Death & Taxes: What the Budget means for you
All articles in this section are provided courtesy of Master Investor Magazine and are not necessarily the views of Alan Steel Asset Management.
"In trying to please all, he had pleased none" —Aesop
Well another Budget slips by and this one came with plenty of rumours, expectation and so called "expert" predictions.
The Budget took its new autumn slot on the calendar to give plenty of time for new rules, allowances and changes to be implemented by the next tax year. The result, though, is that Hammond leaves most things untouched with little impact for the investor/saver.
It's been a tumultuous year for this government, which has been trying to please both young and old but has ended up losing the support of both!
Trying to please everyone is never easy and prior to the Budget there was pressure to ditch business rate rises after lobbying by the British Chambers of Commerce. They argued the higher living wage, auto enrolment pensions and the new apprentice levy are already hitting the pockets of business owners.
Meanwhile, teachers and health workers were looking for wage rises following a pay cap in the past seven years; and although stamp duty intake has risen, property sales have fallen due to high stamp duty costs, meaning radical changes were sure to happen.
The easy target over the past few years has been pensions, as most people don't understand them due to the complications of pensions "simplification" introduced by then Chancellor Gordon Brown in 2006. The rumour was that higher rate tax relief on pension contributions would go, and perhaps even the valuable tax-free cash available to those over the age of 55 would be restricted.
The good news, though, was that pensions were once again left untouched and higher rate tax payers can still get an effective 67% uplift on pension contributions – make hay while the sun shines I'd suggest.
For those earning under £150,000 you can still tuck away £40,000 as an annual contribution and don't forget to mop up any unused tax relief from previous years if available. For those with income over £150,000 your allowance is reduced on a 2 for 1 basis to £10,000 if your income is over £210,000, but carry forward of unused relief is still available. N.B. that's an easy one to be removed in future budgets!
So what were the changes? Well, there was a slight increase to the pension lifetime allowance from £1 million to £1.03 million in line with CPI. This is the maximum amount of funds that can be crystallised without any additional tax charge. This is worth an extra £16,500 to those without any lifetime allowance protection.
After years of Lifetime allowance reductions in past budgets this is a welcome increase but it's still a long way off the £1.8 million allowance available in the 2010/11 tax year.
I was hoping the Lifetime Allowance would be removed with a trade off being basic rate tax relief only on contributions going in. Why should investors be penalised for strong investment performance?
SHELTERING £40,000 FROM TAX PER COUPLE EVERY YEAR IS NOT BE SNIFFED AT!”
In the investment arena the main ISA allowance was left untouched with a generous £20,000 available – sheltering £40,000 from tax per couple every year is not be sniffed at! For those looking to build pots for children, perhaps for further education, the junior ISA allowance was increased to £4,260 per child.
The new dividend allowance will indeed be reduced from £5,000 to £2,000 from April 2018, so having as much as possible invested in ISAs makes sense to reduce the amount of taxable dividends within portfolios.
If you run ISA and non-ISA portfolios, it is worth noting that there has been a £400 increase to the Capital Gains Tax exemption to £11,700 per year – so using this valuable exemption and washing out gains into ISAs each year is a good idea.
Enterprise Investment Schemes (EISs) and small businesses were given a boost with EIS limits doubled to £2 million, but more controls over the type of qualifying business will apply. Mr Hammond seems to have finally got it that small businesses are important to the UK and are the engine room of many economies.
One relief that did get frozen is indexation relief. Many of course will remember this used to apply to individually held shares. The idea was to reduce the capital gain for each year that the investment was held. This relief was still available for companies who were selling assets and one of the biggest target areas, I imagine, for the chancellor are those individuals who have set up companies for their property letting business. In future, any asset sold will still attract indexation relief but only up to January 2018, at which point relief will be frozen at that date.
However, Buy-to-Let investors will be relieved to know that the plan to make investors pay Capital Gains Tax within 30 days of selling a property was not introduced. A surprise really, given the need to raise tax quickly and the current ability to leave CGT unpaid until 31st January following the tax year in which the gain occurred.
Aside from investments and pensions the biggest changes were increases to the personal allowance and higher rate tax threshold along with the removal of stamp duty on the first £300,000 for first-time buyers. The eagle-eyed among you may have picked up that those giveaways are not applicable to us Scots as we have different rates and will have to wait until 14th December to see what's in the Scottish Budget! With young people already struggling to get on the housing ladder, let's hope the same generosity prevails.
So are there any investment opportunities? Well with the government planning to build 300,000 homes per annum by 2025, the stamp duty removal should be encouraging news for housebuilders, and those suppliers of building materials. An increase in infrastructure spend should also help funds exposed to those areas, although much of that may already be priced in. Additionally, we remain way behind the US in technology research and investment in this area is welcome news.
Finally I had to laugh at the announcement of a Task Force to ensure continuity and growth in the asset management industry post Brexit. We are currently in the midst of adopting MIFIID 2 rules, which in simple terms are a directive from the EU taking up huge amounts of time, money and effort with little benefit to the end client. Still, if a task force helped the Ryder Cup team win, then it must be effective!