This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

The Budget – How Will It Affect Private Investors?

George Osborne announced the Government’s Budget yesterday (8/7/2015). These were the main changes that might affect individual investors:

– Personal income tax allowance will rise from £10,600 to £11,000 in 2016-17. The Higher Rate Threshold will increase to £42,385 in 2015-16 with further increases in subsequent years.

– Dividend taxation will be substantially changed. Dividend tax credits will be abolished and be replaced by a new Dividend Tax Allowance of £5,000 with tax rates on dividend income above that at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

– Buy to Let investors will be hit by a reduction in the tax relief they obtain on mortgage costs. This will reduce to relief only at the basic rate of tax, but this change will be phased in over 4 years from April 2017.

– Buy to Let investors will also be affected by replacing the “Wear and Tear Allowance” which they can claim by only allowing them to claim for actual costs incurred.

– Inheritance tax on homes will be substantially reduced by introducing an additional nil-rate band effectively minimising tax on homes worth less than £1 million. But the basic nil-rate band of £325,000 will be frozen until April 2021.

– Non Domicile status will be removed for many people who currently claim it. For example those who have lived in the UK for many years or who were born in the UK. Inheritance tax rules applied to non-domiciles is also to be tightened.

– There will be a further attack on people who pay themselves via personal service companies in the form of dividends rather than via PAYE (the IR 35 rules) by tightening up those regulations and increasing enforcement. There will also be more efforts to collect tax from the “hidden economy” and more focus on the tax affairs of high net worth individuals and non compliance by wealthy people. Trusts, pension schemes and non-domiciled individuals will also be a particular focus.

– Pensions investment tax relief for high earners will be reduced further from April 2016 and the Government is to consult on wider reform of pensions tax relief – for example possibly changing it to more like the ISA arrangements where there is no up front tax relief but no tax when cash is later taken out of the pension.

– Corporation Tax will be reduced from 20% to 19% in 2017 and 18% in 2020. But companies will be required to pay it sooner. Capital Allowances will be fixed at £200,000 and there will be restrictions on reducing tax bills by the cost of “goodwill” on acquisitions.

– Bank levy will be reduced over time down to 0.1% in 2021, and restrict it to UK operations, but there will be an additional bank corporation tax surcharge of 8% from January 2016 (overall banks are still therefore expected to pay more in taxes).

– The National Minimum Wage will be replaced by a higher Living Wage for the over 25s. This will affect those who currently employ large numbers on the Minimum Wage.

– Insurance premium tax will be increased. It will rise to 9.5%.

– The Climate Change Levy exemption will be removed for “renewable” electricity generators.

– The Chancellor seems keen to improve productivity where the UK lags behind other countries and to reduce the over concentration of business activity in London, but the details of how these initiatives are to be taken forward are not particularly clear.

Some comments are as follows:

Dividend tax change. Few people understand the dividend tax credit system so this might be seen as a worthwhile simplification, but it will increase the Government’s tax take, particularly from wealthy investors, very substantially. For example it is forecast to raise over a billion pounds per year in tax!

The original reason for dividend tax credits was to avoid double taxation on the same profits. When both corporation tax and personal tax rates were high, profits made by a company could effectively be taxed twice – once within the company by corporation tax and then when the profits were distributed in dividends. It could result in very high combined rates. But tax rates are now lower, particularly corporation tax.

The new £5,000 allowance will mean the vast majority of individuals who receive dividends will not be adversely affected. However, those with substantial dividend income will be. For example, someone who receives £50,000 a year in dividend income may be £3,800 per year worse off!

This of course will be offset to some extent by the improved personal tax allowance and higher rate threshold. It might however reduce the attractiveness of high dividend paying stocks and encourage a focus on capital growth. Capital gains will be taxed at a lower rate. It might improve further the attractiveness of Venture Capital Trusts where dividends are tax free, or encourage companies to return cash to shareholders via tender offers or buy-backs rather than dividends.

Buy-To-Let Investors and Building Companies.  There has been criticism lately of the profits and generous tax position obtained by buy-to-let investors which have fuelled the growth of this sector in recent years. The tax allowances were because they were treated like businesses where interest on debt is allowed, but unlike private individuals where mortgage tax relief was abolished many years ago. The good profits to be made and the low cost of finance of late has encouraged the growth of this sector and also encouraged the building of new houses, which we are surely desperately in need of but also resulted in more renting and less owner occupation. For example according to the BPF in London in 2013, 61% of new home sales went to investors of various kinds rather than owner-occupiers. The tax relief granted on these mortgages was becoming a very substantial figure and there were concerns that the size of this lending was creating financial instability.  The Chancellors statement caused the prices of house builders to fall substantially  – for example Berkeley Group fell by 7% and Persimmon by 5% on the day although they recovered somewhat the following morning. It was even suggested that buy-to-let investors might seek to sell their properties in future thus affecting the housing market overall. On the other hand, it might encourage more investment in the stock market instead in future years – many people have been investing in buy-to-let as a “pension” because they have seen betters returns there than in other investment sectors but this was always a risky proposition. It would seem unlikely that the sector will change rapidly and other house buyers might pick up any slack as the main limitation on house builders activities are the problems of finding sites and getting planning permission. House builders may be helped by changes to the planning system also announced. How this will all work out in practice is not as yet clear.

Renewable energy subsidies. The changes here caused the share price of Drax to fall by 28% as it was estimated it would reduce their profits substantially. Other companies were similarly affected.

Corporation Tax and Living Wage. The reduction in Corporation Tax rates will clearly help investors. The impact of the higher Living Wage might affect some publicly quoted retailers but in fact they often pay more than the Minimum Wage already – it might be the smaller private businesses that are more affected. Increasing the minimum wage might actually encourage improvements in productivity – by encouraging businesses to replace manpower by machines. It may slightly reduce employment though but is not forecast to have a major impact. Other changes to “benefits” will encourage people to seek employment.

The above is an initial analysis of the impact of the Budget. I hope to add more in the next ShareSoc Members Newsletter.

Roger Lawson

One comment
  1. Paul Scott says:

    Useful comments, thanks Roger.

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