It’s a Budget – But Not As We Know It

The Chancellor, Philip Hammond, delivered his Spring budget yesterday. But as most of the big changes have been moved to the Autumn, this was a “steady as you go” statement in essence.

However there were some significant changes for private investors. The biggest is that the tax free allowance on dividends has been reduced from £5,000 to £2,000. So if you rely on dividend income, say in retirement, this will cost you substantially more – over £1,000 extra in tax in some cases if you pay higher rates of income tax.

The Chancellor seems to have decided to attack the growing number of “self employed” and those who are paying themselves via limited companies. Hence the change to dividend income. Hence also Class 2 and Class 4 National Insurance being raised but the impact of other changes are actually quite complex. Irrespective the Chancellor has decided that the current high differentiation between taxes (and benefits) between employed and self-employed “undermines the fairness of the tax system” even though the latter get fewer benefits. One surely cannot argue with that although he has been accused of breaking a Conservative manifesto promise not to raise taxes.

There are of course some simple steps to avoid higher taxes on dividends. If you don’t need the cash for spending money, then move your high dividend paying investments into an ISA or SIPP. The ISA allowance will increase to £20,000 from April this year as previously announced so enabling you to shelter substantial amounts from the taxman, particularly if you are married and hence can put in twice as much. In addition you might consider investing in Venture Capital Trusts (VCTs) where dividends are tax free. These have become more popular of late because of the limits on pension contributions and the recognition that they have generated good returns in recent years from the best companies, although the availability of new subscriptions to them is now low.

The Chancellor has taken some steps to increase productivity in the UK which is a hot Government theme at present – see the last ShareSoc Informer Newsletter for more discussion on that. So there is money for research into hot technology areas, investment in 5G networks, improvements to the road network (£690m), and £500m to improve technical training (for “T-Levels”).

How is the economy doing generally? Economic growth is now good after the failure of the Brexit decision to dent it as expected. But the Government is still planning to run a deficit so overall Government debt will still rise this year to a new record of over £1.6 trillion. Indeed with some attacks on tax avoidance, overall tax raised will rise under this budget to the highest proportion of GDP since the 1980s. Will this prove a drag on the UK economy and businesses in general? We have yet to see. The Government is also considering how it can raise taxes on on-line retailers who often avoid business rates and will try to close a loophole whereby sales are made VAT-free by being made from overseas.

Thinking of moving overseas for your retirement? The Chancellor is imposing a tax charge of 25% on pension transfers to qualifying schemes (Qrops) from the new tax year with some exceptions. This is to try and frustrate the move of pensions to more favourable tax regimes which has apparently been subject to abuse of late.

But as rather expected, the Government is making a lot of money from pensions being cashed in under the new freedoms to do so devised by former Chancellor George Osborne. The latest estimate has doubled to £1.6 billion!

Or considering what to do after your time as Chancellor ends? Just take note that former Mr Osborne is going to be earning £650,000 per year as an advisor to Blackrock for working four days per month. It was disclosed in the register of MPs interests on budget day.

Roger Lawson

Budget Spring 2016 – You Won’t Need Sugar to Sweeten this Pill

The Chancellor appeared to be in a buoyant mood delivering his budget speech today even though he noted that the global economy is weak and financial markets are turbulent. He reported a fast growing UK economy and lots of personal tax cuts. Indeed he emphasised that with 1% of the richest taxpayers contributing 28% of all income tax, this was proof “that we are all in this together” in case you did not realise it! But the wealthy certainly won’t be suffering as a result of this budget.

Here’s some brief notes on the content of his speech before there is time for a more extensive analysis:

As forecast there will be a limit of 30% on the deductibility of debt interest against earnings for large companies. He will also be strengthening withholding tax regulations, restrict past loss allowances for larger companies and in other ways tackle the problems of companies evading tax. He expects to raise £9bn in extra taxes in this way.

To offset that, Corporation Tax will be reduced by April 2020 to a rate of 17%. “Let the rest of the world catch up”, he said. But he will be taking steps to stop foreign internet sellers who stock and deliver goods into the UK from avoiding VAT.

Small business rate relief will be increased. Some 600,000 businesses will pay nothing in future, and 250,000 will see a reduction. He said this was a “£7bn tax cut for a nation of shopkeepers”. London will also be able to keep business rates paid in the capital.

Commercial stamp duty will be made more progressive (i.e. in staggered “slices” rather than abrupt changes) and 90% will pay less. But large property companies will be hit by the increase in the top rate of stamp duty from 4% to 5%.This theoretically could reduce the value of large properties by 1% although the reality might be different. Note though that most listed property companies are unlikely to be impacted by the change in deductibility of interest mentioned above – see the latest ShareSoc Informer Newsletter for an examination of that issue.

The oil/gas industry will be helped by the Supplementary Charge being halved to 10% and Petroleum Revenue Tax will be abolished.

There will be more Government investment in transport projects including HS3 and Crossrail2.

Fuel duty will be frozen, and duties on beer/cider frozen to help pubs. Whisky and other spirits will also be frozen but all other alcohol duties will rise with inflation.

There will be a new “sugar levy” on the soft drinks industry to begin in 2 years time to combat obesity particularly in children, although natural fruit juices and milk based drinks will be exempt. Shares in AG Barr, Britvic and Nicholls might be affected as a result. This tax will apply to manufacturers apparently so what will stop people simply importing such drinks to get around this tax? The detail announcement says that the levy will also apply to “importers” of soft drinks, but how can that be reconciled with Common Market law one wonders where the free movement of goods is a paramount principle? Although it is claimed it will raise over £500 million each year, it seems likely to turn into one of those political gestures rather than a serious attempt to improve the nations health as there may be many ways to avoid it. The producers of such products suggested consumers could find an easy way around it – just eat chocolate and sweets instead.

Class 2 National Insurance contributions paid by the 3 million self employed will be abolished.

The headline rate of Capital Gains tax will fall from 28% to 20%, and the rate paid by basic rate taxpayers will fall from 18% to 10%, from April this year. There will be a new rate of 10% for long term investments in unlisted companies. However the existing rates will be retained for properties and for “carried interest” – yes the Chancellor is still discouraging buy-to-let investors and hedge funds.

Annual ISA contribution limits will rise from £15,240 to £20,000 in April 2017, and young people under 40 will be able to take out a new “Lifetime ISA”. Up to £4,000 per year can be contributed to such an ISA up to the age of 50 and the Government will add £1 to every £4 put in. This is designed to encourage long term saving. Existing ISAs can be rolled into the new Lifetime ISA. As forecast, the Chancellor seems to have backed off from more wholesale reforms to pension/ISA arrangements. Though older investors might wish to complain about the age discrimination aspect of this proposal.

Tax free personal allowance will rise to £11,500 and the higher tax rate band will rise to £45,000 from April 2017.

Some initial comments: The reduction in Capital Gains Taxes and increase in ISA limits will be greatly appreciated by wealthy investors so it may well please many Members of ShareSoc, but relatively few people nationally either pay capital gains tax or will be able to take full advantage of the new ISA limits. The impact on tax take may therefore be relatively small and lower capital gains tax rates might actually encourage more payment of that tax. For example, long standing holders of assets may be more willing to sell them and there may be less temptation to invest in tax relief schemes such as EIS to avoid tax. But the reduction in Corporation Tax and Business Rates will have a wider positive impact. Likewise the abolition of Class 2 National Insurance contributions and freezing of fuel and some alcohol duties may have wider appeal to middle England. The “Lifetime ISA” will also be very attractive to “millenials” no doubt.

Stock market investors might see some impact from the attempt to recoup more tax from large, multinational corporations. But surely on the whole investors will be pleased with this budget. Perhaps the only slight negative is the addition of yet more complexity to the tax system. Yes the Chancellor and his advisors could not refrain from “tinkering” as forecast in my editorial in the latest ShareSoc Newsletter which is just being published.

Postscript: The budget was criticised by some as diverting money from disabled people to finance tax cuts for the wealthy. Indeed Ian Duncan-Smith, Work & Pensions Secretary, resigned soon after while indicating he had been pressured into excessive cuts to welfare benefits. But the exact position is not entirely clear. The controversy seems to surround the introduction of Personal Independence Payments (PIPs) which replace Disability Living Allowances. The Chancellor in his budget speech said that the “disability budget will still rise by more than £1bn”, but when you look at the details of the budget announcement you find that there is a claimed reduction “from previously announced measures” of over £1bn per annum in Government expenditure from 2018 onwards on PIPs. This arises from changes to the PIPs proposals after consultation. The exact impact on those receiving such benefits is not at all clear at this point in time.

Roger Lawson

Markets in Freefall, Chinese shares and VCT Issues

While the world seems to be collapsing around us – with sharp falls in the price of most commodities including the critical ones of oil and gold – this writer took the time to attend the Annual General Meeting of Downing ONE VCT this morning. Forget also the fact that the Chinese stock market plummeted yesterday. The more I read about the dynamics of that market the more it looks similar to the US market in the 1920s where manipulation was rife, many investors bought on margin and bucket shops exploited unsophisticated retail investors. The interventions by the state to stabilise the market may be to no avail because they have created an unstable and volatile market where investors are borrowing money to buy shares without any real understanding of why they are doing so except that prices are going up.

I may do a longer piece on the problems in the Chinese stock market in the future as it’s passed by a lot of UK investors, but today I wish to talk again on something of more immediate concern to UK investors. This is the impact of the new VCT rules announced in the Budget. The AGM at Downing One VCT enabled me to ask some more questions on this topic, and here is an extract from the report of the meeting which is present on the ShareSoc Members Network:

The meeting was opened by Chairman Chris Kay, who just happens to manage the very successful Chrysalis VCT. He introduced the board and representatives from the fund manager including Nick Lewis, Senior Partner, who I have met many times before and who is very knowledgeable on the issues affecting VCTs.

Mr Lewis was then invited to explain the proposed changes to VCT regulations which will affect what they can invest in. See this ShareSoc blog post for a brief summary:

Mr Lewis indicated that it might create some difficulties with “buy and build” strategies – for example if a pub chain wished to add another pub and finance it via a VCT investment. The reason for the rule tightening is that the previous regulations were seen as breaching EU imposed rules on state aid limitations. The new rules are likely to be approved in September by Parliament with Royal Assent in October.

I asked how many of the investments made by Downing in the last year or two would have been ruled out by the new regulations. The answer given was less than 50% but other VCTs might be more affected (the Northern ones were mentioned later as they do a lot of MBOs which are made difficult by the new rules and Northern have already suspended their dividend reinvestment scheme, presumably as a consequence).

Asked whether representations had been made on the new rules (i.e. to the Government) and the answer was yes but they had apparently “fallen on deaf ears”. The conclusion was that it might definitely shrink the VCT industry with few fund raisings. This change has been imposed by the EU which prompted Nick to say that this is the result of being run by Eurocrats and you will get your chance to get out next year – so we know which way he might vote on any Brexit referendum.

I asked whether it would rule out most AIM investments, and the Chairman said Yes in summary. But they can do follow-on investments if the VCT invested in the company earlier. However the exact rules were very unclear and opaque. Questions to the Treasury about how they are supposed to be interpreted result in confusing answers. Moreover apparently any breach of the rules (even inadvertent ones such as happened at the Oxford Tech VCTs) might result in the loss of VCT status. This would be a nightmare for VCT managers and VCT investors as the rules are already so complex that they take a lot of effort to adhere to.

Is there an easy way around the new rules? Not obviously was the answer.

It seems likely the demand for new VCT share issues will exceed the supply in future. However that might reinvigorate the “second-hand” VCT market.

So there you have it. I have written to my M.P. on the subject of the rule changes. It makes sensible financial planning by VCT investors and VCT company managers very difficult when the Government keeps changing the rules. VCTs have been very successful in stimulating more investment in SMEs and meeting the UK “equity funding gap” as it is called. They are in danger of being stifled by the EU.

After the problems in the Eurozone over Greece, where the solution settled upon does not really resolve the issue of the country having an unsupportable level of debt, it is certainly undermining my personal support for membership of the EU. In Greece they just gave a bad debtor more rope to hang themselves with. Some write-off of debt will surely have to happen sooner or later, and in the meantime the Greeks will just squirm and try to wheedle their way out of their straitjacket.

One could go on at length on the deficiencies in the EU in terms of democratic representation and their ham fisted approach to many matters (Shareholder Rights and the Prospectus Directive are other examples) and the faults in the Eurozone model but that will have to suffice for the present.

Roger Lawson

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

At first glance a good budget for private investors

Is the Chancellor’s budget good for private investors? At first glance it appears to be so, although more analysis of the detail will be needed in due course because like all Chancellors Mr Osborne’s hand outs might be taken away elsewhere in the small print. But there are some very positive things:

– The ISA investment limit will be raised to £15,000 with cash and stocks/shares ISAs merged. There is no obvious cap on ISA contributions which was rumoured as a possibility.

– Defined contribution pension rules will be relaxed and there will be no necessity to ever buy an annuity. Indeed those using drawdown will apparently be able to draw down as much or little as they like, effectively allowing one to completely cash in a pension. Is this right one wonders or will there be tax implications? Perhaps the Chancellor is hoping that all that money stuck in pension schemes will be freed up and spent, thus stimulating the economy and raising tax revenue?  As a result the share prices of insurance firms who provide annuities such as Legal & General, Aviva and Standard Life dropped substantially on this news but asset managers and platform operators might benefit. The Chancellor does not seem worried that pensioners will blow their savings but wants them to take responsibility for their own financial decisions.

– Pensioners over 65 will be provided with new bonds from NS&I that will apparently provide a more real rate of interest than they can obtain from banks or building societies at present. Let us hope that does not create difficulties for the latter institutions and inhibit their lending. It should encourage pensioners to save rather than spend, and help offset the impact of “financial repression” on small savers – surely a morally sound move.

– The Personal Allowance will be raised from £10,000 to £10,500 (i.e. more than inflation), but the 40% income tax threshold will only rise by 1%, thus dragging more people into the higher tax bracket.

– The housing boom will likely continue with the Help to Buy Scheme extended to 2020 as signposted, and a strong commitment to a new “garden city” at Ebbsfleet. The Chancellor made some jibes at Labour for announcing this ten years ago but in practice minimal development arrived. With major development probably dependent on improved road links and a new Thames Crossing (the Dartford Crossing is already severely congested) it may be another ten years before we will see the result.

– Companies using high levels of energy (cement works, chemical companies, brickmakers for example), will get some relief from energy costs which may help them to compete more effectively on the world scene.

– Betting companies will be hit by raised duties on fixed odds terminals, but bingo duty will be cut to 10%.

– Acohol duty will rise in line with inflation except for Scotch and Cider where it is frozen and Beer where it is cut by 1p. Diageo shares, which you might expect to benefit from that did not move, perhaps because international business is of more importance to them.

– As predicted Venture Capital Trust (VCT) rules are to be changed to prevent “Enhanced Buy Backs” but it is disappointing that investment platforms will be allowed to sell those products (the risks of which are not obvious to many). VCT companies and EIS schemes won’t be able to invest in companies which receive renewable subsidies in future which will put a damper on this hot area.

Some commentators point out that to finance some of these give-aways there will need to be further cuts in Government expenditure. That might be good for business and for investors but may not please everyone – here’s where the detail starts to be important.

It’s generally an investor and business friendly budget, and the changes to pension rules (which are surely overcomplicated and unnecessary at present) are really revolutionary. One can imagine the ire of some city directors at these changes though.

Roger Lawson

The Chancellor’s Autumn Statement – What’s in it for investors?

You may well be worse off if you are dead. The Government is to clamp down on the payment of state pensions to people who are dead, which is apparently a particular problem when they move overseas upon retirement.

Otherwise these are come of the changes and how they may affect individual investors:

– As expected, there is to be a restriction on Venture Capital Trust (VCT) “enhanced share buy-backs” upon which there was a recent consultation. In future VCT investments that are conditionally linked in any way to a VCT buy-back or that have been made within 6 months of a disposal of shares in the same VCT, will not qualify for new tax relief. This is going to be tricky for some investors and VCT taxation is already complex enough, so ShareSoc would have preferred a less strict rule.

– There will be a new tax relief for equity and certain debt investments in social enterprises. Charities, community interest companies or community benefit societies will be eligible.

– The permitted maximum level of ISA subscriptions will be £11,880 in 2014-15, which is an increase in line with CPI. No mention of imposing an overall limit as was rumoured.

– There are several attacks on “tax avoidance” with new capital gains taxes where non-residents dispose of UK residential properties, on those who use intermediary companies to appear as if self-employed when they are in fact employed (as the IR35 rules are already in place it is unclear what else is being contemplated here), and on structures used by hedge fund managers and investment bankers to minimise tax.

– The basic personal allowance is to rise to £10,000, but the age allowances for those born before April 1948 are frozen. The age at which you are elligible for a state pension is also likely to rise as the Government is reviewing this and it may rise to 69 for people in their early thirties.

– There is encouragement for fracking and for the development of offshore oil and gas fields.

– Another change to VCTs is that the VCT rules will be changed so that “investors can subscribe for VCT shares via nominees”. This is surely a retrograde step as some VCTs have in the past demonstrated major corporate governance problems (ShareSoc ran a campaign on one of them and there have been other cases in the past where shareholders instigated “revolutions” and changes of management). Allowing nominees will make these kinds of campaigns a lot more difficult and this is a retrograde step surely that has been ill considered. ShareSoc is always opposed to the extension of the use of nominee accounts.

But perhaps the best news was that Mr Osborne was more positive about the health of the economy and projections for future budget deficits. But this budget is in essence fiscally neutral so any giveaways may only come before the next general election.