on to the statute book before the election.

Most will held over until later in the year, to be enacted with the huge mass of changes the chancellor is expected to announce then. The summer Budget will be the one which sets the fiscal agenda for the next Parliament.

March 16 will give careful observers a taste of what is to come.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.