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China emerges on to the investment stage

The importance of China’s stock market is set to quadruple in 2019.  

China has been at the forefront of the headlines recently, whether about the protracted trade dispute with the US, the alleged dangers of using Huawei’s 5G equipment or the first landing of a spacecraft on the far side of the moon. The ‘Middle Kingdom’, as China is sometimes called, is now the world’s second largest economy. If you adjust for the Chinese currency’s purchasing power – not something the Chinese like to do – their economy comes out at number one.

For all its apparent might, China remains classified as an ‘emerging market’ in investment terms. The overall economy may be at, or close to, the top of the charts, but when you look at economic output per head, China drops down to a ranking into the 70s – much the same as Bulgaria. That difference in ranking underlines the degree of China’s scope for growth.

In March, China’s economic status gained another leg up with an announcement from MSCI. The MSCI Emerging Markets Index (EMI) sets the benchmark for an estimated $1,900bn of funds investing in emerging markets and included shares listed in China (so-called ‘A Shares’) for the first time in 2018. Previously it had only included shares in Chinese companies listed outside China, such as Alibaba, which is listed in New York. The 2018 move was an initial step, as MSCI only gave a 5% weighting to the A Shares, meaning that they formed a miniscule part of the EMI.

MSCI’s March 2019 announcement heralds a staged increase in that weighting, which will reach 20% by November, at which point A shares will be 3.3% of the EMI. Further increases are possible later, subject to market developments in China. If – and it is a big if – China A shares eventually gain a 100% weighting, then Chinese companies (wherever they are listed) will account for over 40% of the EMI, up from 31.3% currently, as the chart below shows.


The MSCI move on China is prompting many emerging market investment managers to reassess their Chinese holdings, probably with a view to increasing them. If you want to add to or create your exposure to Chinese investments, there are a variety of options that we would be happy to discuss. If you want to avoid China, then make sure you have a good reason why – it looks set to become ever more important for investors across the globe.

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 overshadowed Spring Statement

The Chancellor’s Spring Statement was almost obscured by other events in mid-March.

Ever since he announced a move to an Autumn Budget in 2016, Mr Hammond has made it clear that he wanted to avoid the Spring Statement counterpart becoming a mini-Budget. His vision was that in March he would be presenting a brief response to the latest forecasts from the Office for Budget Responsibility (OBR). As the Treasury website stressed, “there will now only be one major fiscal event each year”.

Nevertheless, it is unlikely that either the Treasury or the Chancellor wanted the Spring Statement to be an event that was completely overshadowed by other parliamentary business occurring on the same day, as it was by the votes on whether to rule out a no-deal Brexit. Ironically, the Chancellor made his statement on the assumption of “a smooth and orderly exit from the EU”.

There were virtually no new tax initiatives in the Statement, although there were hints that a ‘Deal Dividend’ would help in “keeping taxes low” as well as allow increased public expenditure. In the background papers published alongside the Statement, there were reminders that the tax screw continues to be tightened in some areas. For example, Mr Hammond promised a consultation paper putting flesh on two measures announced in the October Budget, designed to restrict two long-standing capital gains tax reliefs on residential property.

The OBR’s calculations explain why Mr Hammond did not mention fresh tax cuts, as opposed to maintaining low tax levels. In this new 2019/20 financial year, government borrowing is projected to increase by £6.5bn and to still be £13.5bn by 2023/24. Income tax and national insurance contribution receipts have been rising faster than expected and are the main reason why the OBR’s overall finance figures looked rosier in March than last October.

As has been the case for some years now, if you want to see your tax bill reduce, the starting point is not to wait for government action, but to review your personal opportunities for improved 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.

Inflation dips below the Bank of England’s target

UK inflation fell below 2% for the first time in two years.

January 2019 saw the lowest level of inflation since January 2017, with the rate recorded at 1.8%. The data was slightly better than had been expected, with the CPI rate falling to below the Bank of England’s 2% target for the first time in two years. One of the major contributors to the fall from December’s 2.1% rate was the drop in gas and electricity prices prompted by the introduction of the price cap on “standard variable” tariffs. The cap, operated by Ofgem, came into effect at the start of 2019.

However, shortly before the January inflation figures were released in mid-February, Ofgem announced that the utility price cap would be rising by 10.3% from April due to a rise in wholesale energy costs. The unfortunate timing was partly down to the fact that the cap has a six-month summer/winter cycle, so the initial winter cycle has an abbreviated three-month lifespan. All of the big six energy suppliers have since responded with price increases to take effect from April. All other things being equal – which they are almost certain not to be – that means a blip up in annual inflation will occur in April.

A benign outlook

Despite the vagaries of the utility pricing, the outlook for inflation is relatively benign. The Bank of England’s most recent Inflation Report, also published in February, projects a slight rise in 2020, but only to 2.3% before fading to 2.1% in 2021 and 2022. Those projections are in turn derived from market expectations for base rate, which suggest it will not be until 2021 that base rate reaches 1%.

The Bank does hedge its forecast on future interest rates, with the inevitable proviso about Brexit: “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.” This means that the Bank of England has no pre-set plans and could move interest rates up or down. Realistically, few economists believe that rates would rise, even in the most difficult scenario.

For investors, the main conclusion to draw from all this is that short term interest rates are expected to remain well below a rate of inflation that will be around 2%. As has been the case for most of the past ten years, keeping more than needed on deposit will continue to be a way of eroding wealth.

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.

Check your April pay slip

Your April pay may look much the same as March’s, but it is worth giving your pay slip a close look.

If you are an employee, your April pay slip is always worth checking, even if you pay little attention to the other eleven you receive over a year. The items to check include:

Salary Many employers change pay rates from 1 April, often coinciding with the start of their new financial year. If you were notified of a pay increase in March, it is worth making sure the number on the April pay check agrees with what you were promised.

Tax code. Your April pay check will be the first for the 2019/20 tax year and your PAYE tax code will have almost certainly changed from what was on your March pay slip. If you are entitled to a full personal allowance and have no deductions, your code number should increase by 65, reflecting the £650 increase in the personal allowance.

If you have a company car, then it is likely to move your code in the opposite direction. For most cars (other than those with the highest emissions), the percentage of list price that is taxable rises by 3% – £300 per £10,000 of list price. A £22,000 car will therefore more than counter the rise in the personal allowance. The higher scale percentage also means a similar increase in taxable value of employer supplied fuel. In practice you might be better off paying your own fuel bills, even if your employer pays you nothing in compensation.

National insurance contributions (NICs) The primary threshold (that is, the starting point) for NICs rises by £4 a week while the upper earnings limit (the top level of earnings on which you pay full 12% NICs) jumps by £70 a week. As a result, if your annual earnings are more than £46,600 a year, you will be paying more NICs from April. If you earn over £50,000 a year, your extra NICs will be just over £28 a month.

Pension contributions These are generally linked to salary, although not necessarily your full pay, so should increase if you have an April pay increase. If you are in an automatic enrolment pension scheme, your contributions are usually based on “band earnings”, which were £6,032–£46,350 in 2018/19 and are £6,136–£50,000 in 2019/20. The contribution rate will rise, too. How much will depend upon your employer’s contributions: you might see the rate increase by two thirds to 5% of band earnings (4% after basic rate tax relief). If your pay in April is lower than in March, the auto enrolment change could be the culprit.

For more insight on the tax, NICs and pension deductions from your pay and options to limit their impact, please talk to us.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

The rise and rise of UK dividends

Dividend payments from UK companies in 2018 once again outpaced annual inflation.  

Your income could have increased by more than double the rate of CPI inflation in 2018.

Link Asset Services, a leading share registrar, reported a 5.1% growth in total dividend payments of UK companies last year. Their January dividend monitor showed that in 2018 UK companies paid out £99.8bn in dividends, £4.8bn more than in 2017.

As the graph shows, since 2012, total dividend payments have comfortably outpaced inflation. The dividend line is not as smooth as the inflation line for two reasons:

  • To a degree, what companies will pay in dividends depends upon financial conditions. The graph’s dip in 2009 and 2010 calendar years reflects the fallout from the great recession of 2007/08 when some major companies, e.g. clearing banks, suspended dividend payments completely.
  • Total dividend payments represent the addition of regular dividends – what companies pay each year – and special dividends, which are one-off payments. From year to year, the ‘specials’ vary much more than regular dividends. A good example is 2014, when Vodafone sold out its US business interests and made a one-off dividend payment of nearly £16bn.

In its latest monitor, Link notes that rising dividends and falling share prices in 2018 meant that the yield on UK shares in December 2018 hit the highest level since March 2009. The 4.8% yield recorded by Link compares with an average over the last 30 years of 3.5%. In Link’s view, that level of dividend seems ‘’overly pessimistic” and is more likely to represent an undervaluation of UK stocks due to Brexit uncertainty as well as difficulties in the global market. It is hard to disagree.

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.

One more twist on buy to let

Buy-to-let investors will be hit by another notch up of the tax ratchet.

Source Nationwide

When George Osborne announced in his summer 2015 Budget a variety of tax changes aimed at discouraging buy-to-let (BTL) investment, they came as a surprise. To ease their impact, the then Chancellor phased in the most significant reform, a revised treatment of interest relief, over four years and deferred its start date to April 2017. Anecdotal evidence suggests some BTL investors did not know what had happened until they found a larger than expected tax bill in January.

April 2019 will see the start of the third year of the phasing process, which will mean in 2019/20:

  • Three quarters of any interest paid on BTL borrowing will be eligible for a 20% tax credit; and
  • The balance of interest is deductible from rental income, meaning it is fully tax relievable.

If that all sounds rather arcane, the impact becomes more obvious when you look at a simplified example. Suppose a higher rate taxpayer had rental income of £12,000 and interest on a BTL mortgage of £8,000. The investors’ net income position is as follows:

Tax Year Rent Interest Rent – Interest Tax Due Net Income
  £ £ £ £ £
2016/17 12,000 8,000 4,000 (1,600) 2,400
2017/18 12,000 8,000 4,000 (2,000) 2,000
2018/19 12,000 8,000 4,000 (2,400) 1,600
2019/20 12,000 8,000 4,000 (2,800) 1,200
2020/21 12,000 8,000 4,000 (3,200) 800

In practice, the situation might be worse than the table suggests if, for example, the disappearance of the deduction for interest increases the investor’s gross income to the point that it trips over the £100,000 threshold, at which the personal allowance is phased out.

Sales by BTL investors could pick up this year due to the interest relief changes and poor short-term prospects for capital growth. There is another tax incentive to sell on the horizon, too. From April 2020, capital gains tax on residential property (at 18% and/or 28%) will have to be paid within 30 days of sale, whereas the current rules effectively give a minimum of nearly ten months’ grace.

If you are a BTL investor and are considering leaving the market, please talk to us about your options, on both the tax planning and reinvestment fronts.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

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.

Inheritance tax reductions ahead of potential reform

Inheritance tax (IHT) will be slightly reduced for some from 6 April 2019, but greater reforms may arrive soon.

The IHT residence nil rate band (RNRB) increases by £25,000, bringing it to £150,000 for the 2019/20 tax year. In theory that means a married couple can pass on up to £950,000 (2 x nil rate band of £325,000 + 2 x RNRB of £150,000) to their heirs free of tax.

In practice matters are much more complicated, as eligibility for the RNRB comes with a variety of conditions primarily designed to limit the cost to HM Treasury.

A final £25,000 increase in the RNRB happens in April 2020, increasing the available band to £175,000 and the theoretical IHT-exempt estate up to £1 million. There is some doubt, however, whether this will happen, at least as legislation currently envisages. The reason for that uncertainty is a review of IHT, which the Chancellor requested from the Office of Tax Simplification (OTS) in January 2018.

The OTS review of inheritance tax

The first part of the OTS review was published last November. It detailed over 3,000 responses to their consultation and made a range of proposals for simplifying IHT administration.

The second part of the review, which examines the “key technical and design issues” is due in spring. It would not be surprising if the OTS suggested some reform of the RNRB, which it said, “attracted a lot of comments … due to its complexity and because those who do not have children, or their own home, may not be covered by it”.

One obvious possibility would be to enlarge the nil rate band and scrap the RNRB, but as the OTS noted “any changes would of course involve an Exchequer cost”. Mr Hammond’s predecessor turned down such a suggestion, despite heavy criticism of the RNRB’s legislative complexity.

In the meantime, as the end of the tax year approaches the regular IHT exemptions need to be considered. These are currently:

  • £3,000 annual exemption for gifts;
  • £250 per person small gifts exemption; and
  • The normal expenditure exemption, which broadly speaking exempts any gifts that are:
    • made regularly;
    • made out of income; and
    • do not reduce the standard of living of the person making the gift.

For more information on the exemptions and how they can be used, please talk to us. As with much else in IHT, the exemptions contain their own traps for the unwary.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

Preparing for the new tax year

One of the few certainties about 2019 is that the new tax rates and thresholds will take effect from the start of the 2019/20 tax year on 6 April.

Whilst the focus tends to be on year end tax planning at this time of year, it is important to look forward to the new tax year and the changes that it will bring.

From 2019/20 changes will come into effect for key income tax rates and thresholds, as well as pensions.

There are two inflation-busting income tax changes:

  • The personal allowance will rise by £650 (5.5%) to £12,500; and
  • The higher rate threshold will rise by £3,650 (7.9%) to a neat £50,000. However, in Scotland the higher rate threshold (for non-savings, non-dividend income) will be frozen at £43,430.

The personal allowance and higher rate threshold will remain unchanged in 2020/21, so the impact of the above-inflation increase will be soon eroded.

A corollary of the increased higher rate threshold, outside Scotland, is that the upper limit of earnings on which full rate employee/self-employed National Insurance Contributions (NICs) are payable will also rise to £50,000.

The net effect is to claw back a significant slice of the income tax saving and, in Scotland, leave earnings in a band between £43,430 and £50,000 suffering a combined income tax (41%) and NICs rate (12% for employees) of up to 53%.

The ceiling for automatic enrolment pension contributions will also increase to £50,000. This, combined with the increase in the minimum overall contribution rate from 5% to 8% means, in many instances, a jump in employee net contributions of about two thirds from the current level. So if the new higher rate threshold takes you out of higher rate tax, your net contributions could more than double.

The other change affecting pensions is a small increase in the lifetime allowance of £25,000 – this sets the maximum tax-efficient value of pension benefits at £1.055 million.

For more information on how these changes will affect you and how you might counter some of the unwelcome side effects, please talk to us, before the end of the current tax year.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

Money pouring in to VCTs, despite the risks

Investment in venture capital trusts (VCTs) is continuing to rise as we head in to 2019/20.


VCTs have been growing in popularity in recent years, as the graph shows. Nearly £750 million was invested in VCTs in 2017/18, the highest figure since 2005/06, when the rate of income tax relief was temporarily boosted to 40% (against the current 30%).

There were two main reasons for the surge in popularity in the past couple of years:

  • The restrictions on the pension lifetime allowance and the annual allowance have meant that an increasing number of high earners have been seeking alternatives to pension contributions. With HMRC taking an ever-stronger stance towards tax avoidance schemes, VCTs are one of the few areas outside pensions where tax relief is available with a government stamp of approval.
  • Last summer the Treasury published a consultation paper on ‘patient capital’ that indicated new investment restrictions for all venture capital schemes. These details were confirmed in the 2018 Budget, but by then many VCTs had raised substantial funds helped by a buy-now-while-stocks-last message.

New restrictions on investment

The revised investment rules need to be borne in mind if you are thinking about investing in VCTs to reduce your 2018/19 tax bill, because they have made investment in VCTs more risky.

The Finance Act 2018 says that when a VCT invests in a company there must be “a significant risk that there will be a loss of capital of an amount greater than the net investment return”. It is therefore all the more important to choose your VCT provider(s) with care. An existing track record may have been based on an investment approach which would not satisfy the Finance Act 2018 rules.

For information on the VCTs currently available, please talk to us. Despite the risks, the tax advantages mean that the more attractive issues can disappear within days.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax or trust advice.

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

Happy birthday to tax-free savings

The arrival of the new tax year on 6 April means it is time to consider your Individual Savings Accounts (ISA) investments, which will celebrate their 20th birthday in April.

Over the last 20 years, the maximum annual contribution has risen from £7,000 per tax year to £20,000 for 2019/20. If you managed to set aside the maximum each tax year since 1999/2000, you would now have placed over £205,000 into ISAs and largely out of HMRC’s reach.

The relatively simple single investment option has also morphed into a range of plans covering everything from retirement planning (the Lifetime ISA) to children’s saving (the Junior ISA).

However, one aspect has been common throughout the ISA’s lifetime: new investment is concentrated at the end of the tax year. For example, in the 2017 calendar year Investment Association data shows that net ISA investment in the second quarter was £1,421 million against a net total of £1,068 million for the entire year (the first and fourth quarter showed net outflows).

This means, if you are in that ‘leave-it-until-the-last-moment’ majority, now is the time to start thinking about your 2018/19 ISA investment.

The benefits of ISAs

Whilst the value of ISAs has changed over 20 years, as successive Chancellors have altered the tax treatment of interest, dividends and capital gains, the main tax advantages are largely unchanged:

  • There is no UK income tax to pay on interest, whether from cash or fixed interest securities. With low interest rates and the personal savings allowance of up to £1,000, this benefit is less valuable than it once was.
  • There is no UK tax to pay on dividends – This is a more valuable benefit now the dividend allowance is £2,000 and even basic rate taxpayers can face 7.5% dividend tax.
  • There is no capital gains tax on profits.
  • There is no personal reporting to HMRC.

One extra feature added in recent years is the ability to allow ISAs to be effectively transferred to a surviving spouse or civil partner on first death. However, ISAs ultimately remain liable to inheritance tax unless appropriate AIM-listed investments are chosen.

For year end ISA investments and a review of your existing holdings, please contact 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.