Taxation, client behaviour and social benefit

Taxation, client behaviour and social benefit

Wednesday saw me meeting a young professional who had some savings, a well paid first job and a desire to invest in “real-estate”, as he had read that in a book.

The big tax concessions in the UK are ISAs, pensions and the removal of capital gains tax on a principal private residence, so it makes sense for him to save for a house deposit using an ISA, put some money into his workplace pension and as a medium term aim, get out of rented accommodation and become a homeowner, (with lodgers using the Rent a Room Scheme). It will not be easy and it is far from “sexy”, but given average luck, it should set him on the right road very quickly.

Most young professional’s ideas of investment seem to be driven by a mixture of “The Wolf of Wall Street”, American self-help books and half remembered bits of Radio 4’s Money Box, (or a parent’s Which magazine), which means that an IFA like me has a small problem with managing expectations. Nothing comes quickly and everything depends on not spending their income to the max!

Governments have the power to encourage or discourage certain investment activities by offering concessions or punitive tax rates depending on the perceived social value.

It is often said that the taxation tail should not wag the investment dog; (unless the investment is sound, chasing tax concessions is a pointless activity), but they can make a considerable difference to the attractiveness of some behaviours.

It would be very helpful to me, and possibly to the country as a whole, if central government could state explicitly which behaviours they would like to encourage and how they are supposed to fit together in a lifetime. Adverse changes to long-term investment products like ISAs and pensions are very damaging, as it can take a lifetime for something to come to maturity, not just the 5 years of a parliamentary term.

Given the current structure of tax concessions, I would hazard a guess that we are being encouraged to

  • Save in the short term, (Cash ISAs)
  • Save in the long term, (Stocks & Share ISAs)
  • Save for retirement, (Pension rules)
  • Become an owner-occupier, (Removal of Capital Gains Tax on Principal Private Residence).
  • Invest in medium term risky equities, (EIS and VCTs).
  • Buy Premium Bonds, (tax free winnings).
  • Get married, (transferability of some personal allowance, IHT concessions and ISA concessions).

Although these measures suggest some clarity of thought, there is a danger that political meddling can poison a long-standing investment expectation. If anyone doubts how tax concessions can become a political football, think about Buy to Let properties held by private individuals; higher rate tax relief on interest expenses is being withdrawn and there will be additional Stamp Duty to pay on second and let homes. Neither of these are incentives to establish or expand on a buy-to-let empire!

Whether this change in policy has the desired result in terms of social policy, (more houses available to first time buyers and a reduction in private rentals), will take years to establish, but the howls of anguish from investors are clearly audible!

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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.