3 Key Changes Affecting Investors from the Autumn Budget 2017

The Chancellor of the Exchequer, Philip Hammond, announced his Autumn Budget yesterday (Wed 22 Nov).  It included a mixture of headline-grabbing changes, such as the abolition of stamp duty for first time buyers. But behind the more populist measures lie details of significant changes for investors, including some not in the Chancellor’s speech.

We take a look at three key changes that were not widely covered, but will have a big impact on some investment portfolios.

1. Investment companies

The removal of indexation relief, which provides uplift to the base cost of investment by inflation, is a blow to those who hold investments within a corporate structure. It will increase the amount of tax due when the company comes to sell investments.

These corporate structures still have significant benefits, providing great control and flexibility to investors and protecting family members who may not be able to manage assets.

In addition, the tax treatment of dividends received between companies is more favourable than receiving them personally. But this change, together with the changes to personal dividend taxation, ensures the suitability of these must be kept under continual review.

2. Tax efficient investment schemes

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS), which are designed as investment into small fast growing businesses at early stages, have seen a significant rise in popularity recently. They are highly tax efficient, having advantages for both income and capital gains tax.

Increased qualification criteria for companies wishing to secure EIS and VCT reliefs will probably reduce the availability of these investments. It will also ensure that only those with the highest capacity for risk will take up this tax advantage.

If there is the appetite for risk, the annual investment limit has doubled from £1 to £2 million. The 30% income tax relief on offer remains, but the changes mean only companies where there is significant risk to capital above the tax relief will benefit from this relief.

3. Pensions for high earners

The reduced annual pension allowance for those earning more than £150,000 a year, and the £1 million cap of the Lifetime Allowance (LTA) for those who do not have the appetite for risk for an EIS or VCT, provides somewhat of a pincer movement.

There is a small inflationary increase to the LTA of £30,000, taking it to £1,030,000. Investors will need to focus on using their allowances as much as possible (ISA allowances remained at £20,000) and consider investing in a taxable environment to achieve longer-term objectives within a strategy appropriate to their risk profile.

With gains on investments in excess of the Capital Gains Tax (CGT) – still only taxable at 10% for basic rate and 20% for higher rate – this does not look a bad option.