Budget 2017 - A look ahead for savers and investors
- Steps in the right direction for low earners
- Easy targets - second properties and dividend tax
- ISA, LISA and JISA
- Child trust fund (one change long overdue)
- Student loans
There is little room for giveaways in this Autumn’s Budget and plenty of scope to increase the tax take.
Personal taxation - Steps in the rght direction for low earners
We’ll see more progress toward the commitment to the personal allowance rising to £12,500 (currently £11,500) by 2020. The higher rate tax threshold moved to £45,000 in April with an intention to move to £50,000, so we could see some movement there as well.
The personal savings allowance (£1,000 for basic rate taxpayers) could be improved to encourage more people to save at the expense of higher rate taxpayers (currently £500). Although arguably the personal savings allowance has made so much of a dent on Cash ISAs that the government might think twice about hiking the allowance again so soon, and inflicting more damage on the industry.
We saw changes to capital gains tax (CGT) rates in 2016 with shares and funds seeing a tax cut compared to investment property, so I think CGT rates will remain untouched this time around - other than a small increase to the annual CGT allowance (currently £11,300).
It’s unlikely we will see a change to inheritance tax – the introduction of the Residence Nil Rate Band is currently being tapered in and will be £175,000 by 2020.
Easy targets - Property taxation
The housing market needs more supply, not more credit or funding, but we could see a youth-vote-winning cut to stamp duty for first time buyers. Housebuilders would certainly be keen on this.
This could come at the expense of those who own a second property. There has been plenty of talk about how reducing second property ownership would simultaneously depress demand for property, and increase investor appetite for investment elsewhere in the economy, which is on the Chancellor’s wider agenda. Successive chancellors have already taken a red pen to 2nd properties with:
- An extra 3% stamp duty on purchase, higher rates if bought through a company
- Reducing tax relief against mortgage interest – being tapered in – higher rate taxpayers will only be able to claim basic rate relief against mortgage interest payments by 2020
- CGT rates for second property now higher than for funds and shares
Reducing the number of people who buy to let will increase the supply for many, including first time buyers.
Increasing stamp duty has already dampened buy to let demand and a further hike would depress sales further. CGT changes will have little impact on property activity unless there was a big cut, then we would see some sales.
One target could be property income, which is likely to have a great dampening affect than a CGT change. A further reduction in mortgage interest relief would be easy, either to accelerate the current taper, or abolish completely for those on higher incomes.
Easy target - dividend taxation
Aimed squarely at the small business owner, but catching investors as well, the tax-free dividend allowance of £5,000 is already due to be cut to £2,000 a year from April 2018. Above this, dividends are taxed as follows:
|Basic rate taxpayers||7.5%|
|Higher rate taxpayers||32.5%|
|Additional rate taxpayers||38.1%|
Increasing the rates of dividend tax or cutting the tax-free allowance further would be a quick win for the Chancellor.
The main ISA allowance is now set at £20,000, after a big jump this year from £15,240, so it is unlikely we will see any change here. The best savers and investors can hope for is a return to some form of indexed allowance.
Cash ISA subscriptions were down significantly in 2016/17 from the previous year:
|2015/16||£58.694 bn subscribed to 10,118,000 accounts|
|2016/17||£39.191 bn subscribed to 8,480,000 accounts|
This fall is down to interest rates and the personal savings allowance.
The Lifetime ISA launched in April this year and has been popular among the small number of providers who offer one (seven so far). An indexed contribution limit would be helpful for those young savers.
Child Trust Fund
The Junior ISA and Child Trust Fund (CTF) contribution limits increase by inflation annually, so we should hear of a move upward from £4,128 probably to a 3% rise - rounded to allow for easy division by 12 for monthly payments £4,248.
Danny Cox, Chartered Financial Planner, Hargreaves Lansdown;
"We are already expecting a rule change at some stage on CTFs - which would mean rather than maturing at age 18, they would automatically switch into an adult ISA. The Chancellor could look to go one step further and simplify children’s savings by merging CTFs with Junior ISAs in a similar way to PEPs and ISAs merging around 10 years ago."
We have seen two new NS&I products over the last couple of years to help savers to deal with low interest rates. The NS&I has a net financing target of £13 billion this year, plus or minus £3 billion, which is almost the same as when they launched the highly popular “pensioner bonds” in 2015. This is a big target to hit without improving their interest rates, increasing product investment limits or both.
There is an argument to say that over the years, VCTs have become less risky than they once were and so 30% tax relief looks too generous. However, since the rule changes of November 2015, where greater restrictions were imposed on the types of investments VCT managers can make, this has reversed somewhat. However the government shelled out up to £171 million of tax relief on the £570 million raised last year and a cut to the overall £200,000 allowance or a reduction of the rate of relief to 20% is not out of the question. It’s small beer though and cuts off a source of investment for small UK companies.
There are now stricter limits on the investments which may be made by VCTs. They are designed to encourage VCTs to only make investments intended to grow and develop small businesses at an early stage of their life. The most significant changes include VCTs no longer being able to invest in companies more than 7 years old; certain types of transaction, including management buy-outs (MBOs - where VCT funds are used to help existing management buy shares from a founder or other major shareholder), are no longer permitted; and VCTs cannot invest more than £12 million in any one company.
It has also been suggested that asset backed investment will also be banned and a further tightening of the rules will limit the opportunities for investors.
The Conservative Party Conference outlined some forthcoming changes to student loans – in what is being seen as a bid to win over Millennials. So far we know there are plans to freeze tuition fees – cancelling the rise due this year. The government has also confirmed it will raise the income threshold at which loans start to be repaid to £25,000 – and then peg it to earnings. However, there remains the possibility that Hammond may go further. He could, for example, reduce the interest on the loans by linking them to CPI rather than RPI – bringing an end to one of the last remaining links to RPI.