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Budget Update 2016: Chancellor sweetens the pill for investors and savers

Alternative finance platforms should benefit from big changes in ISA and CGT

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Anyone looking for a quick sugar rush of extra spending and big tax cuts will have been disappointed by the budget today. It probably won’t go down in history as a major budget although the announcement of a new sugary drinks tax certainly caught the attention of most headline writers.

 Beyond the big political ‘‘initiatives” there were some important announcements, although in truth most observers were more surprised by what WASN’T announced. There was no attempt to scrap the existing pensions regime, no attempt to curb entrepreneurs’ tax relief nor any big new spending initiatives. But what we did get was a gaggle of announcements that will have a direct impact on the alternative finance space.

First off, the Chancellor left plenty of clues that he intends to push more investors towards ISA accounts and away from pensions by significantly boosting the tax incentives for this popular tax wrapper.

 In terms of ISA changes the main announcements included:

  • A new Lifetime ISA account for those aged between 18 and 40. Any savings into this scheme up to £4000 per annum before the investor’s 50th birthday will receive an added 25% bonus from the government

  • For the new Lifetime ISA there is no maximum monthly contribution – investors can save as little or as much as they want over the long term as opposed to pensions which are subject to a lifetime limit

  • This Lifetime ISA will sit alongside other tax wrappers including the The Innovative Finance ISA, the Help to Buy ISA, the Junior ISA, and of course the Cash ISA

  • The total amount an investor can save each year through any ISA will be increased from £15,240 to £20,000 from April 2017

  • If an investor has a Help to Buy ISA they can transfer those savings into the Lifetime ISA in 2017, or continue saving through both – but they will only be able to use the bonus from one to buy a house

  • With the Lifetime ISA on the investor’s 60th birthday they can take out all the savings tax-free. If they withdraw their invested money at any time before they turn 60 the investor will lose the government bonus (and any interest or growth on this). The investor would also have to pay a 5% charge

Sticking with the theme of investing, the chancellor also dropped what was probably the biggest bombshell of the day, namely a big reduction in Capital Gains Tax for higher rate payers from 28% to 20% and from 18% to 10% for basic rate tax payers. This is likely to prove to be a huge boost for investment orientated products and funds.

According to Landbay’s CEO John Goodall, the new ISA regime “is particularly encouraging, given the imminent launch of the IFISA on 6th April. At Landbay we are strong supporters of such innovation in finance and we are looking forward to launching our property-backed IFISA in April. Government initiatives should be geared to help people look after their hard earned money for fair returns via simple and transparent process and information. The only way investors can unlock their long-term prosperity is to make smarter decisions with their money."

The ISA changes were also welcomed by Pam Burton, COO of Funding Circle UK.

She observed that “with the upcoming launch of the Innovative Finance ISA, it's fantastic news for investors that their ISA limit will increase to £20,000 per year in April 2017. It will allow them to earn further tax free returns at a current estimated return of 7.3%, whilst supporting small businesses. If investors choose to use their full £15,240 ISA allowance in a Funding Circle ISA, they could save nearly £3,000 in tax across five years. Our research shows that Funding Circle returns have exceeded any other major investment product over the last five years."

Another boost for entrepreneurs

Before the budget there had been talk of a more punitive tax treatment of the widely used entrepreneurs relief, which has the effect of reducingCGT to 10% for business directors.

But in another surprise move the Chancellor in fact announced broader eligibility with a new investors’ relief. This will apply a 10% rate of Capital Gains Tax (CGT) to gains accruing on the disposal of ordinary shares in an unlisted trading company held by individuals, newly issued to the claimant and acquired for new consideration on or after 17 March 2016. These shares would also have to be held for a period of at least three years starting from 6 April 2016. In a side note, the government also announced that the qualifying gains for investors’ relief will be subject to a lifetime cap of £10 million.

Not unsurprisingly – given his championing of entrepreneurs – the Chancellor also announced a batch of measures to boost small businesses and support entrepreneurs.

These measures included:

  • Big reduction in business rates for smaller businesses with over 600,000 in total being taken out of the rates regime. Future rates rises will be indexed on the CPI index rather than the higher RPI inflation measure

  • Continued reductions in the corporation tax rate to 17% by 2020

  • Class II National insurance contributions for the self employed will be eliminated in 2018

Most alternative finance platforms seemed to welcome the changes.

Jeff Lynn, CEO at Seedrs – a leading equity crowdfunding platform, echoed many in the sector by saying that he welcomed “George Osborne’s ongoing support for small businesses through today’s Budget announcement that he will cut business rates. Indeed this means that 600,000 companies will pay no business rates at all and by basing rates on CPI rather than RPI, retailers will continue to work with more accurate bills and hence will support their long term future.

“Furthermore the slashing of capital gains tax rate and entrepreneur’s relief being extended at 10% to long term external investors who hold newly issued shares in unlisted companies from March 2016 for longer than three years further reinforces the growing appeal of small business investing. One way of doing this is through equity crowdfunding which has grown to more than £245 million and now makes up around 16% of all seed and venture-stage equity investment in the UK.”

Bank referral update

There was also a major piece of industry specific news, relating to the government’s push for alternative business funding – the bank referral scheme that’s currently resting in the hands of the British Business Bank. In an update the Treasury announced that it intends to designate three platforms in the first wave: Bizfitech, Funding Options and Funding XChange.

Katrin Herrling, Co-Founder and CEO of Funding Xchange, commented: “The requirement of banks to refer SMEs they decline for finance to designated finance platforms is a major step forward. Funding Xchange is proud to be part of the Government’s key effort to make funding available to the many small businesses that have struggled to access bank loans and overdrafts.”

Olly Betts, CEO of (the finance marketplace operated by Bizfitech), said: “Being part of the Government’s referral scheme provides us with the opportunity to help businesses that could grow and succeed – but who simply haven’t found the right finance for them yet.”

According to Conrad Ford, CEO of Funding Options, the third successful platform “Funding Options is very proud to be recommended by the British Business Bank to go forward for designation by HM Treasury for the Bank Referral Scheme, after a thorough assessment process that further validates why many of the UK’s most respected SME-focused organisations already work with Funding Options.”

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