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Budget 2011: time to step out?
Posted 27-03-2011 at 02:14 PM by Parmdeep Vadesha
Some thoughts on the latest budget and what the impact of some of the changes may be...
-> A lot of money will be transferred into backing small businesses, away from traditional pensions... Through the Enterprise Investment Scheme (EIS) investors will now be bale to shelter £13 instead of £500k. Tax relief on EIF qualifying investments will be increased from 20% - 30% in April. The size of the companies that EIS's can invest into will be increased from £7m to £15m.
Investments must be held for 3 years. EIS's are from from inheritance tax after 2 years and you can also defer paying CGT. The annual limit for pension contributions will be falling from £255,000 to £50,000 so for people who have used up their allowances, EIS's provide an attractive alternative.
-> Business premises renovation allowance... Designed to encourafe investment in buildings that have been empty for at least 1 year and within designated 'assisted areas'. The properties are usually purchased and then renovated. Any money spent on renovation can be offset against the investors marginal rate of tax (up to 50% for higher rate payers) minus fees. Usually between 80% - 97% of the total amount invested is eligible. BPRA schemes are not marketed directly and are available through independent IFA’s.
-> Clampdown on tax avoidance schemes... Mainly targeting employee benefit trusts and employer financed retirement schemes which involves non taxable loans paid to individuals instead of as salary. This will affect mostly high paid sports people, city workers etc
-> Big clampdown on stamp duty mitigation schemes. Usually they use sharia law or sub sale relief where a property is immediately flipped to a third party. I read with interest an article in the law society 'law gazette' magazine about this. If you have been involved in any kind of stamp duty mitigation scheme you should talk to your advisors about this crackdown urgently.
-> Set yourself up as a company and pay less tax… From April the corporation tax rate for companies with a turnover of £300k or less will fall from 22% to 21% and they are also not subject to national insurance contributions. Contrast this with higher rate employees who pay 40% rising to 50% for those on £15k+. On April 6th the main rate of employee NIC’s will rise from 11% to 12%. This will lead to growing numbers of salaried employees becoming freelancers and consultants. Just be careful that the company you set up doesn’t fall into the IR35 trap (look it up on Google) so you could have other clients aside from yourself dealing with the company.
-> First buy, a £250m scheme for first time buyers allows FTB’s to apply for loans from the government. From April those earning less than £60k will be offered loans to top up 5% deposits worth an additional 20% of the value of a property, making it easier to secure a mortgage.
Caveat… Only works with new build properties. This looks remarkably similar to the recently axed HomeBuy Direct option which had little take up.
-> The stamp duty due on linked purchases of several properties will (from April) be based on the mean value of the individual properties with a minimum charge of 1%. So instead of paying 4% on a £5m purchase of a bunch of houses (=£20,000) you would pay only £5,000 (=1% of £5m).
-> The income tax personal allowance is raised by £1,000 to £7,475. This represents a £200 a year tax cut for a basic-rate taxpayer.The higher rate income tax threshold - the income at which someone starts paying 40 per cent tax - is lowered by £2,400 a year to £35,000.This means the higher rate comes in once income passes £42,475, less than the current £43,875 - taking up to 700,000 households into the top-rate.
-> The annual ISA allowance rises from £10,200 to £10,680. The allowance for profits free from CGT has risen from £10,100 to £10,600, but the inheritance tax nil-rate band remains at £325,000. Maximum contributions into a pension scheme capped at £50,000, down from £255,000 (see above).
Overall a pro business budget. However, with wildly spiraling inflation, a collossal budget deficit of £150bn, interest rates to go up, thousands of job losses yet to come etc I believe things are going to get worse before they stabilise and get better. For buyers this translates into many interesting opportunities. The obvious one we all know about is the continued availability of distressed property which if you can raise the finance to buy, makes this a great time to buy. Lots of companies are distressed also and struggling to raise finance creating many opportunities to either start new businesses while competitors are weakened or to invest into existing promising businesses.
Assuming inflation will spiral and the government cannot be relied upon to provide for you in your old age, we must aggressively seek out inflation busting investments... You have to wonder why somebody would go for an ISA offering 3% interest when 'officially' inflation is running at 4.4% (see National Statistics Online - Inflation) meaning you lose 1.4% every year all else being equal. Knowing that official reported figures never match reality we can guess that REAL inflation is more like 10% (f you pay for the weekly shop, fill up your car etc you will know that real inflation is much higher and set to get worse). So, if you aren't increasing your wealth by 10% per year then you aren't even keeping pace. So we must invest in assets that at least keep pace with inflation - property and shares are pretty good for that.
It's worth reading Warren Buffets latest letter to his shareholders for investment tips - see http://www.berkshirehathaway.com/letters/2010ltr.pdf "Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. (The two best investments were wedding rings.) For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.
But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford."
When the worlds third richest man rates property as one of his best investments you don't argue
-> A lot of money will be transferred into backing small businesses, away from traditional pensions... Through the Enterprise Investment Scheme (EIS) investors will now be bale to shelter £13 instead of £500k. Tax relief on EIF qualifying investments will be increased from 20% - 30% in April. The size of the companies that EIS's can invest into will be increased from £7m to £15m.
Investments must be held for 3 years. EIS's are from from inheritance tax after 2 years and you can also defer paying CGT. The annual limit for pension contributions will be falling from £255,000 to £50,000 so for people who have used up their allowances, EIS's provide an attractive alternative.
-> Business premises renovation allowance... Designed to encourafe investment in buildings that have been empty for at least 1 year and within designated 'assisted areas'. The properties are usually purchased and then renovated. Any money spent on renovation can be offset against the investors marginal rate of tax (up to 50% for higher rate payers) minus fees. Usually between 80% - 97% of the total amount invested is eligible. BPRA schemes are not marketed directly and are available through independent IFA’s.
-> Clampdown on tax avoidance schemes... Mainly targeting employee benefit trusts and employer financed retirement schemes which involves non taxable loans paid to individuals instead of as salary. This will affect mostly high paid sports people, city workers etc
-> Big clampdown on stamp duty mitigation schemes. Usually they use sharia law or sub sale relief where a property is immediately flipped to a third party. I read with interest an article in the law society 'law gazette' magazine about this. If you have been involved in any kind of stamp duty mitigation scheme you should talk to your advisors about this crackdown urgently.
-> Set yourself up as a company and pay less tax… From April the corporation tax rate for companies with a turnover of £300k or less will fall from 22% to 21% and they are also not subject to national insurance contributions. Contrast this with higher rate employees who pay 40% rising to 50% for those on £15k+. On April 6th the main rate of employee NIC’s will rise from 11% to 12%. This will lead to growing numbers of salaried employees becoming freelancers and consultants. Just be careful that the company you set up doesn’t fall into the IR35 trap (look it up on Google) so you could have other clients aside from yourself dealing with the company.
-> First buy, a £250m scheme for first time buyers allows FTB’s to apply for loans from the government. From April those earning less than £60k will be offered loans to top up 5% deposits worth an additional 20% of the value of a property, making it easier to secure a mortgage.
Caveat… Only works with new build properties. This looks remarkably similar to the recently axed HomeBuy Direct option which had little take up.
-> The stamp duty due on linked purchases of several properties will (from April) be based on the mean value of the individual properties with a minimum charge of 1%. So instead of paying 4% on a £5m purchase of a bunch of houses (=£20,000) you would pay only £5,000 (=1% of £5m).
-> The income tax personal allowance is raised by £1,000 to £7,475. This represents a £200 a year tax cut for a basic-rate taxpayer.The higher rate income tax threshold - the income at which someone starts paying 40 per cent tax - is lowered by £2,400 a year to £35,000.This means the higher rate comes in once income passes £42,475, less than the current £43,875 - taking up to 700,000 households into the top-rate.
-> The annual ISA allowance rises from £10,200 to £10,680. The allowance for profits free from CGT has risen from £10,100 to £10,600, but the inheritance tax nil-rate band remains at £325,000. Maximum contributions into a pension scheme capped at £50,000, down from £255,000 (see above).
Overall a pro business budget. However, with wildly spiraling inflation, a collossal budget deficit of £150bn, interest rates to go up, thousands of job losses yet to come etc I believe things are going to get worse before they stabilise and get better. For buyers this translates into many interesting opportunities. The obvious one we all know about is the continued availability of distressed property which if you can raise the finance to buy, makes this a great time to buy. Lots of companies are distressed also and struggling to raise finance creating many opportunities to either start new businesses while competitors are weakened or to invest into existing promising businesses.
Assuming inflation will spiral and the government cannot be relied upon to provide for you in your old age, we must aggressively seek out inflation busting investments... You have to wonder why somebody would go for an ISA offering 3% interest when 'officially' inflation is running at 4.4% (see National Statistics Online - Inflation) meaning you lose 1.4% every year all else being equal. Knowing that official reported figures never match reality we can guess that REAL inflation is more like 10% (f you pay for the weekly shop, fill up your car etc you will know that real inflation is much higher and set to get worse). So, if you aren't increasing your wealth by 10% per year then you aren't even keeping pace. So we must invest in assets that at least keep pace with inflation - property and shares are pretty good for that.
It's worth reading Warren Buffets latest letter to his shareholders for investment tips - see http://www.berkshirehathaway.com/letters/2010ltr.pdf "Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. (The two best investments were wedding rings.) For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.
But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford."
When the worlds third richest man rates property as one of his best investments you don't argue
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