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Tax measures called for


Calls to reinstate pensioners' council tax rebate

Pensioners groups are urging the Chancellor to restore the one-off £200 council tax rebate offered to elderly households in 2005. The move cost around £800 million. The key factor is that 2005 was, of course, election year. Council tax rose by an average 4.1% in 2005.

Although this year's council tax increase is the lowest since Labour came to power in 1997, cumulatively the tax has risen by more than 90% in the last decade. Increases in council tax hit older people harder than other parts of society - it forms a larger proportion of their monthly spending.

In February, Local Government Minister Phil Woolas responded to a Help the Aged survey on the impact of council tax on the elderly by claiming that his goal was to stabilise council tax changes at below inflation (a pious hope some might say doomed to failure).

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Challenge to Air Passenger Duty

In February, package tour operators launched a High Court challenge to the increase in air passenger duty, which had been announced in the 2006 Pre Budge Report, claiming the basis of the levy is flawed and in breach of human rights legislation.

The increase came into effect on February 1 but cannot legally be passed on to passengers, leaving tour operators with estimated costs of £ 50 million.

The chancellor presented the measure in December as a 'green' tax. It is now charged at a rate of £10 for economy class flights to Europe, £20 for business and first-class flights to the continent and £40 and £80 respectively for economy and business / first-class long-haul flights.

The Federation of Tour Operators (FTO) says a successful case could leave the government open to a £2 billion bill from airlines and passengers for duty collected since 2004.

It claims that the government is not entitled to impose charges on aircraft solely for the right of transit over, into and out of the UK because it is party to the 1944 Chicago Convention on International Civil Aviation, incorporated into European Union law in 2004.

The convention allows charges only if they relate to a service, such as use of airports or air navigation services. The FTO is arguing that air passenger duty is simply a tax that raises revenue for general government.

Andrew Cooper, of the FTO, said air passenger duty was not an effective environmental measure. "Indeed, as a tax levied on passenger numbers not aircraft, its effects are perverse in that it penalises environmentally friendly airlines with high load factors and rewards those with half-empty flights."

Mr Cooper added that the FTO was not shirking its environmental responsibilities, claiming it was already supporting a range of carbon offset schemes. It also believed aviation should be part of the European Union's emissions trading scheme.

"We will not allow any post-rationalised 'greenwashed' claims for air passenger duty to muddy the issue," he said. "Our legal action is being generated simply by the way in which the government chose to introduce the new air passenger duty rates. It was unfair on tour operators and we will use all means to defend the sector from the entirely avoidable consequences."

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Remote Gaming Duty in prospect

Chancellor Gordon Brown is widely expected to introduce a new Remote Gaming Duty tax regime that will allow the online gaming industry to move back to the UK under a new licensing and regulatory framework. However, it is unlikely that the rate of tax levied on internet gaming will be significantly lower than the level paid by bricks and mortar gambling operations.

At the time of the Pre Budget Report last year the Chancellor announced plans for a new duty but added that he would hold off setting a rate until the Treasury had studied the impact of the new Gambling Act. The act allows for online gaming operations based offshore to obtain a licence and move back to the UK from September.

The gaming industry wants a nominal rate closer to 2- 3% rather than the 15% tax on gross profits paid by bricks and mortar gaming businesses.

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Stamp duty under the spotlight

Stamp duty land tax is not charged on sales up to £125,000. It rises to 1% of the value for homes worth £125,000-£250,000, 3% for those at £250,000-£500,000 and 4% above £500,000. Stamp duty is not progressively tiered. This means that a home sold for £400,000 would net the Treasury £12,000, while at £800,000 stamp duty payable would be £32,000.

Over the past five years there has been a 281% rise in purchases above the £250,000 threshold. These sales generated a tax bill of £3.4billion in 2005/06, which is three-quarters of the total raised by stamp duty.

There's talk that the Chancellor will announce two new bands for stamp duty of 5% for property over £750,000 and 6% for property over £1 million, and will raise the nil-rate band from £125,000 to £150,000.

Patrick King, Tax Principal at MacIntyre Hudson, comments, "Adding higher bands of stamp duty would have the progressive effect of hitting the very rich first, especially if Mr Brown made this a revenue-neutral change by raising the nil-rate band. The fact that relatively few house purchases will be hit shows this is the perfect time to do it. Future chancellors can then watch the money come in as inflation takes house prices into the higher bands, without any apparent tax increase."

In fact, soaring house prices mean that 19% of buyers paid at least 3% stamp duty last year, compared with just 6% of purchasers in 2001. The bank notes that if the £250,000 threshold had been raised in line with house prices since 1997, it would now stand at £680,000, while the £500,000 figure would be £1.36million.

The number of properties affected by stamp duty has jumped from 73,403 in 2001 to 279,408 in 2006, according to the first postcode analysis of residential property in England and Wales. Home buyers face a stamp duty bill of at least £20,000 if their purchase is above the 4% level.

Tim Crawford, group economist at the Halifax, commented, "Stamp duty revenue raised from home sales continues to rise rapidly. Bracket creep has been a key factor as a growing percentage of sales now occur above the higher thresholds of £250,000 and £500,000, which have not been changed since their introduction in 1997.

"Nearly a quarter of postcode districts in England and Wales now have an average price above the 3% levy, compared with only one in 20 five years ago."

YO62 in York has seen the biggest increase, with the average bill up 601% from £1,087 in 2001 to £7,620 in 2006. WN8 - at 585% - near Pemberton in the North-west and TR26 - at 583% - in St Ives in the South-west have seen the next biggest rises. Some 206 postcode districts have seen at least a 30% rise in sales above the 3% threshold.

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Staff car parking spaces to be taxed?

Employee car parking is currently a tax-free benefit but tax experts have predicted that it could soon be taxed as a benefit in kind. By taxing employees who park at work the government could actively discourage staff to use cars as their principal mode of transport and reduce the amount of harmful gasses released into the environment each day.

Patrick King, tax principal at MacIntyre Hudson, said: "The big green issue now is getting people out of their cars, and this way the government could say hand on their hearts that this is a green tax."

He anticipated that the budget will also include other incentives to encourage fleet managers and company car drivers to opt for green cars, such as the introduction of Value Added Tax (VAT) bands may be introduced to make fuel-efficient cars such as hybrid and Liquefied Petroleum Gas (LPG) vehicles more attractive to organisations.

"[The Chancellor] may introduce say a 5% VAT charge for a green vehicle and then whack a 25% VAT charge for the less fuel-efficient cars," said King.

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Inheritance tax - the great survivor?

In 1994, when in opposition, Gordon Brown said, "If society is to have inheritance tax, it must be operated fairly. Yet at present, while the very wealthy avoid the tax, many others are being drawn into it." Despite establishing and even burnishing a reputation for inveterate tinkering with taxes, the Chancellor has left inheritance tax (IHT) broadly untouched. Until now?

IHT is charged at a flat rate of 40% on all assets in a deceased person's estate above the threshold of £285,000. Assets pass between spouses free of the tax. The Chancellor has already announced increases in the nil-rate threshold to £300,000 from next month, to £312,000 in April next year and £325,000 in 2009.

If the Chancellor does nothing else to change the threshold, 15% of all households will be potentially liable for inheritance tax by 2009, according to Grant Thornton. In 1997, when Labour came to power, only 4% of estates were hit by IHT. Halifax calculates that if the IHT threshold had kept pace with house price growth since 1996, it would now stand at £460,000.

The Chancellor could abolish inheritance tax - it has already disappeared in the USA, Canada, Australia, New Zealand and Italy. But the lost revenue would obviously have to be replaced. A substantial increase in the nil-rate band threshold could be funded by cutting allowances on gifts and potentially exempt transfers.

Alternatively, the principal private residence (your home) could be exempted from IHT. "Removing principal private residences from the net for IHT purposes would instantly lift the vast majority of ordinary families out of the tax trap," says Chas Roy-Chowdhury of the Association of Certified Chartered Accountants. But such a move could fuel house price inflation and effectively trap elderly people in large, unsuitable homes to avoid tax.

Another option would be to replicate the tiered rates of tax of IHT's predecessor, capital transfer tax. The easiest way out for the Chancellor to be seen to be doing something while doing nothing, would be to set up an independent commission to look into IHT. Sadly PricewaterhouseCoopers suggests that the chance of the Mr Brown using the Budget to announce the abolition of inheritance tax is an improbable 1,000-1.

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An Englishman's home is his tax liability

The Halifax survey of house prices in 2,098 postcode districts across England and Wales found there has been a huge rise in those worth in excess of £300,000 - the 2007/08 inheritance tax threshold.

There are now 236 postcode districts across England and Wales where the average house price has crept above the threshold - more than double the figure of 117 five years ago. And it is not just the traditionally expensive areas of London and the South East that are hit.

The largest increase in the proportion of housing sales above the £300,000 limit took place in Newcastle upon Tyne, and Padstow, in Cornwall!

In 2001 in the NE2O district of Newcastle, 22% of houses sold were above the threshold. Last year the figure was 61%. In Padstow, 10% of house sales were eligible for inheritance tax in 2001. Last year the figure rose to 49%.

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Punitive IHT on pension funds

Inheritance tax is also exercising the pensions professionals as Gordon Brown's attempts to close an inheritance tax loophole could mean some personal pension funds being taxed at 170% on death!

In a bid to reduce the appeal of alternatively-secured pensions (ASPs) - launched as an alternative to annuities for over-75s the Chancellor has proposed that remaining funds at death be taxed at 70%. A 40% inheritance tax on the remainder would bring the tax rate to 82%.

But it has been suggested if the descendants are members of certain types of pension funds - such as a self invested personal pension - the overall tax charge could rise to a crippling 170% and a tax bill greater than the inheritance.

The Business reports that the true extent of proposed new taxes may trigger a legal challenge under European law, on the grounds that the tax is not proportionate and is punitive on those who do not wish to buy an annuity.

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