What should advisers expect in Osborne’s emergency Budget?

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Chancellor George Osborne could target fundamental reforms to capital gains tax, pensions tax relief and salary sacrifice in his emergency Budget next week, experts say.

But observers remain divided over whether the Chancellor will move to slash the top rate of tax from 45p to 40p on 8 July.

Planned reforms announced before the general election include the raising of the inheritance tax threshold to £1m for married couples and civil partners.

The Conservative manifesto said the IHT changes are set to be paid for by a reduction in pensions tax relief to those earning more than £150,000.

The Conservatives have also promised to raise the tax-free personal allowance, while also increasing the level at which workers pay 40p to £50,000, but have also faced continued questioning on whether they would also lower the top rate of tax from 45p to 40p.

Last week, former chancellor Lord Lawson told the Financial Times: “I would strongly support this: It would significantly enhance the attractiveness of the UK as a place to do business at no cost in terms of lost revenue. That was the experience when I brought the top rate down to 40 per cent in 1988 and it is even more relevant today.”

Old Mutual Wealth financial planning expert Rachael Griffin says Osborne may have been tempted by the reduction in a bid to counteract the cut in tax-free pensions savings, which will see annual allowances gradually reduced from £40,000 to £10,000 for those earning up to £210,000.

She says: “There was very much an intention to go from 45p to 40p. And Osborne can’t totally alienate all the additional rate taxpayers, so if he is looking to reduce pensions tax relief there have got to be a sweetener
in there.”

However, experts suggest such a move remains politically unpalatable while the Conservatives are also seeking to bed in a plan for £12bn in welfare cuts.

Demos research director Duncan O’Leary says: “I don’t think the 45p rate will change this Budget at least.

“They won’t want to do something that benefits those at the top while taking away from those at the bottom. The thinking has also been that many of those losing out in the cuts will be families in work, so Osborne would be seen to be cutting the top rate of tax for people earning over £150,000 at the same time as taking quite a lot away from working families.”

Griffin says the Chancellor may instead opt for reforms to CGT, currently paid at 18 per cent or 28 per cent for higher rate taxpayers, as well as providing guidance on future changes to tax relief on pension contributions.

Royal London head of corporate affairs Gareth Evans says his firm is expecting a fundamental review of pensions taxation to be announced.

He says: “We are expecting a rev-iew rather than measures right now. That would be a good outcome and we would be very disappointed if new measures were introduced without consultation. The wider question is whether or not they are going to go ahead with their plans to cut the lifetime allowance to £1m in April 2016. They certainly have a mandate for it after the election, but it could be included in that wider consultation on tax relief.”

Meanwhile, former pensions minister Steve Webb told Money Marketing in June the Chancellor could target salary sacrifice in the Budget.

Chartered Insurance Institute director of policy and public affairs David Thomson says while the move would be unpopular with some Conservative voters, Osborne may take advantage of the long spell before the next election.

He says: “There is a certain window in which an incoming government has to do some radical stuff, which could include hitting middle-class tax through salary sacrifice. People would perhaps forget in a couple of years time.”

Property taxes are also “ripe for reform”, according to PwC tax partner Paul Emery.

He says: “Council tax is based on 1991 valuations and is ripe for ref-orm. The Chancellor could redistribute the tax burden to areas that have received high property growth. If he wants to raise more revenue, he could remove or change the cap on the upper rates of council tax and introduce further bands.

“There’s the potential to raise billions of extra revenue although the Chancellor will be mindful of over- plucking the property goose.

“Restricting interest deductibility for buy-to-let landlords is another option. Currently all the interest paid on mortgage payments can be offset against the tax bill. Perhaps most likely is the extension of existing taxes on high-value properties. In December the Government increased the annual charge for properties held in companies by 50 per cent, and it could decide to continue annual hikes well above inflation.”

Adviser views

Jason Witcombe, Director, Evolve Financial Planning

What I would like to see is some discussion about pensions on either the lifetime or annual allowance. Particularly on the annual allowance, in the election manifesto the Tories were proposing some very strange ideas on reducing it for high earners. So I would like to see some clarity or simplification.

Trystan Lewis, Chartered financial planner, Griffin Wealth Management

My major worry is over pensions tax relief and in particular the lifetime allowance, which is already coming down to £1m next year. There’s an awful lot of people out there with pensions approaching that mark, and I’m not sure it’s been realised how big a problem that might be.