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The new Spring Statement replaces the Budget

There will be no Spring Budget this March, but that does not mean the Chancellor is staying silent.

On 13 March, the Chancellor will present a Spring Statement to the House of Commons, not a Budget. The next Budget should be in the autumn, probably November. The rationale for the revised schedule is to give more time to develop legislation and avoid the situation of changes taking effect from 6 April, but not reaching the statute book until three months or more later.

This problem was made worse in 2017, when the snap election meant most of the March Budget measures were put on hold. Some that took effect from 6 April 2017 – such as the reduction in the money purchase annual allowance – were in a Finance Act that only received Royal Assent on 16 November.

Despite the new schedule, there seem to be plenty of people expecting a Spring Budget in March, perhaps because 2017 was an unusual year – with two budgets and three Finance Bills. However, 2018 should be much quieter on the tax front (assuming there is not another surprise election).

Whilst there is no Budget there may still be changes announced on 13 March that have immediate effect. Few Chancellors can resist the opportunity when they are in the parliamentary spotlight. Mr Hammond’s predecessor was a classic example, as some of George Osborne’s Autumn Statements were more like Budgets than the real thing.

If you are considering year end tax planning, then it could make sense to complete any transactions before 13 March. If you need of assistance in that planning, you should contact us as soon as possible.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Deadline approaching for using your ISA allowances

Investors and their advisers should start to turn their focus to the end of the tax year on 5 April.

ISA contributions have historically always been focused on the end of the tax year. This is the case even though it would make more sense to invest at the start of the tax year, to maximise the period of tax shelter.

This time of year, the personal finance pages start to fill with stories about ISAs, often including tales of ISA millionaires. For all the coverage, these remain a rare breed, but they serve as a reminder that regular saving over a long term can create meaningful amounts of capital.

The past couple of years have seen total ISA contributions falling primarily due to a sharp drop in the popularity of cash ISAs. These have seen contributions fallen by over a third between 2014/15 and 2016/17 for two good reasons:

  1. Ultra-low interest rates and limited competition between banks have made prospective returns look miserable, particularly as inflation has picked up; and
  2. The introduction of the personal savings allowance in 2016/17 has meant many depositors no longer need an ISA to escape tax on their deposit interest.

Stocks and shares ISA contributions have reached a new high, probably helped by some ISA investors abandoning the cash version. This tax year there are a few of points to remember when making your stocks and shares ISA investment:

  • The contribution limit (in total to all ISAs) is now £20,000, up from £15,240 in 2016/17. It will be held at £20,000 in 2018/19.
  • Dividends within an ISA are free of UK tax. With the dividend allowance falling from £5,000 in 2017/18 to £2,000 in 2018/19, you may find you have to pay tax on shares held outside of an ISA.
  • It is important to get your money into an ISA shelter. Whilst your annual limit can’t be carried forward to the next year, you do not have to invest it all in funds by 5 April – once you hold cash in your ISA you can drip feed investment into funds, if you wish.

For more information and advice on selecting ISA providers, please talk to us ahead of the April deadline.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances.

Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The Scottish version of income tax unveiled

Last month saw another Budget – for Scotland, this time.

The Scottish Budget in the middle of December contained potential omens for the whole of the UK with its proposed changes to income tax bands and thresholds. In the foreword to the main Budget document, Derek Mackay, the Scottish Cabinet Secretary for Finance and the Constitution said he believed his income tax measures would make the system in Scotland, “fairer and more progressive”.

Whether or not that is true, Mr Mackay has certainly made it more complicated, as the table of proposed tax rates and bands for 2018/19 shows:

Scotland UK Excluding Scotland
Taxable Income

£

Tax Rate

%

Band NameTaxable Income

£

Tax Rate

%

0-2,00019StarterN/AN/A
2,001-12,15020Basic0-34,50020
12,151-32,42321IntermediateN/AN/A
32,424-150,000*41Higher34,500-150,000*40
Over 150,000*46Top/AdditionalOver 150,000*45

* If earnings exceed £100,000 the Personal Allowance is reduced by £1 for every £2 earned over £100,000.

The proposed structure will result in 70% of all Scottish income tax payers paying less than they do for the current financial year, according to Mr Mackay, although some of this achievement is down to the Westminster Chancellor raising the UK-wide personal allowance by £350. Nevertheless, the other 30% will pay enough extra tax to mean a boost of £164m to the Scottish government’s income in 2018/19. The difference in bands and rates may look modest enough, but Scottish residents earning £50,000 a year will end up paying £9,015 of income tax in 2018/19 against £8,360 for their English, Welsh and Northern Irish counterparts.

Mr Mackay said that increasing the top rate of tax to 50% had been considered, but the Council of Economic Advisers suggested that this would be “unlikely to raise any substantial funds for the Scottish budget, and may in fact reduce revenues”. There are only 20,000 top rate taxpayers in Scotland and the Council was doubtless considering the likelihood, and impact, of some of them crossing the border to England to pay 45%.

The changes proposed in Scotland – which still need parliamentary approval – will be watched with interest in the rest of the UK. John McDonnell, Labour’s Shadow Chancellor, has made his own proposals for raising income tax rates, including a new top rate of 50%. He will doubtless be waiting to see how the Scottish public reacts to Mr Mackey’s “fairer and more progressive” system.

In the meantime, the plans of Mackay and McDonnell both serve as reminders that you should be starting to think about your year end tax planning.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

HMRC v Airbnb – rent-a-room relief in the spotlight

An HMRC paper promised in the Budget could be bad news if you use Airbnb.

The government has set out a call for evidence relating to rent-a-room relief in response to the rise in short term rentals facilitated by Airbnb and its competitors. Rent-a-room relief is typical of some of the neglected parts of the UK income tax system. Introduced nearly 26 years ago, it has subsequently changed only three times, despite governments pursuing the goal of increasing the supply of low cost rented accommodation ever since.

In 1992 the relief effectively meant there was no tax to pay on rental income of up to £3,250 a year for letting a room (or rooms) in your own home. After five years the relief level was put up to £4,250, where it remained for the next 19 years. That period of benign neglect ended in 2016 when the relief was given a boost to £7,500 by one of George Osborne’s final measures as Chancellor. Now, to judge by the call for evidence issued by HMRC in December, his successor, Philip Hammond, appears to be wondering whether the large increase was such a good idea.

When the relief first appeared, it set no minimum letting period, so it applied whether you let a room to 52 different weekly tenants or throughout the year to just one. At the time, the notion of weekly renting to different tenants was at best fanciful – that was what hotels did, not homeowners. Just over a quarter of a century later, Airbnb and its competitors have made a reality of rapidly revolving tenants. Rent-a-room relief is now being used for holiday and event short stays as well as more traditional forms of letting.

As tends to be the way these days, HMRC’s paper does not make any specific proposals, but instead asks leading questions, such as whether there should be a minimum 31-day term for any letting to qualify for the relief. Any resultant legislation is unlikely to take effect until April 2019, but some action seems certain. As with the various measures now hitting buy-to-let investors, the government seems to be taking aim at individuals who seek investment returns from residential property.

From a professional investment viewpoint, it is arguable that most people have enough exposure to residential property through their own home and should diversify their investments rather than add to their housing assets. If property appeals, why not consider commercial property, which can be accessed through a variety of routes, including pension arrangements and ISAs?

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A rewarding 2017 for shares

The world’s share markets were a profitable place to be in 2017. 

Index2017 Change
FTSE 100+7.6%
FTSE All-Share+9.0%
Dow Jones Industrial+25.1%
Standard & Poor’s 500+19.4%
Nikkei 225+ 19.1%
Euro Stoxx 50 (€)+ 6.5%
Shanghai Composite+6.6%
MSCI Emerging Markets (£)+22.7%

2017 had its fair share of dramas. There was the unending reality show of Donald Trump and his tweets. On this side of the Atlantic the ongoing saga was Brexit and the “strong and stable” government that was promised, but somehow never materialised. North Korean rockets were a regular headline feature, as was the growing assertiveness of China under Xi Jinping. Europe had a crop of elections to worry about, ending with Germany being without a government since September and Catalonia seemingly back at square one.

And yet world stock markets had a very good year. In sterling terms, the MSCI World Index was up 20.11%. This was not just the impact of the strong performance of the USA, which accounts for just over half of the World Index: strip out Uncle Sam’s influence and the rest of the world returned 21.03%.

Why markets were so buoyant will keep the commentariat in debate for some while. Continued low interest rates (despite US and UK rises) and more quantitative easing (QE) from the Eurozone and Japan certainly helped. The global economy also began to display synchronised rising growth, with the obvious exception of the Brexit-braked UK.

At first sight, the outlook for 2018 looks similar. There is the ongoing saga of the US administration, the next European election to worry about, in Italy, and Germany will have another attempt at creating a coalition government. Interest rates in the US and probably the UK will rise, while Europe is set to cut back and possibly end its QE.

Most pundits predict investment markets will be more volatile in 2018 – hardly a major insight given their near serene progress in 2017. If you have benefited from last year’s solid returns, do not assume you can leave your investments unchanged for 2018. Now is the time to talk to us about any rebalancing that may be necessary for the year ahead.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The slow climb of US interest rates, a quarter percentage at a time…

The US central bank increased interest rates again in December.

While the Bank of England managed just one interest rate rise in 2017, to end the year at 0.5%, its counterpart in the US notched up three increases, finishing at 1.25%-1.50%. The trio of Federal Reserve increases were all well telegraphed, so much so that by the time each arrived, the focus was on when the next 0.25% addition would occur.

That was the case with December’s increase, the last overseen by Janet Yellen as Chair of the Federal Reserve before Jay Powell, the Trump nominee, takes over. The conclusion from the analysts who delve into the Fed’s reports is that three rate increases are expected in 2018. However, the composition of the Federal Open Market Committee, which makes the interest rate decision, will be changing significantly in 2018, so this number is by no means set in stone.

On this side of the Atlantic, the year ended with the news that November’s CPI inflation had reached 3.1%. That is just (by 0.1%) enough to force the Governor, Mark Carney, to write an open letter to the Chancellor explaining why inflation is above its target range. Even so, the Bank of England looks unlikely to match the Fed’s rate-raising zeal in 2018. In December, the Bank repeated its familiar mantra that “Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent.”

A backdrop in which rates in the US are pulling away from those in the UK and Europe (which are still at 0% within the Eurozone) could create some tension in investment markets in 2018. If you have not undertaken a New Year review of your portfolio, now is the time to talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The only way is up – after 3,773 days…

November marked the first rise in the Bank of England Base Rate in over ten years.

Source: Bank of England

At the start of November, the Bank of England raised its base rate for the first time since 5 July 2007. Just over a decade ago, the previous increase was 0.25%, from 5.5% to 5.75%. This time around the increase was the same, but represented a doubling in the base rate.

The move had been widely expected after several senior Bank officials dropped heavy hints that an increase was likely before the end of the year. In the run up to the announcement, the markets assumed a 0.5% rate as a done deal and focused on whether the rate increase would be “one and done” or the start of a series of rate rises.

The answer to that was given by the Bank’s Governor, Mark Carney. He noted that money markets were forecasting two more rate rises over the next three years, a “gently rising path” consistent with inflation reaching target by the end of that period. In other words, the Bank currently expects base rate to reach the dizzy heights of 1% around early 2020.

If anything, news on inflation released less than a fortnight after the rate rise, pushed out the date of the next increase. Instead of rising above 3%, as widely expected, and thereby prompting an explanatory letter from Mr Carney to the Chancellor, CPI inflation remained unchanged.

The combination of 3% inflation and a 0.5% base rate is not good news if you hold cash on deposit: the gap between the two (plus any tax) is a measure of how fast buying power is being eroded. For alternative options, please talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The buy-to-let Budget headline you didn’t see

The Autumn Budget contained more bad news for many buy-to-let investors which went largely unnoticed.

April 2018 will see the next step down in mortgage interest relief for investors in buy-to-let (BTL) residential properties. The amount of interest that can be offset against rental income drops from 75% to 50%, with a corresponding increase to 50% in the element that qualifies for a 20% tax credit.

If you pay tax at more than basic rate, that means more interest on which you effectively receive only 20% relief rather than 40% or 45%. It could also mean an increase in your gross income, which might trigger other undesirable tax consequences, such as a phasing down or out of your personal allowance.

The mortgage interest changes have encouraged BTL investors to buy new properties via specially-established companies, sometimes also transferring existing properties into the same company. Using a company can create a double capital gains tax charge – once in the company and a second time on the shareholder.

So far, however, the impact of this has been abated by the fact that corporate capital gains still benefit from indexation relief. That relief means only gains above inflation (measured on the more favourable Retail Prices Index – RPI) suffer corporation tax (currently 19%). As the example shows, even when inflation is relatively low, indexation can provide a real tax advantage.

The benefit of indexation relief

In February 2010, the Graham Property Company Ltd bought a flat for £200,000, including costs. Seven and a half years later the company sold the property for £257,000 (net of expenses) – a rise roughly in line with the performance of the Nationwide House Price Index. The RPI increase over the period was 25.3%, meaning the company had to pay corporation tax on a net gain of only:

£257, 000 – £200,000 x 1.253 = £6,400

From January 2018, indexation will be frozen at the December 2017 level, exposing all future gains to tax. HMRC said in the policy paper on the change that “This measure has no impact on individuals or households as it only affects companies”, but clearly individuals who have been driven to use companies for their BTL investment will be affected.

As if that were not enough, the proposed Stamp Duty Land Tax (SDLT) exemption for most first-time buyers outside Scotland will also hit BTL investors competing to purchase lower-priced property. On a typical £250,000 purchase, the first-time buyer will pay no SDLT, while the BTL investor faces an SDLT bill of £10,000, whether buying personally or via their company.

If you have the sense that the government is tilting the scales ever more against your BTL investment, then why not talk to us about other investments that are less heavily taxed?

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The Top 35 Next Generation Advisers 2017

Congratulations to Jenni on making it into ‘The Top 35 Next Generation Advisers 2017’ as seen in Citywire dated 21 November 2017

Jenni Robinson

Technical Analyst, HFS Milbourne

Age 29

A member of the Personal Finance Society, Jenni Robinson has achieved levels 2, 3, 4, and 6 qualifications at the professional body. She has been at Guildford-based HFS Milbourne for a year and a half, having previously been a paraplanner at PSFM.

Robinson supports the firm’s senior advisers, as well as being involved in cashflow planning, research and introducing new technologies.

JK Rowling would be her ideal dinner guest, as she has many unanswered questions about the Harry Potter books that even the depths of Reddit cannot answer.

Top 2017 achievements

Robinson says her aim for the year was to complete all necessary chartered financial planning exams, which involved sitting seven exams. She is awaiting the results and hopes to achieve fellowship before she turns 30 next year

 

Rise in popularity for venture capital trusts

New figures from HMRC show a large jump in VCT investments in 2016/17.

In September HM Revenue & Customs (HMRC) issued updated statistics on the funds raised by venture capital trusts (VCTs). These showed that investment during last tax year reached £570m, an increase of over 28% on 2015/16. This was the highest level of VCT capital raising since the 2005/06.

The rising popularity of VCTs, despite their high risk nature, is due to a variety of factors:

  • The reductions in the both the lifetime allowance and the annual allowance in recent years have made pension contributions no longer a tax-efficient option for a growing number of high earners. At worst a contribution could attract no income tax relief, but still produce a retirement benefit that suffers up to 55% tax.
  • HMRC’s successful campaigns against artificial tax avoidance schemes and a changing public attitude have discouraged the use of aggressive, loophole-seeking arrangements.
  • The VCT market has matured, with a steady pattern of fund mergers creating larger, more liquid VCTs with fixed costs spread more thinly. The sector now has assets under management of over £3.6bn.
  • The VCT tax reliefs are attractive:
    •  Income tax relief of 30% on up to £200,000 investment per tax year, provided the shares are held for five years and you have paid enough income tax to match the relief you claim

       Tax-free dividends – a saving of up to 38.1%.

      No capital gains tax – a saving of up to 20%.

In the run up to the Autumn Budget there has been a large crop of VCT share issues, partly driven by expectations that the Budget will alter VCT investment rules. If you want to know which VCTs are still available to new investors, please talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.