The Government’s Pre-Budget Report (PBR) – issued slightly earlier than usual this year, on 9 October – prompted the usual opposition catcalls and pontification from the tax-planning profession over whether the proposed changes are the right ones for the UK economy, businesses and the general public. There was plenty of information to digest, so what are the main points set to affect the UK’s savers and investors?

Economic growth

The least surprising element of this year’s PBR was Chancellor Darling’s downward revision of UK economic growth. Making his statement to Parliament, he highlighted the ‘increased international economic uncertainty’ that was the background to the report.

He added that, with the full impact of turbulence in international markets still unclear, the Government would remain cautious, and so announced his forecast for growth in 2008 at two to 2.5 per cent. The previous figure was 2.5 to three per cent. However, growth will be back at 2.5 to three per cent by 2009, according to Darling, ‘in line with the economy’s trend rate of growth and in line with the forecast in the [2007] Budget.’

Simon Ward, economist at New Star Asset Management, observed that ‘This forced the Chancellor to push back projected improvement in the public finances but the current budget still miraculously returns to surplus in 2009-10. Risks are high, however. The forecast depends on an optimistic-looking growth rebound in 2009, as well as adherence to restrictive public spending plans and a further rise in the revenue share of gross domestic product.’

Both the Conservatives and the Liberal Democrats, unsurprisingly, picked up on this thread, with LibDem shadow Chancellor (and now acting leader) Vince Cable calling on Darling to give ‘his risk assessment of a recession in Britain.’

Meanwhile, Tory shadow Chancellor, George Osbourne, criticised the prime minister for not preparing public finances for an economic slowdown and public services for a spending slowdown.

Inheritance tax

Perhaps in response to Conservative promises to increase the threshold to £1 million at the party’s conference in September, Darling made his own announcement about inheritance tax (IHT). ‘I want to ensure that husbands and wives can benefit from each other’s unused inheritance tax exemptions,’ he told the Commons. ‘So I will raise the total amount of inheritance for married couples on which no tax is paid. And this will apply to civil partnerships too.’

This sounded great at first, but the devil was in the detail. ‘From today, I can announce that the combined tax-free allowance for their estates will not be the current £300,000, but up to £600,000. By 2010, the combined tax-free allowance for couples will rise to £700,000.’

Even the Chancellor’s promise to indefinitely backdate the change didn’t make some commentators happy. Howard Burns, a wills and probate lawyer at national law firm Lewis Hymanson Small, said, ‘In his last Budget report, Gordon Brown increased the threshold from £275,000 to £300,000 per person. This means that, prior to this year’s Pre-Budget Report, couples with properly prepared wills could already leave up to £600,000 tax free to heirs.

He also pointed out that ‘Brown also pledged to increase the IHT threshold to £350,000 per person by 2010. Again, this amount is no different to the £700,000 rate that the Chancellor is promising by 2010. Essentially, the Chancellor’s nil-rate band increase is a con and will have no added financial benefit for married couples.’

Darling claimed that the new allowance would be more than the value of 97 per cent of UK homes. According to Halifax, however, the remaining three per cent amounts to 600,000 UK properties that will still be subject to IHT. This is 80 per cent fewer than the three million properties valued above the £300,000 threshold. Halifax calculates that in the 2006/07 tax year, 33,000 estates were estimated to have paid IHT, compared to 18,000 in 1997/98. The bank says that the IHT threshold has risen by 95 per cent since 1995, from £154,000 to £300,000 in April 2007.

So what about those who have spent time and money ensuring that their wills account for both allowances? Has all this hard work gone to waste? Not according to Fiona Graham, partner and financial planning expert at Boodle Hatfield. She explains, ‘At this stage it appears that no major [will] redraft is required. Darling has anticipated this outcry and has specifically confirmed that, instead, the will can be rearranged within two years of the first death to get back to ‘square one’.’

She adds, ‘For those people who prefer simplicity – and after years of lawyers advocating long will documents incorporating trusts galore – a one-page will leaving everything to the survivor may now be just as good an alternative.’

Capital gains tax

The other personal taxation change proposed by Darling in the latest PBR was the introduction of a new single flat rate of 18 per cent for capital gains tax (CGT) and an end to taper relief. He claimed that those working in private equity would ‘pay a fairer share’ thanks to this change.

Although the Liberal Democrats condemned the Government’s reforms in this area as a shambles, Vince Cable did admit, at a post-PBR conference for the British Venture Capital Association (BVCA), that the tax system would be simpler without taper relief, saying, ‘There is no justification for complex taper relief and no justification for treating capital gains differently from other forms of income.’

Clive Mackintosh, tax partner and head of private clients at PricewaterhouseCoopers, says, ‘Significant changes to CGT have been announced in the PBR with the introduction of a flat rate 18 per cent on all gains realised by individuals. Previously there had been a differential rate between business and non-business assets.’

He adds, ‘The rate on business assets held for more than two years will increase from ten to 18 per cent, but there is a significant reduction in the rate for non-business assets such as second homes and quoted shares, which was previously between 24 and 40 per cent, depending on how long the property was owned.’

The news is also good for business owners, according to Peter Penneycard, tax partner at PKF, an accountancy and business adviser. ‘Business owners looking to sell up can now do so at a time of their choosing without having to hang on to earn the maximum taper relief. Darling has also removed the difference between business and non-business assets, so at a stroke the whole system has become infinitely simpler for hundreds of thousands of business owners,’ he says.

Pensions

With regard to pensions, the major change was the Government’s draft legislation to bring pension scheme inheritance into line with alternatively secured pension (ASP) inheritance rules.

Jerry McLoughlin of Punter Southall Financial Management says, ‘This reinforces the Government’s intention not to allow pension funds to be passed on to the next generation beyond the age of 75, despite the amount of industry lobbying in this area. Therefore, using pensions as your main means of retirement planning, while a tax-efficient method, should be solely seen as providing for your own/your spouse’s needs in retirement and not as a way of passing an asset to the next generation.’

John Lawson, head of pensions policy at Standard Life, agrees with the creation of a level playing field between ASP and scheme pensions, but adds, ‘The tax rate of 82 per cent applied to inheritances under both types of pension seems unnecessarily punitive and will not do anything to encourage more pension savings.’