Lifetime ISA – a great deal for the under-40s
On the face of it, a great idea. Pensions are much maligned whereas ISAs are viewed positively by many. This new product provides a 25% tax bonus for those saving for their first home or retirement from age 60. The big but is that only £4,000 p.a. can be saved and only if you are under 40 when you start. Our understanding is that you will be able to hold investments within this product as well as cash; this could be a great opportunity for simplified advice providers such as our own Simply EQ.
Lifetime ISAs can be accessed for other purposes, but you lose the bonus plus associated interest/growth will be returned to HMRC – and a 5% levy. Those looking to use the money to buy a first home will have their budget set at £450,000 with no allowance for higher property prices in London. Interesting for some will be the idea that you may be able to borrow part of the value in a similar way to the 401k plans in the US.
But do we really need yet another ISA? What happened to the simple tax regime that we need for ‘the next generation’?
Lifetime ISA impact on pensions
To us, this looks like a future model for pension saving. There’s a good chance we’ll see the contribution limits increase in the future. There’s no facility to pay in more than £4k or take employer contributions at the moment. This would be the logical next step. The fact you can’t access until age 60 points to a likely state pension age of 70 and resetting of expectations on when people can realistically retire.
Increase in standard ISA allowance
Reaffirming that the ISA is very much George Osborne’s product of choice, in addition to the new Lifetime ISA the standard ISA allowance will increase to £20,000 from April 2017, an increase of over 30% on the amount that can be saved tax-free every year. A couple under 40 could now save up to £40,000 into ISAs, £80,000 into pensions & £10,000 into Lifetime ISA in one year – that’s £130,000 of tax-free saving in one tax year.
CGT drop may bring a windfall for Osborne
The Capital Gains Tax (CGT) rates cut, to 10% for basic rate payers and 20% for higher-rate are welcome. It needed to be cut radically before it dried up completely – a classic case of the higher a tax goes, the more incentive there is to avoid it. These changes should result in more revenue for the Government.
Current rates of CGT will remain for gains on residential property and carried interest, equivalent to an 8% surcharge. This will provide an incentive to invest in companies over property. Private residence relief will continue so that an individual’s home will be exempt from CGT.
Entrepreneurs’ relief will be extended to long term investors in unlisted companies. Gains of newly issued shares in unlisted companies purchased on or after 17 March 2016 will be subject to CGT at 10%, provided they are held for a minimum of 3 years from 6 April 2016 and subject to a new lifetime limit of £10 million of gains.
Personal allowance and higher rate threshold rise, to £11,500 and £45,000 respectively
As we urged in our pre-Budget wish list, the move to increase these is welcome. This will take more than half a million people who should never have been paying the higher rate out of that higher tax band altogether.
Social impact investing
Good to see that the homelessness is also being tackled with funding for the ‘Rough Sleeping Social Impact Bond’ doubling from £5m to £10m.