Budget Update: A Radical Sea Change

In the second of our budget updates, John Newth, Deputy Editor of Taxation Magazine examines the implications of this budget and warns that next April's version will be far more radical.

How does the July 1997 Budget affect the elderly client? The following are a few pointers:

* Inheritance tax and capital gains tax changes have not been addressed at all. This gives taxpayers and their advisers eight months to complete current tax planning - assuming that any future tax changes are not retrospective.

* Existing pensioners should be relatively unaffected by the impact of the withdrawal of tax credit relief on pension funds. However, younger taxpayers paying into personal pension schemes and employee money purchase schemes will be affected adversely, and will need to increase their funding in order to achieve their projected pension.

* Tax relief for premiums paid by the over-60s into private health schemes has been withdrawn. The Government stated that only 'well-off' pensioners were retaining cover in any case, although this is doubtful. In theory there will be additional pressure on the beleaguered National Health Service, which has been voted additional funds.

* Pensioners with mortgages will lose at further 5 per cent tax relief on the interest payments from 6 April 1998.

* The combination of the withdrawal of tax credit relief and the windfall tax will have some effect on investment returns. The Budget provisions themselves will, of course, affect share prices.

* Investment opportunities through PEPs and TESSAs are retained, and indeed encouraged by the new Government. The promise of new individual savings accounts is intended to stimulate interest from those who have never saved before.

* The rate of VAT on fuel and power is to be reduced to 5 per cent from 1 September 1997. This will benefit all taxpayers, but those with larger properties the most.

* Stamp duty on house prices is increased to 1.5 per cent for properties in excess of £250,000 and to 2 per cent for properties purchased for more than £500,000. Provincial houseowners may regard these increased as reasonable, but an elderly client living in the London area would not regard a house purchase price of £250,000 as high!

* The Chancellor has taken steps to deal with some environmental and health matters - at the same time raising some revenue. Financial restrictions are therefore placed on car drivers by means of increased excise duty on petrol and a higher licence fee, and on drinkers and smokers by an increase in duty on cigarettes and some alcoholic drinks.

The future

However, as stated, more radical measures will be taken in future Budgets. One of the Chancellor's objectives is to make a general attack on 'unacceptable tax avoidance'. Some measures are announced in the current budget, but estate planners have to be concerned about devices such as deeds of variation and even the potentially exempt transfer for inheritance tax purposes.

More sophisticated schemes involving trusts and offshore arrangements must be under Treasury consideration. An additional worry is that the classic distinction between tax avoidance and tax evasion could become blurred or even disappear.

The consequences of this could be quite disastrous for estate planners, as it would raise the spectre of the imposition of a whole range of tax penalties and interest on tax, let alone investigation by Revenue agencies.

Such a possibility needs to be taken seriously, as we now have a Government committed to radical change, and backed by the general public's perception of tax avoidance by the wealthy as an unacceptable abuse.

Long-established case law commencing with W T Ramsay Ltd v Commissioners of Inland Revenue [1981] STC 174 and Furniss v Dawson [1984] STC 153, and proceeding to Craven v White [1988] STC 476 and then to the recent case of Commissioners of Inland Revenue v McGuckian [1997] SWTI 741 is therefore under threat.

Although Lord Templeman has retired as a law lord, the Lord Chancellor is closely associated with the Prime Minister, and it is likely that the new Government's aims will be reflected in future fiscal decisions by the judiciary. Practitioners would not welcome a return to the climate of the Inland Revenue raids which prompted R v Commissioners of Inland Revenue ex parte Rossminster Ltd [1980] STC 42, but we now have a Government which is unlikely to distinguish between tax avoidance and tax evasion. Tax planners beware!

John Newth FCA, FTII, FTIIT, Deputy Editor, Taxation Magazine