Autumn budget: personal finance considerations


Saunderson HouseBy Legal Futures’ Associate John Hill, Chartered Financial Planner for Saunderson House

Chancellor Philip Hammond finds himself between a rock and a hard place as he prepares to deliver the Autumn Budget on Monday 29 October 2018. This will be the first Budget in October since 1945 and the first on a Monday since 1962, with the date brought forward to precede crucial Brexit talks in November, and moved from its usual Wednesday slot to avoid Halloween and “Hammond’s House of Horrors” headlines. While we have no inside track, we consider below some of the factors that will no doubt influence the Chancellor’s thinking, and what actions, if any, clients may wish to take ahead of the Budget.

Fiscal and political backdrop

While more forecasts will be provided by the Office of Budgetary Responsibility (OBR) on the day, the government appears to have made some progress towards its goal of bringing down the deficit, through public sector spending restraint and rising tax revenues. However, it seems unlikely that the picture has improved to the extent that the Chancellor can avoid having to raise taxes to balance the books while also funding extra spending commitments. Prime Minister Theresa May promised an extra £20 billion per year of NHS spending earlier in the year, and there were other commitments at the Conservative Party Conference to extend fuel duty freezes and allow councils to borrow more to build more houses.

The greatest unknown, even at the time of the Budget, will be how Brexit negotiations subsequently unfold, and the consequences for the UK economy as a whole. The public finances could take a further hit if, as expected by the end of the year, the Office for National Statistics and OBR force the government books to recognise upfront that most students will not fully repay their loans within thirty years, and that the public finances are on the hook for the tab. The Conservatives also have a number of pre-election tax cuts still to honour. These include increasing the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of the Parliament in 2022, and reducing corporation tax from 19% to 17% by 2020.

Against that fiscal backdrop is the political reality that the Conservatives have a very fragile working majority in the House of Commons, and the government will be keen to avoid anything contentious that risks triggering a backlash from their backbench MPs or an early election. Furthermore, with all hands on deck to deliver a Brexit deal, there is a shortage of the resources required to enact any major new legislation in other areas. As a result, we expect that the Budget will be cautious, and steer clear of any radical changes that create quiet winners but a lot of loud losers.

Pensions

There is always talk ahead of Budgets that the ability to take pensions tax-free cash might be restricted, and speculation has been fuelled by the Liberal Democrats recently proposing this be capped at just £40,000.  However, the ability to take 25% tax-free cash has been enshrined as part of pensions legislation dating back over 30 years now, so a large number of individuals have planned for retirement based on the ability to take the tax-free lump sum, for example to repay outstanding mortgage balances.  The likely backlash if such an integral part of the “pensions promise” were removed, not to mention the damage that this would do to the public’s trust in pensions and the incentives to save for one’s own retirement, means that we cannot envisage that the Conservatives would entertain the idea, even under more normal political circumstances.

The Treasury Select Committee (a cross-party committee with no direct power to set policy) has also resurrected another radical idea, a flat rate of tax relief on all future pension contributions at a rate of perhaps 25% or 30%. This was considered too politically sensitive by George Osborne and abandoned when the Conservatives had a much larger majority, so again, in the current political climate, we consider this unlikely, not least given the complexity of implementing such an apparently simple idea.  Sweeping changes would need to be made to the treatment of employer pension contributions, salary sacrifice arrangements, and the three different methods by which tax relief is given on personal contributions.  Such a measure might not even save as much as hoped, as a large proportion of the costs associated with pension tax relief relate to defined benefit schemes and, specifically, that employer pension contributions do not attract National Insurance.  Changing the latter would represent a significant tax rise on employers providing for the long-term financial security of their employees, and risk undoing the progress made in that regard by auto-enrolment.

In our view, the above points towards sticking with the far less politically dangerous approach of maintaining the status quo or, if anything, just tinkering with either the Lifetime Allowance or the limits on the amount of pension contributions via the Annual Allowance or carry forward rules. Indeed, it is worth noting that the amount of tax-free cash that can be taken by most individuals is already capped at 25% of the Lifetime Allowance, and lowering this would be a more subtle means of achieving the same goal.  Where legislation has changed in the past, governments have almost always offered transitional protections, such as Enhanced and Primary Protection when the Lifetime Allowance was introduced, and more recently Fixed and Individual Protection when the Lifetime Allowance has been reduced.  As such, it is more likely than not that new legislation would be structured so as only to affect future pension accrual.  So, if taking any action at all ahead of the Budget, clients with the scope to make material pension contributions may want to move quickly, as a precautionary measure.

Inheritance Tax

 One other particular area to watch of interest to many clients is Inheritance Tax. Earlier in the year, identifying the tax as “particularly complex”, the Chancellor specifically commissioned the Office of Tax Simplification (OTS), an independent government advisory body, to review and report back with any proposals “to ensure that the [Inheritance Tax] system is fit for purpose and makes the experience of those who interact with it as smooth as possible”.  He also asked that they look in particular at “whether the current framework causes any distortions to taxpayers’ decisions surrounding transfers, investments and other relevant transactions”.

That wide-ranging review is expected imminently, and it will be interesting to see what the OTS proposes, and whether the Chancellor takes any action as a result. As above, any radical changes are probably unlikely, but the Inheritance Tax regime is littered with a wide array of complex, but little-appreciated rules ripe for simplification without much controversy.  Even the availability of 100% Business Relief for AIM shares could be in the crosshairs.  That said, while clients may wish to bring forward any prudent estate planning already in the pipeline, such as planned gifts, particularly those being made using the normal out of income exemption, and possibly defer any new AIM investments, we do not believe urgent action ahead of the Budget is generally necessary.

Other Considerations

The Treasury Select Committee also proposed that the Lifetime ISA be abolished, on the grounds of limited take up from providers, the product’s dual purpose (for first property and/or for retirement) being confusing, and the product mainly benefitting relatively wealthy individuals. At the other end of the scale, others have called for the exit penalty to be reduced so that account holders are no worse off than had they just saved or invested via a regular ISA.  Many do not appreciate that a 25% bonus on the amount contributed is less than a 25% exit penalty on the combined contribution plus bonus.  Just in case, where appropriate and means allow, it may be worth bringing forward Lifetime ISA contributions, again on the basis that retrospective changes are unlikely.

The Chancellor has run into trouble trying to reform National Insurance in the past, as proposals in March 2017 to increase the rates paid by the self-employed were very quickly rescinded, and more recently the government has cancelled plans to abolish Class 2 contributions. Nevertheless, the helpful fiction – perpetuated by all political parties – that National Insurance is a different kind of tax that pays for NHS (and other state benefits, such as the state pension) could be used to justify increasing rates to meet the NHS spending commitment, as Gordon Brown last did in 2003.  It is also politically handy that the 2015 Conservative promise not to increase National Insurance was quietly dropped in the 2017 manifesto, and that those over state pension age, with a greater propensity to vote, may not be affected.  Any changes would have little impact on most clients’ financial planning.

Finally, the Conservatives have already announced at party conference that they are to consult on charging foreign property buyers a higher level of stamp duty, rumoured to be up to an additional 3%, and further details may be unveiled at the Budget. It may be worth foreign buyers wrapping up pending property purchases sooner rather than later as a result.

On 2 November at 12.30pm we will be hosting a webinar on the Autumn Budget, where we will explore the highlights from the Budget and we will discuss what this means for high net worth individuals from a financial planning and investment perspective. You can register to attend the webinar here.

www.saundersonhouse.co.uk

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