Tax hikes expected for the better off

Chancellor Alistair Darling is widely expected to announce a raft of tax increases for the better off when he delivers his Pre-Budget Report on Wednesday.

With the Government facing an estimated £175 billion budget deficit, Mr Darling's speech is expected to contain several revenue raising measures.

But with a general election looming, he will have to tread carefully to avoid alienating Labour supporters.

As a result, capital gains tax (CGT) and inheritance tax are thought to be the most likely taxes that he will increase, while income tax for higher earners could also be raised.

Geoff Tresman, chairman of Punter Southall Financial Management, said: "I believe that the Chancellor has no real choice but to signal an increase in taxation and I think one area where he can do so, without sidelining any of Labour's traditional support, is through capital gains tax."

CGT is currently charged at a flat rate of 18 per cent, following changes announced in 2007, on gains of more than £9,600 made in any one tax year when an asset is sold. However, as people's main homes are usually exempt from the tax, it is generally only paid by the better off.

It is thought that Mr Darling may increase the CGT rate to 25 per cent or even 30 per cent, while some commentators think he could go further and raise it to 40 per cent, in line with the 40 per cent income tax band.

CGT receipts have fallen sharply this year, with HM Revenue & Customs expecting to collect just £2.22 billion through the tax in 2009/2010, well down on the £7.85 billion taken in during the previous year, when 350,000 people paid CGT. An increase in the CGT rate would help to offset some of this fall.

Inheritance tax is also widely tipped to be an area the Chancellor will turn to in a bid to raise extra revenue.

It is currently charged at 40 per cent on all assets worth more than £325,000, although anything left to a spouse or civil partner is exempt, while married couples and civil partners can also transfer any of their unused allowance to their partner on their death.

KPMG predict Mr Darling will hit wealthy families with the introduction of a new 50 per cent rate on estates worth more than £1 million.

He could also double the length of time for which people have to live after making a gift in order for it to be exempt from the tax from seven to 14 years, to make it harder for people to reduce the value of their estates.

Chartered accountants Blick Rothenberg is also expecting a new 50 per cent inheritance tax band, although they predict this will apply to estates worth more than £1.5 million.

It also thinks the Chancellor may put a cap on the value of business assets and agricultural land that are exempt from the tax - a move which would prove unpopular with farmers and family firms.

A combination of tax and VAT hikes, rising oil prices and an expected return to more normal mortgage rates will bring the biggest squeeze for decades on the spending power of the rich and middle classes next year, according to research by PricewaterhouseCoopers for The Independent.

But researchers also said the worst-off will see their living standards rise in 2010, with a single mother on about £10,000 a year 2.3 per cent better off.

High earners have already been hit hard by the Chancellor in this year's Budget, when he announced plans to introduce a new 50 per cent income tax band for those earning more than £150,000 from April next year, as well as scraping personal allowances for people earning above £100,000.

Mr Darling also said pensions tax relief would be reduced for those on more than £150,000 from April 2011.

One way in which the Government may squeeze more money out of the better off could be through reducing the level at which the new 50 per cent income tax rate kicks in to £110,000.

Chris Sanger, Ernst & Young's head of tax policy, thinks the Chancellor may go further and introduce a 60 per cent income tax rate on people earning more than £500,000.

He said: "This would be a strong statement in relation to high salaries and could raise in excess of £2 billion."

There may also be a number of modest give-aways in the Pre-Budget Report, such as an extension of the current stamp duty holiday on properties costing up to £175,000, as well as measures to help the less well off, particularly pensioners.

Mr Darling is also expected to announce modest increases to tax allowances, which rise in line with Retail Prices Inflation from April, despite the fact that RPI is currently negative.