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International investments and Brexit

With Brexit now less than a year away, how insular are your investments?

Brexit – or more accurately the start of the transition/implementation period of the UK leaving the EU – begins on 29 March 2019. By the end of the following year, the UK’s remaining links to the EU are due to be cut.

Since June 2016, when the Brexit referendum took place, the FTSE 100 has been one of the world’s poorest performing major indices. So it is perhaps no coincidence that, in March 2018, a survey by the Bank of America (BoA) of 163 global investment managers found the UK stock market was least popular of 22 wide-ranging investment asset classes.

If you live and work in the UK, then naturally enough you tend to think in terms of UK-based investments, be they shares, bonds or property. The BoA survey is a reminder that taking such a parochial view of investments may come at a price.

Diversification is one way investment professionals limit risk and potentially increase returns. For example, the most recent report from the Pensions Regulator showed that in 2017 the average UK defined benefit pension scheme had only one fifth of its total shareholdings in UK quoted shares.

International investment offers:

  • Access to industries not represented on the UK stock market, such as Amazon or Daimler-Benz.
  • The opportunity to benefit from different economies and different stages of the economic cycle, e.g. emerging markets. Both are especially important when UK economic growth is forecast to remain weak.
  • Exposure to foreign currencies, which can provide an additional boost to returns when sterling is weak, as it was in the 12 months following the Brexit vote.

There are many ways to increase the international element of an investment portfolio, whether it is held directly or via an ISA or pension arrangement.

For the strategy appropriate to your circumstances, please talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Taking the early view on ISAs

There are advantages to planning your ISA investments around the start of the tax year.

With ISAs all the taxation benefits occur after investment is made, yet the focus is often on year-end contributions. Various articles on ISAs filled the weekend press in March, and are set to re-emerge like a financial sign of spring in 12 months’ time.

For other investments, such as venture capital trusts and pensions, there is a logic in waiting until the end of the tax year – you have a better idea of your income for the year and hence your tax position. The same is not necessarily true of ISAs.

Indeed, it is sensible to contribute to ISAs as early in the tax year as possible, to get the tax benefits for as long a period as possible. As a reminder these are:

  • No UK tax on dividends, an important factor as the dividend allowance has been cut from £5,000 to £2,000 for 2018/19.
  • No UK tax on interest earned.
  • No UK capital gains tax on any profits realised.
  • Nothing to report to HMRC on your tax return.
  • Allowing a surviving spouse or civil partner to inherit your ISA benefits, effectively treating your ISAs as joint investments.

Making an ISA contribution does not necessarily mean paying in cash. It can include selling an existing investment you hold personally and repurchasing it within an ISA. You may crystallise some capital gains in the process, but at the start of the tax year you almost certainly still have your full £11,700 annual exemption available.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

A refund for power of attorney

You may be due a refund if you have registered a power of attorney in recent years.

It is not often the government offers a refund because of overcharging, but last month it emerged that the Office of the Public Guardian (OPG) had been levying excessive fees for four years. The fees related to the cost of registration of a power of attorney, whether it was an enduring power of attorney or either of its lasting power of attorney successors – dealing with health and welfare or property and financial matters.

The OPG was meant to cover its costs with attorney registration charges, but instead ended up with an £89 million surplus. As such, this sum is being returned to those who registered a power in England or Wales between 1 April 2013 and 31 March 2017. The maximum refund is £54, and most claims can be made via an online form at www.gov.uk/power-of-attorney-refund.

If the person who granted the power of attorney has died, then that individual’s executor must make a claim by email. Figures obtained via a Freedom of Information request show that up to 1.8 million people may be due a refund.

If you have never registered a power of attorney, either for yourself or perhaps an elderly parent, the refund still has relevance as reminder to do so. Enduring powers of attorney address the question, ’Who deals with my affairs – personal and financial – when I cannot do so?’ Although often thought of in terms of the elderly going into care, enduring powers of attorney have a much wider relevance. Unfortunately, accidents can and do happen at all ages.

Enduring powers of attorney are frequently dealt with alongside wills as part of estate planning – in some respects they can be regarded as a form of living will. If you have not reviewed your estate planning for a while and you have no powers of attorney in place, you could make plans now. You never know when an accident might happen.

The Financial Conduct Authority does not regulate tax advice or will writing.

Dividends expected to slow after strong 2017

A recently released report shows dividend payments in the UK grew more than 10% in 2017.

The report included good news for investors, as UK listed companies paid out £94.4 billion of dividends in 2017. This was up 10.5% on the previous year and a new record. However, the headline figures do not tell the whole story:

  • In the final quarter of 2017 year-on-year dividend growth was just 1.1%.
  • The top five dividend payers accounted for £36 out of every £100 paid, with the next ten delivering £24. The rest of the market made up the remaining £40, emphasising the concentration of dividend payers.
  • Nearly half of all special dividends – one-off payments often associated with mergers or asset sales – was attributable to National Grid’s UK gas distribution disposal, totalling £6.7 billion.
  • Dividends (excluding special payments) from the Top 100 companies grew by 10.0%, while the Mid 250 achieved a 14.6% increase.
  • The strongest dividend growth came from the mining sector, with an increase of 162%. There was an element of smoke and mirrors about this as some big mining firms that had suspended dividends in the commodity downturn – such as Glencore and Anglo American – resumed payouts.

The data was published in February by Capita Asset Services, one of the UK’s main share registrars, which was recently sold to Link Asset Services. Fortunately, the new owners have continued to produce the report.

The Link Asset Services figures are a good reminder of the income producing credentials of UK shares. The firm notes that, “A rise in bank rate, the first in over a decade, did nothing to dent the attractiveness of equities for income.” However, it expects much slower dividend growth in 2018, in part due to the pound’s recovery from its post-referendum lows. This deceleration and the continued weighting towards just a handful of substantial dividend payers means that advice is important in selecting income funds.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

A turbulent February for stock markets

February saw a dramatic return of volatility to global stock markets.

On Friday 2 February, after most of the world’s share markets had finished for the week, the Dow Jones Index dropped by 666 points in a day. Never mind all the beastly connotations of that number, in fact it was a drop of about 2.5%. The professional’s measure of the US stock market, the S&P 500, fell 2.1%.

As might be expected, the following week was unsettled, with the Dow losing over 1,000 points on both Monday and Thursday and other global equity markets experiencing similar shocks.

There were a variety of suggestions about the sudden return of volatility to a market which had spent the previous year seemingly asleep. Some blamed monthly figures released on 2 February showing higher than expected US wage growth of 2.9% C. These were read as a possible inflation threat, that would prompt a more rapid rise in interest rates. The fact that such monthly figures are notoriously volatile was, for once, ignored.

Markets recovered their poise in the following weeks. However, the press’s attentions had moved on: a large fall always gains more attention than a similar rise, especially if the rise is more gradual. For long-term investors, the big picture can therefore be lost in the noise of short term headlines. For example, the performance of the main indices in the first two months of 2018:

Index29/12/201731/1/201828/2/2018Year to Date Change
FTSE 1007687.777533.557231.91-5.9%
S&P 5002673.612823.812713.83+1.5%
Euro Stoxx 503503.963609.293438.96-1.9%
Nikkei 22522764.9423098.2922068.24-3.1%
MSCI EM (£)1602.2781650.6791622.978+1.3%
MSCI All-World ($)2106.892214.112140.57+1.6%

From a global viewpoint, as measured by the MSCI All World Index, what happened in February did not fully undo the increases in January.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

An improvement to the ISA inheritance rules

The rules for inheriting ISAs will change from 6 April.

It was announced by George Osborne in 2014 that ISAs would become inheritable by surviving spouses and civil partners. At the time, nobody – not even the Treasury – was clear what the then chancellor meant.

The plans for ISA ’inheritance’, when they eventually emerged, were far from simple. Although a surviving spouse or civil partner could effectively take over the investments in their deceased partner’s ISA, the process revolved around the ISA’s value at the date of death, not when the transfer took place.

To make matters worse, the ISA tax rules ceased to apply at death, but started up again once the survivor’s inherited ISA was in place. It made an administratively complex structure of a straightforward idea.

Last November regulations were approved to simplify the process considerably, thanks to much lobbying and a protracted development of legislation. Now, for deaths occurring after 5 April 2018, in most circumstances:

  • The ISA tax advantages of UK income tax and capital gains tax exemptions will continue throughout the period of estate administration.
  • The inherited ISA can include any increase in value during that period.

If you are in a couple and needed another excuse for contributing to an ISA, either as a tax-year-ending or tax-year-starting payment, the new inheritance rules are a good one.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

Still time for year end pension contributions

This is the time of year to review your pension contributions.

February and March are rightly popular times for reviewing and making pension contributions. By this stage you should have a good idea of what your income for the tax year will be and how much you may be able to contribute as a one-off payment before 6 April arrives.

In this tax year, there are several changes to note:

  • Thursday 5 April will be the last day on which you can make a contribution to mop up any unused annual allowance from 2014/15. To do so you will need to first use up your annual allowance for the current tax year.
  • The money purchase annual allowance was reduced from £10,000 to £4,000 at the start of this tax year, although the legislation achieving this did not arrive until November. If you have used the new pensions flexibility to draw benefits this may limit the amount you can contribute.
  • From 6 April 2018, the lifetime allowance rises by 3% to £1,030,000. At the margin that modest increase may permit more benefits to be taken without triggering tax charges.
  • From 6 April 2018, automatic enrolment contribution levels increase, with the total of employee and employer payments rising by about 150%. There will be another increase of around 60% the following year.

If you want to maximise contributions, contact us as soon as possible. The calculations involved can be complex and miscalculations can lead to lost tax relief.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The new Spring Statement replaces the Budget

There will be no Spring Budget this March, but that does not mean the Chancellor is staying silent.

On 13 March, the Chancellor will present a Spring Statement to the House of Commons, not a Budget. The next Budget should be in the autumn, probably November. The rationale for the revised schedule is to give more time to develop legislation and avoid the situation of changes taking effect from 6 April, but not reaching the statute book until three months or more later.

This problem was made worse in 2017, when the snap election meant most of the March Budget measures were put on hold. Some that took effect from 6 April 2017 – such as the reduction in the money purchase annual allowance – were in a Finance Act that only received Royal Assent on 16 November.

Despite the new schedule, there seem to be plenty of people expecting a Spring Budget in March, perhaps because 2017 was an unusual year – with two budgets and three Finance Bills. However, 2018 should be much quieter on the tax front (assuming there is not another surprise election).

Whilst there is no Budget there may still be changes announced on 13 March that have immediate effect. Few Chancellors can resist the opportunity when they are in the parliamentary spotlight. Mr Hammond’s predecessor was a classic example, as some of George Osborne’s Autumn Statements were more like Budgets than the real thing.

If you are considering year end tax planning, then it could make sense to complete any transactions before 13 March. If you need of assistance in that planning, you should contact us as soon as possible.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Deadline approaching for using your ISA allowances

Investors and their advisers should start to turn their focus to the end of the tax year on 5 April.

ISA contributions have historically always been focused on the end of the tax year. This is the case even though it would make more sense to invest at the start of the tax year, to maximise the period of tax shelter.

This time of year, the personal finance pages start to fill with stories about ISAs, often including tales of ISA millionaires. For all the coverage, these remain a rare breed, but they serve as a reminder that regular saving over a long term can create meaningful amounts of capital.

The past couple of years have seen total ISA contributions falling primarily due to a sharp drop in the popularity of cash ISAs. These have seen contributions fallen by over a third between 2014/15 and 2016/17 for two good reasons:

  1. Ultra-low interest rates and limited competition between banks have made prospective returns look miserable, particularly as inflation has picked up; and
  2. The introduction of the personal savings allowance in 2016/17 has meant many depositors no longer need an ISA to escape tax on their deposit interest.

Stocks and shares ISA contributions have reached a new high, probably helped by some ISA investors abandoning the cash version. This tax year there are a few of points to remember when making your stocks and shares ISA investment:

  • The contribution limit (in total to all ISAs) is now £20,000, up from £15,240 in 2016/17. It will be held at £20,000 in 2018/19.
  • Dividends within an ISA are free of UK tax. With the dividend allowance falling from £5,000 in 2017/18 to £2,000 in 2018/19, you may find you have to pay tax on shares held outside of an ISA.
  • It is important to get your money into an ISA shelter. Whilst your annual limit can’t be carried forward to the next year, you do not have to invest it all in funds by 5 April – once you hold cash in your ISA you can drip feed investment into funds, if you wish.

For more information and advice on selecting ISA providers, please talk to us ahead of the April deadline.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances.

Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The Scottish version of income tax unveiled

Last month saw another Budget – for Scotland, this time.

The Scottish Budget in the middle of December contained potential omens for the whole of the UK with its proposed changes to income tax bands and thresholds. In the foreword to the main Budget document, Derek Mackay, the Scottish Cabinet Secretary for Finance and the Constitution said he believed his income tax measures would make the system in Scotland, “fairer and more progressive”.

Whether or not that is true, Mr Mackay has certainly made it more complicated, as the table of proposed tax rates and bands for 2018/19 shows:

Scotland UK Excluding Scotland
Taxable Income

£

Tax Rate

%

Band NameTaxable Income

£

Tax Rate

%

0-2,00019StarterN/AN/A
2,001-12,15020Basic0-34,50020
12,151-32,42321IntermediateN/AN/A
32,424-150,000*41Higher34,500-150,000*40
Over 150,000*46Top/AdditionalOver 150,000*45

* If earnings exceed £100,000 the Personal Allowance is reduced by £1 for every £2 earned over £100,000.

The proposed structure will result in 70% of all Scottish income tax payers paying less than they do for the current financial year, according to Mr Mackay, although some of this achievement is down to the Westminster Chancellor raising the UK-wide personal allowance by £350. Nevertheless, the other 30% will pay enough extra tax to mean a boost of £164m to the Scottish government’s income in 2018/19. The difference in bands and rates may look modest enough, but Scottish residents earning £50,000 a year will end up paying £9,015 of income tax in 2018/19 against £8,360 for their English, Welsh and Northern Irish counterparts.

Mr Mackay said that increasing the top rate of tax to 50% had been considered, but the Council of Economic Advisers suggested that this would be “unlikely to raise any substantial funds for the Scottish budget, and may in fact reduce revenues”. There are only 20,000 top rate taxpayers in Scotland and the Council was doubtless considering the likelihood, and impact, of some of them crossing the border to England to pay 45%.

The changes proposed in Scotland – which still need parliamentary approval – will be watched with interest in the rest of the UK. John McDonnell, Labour’s Shadow Chancellor, has made his own proposals for raising income tax rates, including a new top rate of 50%. He will doubtless be waiting to see how the Scottish public reacts to Mr Mackey’s “fairer and more progressive” system.

In the meantime, the plans of Mackay and McDonnell both serve as reminders that you should be starting to think about your year end tax planning.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.