As the Chancellor laid out his blueprint for Britain, he revealed a handful of changes for the wealth management industry.

The UK's Chancellor of the Exchequer aka finance minister George Osborne wants to achieve a budget surplus of £10.1 billion ($15.3 billion) by the end of 2020 so the expectation for yesterday's combined Autumn Statement and spending review was that it would be laden with controversial cuts. But the cash-strapped chancellor painted a relatively sunny picture of public finances, apparently easing the pace of cuts. This publication has received a host of reactions on the changes that will directly affect the wealth management industry, among which are the old chestnut that is the tax avoidance clampdown and a setback for the buy-to-let market.

More screws tightened on tax avoidance and evasion

It was no secret that that the government wanted to bring in a new penalty for serial abusers of tax avoidance schemes – cue the introduction of a penalty equal to 60 per cent of the tax due in cases that fall under the General Anti-Abuse Rules (GAAR). 

However, Tina Riches, national tax partner at Smith & Williamson, flagged this penalty as “premature”. She said taxpayers are still very much in the dark on what is caught by the GAAR given that the UK's tax authority, Her Majesty’s Revenue and Customs, has not yet reported on any cases going to the GAAR panel formed after the 2013 legislation.

Other proposals include new criminal offences for those engaging in tax evasion or failing to prevent it, and civil penalties for offshore tax evaders and their enablers. Riches expressed concerns that these proposals seemed to “lack sufficient safeguards for businesses inadvertently involved in providing a service to an evader”. 

The government will also invest £1.3 billion to transform HMRC into “one of the most digitally advanced tax administrations in the world”, with access to digital tax accounts for all small businesses and individuals by 2016-17, and by 2020 for most other businesses.

“Free apps and software will be available to link up and access your account securely with HMRC systems. Turning words into action, this further supports the HMRC message, that there is nowhere left to hide, and soon this will quite literally be the case as it will have a handle on all tax affairs,” said Richard Morley, partner, tax dispute resolution at BDO. 

The HMRC settlement includes £800 million of funding for additional work to tackle tax “evasion and non-compliance”. This is expected to generate additional savings of £7.2 billion over the next five years.

Inheritance tax: deeds of variation

Earlier this year, the HMRC announced a review of how wills can be adjusted through deeds of variation for tax purposes. The formal consultation on the matter has now concluded with the decision not to introduce restrictions on the tax consequences of using a deed of variation, which can result in less inheritance tax due. This development will no doubt come as a relief to families who would otherwise be burdened with additional tax headaches after the death of a loved one. 

A blow to property investors?

Meanwhile, for families buying their own home, there will be a 3 per cent increase in stamp duty for buy-to-let properties and second homes, starting from next year. This will raise £1 billion by 2021. 

“By focusing on housebuilding and 400,000 news homes, Osborne has boosted the opportunity for prospective homeowners. However conversely, the buy-to-let industry may be dented by another blow in the form of a 3 per cent increase to stamp duty,” said Shilen Shah, bond strategist at Investec Wealth & Investment.

Ian Dyall, head of estate planning at Towry, concurred that the higher tax may well sound the death knell for the buy-to-let boom. He advised that property investors should re-evaluate how their investments stack up financially, ensuring that they include the costs that are often forgotten such as stamp duty on purchase, income tax on rent and capital gains tax on sale.

“They should also consider the other investment issues associated with property investments such as a lack of diversification, periods when the house is not rented and the fact that you can’t easily utilise capital gains tax allowances on a regular basis as you can with your other investments,” said Dyall.

Support for the UK's ecosystem of entrepreneurs

The spending review “delivers what business need: competitive taxes”, said Osborne, declaring that 600,000 small businesses will gain from a rate-relief scheme for one more year. Alex Macpherson, head of Octopus Ventures, said the sceme reflected further signs of support for UK enterprise.

“From research, funding for innovative technologies, to early stage investment incentives such as the Seed Enterprise Investment Scheme (SEIS), British support for small businesses is some of the best in the world,” he said. 

Economic horizon

As for economic growth, an increase of 2.4 per cent is predicted both this year and next; this moves up to 2.5 per cent in 2017, returning to 2.4 per cent in 2018 and 2.3 per cent in 2019-20. The deficit is to be 3.9 per cent of national income this year. The chancellor used one of his favourite catchphrases “fixing the roof while the sun is shining” and said the UK will borrow £8 billion less than forecast. He explained that this would help the government reach a surplus while cutting less in the early years. 

“I am confident the conditions are right for the economy to continue its modest expansion throughout 2016, and continue to believe that there are selective opportunities within UK equities,” said Nick Peters, portfolio manager at Fidelity International’s multi asset team, Fidelity Solutions.

“Banks should also be able to put the 2008 legacy behind, particularly as the regulatory burden subsides and the policy environment becomes more supportive. At the same time, the eurozone should continue to recover, helping to deliver increased demand in the UK’s biggest export market."

Shah said the Statement “showed a government that is maintaining borrowing levels at a reasonable level coupled with the anticipation of strong long-term growth. However, fortunately for George Osborne, this has been made possible by an economic environment of both low inflation and low interest rates. Indeed Labour has been somewhat snookered by Osborne’s mix of growth numbers and economic balancing”.

Osborne made a couple of screeching U-turns in his fiscal agenda. Following much pressure from the Labour party opposition, the chancellor announced he was scrapping the cuts he had planned to both tax credits and police budgets. Health too escaped cuts but the fact remains that the National Health Service is under great strain and junior doctors have been driven to strike over contract changes. Other protected departments include schools, international aid and defence and people are rightly wondering: what is the catch?

Shadow chancellor John McDonnell said: “The iron law of chancellors' statements is: the louder the cheers on the day, the greater the disappointment by the weekend.” 

It is now up to economists to pick out the nuances in the chancellor’s aim of plugging an annual £20 billion spending gap relative to plans, said Neil Williams, group chief economist at Hermes Investment Management.

Dean Turner, economist at UBS Wealth Management, said the Statement did little to change the firm's relatively constructive outlook for the UK economy over the next couple of years. He said they still expect fiscal policy to act as a drag on activity for the next couple of years, although the modest easing of the path could be a mild positive in the near term. 

“Nevertheless, the tight fiscal backdrop suggests that monetary policy will remain loose for some time yet. We expect the Bank of England to keep interest rates on hold until May. The pace of tightening beyond this is likely to be glacial compared to previous cycles,” he said.