EDITOR'S LETTERMerryn Somerset Webb
George Osborne has sent UK investors some very clear messages
The Budget didn’t tell us much about the big picture for the UK over the next few years. Growth is forecast to be a little lower than George Osborne had hoped. And he’ll probably have to borrow a little more than he had hoped in the run up to 2020. Beyond that it’s hard to say much: the official forecasts haven’t been particularly accurate recently and the global economy looks even more dodgy than usual.
Still, amid the macro confusion, Osborne did send the UK’s investors some very clear messages. The first is that he doesn’t want you to invest in buy-to-let. He has refused to budge on changes to tax relief for buy-to-let investors. He has expanded his 3% stamp-duty surcharge to large-scale investors in the sector as well as small. And in case anyone was still wondering what he was trying to tell them, he has slashed capital-gains tax (CGT) for everyone except second homeowners. They pay 10% or 20%. You pay 18% or 28%. Osborne’s message? Houses are not for landlords. They are for owner-occupiers.
The second thing Osborne is saying is that he’d really like it if we were more entrepreneurial. That’s why he is cutting corporation tax (17% is low – note that the equivalent rate in America is 40%), cutting rates for small businesses, and offering new income-tax allowances for people selling goods online or renting out their driveways.
The third is that he isn’t anywhere done on pensions. The sharp rise in the annual Isa allowance to £20,000 is interesting, given that we already know people prefer the simplicity of Isas to pensions (it’s also a nice bone to throw to high earners who are about to find their pension allowance slashed to £10,000 a year). But the Lifetime Isa is even more interesting. If you are a 20% taxpayer, the £100 you get back for every £400 you put in makes saving into it income-tax free on the way in and on the way out. Add in the flexibility and who would choose a pension? No one. Our guess is that Osborne now expects gradually to expand the Lifetime Isa until it renders the current pension system redundant. The under-40s are unlikely ever to want an old-fashioned pension once they have a Lifetime Isa. And the over-40s will find their own schemes gradually moving closer to the Isa model.
On that note we can offer a word of warning to those hoping to access their pension at 55 (as everyone can now). The Lifetime Isa becomes freely accessible at the age of 60 (before that there is to be a 5% surcharge unless you use it to buy your first house). How long before 60 becomes the new 55 for all pension products? The message is clear.