The Osborne files
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
George Osborne’s time at Number 11 has come to an abrupt end. Unceremoniously ushered out the back door whilst the Prime Minister enjoyed the pomp and ceremony of a parliamentary farewell.
Highlights from Osborne’s time at the Treasury include his dream of a Northern Powerhouse, the much maligned pasty tax and the unrealised threat of an emergency post-Brexit budget.
Yesterday he tweeted: ‘I hope I’ve left the economy in a better state than I found it.’ No doubt time will tell.
But what has his tenure as Chancellor meant for high earners? What prompted the Financial Times to describe him as ‘the master of the sub-radar fiscal raid’?
Here are the good, the bad and the downright ugly.
Osborne first became a high earners ally in 2012 when he cut the top rate of tax from 50p to 45p. In this year’s budget, he cut capital gains tax from 28% to 20% on all gains other than the sale of residential homes and carried interest.
Perhaps the most dramatic positive change came in the form of pension freedoms. From April 2015 savers over the age of 55 could take up to 100% of their pension pot as cash. Gone was the compulsion to buy an annuity. Investors can decide for themselves what to do with their pensions.
Property investors were not as fortunate. They would be forgiven for striking Osborne off their Christmas card list.
The introduction of a 3% stamp duty surcharge for anyone purchasing a second home or a buy-to-let property has been in effect since April 6.
Landlords with a mortgage on a letting property are also set to lose out. Previously, they could claim tax relief on their mortgage interest payments. Higher and additional-rate taxpayers could claim 40% and 45% relief respectively. Once the changes are in play, they will be restricted to 20% tax relief.
On the face of it pension freedoms were unqualified good news. In reality, they were the smokescreen behind which Osborne hid his subterfuge.
Two changes have made pensions investment increasingly unattractive. In the long run, Osborne’s changes will cost high earners £6 billion in tax relief.
From April 6, 2016 the amount some high earners could save in a pension fell dramatically. It was £40,000. It could now be as little as £10,000.
Moreover, the lifetime allowance has fallen to £1 million. It may sound a substantial pot, but anyone with a final salary scheme pension paying £50,000 may breach the £1 million mark. Any excess will be taxed heavily.
Your happy retirement will be tainted by a punishing 55% tax charge.
A remaining opportunity?
The Financial Times may have a point, but it’s not all bad news for high earners.
George Osborne did leave certain tax-efficient investments untouched. VCT, EIS and SEIS investments have been largely immune to change and are some of the most tax-efficient investments available. By investing in all three, an investor could claim up to £410,000 in income tax relief this tax year alone, although please note tax rules could change.
Indeed, our research suggests 65% of those hit by pension changes will consider these investments.
So, Osborne leaves UK taxpayers with a potentially valuable opportunity. If you’re the right type of investor and are happy with the risks, you can invest in smaller companies, the lifeblood of the economy, and benefit from generous tax-relief and tax-free returns. Before investing in VCTs, EIS or SEIS you need to understand the Risks and Commitments of doing so.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
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