17 November 2015

The Chancellor, George Osborne, is giving little away in advance of the government's Autumn Statement, now only a few days away on 25 November.

After a clutch of radical measures in the government's first Budget in July, including a wholesale rewriting of the tax breaks for buy-to-let investors, hard-hitting cutbacks on pension tax relief and cuts to tax credits for low-paid workers, there has been speculation that George Osborne will use this follow-up review of public finances to cram in more controversial decisions. The idea, of course, is to get potentially painful measures out of the way early in this parliament, and give the Conservatives time to regain any lost popularity before the next election.

However, the House of Lords has already voted to halt the cuts to tax credits in a surprise defeat for the government. As a result Osborne has said he will 'soften the blow' in the Autumn Statement. But how will he achieve that? And what else can we expect to hear about?
Here we look at some of the key areas where we are expecting to see changes - and offer some suggestions of our own.

TAX CREDITS
Guy Foster, Head of Research
The Chancellor has various ways of responding to his setback in terms of tax credit reform.
He can seek to compensate for the shortfall by raising the personal allowance or national living wage (the latter shifting the burden on to the corporate sector), however, the offset will not be perfect.
Alternatively, he can seek to find the replacement funds through more severe cuts to departmental budgets. Finally, he can use a little of the fiscal wiggle-room, which he built into his plans in the emergency Budget that followed the election - he said he is aiming for a £10 billion surplus by 2019/20 but under the terms of the charter he introduced, he need only balance the books.
Given the imperfection of all of these options his best option may be to do a little of all of them.

PENSIONS
Richard Harwood, Divisional Director, Financial Planning
The Chancellor has tinkered too much with pensions recently. He has given flexibility on access to funds with one hand but taken away tax relief for higher earners with the other. I hope that he will not make further changes although that is not guaranteed.
At the Budget in July he launched a review of the way tax relief works for pensions. He mentioned a possible method that would treat pension savings in a similar way to ISAs If relief was amended in this way it would probably be the end of the tax-free cash lump sum.
The government has indicated that this is a long-term project and it is likely that there will be no change this month.
Indeed, responses to the Treasury consultation on pensions had to be submitted by end of September and we've already seen others suggest publicly that findings from this won't come out until well into the new year, 2016. We also support this view, and believe that any move on this needs to have been well thought-through and genuinely encourage individuals to understand the personal accountability and implications for saving plans to support the longer term.

INHERITANCE TAX
Richard Harwood, Divisional Director, Financial Planning
There has been a recent announcement of the Residence Nil Rate Band, which makes a home free of Inheritance Tax up to £350,000. In the Budget there were modifications to the proposals and it is likely that there may be further clarification of a few of the complexities involved in the new band's implementation - the practicalities of how to monitor the process where an individual downsizes before death, for example.
It is worth noting that we have discussed this with a number of clients and many have not understood how this works. A number think that it already applies and a number think that it comes in at £175,000 rather than starting at £100,000 and increasing up to £175,000. There is plenty of scope for making the rules clearer.

DIVIDEND TAXATION
Richard Harwood, Divisional Director, Financial Planning
In the summer Budget there was an announcement of a reform of dividend taxation. This was aimed to increase tax on those who extract funds from a business as dividends rather than as salary or bonus. However it will also hit many basic rate tax payers and increase the tax that they pay on dividends over £5,000 per annum. It is to be hoped that this will be amended so that basic rate taxpayers are not penalised.
Clarification is also required as to how it will apply on certain investment arrangements such as the Investment Bonds issued by insurance companies and held by many thousands of policyholders. Most of these will invest into shares but at the moment they are taxed internally at corporation tax rates. Will they be hit by a tax increase? Or will additional tax apply to investors? This could mean a need for advisers to re-visit many of their clients' situations to reconsider the whole area of tax?

BREWIN DOLPHIN: OUR SUGGESTIONS
Richard Harwood, Divisional Director, Financial Planning
As banks have pulled away from SME lending over the past few years, especially to start-ups, many business projects have been funded by Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS). These offer generous tax reliefs for investing into specific areas. This type of plan has led to investments into power generation via solar and wind, among other things, but the government has been able to change the types of activity that qualify, thereby guiding private investment into specific areas. More recently it has been restricting the types of investment that qualify.

Given the levels of investment needed for social housing and other areas we would suggest that there is a review of qualifying activities and that further opportunities are opened up to guide private investment into areas of social benefit. This would be a relatively simple and fast way to fund essential capital projects.

Rob Burgeman, Divisional Director, Investment Manager.
The Autumn Statement will be more about the spending side than the income side.
I don't think enough groundwork has been done for a wide reaching pension reform at this stage. That may be a blessed relief after the constant tinkering with the system that has gone before.
The same goes for the tax system and I would like to see greater simplification.
I would like to see husbands and wives have the choice to elect to be treated jointly in their tax affairs, so that tax allowances are automatically 'pooled' so that they can be used efficiently rather than having to switch income and ownership between spouses to make use of the individual allowances. There may be some tinkering with tax thresholds.
We welcome the changes that are coming to Inheritance Tax (IHT), raising the threshold to £1m. However, the IHT system remains very complicated and difficult to understand. While I welcome the direction of travel, I remain alarmed at the degree of complexity which has created consternation about how it works in practice.

I would also welcome simplification of the Capital Gains Tax (CGT) system. It used to be linked to inflation over time and I would like to see that indexation reintroduced. Otherwise CGT acts as a tax on inflation. There needs to be a differential in the system that recognises the difference between investing for the long term and short-term speculation.


-ENDS-


For further information please contact the press office on 020 3201 3026
The value of investments can fall and you may get back less than you invested.

Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation, which are subject to change.

The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.

distributed by