In his first Autumn Budget, Chancellor Philip Hammond was classically wedged between a rock and a hard place: the rock of economic reality and a pessimistic growth forecast from the Office for Budget Responsibility; and the hard place of unfavourable opinion – opposition, even – from many of his own party. It was not going to be easy for ‘Fiscal Phil’.
The potentially negative near- to medium-term economic impact of Brexit as a result of diminished or impaired trade and growth, will also be a factor for the future success of the UK’s economy. Those negative predictions may turn out to be wrong, but more than a few seem to accept that they are more likely to be broadly correct.
All this forms the backdrop to the changes and developments announced in the Budget. Given the forecasts and the Chancellor’s underlying cautious philosophy, there was little scope for enormous ‘giveaways’. The underlying focus was on ‘fixing’ – or at least contributing towards the fixing of – the housing market, incorporating actions related to both supply and demand.
It was not going to be easy for ‘Fiscal Phil’
Another fairly well trailed theme was action to address intergenerational unfairness. Unsurprisingly, this didn’t extend as far as the radical reconstruction of pensions tax relief to favour younger contributors that some had said might transpire. Options like a flat rate of relief higher than the basic rate – 30%, for example – and a more positive skewing of tax relief rates to favour younger voters were left for consideration at another time. The cost of pensions tax relief and continuing questions over whether it is achieving its purpose of encouraging greater saving amongst those not currently saving leads most to conclude that it’s a question of when, rather than if, for future change.
All of that said, what were the main changes and proposals announced in the Budget that have greatest direct, or indirect, relevance to financial planners? Here are my seven.
1. The personal allowance and higher rate threshold
The increase of the personal allowance to £11,850 and the increase of the threshold above which higher rate tax becomes payable to £46,350 (£34,500 plus the personal allowance) respectively represent another step towards the very publicly aspired to targets of £12,500 for the personal allowance and £50,000 for the higher rate threshold.
In themselves, these changes are unremarkable, but they serve as a timely reminder to financial planners to ensure that their clients do all they practically can to maximise the use of the exemptions to minimise tax and maximise retained income and capital. This is especially true for families. Wherever possible, and subject to any relevant anti-avoidance provisions, the allowances and exemptions of each member should be used. In planning this “family use of exemptions and allowances” it’s worth remembering that, generally speaking, unconditional transfers between spouses and civil partners are inheritance tax (IHT) and capital gains tax (CGT) neutral, but that any income arising from any capital transferred from a parent to an unmarried minor child will continue to be assessed on the parent.
2. Tax-advantaged investments
The Patient Capital Review was launched to investigate what changes could be implemented to enable funds to more efficiently reach growth-focused businesses. It proposed new investment vehicles seeded with government capital as part of an initiative to “unlock” £20bn of new investment into growth businesses. Of greatest interest to financial planners will be the proposal within the review to look at unlocking some flow of investment into appropriate businesses from pension funds. This could be through an increase to the lifetime allowance/annual allowance for investments into the right kind of businesses, and through changes proposed in relation to the qualifying rules for Enterprise Investment Schemes (EIS) and venture capital trust (VCT) investments.
The Government has made no formal proposals in relation to the former, but has in relation to the latter. It has been proposed that legislation will be brought forward in the Finance Bill to offer the opportunity to invest an additional £1m, on top of the current £1m limit, into EIS investments founded on knowledge-intensive companies, and introduce restrictions to EIS/VCT investments that are structured as low-risk ‘capital return’ plans, with the return being substantially from the tax relief. We await the definitions in relation to both key terms.
3. Indexation relief for companies
The removal of indexation allowance for companies, including life companies, from January 2018 looks, on the face of it, quite innocuous. However, this will have an impact on the tax liabilities of UK life funds and companies investing in capital assets that produce a capital gain.
A consultation is to be launched on trust taxation – a sense of déjà vu on this one
In relation to UK life funds, if we assume that the retail price index (RPI) increases at 3% and capital growth is at least at this rate, the impact that the removal of indexation relief will have will be -6% – that is to say 20% of 3%. One would expect representations to be made about this, given that the impact assessment note accompanying the announcement of this change stated that it would only affect companies. It will clearly also affect individual investors in life assurance products, such as single premium bonds. The change will also affect companies investing in collective investments. However, there will still be the deferment of any tax on capital gains until realisation and tax-free dividends.
4. Trust taxation
A consultation is to be launched on trust taxation – a sense of déjà vu on this one – but trustee investment remains a potentially rich source of collaboration between financial planners and lawyers/accountants.
5. Inheritance tax
Some consumer research has been undertaken and received by the Government into the impact that IHT reliefs and exemptions, in particular business property relief and annual percentage rate, have on estate planning behaviour. It will be interesting to see what the Government intends to do, if anything, with the findings of this research.
6. Off-payroll working
A consultation is to be launched on off-payroll employment status and the use of personal service companies in the private sector.
7. Tax avoidance
A Budget wouldn’t be a Budget without some more anti-avoidance provisions. These just serve to remind financial planners to stick with tried and tested strategies in relation to tax planning.
The financial planning sector has had more intense loads of new provisions to deal with, it’s true, but some of the above at least should cause ‘best practice’ financial planning to be, where appropriate, reviewed, reconsidered and recalibrated. Being aware of change and what it means to particular clients is the essence of delivering ‘advice alpha’ – the improvement to the client’s bottom line brought about by the know-how and expertise of the planner.
Tony Wickenden is joint managing director of Technical Connection, a St James’s Place Group Company. It supplies support and consultancy to financial advisers and financial institutions through an online platform: Techlink Professional.
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