Azara Blog: Alistair Darling delivers pre-Budget report

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Date published: 2007/10/09

The BBC says:

Chancellor Alistair Darling has doubled the inheritance tax threshold for married couples to £600,000.

He also targeted private equity bosses and "non-domiciles" in his pre-Budget report - and pledged to switch green air taxes to flights, not passengers.
At the moment, inheritance tax is charged at 40% on assets worth more than £300,000 that someone leaves behind when they die, unless it is left to a spouse.

When the spouse dies the same £300,000 rate applies.

Mr Darling has simply made the individual inheritance tax threshold transferable - allowing couples to combine their allowances and so escape tax on the first £600,000 of an estate. The measure will be backdated "indefinitely" - and it will increase to £700,000 by 2010.

Analysts say many couples already arrange their tax affairs so that their allowances are combined, meaning the changes may have little effect in practice.
In other pre-Budget measures, Mr Darling announced a crackdown on private equity bosses, saying from next April the government would withdraw the capital gains tax taper relief, which can be as low as 10%, and put in its place a single rate of 18%.

Ignoring the policies themselves, does anyone find it bizarre that with a stroke of a pen the government can arbitrarily take tens of thousands of pounds from some people and give tens of thousands of pounds to other people? How can anyone be expected to do any financial planning in this kind of circumstance? Is there any wonder that politicians and governments are treated with such contempt by people?

Onto the policies themselves. The one real problem with inheritance tax is that married people and civil partners escape it when their partner dies, and nobody else does. This by itself means inheritance tax should be abolished. But the government has done nothing on this front, instead they have made the bias towards married people and civil partners worse (although it is their inheritors who stand to really benefit).

And on capital gains, Labour (i.e. Gordon Brown) arbitrarily changed from a system of indexation to taper relief ten years ago. And now they have arbitrarily removed taper relief. For individuals the rate has changed from somewhere between 20% and 40% (depending on the taper relief) down to 18%. For no particular reason. The rate is one thing (but given that it is lower than the top rate of income tax there will now be additional games played by accountants). But the lack of indexation is another. Even with a low inflation (and so say indexation) rate of 2% per annum, after 20 years that represents an inflation rate of 50%. So the government is claiming you have made a profit of 50%, to be taxed at 18%, even if you have just (effectively) stood still. And if inflation ever becomes high again, this lack of indexation will become manifestly unfair after a very short time span, so some future government will again have to arbitrarily change the rules.

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