Citywire printed articles sponsored by:
View the rest of this gallery online at http://citywire.co.uk/wealth-manager/gallery/a722602
Autumn statement: 10 predictions for the chancellor's statement
From upward GDP revisions to ISA setbacks, here are 10 predictions ahead of the Autumn Statement.
Commentators are tipping upward revisions to GDP and downward revisions to public sector debt forecasts in Thursday's Autumn Statement, as Chancellor George Osborne capitalises on economic recovery
While this could give him room for manoeuvre on policy, industry professionals predict he is highly likely to stick to his fiscal stance. They expect the anti-avoidance crackdown to gather pace, alongside tax hikes for property that is owned by foreigners.
From the anti-avoidance crackdown through to ISA caps, here are 10 predictions for the Autumn Statement.
Upward revisions to OBR's GDP forecast
The OBR is expected to almost double its forecast for GDP growth in 2013 from 0.6% to 1.3%. The trend continues for 2014, where commentators are forecasting that growth forecasts will rise from 1.8% to 2.5% as the UK economy continues to recover.
Howard Archer, chief UK and European economist at IHS Global Insight, expects upward revisions will be in store: ‘Chancellor George Osborne will be in the happy position of announcing markedly increased GDP growth forecasts for 2013 and 2014.’
Back in March, the OBR said it expected to see a pick-up in growth of 2.3% in 2015, 2.7% in 2016 and 2.8% in 2017. Archer expects these forecasts will be raised.
‘And with the economy entering 2014 in a much stronger shape than had looked likely back in March, the OBR is highly likely to raise its 2014 and 2015 GDP forecast to around 2.5%,’ the economist added.
For Ruth Lea, economic adviser to the Arbuthnot Banking Group, faster GDP growth forecasts could be accompanied by raised inflation and unemployment projections, in comparison with those put forward in the Budget in March.Nonetheless, Lea said these were unlikely to differ significantly from the Bank of England’s November forecasts.
Public sector debt reductions
Commentators are also tipping downward revisions to public finance forecasts for 2014-15, buoyed by higher tax revenues and lower unemployment.
‘This, along with the likely markedly lower-than-expected out-turn for 2013-14 should allow the OBR to significantly reduce its public finance forecasts from 2014/15,’ economist Archer explained.
In March, the OBR forecast for public sector net borrowing to rise from 75.9% of GDP in 2012/13 to 79.2% of GDP in 2013/14. It currently stands at 74.1% of GDP. At the time public sector net borrowing was forecast to then rise to 82.6% in 2014, 85.1% in 2015, reaching a peak of 85.6% in 2016 before falling to 84.8% the following year. On the theme of debt reduction, Archer also expects the OBR to bring down its projected peak debt level to 2015/16, a year earlier than was formerly forecast.
In real terms, Arbuthnot’s Lea suggested OBR’s forecasts for public sector net borrowing in 2013 could be around £14 billion lower than forecast in March. She anticipates underlying borrowing (excluding the Royal Mail and the APF) could be £106 billion whilst actual PSNB could be £94 billion.
‘It should be noted that these deficits are still unacceptably high,’ Lea said. ‘£94 billion is 6% of GDP.’
In spite of these positive predictions, some expect expect Osborne could unveil a package of taxation and spending measures. ‘We expect the fiscal package to be neutral,’ Lea added. ‘Even though the public sector net borrowing forecast should improve, there is no room for fiscal laxity. The deficits still look dreadful and debt is rising quickly.’
Taxation of partnerships could hit fund and wealth firms
Lachlan Roos, PWC's UK tax hedge fund leader and Robert Mellor, UK Alternatives Leader at PwC, suggest the Chancellor could propose a further review into the taxation of UK Partnerships.
HMRC already announced the review in the Budget in March. It is expected to affect UK asset management firms and hedge funds.
While HMRC have been working ‘very closely’ with the financial services industry as well as governing bodies on a review of the UK partnership tax laws, Roos and Mellor believe the Autumn Statement could contain follow-up announcements. While measures in the Budget were aimed at putting UK asset management on a par with other fund centres, such as Luxembourg and Dublin, Roos and Mellor suggest local taxation could undo positive action elsewhere.
‘In the Budget this year, Treasury stated that the UK asset management industry is open for business. However, so far HMRC have been focused locally, but not necessarily thinking global.
‘What we are hoping to see from the Autumn statement is that consideration has been given to global practical implications of such a taxing change.’
‘It will be interesting to see whether HMRC have taken industry concerns on board. If we are truly open for business, and it wishes to build London as an asset management centre, then the proposed legislation must not undermine London as a competitive location.’
Caps on ISAs and tax-free lump sums
ISAs could also face setbacks in the oncoming Autumn Statement. Brewin Dolphin's director of financial planning John Fletcher is not expecting to see any improvements in this area.
‘Our best hope is that Mr Osborne won’t make things any worse,’ he said. In his view, the worst case scenario will be further restrictions to pension savings.
‘The British public is already losing trust in the pension system, and any restriction on higher rate tax relief or the 25% lump sum would hugely limit the attractions of pension saving,’ he said.
This view is shared by Dominic O'Connell, head of tax, trust & estate planning at Coutts, who believes the Chancellor could cap ISA pots and/or restrict the tax-free amount that can be withdrawn from pension schemes. O’Connell says it would be ‘misguided’ to introduce such measures before the public start to feel the benefits of economic recovery.
‘Such retrospective, or at least retroactive, measures could also damage public confidence in both the UK's tax system and savings mechanisms,’ he added.
Tax breaks for married couples
Coutts’ O’Connell says a tax break for married couples in 2015 could gain a mention in the Autumn Statement. That said, given the value of the proposed tax break and the number of individuals who would be eligible, he says this historic pledge could ultimately have ‘little impact’ on people's living standards.
'New measures aimed at the low paid should arguably apply across the board and better reflect modern society,’ he added.
Further delays on raising the IHT tax-free band
Other predictions have included a rise in the tax free personal allowance for workers, which is due to rise to £10,000 from next April, but could be raised to £10,500 by April 2015.
For economist Archer and Coutt’s head of tax, trust & estate planning O'Connell, the inheritance tax nil band rate is likely to sit at £325,000, in spite of George Osborne's initial proposals over six years ago to raise it to £1 million.
‘The impact of the IHT tax-free allowance freeze, while understandable in the context of the post-2008 economic landscape, is being compounded by increasing property prices to bring ever more people in to the IHT net,’ O’Connell said.‘Passing on wealth early, to grandchildren perhaps, can be a sensible component of an IHT planning strategy but great care is needed to ensure sufficient monies are kept particularly bearing in mind increased life expectancy and spiralling old age care costs.’
Reduced business rate relief for small companies
Chancellor is also understood to be looking at ways of cutting taxes or costs for small businesses.
Archer suggests another measure that could be announced tomorrow would be a reduction in business rate relief for smaller companies, which is currently due to expire in April.
Tax on foreign-owned property in UK
Analysts are predicting potential capital gains tax on the sales of foreign-owned homes in the UK. For economist Archer, while this would not be a major revenue generator for the Treasury, the main aim would be to try and limit house price gains in London, which, he says, are now rising at a ‘worryingly sharp rate’.
Coutts’ O’Connell also expected high value UK residential property, particularly overseas-owned, to be targeted - although he says the tax system might constrain the available mechanisms. ‘Raising top-end stamp duty thresholds could prove more effective than imposing a capital gains tax charge on non-residents, while a progressive stamp duty system could have an even wider impact.’
As recently as last week, the Bank of England has started to withdraw some of its support to the housing market by, restricting access to mortgages for its Funding for Lending scheme in 2014.
Anti-avoidance crackdown to gather pace
Further measures are expected to be announced to close specific loopholes that are being capitalised on. Following the introduction of the General Anti-Abuse Rule earlier this year, Coutts’ head of tax, trust & estate planning said Osborne could announce further targeted measures to tackle artificial and abusive avoidance schemes.
‘The distinction between 'reasonable' tax planning and unacceptable tax avoidance is often blurred,’ he said.
Help for house building
In line with fears of a house price bubble, particularly in London, the Chancellor is expected to announce measures aimed at stimulating house building, given that the shortage of supply is a major problem that risks fuelling further price rises.
'The construction sector does now seem to be enjoying the decent, and increasingly broad-based, recovery following extended, deep weakness. Of critical importance to the construction sector going forward is that the economy holds up well over the coming months and that housing market activity sees sustained healthy (but not excessive) growth. The first stage of the government’s Help to Buy initiative has been particularly welcome for housebuilders,' Archer noted.