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US Election – Our View

22nd July 2020

Few would argue the US presidential election has always been the great spectacle of global politics and that’s with career politicians in the running, let alone a defending President with more experience in reality TV than politics.

Make no mistake, the stakes are even higher this time around because Trump is already the sitting president so he’s moved from underdog to top dog and with that voters are going to expect him to up the stakes on the campaign trail. Normally raising the stakes like this might be exciting but with Trump’s behaviour polarising the US voter base like no other President in history, I think it’s safe to say this 2020 presidential election will likely go down in history.

Now, it wholly depends on your leaning towards Trump which varies from person to person but consensus is in both Washington and in homes across America that Trump has made some costly mistakes in 2020. Whether they turn out to be lethal remains to be seen. So, from Joe Biden’s perspective, if Trump keeps shooting himself in the foot he doesn’t even need to open his mouth to boost his approval ratings.

COVID19 cases are dramatically spiking in the sunbelt states, some 15 million people are still unemployed, corporate bankruptcies are amassing, and a huge and long overdue focus on racial inequality under the “Black Lives Matter” movement have been grabbing the headlines in the US of late.

Right now Joe Biden has been deliberately tight lipped on all of these issues in favour of letting Trump make the tough calls as President and getting the subsequent flack for being apparently flat footed in his response to almost everything. It’s equally as bad on a party level with the White House coming under fire for being slow to lock down the US states and implement proper testing. Forcing southern state governors to open up ahead of time only to have them re impose lockdowns has also been hammering Trump’s approval ratings. Ironic to think it’s the southern states with the highest COVID19 cases that are the same states that propelled him to victory in 2016 and who have now been turning against Trump in the latest polls.

What’s exacerbating the drop in his approvals ratings is more personal in nature. Trump’s initial refusal to take COVID19 seriously and only just beginning to wear a mask, his suggestion the virus was simply a conspiracy by the Democrats, his apparent endorsement of injecting disinfectant to combat the virus have all reflected badly on his ability as a leader. But above all the fractious and often incendiary comments from Trump on the Black Lives Matter movement have, at best, raised questions about his views on the racial divide and, at worst, fanned the flames of racial inequality in the US which have, in the latest polls, driven his approvals ratings in the Black voter base to just 10%.

The proverbial nail in the presidential coffin, is the damming portrayal of Trump in John Bolton’s book on the White House, and the equality scathing book on Trump’s inadequacy as Commander in Chief from his niece, Mary Trump which have both contributed to the demise in Trumps ratings.

Weirdly, it’s actually in times of national crisis that US Presidents notch up record approval’s ratings as the population rallies behind the government in support. In 9/11 and both Gulf Wars sitting presidents had approvals ratings in the 70% range. Not the case this time around, Trumps approval’s in the height of the pandemic were in the late 40% range.

Again, none of this has anything to do with Joe Biden and yet he’s amassed voters and poll leads simply by keeping his mouth shut.

Clearly “discretion is the better part of valour” is something not lost on Joe Biden because keeping quiet has rarely been so successful.

Now, that’s done the Biden camp proud so far but he has to come out and fight at some point and this is when Trump’s formidable campaign machine will begin to land some punches.

We can already see Trump softening up the Democrat challenger labelling him as “1% Joe” a reference to Biden’s disastrous election bids in 1988 and 2008. Trump’s further labelling of Biden as “weak” and “slow” is all an attempt to erode confidence in the challenger. Supporters of Biden know he is prone to putting his foot in his mouth on occasion and Trump’s goal right now is to coax him out of hiding to allow him a platform to slip up. All of this is part of a campaign playbook the Trump election machine is adept at and we will get ample opportunities in Q3 to see it in full swing so expect to see his approvals ratings to begin closing the gap.

Biden still has some powerful cards to play in this race which have the potential to be disastrous for Trump’s election prospects. Firstly, Biden’s choice in running mate for Vice President. It’s likely he could play into both the racial and gender inequalities in the US and choose a candidate like Kamala Harris who would be the first black female VP in US history. Whilst making a highly qualified VP in her own right, Kamala could likely galvanise both the black and female vote which are both formidable forces in the US.

The second power card is in the form of Barack Obama, his president when Joe Biden was 2nd in command. Barack’s highly effective campaign rallies could be very powerful in garnering support across the nation for those who still have a place for mainstream politicians in their hearts.

From a market’s perspective, the stock market is a creature of habit and not prone to adapting well to change. The equity market has learnt to love Trump’s low tax, low inflation mandate to supercharge growth. With a Biden / Democrat victory in November’s election we could see more austerity measures such as higher corporate taxes to help pay for the unlimited spending now being seen in the US. Higher taxes mean lower revenue which means lower stock prices and we can expect to use the S&P 500 as a barometer of what the market thinks Biden’s chances of winning are so watch out for this.

From a national perspective Biden would put climate change back on the map with his $2 trillion spending pledge, we would see relations with Europe begin to thaw as we likely would with Mexico and Canada in the NAFTA treaty. Biden remains tough on China so expect to see trade and sanctions remain on the table in a Biden presidency.

As they say, “a week is a long time in politics” and this quarter, whilst we won’t see the vote, we will likely see some big battles between the two – won and lost depending on which side of the fence you are on. So much so that you might be able to see a clear favourite the closer we draw to November.

Where next? – Crystal Ball Time

19th June 2020

Judging by the calls I receive these days it seems the number one question on everyone’s minds is what should I be investing in next/going forward.

No doubt you will have felt the falls in markets over the past few months, but for those that sat tight will have also recouped much of that fall, but what and where to invest going forward is the $64m question.

World stockmarkets finally woke up to the fact that Covid19 might be a bigger problem than originally anticipated on 19th February (strange coincidence that its called Covid19). I set out below a few of the major stockmarket indicies around the world since 19/02/2020

As you can see, some markets have fared better than others, but some markets were at different stages than others, which demonstrates why diversification is so important to a portfolio. UK & Europe fell the hardest but have since recouped a considerable amount of the fall, having initially lost around 35% but now only around 15%.

Helicopter View

I often find it helps to start by taking a bigger picture view of where we are now and then apply your crystal ball view of where you think we are likely to be in the next 5/10 years, this requires you to consider virtually everything that you currently know about everything that you think will affect markets, such as demographics, government & corporate debt, the outlook for future interest rates and inflation rates, short term stories like Brexit, US/China trade deal and longer term changes to the way we live like climate change etc.

It is virtually impossible to predict black swan events that might come along from time to time to derail the status quo like Covid19 or what the next black swan event might be. If this was possible then those clever fund managers in the city would have sold out of travel & hospitality stocks in February, but they didn’t, as no one really saw this coming until it had happened, so they sit tight and wait for time to pass and for the inevitable bounce to happen.

Remember, markets are always forward looking, so they discount a bad year as 2020 is bound to be, and focus on 2021 and 2022, which is why we have seen the markets bounce recently.

The facts as we see it

The last two black swan events (namely the credit crunch & Covid19) have seen huge intervention by the state and central banks, which shows in general that governments around the world are ‘in the words of Mario Draghi’ “prepared to do what it takes” to keep their economies on track and growing. A side effect of this medication of ever higher debt piles on the state has been sustained long term low interest rates and even talk of negative interest rates with inflation seemingly low at the same time. This has meant that money is generally cheap to borrow for governments, companies and individuals. This looks set to continue to be the case several years out from here.

I have long held the belief that many central banks around the world were already holding interest rates artificially lower than they should actually be (pre-Covid19) due to fear that raising them in any meaningful way could dampen spending and economic growth. The only country that tried and failed to raise interest rates was the Fed in the USA and they have since pulled back.

To a large extent not much has changed for those investors that dislike risk. Lower risk investors were always told that they needed to accept some risk if they are to maintain the spending power of their money over the longer term as the margin between inflation and interest rate is the real return for a cash investor, but now with interest rates at virtually zero and inflation at around 0.5%, the margin is relatively insignificant and at these rates it would take decades to really feel the effects of the devaluation in your spending power.

When people say they dislike risk, what they are really saying is that they dislike volatility. These are two different things. Volatility is the up’s and downs of the value of the underlying holding over the course of time that you remain invested and large swings (like those seen in the past few months) scare some people more than others. The media love a bad news story, so tend to highlight dramatic falls on their news bulletins, but rarely do they highlight with the same vigour when markets make a gain of the same amount and this only serves to confirm the actions taken by a risk averse investor to be the correct one. Risk is about the percentage chance you have of achieving an above average return over a given period of time or even a potential loss over that same time. In other words, from point ‘A’ at the start to point ‘B’ at the end.

Let’s look at the bond market: it used to be the case that you could lend your money to the UK government (which is virtually guaranteed to repay your loan at a pre-determined date) via buying a government gilt paying say 7%pa coupon. Nowadays that same gilt will cost you more to buy as the market calculates the future coupon and expected maturity date into the current price, so the price would be what is known as above par. Hence investors are being forced up the risk scale to take on higher risk debt instruments below what is known as investment grade in order to get the coupon they desire at a lower price but still above par.

So if cash and bonds are no place to hide, where else? The obvious answer is equities, but you have to be able to stomach volatility and if you can’t take the volatility then your only option is to stick with cash full-stop. Of course there are some other clever variants like structured deposit products that can potentially offer you a higher return if stock markets achieve a particular return and if they don’t, then you simply get your cash back with no interest, but that could be in 3 or 6 years depending upon the structured deposit product on offer. Some would argue that as long as they get their capital back then that’s fine, as the interest they would have earned in the bank was not worth worrying about anyway.

In Summary

I could ramble on for ages, so without further ado…….The bottom line is that sitting in cash may not be such a bad thing as long as you can live with or prefer to make a ‘known loss’ of around 0.5% each year with the peace of mind knowing that your loss is limited to this. Move up the risk scale to investing into bonds (both government and corporate debt) but I would suggest via a strategic bond fund or discretionary portfolio service where the fund manager has the flexibility and freedom to buy and sell as he/she see’s fit, and hopefully they can make you some money (after their charges) in the margins i.e. the redemption yield which is the price paid for the bond and the coupon you are expecting to receive.

The two things that concern me about bonds at the moment is the amount of borrowing generally by governments and corporates and probably more likely is any potential for interest rate hikes, albeit seems unlikely at the moment, this could still happen and remember markets are forward looking so would react before the event actually happened, as they would start to price the value of bonds in anticipation of interest rate hikes.

Equities seem to be the only game in town at the moment, but obviously come with risk and volatility, but over the longer term equities should outperform cash and bonds just by their very nature that what you are buying is part of a company and in general that company will sell things and always charge sufficient for it’s product or service to cover its running costs (including servicing of any debt obligations) as well as building in a healthy profit margin. The choice of which sector you invest into will be extremely important as we have seen with Covid19, hospitality has suffered whilst technology has benefitted. Of course if they have increased costs then they tend to increase their price, which then helps drive up inflation which in turn makes it more likely that interest rates would rise to curb the effects of inflation. So in a way equities are kind of inflation proofed. It’s a bit like the ‘circle of life’ and this is why I believe we will never be able to stop boom and bust market scenarios, it’s just the way the markets work, or should I say we all work, as we don’t all stand still and stay the same. Sometimes we carry more debt, sometimes we have more savings, sometimes we earn more and sometimes we earn less.

If you can live with the volatility and stick by a few simple investment behavioural rules then you should be fine. Don’t get greedy, sell when markets are relatively high, you will never pick the top, just like you will never pick the bottom. Resist the temptation to sell when markets are falling. Diversification is your friend, accept that not all investment types will perform the same but they all have a purpose in a well diversified portfolio. Ignore the noise both at distressed times as well as jubilant times. Don’t worry about sitting in cash earning no interest for a while or even a few years if necessary.

Final point – remember, when I talk about holding equities or bonds we are not stockbrokers and so do not recommend specific stocks. We are independent financial advisers and use collectives (i.e. funds) which could be a unit trust, open ended investment company (OEIC), Exchange Traded Fund (ETF) or an investment trust. Each type of collective structure has it’s pro’s & con’s so make sure you contact us for advice before making any investment.

Information contained in this article is purely based on our own personal opinion and should not in any way be mistaken for personalised investment advice that might be applicable to your personal circumstances.

Covid 19 – Our take on the current situation & markets

23rd March 2020

Although it may seem like the world is falling apart around you with markets heading south daily, and the numbers of reported cases and deaths each day caused by the Covid 19 outbreak on the rise, rest assured, this is not the end of the world as we know it.

Mark Dean Wealth Management might have only been in business since 2010, but we have some very experienced advisers with many years of experience behind them, and have lived and worked through times like these before.

Admittedly, every market down-turn is triggered by a different set of circumstances. This time it happens to be all about the virus outbreak that no one could have foreseen, but last time is was the ‘credit crunch’ (as it was often referred to) and everyone then thought it was the end of the world.

Without wanting to sound too clichéd, it’s always darkest before dawn. But more importantly in this situation, while it might feel terrifying, the world is not ending. The financial system is not about to collapse. Even before the virus outbreak began to affect financial markets there were good fundamentals and a reasonably optimistic outlook on global future growth prospects.

So What next?

Frankly we don’t know – and we’re certainly not going to try and guess. What we do know is that a company trading at a third or even 50% cheaper than it was only a few weeks ago, when we were quite aware that it already faced a tough couple of quarters, is a buying opportunity – not a time to sell in a panic.

The psychology of investors frequently leads them to overlook something staring at them in the face, until they suddenly reverse course and pathologically focus on that set of facts that they had previously dismissed as unimportant. Hence the complete shift in investor sentiment between February and today concerning the impact of the Coronavirus.

The late economist Charles Kindleberger, author of the classic “Manias, Panics, and Crashes”, poignantly exposed numerous examples of situations where investor exuberance gives way to a reality check (how coronavirus will cause economic distress in this case) and led the financial system to move into a distressed state, followed closely by panic. And this is where we are at present.

Lessons of the past

To put this into some sort of perspective, at similar points in recent US bear markets, the equity correction following 9/11 led to markets dropping by 14% and did not lead to a technical recession, defined as two consecutive quarters of negative GDP growth. The bear market in 2008/09 saw a market drop of 19% at this point in the correction, but this led to a serious recession which took years for the US and Europe to recover to Q1 2008 GDP levels.

The current market has already fallen by almost 30% since late February and could fall further, but this seems overdone given that the inevitable recession seems more likely to be sharp and short. Unlike the 2008 crisis, which could have imitated the 1930s had governments not learned lessons from the Great Depression (when 1929 US GDP did not recover until the 1940s), this will be a time-limited recession (i.e. discover a vaccine or slowdown the growth rate), and one which will be greatly aided by the fiscal packages that governments have announced over the past few weeks and further measures that will undoubtedly follow.

Even if financial markets decline further over the next few weeks, there is not the systemic risk that existed in 2008 and markets have almost certainly oversold, leaving an almost unprecedented opportunity in the next few weeks and months.

What about the science ?

We’re no epidemiologists, but the one thing we do know is that this will pass at some point and markets will rebound. The infection rates right now are horrifying, even if the mortality rate gives us some comfort.

The measures that governments in the western world up until now have been taking have been found wanting and are therefore likely to enforce those measures even stronger with fines and penalties. This can only contribute to rising fear and panic that is exponentially more infectious than the coronavirus. Scaremongering media also doesn’t help. Uninformed comments from politicians and commentators don’t help.

From the basic facts that we understand, lead us to believe that in 6-12 months we will look back on this horrific period with a sense of relief and a more relaxed and considered perspective. We are not going to attempt to offer an opinion on the science behind the coronavirus contagion, but there are certainly strong signs of encouragement that are being ignored by financial markets as Europe and the USA move further into meltdown.

First, there is a clear sign of slowing infection rates in China, meaning that the current restrictive practices in Europe and the onset of summer perhaps offers tangible hope to the Northern Hemisphere countries.

Second, against this backdrop of slowing infection rates, UBS reports that only 0.005% of the Chinese population is infected. Even if all these people were to die, and this was to be followed by much larger infection/death statistics in Europe and North America on a per capita basis, these numbers are far smaller than what the financial markets are currently discounting.

Third, scientists around the world are concentrating on providing a vaccine solution in what would appear to be an unparalleled coordination by the global scientific community. Moreover, this was originally given impetus by the Chinese efforts to sequence the genetic material of SARS-CoV-2 and sharing that sequence with research groups around the world. As a result, 35 companies and academic institutions are working to create such a vaccine, and the first human trials are starting imminently. Although a breakthrough on developing a vaccine puts an instant end to this current crisis, the fact that progress is being made on several fronts will soon filter through to the general public over the coming months and even pessimists believe that a vaccine solution is 12 to 18 months away. Yet this virus is unprecedented in so many ways, and so it is in respect to the amount of resources dedicated to the problem, meaning that it is not inconceivable that a vaccine will be found considerably sooner.

The World Health Organisation (WHO) reported a Case Fatality Rate as high as 3.4%, and this dramatically increased bearish sentiment in the markets, but this simply measures the number of deaths divided by the number of reported cases, and it looks increasingly like there are many people who have been infected but have not been reported in the statistics that are offered daily in the press.

The UK’s announcements last week of much more draconian isolation guidelines, also involved the government making the interesting observation that the UK will soon be testing for those who had recovered from the virus but had not been previously tested and might well dramatically increase the denominator and give a much different outlook to what is currently discounted by the markets. Anything approaching this realisation will have a dramatic impact on the global financial markets.

Will the recovery be V, U, L or W shaped?

Again – we don’t know, and we’re not in the business of trying to predict. But experience tells us that for anyone with a time horizon longer than a few months, this is a wonderful buying opportunity. Whether that’s today, or next week, or next month.

Many experts in the investment world have been trying to anticipate if the recovery from this market shock will be a V, U, L or W shaped recovery. In other word’s a ‘V’ shaped recovery means the markets reach the bottom and bounce straight back to where they were before the crisis in about the same time as we have had the crisis. By our reckoning the financial markets seemed to wake up to the fact that this may be a major issue on 19th February, so it has been with us for just over 1 month. We feel it is unlikely that the markets will perform a V shaped recovery and get back to where it was in the next month. There is no expectation in the short term of a vaccine or miracle cure so we can realistically rule out a V shaped recovery.

A ‘U’ shaped recovery is broadly similar to a ‘V’ shaped recovery except it is expected to happen over a slightly longer time period of 4 to 6/12 months and the market gradually recovers.

An ‘L’ shaped recovery is the worst possible scenario where the markets fall and then just continues to flat-line with no recovery occurring.

A ‘W’ shaped recovery is where markets start to show signs of recovery as the numbers of cases reported and resultant deaths begin to decline but all of a sudden, the numbers start to increase again and cause the markets to dip again.

The sheer panic that has infected the markets is due to a feeling of there being an economic black hole whereby it is impossible to measure the financial downside for a given investment.

Remember, markets hate uncertainty and at times like this will almost always over-play their hand in terms of being too pessimistic on the downside or too optimistic on the upside, which in turn provides buying or selling opportunities and as far as we see it, this is a fantastic buying opportunity for investors with a longer term investment horizon.

Budget Update – March 2020

13th March 2020

The newly appointed Chancellor, Rishi Sunak, announced a Budget with a repeated emphasis on ‘getting things done’, echoing the recent election campaign.

His initial focus was on the short-term measures needed to deal with the challenges the UK faces as a result of the coronavirus pandemic. These amounted to a £12bn fiscal stimulus, with more available if required. There was help for both businesses and individuals.

For the coming year, statutory sick pay will be available to more people and so will some other social security benefits. Business Rates will be reduced or even eliminated for some smaller businesses – at least in the short term. Other immediate support initiatives for smaller businesses include greater access to bank lending, as well as enhancements to the HMRC ‘Time to Pay’ service.

The Chancellor is due to announce another Budget in the Autumn and so there were several consultations about possible future tax changes, including new proposals on the treatment of fund management companies, pension tax administration, and aspects of research and development tax credits.

Some of the other highlights were:

  • The changes to the taper of the pension annual allowances will mean that many fewer higher paid people – especially important for the NHS – will be hit by a reduced annual allowance.
  • The reduction of entrepreneurs’ relief to £1 million of gain was well trailed, and for a time abolition seemed a possibility.
  • More than doubling of the annual limit for Junior ISAs to £9,000 was a pleasant surprise.
  • Smaller businesses will welcome the increase in the NIC employment allowance to £4,000.
  • Publishers should be very pleased by the decision to make electronic publications zero-rated for VAT.
  • From April 2021, only electric and other zero-emission cars will qualify for first year allowances and cars with emissions over 50 g/km will qualify for writing down allowances of just 6% a year.

Pensions

The Chancellor decided to raise the annual allowance taper by £90,000 immediately from this April. For the tax year 2020-21, the threshold income will be £200,000 as opposed to the current £110,000. The annual allowance will only begin to taper down for individuals who have an “adjusted income” above £240,000. In other words, the taper now kicks in for those with adjusted income between £240,001 and £312,000 though the lowest relief can fall to £4,000, lower than the current £10,000.

The Government wanted to resolve the issue for senior NHS staff and, especially, to end the disincentive for doctors to work additional hours. It believes it has now removed the vast majority of them from facing additional tax bills. That could prove very important if the NHS is trying to catch up with a backlog when Covid-19 does finally relent.

In a more run-of-the-mill change but still a helpful one, the lifetime allowance itself will increase in line with the consumer price index (CPI) for 2020/21, rising to £1,073,100.

Generally, we welcome the decision not to radically alter tax relief more broadly either in the quest for extra cash or indeed of ‘levelling up’ the pension system. In our view, it would really have been levelling down.

Entrepreneurs Relief and ISA changes

There were no changes to personal income tax rates, bands or allowances. Capital Gains Tax threshold will rise to £12,300 from 6th April 2020. The big loser is entrepreneurs Relief, which has been cut back from £10m to £1m. More business people will face a full 20 per cent CGT bill on the bulk of money raised from the sale of a business rather than the current 10 per cent.

But the Chancellor has also given back at least a little – so for example, the national insurance threshold will rise to £9,500 and the junior ISA limit will rise significantly from £4,368 a year to a much more generous £9,000.

This means that, at the age of 16, a child can have access to both an adult ISA as well as their JISA, so can potentially put away £29k tax free, starting from April this year.

Inheritance tax

The residence nil rate band will increase from £150,000 to £175,000 from April 2020, delivering on the Government’s commitment to allow some couples to leave an IHT-free inheritance of up to £1 million to future generations.

Despite recommendations to make sweeping changes to the Inheritance Tax legislation by the Office of Tax Simplification, no changes were announced.

Property tax

From 1 April 2021, non-UK resident buyers of residential property will pay an additional 2% of stamp duty to help ease house price inflation and make homes more affordable to UK residents

Funding the giveaway

The Budget has been financed in part with the direct fiscal savings associated with Brexit – the contributions no longer required (net of the divorce settlement) and the customs duties no longer remitted to the EU – and by cancelling the corporation tax cut that was due in April.

But tax receipts will rise a little too. Revenue from income tax and National Insurance contributions will go up by 0.7% of GDP over the course of this Parliament because unchanged personal allowance and higher rate thresholds mean more people will be dragged into higher tax bands. Capital taxes are boosted from 2021-22 onwards by the big curtailment of entrepreneurs’ relief. According to the government there is no evidence this relief actually encourages entrepreneurialism.

But the huge amount of new spending announced Wednesday will be financed mainly through higher borrowing.

The fact is, governments with their own mints can spend as much money as they want. The government’s ability to finance itself is ultimately constrained only by inflation. It collects taxes and issues debt.

If inflation expectations remain low, a government with its own currency can run deficits ad infinitum. Just look at Japan, the sustainability of Japan’s debt rarely gets mentioned these days, even though its net debt ratio is c.150% of GDP (the UK’s is c.80%).

Excluding the virus-related stimulus, the OBR expects the economy to grow by just 1.1% in 2020, even with the purse strings significantly loosened. This shows what a weak state the UK economy is in. Indeed, this may even be a bit optimistic.

Assessing the impact of Covid-19 itself and the related stimulus is extremely difficult. We do not know if the disruption is likely to lift rapidly in the second quarter or carry on for some time. On balance, the extra stimulus announced by Mr Sunak is likely to be offset by the cost of the disruption. It is unclear at the time of writing whether the stimulus would remain in place for the full year if the disruption lifts quickly. 

Gilt yields and interest rate expectations were little changed following the Chancellor’s speech. The pound weakened a touch, but that could be due to the general risk-off move in global markets that has little to do with UK fiscal maths. The more pertinent question for investors is: will the EU and the US do more to stimulate the economy? We’ll continue to monitor the developments and endeavour to keep you up to date.

If you have any questions about the summary’s contents or how any aspects of your tax and financial planning may be affected by the Budget, please call us to discuss them.

Impact of Corona Virus on Markets – Our View

1st March 2020

There’s no doubt that last week was a torrid time for stock markets around the world with some being down more than others.

It’s difficult to calculate the impact Boris Johnson made on Thursday when announcing he would be happy to walk away from trade negotiations with the EU in June if things were not to his liking (a bit like a child saying “it’s my toy, so if I don’t win we won’t play anymore”).

You could also say that last week was a good time for burying bad news as everything was dwarfed by the panic and fears created by the seemingly impossible to stop spread of COVID-19 otherwise known as Corona Virus.

Oddly the emerging market indices suffered less than the developed markets, as you can see from the chart below which runs from 19th February, which was when the markets around the world seemed to realise this was going to have an effect:

I have read reports and research that range from complete Armageddon to don’t worry just carry on as you were. The fact is that financial markets will always over-react to events and this can be a positive over-reaction where prices seem to increase daily as the optimism just grows and grows, like the dot com bubble, or they over-react to the negative which is mostly driven by fear, and of course much of this fear is fuelled by the media pumping out the news about the negative event that can capture the most audience attention. Look what happened when Robert Peston stood outside a branch of Northern Rock on the 10 o’clock news and said banks were in trouble, next day there were ques around the corner and the bank went bust (a self-fulfilling prophecy).

I am not trying to be-little in any way shape or form the seriousness of the effects that the spread of this virus might have or the poor people that have suffered as a result of this virus, but when I see headlines on a newspaper that say ‘UK Gripped by Killer Disease’ (when there are 63.5m people living in the UK and just a handful have been diagnosed in the UK and the mortality rate is just 2% or even lower) it tells me the journalist are hard at work to instil maximum fear and create panic which in turn will create more stories. It is more about the restrictions of trade for services and goods that the markets fear, as this affects profits of companies.

As a longer term investor, you should be able to see this for what it is (part of the investment journey), markets will go up and down all the time, this is the nature of longer term investing. Neither you or I can predict the future, but we can diversify our portfolios so as to cope better with the up’s & downs of the markets. That’s why I always talk about the importance of your risk profile and the asset allocation should match your risk score, then your portfolio will perform (95% of the time) in line with your growth expectations and in line with your anticipated volatility levels. I’m sure you have also heard me going on about ‘if you had missed out on the 10 best days over the past 10 years your returns would be 50% of what they are today’ (see article in our Financial Focus magazine Oct 2019) so sit tight, try not to watch the news (or if you do, then do not let it influence you to the negative). If anything, this is exactly the sort of time you should be thinking of investing, you might not catch the bottom, but you will certainly buy in at a cheaper price than it was a week ago.

I could go into detail about the numbers of people affected and have a guess about where we go from here, but the fact is I do not have a crystal ball, nor do any of us (that includes the journalists, but they are not regulated like me, so they can say whatever they like).

If you feel the need to discuss this matter further then as usual feel free to either call or send an e-mail.

Tax Year End Tips & Reminders

27th February 2020

As the tax year end approaches it seems like a good time to double check you have made the most of all your limits and allowances, so here’s a bit of a tick list for you to just consider……………………….

  • Pension (annual allowance £40,000 gross)
  • ISA (maximum £20,000)
  • Junior ISA (maximum £4,368 per child)
  • Gifting for Inheritance Tax (up to £3,000)
  • Income Tax (£12,500 @ 0%)
  • Capital Gains Tax (£12,000 personal allowance)
  • Venture Capital Trust’s (30% tax relief up to a maximum £200,000)
  • Enterprise Investment Schemes (maximum £1m)
  • Seed Enterprise Investment Schemes (maximum £100,000)

These are only bullet points of tax year end time critical issues to consider, there are plenty of other planning ideas/solutions to dealing with efficient tax planning over the longer term, which we are always happy to assist and advise you upon.

Pension – Essentially you can contribute as much as you like into a pension but you will only be entitled to receive tax relief on up to £40,000 (known as the annual allowance) or 100% of your earned income, whichever the lesser.

You are able to carry forward unused allowances from the past 3 tax years provided you were a member of a pension scheme during that time.

Pitfalls – People who have already started to drawdown money from their pension unfortunately get a reduced annual allowance of just £4,000. Also those fortunate enough to be earning in excess of £150,000pa have their annual allowance reduced by £1 for every £2 over the £150,000, therefore someone earning in excess of £210,000pa would end up with an annual allowance of just £10,000.

Also, be mindful of the ‘Lifetime Allowance’ which is currently £1,055,000 which basically means you could face a tax charge of 55% in the future on the excess over this amount if all your pension pots when add together breach this limit. It does go up each year in line with CPI.

Planning Opportunities – If you have children under the age of 18 or a spouse who does not work, or does work but earns under £12,500 (income tax personal allowance), you can still contribute to a pension in their name and receive 20% basic rate tax relief on the contribution. It’s called the di minimis level and it is £3,600 gross or £2,880 net. So you pay in £2,880 and it automatically becomes £3,600 by the time HMRC applies the tax relief, this is the equivalent of a 25% return.

ISA/Junior ISA – HMRC allows every UK resident (over the age of 18) to invest up to £20,000 per tax year into any ISA qualifying investment and all income and gains are free of tax. You can also contribute up to £4,368 into a junior ISA for a child or grandchild. Investments range from cash only to funds, investment trusts and even peer to peer lending under what is called the Innovative Finance ISA (IFISA). Please bear in mind IFISA is not available for junior ISA’s. The important thing is to use your allowance each tax year whenever possible as next tax year you get another £20,000 allowance and there are people in the UK that have made use of this allowance every year and are now known as ISA millionaires.

Pitfalls – ISA’s might be free of income tax and capital gains tax which is all good and well whilst you are alive, but when you pass away the ISA wrapper dies with you and the total value of all your ISA’s are included in your estate when it comes to calculating inheritance tax due on your estate. There is one exception to this where the ISA’s are invested in AIM listed stocks, which basically means smaller companies and obviously comes with much higher risk to capital and increased volatility.

Planning Opportunities – Maximise the amount you can get into ISA’s and junior ISA’s, even if you are uncertain about the markets at the moment, as you can always simply hold it in cash for now until you are ready to invest, the main thing is not to lose this tax years ISA allowances, as you can not go back in time.

Gifting for Inheritance Tax – You can gift away up to £3,000 per tax year and even carry back one year if you did not make use of this last tax year, therefore theoretically you could gift up to £6,000 without the need to survive 7 years after making the gift as this is your personal annual allowance and is considered immediately out of your estate. There are also other small gift exemptions like £5,000 for the wedding of your child or £2,500 for a grandchild or great grandchild and £1,000 to anyone else. I know these are reasonably small sums, but again they soon compound to make a reasonable difference if you make use of these allowances each and every year.

Pitfalls – Every little helps but I hear you saying these amounts are simply too small to be bothered about and how do I prove I made the gift anyway – that’s easy, there’s a box for it on your annual tax return that tells HMRC you have made use of this particular allowance.

Planning Opportunities – I’m struggling to put a positive spin on this one, but I guess it just comes back to ‘every little helps’ and those kids and grandkids will certainly love grandma! Remember, you can’t take it with you, despite what the Egyptians thought.

Income Tax – Unless you are a non-domicile claiming the remittance basis of tax then everyone in the UK over the age of 18 get’s a personal income tax allowance where any earnings up to £12,500 per tax year are taxed at 0%, however not everyone actually fully utilises this important allowance. There is also a £2,000 allowance for dividends.

Pitfalls – It’s not just earned income that uses up your personal income tax allowance, it’s also any income you receive from bank interest or dividend income from shares you may own. Remember once you exceed £12,500 then you pay 20% tax on anything up to £50,000 then from £50,000 to £150,001 you pay 40% then 45% thereafter.

Planning Opportunities – I encounter so many couples where one of them is the main breadwinner with all the earnings and taxable income and in most cases they have never even given it a thought that by putting investments or anything else that is likely to generate taxable income in the other spouses name they can better utilise both income tax allowances.

Capital Gains Tax – Just like the income tax personal allowance, everyone who is resident in the UK is entitled to a £12,000 capital gains tax (CGT) annual allowance whereby any capital gains you make in a tax year are taxed at 0% up to a gain of £12,000 (£6,000 for trusts). Any gains made in a tax year by a basic rate taxpayer are taxed at 10% and 20% for a higher rate taxpayer. Worth noting property is still taxed at 28% if it is not your principle place of residence.

Pitfalls – Never let the tax tail wag the investment dog. By this I mean don’t simply sell a good investment to make use of your CGT allowance, but equally try to manage your CGT allowance to make full use where possible both sides of the old and new tax year.

Planning Opportunities – There is no CGT between spouses (even more reason to be married and stay married!), so you can transfer an asset to your spouse and he/she can sell the asset in his/her name and you effectively get two CGT allowances.

Venture Capital Trusts – These offer 30% flat rate of income tax relief, so for example if you invested £50,000 into a VCT this tax year you could reduce your income tax liability for the current tax year by £15,000. Of course, you have to have a tax bill of £15,000 or higher to start with, as you can not claim tax relief that is higher than the amount you actually owe. But theoretically you could invest up to a maximum of £200,000 per tax year and get up to £60,000 in tax relief. Worth noting though, that you must hold them for a minimum of 5 tax years in order to retain that tax relief.

Pitfalls – These are considered higher risk investments and are not for the feint hearted, however there are some VCT’s that are less well established than others so it could be argued that they pose a higher degree of risk to the underlying investment than others which have a well established track record where some of those underlying companies are £2bn companies and arguably very large small companies. It’s important to remember that the government is dangling the carrot of 30% tax relief to encourage investors to take risk and invest in UK smaller companies where there will inherently be more risk than investing in a FTSE100 larger company.

Planning Opportunities – I would say that VCT’s should only be considered by those at the higher end of the risk profile and also only be considered once you have maximised pension contributions or where you are at or over your pension lifetime allowance. For those over their lifetime allowance for pensions this seems to be where everyone is flocking as it gives a flat rate of 30% tax relief (not as good as pension) but the next most obvious choice.

Enterprise Investment Schemes – If you thought VCT’s sounded a bit risky then EIS can best be described as a VCT on steroids, so certainly not for those concerned with risk to capital. They do however offer you 30% tax relief like a VCT and you only have to hold them for 3 years in order to retain that tax relief.

Pitfalls – Under an EIS you are directly investing into smaller companies and it can take up to 18 months before becoming fully invested as each individual investment generates a share certificate and other associated paperwork and although the rules say you only have to hold it for 3 years to retain your tax relief in reality it can take longer than that by the time you become invested and then there is the time to find a buyer as these are unquoted companies and some of them will undoubtedly fail.

Planning Opportunities – Unlike VCT’s, an EIS offers loss relief which enables you to offset any losses made against your income tax bill. Also, for those with sufficient wealth these do allow you to invest up to £1m per tax year or even £2m where at least £1m is invested in what are known as ‘knowledge intensive companies’.

Seed Enterprise Investment Trusts – Maximum investment of £100,000 per tax year. I would describe these as a risk profile 11 out of 10 as they are quite simply investments into start up business’s where typically 8/9 out of 10 will probably fail, but that one success could be a good one. Hence HMRC offers investors 50% tax relief when investing into an SEIS.

Pitfalls – Tax relief is nice, but there’s a reason HMRC are trying to sweeten the deal here, it all about RISK!

Planning Opportunities – Unless you are that way inclined that you like a gamble, and have plenty of cash to do it with, then I would advise you to stay away from this type of investment (or should I call it gamble) as it is akin with that old saying about buying a football club if you want to get poor quickly

No Safe Havens 2019

14th March 2019

Alongside the Spring Statement were two new publications. The first was entitled “Tackling tax avoidance, evasion, and non-compliance”, however, the second one entitled “No Safe Havens 2019” is more relevant to foreign domiciliaries (or “non-doms”), as it is an update of the HM Revenue & Customs (“HMRC”) strategy for offshore tax compliance.

“No Safe Havens 2019”, as the title suggests, intends to scare UK resident taxpayers who have financial connections to tax havens. In a previous campaign, HMRC blithely declared, “If you have declared all your income you have nothing to fear”.  Nevertheless, in reality, there is a considerable cost, both emotionally and in professional fees, trying to prove that you do not owe HMRC any money.

On the same day as the Spring Statement 2019, the Inspectors of HMRC flexed their collective muscles by declaring that they have received financial data from around the world under the Common Reporting Standard. In 2018, HMRC received information about the offshore financial interests of around 3 million UK resident individuals, or entities they control. In addition, HMRC received 5.67 million records of UK taxpayers’ offshore bank accounts in 2018.

HMRC say, “We have begun using this data to detect possible non-compliance”, using their super-computer called Connect, which is capable of processing 22 billion lines of data and can correlate the data within a taxpayer’s return and property information together with financial data, including the offshore account information. Each year Connect finds 500,000 cases (onshore and offshore) to investigate.

The majority of these offshore bank accounts will be held by the 10 million foreign born persons living in the UK, or Brits who have a foreign bank account because they have property abroad.

There is a legitimate tax planning reason for wealthy non-doms to keep their wealth offshore and claim the remittance basis.  But HMRC know that taxpayers make “common mistakes”, for example, omitting foreign income taxed abroad in a tax return (unless the remittance basis is claimed), or omitting untaxed foreign income remitted to the UK in a tax return when a wrong debit card is used. Sometimes the taxpayer takes and follows professional tax advice, but fails to get the advice updated when there is a change in law (which happens now with alarming regularity). At the other end of the spectrum are people who use offshore bank accounts to hide income to evade tax illegally.

In the past HMRC tended to focus on tax evasion, but now their net is being widened to include mistakes, tax avoidance (where tax rules are exploited to give an economic consequence unintended by Parliament), as well as tax evasion.

This change in approach, together with the new extended time limits on investigations, relating to Offshore accounts, which can now go back 12 years and tougher penalties; means that there are considerable tax collecting opportunities for HMRC. In practice, this means that wealthy non-doms can expect to be contacted by HMRC.

HMRC say they have written already to tens of thousands of taxpayers informally, to ask them to confirm that they have declared everything they ought. Alternatively, HMRC can chose to use their formal powers to launch either a civil or a criminal investigation.

Non-doms are advised to make sure that they have declared everything correctly and to refresh any old tax advice, just in case the rules or the interpretation of the rules have changed.

A Spring Statement in the eye of the Brexit storm

The Chancellor rose in a parliament preoccupied with the ongoing Brexit drama to deliver a Spring Statement on the state of the economy.

Mr Hammond made clear some while ago that he wanted his Spring Statement to be a short financial briefing and he stuck to a no-frills script.

There were no new tax measures and only minor spending changes. The Office for Budget Responsibility (OBR) trimmed its projections for government borrowing, but Mr Hammond kept his powder dry for the forthcoming Spending Review.

While the Chancellor may have appeared to say little, his statement was followed by some announcements and the publication of a range of documents covering areas including:

• Making Tax Digital (MTD) – the government confirmed a light touch approach to penalties in the first year of MTD’s implementation. MTD will not be extended to any new taxes or businesses in 2020.

• Apprenticeship levy – the timing of the reduction in the co-investment rate for employers from 10% to 5%, and the increase to 25% in the amount that employers can transfer to their supply chains, will be brought forward. These changes will take effect from April 2019.

• Draft legislation for the new structures and buildings allowance for investments in non-residential structures and buildings announced in the 2018 Budget. The relief will be given as an annual 2% flat rate over 50 years for new commercial structures and buildings.

• Review of time limits for the recovery of lost tax involving an offshore matter, comparing them with other time limits. It will set out the rationale for the charge on disguised remuneration loans and will be laid by 30 March 2019.

• CGT private residence relief changes announced in the 2018 Budget to lettings relief and the final period exemption.

These documents are likely to result in legislation following the Autumn Budget.

Moving abroad? – Don’t forget to review your protection policies

19th June 2018

Are you thinking of moving abroad with your family? More and more people in the UK are leaving our home shores every year for a retirement in the sun or perhaps working abroad.

However, many do not consider how their life assurance or critical illness policies will be affected by such a move.  Ensuring you have a globally portable life/critical illness policy should arguably be top of the agenda of anyone planning to become an expat.

Consider the following situations:

Mr X lives in Hong Kong whilst letting out his UK property. He has outstanding mortgage of £200,000 on the property and he would like to assess whether his existing UK cover will be valid should a claim arise.

Mr Y is retired and lives in Portugal. He still holds UK assets and is concerned about a potential inheritance tax liability his children could face in future if Mr Y was to die whilst living in Portugal.

Mr and Mrs Z now both live in Dubai, with Mr Z being the main breadwinner whilst Mrs Z is looking after their new-born twins. He wants life and critical illness cover in the event he is unable to work, so that his income could continue to provide for the family. He discovered that British expats living in the Middle East have relatively few options when it comes to providers and policies. Besides, he is wary that beneficiaries of expats who die outside of the UK often find it difficult to make claims with insurers local to where the deceased lived.

Mr A is about to accept a job offer to work in Lebanon.  He discovered that his existing insurer is not covering war risks and he is concerned that his dependants will fall into severe financial distress if life assurance cover is not in force.

These four situations highlight the fact that expats should review the terms and conditions and exclusions of each available policy very carefully and ask as many questions as possible.  We suggest that the following issues are addressed:

–       Policy ‘portability’ and validity whilst an expat moves from country to country.  It may be that the contract will need adjusting for each international relocation.

–       Does the policyholder need to demonstrate intention to return to their home country in the foreseeable future, or is the policy truly international?

–       Are life assurance benefits paid irrespective of where the survivors are located?

–       What currency are life assurance premiums and benefits paid?

If you are considering life assurance or need to assess your existing life policies before you relocate, contact us for a free, no obligation consultation.  We will provide you with a FREE no obligation independent assessment of the options available to you.

Spring Statement 2018 – Summary

14th March 2018

The Chancellor Philip Hammond presented his first Spring Statement on Tuesday 13 March 2018.

The Chancellor promised a Spring Statement devoid of mini-Budget trappings, and that is precisely what he delivered. He announced no new spending or tax measures, despite the Office for Budget Responsibility (OBR) providing a marginally more upbeat forecast. Instead Mr Hammond used his despatch box time to review the economy and launch no fewer than 13 consultations.

The highlights of the Spring Statement were:

  • No new tax or spending initiatives were announced.
  • Borrowing numbers turned out to be better than expected – which allowed the Chancellor to see ‘light at the end of the tunnel’. Public sector net debt (projected to be £1,783 billion at the end of 2017/18) is now predicted to fall as a percentage of the economy, although in absolute terms it will continue the march towards debt of £2 trillion.
  • The next revaluation of business property in England will be brought forward one year to 2021; but ‘at this stage’ the government will not introduce self-assessment. A summary of responses to an earlier consultation document on three-yearly revaluations was published alongside the Spring Statement.
  • A ‘position paper’ on corporate tax and the digital economy represented the latest government thinking on how to address the taxation of the internet economy’s elusive profits.
  • A consultation paper was issued on allowing entrepreneurs’ relief in circumstances where it would otherwise be lost because of a new share issue.
  • There was a call for evidence on the design of the VAT registration threshold and whether a revised structure could offer more incentives for small businesses to grow.
  • There was a consultation on the extension of tax relief for self-funded work-related training by employees and the self-employed.
  • There was a consultation on the extension from April 2019 of the existing security deposit regime to include Corporation Tax and Construction Industry Scheme deductions.

The raft of consultations will potentially mean that, after the content-light Spring Statement, the Autumn Budget will be a full-fat fiscal event.

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