Stamp on stamp duty, give us a break on IHT

Sam Dunn on the industry's tax hopes for the pre-Budget report

It began seven years ago as a simple revamp of the Chancellor's autumn state- ment on the nation's economic health. But now the pre-Budget report (PBR) has become political theatre.

It began seven years ago as a simple revamp of the Chancellor's autumn state- ment on the nation's economic health. But now the pre-Budget report (PBR) has become political theatre.

The 10p starting rate of income tax was first unveiled by Chancellor Gordon Brown in a PBR, while last year's report revealed that residential property holdings could form part of a pension fund.

This Thursday, Mr Brown delivers his last PBR before an expected general election next year. In such a political climate, his speech will be scrutinised for clues to future policy on personal taxation. Members of the financial services industry will pore over his words for any signs of changes in the wind - changes that will ultimately affect our own finances.

Here is their reform wish-list.

Stamp duty

Raising the threshold at which the duty has to be paid would particularly help first-time buyers who, already struggling with house prices at record highs, have to find extra funds to fork out for the tax payment.

The lowest stamp duty band of 1 per cent currently kicks in at a purchase price of £60,000 - a threshold last raised in 1993, says Ray Boulger of mortgage broker Charcol. "Adjusting for property price inflation since then would mean increasing this to around £170,000," he suggests. More homes would then fall outside the tax band and spare first-timers the extra cost of getting on the ladder.

"Stamp duty is one burden too many in preventing them from buying their first property and this unfair tax is ripe for reform," adds Mr Boulger. So overhauling the banding system, although unlikely, would be welcome.

At the top end of the housing market, stamp duty rates could increase from the current 4 per cent on homes over £500,000 - and be staggered even higher according to the property's value, says Victor Dauppe, partner at chartered accountants MacIntyre Hudson.

Once your house price breaches a tax band, you have to pay duty on the whole amount - rather than just on the balance, as you do with the income tax on your salary.

For example, with the average UK property costing £188,000, according to the Land Registry, 1 per cent stamp duty leads to a bill for £1,880. However, by switching to the same tax system used for our income tax and raising the stamp duty threshold to £170,000, the 1 per cent duty would be paid on just £18,000, giving a bill of £180.

Small businesses

Many small husband-and-wife firms prefer to pay themselves in dividends on their earnings rather than taking a salary out of their business. However, while some think they will reduce their tax liability by doing this, the system is complex and the Inland Revenue's stance is unclear, comments Chas Roy-Chowdhury of the Association of Chartered Certified Accountants. "We need concise guidance on what transactions will be caught [by the rules] - instead of the 50 pages of explanations it recently issued."

Capital gains tax

Most people don't have to worry about CGT since they are currently entitled to annual tax-free gains of £8,200. But many in the financial services industry are confident that there will soon be a CGT opportunity. They believe the Chancellor will use this week's PBR to apply tax "taper relief" of at least 10 per cent to non-business assets such as a large shares portfolio.

This could make it more attractive to hold such investments, says Paul Falvey, a partner at accountants Grant Thornton.

Inheritance tax

Where once inheritance tax (IHT) - a 40 per cent liability on any estate worth over £263,000 - applied only to the particularly affluent, soaring house values have pushed many more of us into the IHT bracket.

Raising the threshold, even by just a small sum, would prove a vote winner, according to mortgage broker FPD Savills. "The Chancellor could easily do this without losing too much income and it would also earn some goodwill," says a spokeswoman.

An increase from £263,000 to £300,000 could be introduced "without upsetting" the Chancellor's sums if he also introduced a new higher rate - 50 per cent on £1.5m or more - says Mr Dauppe at MacIntyre Hudson.

The savings culture

From 6 April 2006, the maximum amount that can be invested in a mini cash or equity individual savings account (ISA) will be slashed from £3,000 to just £1,000, and that in a maxi equity ISA from £7,000 to £5,000.

Although ISAs are to be reviewed in 2006, any change of heart now would be a boost.

Pre-owned assets

Uncertainty could be cleared up over the tax paid on a benefit enjoyed on a previously owned asset, such as a house put in trust.

Reits

Real estate investment trusts will offer incentives to invest in property; the Chancellor could shed some light on their tax structure in the PBR.