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A team of experts including FT journalists Chris Giles, Vanessa Houlder and Robert Budden, answer your questions on personal finance, tax and the economy following what could be Gordon Brown’s last Budget as chancellor.
There seems to be confusion over revised stamp duty rates and thresholds. Please can you clarify.
Rob Budden: The new stamp duty limits take effect from today (March 23). So any residential property purchased from today which is sold for £125,000 or less will escape stamp duty. Prior to Wednesday’s Budget this limit had been set at £120,000. This change will have little benefit for first-time buyers in the South east where property prices are the most expensive. But it will help some buyers in other parts of the country. Nationwide estimates 30,000 buyers will benefit from the change.
The other stamp duty thresholds remain the same. Stamp duty is charged at one per cent (on the total purchase price) of properties between £125,001 and £250,000 attract stamp duty of one per cent. It rises to 3 per cent for properties costing between £250,001 and £500,000 and then increases to four per cent for all residential properties costing more than £500,000.
Why is the chancellor not taxing champagne when the only people who actually drink it the most are the rich fat cats and celebrities? A couple of quid on that instead of the poor man’s beer and wine would surely give him a lot more profit, wouldn’t it?
Mrs V Magson
Chris Giles: It was, I fear, just a gimmick so that Mr Brown could make a joke about toasting the England football team’s success in the world cup. Champagne duty raises barely any revenue, since it is drunk in much smaller quantities than beer or wine. There is currently a tax of £2.20 on a bottle of champagne and only £1.72 on still wine, so it is still taxed at a higher rate.
I must note, however, that Gordon Brown made exactly the point you made back in 1994 when Ken Clarke cut the duty of champagne. He told Ken Clarke, the chancellor at the time, “’Will you now explain to 10m pensioners and others on low income why you are so out of touch ... that you are clawing back the compensation for pensioners while you insist on going ahead with cuts in the price of champagne? ‘You are punishing pensioners when it is the Conservative party that should be paying the price for the government’s mistakes,’ he said.
Hasn’t he changed his tune.
The Budget appears to have increased the burden of inheritance tax for people leaving money for their offspring. Is there a way around this?
Maria Tozzi, London
Rob Budden: Inheritance tax used to be deemed the voluntary tax. This is certainly less the case now, even though Gordon Brown yesterday announced increases in the nil rate band for inheritance tax (the maximum amount that can be left to heirs without inheritance tax being levied).
In the current tax year that limit is £275,000. By the tax year 2009/10 it will have risen to £325,000. This is a modest increase but since Gordon Brown took over as chancellor in 1997, hikes in the IHT nil rate band have lagged far behind house price inflation, normally the biggest asset in peoples’ estates.
Separately, Gordon Brown announced new tax charges on “accumulation and maintenance” trusts and “interest in possession” trusts this week. Significant numbers of parents and grandparents have used these trusts as a tax efficient way of passing on wealth to offspring. But, following Wednesday’s Budget, these trusts are now much less tax efficient. The new measures will apply to trusts set up in the future and to existing trusts from 2008.
But one way of avoiding IHT still remains. This is the “potentially exempt transfer” or PET. The term “Pet” is a shorthand description of gifts that may (“potentially”) be considered outside your estate once you die. They are only “potentially” exempt from IHT because the donor has to survive for seven years after making the gift. After that, the money is outside the estate, provided it meets certain criteria. If you would like to find out more about Pets and inheritance tax in general, you can read a library of FT Beginners’ Guides online. Please go to: www.ft.com/beginnersguides
I wondering if the budget affects contractors in any way? I’m currently working as an IT contractor.
Vanessa Houlder: The Budget was potentially quite good news for freelance consultants and contractors, in the view of the Professional Contractors’ Group, which represents freelance consultants and contractors.
In particular, it highlighted a review of so-called “disguised employment”, in which employment income is disguised as dividends by “mass-marketed managed service company schemes”. It thinks this is aimed at stopping companies from hiring workers as contractors and then forcing them to work as if they were employees. It says this would be a good thing because companies wishing to hire contractors should do so on proper business-to-business terms.
The government’s review will also look at the relationship between income tax and national insurance contributions. This could offer an opportunity to address the legislation known as IR35, which has caused headaches for many contractors. It could also be a chance to simplify the tax regime for freelance consultants and contractors, which is notoriously complex.
In regards to the 50-year dated long-term gilts increase, do you think it is fair that the chancellor is borrowing money from our grandchildren to prop up the failing NHS and other government sponsored relics of the past?
Chris Giles: Yes, I think it is fair for the government to borrow by selling long-dated gilts. This is the cheapest way to borrow at the moment, so he is saddling our children and our grandchildren with lower debt servicing costs than if he borrowed in short-term financial instruments. The issue of the burden on our grandchildren is more to do with the level of overall borrowing and its sustainability than the financing options. On this matter, most economists believe the chancellor is borrowing a little too much at the moment and that it should be brought down by about 1 to 2 per cent of national income, either by higher taxes or by lower public expenditure growth.
In regards to road tax, which cars beside the 4x4 are classed as gas guzzlers and which cars are classed as the greenest? Is there a list?
Vanessa Houlder: Information about the new vehicle excise duty rates are available from the vehicle certification agency http://www.vcacarfueldata.org.uk/ved/ including a calculator to work out the VED rate for any particular car. More details about the new bands on vehicle excise duty are available on the DVLA website http://www.dvla.gov.uk/newved.htm. In addition, the VCA says that information can also be found in DVLA leaflet “INF96” which should be available at most motor dealers. Alternatively, it is available on request from DVLA, free phone number 0845 605222.
What has happened to the pre election budget promise of free public transport for pensioners, thus eliminating varying arrangements across the UK, and particularly its application in cases of any cross boundary travel between local authority areas?
Chris Giles: It is coming. Free local off-peak bus travel will be introduced in England this April for everyone over 60, and for all disabled people. Mr Brown’s new commitment in the Budget was to provide free national bus travel for pensioners from April 2008. The exact details of what constitutes an eligible bus journey is yet to be decided.
Can you please explain what will happen to the remainder of my pension if I choose the alternately secured (AS) option and then die? My daughter will be 25 when I am 75 so will probably not be in full time education anymore. My husband will be 71 then.
Deborah Evelyn, Oxford
Rob Budden: The chancellor has revealed more of the rules regarding the alternatively secured pension (ASP). The ASP is essentially a new pension arrangement that comes into force from April 6 this year that allows people aged 75 or more to draw an income directly from their pension fund, rather than purchase an annuity. (An annuity may provide an income for the remainder of your life but they are unpopular with some investors as they require you to hand over a lump sum payment to an insurance company).
Under the ASP, the chancellor has confirmed that your pension fund will form part of your estate for IHT purposes on death. However spouses, civil partners and charities will be able to receive pension fund assets without an IHT charge.
Advisers say that, when you go into an ASP, you should nominate your beneficiaries in much the same way that you would with a will. Under the ASP, if you were to die first, your pension fund would pass straight to your husband, without an IHT liability. If he were over 75, he would have to carry on drawing an income in line with the ASP rules. These rules insist that the maximum income withdrawn must be no more than 70 per cent of the income payable from a single life annuity, as defined by the government actuary. If your husband was under age 75 at the time of your death, the pension would fall under the more generous income drawdown rules. This would allow him to withdraw a higher level of income. But as soon as he reached age 75 the pension would then fall under the more restrictive ASP rules.
Your husband could then nominate your daughter as a beneficiary of the pension fund but it would then form part of his estate for inheritance tax purposes. You should also be able to draw up your ASP so that, should you outlive your husband, it would pass directly to your daughter (although again subject to IHT). But it is vital that these arrangements are structured properly so before you enter an ASP you should seek expert advice. Some in the pensions industry are also concerned that the government could introduce more restrictive rules on ASPs further down the line. In theory at least, some fear that if many people go down the ASP route for IHT planning, the government could seek to introduce more restrictive tax charges.
With regards to the tax relief for home computers being scrapped - does this take effect from the 1st April this year? On the same note does the tax relief for Cycle to Work schemes and Child Care vouchers still remain?
Chris Giles: The tax relief for home computers - or more precisely tax relief for computers loaned from work - will be abolished on April 6. The Budget notes are very unclear but an enquiry to HM Revenue & Customs elicited the response that people who have already got computers under the scheme will not have to start paying tax. It seems time to get your skates on if you want to benefit from this tax break.
The cycle to work and childcare voucher schemes remain, for now.
How much difference will the environmental tweaks in this year’s budget make?
Vanessa Houlder: The most eye-catching gesture in the budget was probably the decision to increase the road tax on cars emitting the most greenhouse gases while cutting tax on the cleanest cars.But that has been widely dismissed as merely symbolic. The extra tax for big gas-guzzlers will be around an extra £40 a year, “about the equivalent of a cappuccino a month” according to Friends of the Earth.
In general, though, the campaign groups were quite pleased with the Budget. Green Alliance welcomed the support for micro-generation, which could play a critical role in tackling climate change, by bringing solutions closer to people. The increase in climate change levy, the new energy research group and the extension of the tax breaks for biofuels were also viewed as important. But the table published by the Treasury in its “Red Book” on the environmental impacts of Budget measures suggests the new measures will have a modest impact, at least in the short run. Overall the measures will “collectively only make a small impact on emissions”, according to Friends of the Earth.
What would be the effect of announcing the abolishment of income tax on interest rates? Could the government introduce a tax system whereby individuals could defer their tax liability till the following year, if for instance they were expecting an expensive year this year?
Chris Giles: The simple effect of abolishing income tax on interest bearing accounts would be to bring savings taxation for accounts in banks and building societies into line with individual saving’s accounts. It would have the economic advantage of enabling people to be taxed once on their savings, not twice as at present (once when the income is earned and once when interest on savings is accrued) In economics jargon it would create tax neutrality between present and deferred consumption, and in English that means that people would be able to choose to spend their earnings today or in the future without regard to the tax system. The cost would be lost revenue for the exchequer. HM Customs & Revenue estimate that abolition would cost a minimum of £2.3bn, which is the amount collected from the 20% withholding tax on interest deposits in banks.
You could certainly envisage a lifetime taxation system which would allow people to smooth tax over their lifetime, but it would be horrendously complex and would involve people paying high tax in years when their income was temporarily low.
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