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A team of experts, including FT journalists Chris Giles, Robert Budden and Vanessa Houlder, answer your questions on personal finance, tax and the economy following Gordon Brown’s pre-Budget report on Monday.

Answers appear at www.ft.com/pbrquestions

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Has the idea of putting fine wine, residential property and yet more exotic investments in your pension now been fully stamped out?

Peter Francis, Dulwich

Robert Budden: The short answer is yes. A briefing paper accompanying the pre-Budget report had the following to say about self invested personal pensions (Sipps) - these are pensions which already enjoy wide investment freedoms, for example permitting investors to buy stocks and shares or commercial property: “[Sipps] will be prohibited from obtaining tax advantages when investing in residential property and certain other assets such as fine wines.”

This u-turn will cause a lot of pain for some investors who have been setting up Sipps in the hope of making use of the planned A-day investment freedoms which were to have been introduced in April next year. These investors will still be able to use their Sipps but it will make no sense for them to use the money tied up in their Sipp to buy directly into residential property or other alternative assets such as fine wine or classic cars. Investors will still be able to access residential property as an asset class but only via funds such as the soon-to-be-introduced Real Estate Investment Trusts (Reits).

To what extent are the public finances boosted by Gordon Brown’s projection that public spending will begin to fall as a share of national income?

J Gabriel, London

Chris Giles: There has been quite a lot of confusion over the medium-term public finance projections with many people, including respected commentators such as the Institute for Fiscal Studies, pointing out that public expenditure on day-to-day items as a share of national income is now projected to fall from 39.3 per cent of GDP in 2006-07 to 38.6 per cent in 2010-11. The IFS calculated this as a £9bn spending squeeze.

Very uncharacteristically, the IFS have made a bit of an error in its interpretation of the sums. The bald facts are these. The Treasury is planning to spend a little more than it was in the Budget - £1bn more every year until 2009-2010. It is true that there is now a big decline in the spending share of national income, but this has nothing to do with projections for public expenditure and everything to do with the government’s projections for national income.

Slower growth in 2005 and 2006 cut the Treasury’s forecast for GDP, and pushed the forecast spending share in 2006-07 up from a forecast 38.6 per cent in the Budget to 39.3 per cent in yesterday’s pre-Budget report. This had nothing to do with a spending splurge, just slower growth.

The opposite thing happens after 2007, since the Treasury assumes a big bounce-back in economic growth, raising GDP faster than previously forecast and bringing down the projected proportion of public expenditure in GDP. The fall in spending as a share of GDP, again has nothing to do with tighter spending settlements and everything to do with an assumption about faster growth.

The IFS and other commentators seem to have forgotten how fractions work. The outcome can depend on the denominator as well as the numerator.

The sad truth is that at present almost nothing can be said about public spending later in this parliament - we’ll have to wait for the 2007 comprehensive spending review to find out. If Mr Brown keeps spending growing at its current rate, he will have to raise taxes; but given the precarious nature of the public finances, he might have to do that anyway

Has Gordon Brown made any changes to the tax treatment of AIM listed companies - for example changing Venture Capital Trust tax relief, or changing business property relief as applied to AIM listed companies ?

Justin Jordan

RB: There did not appear to be anything on the tax treatment of Aim listed companies in the briefing papers accompanying the pre-budget report on Monday. There has been a strong increase in companies seeking listings on Aim, the junior stock exchange, partly drawn by the tax perks that this exchange offers shareholders. Currently, many Aim shares fall outside of an investor’s estate for inheritance tax purposes if held for at least two years. There are currently around a dozen or more stockbrokers and fund managers that offer Aim stock portfolios purely designed to shelter investors’ assets from inheritance tax. Some Aim shares also attract EIS reliefs which means the an investor receives both income tax relief on their investment as well as capital gains tax deferral relief. Silence on all these tax perks in the pre-Budget implies that these reliefs are safe for the time being. But there is no guarantee that they will not be tweaked or watered down in the Budget next year.

On VCTs the government did say a little. This is the exact quote: “The Government remains committed to ensuring the long-term sustainability and success of the VCT market, and will announce the future level of VCT reliefs at Budget 2006. The intervening period will allow further analysis of trends in the VCT market and continued dialogue with key stakeholders.”

What does this really mean? The truth is it’s hard to tell. But it is fairly likely that some tweaks to the tax treatments of VCTs will be made in the Budget. In the last tax year, VCTs - these are funds which invest in small and unquoted companies - raised a record £520m. This was because Gordon Brown announced a temporary increase in the income tax relief on VCT investment from 20 per cent to 40 per cent. This generous 40 per cent relief remains for VCT investments made in the current tax year. But there are signs that some VCTs, having raised so much cash, are finding it tough to find enough decent investment opportunities. The income tax relief could be reduced in the Budget for the next tax year as a means to dampening investor appetite for these funds. Some believe income tax relief could be brought back down to 20 per cent, or it could even be brought down in stages, say to 30 per cent in the next tax year and to 20 per cent in the following tax year.

If Gordon Brown does chop the income tax relief on VCTs to just 20 per cent, he could introduce other tax perks to sweeten the pain for future investors. This could perhaps see CGT deferral relief reinstated. Or he could even introduce IHT relief for VCTs, similar to Aim shares. But until we see next year’s Budget, I’m afraid this is all just speculation.


Will Gordon Brown’s decision to double the levy on oil companies affect investment in UK oil and gas?

Carl Inch, Ealing

CG: The short answer is yes. The effective corporation tax rate on North Sea oil profits will rise from 40 per cent today (30 per cent standard rate plus 10 per cent supplementary rate) to 50 per cent, now that the supplementary rate of corporation tax will be doubled to 20 per cent from next April. This increases the effective cost of capital for companies and will make them think twice about risky investment projects, where there was some risk that profitability might not be high.

If the oil price falls back, as many oil companies believe it will, the increase in tax makes their investment calculations even more marginal.


Has a decision been taken re removal of derogation on red diesel?

Tony Palmer

Vanessa Houlder: The pre-Budget report said that the government was minded to apply to the European Commission for an extension of the derogations for fuel used in private air and pleasure craft navigation, liquid petroleum gas and natural gas used as motor fuel and waste oils reused as fuel. But it also said it would issue a regulatory impact assessment on the effects of ending the derogation for private please craft early next year. This would be used as the basis for more information gathering and discussions.

The Treasury also announced a rise in the duty on red diesel - rebated gas oil - of 1.22 pence per litre. This is designed to reduce fraud, which costs the government about £700m a year. It also announced the exemption for duty of rebated oil from electricity generation from 1 January 2006.

The FT has reported that the Revenue is to crack down on the use of dual contracts of employment by non domiciliaries. Does the pre- Budget Review give any indication as to how the subject of taxation of non-domiciliaries generally is to be dealt with in future ?

Paul K. Wood

RB: There was nothing in the pre-Budget report specifically on the Inland Revenue crackdown on dual contracts. These contracts have been given to City workers who are non-domiciled in the UK and who do some work outside of the UK. The aim of these contracts is to remove a slice of the individual’s income outside of the UK for tax purposes with the aim of reducing the employee’s overall tax bill. Silence on this particular issue is not necessarily good news. Tax accountants do not expect the Revenue to relax its focus on dual contracts. Accountants say the Revenue is looking closely at dual contracts and that it is likely to put a stop to them where it believes that they are being used artificially to divide a job into two separate roles purely for tax planning purposes.

However, on the wider issue of the tax treatment of non domiciles, there was a little in the pre-Budget report. Point 5.103 of the full report states: “The government is continuing to review the residence and domicile rules as they affect the taxation of individuals, and in taking the review forward will proceed on the basis of evidence and in keeping with its principles.”

Currently non domiciles pay UK income tax on their UK earnings but they can avoid paying UK tax on assets held offshore. The statement from the pre-Budget report confirms that this issue is still very much on the government’s agenda.

Is there any indication of accountants and lawyers facing a one-off tax charge and, if so, of that being spread over a number of years?

P F Chapman, London

VH: Yes, the government announced some good news for many accountants, lawyers, other professional firms and tradesmen, who have been concerned about a one-off tax charge that is likely to result from a new accounting standard on work in progress. In the PBR it said it would legislate to spread this extra tax charge over three years, while the most severely affected would be able to spread the charge over six years.

The new accounting standard – known as Urgent Issues Task Force 40 - had threatened to put up many firms’ tax bills by 50-100 per cent in the year it was introduced, without generating any additional cash to pay for it, according to research presented to the Treasury by the Law Society and the accountancy bodies.

Do you think the proposed planning gain tax on landowners will deter developers from building new homes? It seems at odds with the chancellor’s statement that he will increase stocks of affordable homes.

Joan Matthews, Nottingham

CG: This is very difficult. There are already planning gain agreements with local authorities - called Section 106 agreements. So a universal planning gain supplement might make developers more or less willing to develop land.

In general, you would expect a tax to discourage an activity, but the gains from planning permission approval in terms of increased land price are so large that a modest planning gain supplement is unlikely to have much effect. What is needed, however, is an estimate of the responsiveness of building to potential tax rates, taking into account the existence of Section 106 agreements - and I’m afraid I do not have one to hand. I don’t think one exists. Certainly, the Treasury only included the most perfunctory cost-benefit analysis in its consultation document on Monday.

The sport-minded are perplexed that Gordon Brown made no mention of their getting the large injection of funds they feel the UK needs for success when the Olympic games come to London in 2012. Did he just forget about them, or do you think he has a later announcement planned?

Frank O’Connor, Welwyn Garden City

CG: Most of the planned expenditure will come from existing revenues from the national lottery and a surcharge on London’s council tax payers. Any remaining calls on the public purse will be dealt with in the 2007 Comprehensive Spending Review , which will set detailed public expenditure plans for the years 2008-09 to 2010-11.

Can a SIPP, new or existing, invest in residential Buy to Let without having the tax relief perk? I have an existing SIPP and want to sell it, at market value, a buy to let apartment I already own so as to broaden its asset allocation?

Rob Mitchell

RB: Technically a Sipp will be able to invest in residential property but the tax penalties will be so significant that it will not make any sense to do so. There will also be tax charges on the Sipp trustees that allow direct investment in residential property so even if you wanted to do it, you are likely to find it near on impossible to find a trustee willing to sanction a direct investment in residential property.

Under the new rules, an investment in residential property will be deemed an “unauthorised payment”, as such you will be hit with a 40 per cent tax charge. In addition, the scheme - in this case the Sipp trustees - will be hit with a 15 per cent charge. Further you will lose the other tax perks associated with holding assets in your pension. Rental income will be taxed at 40 per cent and gains in the property’s value will be taxed at 40 per cent. Finally, if the property purchase represents a large proportion of your pension fund assets, there will be further tax charges. One actuary has calculated that, in some scenarios, there could be total upfront tax charges and penalties of £104,000 on the purchase of a £100,000 residential property within a Sipp.

I was ploughing through the coverage of the Chancellor’s pre-budget report when I stumbled accross the abolition of the 19 per cent tax on dividends and the 0 per cent band on the first £10,000 of profits. This is being ‘simplified’ to a starting rate of 19 per cent I understand, coupled to higher capital allowances. It seems that the Chancellor is attempting to encourage businesses to invest rather than distribute profits. This strikes me as possibly a step towards higher corporate taxes overall eventually to try to force business to invest. I wonder if there’s a danger that the process will become one of annual ‘simplification’ towards the 30 per cent rate for all businesses if investment doesn’t do as it’s told.

Andrew Wright, Archaeologica Ltd, Milton Keynes

VH: This “simplification” is certainly lucrative for the Treasury. Its move to tackle “tax-motivated incorporation” by introducing a single 19 per cent rate for small businesses is expected to yield £530m by 2008-09, while the increase in capital allowances to 50 per cent will cost the Treasury just £60m in 2007-08.

Could this kind of move be repeated? It seems very unlikely. It makes more sense to view this latest change to the taxation of small businesses as the end of a chapter, rather than the start of a new one.

It is an attempt to clear up the mess that was left after the Treasury introduced its zero per cent rate in 2002, which was designed to stimulate the growth of small businesses. The tax change prompted a scramble to incorporate by many sole traders wanting to lower their tax bills. In 2004 the Treasury tried to clamp down on what it saw as an abuse – but what many other commentators viewed as a legitimate response to an incentive – by restricting the zero per cent rate to small businesses retaining profits their company. This was widely viewed as a clumsy and complicated compromise, which many companies found incomprehensible. Monday’s announcement has at least introduced some simplicity into companies’ tax affairs – although, for some, it will come at the cost of a higher bill.

Chancellor Brown has advised that the purchase of Holiday Homes will not be allowed under Sipps in 2006.

Current UK based Furnished Holiday Homes are treated by the Revenue as a business asset and as such generous tax breaks are available. ie CGT reduces to 10 per cent if the property is held for two years and any losses that are incurred in the year can be offset against personal taxation paid in previous years.

My question is : Has the Chancellor changed any of the existing tax breaks that apply to Holiday Homes or has he solely referred to Holiday Homes to be purchased under a SIPP?

Mike Lawson

RB: To be precise, the Chancellor has referred to all forms of direct property investment in Sipps in his tightening up of the rules. So his changes cover not just holiday homes but also buy-to-let properties and even putting your own home in your Sipp. Under the briefing paper released on Monday, all these types of direct investment in residential property within a self invested personal pension (Sipp) will not attract the generous tax reliefs of pensions and will in many cases be subject to additional punitive tax charges.

With regard to holding UK-based furnished holiday homes held outside a Sipp, the generous tax breaks that you refer to continue to apply. In order to qualify for these perks, the holiday property must be available for let for 140 days a year and it must be let out for 70 days a year. The property must not normally be let out for more than 31 consecutive days to the same person.

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