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  • Stuart Fowler

Pre-budget report speculation


If the Sundays and the Friday and Saturday FTs are on the mark, we should not expect much revenue raising yet. The mooted freezing of threshholds and allowances may be coupled with some additional measures aimed at the rich but these are generally expected to be more to trick the Conservatives into appearing to defend privilege.

There is no shortage of speculation about narrowing the gap between tax rates on income and capital gains. This gap was Labour’s creation but it was bundled up with a significant strategic change we regard as fundamentally dishonest: the removal of inflation indexation. It would be typical of the absence of transparency associated with Labour’s tax changes that we will end up with both the taxation of monetary gains that are purely a reflection of general inflation and a much higher charge.

Together with fiscal drag, via allowances and threshholds that decline in real terms, taxing inflationary gains on both individual capital assets and corporate inventories is a horrible memory for those of us who lived through the 1970s.

The drug of choice for desparate politicians was then using inflation to deflate outstanding debts. Ironically, in driving interest rates up (and hence the taxable inflation compensation element of interest payments) and sterling down, their policies also had the effect of making the doubtful dividend of ‘fiscal drag’ even larger.

The big difference now is that much of the UK’s debt (though not that held by foreigners) is index linked, so the same trick may not work. In any event, our clients are probably glad that they typically hold a significant proportion of their wealth in index linked government stock, including NS&I (and hold no conventional bonds). Apart from ensuring themselves against longer term inflation, they also avoid HMRC taking nearly half the inflation compensation element of nominal interest rates in income tax, as if it were a real economic rent.

Even if the PBR goes easy on wealthy private clients, they are likely to assume that the bad news has merely been postponed. We anticipate a lot more interest in the future in proper financial planning, where pension and investment strategies should always be intelligently integrated with non-aggressive tax mitigation.

#debt #financialplanning #indexlinkedgilts #inflation #taxation

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