Personal finance: Brown must tread carefully

The shake-out on the stock market in the past few weeks has inevitably had a dampening effect on investor confidence. It would be worrying if it had not. Shares and other investments linked to the stock market are actually 10 per cent cheaper now than they were at the beginning of October but investors will not want to buy heavily until they are reasonably certain the shake-out has ended, and that is not yet clear.

Another reason why investors are pausing for reflection is the possible effects of the Chancellor's pre-Budget review on taxation policy on Tuesday. Financial advisers have been encouraging clients to buy personal equity plans, realise capital gains, change wills, transfer assets to children and set up trusts to shelter their assets against inheritance tax in case Gordon Brown makes it more difficult and less tax-effective from Tuesday. But the natural reaction of most investors will have been to wait and see rather than try and second-guess the Chancellor.

He may well announce plans to reform capital gains tax and inheritance tax to try and make them more productive as taxes, in sharp contrast to John Major's government, which seemed ready to abolish both taxes, but never actually got round to doing so.

CGT is a complex tax, and a move to a simpler system, perhaps abolishing indexation in favour of exempting gains made over longer periods of time, would be widely welcomed but it is likely to be balanced by tighter rules on short-term gains.

Inheritance tax has become almost a voluntary tax thanks to the regular increases in the starting point to the current level of pounds 215,000 and the concession allowing life-time gifts to escape the net altogether if the donor survived for seven years could well be tightened up. The starting point could also be reduced if the starting rate of 40 per cent is cut. But it would be a risky move to tinker with the rule which exempts all assets left to surviving spouses in the UK.

These are not the only areas where reform is needed. The rules on pension contributions are complicated and clearly work against the urgent need to encourage individuals to contribute more to pension provisions.

Individuals need to know how existing pension schemes will sit alongside the promised stakeholder and citizen pension plans. But consultation is still taking place and it could be two years before they are up and running.

Hopefully Mr Brown will see the need to clarify the relationship and reduce the risk of creating uncertainty which could discourage contributions to existing pension plans. He would be taking a real risk of inhibiting contributions if, after reducing tax relief on pension funds in July, he tries on Tuesday to reduce tax relief on individual pension contributions across the board with immediate effect. He may well, however, be tempted to restrict tax relief on pension contributions to the standard rate of tax.

The prospect of changes in tax concessions on savings when the individual savings accounts are introduced in 1999 is already discouraging demand for PEPs and Tessas. Although providers and advisers have naturally been trying to persuade investors to buy while stocks last, on the grounds that the tax breaks on the ISA will be less attractive, investors will be reluctant to buy more PEPs until they know whether there will be a fixed limit on the total tax-free savings individuals can hold, which might mean large PEP investors lose tax relief on their excess holdings.

The trick next week is to banish uncertainty even though new rules are not ready to introduce. If Mr Brown can do that the financial services providers and advisers can look forward to another bumper sales season next spring. If he fails he could damage the industry materially.