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Deal or no deal on the final box?

James Salmon looks at the prospects for Brown’s last Budget.

Gordon Brown is set to set out his final Budget as Chancellor next week and the financial services industry is hoping but not hopeful that he might give ground on some key issues.

One of the key proposals in the pre-Budget report was the punitive 82 per cent tax charges on death benefits for alternatively secured pensions.

This would be likely to spell the end for Asps as an estate planning tool and as a viable alternative to annuitisation. The Government also announced a minimum income requirement of 65 per cent of the annual amount of a comparable annuity for a 75-year-old.

Despite industry lobbying, to force the Government to back down, there is a marked lack of optimism that the Budget will contain any major concessions on Asps.

Cicero Consulting director Iain Anderson believes it is politically inconceivable that Brown will allow the Government to relax its stance, as this may be construed as weakness.

He says: “It is very difficult for the Chancellor to relax rules in the Budget when he is about to go into a leadership election.”

Syndaxi Financial Planning managing director Robert Reid believes the industry has been “politically naive” in thinking the Government was ever going to change its mind. He says it will stick firmly to its guns, adding that research from Hargreaves Lansdown, showing that the tax take from Asps would be higher than from annuities, misses the point.

Reid says: “I do not think that the industry has made a case for changing the pre-Budget proposals. I agree with Hargreaves numerically but it is naive from a political point of view. The idea of people being able to leave money behind has never been popular with the Government.”

Hargreaves Lansdown head of pensions research Tom McPhail, who has started a petition for the Government to relax its stance on Asps, admits there was never much hope for significant change in the Budget beyond making the minimum and maximum income rules more flexible.

He says: “The prospects of the industry overturning the Government on this issue were always poor. The Government’s skewed rationale for providing special rules for particular religious minorities meant we were always going to struggle to win them over with rational argument but that does not mean we were wrong to try.”

Skandia marketing director Billy Mackay believes the Budget will confirm the proposed crackdown on scheme pensions being used as a tax-efficient means to pass down benefits.

The other major talking point in the pre-Budget report was the Government’s U-turn on pension term assurance. The Chancellor said he was looking at removing tax relief on PTA, prompting several adviser firms to stop selling the product and a number of providers to pull out of the market.

There has been much talk of U-turns on U-turns, with the Treasury understood to be considering offering a lifeline on PTA by allowing consumers to take out the product if they self-certify that they have some form of pension provision.

Reid is unwilling to predict whether any concessions will be made on PTA but he is convinced that the Government will scrap the product as a stand-alone proposition, which will be a big issue for protection providers that do not sell pensions.

Anderson predicts that talks on PTA between the industry and the Government will go right down to the wire and does not believe that a decision has been reached.

“I think it is finely balanced and conversations are still taking place,” he says.

Anderson expects the Government to announce further details on changes to the Isa regime, after the announcement that Isas will be retained permanently beyond 2010. Other changes, such as the ability to bring Peps within Isas, will be confirmed in the Budget but will not take effect until the 2008/09 tax year, he says.

As for venture capital trusts, Anderson predicts the Budget will further tighten the rules on investments in these vehicles.

The Government has already reduced the market cap for VCTs, leading to forecasts it will be a 150m market this year compared with 750m last year.

“When VCTs were set up, the idea was to use them to invest in flourishing start-ups rather than established companies. The Government will tighten up the rules to ensure that they fit the original purpose,” he says.

Alliance & Leicester head of intermediary mortgages Merhdad Yousefi believes the Government may get greener in the Budget.

The pre-Budget report offered stamp duty exemptions for zero-carbon homes and Brown said all new homes should be zerocarbon by 2016 and from 2007 most of new zero-carbon homes will be exempt from stamp duty for an unspecified limited period.

Yousefi predicts that the Government could go a stage further by, for example, giving council tax discounts to energy-efficient households.

He also believes that the threshold on stamp duty could go up by 10,000 from 125,000 to 135,000 to reflect house-price inflation.

Most commentators believe the Budget will not waiver hugely from the PBR proposals but Anderson is convinced that Brown’s Budget swansong will throw up some “eye-catching measures”.

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