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This was a Budget with more giveaways than takeaways. It was aimed at younger voters, with a finale of tax breaks for first-time buyers, but the chancellor also left wealthy voters relatively unscathed.
The biggest winners benefited not from what the chancellor did, but more what he did not do — notably, his decision not to tinker with pensions.
“On many of the nuts and bolts personal finance topics, this Budget was frankly boring and that is not necessarily a bad thing,” says Jason Hollands, managing director at Tilney Group. “Particularly pleasing is that a feared overhaul of pension tax reliefs or a cut to the annual allowance never arrived, so for now pensions remain unbeatable in their generosity, especially for higher rate taxpayers.”
When it comes to headlines, however, the clear winners from the Budget were first-time buyers.
Stamp duty cut
A stamp duty cut was the most eye-catching gambit offered by Mr Hammond, as he abolished the transaction tax for those first-time buyers paying up to £300,000 for a residential property.
In expensive areas such as London, homes costing up to £500,000 would maintain a zero per cent tax rate on the first £300,000, saving buyers up to £5,000.
Usually, stamp duty of 2 per cent is paid on the value of a property over £125,0000 and 5 per cent on £250,000 to £500,000.
First-time buyers, as defined by the Treasury, are exactly that. If you have ever owned a residential property anywhere in the UK or overseas — or had an interest in one — and intended to occupy it as your main residence, you won’t qualify.
Buyers should not assume that simply because they have been offered a “first-time buyer mortgage”, they will benefit from the stamp duty break, since lenders may apply different criteria from the Treasury when deciding whether someone counts as a first-time buyer.
Nimesh Shah, a partner at accountancy firm Blick Rothenberg, warns: “Watch out, joint buyers: both need to be first-time buyers to qualify for the stamp duty cut. If one has previously had an interest in a property, they will not be eligible.”
Those who had already exchanged on a property before the Budget will still qualify for the tax break, since it only applies on completion.
|House price||Previous stamp duty land tax||New SDLT (first-time buyers only)||Saving|
The cut is projected to have a widely varying impact on different regions. Economists at estate agent Countrywide calculated that 98 per cent of first-time buyer purchases in the Northeast and Yorkshire were below £300,000, whereas only 30 per cent were in London. However, the £500,000 limit has much more impact in the capital, covering 85 per cent of first-time buyer transactions.
Richard Donnell, research director at housing market analysts Hometrack, says the government’s efforts to increase supply are an important accompaniment to the stamp duty cut.
“The decision to abolish stamp duty for first-time buyers will provide some comfort to young people wanting to join the property ladder, but it fails to address the biggest barrier for first-time buyers which is the level of income required to pass lender affordability tests,” he says.
A furious debate is raging about whether abolishing stamp duty would cause house prices to rise. The independent Office for Budget Responsibility calculated that prices will rise by 0.3 per cent over five-year forecast period as a result of the chancellor’s decision.
Mr Hammond retorted by pointing to the supply-side measures he was boosting with government funding, loans and guarantees.
In its post-Budget assessment, though, the Institute for Fiscal Studies found that first-time buyers would be “in general better off” as a result.
“Instead of paying, say, £100,000 for £98,000 worth of house plus £2,000 of tax they might be paying £102,000 for £102,000 worth of house. That’s a better outcome for them,” says Paul Johnson, director of the IFS.
Lindsay Cook, FT Money Mentor columnist
No one expected fireworks but this Budget was the dampest of damp squibs. The chancellor had been expected to target any giveaways towards millennials and students, but there was very little — other than a railcard, and confirmation that the earnings threshold for repaying student loans will revert to the £25,000 level intended when tuition fees were tripled in 2012.
Increasing the stamp duty threshold to £300,000 for first-time buyers will help those in London and the Southeast, but not the regions where properties are more likely to be priced under the existing limit of £125,000.
The Rent-a-room scheme has benefited young renters by encouraging homeowners to rent out spare rooms with a £7,500 annual tax break. The Budget document says this is to be reviewed, which I fear could be the first step towards making it more complicated, less tax efficient and therefore less worth providing.
And at the other end of the age scale there was nothing to help the elderly who fear going into a care home and how they will pay for it.
But there was small comfort for all basic-rate taxpayers, who will able to keep an extra £1.35 a week from their earnings when the personal allowance increases next April. Don’t spend it all at once.
Nimesh Shah, partner, Blick Rothenberg
In a move to support British tech businesses, the Budget announced reforms to rules governing Enterprise Investment Schemes and Venture Capital Trusts to encourage more private investment in high-growth innovative firms.
From April 6 2018, an individual investor could enjoy up to £600,000 of tax relief a year through the doubling of the current limits. While this is a welcome measure, the chancellor could have done more by increasing the associated tax relief to 45 per cent (from the current level of 30 per cent).
The amount of available cash in the private sector is higher than ever, especially following recent restrictions to the amount a person can contribute to their pension, and introducing a higher associated tax relief could have resulted in even more investment.
On the flip side, to protect founders of businesses taking on additional investment in their companies, the government will consult on a proposal to allow business owners to continue to qualify for the 10 per cent entrepreneurs’ relief rate, even where their shareholdings fall below the 5 per cent threshold because of dilution through external investment. Another welcome proposal to support Britain’s entrepreneurs.
Boost for EIS and VCT investors
The chancellor surprised investors by doubling the investment limit in enterprise investment schemes (EIS) from £1m to £2m. In return, EIS and venture capital trusts (VCTs) will have to abide by new rules concerning the level of risk their investors will be taking.
The increased EIS limit applies to investments in “knowledge-intensive” companies. From April 6 next year, the amount of tax relief an individual investor will be able to claim doubles to £600,000, from £300,000 in the current tax year. But few have such sums to invest — it is forecast 4,000 individuals are set to benefit per year.
The government will crack down on schemes that allow individuals to benefit from tax breaks without funding truly innovative businesses. New rules in the 2017/18 finance bill will stop VCTs and EIS schemes investing in low-risk companies, and will ensure VCTs put their money to work faster.
Companies receiving investment have to be “truly entrepreneurial” and pass tests concerning “significant risk of loss of capital, where the amount of the loss could be greater than the net return to the investor”.
Jason Hollands, managing director at Tilney Group, says: “There will be no more ultra-conservative capital-preservation type forms of EIS.”
The government is targeting asset-backed deals, which provide security to investors who ultimately hold an asset with value, even if the investment fails. Alex Davies, chief executive of broker Wealth Club, says: “Deals like investing in crematoria, pubs or nurses homes [will come under threat]. Investments in film companies could also be in focus and might have to take a lot more risk.”
Although VCTs will have to adapt, these structures will be able to retain legacy asset-backed investments as long as they do not put new money to work in these.
As well as investing in higher-risk companies, VCTs will also have to put their money to work faster in the future. From April, VCTs will have to put 30 per cent of the funds raised in a qualifying accounting period to work within one year. And from 2019, 80 per cent of VCT funds will need to be put into qualifying investments, up from 70 per cent previously.
That is potentially an issue for the sector, which has raised bumper levels of funding in the past year. In 2016/17, a total of 18 funds came to market raising more than £800m, the highest level since 2004. Overall, £416m has been raised in VCT new offers launched this tax year out of £640m capacity — far higher than the usual take-up at this point in the year, according to Mr Hollands.
“You could have a scenario whereby there is a bumper crop of dividends coming up when some VCTs find they are unable to invest in enough deals and issue dividends to get rid of the cash they are carrying,” says Mr Holland.
“Unexpectedly, this has been a very good Budget for VCT and EIS investors,” says Mr Davies. “It rewards entrepreneurial companies and investors who are prepared to take some risk to support British business. Whilst there will be restrictions on some capital preservation-focused products . . . with all the changes to pensions beginning to bite, this type of investment is only going to grow in popularity.”
Raj Mody, partner and global head of pensions, PwC
Of the “p” words to feature today, it was inevitable that “productivity” would be mentioned more than “pensions”. Despite the desire for stability, the relative silence on pensions is not good.
Our pensions tax system is ripe for reform and simplification. At every recent Budget, there has been speculation on what might change, and people react. Some crystallise their pensions early to get their 25 per cent lump sum, fearing its tax-free status could be lost. Others save more — or less — for short-term arbitrage. Trust and confidence in the pensions system as a whole does not improve.
Any change would be technically difficult and controversial. If pensions tax relief had a Facebook page, its relationship status would be “it’s complicated”. But it is a shame that this Budget takes us no further forward.
The chancellor announced in 2016 that there was “no consensus” for a new approach. In my view, there will never be consensus — but change is necessary. With nearly £40bn a year of tax revenues at stake, I expect this topic to come back another day.
Christine Ross, head of advice, Handelsbanken Wealth Management
This Budget will be remembered for what it did not include. There was no increase to the annual Isa allowance which remains at £20,000, although the Junior Isa limit will increase to £4,260.
None of the anticipated pension changes materialised, to the relief of some. The abolition of stamp duty for first-time buyers on properties up to £300,000 is welcome, but housebuyers will need to be clear on the definition of first-time buyer. Couples where one partner has previously owned a home will not qualify.
Tucked away among the many Budget publications is a research piece relating to inheritance tax and how the present tax reliefs influence the succession planning decisions of those owning business or agricultural assets. Currently, privately owned trading businesses and farming assets benefit from inheritance tax relief. The research concludes that many are unaware that these tax exemptions exist. I wonder if this might provide an idea of what is being considered for the future.
Changes to stamp duty and investment tax perks were the big personal finance news, but Money readers should not ignore the Budget’s bigger message. The bleak economic forecasts outlined by the government’s fiscal watchdog will, if realised, have big implications for workers, investors, taxpayers and anyone who uses public services.
The views of the Office for Budget Responsibility make “pretty grim reading”, according to Paul Johnson, director of the Institute for Fiscal Studies, an independent think-tank. He describes as “truly astonishing” the forecast that earnings might still be below their 2008 level in 2022. He adds: “We are in danger of losing not just one, but getting on for two decades of earnings growth.”
The outlook for economic growth has deteriorated and now lags well behind the forecasts for other G7 economies, with only Canada within touching distance.
With growth, at most, of 1.6 per cent a year expected over the next five years, Mr Johnson says: “It really is time to start forgetting that for decades, anything less than 2 per cent was considered seriously disappointing.”
The gloomy economic forecasts reduce the likelihood that the government would achieve its goal of balancing the budget by the mid-2020s. Less than two years after George Osborne, the former chancellor, was promising a surplus of £10bn in 2019/20, Mr Hammond is expecting a deficit of £35bn.
That will not, however, mean the end of “austerity”. There are still nearly £12bn of welfare cuts to work through the system, while day-to-day public service spending is still due to be 3.6 per cent lower in 2022/23 than it is today.
The modest growth forecasts also suggest it would take decades — “until I’m dead, certainly” says Mr Johnson — to clear the debt accumulated during the financial crisis. The IFS calculates it would be well past the 2060s before debt falls to its pre-crisis levels of 40 per cent of national income, assuming the deficit was kept at just over 1 per cent of national income and there were no recessions.
While most post-election Budgets are used to raise taxes, the chancellor’s political constraints meant he did not tighten the fiscal screws. Instead he unveiled a giveaway — largely through the housing measures and the freeze on fuel duty — that is set to peak at £9bn in 2019/20.
The measures broadly helped everyone by about the same amount. But the cumulative effect of all the changes announced since May 2015 have hit the poorest 30 per cent the hardest, while helping people near the top — the eighth income decile — the most.
If the changes are traced back to 2010, the biggest losers have been at the bottom and at the top of the income distribution. But that may change. There is likely to be more pressure for more tax cuts and spending increases as the next election approaches.
Budget 2017: Other measures at a glance
- Personal tax: The tax-free personal allowance will increase to £11,850 on April 6 2018. The higher-rate tax threshold increases to £46,350
- CGT: The annual exempt allowance for capital gains tax will rise from £11,300 to £11,700 from next April.
- IHT: The residence nil-rate band for inheritance tax (IHT) came into effect this April. Initially set at £100,000, it will rise to £125,000 from April 2018. The standard nil-rate band will remain fixed at £325,000 up to and including the 2020/21 tax year.
- Lifetime allowance: The lifetime allowance for pension saving will increase in line with the Consumer Price Index to £1.03m for 2018/19. It is the first time the allowance has risen in line with inflation. The annual allowance on pension contributions, set at £40,000 for most people, has not changed.
- Pensions tax relief: Nothing was said in the Budget, despite widespread fears of reform. “The relative silence on pensions is not good,” says Raj Mody, partner and global head of pensions at PwC. “If pensions tax relief had a Facebook page, its relationship status would be ‘it’s complicated’. This Budget takes us no further forward.”
- Value added tax: The threshold at which companies need to register for VAT will be maintained at £85,000 for two years from April while the government consults on its future. Additionally, HMRC will hold online marketplaces such as eBay and Amazon responsible if sellers using their platforms fail to pay VAT on their sales.
- Savings: The annual individual savings account (Isa) subscription allowance is unchanged at £20,000, but the Junior Isa allowance will increase to £4,260 from next April.
- Trusts: The government will publish a consultation next year on how to make the taxation of trusts simpler, fairer and more transparent.
- Council tax: Local authorities will be able to increase the council tax premium to 100 per cent if a home has been empty for two years or more, unless it is an annexe to a property or the owner is a member of the armed forces. Councils can currently charge up to 50 per cent on these homes.
- Student loans: Student loan overpayments will be eradicated. HM Revenue & Customs will share information with the Student Loans Company to ensure repayments will stop once graduates have paid off their fees in full. The student loan repayment threshold will rise from £21,000 to £25,000 as a part of a wide-ranging review of student finance.
- Tax evasion: The chancellor reiterated the government’s commitment to tackle tax evasion and avoidance, aggressive tax planning and non-compliance, including those seeking to evade or avoid tax using offshore structures
- Electric cars: From next April there will be no benefit in kind charge on electricity that employers provide to charge employees’ electric vehicles.
- Air passenger duty: Short-haul air passenger duty rates and long-haul economy rates are to be frozen from April 2019, paid for by an increase on premium class tickets and on private jets.
- Universal credit: £1.5bn has been earmarked for reforms which will remove the controversial seven-day waiting period, reducing the current six-week wait for most claimants. The chancellor also said he would bring forward when people could claim advance on the benefit to five days. Claimants will in future have 12 months to repay advances, instead of the six months at present.
- Non-residents: From next April, corporation tax or capital gains tax will be charged on gains made by non-residents on the disposal of UK land and property. Mark Davies, managing director of Mark Davies & Associates, says: “Currently capital gains tax only applies to non-residents who dispose of UK residential property, not commercial property, so this will undoubtedly have a massive impact on foreign investment in the UK.”
- Railcard: 4.5m people aged 26-30 can save one-third on off-peak rail fares with a new railcard. As expected, the new railcard will be very similar to the current 16-25 one, costing £30 a year.
- Marriage allowance: The marriage allowance, enabling a spouse or civil partner to transfer a tenth of their personal allowance to their income tax paying partner, is to be extended to widows and widowers, who can make a retrospective claim. Currently, the legislation does not allow transfers of personal allowance on behalf of deceased spouses and civil partners, or from a surviving partner to a deceased partner. But the government will now allow claims in cases where a partner has died before the claim was made. This can be backdated up to four years.
- Making tax digital: These changes, including plans to make businesses and landlords keep digital records and report quarterly to HMRC, will not come into force until April 2019. At that point it will only apply to VAT and to those businesses above the £85,000 VAT threshold. The Budget documents said the earliest date for the full roll out would not be before April 2020 — and then only if the initial implementation had been shown to work well.
- Pensions cold calling: The government is to bring forward the publication of draft legislation to ban pensions cold calling, including texts and emails to early 2018. This is slightly earlier than originally anticipated following the Department of Work and Pensions and Treasury response published in August 2017 to a consultation on pension scams.
Reporting by Lucy Warwick-Ching, Vanessa Houlder, James Pickford, Kate Beioley and Claer Barrett