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Pre-Budget Report - December 5th, 2005


"There will be no let up... no relaxation of our fiscal grip"
"It's the rock of stability upon which we can and must build."

Gordon Brown

Gordon Brown, November 2005

Divide... and rule?

Gordon Brown's ninth Pre-Budget Report was entitled "Britain meeting the global challenge". As expected, the Chancellor admitted that this year has been a difficult one for the economy - this is the polite way of saying he had to cut his economic forecasts in half! In other words, think of the number you first thought of and then divide by two. His theme was one of meeting global economic challenges, enterprise, innovation, housing, science, skills, capital markets, education and reform.

Despite having made a mess of his economic numbers the Chancellor nevertheless managed to crow that the UK is on course to meet the 2% inflation target this year, beating US and EU competitors, and remains on target for 2006 and 2007 (not that this actually has anything to do with him, being the responsibility of the Bank of England). Next year, economic growth will, claimed the Chancellor, rise to 2-2.5%, 2.75-3.25% in 2007 and 2.75-3.25% in 2008.

However, there was, with this Pre-Budget Report, an early sighting of the perhaps welcome return of the Iron Chancellor of New Labour's early years. After the unparalleled spending spree of the recent past, there are signs that the Chancellor is starting to rein in the rise of public spending. In fact, on his numbers, public spending overall is set to grow by slightly below the rate of growth in the economy for the rest of this Parliament past 2008.

Gordon Brown obviously wants to hand over the books in good shape for the benefit of the next Prime Minister (which he assumes is going to be him).

The biggest shocker on personal finance matters was the Chancellor's about turn on Self Invested Personal Pensions. SIPPs and all other forms of self-directed pensions will be prohibited from obtaining tax advantages when investing in residential property and certain other assets, such as fine wines, from April 6th, 2006.

This action is aimed at ensuring that tax relief is only given to those whose purpose in making the contribution is to provide themselves with a secure retirement income; and action will also be taken to prevent abuse of the rules for tax-free lump sums from 6 April 2006. The legislation will remove tax advantages where lump sums are recycled back into funds in order to generate artificial levels of tax relief.

Following Kate Barker's recommendation, it was confirmed that draft legislation to establish UK Real Estate Investment Trusts will be included in the 2006 Finance Bill. Details of the tax proposals will be published by HM Revenue and Customs before the end of 2005.

Affordable housing was a big issue. Alongside the Pre-Budget Report, Deputy Prime Minister John Prescott issued new planning guidelines to bring more brownfield sites onto the market and to speed up the planning process for new affordable developments. Some gains on planning permission (ie. increased land value when building consent is granted) will be passed to Local Authorities for use on social housing.

New measures are being taken to beef up disclosure rules on tax schemes. Action is also being taken on transfer of assets abroad, and gifting with reservation and pre-owned asset elements of the inheritance tax structure.

Unclaimed assets lying in dormant accounts are going to be taken by the Government and put to use boosting youth and community facilities.

The government is now taking comments and consultations on the previously proposed top up payment into Child Trust Funds at age seven. However, the Chancellor failed to address the issue of the approximately one million CTF vouchers that have yet to be used.

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