October 17, 2007	Wednesday	Shawwal 4, 1428

The Labour government has pledged in the Combined Pre-Budget Report and Comprehensive Spending Review announced last week an extra £400 million for the armed forces indicating that Britain is planning to further upgrade its troop presence in Afghanistan in the next 12 months. This allocation is also expected to take care of housing accommodation of troops at home.

A new single budget for tackling terrorism has also been announced which is expected to bring together the work of the police, the security services and all parts of the government responsible for addressing the threat of terrorism.

The allocation for the purpose will rise every year over the next three years to £3.5 billion a year, representing a trebling in cash terms in a single decade including £700 million over the next three years for Home Office anti-terrorist work.

But it is not these two spending measures which have attracted any significant debate among independent economists, political parties and the media. What is being discussed more hotly here are the taxation part of the report and mainly whether or not the enhancement announced in the threshold of inheritance tax is adequate House prices in the UK are said to have gone up by over 219 per cent over the decade when the threshold was fixed at £300,000. The Conservative Party last week had proposed that it would go for enhancing the threshold to £ I million. However, Chancellor Darling has announced enhancement to £600,000.

Under Mr Darling’s proposals, the total amount of inheritance for married couples and civil partnerships on which no tax is to be paid will immediately rise to £600,000. By 2010 the combined tax-free allowance for couples will rise to £700,000.

This will be backdated indefinitely for every widow or widower, and in future years, both house prices and inflation will be taken into account when setting thresholds. Although it was well-received, Mr. Darling’s move to double the IHT threshold is not said to be as generous as it might first appear.

All married couples already have the ability to pass on up to £600,000 to their heirs tax free, but this does require both spouses to set up complex wills and trusts to ensure both spouses’ nil-rate band of £300,000 is used. The reforms announced today will certainly result in all couples using both allowances and will simplify inheritance tax planning for much of middle England.

According to Darling, 97 per cent of homes in the country are valued at less than £600,000. He said that 12 million married couples and three million widows and widowers will benefit from these proposals.

Critics said that the scheme that Mr Darling favours benefits only those who are married (or in civil partnerships) or were married when their partner died. Everyone else — single persons, couples in long-term cohabitation and divorcees who have not wed again — will be no better off. This explains, they said, why the cost of these changes are much lower than the Conservative blueprint.

To balance the loss that would accrue to the budget because of this measure the Chancellor has announced reforms in the capital gains tax which will hit not only private equity but is expected also to discourage smaller businesses.

The Chancellor also adopted proposals to switch flight taxes from individual passengers to flights - penalising airlines that fly half-empty planes but with no relief for the passengers who would continue to pay very high fares for their air tickets.

Mr Darling rejected Tory’s proposal for a £25,000 flat rate charge on “non domiciled” wealthy foreigners - saying it would raise just £650m, not the £3.5bn that the Tories claimed. He said that he would be bringing forward his own measures to ensure that the “non-doms” were made to “pay their fair share”.

The non-domiciled foreign tycoons own huge properties and businesses and also hold large bank accounts in the UK but pay no taxes as they are exempt from the local tax net. This has created a visible anomaly which successive governments have refused to correct on the plea that withdrawal of the exemption would discourage foreign ‘workers’ from coming to the UK. But this excuse is not likely to be accepted any more by the voters and if the Labour delayed action on this matter until the next elections it is expected to lose a lot of its voters to the Tories who seemed to have taken a political decision to tackle the issue head on.

Mr Darling has also made a firm commitment to sustained increases for the most favoured public services like health and education as well as overseas aid, of the kind that the critics of Conservatives said they would never have volunteered. Given the economic outlook, the Labour efforts are said to be all the more commendable.

Mr Darling said that growth next year would be 0.5 per cent less than forecast - but after that it should bounce back. Independent forecasters are not so sure. They point to weakness in the housing market and the credit squeeze in the City, which has powered so much of the UK’s boom. These forecasters said the chancellor may need to borrow more than his already hefty extra allowance of £13 billion.

The Confederation of British Industries (CBI) described the Chancellor’s combined Pre-Budget Report and Comprehensive Spending Review as a “mixed bag” for business.

John Cridland, Deputy Director-General of the CBI, said:

“The CBI was hoping for a statement for enterprise with encouragement for small businesses, which were hit by tax increases in the last budget. There was no such statement and many small businesses will be hit again by the increase in the Capital Gains Tax (CGT) rate.

“Changing CGT rate to a flat rate of 18 per cent will adversely affect the balance between risk and reward, both for entrepreneurs and for the UK’s vital private equity industry. This move is disappointing and may lead to a reduction in investment in start-up and growing businesses

“The Chancellor’s commitment to business tax simplification is welcome, but business will want to see action as well as words. ”It seems that the tax changes for aviation are a significant tax increase. We will need to study how effective this is as a green tax.”