Pre-budget tax rises are likely to hit City workers

WE HAVE all become accustomed to woe-filled stories about the economy. Last week&rsquo;s headlines included news of a budget deficit of over &pound;11bn for the month, or &pound;87bn in the fiscal year to date. Attempts to bridge the gap through better enforcement of existing tax laws may not be helping &ndash; rumours suggest that HM Revenue &amp; Customs&rsquo; (HMRC) latest offshore amnesty has not yet yielded significant levels of undisclosed accounts, as hoped.<br /><br />On 9 December, the chancellor will give his annual Pre-Budget Report, often used as an opportunity to adjust tax rates or announce tax changes to be made the following April. With even the government hinting that he may need to use the opportunity to raise taxes further, there may be some significant changes for those working in the City.<br /><br />The clearest target for a tax increase must be capital gains tax. As matters stand, tax experts are dusting off their books from the 1970s, looking for ways to convert income (taxed at up to 50 per cent from April) into gains (taxed at 18 per cent). The chancellor will need to weigh up the need to encourage growth and enterprise against his need to raise money &ndash; this tempting opportunity for arbitrage is unlikely to remain untouched. Some commentators suggest a rise in the flat rate of CGT, perhaps to 25 per cent or 30 per cent, though care is needed to ensure that the UK&rsquo;s rate does not become uncompetitive in comparison with the rates offered by our EU neighbours. <br /><br />Alternatively, the rise could come in the form of a return to different rates of tax to encourage longer-term investment &ndash; taper relief was abolished just 18 months ago, but the chancellor may re-introduce higher taxation for short-term gains (perhaps taxed as the top slice of income once again), with reduced rates for longer-term gains. He may also be inclined to defer the new rules to April, in the hope that some will take their gains from this year&rsquo;s rise in the markets and pay tax at 18 per cent, giving a short-term boost to revenues.<br /><br />That may not be all for CGT surprises &ndash; the recent MPs&rsquo; expenses claims fiasco highlighted the potential for &ldquo;abuse&rdquo; of the principal private residence (PPR) election. If you have two properties, you have the right to say which is your main home and thereby free from CGT on sale. This relief has been available to us all, but this summer Westminster gave us a new phrase: &ldquo;flipping&rdquo;, changing which is your main home and which is your second home.This has always been allowed, but is now regarded as cynical and self-serving. You can change your PPR election at any time, and the relief is deliberately generous to allow time for people who have been unable to sell a former home to do so without penalty.So the election is not just forward-looking, but gives you some relief for gains in the recent past as well. The MPs&rsquo; perceived misdemeanours made this slightly obscure subject a topic for daily discussion, and PPR may be a target for reform or abolition. <br /><br />Following the raising of the top rate of income tax to 50 per cent, you might assume that income tax is safe from further change. This seems unlikely, given that even the 50 per cent rate represented an adjustment from an earlier announcement that the top rate would rise to 45 per cent. Since then, the budget deficit has grown further, and one possibility is that the threshold could be reduced from &pound;150,000 to &pound;120,000 or even &pound;100,000. <br /><br /><strong>PRAGMATICCHANCELLOR</strong><br /><br />A pragmatic Chancellor might not introduce anti-forestalling measures if he wishes to incentivise businesses to accelerate dividends/profit payments and so to increase tax collections in the current year. But he is unlikely to want to encourage large bonuses, which some reports suggest he will seek to tax at yet higher rates.<br /><br />Inheritance tax might also be a target. With the chancellor having recently introduced the transferable nil rate band, the chance that the nil rate band will be abolished in the Pre-Budget Report are low. More likely is a rise in the level of the band (currently &pound;325,000) with the introduction of a 50 per cent band on estates over &pound;5m. <br /><br />Finally, VAT is due to revert to 17.5 per cent in January 2010. While many may not have noticed the decrease in the cost of their daily cappuccino, the increase may feel disproportionately painful. It has been suggested that the chancellor will increase the rate to 20 per cent.<br /><br />Such rises by themselves are unlikely to refill the Treasury&rsquo;s coffers; so what might an imaginative chancellor do? There have been suggestions for a property tax, generally thought to be too expensive and bureaucratic to introduce. But what about a wealth tax, common in some European countries but never known in the UK? In France, for example, the wealth tax is levied at 1 per cent (or 3 per cent in certain cases). This could be introduced on properties worth more than &pound;1m or on total assets (including or excluding your main home) above a certain level; and while this would bring howls of &ldquo;unfair&rdquo; from London dwellers, their cries are unlikely to elicit sympathy from the rest of the electorate.<br /><br />Arabella Saker is a partner at Maurice Turnor Gardner