After every Budget or Autumn Statement my inbox rapidly fills with commentaries and summaries, with a race to be the first. I think this year the record was broken when a glossy, picture-filled and very comprehensive email from an accountancy firm arrived barely two hours after the Chancellor had sat down. But many of these concentrate either on details or on the eye-catching stuff. I particularly liked ‘A sugar-coated budget for the next generation’.
So, with so much commentary readily available, I have decided to look in more detail at just two measures: the changes to Capital Gains Tax and the new Lifetime ISA.
Capital Gains Tax
Many will remember when CGT was charged at the same level as income tax; so a higher rate taxpayer paid 40% on all gains realised above their annual exempt amount. Then in 2008 Alistair Darling shocked us all by cutting the tax to a flat rate of 18% for everyone. This proved too tempting and, by 2010 the link to income tax was reintroduced with basic rate applied at 18% and higher rate at 28% (nevertheless still attractive in comparison with income tax rates).
In this latest Budget the Chancellor has reduced both rates to just 10% for basic rate taxpayers and 20% for higher rate taxpayers, effective from April this year. This is a welcome change and, as you would expect, opens up some planning opportunities. For example, whilst it will often make sense to utilise the current year’s annual gains allowance, it may be preferable to defer realising gains for just a few weeks to benefit from the lower tax rates; or for Enterprise Investment Schemes and older Venture Capital Trusts that are carrying forward deferred gains, it might be a good opportunity to exit after 6th April and pay a considerably lower rate of tax than would have applied to the gains before they were deferred. However, despite these tax rate improvements, the Chancellor continued his unpopular stance on the buy-to-let market, retaining the CGT rates of 18% and 28% on gains realised from the sale of second properties.
There was a time when we simply had the ISA in two versions, the Cash ISA and the Stocks and Shares ISA. We still have these, albeit the limits are now the same. Then came the Junior ISA or JISA for children. Last year the Help to Buy ISA was introduced (H2BISA?) to assist first time buyers. On the horizon we have the Innovative Finance ISA (IFISA) which will allow peer to peer lending in an ISA. And now LISA will be joining the ranks of tax advantaged savings.
This is another scheme to assist the young. Between the ages of 18 and 40 a Lifetime ISA can be opened and investors can save up to £4,000 a year until the age of 50. This will then be topped up by a 25% bonus from the Government, making up to £5,000 saved every year. Access will be allowed for the purposes of purchasing a first home, or after the age of 60. Other than that any attempt to withdraw before the age of 60 will mean loss of the bonus, plus any interest or growth on the bonus along with – most controversially – a 5% exit charge, which is surprising given the Government’s current attempts to eliminate early withdrawal penalties from some pension plans. If the maximum is invested from age 18 to age 50, and say 4% annual growth is achieved, a pot around £349,000 will have accrued. But if this is then withdrawn, after the exit charge and loss of the bonus, only £265,000 would be paid out. There will be consultation on allowing withdrawn amounts to be repaid to re-secure the bonus.
So where next? I wonder if we are seeing a nascent Pension ISA (I have been struggling to come up with some wordplay on PISA, but will have to leave that to your imaginations). Pensions, as they currently stand, are E,E,T schemes, Exempt, Exempt, Taxed – i.e. money going in is exempt from tax, growth inside is exempt, but withdrawals are taxed (albeit that 25% is tax free). ISAs are T,E,E – i.e. cash going in comes from taxed monies, but growth within and money taken out is tax free. Now, with the Lifetime ISA we have a partial blurring. We could perhaps call it T/E,E,E/T (more wordplay anyone?) and this leads me to my point. Last year George Osborne floated the idea that pensions might become more like ISAs – that no tax relief would be given going in but income taken out in retirement would be tax free. Is LISA on her way to PISA?
Philip Chandler APFS, CFPTM, Chartered MCSI
Chair of Aspinalls Technical and Investment Committee