Some Thoughts On The Chancellor’s Pre-Budget Report

The media made much mileage this month of Gordon Brown’s opportunistic ‘acquisition’ of the inheritance tax issue from the Conservatives’ bag of tricks. His partner-in-crime, Chancellor Alistair Darling, announced in his Pre-Budget Report that the government would be raising the inheritance tax threshold for couples, allowing them to jointly pass on £600,000 of their already-taxed money to their loved ones without being taxed another forty percent.

With the Conservative Party’s conference announcements on inheritance tax (IHT) being exceptionally well received by the electorate, death duties had become a central political issue. The sharp rise in house prices in recent years has pushed many more hardworking families over the IHT threshold, making the tax one of the most unpopular and unfair now levied on the public. My opposition to inheritance tax predates my entry to parliament but since my election I have continued to make clear my views on this unfair form of double taxation. Behind closed doors, most Conservatives felt the same but it is only recently that they have braved the worst kind of class war rhetoric to raise this important issue again.

By playing on the new-found popularity of the IHT issue, Alistair Darling managed to grab some cheap headlines whilst effectively changing very little. Each individual in a married couple already had a personal allowance of £300 000 before IHT kicked in and most couples were able to reap the advantages of a £600 000 joint allowance through the careful rearrangement of house deeds and the setting up of wills and trust funds.

Worryingly, however, in grabbing the headlines with the inheritance tax issue, Mr Darling was able to distract the media from some of the less palatable aspects of his hastily composed announcements. Mr Darling’s Pre-Budget Report was not the tax-cutting, equalising and simplifying paper he proposed it to be. It was in fact a highly political document with far-reaching and potentially damaging economic consequences.

The private equity industry has come in for a barrage of criticism in recent years for managing to exploit and profit massively from a system of low business taxes. Mr Darling clumsily addressed this issue in the Pre-Budget Report by scrapping taper relief and introducing a flat rate for capital gains tax of 18 per cent. As the Shadow Chancellor George Osborne neatly put it, Darling had opted to ‘use a sledgehammer to crack a nut.’ In other words, to deal a token blow to the private equity industry, the Chancellor is proposing to implement changes which have the potential to seriously harm small businesses and other wealth creators.

Taper relief was introduced by the Labour government in 1998 and was lauded as one of its most successful measures for encouraging entrepreneurs. It was intended to reduce the capital gains tax (CGT) that an individual had to pay when disposing of an asset. Once a business asset had been held for two years, the rate of CGT payable on sale would be reduced from 40 per cent to 10 per cent. It rewarded people who held their unlisted shares for longer periods and therefore encouraged investors to back entrepreneurs setting up new businesses.

By removing such a system, investors will inevitably be more cautious about involving themselves in fledgling enterprises. Likewise entrepreneurs ? this nation’s real wealth creators and employers ? will face greater risks when establishing their businesses. This will also affect those employees who have shares in their employer and who currently benefit from a reduced rate of tax.

It is now thought that more small companies will go into liquidation as a result of the Chancellor’s changes and a big sell off of shares will be triggered before his proposals are implemented in April 2008. With this in mind, prospective buyers of small companies are likely to lower their offers, knowing that owners will be keen to sell before the new less generous (from their perspective) tax rate comes into force.

Mr Darling advertises his proposal as a means of restoring fairness to the system, closing the mechanism private equity companies use to gain such vast wealth. But in targeting a few rich individuals, the Chancellor looks to have created an air of instability and uncertainty in the business community which will affect everyone from share owning employees to budding entrepreneurs.

In addition to the taper relief announcement, the Chancellor quietly raised his borrowing forecast for the year and hid the rest of his borrowing by pushing it into the future. The government now hopes to raise £581 billion from taxes in 2008/09 ? nearly 40p in every £1 earned in Britain. This is a colossal amount and is surpassed only by government expenditure which now accounts for more than 42 per cent of the economy. The mortgaging of our future in this way is a serious issue and it is a matter I have already raised personally with the government for fear of what lies ahead for the young workers of today.

Whilst some political commentators will have revelled in the wily manoeuvring which preceded – and the entertaining uproar which followed – the Chancellor’s Pre-Budget Report, there are very serious implications to his announcements which I fear may significantly damage the wealth creating part of our economy. Mr Darling’s stunt over capital gains tax certainly is unlikely to reap him lasting political capital. Meanwhile the owners of small businesses across the land, entrepreneurs of the future and employees will not be thanking him for his hastily put-together package of reforms.