SPECIALS
The Anti-Budget

By Stephen Bland (TMFPyad)
March 6, 2001

Tomorrow is the annual Budget. I am not going to join the ranks of media pundits trying to forecast what changes may be announced. This futile exercise, to which many newspapers devote substantial amounts of space, always amuses me. In fact the whole concept of the budget, this piece of theatre, is unnecessary anyway. A circus. A large number of routine amendments to taxes have always been announced before the day itself, and even more radical changes, such as the famous IR35 last year, are largely known in advance because the government has published its various proposals.

Most tax practitioners would pray for a single year in which the Government just leaves things alone. And if and when changes are required, they could simply be announced and debated without the circus. The only budget that would really make sense is one where the Chancellor stands up and says that he is going to do precisely nothing, all routine amendments having been announced already, non-circus style, the whole speech taking about fifteen seconds. That would truly be a courageous choice. I cannot recall this ever having happened.

But no, they cannot do this. They have to meddle every year. If following an election there is a change of administration, then we see even more radical changes. The incoming government insists on interfering with what its members may well believe privately is a perfectly adequate situation, just to make its mark. A great example of this sort of nonsense is the Individual Savings Account (ISA), introduced by Labour to replace the old Personal Equity Plan (PEP).

Why could they not simply have let PEPs stand? No, they introduce the ISA: far more complex, hardly anyone understanding the labyrinth of the various versions, and introducing the insurance ISA, possibly the greatest financial white elephant in living memory, which I, or anyone who actually deals with the real world could have told them, would not result in the slightest interest whatsoever from the public or even the insurance industry. And if the latter -- of all people -- are not interested in selling some product to the public, imagine how truly awful it must be.

Another even better example of this is the radical changes to capital gains tax that took effect from April 1998. This tax, understandably, is the one that concerns Fools the most, judging by tax board messages. But there was absolutely no need for these changes (assuming you believe in a CGT at all, which I don't). The old system for calculating cost of shares by indexation and pooling worked perfectly well, but they could not accept it: they had to introduce taper and LIFO, a far more complicated approach for little achievement far as I can see.

And it reintroduced the phoney fiscal morality, which we have had at various times in the past, that longer term gains are somehow good, giving taper relief for three to ten years holding, but short-term gains are bad, under three years holding attracting no relief. This concept has always disturbed me in tax policy: it's the idea that apart from screwing money out of people, the Government has to do it in a way that in many cases is somehow linked to its idea of how you should lead your life, of what is "good" and "bad". And short-term gains are bad, in their view, and long-term ones over three years are good. In return for being a good boy or girl, holding your shares like nanny says for at least three years, you get a discount on your CGT. Why? Beats me. It leads to poor financial management, of people perhaps hanging on to shares pregnant with gain that they should dump on investment judgement grounds, yet hang on to because of the mitigation of CGT.

And every time you make a change like this, as well as everybody having to understand the new system, it introduces yet another problem for people who own shares purchased under the old rules, because CGT calculations then have to deal with one set of rules up to 5 April 1998, then switch to the new ones.

We've not had it this year far as I know, but the insurance industry often used to spread a rumour in the past, shortly before each budget, that tax relief on personal pensions was going to be abolished or restricted to basic rate. Don't forget that pension plans are the only investment to attract full tax relief and therefore this alarmed some people.

This pressure in some years was quite intense. The last time it happened, not that long ago, maybe three or four years, I was contacted in my practice by several brokers and company reps "warning" me that I should ensure that all clients stick the maximum into PPs before they so much as take another breath, because after the budget tax relief would disappear or be restricted. So bad had this rumour become that the Chancellor actually remarked upon it in his budget speech, stating that he had never had any intention of restricting PP tax relief, thus calling the insurance industry's bluff.

When I mentioned this later to one of the brokers, he claimed that the Chancellor was not telling it like it was, and that the intention had been to restrict the relief. However strong lobbying by the insurance industry, in the interests of their customers of course, persuaded the government to withdraw this change. Hmmm, I thought: who does one believe, a politician or an insurance man? Well, not a lot to choose there either way I guess, both parties being renowned for their absolute integrity. My money, though, was on the politician in this case.

It would of course be entirely cynical of me to suggest that this was a crude, but frequently successful, ploy to sell more policies by suggesting that investors make their contribution immediately, before the government restricts the relief. I would never dare accuse the industry of such cynicism as to spread deliberately a false rumour of this nature and, in consequence, I am sure they really believed such tax changes were a real threat. As we all know at the Fool, the insurance business is dictated by pure altruism.

And, as a non-tax matter, I had long ago come to the conclusion in any event that the majority of PPs were a poor investment, and on top of that were unacceptably restrictive because of the compulsory annuity purchase required with 75% of your money. As far as I am concerned, I wish they would abolish tax relief on PPs and as a result withdraw all restrictions on use of the final fund, these restrictions being there as the punishment for receiving tax relief on the contributions. This would level the situation between PPs and other investments. Of course nobody would then buy a PP, and the insurance industry must be petrified of this ever happening.

People might then be free to set up their own retirement arrangements, free of the perversion of tax relief or the siren song of the insurance company. What an awful thought. What? Simply use your regular savings to buy shares, or perhaps a tracker or decent active unit/investment trust, to provide for retirement, without tax relief and without the intervention of an insurance company? You crazy? Everyone knows insurance companies can do this far better than the average person. You can't trust a person with their own money, you know.

More: Tax centre, ISA Centre, Pensions Centre.