Inheritance disputes

More arguments about wills are reaching the High Court.

A recent report from the Ministry of Justice revealed that, last year in England and Wales, 188 cases involving contested wills were heard in the High Court, an increase of nearly 50% over the previous year. In practice that figure almost certainly understates quite how many disputes there are about wills and inheritances. The cost of going to court often encourages arguing parties to reach an agreement rather than see a slice of the estate – or their own funds – wasted on legal wrangling.

Challenges to wills can arise for a variety of reasons:

  • A co-habiting partner may find that they have been left out of their late partner’s will because it was not updated when the co-habitation began.
  • Children from previous relationships may feel they have been unfavourably treated relative to others born later.
  • An estranged child who is excluded from the will could attempt to make a claim for ‘reasonable financial provision’ under the Inheritance (Provision for Family and Dependants) Act 1975.
  • Disappointed beneficiaries might argue that the deceased lacked the mental capacity to make a will or was subject to undue external pressure.
  • The will may contain errors, a problem more likely to appear in DIY variants.

A common piece of advice is that if you think your will could be viewed as contentious for any reason, you should clearly set out the reasons for your decisions. Usually this would be done in a ‘letter of wishes’ that sits beside the will but is not itself a legal document. In an ideal world you would also explain your choice to the person(s) involved during your lifetime, but such discussions can be highly emotive, making them difficult or impossible.

The Covid-19 pandemic prompted a sudden interest in will writing and estate planning at a time when doing either was logistically problematic due to social distancing. It may also have resulted in some homemade wills that will reach the courts in years to come.

On 25 July the Ministry of Justice announced it would be amending the law in England and Wales to allow remote witnessing of wills by video link for a period of two years, with a retrospective start date of 31 January 2020. Wills made in Scotland are already able to be witnesses via video. Will writing and estate planning are best done with expert advice in an unrushed manner. But, as Covid-19 presented an unwelcome reminder, it does need to be done.

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

Summer stamp duty changes

The Chancellor’s Summer Statement introduced temporary changes in stamp duty land tax on homes, which prompted similar – but not identical – changes in Scotland and Wales.

In his Statement on 8 July, the Chancellor raised the starting point for stamp duty land tax (SDLT) in England and Northern Ireland from £125,000 to £500,000 until 31 March 2021. Shortly afterwards, the Scottish government made a change to the nil rate band of its Land and Buildings Transaction Tax (LBTT), increasing it from £145,000 to £250,000. Last of the line was Wales, which adopted a slightly different tack, raising the nil rate band on land transaction tax (LTT) from £180,000 to £250,000, but only for main home purchases, but not for second homes or buy-to-let investments.

Outside of Wales the tax cuts prompted several news stories about a boost to the buy-to-let market. There is no arguing that the costs of buying an investment property have dropped – by up to £15,000 in England and Northern Ireland. However, the extra 3% SDLT surcharge on the full price will continue in England and Northern Ireland, as will the corresponding 4% LBTT levy in Scotland.

The other tax changes which have been made to buy-to-let over recent years remain unaltered, meaning that:

  • any personal mortgage borrowing cannot be offset against rent received but instead qualifies for a 20% tax credit; and
  • any capital gains on sales not covered by the annual exemption are subject to rates of up to 28% and the tax must be paid within 30 days of completion.

In the English context it is also worth remembering that there is still an unfinished consultation on ‘modernising the rental sector’, including the possibility of removing the availability of assured shorthold tenancies (ASTs).

Another upshot of the tax changes was the suggestion that they had given buy-to-let investors, who directly own their property, a chance to move the property into a company, at a reduced cost, to increase tax-efficiency. This may be true in some instances, but any such transfer could result in one of the 30-day capital gains tax bills.

Buy-to-let investment has been on the government’s hit list since 2016. If the stamp duty and land tax cuts tempt you to think about investing in this sector, make sure you take advice and understand all of the tax consequences before doing so.

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.


Capital gains tax comes under review

The Chancellor has asked the Office of Tax Simplification to review capital gains tax.

Within a week of giving his Summer Statement, the Chancellor wrote to the Office of Tax Simplification (OTS) asking it to “undertake a review of capital gains tax (CGT) and aspects of the taxation of chargeable gains in relation to individuals and smaller businesses”. The request was unexpected and prompted some press speculation that Rishi Sunak was beginning his hunt for extra tax revenue after the unprecedented spending on Covid-19.

CGT is certainly an interesting place to start:

  • The latest data from HMRC show that there were fewer than 300,000 CGT payers in 2017/18.
  • Nearly two thirds of the tax raised in that year came from 3% of CGT payers who made gains of £1 million or more.
  • Over half of the CGT payers either paid no income tax, or paid it only at the basic rate, as the graph below shows.

The main reason why CGT payers are such a rare breed is the annual exemption. For 2020/21 this allows up to £12,300 of net gains to be realised before any tax becomes payable. Even then, the maximum tax rate is 20% (28% for residential property). At the last election, both the Labour Party and the Liberal Democrats called for gains to be taxed at full income tax rates and for the exemption to be cut to just £1,000 or abolished. The Conservative manifesto made no comment – CGT was not one of the taxes for which a rate freeze was promised.

Neither Mr Sunak nor the OTS has put any date on when the review might be published. However, the OTS has asked for all comments to be in by 12 October, so government proposals might emerge in the Autumn Budget, particularly if that Budget appears later in the year.

There is a precedent for changing CGT rates part way through a tax year – as then Chancellor George Osborne did  in 2010. With this in mind, a wise precaution could be to review your portfolio and consider whether you wish to realise any gains in the next few months, while the current generous CGT regime is in place.

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.  


An alternative tax

The adoption in the UK of a transatlantic approach to income tax could appeal to a cash-strapped Chancellor.

“…only the little people pay taxes.”

That 1980s comment by the New York Hotel owner Leona Helmsley sums up an attitude that many taxpayers still believe to be true. Today the same idea often manifests itself in headlines suggesting that the chief executive pays a lower rate of tax than his (it’s usually his) cleaner. There is an element of truth in such assertions, as the wealthy generally have greater opportunity to plan when, where and how they receive their income.

The US has long attempted to address the problem with the Alternative Minimum Tax (AMT). The rationale behind AMT is simple: those with income above a certain threshold ($197,900 in 2020) must pay a minimum rate of tax on their income after deducting a flat exemption. If their tax bill calculated on a normal basis is lower than the one produced by applying the AMT rates, then it is the AMT amount that must be paid. There comes a point, therefore, at which tax planning has no benefit.

Two UK academics with links to leading think tanks recently published a paper examining the possibility of a UK version of AMT. With the help of anonymised HMRC data, the pair were able to show that the average effective rate of tax paid by one in ten people with income (including capital gains) of over £1m was lower than for somebody earning £15,000. The inclusion of capital gains is open to challenge and one reason why the result was produced – capital gains are more lightly taxed than income.

The headline proposal of the paper was that the UK government could raise £11bn a year – about the same as 2p on the basic rate of tax would produce – by applying an AMT rate of 35% to anyone with income (again including gains) above £100,000. For a government that was elected with a pledge not to increase income tax rates, AMT offers an interesting revenue raising opportunity.

If nothing else, these AMT proposals are a reminder that – at least for now – tax planning can save you money.

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

Accumulated runs: two tricky hundreds

The cricket season may only now be slowly getting underway, but May saw the Chancellor score two centuries which, in different times, would have deeply worried investors.

Every month the Office for National Statistics (ONS) publishes a detailed summary of the public sector finances, showing how much the public sector has spent and how much income (mostly taxes) it has received in the preceding month. It is the sort of data that interests the more investment-oriented economists, but few others.

May’s data was somewhat different and received national headlines. It showed the stark impact of the two months of the Covid-19 pandemic and the government’s wide-ranging ‘whatever-it-takes’ response:

The first of those centuries is tied to government borrowing. In the first two months of the 2020/21 financial year, the estimated figure stands at £103.7bn. To put that eye-watering number into perspective, it is six times the amount borrowed in the same period last year and the highest amount for any April/May period since ONS monthly records began in 1993. In terms of tax, £103.7bn is almost equal to the total amount of VAT the government is projected to collect in 2020/21.

If £103.7bn sounds like a millstone, then it is nothing – well, about 5% – compared with the government’s total debt, that is, its accumulated borrowing over many years. In May that reached £1,950.1bn (the £0.1 billions still count). That figure produced the second century because it was equal to 100.9% of the UK’s gross domestic product (GDP).

In other words, the UK’s debt was just slightly bigger than a year’s worth of the country’s entire output. The last time the 100% barrier was breached was in 1963, when the government was still in the business of paying down the debt it had incurred in the Second World War.

It sounds grim and will get worse, but at least for now the interest on all that debt is affordable. The government currently can borrow for 30 years at a fixed rate of about 0.7% and over 10 years at just 0.25%. If interest rates were to start rising, that is when the problems could begin, so HM Treasury will want to reduce the overall level of debt over time. And it will probably be a long, long time. Taxes will rise and manifesto promises may fall by the wayside. Some tax shelters could be watered down, as happened with entrepreneurs’ relief (now business asset disposal relief) in March, or even disappear.

We should learn more in the Autumn Budget. Meanwhile some pre-Budget tax planning could be a wise precaution.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice. 

Calling time on the triple lock?

The state pension triple lock may not survive much longer.

The impact of Covid-19 on earnings could mean a change in the way that state pensions are increased in each year. If nothing is done, it could give pensioners a large income boost, but cost the government dearly.

At present, the new (single tier) state pension and its predecessor, the basic state pension, both benefit from increases based on the ‘triple lock’. This was introduced by the Coalition government in 2010 and means that these two state pensions increase each April by the greater of:

  • yearly CPI inflation to the previous September;
  • average weekly earnings growth to the previous July; or
  • 2.5%.

This basis means that for 2021, the increase is likely to be 2.5% because CPI inflation will be lower (it was 0.5% in May) and earnings could well be falling due to the impact of furloughing.

It is in 2022 that a potential problem emerges for the Treasury. The furlough scheme ends at the end of October 2020, and if the economy starts to recover, by July 2021 earnings could be back to near ‘normal’. The fact that by then some of the formerly furloughed employees will be unemployed makes no difference to average earnings figures.

Economists reckon that the difference between ‘normal’ average earnings in July 2021 and furlough-depressed average earnings in July 2020 could be significant. In its Covid-19 ‘reference scenario’ the Office for Budget Responsibility has estimated earnings growth of over 18% in 2021 (against a 7.3% fall for 2020). No Chancellor would want to fund such a large rise in state pensions, not only because of the expense, but also on grounds of intergenerational fairness.

The Treasury and many economists have long argued that the triple lock is an unnecessary cost, but politicians have always been wary of upsetting an important section of the electorate. This additional problem now created by Covid-19 gives the government the best justification it is ever likely to have to dispense with the lock. There are even suggestions that state pensions could be frozen for the next two years until the issue (hopefully) disappears.

State pensions play an important role in many people’s retirement income planning, but their payment is ultimately a state decision, as evidenced by the many changes of recent years (for example to starting age). For that reason, if no other, private provision remains a vital component of your retirement planning.

The value of your investment, and the income from it, 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.

Bounce back quarter

The second quarter of 2020 saw a substantial switch back from the falls of the first quarter.

2020 so far has been a rollercoaster ride for investors. It started off well enough, but in the middle of February, Covid-19 prompted a rout that took markets deeply into the red by the end of the first quarter. Although it was not obvious at the time, by then the world’s central banks had in fact taken enough action to encourage a market recovery in the second quarter of the year.

There is a point to watch when looking at these quarterly numbers: contrary to what we might think, the rules of mathematics mean that a fall of 20% is not cancelled out by a subsequent rise of 20%. In fact, what is needed is a 25% rise (100 x 80% x 125% = 100). So the momentum of the second quarter has left even the best performers, such as the US S&P 500 index, marginally below where they began 2020.

The UK’s second quarter recovery was not as strong as many other major markets. That could reflect the relatively poor performance in dealing with the pandemic, the UK indices heavy weighting to banks and oil majors (neither popular) and their lack of technology companies. Across the Atlantic, it is the technology shares which have been the biggest drivers of market performance – Microsoft, Apple, Amazon, Facebook and Alphabet (Google’s parent company) are now the five largest companies in the S&P 500.

The bounce back in the second quarter is a reminder that trying to time investment can be a futile exercise. With hindsight – but only with hindsight – it is easy to spot that selling in early January and buying towards the end of March was the way to a fortune. If you lack such perfect vision, then the lesson so far in 2020 has been that volatility works in both directions. In such circumstances, it pays to take advice before taking an action.

The value of your investment, and the income from it, 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.




Keep going well…? Shell’s historic dividend cut

When a 75-year run is broken, something significant has probably happened.

If you are of a certain age, ‘Keep going well…’ could have you instantly remembering the rhyming counterpart; ‘Keep going Shell’. At the end of April 2020 that 1960s advertising slogan suddenly looked particularly jarring to many investors.

Royal Dutch Shell, to give the company its proper title, announced on 30 April that it would be cutting its quarterly dividend and it was not just any cut: the payment was to fall from $0.47 to $0.16 per share. The near two thirds reduction shocked the market. It was the first time the company had lowered its dividend since 1945. In recent times it had seemed that Shell would do anything – sell assets or even borrow – to make sure the money was there for the quarterly payment.

Shell has regularly been the biggest payer in terms of the total amount of cash it handed out – for each of the last five years it topped Link Asset’s list of dividend payers. It has been a core holding of many income funds and individual investors’ portfolios for that very reason.

Shell pointed to “…the pace and scale of the societal impact of Covid-19 and the resulting deterioration in the macroeconomic and commodity price outlook” to justify its axe-wielding.  However, it also said that it was resetting the dividend, which is corporate-speak for saying 16c a share will be the new base level, not just a temporary adjustment.

The oil sector has been falling out of favour with some institutional investors who see it as increasingly problematic on both ethical and financial grounds. Goals for global carbon reduction are difficult to square with the way in which big oil majors make their money. There is a growing concern that the companies could find themselves holding “stranded assets” – oil reserves that are just not worth extracting.

The Shell story is a good example of the growing relevance of ethical considerations in investment decisions. There is now over £25bn invested in ethical funds according to the Investment Association. To discuss your options, please contact us, as another slogan that has better stood the test of time reminds us: ‘it’s good to talk’.

The value of your investment, and the income from it, 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.

Should you review your pension fund withdrawals?

The fall in world stock markets has cut the value of many pension pots.

Which would you choose as investment performance, assuming a £10,000 investment that would be untouched for 10 years?

  1. A steady return of 5% a year throughout the period; or
  1. Two years of 20% annual losses followed by eight years of 12.39% a year growth.

The outcome in both instances would be the same: both would produce an overall gain of £6,289. Compound interest can produce many surprises if you are not accustomed to its effects.

Now, try something a little more difficult. Use the same two sets of investment return, but now assume you withdraw 5% of your original investment (£500) at the end of each year. Which would you choose?

  1. A 5% return on £10,000 is £500, meaning the growth will be removed at the end of each year, so after ten years there will be £10,000 remaining.
  1. With a varying growth pattern, you need a spreadsheet to give a quick answer (or a calculator and paper for the slower version). Either way, at the end of ten years, £7,761 is left.

The £2,239 difference is an illustration of an effect known as ‘sequencing risk’. At first sight the gap between the two results appears too large – after all there is no difference when there have been no withdrawals.

However, drill down and what is happening becomes apparent. At the end of two years, taking £500 a year out from a fund that has been falling by 20% a year, leaves you with just £5,500. Suddenly a withdrawal that was 5% of your original investment has become 9.1% of the remaining capital. Even a growth of 12.39% a year thereafter cannot rescue the situation.

These calculations make a point which you should consider if you are taking regular withdrawals from your pension or are planning to do so soon. The recent declines in investment values make it important that you review your level of withdrawals and consider other income options. This is an area that needs expert advice: the wrong decision can leave you with an empty pension pot, but still plenty of life left to live.

The value of your investment, and the income from it, 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.

Missing in inaction: calculating inflation under lockdown

The Covid-19 pandemic has created problems for the statisticians who calculate the rate of inflation.

Inflation, as measured by the Consumer Prices Index (CPI), fell sharply in April to just 0.9% against 1.5% in the previous month. The main reason for the drop was energy costs:

  • Ofgem’s new price caps for gas and electricity standard variable rate took effect in April and these were about 10% lower than the rates from April 2019. Even so, the bills set by the caps are generally much higher than those that can be found on any comparison website.
  • Petrol and diesel prices were also much reduced year on year – by 15.1p a litre for petrol and 17.0p a litre for diesel.

The sharp moves in energy costs were not the only unusual features of April’s inflation statistics. There was also a serious problem with gathering the data. The Office for National Statistics (ONS) has an annually reviewed ‘shopping basket’ of goods and services which it uses to calculate the various inflation indices. However, for the latest numbers, the ONS discovered about 90 of the items in its basket – about one sixth of the total value – “were unavailable to consumers in the UK”. Haircuts, cinema tickets and a pint in a pub are just some of the many examples. Other items were theoretically available, but in such short supply that the ONS’s price-tracking task more difficult – self-raising flour being a typical problem item. Ultimately the ONS was forced to “impute” (i.e. estimate) some prices.

There is another twist to the price calculation which you may have noticed personally: the pattern of purchases has changed. The ONS basket contains items which can be bought but are just being ignored in lockdown – many travel services fall into this category. For now, at least, the basket is not representative of spending patterns. We may find that creates problems in the long term-, as inflation indices are widely used by government to adjust benefits, prices and tax allowances.

Inflation may be under 1% and somewhat distorted at present, but it has not gone away. Some economists fear that it could roar back because of all the borrowed money being pumped into the economy by the government. Others think a recession/depression will keep inflation in check. Either way, it still needs to be part of your financial planning: £1 in April 2015 has only 92p of buying power today.