What Autumn Statement 2014 means for your money
Anyone who heard the call which Captain “stay the course” George Osborne sounded to savers and home-owners just minutes into his Autumn Statement yesterday might think something suspicious was swirling in the hull of the British economy, writes IFA Tony Harris of ContractorMoney.
But I’m pleased to report there were no gaping holes in the sincerity of our current economic steward. It was in fact an early signal from first-mate Osborne to both mortgage and account holders that they would have no reason to mutiny while he’s speaking.
“Stay the course”
As usual, skipper Osborne started his speech with a roundup of how the country is faring economically and how the UK is performing against previous forecasts. The mainstream press has been widely speculating that the storm-hit chancellor would be in a ‘fiscal straight jacket,’ but he looked to silence his critics with a better than predicted economic log.
Indeed, Osborne pointed out that the UK has the fastest growing economy in the G7 with 3% growth forecast in 2014, up from 2.7% predicted in the Budget in March. He then went on to explain that we now have an on-trend 2.4% growth forecast in 2015, followed by 2.2%, 2.4%, 2.3% and 2.3% in the following four years. The log also shows there have been 500,000 new jobs created this year while unemployment is set to fall to 5.4% in 2015.
His most bullish moment was when he came upon the UK’s deficit, which he stated has been 'cut in half' since 2010. It is projected to fall to £75.9bn in 2015, £40.9bn in 2016, £14.5bn in 2017 before reaching a £4bn surplus in 2018. HM Britannia will even be able to boast of a surplus of £23bn in 2019/20!
Before exploring implications of the AS for the average contractor’s treasure chest, often containing a mortgage, savings and investments, there are a two other ‘big picture’ economic areas to map out. Business investment, it was claimed by Osborne, has increased not by the paltry 4% anticipated, but by an impressive 27%. Our IFAs are all pleased to see that, finally, official statistics are falling in line with our experience on the ground, in terms of how our contractor clients are putting more cash into their commercial operations.
Inflation is the other big area to keep in mind. As we predicted, seasoned economic sailor Osborne spoke from the deck about the lessening of inflationary pressures, given the falling costs of energy and lower food costs. Inflation is forecast to be 1.5% in 2014, falling to 1.2% in 2015 which will keep interest rates low. This represents great news for contractors hoping to step on, or up, the housing ladder in 2015, or remortgage on to a lower rate. Such an inflationary outlook also offers the prospect for real wage growth for many, including pensioners who would be due increases in the state pension of 2.5% per annum (guaranteed).
Osborne steered clear of laying out any firm plans to address any deflationary threats associated with the Eurozone, but he did stress the importance of steadying the economic ship ahead of next year’s election. With this in mind, the chancellor was expected to have little room for manoeuvre in terms of headline-grabbing giveaways, but he actually delivered more of these for the UK’s fleet of contractors than we expected.
Personal Allowance & Taxation
As part of the voyage he’s committed to completing – a £12,500 personal allowance for everyone – Admiral Osborne hoisted the threshold at which people start to pay tax to £10,600 from April 2015.
This is clearly a ‘sweetener’ ahead of next year’s general election but we’re not complaining, and we don’t expect contractors will either. The fact that the increase of the personal allowance will be passed on to higher rate taxpayers for the first time in this parliament will go down well with many consultants. These professionals will likely also be pleased to hear the chancellor call for a higher rate tax threshold of £50,000 (by the end of the decade). Many contractors have found themselves falling into the 40% bracket in recent years so will welcome this objective. Meanwhile, the higher rate income tax threshold next year will rise to £42, 385, which is more than was expected.
The ISA allowance will increase to £15,240 from April 6th 2015 – a move Osborne was understandably keen to get into his ‘back the aspiration to save’ speech.
But the more significant announcement around ISAs is that such accounts will be allowed to be transferred upon the account holder’s death to a partner without any tax to pay! Currently, the tax-efficient wrapper is lost when as ISA is inherited by a spouse, meaning they become liable for tax when they are distraught. This welcome move could have a significant impact on the tax paid on savings income by the remaining partner, and is further evidence of Captain ‘stay the course’ trying to woo seadogs ahead of the polls in May.
In light of the pensions revolution he led at Budget 2014, Osborne’s follow-up moves in this Autumn Statement were always going to make smaller waves. Fortunately though, no distress flares were needed. Tax relief on pensions remains untouched, despite concerns it would be pared back.
The chancellor confirmed his recent announcement to the House of Commons that allows contractors to avoid ‘the death tax’ on pensions. So death benefits post-April 2015 will be tax-free for any contractor who is under the age of 75 at the time of death. This will include any benefits that were previously in a ‘drawdown’ arrangement, which were taxed at 55% if inherited as a lump sum. Post-75 years-old, benefits will be taxed at the receiving dependant’s marginal rate of income tax until 2016/17 but will be taxed at 45% until then.
Some onlookers will have wanted to see the Tory manifesto pledge of a £1million IHT threshold belatedly reach fruition. But we expect pensions to move to the centre of our estate-planning efforts with clients in the years to come. Coupled with the ability to retain the tax wrapper on ISAs passed between spouses (see above) , these pension changes represent a significantly fairer attitude by HM Revenue & Customs towards preservation of families’ wealth upon the death of an investor.
98% will pay less Stamp Duty
The real prize from the chancellor yesterday however was major Stamp Duty reform.
It is not often that the Tories follow the SNP’s lead in terms of economic policies, but I’m thrilled to report that Osborne made an exception with a monumental announcement about Stamp Duty Land Tax. Back in October this year, Scotland announced plans to change their stamp duty system to a graduated Land and Buildings Transaction Tax (LBTT) where 10% tax is charged on properties purchased over £250,000, a property purchased between £135,000 and 250,000 is charged at 2% tax and no tax is due on purchases under £135,000.
Well, Captain ‘Catch-Us-All-Off-Guard’ announced that he will “fundamentally change Stamp Duty and abolish the residential slab system” in the rest of Britain, and no sooner than midnight on December 3rd! So almost immediately, property buyers will pay no tax up to £125,000; then 2% tax between £125k and £250k. Over £250k you will pay 5% up to £925k, then 10% up to £1.5million and 12% on anything over that.
This will make a massive difference to those buying at the lower end of the property ladder, as anyone purchasing a property below £135,000 will pay no tax at all, but even those buying more expensive properties will see a benefit as the buyer will only pay the increased stamp duty on the portion of the houses value that is over each threshold. So if you purchase at £300,000, you will pay nothing on the first £125k, 2% between £125k and £250k, and 5% on the last £50k.
This reform is therefore designed to avoid the harsh realities of the current slab Stamp Duty system where properties that are just a single pound over each threshold are charged at the full amount i.e. 3% on properties over £250,000. This should avoid sellers being forced to down-value their property to bring it within a Stamp Duty threshold. It should also avoid buyers from having to pay over the odds if a property is only slightly over the tipping point.
The stamp duty changes will become a game-changer for many, many aspirational first-time property buyers and Commander Osborne deserves a 21-gun salute! One of our own junior IFAs will save over £4,000 on her house purchase -- money that she’s already planning to recycle into the economy, thereby boosting growth.
The current system was massively distorting to the housing market, with clients falling off a cliff, financially, if they were unable to negotiate their way below one of the thresholds. We expect there to be a marked increase in first-time buyer activity as a result of freelancers and contractors now only paying a graduated rate of stamp duty.
A hearty 3 cheers for Osborne
The Autumn Statement has morphed into a mini-Budget in recent years and AS 2014 from George Osborne was no exception. What’s different, however, is the appearance of considerably fewer devils hiding in the detail than normal, for savers and investors. This “stay the course” chancellor provided a durable raft of new measures that, with the right advice, contractors will be able to navigate with positive results in 2015 and beyond.