17th January 2021

The tax year end approaches as filing deadline eased

2020/21 is drawing to a close, with a Budget now slated for early March. Ahead of that, HMRC is easing some of its traditional deadlines in the light of the ongoing pandemic.

If you’re struggling to prepare your self-assessment tax return due to the effects of the pandemic, you may get some relief. It has been reported that HMRC will consider being affected by Covid-19 as a reasonable excuse for anyone filing late returns or making late payments this year. Any fines may be waived if you explain how you were affected in your appeal. You must still make the return or payment as soon as you can. The Chancellor is also apparently considering extending the filing deadline for everybody, moving it from 31 January to 31 March, but this has yet to be announced.

The timing of the tax year end, however, is fixed. Immune to weekends and holidays, it always falls on 5 April, which will coincide with Easter Monday in 2021. The odd date stems from the combination of the ancient British tradition that New Year’s Day coincided with Lady Day (25 March) and the introduction of the Gregorian calendar across the British Empire in 1752.

The timing of the Budget is considerably more variable. Currently scheduled for every autumn, it is, however, subject to other forces. In 2019, the election got in the way and pushed the Budget to March 2020. A similar time lapse has occurred again, because in autumn 2020 the Chancellor chose to wait until the economic fallout from the pandemic was clearer. Shortly before Christmas he confirmed the Budget would be on 3 March.

This year’s Budget could mark the start of measures to restore the public finances, adding to the importance of sorting out your year end tax planning before the Chancellor rises to his feet. Among the areas to consider are:

  • Top up your pension contributions. For many years there have been rumours that tax relief on contributions could move to a fixed rate, disadvantaging higher and additional rate taxpayers. The pandemic might be the reason the change finally happens in 2021.
  • Use your inheritance tax exemptions. The Chancellor has a pair of reports on his desk from the Office of Tax Simplification (OTS) about inheritance tax reform.
  • Use your capital gains tax annual exemption. The Chancellor also has a paper from the OTS on capital gains tax (CGT) reform which included suggestions such as reducing the annual exemption from £12,300 to £4,000 and aligning CGT rates with income tax rates.
  • Top up your ISAs. With possible CGT increases on the way, the tax shelter offered by ISAs should not be forgotten.

For more information on any of the above and for other year end planning opportunities, please contact us as soon as possible. 

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

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.

17th January 2021

The 2020 investment year – a ride to remember

The world’s share markets had a rollercoaster ride in 2020.

Index 2020 Change
FTSE 100 -14.3%
FTSE All-Share -12.5%
Dow Jones Industrial +7.25%
Standard & Poor’s 500 +16.3%
Nikkei 225 +16.0%
Euro Stoxx 50 (€) -5.1%
Shanghai Composite +13.9%
MSCI Emerging Markets (£) +12.3%

Investors had to hold on tight as 2020 turned into a white-knuckle experience.

It began quietly enough and then in the second half of February global stock markets took on the concern at the spread of Covid-19. As infection rates increased and the economic outlook darkened, there were precipitous falls in all the major markets. A sense of panic was in the air, not helped in the UK by two base rate cuts within the space of a fortnight. Then, just about the time the UK formally went into lockdown on 23 March, around the world market sentiment turned sharply. After something of a sideways drift during the summer, November saw a further boost to confidence from the news on the Pfizer/BioNTech vaccine.

By the end of the year, the US, Japanese and Chinese stock markets were all recording overall gains – a far cry from the picture in March. As the table above shows, the UK market was a laggard in 2020. The have been many explanations for that – the FTSE 100’s heavy weighting in banks (which stopped paying dividends) and oil majors (which slashed their payouts) are obvious culprits. So too were the uncertainties of the Brexit finale and the government’s handling of the pandemic.

On the opposite side of the Atlantic, the US government Covid-19 response was hardly any more impressive, but the US markets benefited from their exposure to technology companies: we were all Zooming, Googling and buying from Amazon.

There are a few useful lessons to draw from 2020:

  • It is all but impossible to achieve perfect timing for making an investment. That March sentiment flip seemingly came from nowhere.
  • Those who cashed in at the peak of the panic chose the worse time to sell up. Once again, the advice to sit tight proved correct.
  • International diversification is important for UK-based investors. The UK may host many large multinational companies but, like Europe, it lacks exposure to technology giants.

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.

16th December 2020

Continuing challenges in the search for income

Deposit rates are continuing to fall.

On 24 November, the interest rate cuts that National Savings & Investments (NS&I) announced back in September took effect. The headline change was a drop in Income Bond rates from 1.15% to just 0.01%.

Reports suggest that NS&I has seen predictably heavy outflows, although savers have struggled to find alternatives. Such has been the flow of money, top-of-the-table offers have frequently lasted only a few days before their providers – often smaller banks –received all the funds they required. There is a certain irony here, as back in the summer the same institutions were quietly complaining about NS&I cornering the market.

According to Moneyfacts, the interest rate monitoring website, in November the average rate on easy access interest accounts was just 0.22%. Locking your money up for a fixed term produced a higher, but hardly enticing return – the average one-year fixed rate bond was just 0.61%, a record low. Even the best five-year return, from the Sharia banking sector, was an expected profit rate of 1.5%.

Half a decade is a long time to tie up cash at such an historically low rate, but the chances of interest rates rising any time soon appear to be close to nil. The Bank of England has recently been sounding out institutions about their ability to cope with negative interest rates. To judge by experience in other countries where negative rates already exist, only large savers and corporate depositors would actually pay to park their money at a bank, while everyone else received a zero return.

In practice, the UK government is already borrowing at negative interest rates. For example, in late November, most conventional government bonds (gilts) with a maturity date of up to March 2025 guaranteed their purchasers a loss (i.e. a negative yield), if held to the end of their term.

If you are looking for an income return above today’s miniscule deposit rates, then you have to accept some risk to your capital. While dividends from shares have fallen globally in the wake of the pandemic, there are now signs that the worst may be over and that dividends could start increasing in 2021. For information on the funds that could benefit from such a turnaround, please contact us.

The value of your investment and income from them 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.

15th December 2020

Capital gains tax: increases on the way?

A recent report could herald changes to capital gains tax.

Last July the Chancellor asked the Office of Tax Simplification (OTS) to undertake a review of capital gains tax (CGT) “in relation to individuals and smaller companies”. The request was something of a surprise for two reasons. Firstly, there had been no suggestion that Mr Sunak wanted to reform CGT. Secondly, two earlier reports on another capital tax, inheritance tax (IHT), had been sitting in the Treasury’s in-tray for over a year, awaiting attention.

Cynics pointed out that while the Conservatives’ 2019 manifesto promised no increases to the rates of income tax, VAT and national insurance, there was no such protection for CGT. Certainly, the ideas put forward by the OTS would raise extra revenue for the Treasury’s depleted coffers, but probably not the £14bn seen in some of the November headlines.

The OTS made eleven proposals for the government to consider. The more significant were:

  • CGT rates should be more closely aligned with income tax rates, implying the maximum tax rate on most gains could rise from 20% to 45%.
  • The annual exempt amount, currently £12,300 of gains, should be reduced to a “true de minimis level” of between £2,000 and £4,000.

When IHT relief applies to an asset, there should be no automatic resetting of CGT base values at death, as currently occurs. The OTS also suggested that the government should consider whether to end all rebasing at death, meaning that the person inheriting an asset would be treated as acquiring it at the base cost of the person who has died.

The £1m Business Asset Disposal Relief, which only replaced the £10m Entrepreneurs’ Relief in March 2020, should itself be replaced with a new relief more focused on retirement.

The OTS paper underlines just how favourably capital gains are currently treated relative to income. As the tax year end approaches, the report is also a reminder to examine your use-it-or-lose-it options for the 2020/21 annual exemption and to top up your CGT-free ISA. 

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 and 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.

16th October 2020

Another Autumn Budget deferred

After heavy hinting from the Treasury for some weeks, the expected Autumn Budget has been pushed into spring 2021.

Since the March Budget and through to August, the expectation was that the Chancellor, Rishi Sunak, would introduce his second Budget this autumn. Such timing would have restored the cycle of a Spring Statement followed by an Autumn Budget after it broke down last year in the lead up to the general election.

With intense speculation around tax rises to pay for the raft of Covid-19 support measures, the first serious clue to a possible Autumn Budget delay emerged on 8 September, when the Office of Tax Simplification (OTS) slipped out a statement about its review of capital gains tax (CGT), which had been commissioned by the Chancellor in July. The statement announced the response deadline on the technical part of the OTS consultation would be deferred by four weeks, to 9 November. This was a surprising move as the OTS CGT report was expected to feed into the Autumn Budget.

Soon after, the Chancellor himself issued a brief written statement saying he had asked the Office for Budget Responsibility (OBR) to prepare an economic and fiscal forecast “to be published in mid-to-late November”. The vagueness surrounding the timing was evident, as the OBR report is produced alongside the Budget and incorporates costings for Budget measures.

What had started to look inevitable was confirmed on 24 September when the Treasury cancelled the Autumn Budget. The Chancellor will still have a set piece event towards the end of the year; not only is there the OBR report to present, but Mr Sunak must also publish a Spending Review. The latter was also a victim of the general election and ought to have been produced a year ago to cover the three years from April 2020. Instead, the then Chancellor published a one-year Spending Round. Given the pandemic uncertainties, it is likely that Mr Sunak will take a similar short-term view, rather than introduce a multi-year plan.

The postponement of the Autumn Budget does not mean the spectre of tax increases has also evaporated. The level of government borrowing (£174 billion in the first five months of 2020/21) makes tax rises virtually inevitable. However, the Chancellor has afforded you more time to plan and take action in areas such as CGT and pension contributions.

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

15th October 2020

Market update: a quieter quarter

The third quarter of 2020 saw share markets calmer than in the previous two.

Index 2020 Q3 Change
FTSE 100 –4.9%
FTSE All-Share –3.8%
Dow Jones Industrial +8.0%
Standard & Poor’s 500 +8.5%
Nikkei 225 +4.0%
Euro Stoxx 50 (€) –1.1%
Shanghai Composite +7.8%
MSCI Emerging Markets (£) +3.9%

For many, 2020 has not been a year they will want to remember. For investors, the first two quarters were a whiplash experience. For about a month from mid-February, Covid-19 pushed share markets down with a brutal abruptness. By the time March came to an end, there was a consensus that, as often happens, the gloom had gone too far. As a result, the second quarter produced rises across the major markets. In the summer, it looked like the worst of the pandemic could be over and the forecasts of a V-shaped recovery would prove correct.

The third quarter, and in particular September, provided a different story. The threat of a second wave of Covid-19 emerged, while two other longstanding ‘known unknowns’ – the US presidential election and the end of the Brexit transition period – came closer into sight. Central banks’ talk of multi-year zero or sub-zero interest rates did not encourage investors, perhaps suspicious that 12 years after the global financial crisis, the rate setters had finally run out of monetary ammunition.

The UK stock market’s third quarter was weaker than in other major markets. In global terms, it is arguable that the UK looks cheap – the historic price-earnings ratio for the UK market is around 21 compared with 29 in the US. However, across the Atlantic, the main market index, the S&P 500, rose by 8% in the third quarter against a fall in the FTSE 100 of 5%. Once more, the US market has been driven by the five technology giants – Microsoft, Apple, Amazon, Facebook and Alphabet (aka Google) – which account for 1% of the number of companies in the S&P 500 Index, but almost 23% of the by value.

The third quarter was generally more rewarding for investors in overseas markets. The fourth quarter’s impending US election and Brexit finale looks set to create a dramatic end to a dramatic year. What 2020 has proved yet again is that market timing is virtually impossible, so if you think now is the time to act – whether buying or selling – make sure to take advice before pulling the trigger.  

The value of your investment and 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.

17th September 2020

Who pays capital gains tax?

HMRC has published some interesting research into capital gains tax (CGT).

Here are three CGT questions for you to ponder:

  1. How many individuals made enough capital gains in 2018/19 to face a CGT bill?

The answer is just 256,000, according to the latest provisional figures from HMRC – 9,000 fewer than in the previous tax year. Viewed another way, that is less than 1% of all income taxpayers. However, over the 10 years since 2008/09 the number of CGT payers has nearly doubled.

Now you know that individual CGT payers numbered only about a quarter of a million, try the next question…

  • How much tax did they have to pay in total?

The answer is £8,805m, which is over £3,400m more than was collected in inheritance tax (IHT) in 2018/19. IHT and CGT are both capital taxes, often levied on the same asset, albeit usually at different times. Yet CGT attracts much less criticism than IHT, which has been rated as the UK’s most-hated tax.

With the information on how many taxpayers and how much tax was collected, the third question might look easy…

  • What proportion of that £8,805m was paid by the top 5,000 CGT payers?

The top 5,000 – about 2% of all CGT payers – contributed 54.4% (£4,789m) of all CGT paid. They all had gains of at least £2,000,000. Expand the band a little and 18,000 individuals, with gains of at least £500,000, accounted for just under three quarters of the CGT paid. The spread of gains and tax paid is shown in more detail in the pie chart below.

The answers to these three questions highlight two points which give pause for thought, one for the Chancellor and the other for you as an investor:

  • As with some other personal taxes, the amount raised from a small number of the wealthiest individuals is a significant proportion of the total. This means that the results of increasing the tax rate(s) will heavily depend upon how those individuals react. If some of them decide not to realise their gains, the overall takings from this tax could fall rather than rise.

  • The annual CGT exemption is £12,300 in 2020/21. Investment returns that are received as capital gains are usually taxed more lightly than those received as income. The relatively small number of taxpayers is a reminder of the current generosity of the exemption.

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 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.  

12th August 2020

Dividends fall by over 50%

Dividends paid by UK companies dropped dramatically in the second quarter of the year.

The impact of the Covid-19 pandemic on dividend payments has been highlighted by recent research from Link Asset Services, one of the leading UK company registrars. It looked at the dividend payments from UK listed companies in the second quarter of the year and found that:

  • Total dividend payments, both regular and one-off special payments, fell by 57.2% compared with the same quarter in 2019. If special dividends are excluded – and there were very few – regular dividend payments fell by 50.2%.
  • 176 companies cancelled their dividends and 30 more cut them. In total that represented three quarters of the payers in an ‘ordinary’ second quarter.
  • Among the 100 largest companies, dividend pay outs fell by 45%, but in the next tranche of more UK-focused ‘mid-cap’ companies, the drop was 76%.

To some degree, the second quarter of 2020 represented the perfect storm. This is when the big banks (Barclays, HSBC, Lloyds, NatWest (formerly RBS) and Standard & Chartered) usually pay their final dividends. This year, none of them made a payment, following direction from the Bank of England on preserving capital. Those five alone accounted for half of the decline in regular dividends over the quarter. April to June was also the period in which the dramatic dividend cut from Royal Dutch Shell took effect. For each of the last five years from 2015 to 2019, Shell has been the company which has paid out the largest amount in dividends, but its June 2020 quarterly dividend payment was around one third that of March.

Looking ahead to the rest of the year, Link predicts that, at best, the drop in total annual dividend payments will be 39% for regular dividends and 45% for all dividends; the worst case scenarios are 43% and 49% respectively. For 2021, the report suggests that there could be a rebound of ‘as much as 29%’ in dividends.

Inevitably the dividend cuts will work their way through to the payments made by UK equity income funds. Some will be harder hit than others, particularly those that relied on banks to boost portfolio income. The income funds for the ‘new normal’ are likely to look different from their predecessors. For our view of the income funds to consider now, please contact us. 

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.

15th July 2020

Bounce back quarter

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

Index 2020 Q2 Change
FTSE 100 +8.8%
FTSE All-Share +9.8%
Dow Jones Industrial +16.4%
Standard & Poor’s 500 +21.8%
Nikkei 225 +17.8%
Euro Stoxx 50 (€) +16.0%
Shanghai Composite +8.5%
MSCI Emerging Markets (£) +17.7%

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.

16th June 2020

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
  • 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.
  • 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.