Significant Points Arising from 2005 Pre-Budget Statement
Originally sent: December 12, 2005We have all been subjected to two major events in recent days. The publication of the Turner report, and the annual Pre-Budget report.
I will not spend time on the Turner report. In my view it will have little relevance for most of us, even if the government surprises us by implementing any of its recommendations. Quite properly, it has concerned itself with the 50% of the population who neither have nor can afford proper pension arrangements, and whilst I sympathise with their plight it is unlikely any of them would be prospective clients. Besides which, I cannot see the relevance to our business of taking a garden shed, turning it into a boat, and then turning it back into a shed, or of painting a cactus from the by product of cycling across a Spanish desert. Or was that the Turner prize?
As I usually do, I have read through the Pre-Budget Report with my Financial Adviser hat firmly on to see what impact it might have on our business and the advice we might give our clients. This is very much a personal view and is not intended in any way to be a comprehensive summary.
I am sure none of you missed the fact that clients will not be able to put wines, residential properties etc into their SIPPS. Well, strictly speaking, they will be able to put them in, but they won?t get tax relief if they do. There is still the opportunity to access residential property, but mostly no longer directly. There are also some opportunities to put in, for example, flats linked to commercial properties, so all is not completely lost.
Whilst on the subject of the new pensions regime from April next year, the Chancellor has also announced that measures will be introduced to prevent recycling of tax free cash in a pension in order to create a tax benefit.
In other words, two major planks of many IFAs? post simplification pension strategies have been removed overnight.
Whilst on the subject of government u-turns, all very small companies will face a Corporation Tax hike. The 0% band and the lower marginal rate band are to disappear completely. All companies will now pay at least 19% on all their chargeable profits.
Anti-avoidance legislation is to be strengthened further, not least by the introduction of a rule that any anti-avoidance rules may now be backdated to December 2004. In other words, if you are using a scheme which is perfectly legitimate now, the government can simply pass a new law and then claw back all the tax you saved. This mirrors the attempt in the latest National Insurance Contributions Bill on which I commented recently. I do not believe either attempt can be legal, but we will just have to wait and see if this is challenged by someone with very deep pockets.
One specific anti-avoidance measure being introduced is the closure of the loophole introduced by Section 48 of the IHTA 1984. This has allowed many deathbed clients to avoid Inheritance Tax through the use of marketed Excluded Property Trusts. That opportunity now appears to have disappeared ? at least until we see the small print of the actual legislation.
Property investors who, up to now, have been able to reduce their taxable profits with a ?wear and tear? allowance may soon find it more difficult to do so. This is now to be linked to the energy efficiency of the property and will be withdrawn if the property is not deemed to be efficient enough.
Local authorities will be encouraged to introduce road use charges, similar to that already applied in Central London. If you conduct business in a city centre and expect clients to travel to your premises, then watch this space! Likewise if you travel to your clients, most of whom are in a city centre. This is most unlikely to have an immediate effect, but will probably ultimately impact on your business and that of your business clients.
How about the good news? Well, there really isn?t very much. But here are a few scraps the Chancellor has thrown us:
First Year Allowances for Plant & Machinery will increase to 50%.
There will hopefully be easier borrowing of up to ?250,000 for small businesses through the Small Firms Loan Guarantee Scheme.
And a small hint that perhaps, but only perhaps, the 40% income tax reducer on VCTs could be extended beyond April 2006.
Finally, just how much are taxes likely to increase over the year, and where will the main source of tax revenue be?
The latest published RPI is 2.5%. You might therefore be forgiven for expecting the increase in tax revenues to be around 2.5% too. Wrong! The increase in total projected tax take for this year is 7.3% - nearly three times inflation!
Nearly 48% of this tax revenue is expected to come from Income Tax, National Insurance, and Capital Gains Tax. 16% will come from VAT, and 9% from Corporation Tax. Inheritance Tax is hardly in the picture, constituting less than 1% of the total tax take ? although still up by over 13% from last year.
Three guesses where the main anti-avoidance efforts will probably focus ? and no prizes for the right answers!
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
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