New government, new tax targets?

How will the new government affect your financial planning?   

December’s general election delivered a Conservative government with the sort of majority which consigns the knife-edge parliamentary battles of recent years to the past. So what will the new government do, apart from “get Brexit done”?

A look at the Conservative manifesto, easily the shortest of the three main parties, gives some limited clues.

Income tax There was a promise of no increases to income tax rates – although it is worth remembering that this does not extend to Scotland and Wales, which can both set their own rates. While Boris Johnson had talked about an £80,000 higher rate threshold during his campaign to become party leader, this idea did not reach the manifesto.

National Insurance Contributions (NICs) A no rate increase promise also applies to NICs, however, this may prove difficult to square with the abolition of class 2 self-employed contributions, which has been regularly deferred. The manifesto also promised an increase in the national insurance threshold to £9,500 in 2020/21 from the 2019/20 level of £8,632. That is worth a theoretical maximum saving of £104 a year for an employee (and £78 for the self-employed). The true saving is smaller, as the threshold would have risen to £8,788 through normal inflation linking. The manifesto expressed an ‘ultimate ambition’ – with no date specified – to raise the threshold to £12,500 (matching the current personal income tax allowance).

Social care After the problems Boris Johnson’s predecessor encountered on this topic during her election campaign, the manifesto (and Queen’s Speech) gave few clues beyond a commitment to build a cross-party consensus to solve the problem of funding social care. One condition of that solution would be that nobody needing care should be forced to sell their home to pay for it.

Corporation tax The rate cut from 19% to 17%, which was legislated to take effect from April 2020, will no longer happen.

The change in the NICs threshold represents over two-thirds of the tax cuts promised in the manifesto over the next four tax years. The financial picture should be made clearer in March, when the long-overdue Autumn Budget will now be delivered. In the meantime, if you want to see your tax bill fall, the solution looks to be in your own hands, not the Chancellor’s.

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

HMRC keeps an eye on offshore fund investors

In early November, HMRC undertook a distinctly non-festive bulk mailing.

“We receive information about investment funds and this information shows that you may have invested in Offshore Investment Funds.”

Those slightly discomforting words are contained in a letter which HMRC sent out in early November. It was sent to a subset of taxpayers whose tax affairs are dealt with by HMRC’s Wealthy & Mid-Sized Business unit. What the letter shows is:

  • HMRC continues to be focused on offshore evasion as an area to raise additional revenue. It makes sense for HMRC to do so – the ‘Panama Papers’ exposure of 2016 is reported to have netted £190m so far for the Exchequer.
  • The Common Reporting Standard (CRS), which came fully into force in October 2018, is now being used by HMRC to target individuals. The CRS provides an automatic exchange of information between the tax authorities of over 100 countries.

As HMRC says in its letter, “How to treat amounts gained from an investment fund can be complex.” Most of the offshore funds now marketed to UK resident investors are ‘reporting’ funds and many of these distribute all of the income they receive. As a result, their tax treatment is very much like their UK-based counterparts, with any gains subject to capital gains tax. However, problems start to arise when some of the income of a ‘reporting’ fund is accumulated within the fund. Such unseen income remains taxable as personal income.

Unsurprisingly, the other category of offshore fund is a ‘non-reporting fund’. If these types of fund distribute income, then it is taxable in the normal way as either dividends or interest. However, any capital gains – including those from accumulated income – are taxed under income tax rules on sale. That harsher treatment explains why ‘non-reporting’ funds are not often recommended to UK resident investors.

HMRC’s action does not mean offshore funds should be avoided. In some circumstances, they have a valuable role to play. One point that the HMRC letter effectively does make is that if you want to invest in these types of funds, you need advice to avoid the potential tax pitfalls.

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

Factor inflation into your planning cycle

Inflation has fallen to its lowest level in almost three years, but you should still take it into account.

Source: ONS

The October 2019 measure of annual inflation was lower than most experts had expected. At 1.5% on the CPI yardstick, it was the lowest since November 2016 and 0.5% below what is still the Bank of England’s central target of 2.0%. Ironically, the main reason behind the fall was a government price control, which began at the start of the year: the utility price cap.

This now operates on a half yearly cycle, with the cap reset on 1 April and 1 October by OFGEM, the utility regulator. The fall in the annual CPI rate reflected the latest October adjustment, which produced a theoretical dual fuel price cut of 6% for the ‘typical customer’ on default rates.

Of course, what the regulator gives, the regulator can just as easily take away – the April 2019 review resulted in an average 10% increase in the cap. Either way, it is a reminder that behind the headline inflation number, there are many factors at work, often pulling in opposite directions at different times.

Cumulative effect

While inflation is now relatively low, it remains an important factor in financial planning, not least because of its cumulative effect. Over the last five years, the period covered by the graph, prices rose by 7.9%, while over the last ten years prices increased by almost a quarter at 24.2%. Unless your financial planning is regularly reviewed to take account of inflation, you could find that it gradually becomes outdated.

It is a wise idea to look at any fixed components of your planning, such as life assurance cover, income protection or regular pension savings, and consider whether they need to be increased to counter the effect of inflation. Do talk to us before taking any corrective action as it might be better to start afresh rather than make an incremental increase to an existing arrangement.

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.

Calling a halt on mini-bonds

The Financial Conduct Authority has announced a temporary ban on the promotion of most ‘mini-bonds’.  

Have you ever been tempted by those advertisements offering 8%+ yields on property-backed bonds?

If you have, then you’ve probably been looking at a promotion for ‘mini-bonds’. These investments are not always what they seem and have already resulted in losses for investors, notably in the case of the failure of London Capital Finance (LCF) at the start of 2019.

There is no legal definition of what constitutes a ‘mini-bond’, but generally it is a fixed term bond that cannot be traded on the stock market and is typically issued by a small, unquoted company. As securities, rather than deposits, mini-bonds are not covered by the £85,000 depositor protection given by Financial Services Compensation Scheme (FSCS).

At the end of November 2019, the Financial Conduct Authority (FCA) announced that it would be banning the promotion of most new mini-bonds to all but high net worth and sophisticated investors from the start of 2020. Many thought the FCA’s move was overdue, as there have been other failures since LCF.

A lesson from the whole sad mini-bond saga is that unadvised investors can end up taking risks which are not sufficiently explained and/or which they do not fully understand. Many of the mini-bonds appeared to have some form of property backing, but the existence of a reference to bricks and mortar is no guarantee of capital security. Investors should be particularly wary if the property involved is a speculative development.

The high interest rates on offer ought to be a warning of potential dangers. At a time when bank base rates were under 1%, red lights should have been flashing at interest rates over 7% higher for ‘secured’ loans. Remembering the adage that “If it looks too good to be true, it probably is”, could have saved some mini-bond investors five-figure losses.

Next time you come across an investment that quotes returns well above normal market rates, think twice before going any further. And if you decide you are still interested, take independent financial advice before parting with your money. That way you are firmly within the FCA’s regulatory remit and associated compensation schemes.

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.

Higher state pension increases on the cards

Recently released economic data suggest a relatively large increase in the main state pensions for the next tax year, but it’s still inadequate for a happy retirement.

The new levels of state pension for the coming financial year (2020/21) are usually revealed in or alongside the Autumn Budget statement. But as 2019 has been a strange year – in particular with no Budget – there has been no official announcement yet on what state pensions will be from April 2020.

However, it is possible to work out fairly accurately what the new rates may be because the basis of increase is fixed.

New state pension, old basic state pension

These are both subject to the so-called ‘triple lock’, which means the annual increase is the greatest of:

  1. The annual increase in the CPI to September (1.7% in 2019);
  2. 2.5%; and
  3. The 3-month average earnings increase to July (3.99% in 2019).

In this instance average earnings are the clear winner. The precise (rounded) figures must await the Department for Work and Pensions’ formal announcement, but it looks like the new state pension (for anyone reaching state pension age (SPA) after 5 April 2016) will rise from £168.60 to £175.30 a week, while the basic state pension will rise from £129.20 to £134.35 a week.

Other state pensions (including SERPS and S2P)

The triple lock is limited to the new state pension and the basic state pension. Other state pension entitlements, such the old additional pension elements for those who reached SPA before 6 April 2016 will increase in line with the CPI, i.e. by 1.7%.

While the increases are to be welcomed, the new state pension is still far from being enough for a comfortable retirement. At just over £9,100 a year from April, it will be more than £3,300 less than the income tax personal allowance in 2020/21. The current national living wage for a 35-hour week works out as more than 60% higher.  

If you want a retirement that you can enjoy, you need to make sure you have adequate private pension provision on top of what the state provides.

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.  

Probate fee increases abandoned

The planned reform of probate fees in England and Wales has been scrapped.

A year ago, the government tabled proposals to increase the level of probate fees in England and Wales. The idea was to move from the current single fee approach (£155 via a solicitor, £215 otherwise) to a sliding scale, based on estate value. For estates valued at over £2 million, the fee would have escalated to £6,000.

The proposals met with predictably heavy criticism, winning the distinction of being labelled a ‘new death tax’ in some parts of the press. Nevertheless, the government pushed ahead with draft legislation, aiming to launch the new fees from April 2019. One consequence was that solicitors, and others acting as executors, rushed to submit probate documentation ahead of the anticipated fee increase.

As a backlog built up at probate offices and HMRC, everything went strangely quiet at the Ministry of Justice (MoJ). For reasons which are not entirely clear, April passed without the final stage of the legislative process being triggered. This only encouraged more rushed submissions as the new deadline was unknown. The Law Society noted that many solicitors and their clients were reporting a wait of much longer than the six to eight weeks timescale claimed by the MoJ for probate grants. It did not help that, coincidentally, a new administrative system for probate was being rolled out in the first half of 2019.

What finally put an end to the proposals was the (second) prorogation of parliament, which meant that the legislation automatically lapsed. While it could have been reintroduced, Brexit and an impending election both provided reasons not to do so. Instead the MoJ will now undertake a wider review of court fees which will involve “small adjustments to cover costs”.

If you think that the whole saga sounds eerily like something that has happened before, you are right. In 2016 even higher increases in probate fees were proposed (up to £20,000), only to be abandoned in May 2017, just as the following month’s general election loomed into view.

Helpfully, the MoJ’s announcement has indirectly highlighted the importance of having a Will and the time it can take to transform its contents into reality. If you don’t have a Will – and over half of the adult population does not – your estate will be subject to a process very similar to probate, but with the added disadvantage that the laws of intestacy, rather than your intentions, determine its distribution. Creating a Will, and regularly reviewing it, is a bedrock of good financial planning.

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

Starting early for tax year end investments

Venture Capital Trusts have started their fundraising for 2019/20. 

There was a time when tax year end planning didn’t begin until well after the New Year festivities were over and a March Budget was nearing. This rhythm has now shifted. The last months of the tax year are still important, as they are the point at which you should have a reasonable idea of your total income in the year. But Philip Hammond’s move to an Autumn Budget from 2017 means that there is now more focus around this time of year, rather than post-Christmas. Although 2019 has become an aberrant year in many ways, including the postponement of Chancellor Sajid Javid’s planned Budget in November, business as usual on year end planning continues.

The seasonal switch is particularly noticeable in terms of Venture Capital Trust (VCT) offerings. VCTs allow you to invest in a basket of small, unquoted companies with the aim of helping them grow and develop. The high-risk nature of fledgling companies means VCTs come with significant incentives and have grown in popularity in recent years. In 2018/19 the highest amount ever was raised at the current level of tax relief.

There are three main reasons for the increased interest:

  • Tax reliefs VCTs offer 30% up-front income tax relief, tax-free dividends and freedom from capital gains tax.
  • Pension allowances Although the lifetime allowance is now index linked, it and the unchanged rules on the annual allowance act as increasing constraints on pension contributions. The highest earners cannot now contribute more than £10,000 a year to their pension with full tax relief.
  • Aversion to avoidance HMRC’s anti-avoidance armoury has been much strengthened in recent years, witness the problems faced by some tax-avoiding celebrities. The public attitude has also moved to the point that being associated with aggressive tax avoidance is bad PR.

There was an initial autumnal rush for VCTs in 2017 at the first of the current crop of Autumn Budgets, ahead of widely anticipated reform of the VCT rules. This year many VCTs have already started their fund-raising for 2019/20 or announced the intention to do so shortly. Some of this may have been in anticipation of the 2019 Budget, although there were no significant changes expected. The spectre of an imminent general election, now confirmed for 12 December, may also have encouraged an early start.

If you are considering VCT investment in this tax year, please do not wait until February. By then you may not have very much choice left.

Venture Capital Trusts (VCTs) invest in assets that are high risk and can be difficult to sell.

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. 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 step at a time – investing slowly

Are you reluctant to make a lump sum investment in case the timing is wrong?

 FTSE 100: 1 January 2017 – 31 October 2019

Source: London Stock Exchange

It’s been both a rollercoaster and a trip to nowhere for the FTSE 100 index in recent years. The fluctuations can be seen in the graph above showing the performance of the top 100 companies listed on the London Stock Exchange since 2017.

From 1 January 2017 to date, the index has moved in a band of about 1,300 points, but by 23 October 2019 it was at virtually the same level as it started. Busy going nowhere might be one description, although, importantly, that ignores the dividend income which the companies in the Index would have generated over the period. This boosted investors’ total returns over the period from 1.7% to 14.7%.

The combination of the market’s movements and political uncertainties have made some people reluctant to invest lump sums. “Now is not the time to buy,” has been an understandably tempting thought. However, to paraphrase one of America’s most famous fund managers Peter Lynch, more money has been lost by investors waiting for market falls than has been lost in the falls themselves. The hard truth is that anticipating market timing is virtually impossible.

Phased investing

One halfway house that is worth considering if you have a lump sum to invest, but still cannot bring yourself to commit it all at once, is phased investment. This involves investing capital systematically over a relatively short period. A typical approach might be to spread investment over 12 months, with equal amounts invested each month. Because you buy more when the price is low and vice versa, the mathematical result is that the average price of your investment is lower than the simple average of the prices at your 12 investment dates. The effect is known as pound-cost averaging and is mostly thought of in terms of regular savings plans rather than phased lump sum investments.

Many investment platforms will run the process automatically, transferring money from a cash account or cash funds to your chosen investment funds every month. However, the various platforms have differing rules, with some being more flexible than others. The easiest way to find the one most suited to your goals is to seek independent advice. No less than Warren Buffet has said “The stock market is a device to transfer money from the impatient to the patient.”  If you’re prepared to be patient, you can harness your hesitancy to your advantage.

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.

UK dividend growth continues, but for how long?

Recent data show that dividends from UK shares rose by nearly 7% year-on-year in the third quarter.

Source: Link Asset Services

The latest Dividend Monitor from Link Asset Services, the share registrars, shows that dividends from UK shares continued to grow faster than inflation in the third quarter of 2019, despite all the political turmoil the UK experienced over those three months.

Compared with the same quarter in 2018, total UK dividend payments rose by 6.9% to a new third quarter record of £35.5bn. Link attributed the increase to a variety of factors, including:

  • A near 300% increase in special (one-off) dividend payments. These included a £1.1bn special dividend payment from the Royal Bank of Scotland to its major shareholder, the UK government.
  • A 29% increase in payments from companies in the mining sector, which is now second only to the banking sector in terms of the value of dividends paid.
  • Foreign exchange gains on dividends declared in US dollars and euros added 2.6% to the overall dividend growth figure, the flip side of adverse impact of political uncertainty on the pound.

As the graph shows, Link estimates that total dividend payments in 2019 will exceed £100bn for the first time, rising 10.4% above last year’s outturn. The importance of special dividends to achieving that growth is highlighted in the different heights of the red columns in 2018 and 2019.

Two of those driving factors for 2019 dividend growth – exchange rate movements and one-off payments – could reverse direction in the coming year. Link suggests that if these two elements were removed from the calculations, the trend for dividend growth would be ‘flat or low single-digit increases’.

On the other hand, the upward trajectory is not expected to last. Link expects shares to yield 4.4% over the next 12 months, excluding any special dividends. But as it notes, ‘By comparison, the yield on UK government bonds dropped to just 0.49% in Q3, while residential property and savings rates were flat. Equities, once again, continue to deliver far more income for every £1 invested than any other asset class’.

As ever, a balanced portfolio and regular advised reviews should keep your investments on track.

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.


Autumn Economic & Investment Seminar

We are pleased to report that our Autumn Economic & Investment Seminar held this morning at the Harbour Hotel in Guildford seemed to go down very well with our guests!

We had a total attendance of 74 guests plus our team, and we were fortunate to have two excellent guest speakers, Rory McPherson, Head of Investment Strategy at Psigma Investment Management (who sits on our Investment Committee), and Karen Ward, Chief Market Strategist at J P Morgan Asset Management. The guests included our professional connections, mostly from the legal & accounting fields, plus existing and some new clients.

We set out in detail how we manage our client’s money, and what our views are of World Markets from an investment & economic viewpoint, taking Brexit into account of course (we fear Brexit may feature in many of our future seminars!). Our Portfolios have given some very good returns over the last 12 months and year to date, despite the challenges out there. It’s all about getting the asset allocation right and making sure you use the right fund managers. Our mid-range risk graded portfolios have posted a return of +6.83% over the last 12 months and +11.02% YTD.

Feedback has been very good, and we will post further blogs when we announce the next Seminar