CGT and IHT likely targets in Budget 2010 - L&G

The Chancellor will use the Budget to hike capital gains and inheritance taxes to fund Gordon Brown's pledge today not to cut front-line services, Legal and General predicts.

On 24 March, announced this morning as Budget Day 2010, Alistair Darling can only support the PM's assurances by borrowing more or upping taxes, says L&G's head of tax and estate planning Mark Green.

"We all know we are borrowed up to the hilt. There's no reason why he wouldn't up capital gains tax (CGT) from 18%, and even align it with income tax at 40 or 50%," he says.

In a speech in Canary Wharf this morning, the Prime Minister asked: "Do we undermine our frontline public services...or instead reduce the deficit by taking tough and fair decisions on tax and spending?"

Elsewhere, he explicitly mentioned inheritance tax (IHT) as a target for Government fundraising.

"It simply does not make any sense to me to cut tax credits for one million and a half middle class families on modest incomes - while at the same time proposing massive inheritance tax cuts worth £200,000 to a handful of estates," he said.

Efforts to restrict IHT planning are getting more "aggressive", says Green, who attended a Government-organised meeting of industry trade bodies in January on behalf of the ABI, to discuss a potential reporting scheme of limited disclosure on tax avoidance.

In December's Pre-Budget Report, the Chancellor froze the IHT threshold for 2010/11 at £325,000 for individuals and £650,000 for married couples and civil partners. It was due to rise to £350,000 for a single person.

At the time, Darling said fewer than 3% of estates would pay inheritance tax.

"IHT and CGT have not traditionally raised much revenue but with lower levels of corporation and income taxes due to higher unemployment, now every penny counts," says Green.

"The Government is getting quite aggressive with tax avoidance schemes, especially discretionary trusts."

He also sees stamp duty rising, in line with a steady increase in house prices since June: "In days gone by stamp duty has raised more revenue than IHT and CGT combined."

A 2.5% rise in VAT to 20% is also likely, though it could be implemented in a two-tier system with only items considered "luxuries" attracting the higher rate, says Green.

However, Green warns this month's Budget may disappoint those looking to pin the Chancellor down on detail.

"Darling could deliver a dull budget on 24 March to avoid rocking the boat before an election, saving the bad stuff like tax rises for the second Budget in June or July.

"But whether they come now or later, from Labour or the Tories, taxes will increase.  It is just a case of by how many percentage points."