Reading the Runes for Budget 2017

Three Little Pigs

This year’s Autumn Statement was much awaited as the first set piece for the new Chancellor, Philip Hammond. In the days immediately following his appointment Mr Hammond had spoken about the possibility of a “fiscal reset” and November 23 was eagerly anticipated as the time when the meaning of the phrase would be revealed.

In the event, there was little sign of a reset, beyond £122bn being added to the projected numbers for government borrowing through to 2020/21.

Mr Hammond – “Spreadsheet Phil” as the Financial Times calls him – has a more restrained style than his predecessor, a fact which came through in the measures he announced. In terms of tax and spending there were no rabbits-out-the-hat, but the Chancellor did manage to surprise MPs and pundits alike by announcing he would move the Budget onto an Autumn cycle from November 2017. This means that we can look forward (or otherwise) to two Budgets this year and an Autumn Budget only from 2018 onwards.

We will not have too long to wait for the next instalment as the Spring Budget will be on 8th March 2017.

More changes to UK Pensions

The more interesting measures that were announced in the final (for now) Autumn Statement involve changes to UK pensions and hints of sweeping changes to come.

The usual rumours that higher rate tax relief on pension contributions was for the chop once again proved unfounded. However, the Chancellor did announce a further tightening of the tax relief screw, with a 60% reduction in the money purchase annual allowance (MPAA) to £4,000 from 2017/18. This allowance only applies if you are making pension contributions having drawn any income using the pension flexibility rules.

Interestingly, the consultation document which the Treasury published on the revised MPAA said “The cost of tax and National Insurance contributions relief on pension savings is one of the most expensive sets of relief offered by the government. In 2014 to 2015 this cost around £48 billion, with around two thirds of the tax relief going to higher and additional rate taxpayers.”

Draw your own conclusions…


One of the less endearing habits of Chancellors, regardless of political hue, is to announce tax changes which are deferred for a year or even more. This might be to delay a cost to the Exchequer or in the hope that a tax increase gets forgotten. Mr Hammond served up some deferred measures, but for April 2017 there are two from his predecessor worth remembering:

Inheritance tax residence nil rate band (RNRB)

The RNRB starts from 6 April 2017 and initially is worth only £100,000. It will rise by £25,000 a year to reach £175,000 in 2020/21, shortly before the next election is due. Very broadly speaking the RNRB is equivalent to an extra £100,000 on the nil rate band, but it only applies to residential property (or assets replacing that property on downsizing) passing to lineal descendants on death. The RNRB is subject to taper for estates over £2m and, like the ordinary NRB, any unused element can be effectively inherited by a surviving spouse or civil partner.

Tax relief on buy-to-let mortgages

In the first Budget after that 2015 election which the Conservatives won, George Osborne announced two measures aimed at cooling the buy-to-let market. The first, the replacement of the 10% wear and tear allowance, took effect last April. The other, a four-year phased reform of the tax relief on mortgage interest, begins from 2017/18. In the first stage, a quarter of interest payable will cease to be allowable against rental income and instead the borrower will receive a 20% tax credit on that portion of interest.

This is an unwelcome two-edged sword if you are a buy-to-let investor:

  • If you pay tax at more than basic rate, then the tax relief you receive on interest payments will be less. Ultimately, most higher rate taxpayers will see their mortgage interest tax relief halve by 2020/21.
  • Because the interest deduction against rental income is being tapered away, your total income (including rent net of expenses) will increase. This could mean extra tax because you move into a different tax band or the extra income takes you over a tax threshold, e.g. the £50,000 ceiling above which child benefit is effectively taxed.

It is generally best to plan for tax changes before they take effect, rather than once they are in force and with the next UK Budget being announced for 8th March 2017 you should not delay.

The RNRB’s arrival is a good reason to review your estate planning. For example, it may no longer make sense to pass everything to a surviving spouse on first death. If you are UK Domiciled, you should review your Estate Planning arrangements considering these changes to ensure you minimise any Inheritance Tax payable.

 Similarly, the reduction in buy-to-let interest relief should prompt a re-assessment of the structure of property ownership and even whether the investment remains worthwhile, especially as interest rates could rise from current low levels just as tax relief drops.

To arrange your no obligation review, contact your AAM Financial Planner or email now.

Ian Black
Head of Wealth Solutions
AAM Advisory Pte Ltd


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