The Budget: What Could It Mean For Tax-Efficient Investors and Wealth Managers?
It has recently been mentioned that Monday’s budget has been moved back two days from its original Wednesday date so as not to interfere with Halloween celebrations, and the gift that might offer to news publications exploring the budget for tricks and/or treats, the lighting of bonfires, or even the appearance of a ghost. It is also perhaps fitting that the UK government is seeking to avoid a conflict with a day whose origins come from a pagan Celtic festival, given the mess that this government has gotten itself into with Northern Ireland and the Brexit fiasco.
Yet for private client investors, this budget will not be as momentous as last year’s affair, which dramatically recast the entire EIS & VCT market following the announcement of the Patient Capital Review and the effective elimination of the subset of the market known as ‘capital preservation’ or ‘asset-backed’ investments.
Nevertheless, there should be some significant changes for investors, even if the budget will probably be cautious ahead of the possibility of a messy Brexit slip in March, in which case an entirely different budget will be released shortly after that date with considerably more dramatic changes. Putting that aside for the moment, what can investors expect this week? The first thing to note is that this will probably not be a visionary budget, although it could be a disaster if he capitulates too obviously to Theresa May’s assertion that the “end of austerity” is now upon us. The word ‘austerity’ is often employed by the economically illiterate and virtue-signalling social media trolls, but let’s assume that the Prime Minister is signalling that a decade of ‘loose’ monetary policy and ‘tight’ fiscal policy is at an end. Given that she kindly gifted the Chancellor with significant increases in NHS spending to accompany the ‘end of austerity’ this really only leaves him with two choices: he can either increase the deficit and issue more gilts (reversing the hard won path towards fiscal stability and a decreasing debt-to-GDP ratio) or he can increase the amount of money raised through taxation. In truth, pursuing the latter option is probably the only course of action which will preserve his reputation. We know some of the headlines already. In addition to the significant rises in NHS spending, expect the imposition of stamp tax on foreign property purchases, more money for the implementation of Universal Credit, the previously announced increase in council house spending, and some significant relief for high street businesses (although not a restructuring of business rates). From an investor’s perspective, tax-efficient investing is almost certain to be a focal point for the Chancellor. Here are the areas that are likely to be most affected: Pensions – there are two changes that may figure prominently. The first is a reduction in the annual amount that you save from a pension before tax, moving the current rate of £40,000 downwards yet again, probably towards £30,000. This is an obvious cash cow because it can generate a lot of money painlessly. Perhaps a more adventurous Chancellor might move the £40,000 annual contribution back to £50,000 whilst simultaneously removing the relief from an individual’s marginal rate of taxation to the basic rate of taxation. But that sounds too much like George Osborne to pass muster this week. The second change might be to announce a consultation that would permit defined-contribution pension investors to invest in Knowledge Intensive technology companies, perhaps even allowing this to sit outside the £1.03 million tax-free lifetime pension allowance. This could be building on the Treasury’s patient capital report from last year. Entrepreneurs' Relief – this generous allowance was introduced a few years ago to encourage and incentivise entrepreneurs to start new businesses and offers an attractive 10% tax rate for exits up to a cap of £10 million. Some feel that this is either too generous and that perhaps the cap should be lowered or that the relief should be abolished altogether given how low CGT is at present, particularly given that it cost the Treasury a higher-than-expected £2.7 billion last year. Inheritance Tax Relief – following the review of the EIS & VCT market which culminated in last year’s budget, there is currently a similar review on IHT and Business Relief by the Office of Tax Simplification. We don’t expect anything too radical in this budget, but that may well change next year, as there is a lot of money at stake for the Treasury. Capital Gains Tax – this must be the tax that politicians worldwide always seem to want to tinker with on a continual or rolling basis. Some are saying that the 10%/20% structure should increase, but we find this an unlikely occurrence. EIS/VCT Income Tax Relief – there has been some discussion about moving the 30% income tax relief to 20% as part of a general budgetary belt tightening following the need to find money to fund the NHS. Symvan feels this is rather unlikely, particularly after the extensive review of EIS and VCT that was undertaken last year, which was meant to be the last major reform for a few years. If we were to dare to hope for some positive news on this front, perhaps it could be an announcement that the Treasury is going to look into increasing the amount that SEIS companies can raise following the UK’s departure from the European Union. The Treasury has often been sympathetic to our suggestion that the £150,000 limit should be closer to £500,000 if the desire is to provide incentives for technology companies to develop a MVP, and it would be in fitting with the Patient Capital Review. In conclusion, we expect less fireworks than if this budget had been stuck to its Halloween script, but there should be some tightening of the noose, particularly on the Pensions front and possibly intimations that significant changes will be happening in the IHT space in the foreseeable future.