Personal allowance headlines while pensions tax relief off the hook in pre Brexit Budget
29 October 2018
Headline news from Chancellor of the Exchequer Philip Hammond’s Budget speech was that personal tax allowances of £12,500 basic rate and £50,000 higher rate thresholds promised in the Conservative party manifesto would be brought forward a year and implemented in April 2019.
And after weeks of speculation that pensions tax relief would be used to help fund the government’s spending plans for the NHS, the potential raid by the Chancellor of the Exchequer did not happen.
However, as Jason Hollands, managing director of investment and financial planning group Tilney, notes, these reliefs looked to have been living on borrowed time since the Chancellor’s predecessor, George Osborne, came close to overhauling them in 2016.
Hollands comments: “The current system of pension tax reliefs have proved as resilient as a cat with nine lives. While that will undoubtedly be welcomed by many middle class professionals, with a potential Labour government in the wings no one should take the long-term continuity of such generous reliefs for granted because of today’s stay of execution.”
Treasury papers confirmed that the Lifetime Allowance for pensions savings will increase in line with CPI for 2019-20, rising to £1,055,000. Starting rate for savings – the band of savings income that is subject to the 0% starting rate – will be kept at its current level of £5,000 for 2019-20.
ISAs and Child Trust funds
Individual Savings Account (ISA) annual subscription limits for 2019-20 will remain unchanged at £20,000. The annual subscription limit for Junior ISAs for 2019-20 will be uprated in line with CPI to £4,368.
The government will publish a consultation in 2019 on draft regulations for maturing Child Trust Fund accounts. The annual subscription limit for Child Trust Funds for 2019-20 will be uprated in line with CPI to £4,368.
However, the Chancellor tightened the rules around Entrepreneurs Relief, in a move that will affect smaller employee shareholders. As of now, shareholders must have at least a 5% share of the profits and net assets of a company to benefit from the 10% Entrepreneurs Relief rate of capital gains tax. Hammond also announced a doubling of the minimum holding period from 12 to 24 months to better target capital gains tax at true entrepreneurs.
The Chancellor’s also announced that contractors working for a single employer in medium and large private sector companies will be taxed as employees from 2020. In the light of this, pensions giant Aegon called upon the government to also grant them employee pension benefits.
Steven Cameron, pensions director at Aegon, explained: “It makes sense to class contractors and consultants working for a single employer within the private sector as employees, extending the rules already in place in the public sector. With implementation deferred until April 2020, we urge the government to take the next step and ensure they are not only taxed as employees but receive the same benefits as employees, including being automatically enrolled into a workplace pension with an employer contribution.”
Cameron also pointed out the need to address the pension gap that exists for the self-employed who do not currently benefit from auto-enrolment.
He elaborated: “While bringing these contractors and consultants into auto-enrolment would be a step in the right direction, it would still leave a gaping hole in the retirement prospects of others in the growing army of self-employed and gig economy workers. The government needs to look for a solution along the lines of auto enrolment that makes pension saving the default for all such workers if we’re to avoid them retiring as second class pension citizens with nothing more than a state pension.”
Cold calling ban
Documents from the Budget included a commitment to ban pensions-related cold calling, which the government has vowed to put before Parliament this Autumn with a view to introducing soon after. This was most likely to affect lead introducers and smaller adviser firms using their services, Treasury papers said.
Prudential’s retirement expert Vince Smith-Hughes said the measures to ban cold calling cannot be introduced soon enough. According to the life assurer’s research, nearly one in 10 over-55s fear they have been targeted by scammers since the launch of pension freedoms in 2015, while one in three over-55s say the risk of being defrauded of their savings is a major concern. Yet, nearly half of those approached say they did not report their concerns because they did not know how to or were unaware to whom they could report the scammers.
Smith-Hughes commented: “Pension freedoms, though enormously popular with consumers, have created a potentially lucrative opportunity for fraudsters and people need to be vigilant to safeguard their hard-earned retirement savings. Banning cold calling won’t stop scamming in itself, but it is a step in the right direction and the quicker the ban can be implemented the better”.
Property purchase charges
The property market also fell under the Chancellor’s spotlight. Hammond announced that first-time buyers relief will be extended in England and Northern Ireland so that all qualifying shared ownership property purchasers can benefit whether or not the purchaser elects to pay stamp duty land tax (SLDT) on the market value of the property. Hammond said this change will apply to relevant transactions on or after 29 October 2018 and will also be backdated to 22 November 2017 so those eligible who have not previously claimed first-time buyers relief will be able to amend their return to claim a refund.
The government also announced it will publish a consultation in January 2019 on a SDLT surcharge of 1% for non-residents buying residential property in England and Northern Ireland.
Also, in an effort to better target private residence relief at owner occupiers, the Budget unveiled plans to reform lettings relief from April 2020 so that it only applies in the event the owner of the property is in shared occupancy with the tenant. In addition, the final period exemption will be reduced from 18 months to 9 months. However, no changes are to be made to the 36-months final period exemption available to disabled people or those in a care home.
Commenting on the reduction of the grace period, Tim Walford-Fitzgerald, private client partner at H W Fisher & Company, said it comes at a time when many are already experiencing stagnation in the property market, particularly at the higher end of the market.
“It’s unlikely that the owners of such properties will thank the Chancellor for this but at the same time by pushing the change back to April 2020, he can say that he is giving most home owners a realistic chance to sell their home in time,” he points out. “In effect, the change stops the practice of renting the home out for twelve months and still achieving a tax free gain on the sale of the property.”
Ian Dyall, head of estate planning at financial planning firm Tilney, added:
“Three years ago, George Osborne hit property investors hard by announcing an increase on stamp duty for second homes and limited mortgage interest tax relief. Today’s announcement is another nail in the coffin for buy-to-let property investors.”
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