Philip Hammond’s 29 October Budget has been heralded as the “biggest giveaway Budget in recent history”.
Better-than-expected tax receipts and growth forecasts gave Mr Hammond scope to spend, with much of the extra money going on the NHS and universal credit, helping those in greatest need.
The wider taxpaying public benefits too as promises to raise the personal allowance (the amount anyone can earn free of income tax) and the threshold at which higher-rate tax applies were both brought forward. This means, for example, that a married couple in retirement can now receive £100,000 in annual income without paying higher-rate tax (see below for details).
The Budget was also relatively benign in that many potential revenue-raisers, including further loss of reliefs for higher earners and investors – which we had earlier identified as possible changes – were not brought into effect.
All of the above is welcome news, but it is contingent on one crucial factor: Brexit.
The Brexit proviso
The Chancellor’s comments to the media ahead of the Budget indicated that if the UK does not obtain a fair deal (or any deal) with the EU then we should expect an emergency Budget. This would be in order to provide the necessary public spending required to support the economy through a period of shock.
In his Budget address he reiterated the point, saying: “We are at a pivotal moment in our EU negotiations. Get it right, and we will not only protect Britain’s jobs, businesses and prosperity, but we will harvest... a boost from the end of uncertainty.”
Reading between the lines, his message appears to be that Budget giveaways are contingent upon a successfully negotiated departure from the EU. In the absence of an agreement an “emergency Budget” could see the reversal of spending announcements and, potentially, the introduction of increased taxes.
This prompts us to view the current relative calm (from a fiscal perspective at least) as an opportunity.
Substantial scope to plan – but for how long?
The UK’s existing tax regime offers a relatively benign environment with much room still available for effective financial planning.
This is particularly true for those facing inheritance tax (IHT) liabilities. It had been thought possible that IHT rules might tighten, given that the Chancellor asked the Office of Tax Simplification for a review of the regime in his Spring Statement earlier this year. There was much speculation regarding potential extension of the seven year gifting rule, creation of a gift tax akin to the rules in the U.S., changes to business and agricultural property reliefs, but nothing materialised in the 29 October Budget.
This means a number of planning avenues remain readily available for those with the foresight to plan ahead. These include:
- The very simple ability to make gifts on an unencumbered basis. If you are considering giving assets away then now may be the time to put such plans into action to get ahead of any future changes to these rules. Insurance cover can be taken out relatively cost effectively to insure the liability for the seven year period if there are concerns about the recipient of the gift having a tax liability if death of the donor occurs within seven years.
- Business property relief, which applies a 100% inheritance tax exemption for qualifying company shares, provided they are held for a minimum two years, continues to offer an attractive and flexible planning opportunity for those with the appetite to absorb the investment risk; it only applies to smaller, generally private companies, including many on AIM. Cazenove Capital offer an IHT Portfolio Service providing a diversified portfolio of such stocks and October’s market weakness has provided a relatively attractive entry point.
- Tax-efficient arrangement of assets within various vehicles that can provide protection against higher rate tax for those with an income, or income requirement, in excess of £50,000 per annum, or £100,000 for a married couple (see below). These include ISAs, pensions, insurance wrappers and for more substantial assets, companies, partnerships and bespoke investment funds.
- With no further changes to capital gains tax (CGT), other than a small increase in the annual exemption (see below) it is worth pointing out that rates on non-property gains are today at historically low levels. For those looking to restructure their assets, in order to plan for IHT efficiency for example, which may require a disposal of assets and realisation of capital gains, with rates at their current low levels, now might be the time to get on with it.
In all cases where significant actions including gifts, asset disposals, or business or portfolio restructuring are being considered, please contact your Wealth Planner in advance to best ensure this is done in an optimal way.
Budget 2018: key points
In a nutshell – changes effective from April 2019
- Personal allowance* increased from £11,850 to £12,500
- Basic rate tax band** increased from £34,500 to £37,500, raising the higher rate tax threshold to £50,000
*Don’t forget that the personal allowance is reduced by £1 for every £2 of income in excess of £100,000, creating an effective 60% tax band between £100,000 and £125,000. Anyone with income greater than £125,000 will still receive no personal allowance.
**Scotland’s tax bands differ from those in England and Wales
The main allowances
- Pension Lifetime Allowance and annual allowances: No change to pensions outside of a statutory increase in the Lifetime Allowance to allow for inflation. The threshold now sits at £1,055,000.
- Junior ISA threshold: increased by inflation to £4,368 per year
- Main ISA allowance of £20,000 remains unchanged
- Annual capital gains tax exemption rises to £12,000
- Consultation being launched next year regarding a 1% surcharge on stamp duty payable by foreign buyers of UK residential property. Watch this space.
Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and reliefs from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.