President George W Bush has warned the US economy continues to face “serious challenges” after signing a $700bn (£394bn) financial sector rescue plan.

The controversial package is aimed at buying up the Wall Street’s bad debts in an effort to ease the credit crunch which is crippling the US economy.

The president said it would take “time and determined effort to get through this difficult period”.

The US House of Representatives passed the bill by 263 votes to 171 on Friday.

It was the second vote in a week, following the shock rejection of an earlier version of the deal on Monday.

The House adopted the new version of the Emergency Economic Stabilization Act after the Senate added about $100bn (£57bn) in new tax breaks to win Republican votes.

Job losses

The complex process of auctions to buy up the problem assets will be overseen by the US Treasury and is not expected to take place for at least a month.

Despite the adoption of the bill, share prices in New York ended Friday down, as government figures showed US job losses at a five-year high.

Mr Bush welcomed the approval of the bill, which he said was “essential to helping America’s economy weather the financial crisis”.

The president acknowledged that there were concerns about the government’s role in the deal and its cost.

“The passing of the bail-out plan is just the first stage and it will be several months before anyone can tell whether it is working” Greg Wood, BBC business correspondent

He said he believed in intervention only when it was necessary but that “in this situation, action is clearly necessary”.

“Ultimately the cost to taxpayers will be far less than the initial outlay,” he said.

Fearing a backlash from furious voters in November’s looming congressional elections, politicians were hugely divided on the unpopular bill during the House debate.

Some who had voted “No” on Monday said they were switching because of the improvements to the bill, but many of them still expressed serious reservations.

Others maintained their opposition, saying the bill was still a bail-out benefiting mainly Wall Street.

‘Outrage’

Both candidates for the US presidential election in November have welcomed the deal but neither were enthusiastic about the details.

Speaking in Arizona, Republican candidate John McCain said the deal “isn’t perfect and it’s an outrage that it is even necessary”.

NEW MEASURES IN BAIL-OUT BILL

Increased protection for saving deposits
Increased child tax credits
More aid for hurricane victims
Tax breaks for renewable energy
Higher starting limits to alternative minimum tax

But he said the US had to stop damage to its economy caused by “corrupt and incompetent practices on Wall Street and in Washington”.

Mr McCain said the deal was a temporary solution and it should not take a crisis for Congress to reach bi-partisan accord.

Democratic candidate Barack Obama said it was important that the Bush administration used the new powers granted by the deal wisely.

“We still have a health care system that’s broken, we’re still overly reliant on oil from the Middle East and so we’ve still got these structural problems,” he said, on the campaign trail in Pennsylvania.

“The fundamentals of the economy aren’t sound and we’re going to have to do a lot of work moving forward.”

BBC Washington correspondent Rachel Harvey says the focus now shifts back to the US Treasury, which is tasked with using the billions of dollars of taxpayers’ money to try to unclog the financial system.

After all the political wrangling to get this plan passed, the question now is whether it will actually work, she says.

US Treasury Secretary Henry Paulson has vowed speedy action to get the rescue package up and operating.

BBC North America business correspondent Greg Wood says it will be several months before anyone can tell whether the plan is working.

News reported by The BBC

The economic situation over the past year or so has been difficult and words such as “credit crunch” are now quite common.

This has badly affected the housing market with sales declining.

Some people still have to move as a result of job changes or family circumstances.

But if they rent out their home, rather than trying to sell it in a depressed market, they have some opportunities to save tax while waiting for the housing market and the availability of mortgages to improve.

That is because there are a number of tax breaks available to the home owner who moves away and lets his home, and either buys another property elsewhere in the UK or rents.

Capital Gains Tax

The basic rule is that if the house you are leaving has been your only or main residence throughout the period of ownership, any gain in the value when you sell is exempt from capital gains tax (CGT) under the principal private residence rule (PPR).

Where you have vacated the property for a number of years, any gain in the last 36 months is also treated as exempt from CGT.

Some people are now having to relocate and, being unable to sell, are letting the property they have vacated.

If the property is let to tenants, and was previously the owners’ main residence, the owners should also qualify for another relief from CGT – lettings relief.

This could be available in any period where the house was not the main residence and does not fall within the past 36 months.

These two reliefs can be substantial.

How they work

Broadly, lettings relief is worked out to be the smaller of:

£40,000 or
an amount equal to the exempt amount for the owner-occupied period.
To understand how this works, take the example of a house you own and have previously lived in, but which you have been letting for some years.

You sell it this year for a total capital gain of £80,000.

Of that gain, £36,000 accrued while you were living in it, and in the three years after you moved out.

So that sum is exempt from CGT under the PPR rule.

That leaves £44,000 potentially still liable to CGT.

However that gain is reduced by the lower of:

£40,000 or
£36,000 (under the rule shown above).
Thus, in this case, the gain of £44,000 is reduced by £36,000 leaving just £8,000 liable to capital gains tax.

However, the CGT annual exemption will also be available if not used against another sale in the same year.

The exemption is currently £9,600, which exceeds the net gain of £8,000 in this example – so the result is that no CGT is payable at all.

The lettings relief is available to spouses and civil partners in respect of jointly owned property, so it could be worth as much as £80,000 per couple.

Income Tax

Income tax can be reduced too.

House sales may be falling but there is still demand for rental properties

Where a loan is secured against a rental property – typically a traditional buy-to-let – the interest on that loan is allowable as a deduction against the rental income received.

This means that the interest paid on the loan reduces, for tax purposes, the net rental income, and hence reduces the amount of tax payable.

Where an individual leaves his home, and lets it as discussed above, he would often like to buy a property in the area he is relocating to.

Obtaining a mortgage may be a problem in the current climate as he already has one on the home he is now going to let.

But if he is a good borrower with a good credit rating he may be able to persuade his lender to give him access to further funds, secured against the old property the family are leaving.

This may be sufficient in some cases to purchase a property in a lower cost area or at least give him a healthy deposit to arrange finance for the new property.

The tax benefit of taking out this new mortgage, secured on the original property that is now being let, is that all the interest paid on this second loan will be available to set against the rental income received for that property.

This means that he can release equity from his rental property to use to buy his new family home, or indeed for any other purpose as there is no restriction on how he spends the money raised.

Example

The reasoning behind this is that the letting of property is consider to be a business for tax purposes.

“Tax saving opportunities are available for those having to relocate and letting their old property”

The Revenue agrees that relief is due and the following example is taken from their Business Income Manual to illustrate how it works.

Mr A owns a flat in central London, which he bought 10 years ago for £125,000.

He has a mortgage of £80,000 on the property.

He has been offered a job in Holland and is moving there to live and work.

He intends to come back to the UK at some time.

He decides to keep his flat and rent it out while he is away. His London flat now has a market value of £375,000.

He renegotiates his mortgage on the flat to convert it to a buy-to-let mortgage and borrows a further £125,000.

He withdraws the £125,000, which he then uses to buy a flat in Rotterdam.

Although he has withdrawn capital from the business the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started.

So, tax saving opportunities are available for those having to relocate and letting their old property and these can be very valuable.

If in doubt professional advice should be taken to structure this correctly as it is sometimes difficult to change arrangements after the event.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

News reported by The BBC

The Spanish government has approved a 20bn euro ($30bn, £15bn) stimulus plan to tackle the cooling economy.

Prime Minister Jose Luis Rodriguez Zapatero interrupted his holidays for a meeting with economy minister Pedro Solbes and other cabinet members.

The plan, yet to be finalised, includes a 20m-euro ($30m; £15.9m) package to help families access mortgage finance.

The government has admitted that 2008 and 2009 will be tough, with Span’s GDP growth rate slowing sharply.

But it said Spain should return to GDP growth of about 3% starting in 2010.

Growth slowing

On Thursday Spain’s National Statistics Institute said the economy expanded by just 0.1% in the second quarter, compared with 0.3% in the first three months of the year.

Compared with the second quarter in 2007 Spain’s economy had grown by 1.8%, down from the year-on-year growth rate of 2.7% in the first quarter. Last year, Spain’s economy grew by 3.8%.

The economic measures approved also include proposals to cut red tape to make Spanish firms more competitive.

There will also be reforms in the housing, transport and telecommunications sectors.

The core of the 20bn-euro economic stimulus package has been a 400 euros rebate for 16 million workers and retired workers in the hope this would boost consumption.

Further measures are designed to help the construction industry by awarding more money to construct subsidised housing.

Inflation rate

On Wednesday, figures showed prices in Spain rose at their fastest annual rate for 15 years in July, driven by rising food and fuel costs. The annual inflation rate climbed to 5.3% in July, up from 5% in June.

Transport costs were 10.6% higher than a year earlier, the National Institute of Statistics said, with food prices up 7% compared with July 2007.

Spanish inflation is above the eurozone average of 4.1%, but Spain’s Economy Minister Pedro Solbes said the rate of inflation could drop to about 4% by the end of the year as oil prices decline.

News reported by The BBC

Between a rock and a hard place – the Bank of England’s predicament as described by increasing numbers of pundits around the City of London.

And it’s an uncomfortable position as the Bank opts for a third successive hold on 5% rates at its latest monthly meeting.

The rock is inflation, well above the Bank’s 2% target, now at 3.3% (by the CPI measure) and set to head above 4% later this year.

The hard place is the looming possibility of recession with all that means for jobs and economic output.

The Bank’s remit is to keep inflation to its target range and to set policy accordingly. With that in mind a cut in interest rates would have been difficult to justify.

“We won’t get the minutes of the latest MPC meeting till Wednesday 23 July… it will make interesting reading”

The bank’s governor, Mervyn King, has expressed his concerns about a wage/price spiral developing with above inflation pay settlements forcing up prices.

He and his eight colleagues on the Monetary Policy Committee (MPC) will need time to assure themselves that the surge in international food and oil prices has not generated this sort of “second round effect”.

Three-way split?

But the nagging worry for the MPC is that the evidence of a slowdown seen in recent weeks points to something worse, namely a steep contraction in growth in the second half of this year.

Business sentiment has soured in recent weeks. Expressions like “fallen off a cliff” have been heard in relation to orders and sales, and not just in the housebuilding industry.

The Bank of England has made it clear that a growth slowdown and squeeze on living standards is the price that will have to be paid if inflation is to be forced back into the bottle.

A slowdown is one thing but a prolonged period of negative growth is not part of the Bank’s game plan. Such an outcome would bring inflation down with a bump, quite possibly requiring a letter to the chancellor explaining why it was too far below target.

Professor David Blanchflower has hitherto been the one member of the MPC consistently calling for lower rates. For him, a housing and consumer slump in line with the US is the biggest risk to the British economy.

But several of his colleagues have admitted to considering the case for higher interest rates because of the inflationary threat.

We won’t get the minutes of the latest MPC meeting till Wednesday 23 July. It will make interesting reading. There could have been a three-way split between rate cutters, holders and raisers. Feathers could have been flying in a clash between hawks and doves.

Predicting an MPC meeting vote is an entertaining parlour game. But it’s not so much fun when the stakes for the economy are so high.

News reported by BBC