Discussion on today's mega budget

22nd Jun '10 by doverbeach

12 comments 6006 reads

Here is the BBC's summary; http://news.bbc.co.uk/1/hi/politics/10374475.stm

I am glad I spent some time sorting out old positions with accumulated CGT a few weeks ago - but I am not sure that 18% => 28% will make people rush to close old positions this afternoon.

db

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Doverbeach

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12 comments

emptyend

22nd Jun '10

Very interesting budget. Still trying to get my head round the implications but I'm reminded of the time when, back in 1979, Mrs Thatcher got elected. As someone who was employed in the public sector at that time, I very swiftly concluded that it would be very much better to make a move into the private sector - and I suspect (with an average 25% cut in spending across most departments) that many public sector employees will draw a similar conclusion this time round.

Very interesting to see the regionally-targetted incentives re Nat Insurance and other matters - and that must surely give encouragement to businesses to set up away from London and the south east (and east, I note, with more surprise).

VAT rise next year no surprise really. Good to see caps on housing benefits and the intention to re-examine disability allowance claimants from 2013 - those who have spent their lives gaming the benefits system look likely to find things much tougher in future......and they may well be better off biting the bullet now at an early stage and reorganising their lives accordingly.

Good news for pensioners too re indexation - and for the low paid re raising income tax threasholds.

Surprising to see no changes to duties at this point (Mrs ee says I should send back my pre-emptive wine purchases from yesterday). Not surprising of course to see the CGT rise - but very good to see that he has limited the rise to 28% (and protected those on low incomes) to forestall many of those who flip income into capital gains (or vice versa).

Shameless politicking from Labour in response - shows just how morally bankrupt and corrupt that party has become in recent years!

Fangorn

22nd Jun '10

Have to say from a quick glance of the main points the budget wasn't as brutal as I was expecting, particularly in relation to the speculation surrounding CGT - talk of 40% and the threshold being reduced to the Libdems target of 2500 failed to materialise. 28% for high rate taxpayers is more than fair imv.

Thankfully no further taxes on Alcohol, tobacco or fuel either(that will no doubt come next year!)

Good to see the welfare cuts coming into play,and its perfectly reasonable for those on 40k plus to lose child benefit imv, they really don't need it,and the marginal benefit they obtain is far outweighed by giving those that really need it a little bit extra. As for housing benefit, it's frankly ludicrous that this was ever being paid at a rate higher than 400 pounds per week(400 is now the cap). Are we giving those claimants luxury apartments or something in the capital? Sixteen hundred pounds a month outside of london buys quite alot doesn't it on the rental front? Hell, where I am living the houses cost 600k plus and the rental is 2000-2200 per month. Housing benefit needs to be cut further imv.

Has anyone done a costing of the likely net reduction in the government debt post all these cuts,VAT hikes, and seeming tax giveaways(Corporate tax reduced, Personal Allowance raised to 7475.)

All in all am fairly pleased with this, particularly after all the talk of everyone being alot worse off. Pretty sure the public sector strikes will be imminent however.

Fangorn

22nd Jun '10

hmmm on closer inspection the CGT changes don't look so acceptable.

It seems that, contrary to the belief that only those in the higher income tax brackets will be paying the new 28% (basic income tax payers pay 18%) what we have now is a threshold determined by "Total income", namely Income Tax + Capital gains. Thus if you earn 20k pa, and make 25k capital gains you are now apparently liable for the higher rate of CGT!! Missed that first time round. Bit of a stinker IMV.

Treasury documents make it clear that an individual’s gains will be added to their income when assessing whether they remain basic rate taxpayers for the purposes of the new higher rate of CGT. So, anyone whose income and gains exceed £43,875 will be liable to pay 28 per cent rather than 18 per cent CGT on gains made after midnight tonight. That’s a big difference and may seem very unfair on people with lumpy assets, such as second homes, which – unlike shares – cannot be sold in small parcels to stay within annual allowances or limits.

Still could've been worse I suppose although I'd wager this little trick will catch a fair few people out. So essentially a bit disingenuous of the new chancellor to claim that the new CGT is only for higher rate income tax payers when in fact it will actually apply to nearly everyone...........

kinkell

22nd Jun '10

I suppose we need to see it as the price we have to pay to rid ourselves of what has been referred to above as a "morally bankrupt and corrupt" party from power. That makes it a little more palliative to me!

Impvesta

22nd Jun '10

It seems that, contrary to the belief that only those in the higher income tax brackets will be paying the new 28% (basic income tax payers pay 18%) what we have now is a threshold determined by "Total income", namely Income Tax + Capital gains. Thus if you earn 20k pa, and make 25k capital gains you are now apparently liable for the higher rate of CGT!!

But the higher rate of CGT doesn't apply to the full gain of 25K, only that portion which takes the taxpayer into the higher rate bracket. Seems fair enough to me, and a lot better than I was anticipating!

Fangorn

22nd Jun '10

True Imp, but it's still a bit much to pay the same CGT as higher rate taxpayers because you have managed a large capital gain despite being on a relatively low income! Harsh on those who've retired(with second homes/buy to let homes to suppliment a low income). This is essentially a penalty on success or risk taking to provide one with a better retirement income(so as not to require state taxpayer funded support!)

It was however alot better than i was expecting too.

dodge1664

22nd Jun '10

they've kept the £10k CGT annual allowance though - that must help, especially for equity investors who are in a position to maximise their use of it. There's also still the ISA tax shelter.

snaj

23rd Jun '10

Some more clarity on the CGT change from Skandia...

"An example provided by HMRC illustrates how these changes might work in practice:
In 2010/11 X's taxable income, after all allowable deductions and the personal allowance, is £27,400. The upper limit of the income tax basic rate band is £37,400. X sells an asset in May 2010 and realises a chargeable gain of £17,000. In November 2010 X sells another asset, realising a chargeable gain of £25,100. X has no allowable losses to set against these gains, and the AEA for 2010/11 is £10,100. Neither of the gains qualifies for entrepreneurs' relief.

X's taxable income is £10,000 less than the upper limit of the basic rate band (£37,400 - £27,400). X sets the AEA against the later gain (because part of that gain is liable to tax at the higher CGT rate), leaving £15,000 taxable (£25,100 - £10,100). The first £10,000 of the £15,000 is taxed at 18% and the remaining £5,000 is taxed at 28%. The £17,000 chargeable gain X realised in May 2010 before the change of rates on 23 June 2010 is taxable at the old 18% rate."

Another relatively overlooked plus point is the ending of compulsory 'annuitisation' at age 75 from April 2011 - combined with other sensible pension change proposals, we may not only postpone the detonation of our demographic timebomb but the quantum of explosive involved may also reduce, as pension saving becomes more attractive to more people.

ee hits the nail on the...erm...elephant in the room which is that although there is much discussion about VAT, CGT etc, reducing non-ringfenced departmental spending by an average of 25% is by far the most significant announcement today - only thing is we have to wait until the autumn spending review announcement to see the details.

My speculation: a winter of discontent would not be surprising and then we'll see if the coalition survives deep LibDem discomfort from the ex-leaders, Hughes etc. If the country gets through all that, either with coalition intact or a second GE with a clear Conservative majority the economic future is likely to be bright with a shrinking state & Osborne's private sector-led recovery!

dcomd99

23rd Jun '10

One thing which I think has been missed is the change to annuities

http://www.telegraph.co.uk/finance/personalfinance/how-budget-affect-me/7847384/Budget-2010-annuity-rule-scrapped.html

This could be massive, IMV. Life companies have an impossible task (all the important variables are completely unknown!) when trying to value an annuity properly, so they must be very cautious. This means they are very bad value.

We need to wait until next year for the details, but I believe they will want to make them attractive.

emptyend

23rd Jun '10

Very good points from you and snaj.

I also hope that annuities will be made more attractive, as I'm now only 4 years from potentially taking one or more. However, one must be wary of disingenuous comments like this from the Telegraph article that you quote:

With annuity rates at a 20-year low, many savers are reluctant to hand over all their pension assets to an insurance company. Twenty years ago a £100,000 pension fund would have secured an annual income of £15,600 for life; today it buys just £5,860.
Annuities are often perceived as poor value for money because once an annuity is bought the entire pension fund belongs to the insurance company. Even if the annuitant dies just a couple of years later, the insurer keeps any surplus funds in the pension.

This is a comparison between apples and oranges. The inflation environment and the expected returns from investment were both substantially higher 20 years ago than they are today. In the last 5-10 years I've been keeping an eye on annuity rates - and they have generally (always) been in the 5-7% range for 60 year old male annuitants, so the current low rates aren't a particular shock. Indeed I'd think that the high rates available through the 1970s and 1980s will prove to be a historical anomaly.

Nevertheless - there can be significant differences between annuity providers (illustrated here) and so greater competition (and portability) is to be welcomed.

I also note from the article that the marginal tax rates on any pension entitlements in one's estate appear to be 82% - which I certainly wasn't aware of and which, if true, are a major disincentive to delaying too long in taking an annuity.

dcomd99

23rd Jun '10

82% only applies if you are over 75. Gordon made it very unattractive. I think it will need to become be become much more sensible. (40%?)

dodge1664

23rd Jun '10

I'm a little surprised that X can elect to offset the AEA against the November gain rather than the May one, but if that's what HMRC are saying...

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Discussion on today's mega budget

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Doverbeach

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