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Harvest crumbs from the Autumn Statement

Harvest crumbs from the Autumn Statement

The Chancellor’s Spending Review and Autumn Statement has wide ranging ramifications for investors and high earners.
Directly or indirectly it affects:-
•Property investment
•Pensions
•Dividends
•Taxes.

Property
Back in October 2011 we suggested that the economy was looking right for buy-to-let. By February 2012 BTL had become the apparently perfect investment, with a growing market and huge tax breaks. But by mid-2015 it had become evident that the government was targeting residential buy-to-let by reducing the incentives, and that has carried on with the Autumn Statement announcement of a 3% stamp duty hike on second homes and BTL properties.

This is the strongest reinforcement of the government view that it is unfair to own more than one house – that may often stand empty for much of the time – when many cannot find one to buy.

The new BTL stamp duty bandings add 3% to each of the existing bands. So the 0% band up to £125,000 will now cost £3,750, and the 2% band up to £250,000 will be 5% for BTL. Buying a second home for £250,000 under the previous rules cost £2,500, but will cost £7,500 more from April 2016.

The effect will be most noticeable on lower priced properties where the charge will more than triple, whereas the highest SDLT band has had a mere 25% added.

The tiered structure of SDLT with such high charges is likely to force more BTL property transactions to “just under the bar” prices, and that is likely to have a subduing effect on property prices overall. It is also likely to cause rent rises in the short term.

This is the third attack on small BTL landlords in a year, following on the announcement of a reduction in the previously generous wear and tear allowances from 2016, and the tapered reduction in tax relief on mortgage interest from 2017.

But there are exceptions to the new stamp duty. Landlords with more than 15 properties will not pay the additional charge, suggesting that it is smaller individual investors who are being targeted, and that the larger and – in theory – more “professional” landlords are to be allowed to grow unhindered. It is also intended to encourage large scale institutional investment in the property rental market. Investors who were considering property rental as a reliable retirement alternative may now have to think again.

The increasing autonomy of regional from national government does offer one last opportunity. Scotland uses the Land and Transaction Tax, and won’t be adding the SDLT surcharge. So for now at least, property north of the border will be cheaper for BTL landlords to purchase. Bear in mind that the Scottish finance secretary does now have powers to change these taxes should he wish.

Another way around the charges may be to make new purchases within a corporate entity, progressively transferring the portfolio over the natural buying and selling lifecycle from private to corporate ownership. Against this must be set the disadvantages of drawing rental income through a company, and the loss of the personal capital gains tax annual allowance on sales.

Other bugs are yet to be clarified, including ownership by couples who are not married, and those not selling their properties in succession.

The final nail for BTL is that from 2019 CGT on gains from BTL properties will have to be paid within 30 days of a sale when the new online tax accounts are rolled out.

The plans for a new housing expansion programme of 400,000 homes by 2020 is good news for builders, and good news for investors. Concerns over any effect of the BTL stamp duty increase were dismissed by the industry; they say that a very small proportion of new build is for the rental sector. With eight major home builders to choose from, the problem will be in deciding which horse to back in the race for the contracts.

Pensions

The handcuffs that came with the relaxation of pension rules are soon to come off, or at least be loosened. Savers are currently required to seek advice if they have a guaranteed income or defined benefit of £30,000. The government is consulting on changing this to the value of the pension pot, not the income derived from it.

There was an expectation that there might be changes to pension taxation to make pensions become more akin to an ISA, with no tax at the back rather than tax-relief at the front end. The fact that it didn’t happen has led to an increased view that it may happen in April. If so, make the most of tax relief while it is still around.

Dividends

The Chancellor announced that he was applying a 0.5% “apprenticeship levy” on companies with a salary bill of more than £3m, with an offset allowance of £15,000. He intends to raise £3bn for 2020-21 to fund more apprenticeships. And very noble it is. But you may assume that this means £3bn won’t be available to be paid in dividends to investors, equivalent to a 2 per cent rise in corporation tax. The levy will be paid by about 200 of the biggest companies, but all businesses will be able to apply to the fund when it becomes available. Industry has described the levy as another payroll tax alongside the pension auto-enrolment costs.

Under the proposed plan a company will be entitled to vouchers for training worth the amount they have paid to the fund, so incentivising them to recruit and invest in more employees.

Taxes

Those continuing to use known tax avoidance schemes are likely to be targeted in the ongoing anti-avoidance crackdown.

Local authorities will be able to raise cash for use in social care projects by charging up to an additional 2% on your council tax.

Conclusion

The Chancellor’s speech was as much about rabbits and hats as any real fabric. The weight on business is the real worry as much of the magic appears to be based on its fortunes. An enhanced view of the country’s current fiscal position allowed fewer cuts and the reversal of the controversial tax credit plans, but we should be wary that the winds that changed that view so radically within just a few months might well change back again. Use the allowances and opportunities that remain while they are still here, but be prepared for them to disappear in the Chancellor’s next stage show.