By ROB MORGAN
IT’S THAT time of the year again, when policy ideas swirl around the money columns like leaves in the Autumn breeze. How they settle in the chancellor’s statement next month remains to be seen, but it’s definitely worth keeping an eye on.
The Autumn Statement, due on November 22, is the Chancellor of the Exchequer’s second of the year, some months after the Spring Budget. There is much speculation about what it will contain.
A modification of the state pension triple-lock and changes to inheritance tax are perennial grist for the rumour mill, while possible changes to individual savings accounts (ISAs) are more unusual — and intriguing.
Changes to the triple lock at some point wouldn’t be a surprise. Under current terms, the state pension increases each year by the highest of inflation, wage growth, and 2.5 percent. The prospective increase next year is 8.5 percent, with wages having grown by that amount in the period to July. That was higher than the annual rate of CPI in September.
It means pensioners are in line for another hefty income hike, following the 10.1 percent increase this year. A full state pension would jump from £10,600 this year to £11,501 next April. This has led to speculation around how sustainable the triple lock is, given its growing drain on national finances. A tweak to the calculation is possible at some point, but maybe not just yet.
A reform of inheritance tax (IHT) is another traditional item on the pre-fiscal statement bingo card. Many families may find themselves paying it because of a freeze to the tax threshold and higher asset prices.
IHT is charged at 40 percent on the value of estates worth more that £325,000 — but if you’re married or in a civil partnership, you can pass on your allowance to your partner. In that case, no tax is payable until the combined estate is above £650,000.
A further boost to the allowance, or “nil-rate band”, can come from the family home. Couples can leave an estate worth up to £1m to loved ones — IHT free. There are also various annual gift provisions that mean you can reduce the size of your estate tax-free.
Inheritance tax could be reformed in some way, but it would be a significant cost to abolish it entirely. Receipts amounted to some £7bn in the 2022/23 tax year — and they are set to increase as the value of estates rise and the thresholds outlined above remain frozen, an effect known as fiscal drag. However, IHT accounts for less than one percent of total tax receipts overall, so it could be somewhere the chancellor looks.
A third notion currently doing the rounds is more novel and eye-catching: an extra ISA allowance for UK stocks.
Individual savings accounts are one of the most efficient ways of saving — because any returns are tax-free. The Treasury is reportedly looking at increasing the amount that can be put into them, as well as whether to merge Cash and Stocks and Shares ISAs into a single product. Currently, everyone can save up to £20,000 each tax year, which can be spread between the pair in any proportion.
On the surface, an additional allowance for UK stocks presents an elegant solution to two issues: The UK’s waning shareholder culture, and the general lack of interest in the UK stock market (as well as the increasing tax burden on small shareholders). The present ISA allowance has remained frozen for several years and the dividend allowance, the annual tax-free amount a taxpayer can earn in income from shares, has all but withered away. It’s due to fall to just £500 next tax year — a tenth of its level in 2017.
An extra tax-free share allowance is not an entirely new concept. In the 1990s, Personal Equity Plan (PEP) allowances, the forerunner to ISAs, came in two types: a £6,000 “General” PEP, which could be invested in anything from funds to shares, and Single-Company PEP that had to be a single share.
The resurrection of this idea is potentially good news — but it is at odds with calls for ISA simplification. Over the years, the ISA regime has morphed into a many-headed beast with such variations as Help to Buy, Innovative Finance and Lifetime ISA, not really aiding consumer understanding. It also raises a significant number of questions about how it would be designed and implemented.
Questions abound. We’ll just have to wait to see which rumours become reality.
Rob Morgan is chief investment analyst at Charles Stanley