Opinion
James Hender 30 Oct 2018 10:05am

What the Budget means for private wealth

Finding Brexit to the right of him, and a promised end to austerity on the left, chancellor Phillip Hammond was shaping up for what could have been the most politically sensitive Budget in many years. That was until the OBR doled out its own stash of pre-Halloween treats

Of course, Hammond and the wider Conservative Party’s, mantra of fiscal responsibility would not countenance a spending spree backed up only by revisions to economists’ forecasts and there was always likely to be smattering of pain to match the gains.

Many had presumed that, with public spending set to increase, a sensible place to start in terms of balancing the books would be freezing the steady rise in the personal allowance. However, the OBR windfall has enabled the government to bring forward the planned changes, with the personal allowance increasing to £12,500 from 1 April 2019 and the higher rate tax banding now starting at £50,000; a year earlier than anticipated in the 2017 manifesto. Thirty-two million tax payers will be delighted by these changes.

However, it must be remembered that the level at which the additional 45% rate of tax kicks in has not changed since it was introduced by Alastair Darling in 2010 and there has been the unforeseen consequence that fiscal drag is increasingly hitting higher earners in the economy who are shouldering a significant economic burden whilst lower earners receive a tax cut.

Property tax reform

As well as giving a leg-up to lower income earners, there were some key shake-ups to property taxation. Chancellors are not generally known for making tax changes retrospective but there was an early Christmas present for first-time buyers of certain shared ownership properties, who will be delighted to be able to claim back stamp duty which they paid over the last year.
The two amendments to Capital Gains Tax reliefs on peoples’ homes sounded innocuous, but they will hit people who have to vacate their properties before they sell.

In a surprise move, the final PPR relief period is reducing. Having previously been entitled to relief over the last 36 months of a property’s ownership, this was reduced several years ago to 18 months. Hammond is now taking this a step further and reducing the final period of relief to 9 months. This is particularly relevant when people have to move for work-related reasons, but are unable to sell their homes quickly in the current market conditions.

Read all the news, analysis, and comment on this year's Budget here

In the second amendment, lettings relief will be restricted to where the owner is in occupation. This generous relief has frequently assisted those selling their main home after a period of letting to pay limited tax on any gain outside the PPR period. Many will therefore want to review their CGT position on their former homes as these changes represent a large tax increase for those affected.

We also expected movement on SDLT for non-resident buyers, first mooted by prime minister Theresa May at the Conservative Party Conference. Little detail was forthcoming; however it appears that a 1% levy will be charged on purchasers who are not UK resident. A consultation is expected in early 2019, but the chancellor will be cautious of throwing the baby out with the bathwater in any reform to the system. Overseas capital remains both a sizeable source of income for the treasury and an important investment pool for the property industry.

Entrepreneurship

Hammond also made a big play of his support for innovation and dynamic businesses, including in terms of investment and supporting start-ups.
Amidst some criticism of the system, Entrepreneurs’ Relief will now have a two-year qualifying time limit before the reduced 10% CGT will apply.

When considering Entrepreneurs’ Relief on the sale of shares in a company there have always been plenty of ways to trip up, but in general terms people could get the relief as long as they held over 5% of the shares and votes. A further review of the conditions will now be needed as additional rules will mean that the seller must have rights to 5% of both distributable profits and net asset value.

As a result, anyone thinking about selling their business in the next few years should seek advice to ensure that they comply with the new rules.

The extension of IR35 reforms into the private sector was expected - with many contractors, particularly in the technology and media industries using such structures - but the changes will need to strike a careful balance between protecting employment rights and providing the flexibility required to drive productivity in a dynamic economy.

Fundamentally, though, much remains up in the air. We still await guidance on Inheritance Tax with the OTS’s review ongoing, and there was uncomfortably little from the Chancellor on Making Tax Digital. Meanwhile, with Brexit looming large on the horizon there is a real possibility that the Spring Statement will transform into a fully-fledged Spring Budget.

James Hender, head of Private Wealth at Saffery Champness

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