Another year goes by, and another fiscal Budget from the government is due to be unveiled. Although this year is anything but an ordinary year. For starters, there’s a break in tradition: this budget will be held on a Monday (the 29th October), rather than the customary Wednesday – ostensibly to fend off, as far as possible, the political own-goal of announcing a new fiscal agenda on Halloween. Even then, you can practically hear sub-editors of newspapers up and down the country rubbing their hands together in glee. Think of all the pun-laden headlines now available to them: “The Nightmare before Brexit”, “Phillip Hammer-Horror’s Budget Bogeyman”, or, my personal favourite: “The Chancellor’s Taxes Chainsaw Massacre”.
It seems everyone in Westminster is up in arms over the progress of Theresa May’s ‘95% agreed’ deal (in which the remaining 5% – the Irish border question – is approximately 500% harder to reach an agreement on than everything else discussed in Brussels thus far). This year’s budget will set the stage for our impending departure from the EU, or lack thereof, depending on whether or not the talks break down and a ‘people’s vote’ goes ahead.
Brexit aside however, the Chancellor is hopefully about to remind his colleagues that there’s more to running a country than squabbling over our future relationship with the rest of the continent.
So here we discuss the top two ‘game-changing’ policy proposals that are rumoured to make an appearance next week:
1: “Help-to-Buy for private tenants”?
Could it be that the policy wonks down in Westminster have finally struck electoral gold for the generation that can’t afford to buy their own homes? Word on the street is that they have. The thinktank the Centre for Policy Studies has come up with a fully costed-up plan to help privately renting tenants buy their homes from their landlords. It works like this:
- Landlords who opt to sell to their tenants will be offered a 33% rebate on their Capital Gains Tax liability;
- The tenants will then receive the remaining 66% of the tax paid by the landlord (up to 6.6% of the value of the property) to use as a deposit towards the cost of the house;
- Tenants who receive the maximum 6.6% deposit contribution therefore will only need to find a deposit of 3.3% – rather than 10% – of the property value if they want to buy the home they rent.
The CPS gives the following example: “This scheme, entitled Help to Own, would mean that for every £1 a tenant invested to buy the property they rent they would receive a total of £3 for their deposit. For an average property worth £228,000, they would be putting in just over £7,000 and getting £22,800 back*.”
*This seems a slightly skewed way of presenting it, given that the roughly £7,000 stumped up by the tenant is incorporated in the £22,800 figure. Still, a windfall of just over £15,000 is nothing to be sniffed at…
The CPS believe that the scheme is effectively revenue-neutral, as it is likely to encourage landlords who would otherwise have held onto their assets to sell. Also, the advantages of encouraging a ‘property-owning democracy’ are thought to be worth the public investment. It’s been rumoured that we’ll see the proposal laid out in Mr Hammond’s upcoming Budget, and a policy that’s a) cheap to implement, and b) likely to be a major vote-winner will be very difficult for MPs to oppose, lest they be accused of not wanting young people to get a helping hand.
There are legitimate objections however:
- This will only be available on properties that have seen a capital gain significant enough to produce a tax liability. For landlords who have owned rental properties for well over a decade, it’s more likely than not that at least some gain will have occurred. But if you visit https://houseprices.io/, you’ll see it’s not uncommon for properties selling today to have not recovered in value since the 2008 crash.
- There is already a loophole that small-time landlords can take advantage of to dramatically reduce their CGT bill: by living in the rental property themselves at some point before selling. (Optimise Accountants explain how in further detail here). Obviously, this option won’t be viable for landlords with huge portfolios of hundreds of properties… but the majority of landlords have between one and three rented homes (according to the National Landlord’s Association) under their belts. If this strategy is more financially lucrative than the new one being proposed, then take-up of the CPS idea is unlikely to be significant.
Still, if the government can find ways to mitigate these two stumbling blocks, Mr. Hammond could be onto a rare vote-winner.
2: A pensions “tax raid”?
There are two possible ways the chancellor could choose to ‘raid’ the pensions tax relief system for a wad of extra NHS funding in next Monday’s Budget:
- To introduce a ‘flat-rate’ of pension tax relief at 25% – a boon for basic rate taxpayers who’ll receive a 5% tax credit, but a loss of 15% and 20% for higher and additional rate taxpayers respectively.
- To cut the maximum annual tax-relievable allowance for pension savings to £30,000 from £40,000 (or 100% of annual relevant earnings – whichever is lower).
The first is certainly the more radical of the two. Pensions tax relief was originally brought in to avoid the problem of double taxation, i.e. if you put your after-tax earnings into a pension pot, without tax relief you’d face paying tax again on the same income when drawing it in retirement. The intention was therefore to create a system of tax deferral rather than outright tax relief.
The unintended consequence however has been that many higher and additional rate taxpayers have ended up better off, since it’s quite common for people on high incomes to move down a tax bracket when they retire (i.e. additional-rate workers often become higher or basic-rate retirees, and higher-rate workers often become basic-rate retirees).
In times of austerity, this benefit for higher earners is starting to look like an easy target for the cash-strapped chancellor. As Philip Aldrick, Economics Editor of The Times, pointed out in July, ‘parliamentary arithmetic’ means that it’s difficult to get any proposal that seeks to raise taxes voted in, so stealth taxes of this variety can be a handy way of satisfying the requisite number of politicians of all stripes to get something on the statute books.
That said, it’s still a hugely contentious issue – one even guns-blazing reformer George Osborne put on the backburner. The penalty for future higher and additional-rate pensioners (who will end up being taxed twice on the same income) might also alienate a significant portion the Conservative party’s core voter base. ‘Spreadsheet Phil’ will be keen to avoid another ‘OmNICshambles’, so as we draw closer to Budget day, this one is looking increasingly unlikely.
The second pensions tax relief measure – the £40,000 annual allowance – is now the top contender to face the chop, to be replaced by the much stingier £30,000 limit. Since having a spare £40K lying around to stick in a pension is a problem very few people in this country have, it would provide a much-needed cash injection, and carries far less risk of triggering a public backlash.
If your current pension savings strategy involves annual contributions of over £30,000 a year, then you might want to have a conversation with your financial adviser if this one goes through.