Read Experts' Reactions to the Summer Budget for more analysis.
Chancellor George Osborne took the opportunity of the Emergency Budget to remind people that, as the example of Greece has demonstrated, “if a country’s not in control of its borrowing, the borrowing takes control of the country”. With that in mind, he set out his agenda to transform the UK from “a low wage, high tax, high welfare economy; to the higher wage, lower tax, lower welfare country”.
This turned out to be good news for the ‘squeezed middle’, which will see cuts to both its income and inheritance tax rates. It will be less welcome by those who are welfare-dependent—who will bear the brunt of the £12 million cut in the welfare bill, or the ‘super-rich’, who will see their tax loopholes closed as well as cuts to their pension relief.
The Economic Backdrop
The Chancellor was able to deliver some good news on the economy. For 2015, the OBR forecast for UK GDP growth remains unchanged at 2.4%. Osborne said: “That is faster than America, faster than Germany and twice as fast as France. For the second year in a row, Britain is expected to have the strongest economic growth of any major advanced economy in the world.”
The 2016 forecast remained unchanged at 2.3%, with a revised (higher) figure of 2.4% in the following year. The Chancellor also pointed out that key measures, such as business investment, were notably higher than in 2010. He committed to the creation of 2 million more jobs in the life of this parliament.
Inheritance Tax
The move to exempt main home from inheritance tax had been a key election pledge for the Tories. The Government will phase in a new £175,000 allowance for the main home when it is left to children or grandchildren. This sits on top of the existing £325,000 threshold, which will be fixed until the end of 2020-21. Both allowances can be transferred to a spouse or partner. Also, those who choose to downsize will not lose any of the allowance from the property they used to own. This relief is tapered for estates of over £2 million, but it achieves the goal of allowing families to pass up to £1 million on to their children free of inheritance tax.
Dean Mirfin, technical director at Key Retirement says: "This news will be very welcome to the majority of pensioners who have invested heavily in their homes, and invested for a great many years. This move will enable many retirees to more effectively plan their estates and to secure greater protection for what for many is their most valuable, or only real, asset. Following the changes to death benefits held in pension assets, this makes effective estate planning more straightforward."
Pensions and Savings
As expected, the Chancellor announced plans to taper tax relief for higher earners. For every £2 of adjusted income over £150,000, an individual’s Annual Allowance, the limit on the amount of tax relief available to an individual or their employer each year will be reduced by £1, down to a minimum of £10,000.
The Chancellor also announced a savings ‘green paper’, to consult on whether the pensions regime should be more like the ISA regime. He said the Paper would “ask questions, invite views, and take care not to pre-judge the answer.”
Phil Loney, chief executive officer of Royal London, says this review should be judged on a number of measures: “Do the proposals preserve the fiscal neutrality of long term saving, so everyone is able to continue to make meaningful contributions to their pension pots without the penalty of paying income tax twice? Are the positive incentives to save within the tax relief system shifted away from people on higher incomes to those paying lower rates of income tax? Do the proposals remove the need for a “lifetime allowance,” thus no longer preventing people from using their pensions to save for the full range of later life needs, such as long term care and inheritance?”
Reforming Dividend Tax
One surprise measure from the Budget was a simplification of the dividend tax credit rules. The dividend tax credit, controversially introduced by Gordon Brown, will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016. To compensate, tax rates on dividend income will be increased. Although the Chancellor said that this ‘simpler’ system would mean that only those with significant dividend income would pay more tax, it will hit the self-employed who use limited companies.
Tax Abuse
The Government once again made it clear that it would not tolerate creative tax planning arrangements, arming HMRC with a higher budget to trap serial tax avoiders. It believes this could raise as much as £7.2 billion in extra tax. The Government’s targets include loopholes on ‘carried interest’ exploited by private equity managers, but—perhaps most importantly—non-domiciliaries. The Chancellor abolished ‘non-dom’ status for anyone who has been resident in the UK for 15 out of the past 20 years.
Restricting Landlord Tax Relief
In the end, the changes to the buy-to-let system were not as draconian as feared: The Chancellor reduced the amount buy-to-let landlords could claim in mortgage interest to 20%, but did not—as many had feared—abandon the relief altogether. The change will also be introduced over four years to minimise the impact on the housing market.
Tax Rates
Although released from the obligations of Coalition, the Chancellor held with the Liberal Democrat commitment to taking more people out of tax. The Chancellor raised the personal allowance to £11,000 in 2016-17 and stated his ambition to increase the Personal Allowance to £12,500 by 2020. The higher rate threshold will increase from £42,385 in 2015-16 to £43,000 in 2016-17.
Bad News for VCTs
The Chancellor also announced restrictions on the type of companies that are allowable under VCT and EIS schemes. This will direct VCT investment to earlier stage, higher risk investments.
Investors have grown used to relatively tame budgets in recent years, and this was the Chancellor’s most radical yet. The detail will need to be digested, but it may have ramifications for the way investors structure their finances for the longer-term.
