26th June 2015
From pensions to buy-to-let, wealth manager Brewin Dolphin believes nothing is safe from tinkering in the Emergency Budget.
The Emergency Budget is set for 8 July and will give chancellor George Osborne another chance to make sweeping changes to pensions and savings, as well as clawing tax back from buy-to-let landlords.
Here are their seven predictions:
While pensions have seen an unprecedented amount of change in the past year, it’s not over yet. The government has already laid out plans to cut the lifetime allowance from £1.25 million to £1 million and cut pensions tax relief for people earning more than £150,000 a year. The tax-free allowance will be scaled down by £1 for every £2 they earn above that level.
Richard Harwood, divisional director of financial planning at Brewin Dolphin, said: ‘This would make pensions tax relief a lot more complex, like the Laour system the Tories removed.
‘It might sound politically attractive, but will be very costly to administer, particularly for final salary schemes. I would like to see more certainty and stability rather than messing about with the rule, so that individuals, employers and pension providers can make long-term plans. If the government learnt from previous mistakes I would be surprised if this proposal was implemented or it was not significant modified.’
In the Conservative manifesto the party pledged to increase the inheritance tax (IHT) threshold to £1 million purely to cover the family home. From 2017 the existing nil rate band – on which no IHT is paid – of £325,000 will be increased with a main residence allowance of £175,000. For married couples and civil partners that will mean a family home of £1 million will be able to be passed on tax-free.
Harwood said: ‘There is a real danger of making IHT overly complicated. I would like to see something to simplify the system, such as a simple increase in the nil rate band for all.
‘I would also like to see more serious consideration of the elderly that need care buy may end up holding onto inappropriate properties and not moving to residential care in order to reduce a tax liability.’
Tax and national insurance
A long-held plan by the Conservatives is to increase the higher rate income tax starting threshold to £50,000, lifting thousands of people out of higher rate tax.
Brewin Dolphin investment manager Rob Burgeman said: ‘At the moment the tax system is prejudiced against families where one parent works and one is more active in childcare.
‘We would like to see a change to tax allowances so that couples could elect to be taxed jointly, with two sets of all allowances and two sets of pension allowances.’
A number of commentators have been calling for the generous tax breaks offered to buy-to-let owners to be reduced, arguing that wealthier older people are benefiting from tax breaks to buy a second home while younger people are struggling to get on the ladder.
The main sticking point is the tax relief landlords can claim on their mortgage interest, which has long been removed from those with just one home.
‘Tax relief on interest on buy-to-let properties has created enormous distortions and price out many first-time buyers,’ said Burgeman.
‘It encourages speculation and high levels of borrowing, as buy-to-let investors offset the costs of borrowing against rental income. This could be addressed, but will the Conservatives want to attack buy-to-let landlords who may be their natural supporters?’
EIS & VCTs
Enterprise investment schemes (EIS) and venture capital trusts (VCT) offer large tax breaks for investors who put their money into the high-risk schemes. The tax breaks are so large because the government wants to encourage entrepreneurship and the creation of job in the UK.
Until recently, the most popular EIS investment was into renewable energy, which not only benefitted from the large tax breaks but also from government subsidies. Now the government has stopped these schemes investing in renewable energy, there is scope for a new target for the money.
‘Previous rules for EIS have caused funds to be targeted at solar power, windfarms and biomass fuels and have made a big difference,’ said Harwood.
‘There is a real opportunity here to use EIS relief to support social and affordable housing by encouraging investment for the good of society.’
Clamping down on individuals and companies that avoid paying their fair share of tax had been a key objective of the last government and that is expected to continue.
‘Although we are likely to see the closure of some loopholes, this is hard to achieve – there may be more high-profile court cases to act as a deterrent,’ said Harwood.
‘Whenever one loophole closes, another opens. Going down the route of naming and shaming may be a better way.’
Capital gains tax
Capital gains tax (CGT) has not been reformed in a number of years and there is concern that it encourages individuals to hold on to capital producing assets because there is no allowance for inflation or for how long an asset has been held.
Burgeman said: ‘It might not be high on the agenda, but we would like to see reform of CGT.
‘It is a very complicated tax that creates distortion. A big problem is that it does not may any allowance for inflation, so over long periods even modest amounts can have a big impact.’