Jeff Salway: Government holds course on plans for vilified ‘granny tax’

IF YOU are not left too dizzy by the government’s latest budget U-turns, you may now be wondering where the next climbdown will come from.

In the last week alone the increasingly exposed coalition has bowed to pressure by walking back on proposals to clamp down on tax relief for charity donations and on plans to impose VAT on hot food, the so-called “pasty tax”.

They’ve also backed down on a 20 per cent VAT rate for static caravans, lowering it to 5 per cent.

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What’s next? The budget was such a catastrophic mess that there are several candidates if we’re looking for further potential U-turns. The government hopes the compromises announced since Osborne’s budget “omnishambles” will ease the pressure on it to reconsider far more significant measures.

For all the coverage following the budget, pasty tax wasn’t a big issue. Certainly not compared with what was dubbed the “granny tax”, which the government will now feel it can get away with following this week’s U-turns.

The “granny tax” is the freeze on the personal income tax allowance that will cost the average pensioners more than £80 a year, with some retiring over the coming year losing out by more than £320. The freeze, expected to affect around 4.4 million pensioners, is part of plans to scrap the different personal allowance thresholds. However, it is widely viewed as punishing those on modest incomes who have made the effort to save for their retirement.

Osborne’s biggest error was perhaps in presenting the measure as aimed at tax simplification and underplaying the impact on pensioners, but the controversy will linger.

However, the move will raise an estimated £3.3 billion for Treasury coffers, and having kissed goodbye to savings worth around £120m by caving in over pasties, caravans and charity tax reliefs, the government now seems certain hold its line on “granny tax”.

TESCO’S recent corporate bond issue was forced to close prematurely earlier this month after massive demand saw savers pile in more than £200m in just two weeks. The appeal was obvious. A combination of 5 per cent income – at a time when that kind of yield is in short supply outside equities – and the Tesco brand, suggesting the chances of it defaulting on repayments would be a scarce as it gets.

Look more closely, however, and it seems it’s more risky than is at first apparent. That’s because the issuer is Tesco Bank, not Tesco Plc. The problem here is that not everyone is aware that Tesco Bank is a completely separate entity to Tesco, meaning it doesn’t have the supermarket giant behind it to support the issue.

That would explain why the group’s bonds were rated as “junk”, reflecting a greater risk of going bust. In that context, a 5 per cent return over 8.5 years is not so impressive, underlining that the huge demand was fuelled by the Tesco brand association.

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As Ken Taylor at Mackenzie Taylor Wealth Management has pointed out, companies with an equivalent rating generally need to offer well above 5 per cent to attract support from institutional investors, yet ordinary savers have oversubscribed a relatively uncompetitive issue by an unsupported borrower.

This kind of corporate bond issue was facilitated by the 2010 launch of the London Stock Exchange’s bond exchange, which opened up individual corporate bonds to ordinary savers with around £1,000 or more to invest. Many more will be on the way, following the success enjoyed not only by Tesco, but also in previous issues by National Grid, Lloyds Banking Group and other household names.

Tesco will almost certainly be back with another offer that will tempt income-hungry savers. But take time to look under the bonnet, because – as all too often – the risks are not too obvious.

THERE are many reasons why the housing market faces a long, quiet summer. In fact, it’s reasonable to expect house prices to fall further, given the collapse in consumer confidence and the dire economic outlook for the Eurozone and the UK. That’s before factoring in unemployment trends, low earnings growth and a renewed nervousness among lenders, who are raising mortgage rates and gradually re-tightening criteria for first-time buyers.

Yet asked to explain why he thinks housing market activity will be particularly subdued over the coming months, one pundit this week pointed to the European football championships this month and the forthcoming Olympics.

He claimed that “…people are going to be glued to their televisions rather than viewing properties”. If someone who had been planning to buy a home decides against it this summer because there’s a couple of good games on the telly, my hunch is that they probably weren’t being very serious about it.