Budget July 2015

Budget July 2015

This post is a quick response to today’s extra Budget, the first Conservative budget in almost 20 years (the last was from Ken Clarke in 1996).

What were we expecting?

Budget bingo

Expected tax changes

Here are some tax changes that had already been announced / leaked:

  • The personal income tax allowance will be raised in April 2016, along with the higher rate threshold – CONFIRMED
    • The personal allowance will rise from £10.6K to 11K
    • The 40% tax threshold will rise from £42.4K to £43K
  • Pension contribution tax relief will be reduced for high earners (over £150K) – CONFIRMED
  • An increase in the inheritance tax threshold to £1m for married couples by 2017 – CONFIRMED
    • This only applies to those passing on property to children or grandchildren
    • The extra relief will be tapered away from estates over £2M
  • Tightening up of non-dom rules – CONFIRMED
    • Permanent non-dom status will be abolished from April 2017 – anyone who has been resident in the UK for 15 of the previous 20 years will be considered UK-domiciled for tax purposes
Higher wages, lower tax, lower welfare
Expected non-tax changes
  • A lowering of the benefits cap from the existing £26K to £23K in London and £20K elsewhere – CONFIRMED
  • High-earning social housing tenants (> £40K in London, or > £30K elsewhere) to pay market rents  – CONFIRMED
  • Extending the right-to-buy scheme to housing association tenants – CONFIRMED
  • Student maintenance grants (for those with parents earning less than £42K) to be replaced with loans – CONFIRMED
  • The cost of providing free TV licences for over-75s to be included within the BBC’s budget (effectively a budget cut to the BBC) – CONFIRMED
  • More details on the “Northern Powerhouse” plan – CONFIRMED
  • Relaxation of Sunday trading laws – CONFIRMED
What else might have happened?

Rewarding work and backing aspiration

Possible changes that did happen

Other things that had been discussed include:

  • ISA regime to be extended to P2P lending – CONFIRMED
    • An “Innovative Finance” ISA will be introduced from April 2016
    • A consultation will take place on whether crowd funded debt and equity should also be included
  • Restrictions on tax relief for buy-to-let landlords – CONFIRMED
    • Mortgage interest relief will be cut to the basic rate of income tax
    • The annual ‘wear and tear allowance’ will be replaced by a system that only allows relief when furnishings are replaced
  • Tax credits may be restricted for those with more than two children, but only for new entrants to the welfare system, or extra children – CONFIRMED
Fixing the economy
Possible changes that did not happen
  • The additional (45%) rate of income tax might be abolished – DID NOT HAPPEN
  • Salary sacrifice / NIC relief on employer pension contributions to be restricted / withdrawn – DID NOT HAPPEN
  • Possible changes to housing benefit so that the entire bill isn’t covered – DID NOT HAPPEN
  • Possible restrictions on capital gains exemption to main residence – DID NOT HAPPEN
  • Possible changes to pension tax relief rates (eg. flat 30% / 33% relief) – DID NOT HAPPEN
  • Possible restrictions on access to 25% tax-free lump sum when crystallising pension – DID NOT HAPPEN
  • Possible merger of NIC and income tax systems – DID NOT HAPPEN
Surprises and other announcements

Budget word cloud

Changes to the VCT regime and dividends

The big surprise for investors was further changes to the VCT regime:

  • VCT rules were changed as recently as the March Budget, in order to comply with European State Aid rules.
  • Eligible businesses needed to be less than 12 years old, or 10 years for “knowledge intensive companies”.
  • A lifetime allowance for tax advantaged funding of £15M per company was also introduced.
  • The regular company age limit has been reduced today to 7 years.
  • The lifetime allowance reduced to £12M, possibly because of FX movements against the Euro (though it has increased to £20M for “knowledge intensive” companies).
  • “Grandfathering” of money raised from exits in similar businesses (now no longer eligible) appears to be outlawed also.
See also:  Weekly Roundup, 6th November 2018

Public sector net borrowing

These changes will force VCTs to refocus on earlier-phase businesses, which will both make them less attractive to investors and also shrink the industry. NVM recently chosen to return capital to shareholders, citing the new EC rules.

Without these changes, the industry might have expected to grow in the face of increased demand from investors unable to access pensions because of lifetime allowance reductions and / or restrictions on relief for higher earners:

  • The lifetime allowance for pension pots was confirmed as being cut from £1.25M to £1M from April 2016, but it will be indexed to inflation from April 2018.

Regional differences

The other major change for investors was the introduction of a £5K tax-free band for company dividends, and extra taxes above that. This will impact those with a high income from dividends, who will mostly be the self-employed working through service companies.

Other announcements

taxes per worker by authority

Away from the investment arena, other changes include:

  • A new “National Living Wage” for over 25s to be introduced from 2016 at £7.2p per hour (cf. current minimum wage of £6.50 per hour). Will rise to £9 per hour by 2020.
  • “Rent-a-Room” tax relief on spare room lodgers rises to £7.5K pa (had been stuck at 4.25K since 1997).
  • Corporation tax will be cut from 20% to 19% in 2017 and then to 18% by 2018.
  • Working parents of three- and four-year olds will receive 30 hours of free childcare a week – up from 15 – from September 2017.
  • The bank levy will be reduced from 0.21% to 0.1% between 2016 and 2021, but a new 8% tax on banking sector profits will be introduced from January 2016.
  • From 2017, there will be a flat rate road tax of £140 for most cars, except in the first year when tax will remain linked to CO2 emissions. Electric cars won’t pay road tax and the most expensive cars will pay more.
  • Defence spending will meet the Nato target of 2% of national spending.
Conclusions

spend by authority

There’s a lot to like about this Budget, not least Osborne’s stated agenda to move the UK from being “a low wage, high tax, high welfare economy; to a higher wage, lower tax, lower welfare country”.  He also said “the benefits system should not support lifestyles and rents that are not available to the taxpayers who pay for that system”.

More specifically on the changes:

  1. The increased minimum wage and reduction in tax credits send a clear message that work is better than welfare.
  2. The benefit cap reduction is very welcome. In the context of an £8K new state pension and a £12K minimum wage, £20K is still an extraordinary amount of money to give to someone for doing nothing.
  3. I also like the recognition that London is not like the rest of the country, and would like to see this regionalisation extended to public sector wages.
  4. The increase in the inheritance tax threshold is a step in the right direction, but the £1M cap (with tapered withdrawal above £2M) doesn’t go nearly far enough for those living in London. The restriction on passing property to direct descendants mean that for many (including myself) it is irrelevant.
  5. Admitting P2P lending to the ISA regime is good news, but the devil is in the implementation – will platforms allow P2P in existing ISAs, or will yet another account need to be opened?
  6. Restricting benefits to third children and above is long overdue. It needs to be clear to potential parents that they need to be able to afford the children they want, just as they need to afford anything else in life.
  7. The 1% public sector pay rises and freezes to welfare are also good news. It’s important to the future success of the country that hard work, preferably in the private sector, should be seen as the best way to achieve your ambitions.
  8. Restricting buy-to-let mortgage tax relief to basic rate makes sense in the context of the UK housing market, but it makes B2L borrowing different from debt in all other industries. Whether small landlords will incorporate, or institutions and REITs will move into private lettings, remains to be seen.
  9. The VCT changes are regrettable, but presumably are driven by Europe.
  10. The introduction of a new tax regime for dividends will impact those with a high income from this source, typically the self-employed working through service companies.
  11. High earners are an obvious group to penalise, but there does now seem to be a clear target pinned to anyone earning more than £150K. This must eventually impact aspiration.
See also:  Weekly Roundup, 21st November 2017

Until next time.

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

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Budget July 2015

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