A pre-election budget and its accompanying budget speech, is often amongst the most interesting of government communications, seeking to balance not only the books but also the politics: kicking off the election campaigning by setting out the ruling party’s stall. Any notion that this has been a politically balanced coalition was completely put to rest as the Chancellor delivered a firmly Conservative view of the economy, highlighting the positives and burying the negatives. It is no more than you’d expect. He is, after all, a politician and one facing a general election in just two months time.
This is what we think:
Help to Buy ISAs – Great Idea at No Immediate Cost to the Government
Designed to help first time buyers build up a deposit for a first house purchase, this extension of the ISA rules to allow tax relief on something other than a pension contribution may be very popular, particularly amongst parents and grand parents who want to help their children and grand children save for their first home, although the funding mechanism will take some deciphering.
The scheme is based on personal net monthly contributions of up to £200 a month with no monthly minimum. This will entitle the Help to Buy (HTB) ISA holder to a 25% credit from the government that will be added at the time the deposit is used to buy a first home.
There does not appear to be a facility to accumulate these monthly allowances or back date them with lump sums (except for kick starting the scheme with up to £1000 from the new tax free savings allowance) and so the sooner an individual starts saving the better.
The allowance is personal and more than one allowance can be used to buy a single home. There are strict limits on the price of the new home for which the bonus will be available, which are £250k outside London and £450k inside London.
For every £200 saved the government will contribute £50 making a gross contribution of £250 per month up to a maximum of £15,000 in any one tax year.
However, by only crediting the 25% bonus at the end of the scheme when the HTB ISA is used to buy a house, the government cleverly reduces its immediate liability to spend any money now, deferring the cash flow for probably four years or more. The benefit to savers in terms of interest on their HTB ISA and any consequent compound interest is also limited to their personal net contributions. The fact that these ISAs appear to be restricted to cash may also prove disappointing with interest rates so low.
Tax Free Cash Savings – Less is More?
The first £1000 of gross interest on cash savings is to be tax-free for basic and nil rate taxpayers. Only the first £500 will be tax-free for higher rate taxpayers.
This could make it more attractive, particularly for basic rate taxpayers, to place cash on deposit. However the rate of interest on cash savings is still very poor. The best instant access rate we could find yesterday was 1.55% gross AER*. To maximise the tax advantage for a basic rate taxpayer using this account would require a deposit of £64,516. After that the interest would be taxed at 20%. For a higher rate taxpayer the amount needed to maximise the tax benefit would be half that.
Nonetheless, this may encourage more higher rate taxpayers to consider using the government’s new Pensioners Bonds which, despite the relatively high rates of interest, have proved unattractive to higher rate tax payers.
Many have reduced their exposure to cash, because of low rates of return, in favour of more risky asset backed investment such as shares and bonds,
Now, a higher rate tax payer, with limited cash savings, will be able to benefit from tax free income on both the 1 year 2.85% and the 3 year 4.80% Pensioner Bond, into which a total of £20,000 can be deposited.
In any event the change is welcome and planning opportunities for using this allowance together with the other tax free schemes such as ISAs and Pensions will be helpful to most clients.
A Drop In The Pensions Lifetime Allowance
The amount of money that can be held in a pension has been reduced from £1.25m to just £1m. I say just £1m deliberately as for many people in final salary, defined benefit pension schemes, the £1m limit could prove challenging. For others, in particular widows inheriting their spouses pensions when they have a pension of their own, this could also be an issue.
Although the Lifetime Allowance will be indexed from 2018, a £1m limit may well prove to be an incentive for many more wealthy individuals to consider alternative means of funding their retirements, through Individual Savings Accounts, offshore investment bonds, Business Property Relief Schemes, Venture Capital Trusts and Enterprise Investment Schemes. For many entrepreneurs and small business owners, the idea that their business is their pension may be reinforced by this reduction.
One Good Deed Deserves Another Look…
Deeds of Variation are commonly used to change the terms of a will after someone has died. This may be necessary because the original will was written before a significant change in the deceased circumstances or a change in legislation that has adversely affected the interests of the beneficiaries. Crucially, this can include making changing to improve the tax efficiency of the will to save inheritance tax, which was the point being made by the Chancellor directed at the Leader of the Opposition who recently used a Deed of Variation to alter the terms of his late fathers will for such reasons.
It is likely that the proposal to ban Deeds of Variation was a blatantly political and raised simply to embarrass the Leader of the Opposition. It is hard to believe that Deeds of Variation, introduced by the Chancellor’s heroine, Margaret Thatcher in the Inheritance Tax Act 1984 (s 142) would be scrapped, particularly by George Osborne. The alternative is that the deceased’s estate is administered in an inflexible way under the terms of the Administration of Estates Act 1925.
It is likely that the professional bodies representing solicitors and estate practitioners would have some strong words to relay on this as the measure has been extremely popular and useful and can only bring to bear legitimate tax planning technics that are perfectly legal for the living. Banning them for the dead seems very inequitable.
The desired outcome of a squirming Leader of the Opposition, may have satisfied the Chancellor and Deeds of Variation may well survive, even if one of them does not!
Deficit Reduction
The level of spin employed in the Chancellor’s delivery of the success story was enough to make even the most Mandelsonian, Campbellesque spin doctor blush.
The Telegraph’s Dan Hodges, in his contribution to their online budget coverage made the point when he said: “As expected, George Osborne has killed off Labour’s main attack line – that Tories would take spending back to 1930s. But he’s also taken out another key attack line – that he failed to meet his deficit reduction target. His claim that debt will actually start falling as a percentage of GDP will need to be checked. But if true, no one was expecting that”
That deficit reduction which the Chancellor claimed will lead to a £5bn surplus by 2018, will be funded by large additional cuts in funding for the NHS, MOD and the Police, went completely unstated in the Chancellor’s speech. Such massive reductions in government debt have to come from somewhere and there is great scepticism over how this will be achieved. It is possible that the Chancellor is thinking that if he can claim victory over the deficit now, a view that is not shared by many analysts, then explaining a future failure to meet his targets may not be so difficult and after all, there is an election to win in the meantime so focusing on that may well be the current priority, particularly if you believe, as does the Chancellor, that the alternative would be even more unpalatable.
The Annual Tax Return is Dead. Long Live the Tax Return!
Of course announcing the abolition of the annual tax return is a great headline grabber but the reality is that the HMRC will always want us to declare our income and capital gains so they can exact their pound of flesh.
So this announcement is about the transformation of the tax return into a digital account that is ongoing, removing the need for an annual return to be completed, often at the last minute, whilst one is still hung over from the New Years celebrations. Instead one will run a tax account and have the option to pay tax on a monthly pay as you go basis.
Individuals will be able to opt to continue to complete a paper tax return if they so chose but it is unlikely that the HMRC will want that to continue for very long. We expect that over the five year implementation period paper returns will be phased out.
Many experts believe that the five year completion target is unrealistic, based on the experience of previous IT projects which have failed to meet such deadlines.
Roll Up, Roll Up, Get Your Interest Gross
Changes to the tax return system go hand in hand with another significant change that will see interest being credited to all savings accounts gross, without the deduction of basic rate tax. This is already common practice in many other countries. By being allowed to keep all the interest deposit holders will benefit more from compound interest. They will have to declare the tax through their online tax accounts and enter all the details.
For the government the disadvantage of not getting the tax up front will soon fade as the tax is paid monthly through the new tax system.
More importantly for the HMRC, they will be able to better tie the interest payments into the information the receive from us and the deposit providers.
Through the new system over and underpayment of tax will be theoretically less likely and there won’t be the risk of shock demands and windfall repayments.
In any event, what is clear is that the HMRC will ultimately know more about the details of our financial affairs than they ever have done before, with account numbers and other details being available to them through our online accounts.
