Budget Analysis

Pensions

The Lifetime Allowance will be reduced from £1,250,000 to £1,000,000 from April 2016. Transitional protection for pension rights already over £1,000,000 will be introduced at the same time.

Together with the reforms to Pensions introduced on 6th April 2015, these measures mean that detailed advice is now almost always needed about how, when and whether to draw UK pension benefits and the options open to you when you do.

Inheritance Tax

In a move which will delight many, the Government will be introducing an additional nil rate band when a residence is passed on death to direct descendants. The additional allowance will be £100,000 in 2017/18, £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21. This will effectively raise the combined nil rate band for a couple to £1,000,000. There will be a tapered withdrawal of the additional nil rate band for estates with a net value of more than £2,000,000. The nil rate band will continue to be frozen at £325,000 until April 2021.
 

Changes to Rates and Allowances

The Government aspires to raise the Personal Allowance to GBP 12,500 and the Basic Rate of Tax to GBP 37,500 by the end of this Parliament, which will certainly result in some helpful tax savings. Time will tell whether they do eventually make good on their threat to withdraw the allowance from non-residents; no further comment is expected on this subject until April 2016.

Economic Overview

The UK economy hit zero inflation in the first half of 2015. That is almost unprecedented and the lowest rate for half a century. Interest rates remained at 0.5%, where they have been since March 2009 - making David Cameron the only Prime Minister since the 1950s to preside over a whole term in office with a constant rate of bank lending. It also made deflation a real possibility and any increase in house prices even more rewarding for investors.

The three factors that drove low inflation were further falls in the price of oil, low wages growth and a strong pound - which reduced the price of imported goods for the consumer. Supermarket price wars were also a factor in containing the cost of food and other household goods.

Most commentators expect low levels of inflation to return by the end of 2015, but still well within the Bank of England’s target rate of sub -2%. The greatest threat with a zero inflation economy is that consumers stop spending because they expect prices to fall further but spending has held up well in the UK, supported by the strong pound and low cost imports from other deflationary economies.

The Bank of England said, in its May quarterly inflation report, that it expects interest rates to gradually increase to 1.5% over the next three years with the first rise likely in the middle of 2016. It also downgraded its forecast for GDP growth, bringing it in line with other forecasters at 2.6% for 2015, compared with the OBR forecasts of 2.5% in 2015 and 2.3% in 2016.

Low interest rates do little to entice savers, indeed they encourage borrowing - a combination which makes the government’s recent pension reforms even more likely to create new buy-to-let investors.

Under the new rules, introduced in April 2015, pension fund investors can withdraw capital from their pension pots and, rather than being obliged to invest in an annuity, they are free to re-invest in any way they see fit. While it is too early to measure the effect of the changes on the property market, there has been a tangible surge in interest in the buy to let market, urged on by media coverage and it is likely to provide a boost to the investor market across London and the UK.

The relative stability of the UK economy, together with the impressive record on job creation, was probably a major factor in the conservative victory at the General Election. The chancellor has committed to further austerity measures and has announced a ‘stability’ budget on 8 jULY to set out, amongst other things, how he intends to save a further £12 billion from the welfare budget and to boost the UK’s sluggish productivity by investing in apprenticeships and skills. He has also promised to “crack down hard on tax avoidance and aggressive tax planning by the rich”. (Source H.S.C.)