Your IndustryMar 17 2016

Investment on the radar in the Budget

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Investment on the radar in the Budget

Investors were given a fillip by the increase of nearly £5000 on the amount they can save into an Isa in this year’s Budget.

Page 34 of the Budget 2016 document states: “To further help savers at a time of unprecedently low interest rates, the Isa allowance will rise from £15,240 to £20,000 in April 2017.”

Announcing the change, Chancellor George Osborne said this was one of “significant steps” the government was taking to support savers.

In his speech, he said: “This has nearly tripled the amount of cash that people can save in Isas and made them more flexible.”

The government has also abolished tax on savings for 17m people through the introduction of the personal savings allowance (based on HMRC calculations using data from the Survey of Personal Incomes), and given people pension freedoms, which Mr Osborne said were further signs that the government was committed to helping people save.

David Harrison, managing partner of True Potential Investor, has welcomed this move, saying: “Isas are the key to closing the savings gap and turbo-charging them is a huge step in the right direction.

“We called for a top-up and a higher annual limit and the Chancellor has delivered both. This is excellent news and will change the way the nation saves for the better.”

Help to Save

The government announced a Help to Save scheme for those on low incomes who wish to set aside some of their income.

The scheme will be open to 3.5m adults in receipt of the universal credit, with minimum weekly household earnings equivalent to 16 hours at the national living wage, or those in receipt of working tax credit.

It will provide a 50 per cent government bonus on up to £50 of monthly savings into a Help to Save account.

The bonus will be paid after two years with an option to save for a further two years, meaning people can save up to £2,400 and benefit from government bonuses worth up to £1,200. There is full flexibility on how people use these savings.

The Lifetime Isa

Arguably the biggest news in the Budget was the announcement of the Lifetime Isa - based on a system proposed by Michael Johnson, fellow of the Centre for Policy Studies - and which would target the younger generation primarily.

It is to be used for long-term savings: either to fund a house purchase (up to a limit of £450,000) or to be taken at 60 for use in retirement.

From 6 April 2017, any adult under 40 can open a Lifetime Isa and save up to £4,000 a year. They will receive a 25 per cent bonus from the government for every £1 they put in - so a full year’s contributions from a young investor will be matched by a £1,000 contribution from the government.

Contributions can be made, with the bonus paid up to the age of 50.

Brian Spence, of Spence and Partners believes this “is the shape of things to come”. He says: “What’s not to love about the Lifetime Isa compared to the complex pension tax system? The snag is the government bonus stops at 50 and if you are over 40 before April 2017 – tough luck.

“Young people get a government bonus of £1,000 for each £4,000 and you can take it out whenever you want if you need it, but lose the government bonus until age 60.

“For young workers it is a no-brainer – max out your Lifetime Isa before you even think about pensions saving with its complexity, tie-ins, charges and near certainty of political interference.”

The steep cuts to CGT at the higher end look set to prompt a stampede of interest in enterprise investment schemes Jason Hollands

There will also be a 5 per cent exit penalty applied on this, although the government said it would discuss with the industry whether funds could be borrowed from the Lifetime Isa without the 5 per cent fee, provided the money was repaid in full.

However, not everyone in the industry believes the Lifetime Isa’s dual savings objective can offer the best of both worlds.

Steven Cameron, pensions director at Aegon, says: “For many younger savers, the Chancellor’s new Lifetime Isa may seem like an ideal way of saving for their two biggest financial needs – a deposit for a first home and a pension.

“However, these two aims are incompatible, and need different investment strategies.

“If a house deposit is your primary aim, the Lifetime Isa is attractive but don’t let yourself pretend it’s also taking care of your retirement planning.

“If you’re an employee, the best way of saving for your retirement will be through a workplace pension, which will benefit from not just a government tax boost but also an employer contribution.”

EIS and VCT

There was a big boost to enterprise investment schemes (EIS) in the Budget. Although Mr Osborne did not specifically mention measures designed to boost these schemes, as he has in previous Budgets, the deep cuts to capital gains tax (CGT) have helped the investments.

Jason Hollands, managing director of communications for Tilney Bestinvest, says: “The steep cuts to Capital Gains Tax, from 28 per cent to 20 per cent at the higher end, look set to prompt a stampede of interest in EIS.

“This is because investment in EIS not only provides a 30 per cent Income Tax credit, it also enables those who have incurred a capital gain to defer their capital gains tax liability by reinvesting their gain into EIS companies.”

Although the tax liability doesn’t disappear, but recrystallises when the shares are sold, it would then be calculated at the prevailing CGT rates at that time, so the cuts will prove beneficial.

Mr Hollands explains: “This deferral feature can apply to gains incurred up to 36-months before subscribing for the EIS shares.

“This means those who have realised a hefty gain over the past three years - for example on the sale of shares - now have an additional incentive to make use of EIS to defer that gain and reduce their tax liability when the gain recrystallises at the new, lower rates.”

However, there was a nail in the eco-friendly coffin of energy generation’s inclusion into EIS and VCT, as it will be excluded from these investment vehicles from 6 April.

Philip Rhoden, director of discount broker and EIS and VCT distributor Clubfinance, comments: “The confirmation that energy generation will be excluded from EIS and VCT from 6th April 2016 is definitely a last call for interested investors.”

Sovereign bonds

Investors in gilts were given a slight cause for hope UK government bonds might be more attractive, as sales next year were announced at £129.4bn, a small increase from this year’s £127.4bn.

Although the split of issuance was kept broadly similar to this year, the Debt Management Ofiice announced an increase in the number of auctions enabling smaller average sizes.

According to the latest Bank of America Merrill Lynch Global Research report, this may be a glimmer of hope for UK gilts post-Budget.

It says: “Gilt supply is flat but there is increased flexibility on the delivery.

“Beyond [the higher sales and higher auctions] there were further operational measures announced that addressed both the short run event-risk posed by June’s referendum as well as the longer term structural issues facing the market.

“We continue to expect a front-loading of supply in April and May pre-EU referendum.”

Property in Sipps

Stamp duty land tax (SDLT) on commercial property transactions was charged on the old-fashioned “slab” basis rather than the marginal basis brought in for residential property in December 2014.

However, the Chancellor unveiled changes to this from midnight on 16 April, however, replacing this with a marginal scale - covered in full in other sections of this guide.

Smaller transactions are likely to benefit from this, which may in particular provide a fillip for individuals who wish to purchase a modest commercial property within their self-invested personal pension (SIPP).