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The 2018 investment year  
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The world’s share markets mostly saw falls in 2018.

Index

2018 Change

FTSE 100

-12.5%

FTSE All-Share

-13.0%

Dow Jones Industrial

-5.6%

Standard & Poor’s 500

 -6.2%

Nikkei 225

-12.1%

Euro Stoxx 50 (€)

-14.3%

Shanghai Composite

-24.6%

MSCI Emerging Markets (£)

-11.5%


2018 was a very different year for investors from 2017. During that year, the share markets generally produced positive returns with very little volatility. Both years had their fair share of dramas, with Brexit and Donald Trump sources of concern across the 24 months. However, whereas in 2017 stock markets seemed relatively unphased by events, the opposite was true in 2018.

In sterling terms, the MSCI World Index was down 4.9%, much less than the main UK indices. However, this hides two factors:

1. The US stockmarket, which forms about half of the World Index, was relatively strong. Strip that out and the MSCI World Index ex-USA was down 11.2% in sterling terms, only marginally less than the main UK indices.

2. The Brexit-battered pound was weak during 2018, which flattered overseas returns.
 
 
 
Filling the pensions hole for the self-employed  
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The Department for Work and Pensions (DWP) is aiming to expand pension coverage among the self-employed.

Pension automatic enrolment has become a major success since it was launched nearly seven years ago, with almost 10 million people joining a workplace pension arrangement. Take-up rates have been much higher than some pundits had forecast – the latest calculation from the DWP showed that in 2016/17 the overall opt out rate was just 9%.

However, there is one group of people that the automatic enrolment regime completely misses: the self-employed. According to the DWP, the self-employed account for about 15% of the UK workforce – 4.7 5 million people. Private pension coverage in this sector is low, despite the tax benefits on offer. The DWP has calculated that in 2016/17, only about 1 in 7 of the self-employed were saving into a pension.

Encouraging pension saving

In December the DWP announced that it would be running a programme of trials aimed at encouraging the self-employed to start saving. These trials will involve a range of trade bodies and financial services organisations, including the main government initiated auto-enrolment scheme, NEST, which now has over seven million members.

 
 
 
Understanding the Child Benefit Charge  
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7 January marked the fifth anniversary of the tax on child benefits, an imposition that is still not widely understood.

The High Income Child Benefit Charge (HICBC), to give child benefit tax its correct name, was introduced in a rush by George Osborne – so much so that it began three months before the start of the 2013/14 tax year. It was, and remains, a classic example of the type of tax system tweaking beloved of Chancellors and disliked by those who have to deal with the consequences.

The HICBC represented an attempt to use the income tax system to withdraw child benefit from parent(s) (married or not) where one had income exceeding £50,000. Its introduction was poorly publicised, leaving many people – particularly PAYE earners – unaware of their potential liability.

Caught by ‘failure to notify’?

If proof were needed of the flaws in HICBC, it arrived in November 2018. That was when HMRC announced it would be reviewing ‘Failure to Notify” penalties for 2013/14, 2014/15 and 2015/16 “to customers [sic] who did not register for the High Income Child Benefit Charge” and therefore did not pay the HICBC tax. Unusually for HMRC, it is not looking for the taxpayer to provide a “reasonable excuse” before considering a refund. It may be hoping to avoid a flood of letters from those affected.

The income trigger for the HICBC remains at £50,000. That means that for 2019/20 the trigger matches the UK higher rate threshold. When it began, the charge started at over £7,500 above the then threshold.

 
 
 
Shake up your New Year’s resolutions  
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The time to resolve has returned.

Have your New Year resolutions fallen by the wayside yet? You know, the ones about eating better, drinking less and exercising more. The problem is they all require you to make a change to your lifestyle, which is never easy, particularly in the dark days of mid-winter.

Some people prefer to talk about intentions rather than resolutions. And to try to look beyond the short-term goals to longer term outcomes to boost the likelihood of sticking to them.

Here are four simple financial New Year’s resolutions. They need only one-off actions, so they should be easier to stick to. And they could provide long term benefits:

1. Make a will. If you don’t have a will, you have no say in how your estate is distributed. That may not matter if the laws of intestacy match your wishes, but often the two diverge considerably, leaving difficult issues for your dependants. If you have made a will, you are not completely off the hook: resolve to look at it and make sure it is still the right will for your current circumstances.

2. Set up lasting powers of attorney. Who would make decisions about your finances and medical treatment if you were unable to do so? Just as with a will, a lasting power of attorney lets you decide the answer rather than falling back on what the state determines or leaving your family without the ability to really help you.

3. Check what you are earning on your deposits. Many banks and building societies continue to pay negligible rates on accounts that are “no longer available” to new savers. Just because an account has ‘gold’ in its title is no guarantee that it won’t be paying a mere 0.1%.

4. Check your state pension entitlement. This is easy to do online (https://www.gov.uk/check-state-pension) and shows both what you should receive based on current rates and when you should start to receive it. The projection will also indicate any scope you have for increasing your state pension.
 
 
 
New earnings thresholds for auto-enrolment  
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In early December the Department for Work and Pensions (DWP) announced the thresholds that should apply to automatic enrolment pension contributions from 6 April 2019. We say ‘should’ because, strictly speaking, they need final approval from the Secretary of State, although any change is extremely unlikely.

There are three key levels to be aware of:

The Earnings Threshold This is the trigger level of earnings which brings a ‘worker’ into automatic enrolment. It used to match the personal allowance, but since 2015/16 has been frozen at £10,000. That round number will stay in place for the coming tax year.

The Qualifying Earnings Lower Limit This is the floor level of earnings above which contributions are payable, but only if the earnings threshold is triggered. It matches the lower earnings limit, which is a key level for social security benefit entitlement and will be £6,136 (£118 a week) in 2019/20, an increase of £104 (£2 a week)

The Qualifying Earnings Upper Limit This is the upper level of earnings on which contributions are payable. In past years it has matched the UK higher rate threshold. The same will be true for 2019/20, despite the £3,650 increase in that threshold to £50,000. This is not good news for Scottish taxpayers, whose own higher rate (41%, not 40%) threshold for earned income is set to be £43,430 in 2019/20.

Increasing contribution rates

These numbers take on more significance for 2019/20, as the minimum total auto-enrolment pension contribution rate will increase from 5% to 8% of qualifying earnings. Of the 8%, the minimum payable by the employer will be 3%, meaning many employees will see their contribution rate jump from 3% to 5% – a two thirds rise.
 
 
 
Office of Tax Simplification’s first report on inheritance tax  
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The Office of Tax Simplification (OTS) has published the first part of its inheritance tax (IHT) simplification review.

The report highlights a variety of issues with the current IHT system:

• IHT returns are submitted for about half of all estates, even though tax is paid by less than 5%;
• Most of the paperwork cannot be completed and submitted online and is far from user-friendly;
• Probate is not normally granted until IHT has been paid, which can create difficulty for executors;
• The residence nil rate band, introduced in 2017/18, was widely criticised as being ‘very complex’, and disadvantaging those who do not have children and those who have not owned their own home.

The OTS made a key administrative recommendation: ‘The government should implement a fully integrated digital system for Inheritance Tax, ideally including the ability to complete and submit a probate application’. HMRC have already started such a project in 2014, and in April 2018 announced it would be delayed, choosing instead to focus on the short IHT205 form which applies to certain estates where no IHT is payable.
 
 
 
Index-linked savings certificates  
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The popular National Savings & Investments (NS&I) savings certificates will be indexed to CPI instead of RPI from next year.

The Gap Between RPI and CPI since 2010

The certificates have not been on sale since 2011, but NS&I allow existing certificate holders to reinvest in new series of certificates when their old ones mature. The terms have gradually worsened over the years and at present reinvestment promises a return of RPI inflation +0.01% a year. For certificates maturing from 1 May 2019, the basis of indexation will change from RPI to CPI.

The change was not picked up by newspapers at the time because they were released the Friday before the 2018 Budget, held on the Monday. Government departments are often accused of burying bad news, and the downgrading of the NS&I index-linked savings certificates is certainly bad news for affected investors.
 
 
 
UK dividends remain strong despite volatile markets  
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UK dividends are continuing to grow faster than inflation, according to the latest quarterly data from Link Asset Service.


Source: Link Asset Services, FTSE

The latest UK Dividend Monitor (UKDM) shows that in the third quarter of 2018 dividend payments were 4.1% up on the previous year, comfortably above the current rate of inflation. Looking over the 10-year period from the end of 2007 to the end of 2017, total dividend payments have risen by an average of 5.1% while CPI inflation has averaged 2.4%.

The UKDM is published by Link Asset Services (formerly produced by Capita) and totals the dividends paid out on the ordinary shares of companies listed on the UK Main Market every quarter – excluding investment companies, to avoid double counting. It captures both regular dividends and one-off special dividends, which often stem from takeovers or other corporate restructurings.

As the graph shows, over the last ten years, the amount paid out in dividends has grown faster than the capital value of shares. There are still dips, but between 2007 and 2017 the regular dividend total dropped only once, in the wake of the global financial crisis. The jump and dive between 2013 and 2015 is an aberration caused by a one-off £15.9 billion special dividend paid by Vodafone in 2014.
 
 
 
New probate fees to affect many estates  
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The government has revived plans to raise probate fees in England and Wales.

A new, banded structure for probate fees in England and Wales is to be introduced, according to a written statement issued a week after the 2018 Budget by the Parliamentary Under Secretary of State for Justice.

The announcement comes after the absence of inheritance tax (IHT) reforms in the Budget, despite the Chancellor commissioning a review by the Office of Tax Simplification in January 2018. The only change to IHT announced in October was a small adjustment to the legislation for the residence nil rate band – this being such a complex piece of legislation, it had been wrongly drafted.

New fee structure
If new probate fees sound familiar, it is because a very similar announcement was made in March 2017. At the time the proposal provoked widespread criticism, because the higher levels were seen to be more of a new tax than a simple fee adjustment. In the event the planned change fell victim to the legislative logjam around the last General Election and disappeared. Since then, the government has taken on board some of the original criticism and cut the fees they are proposing, particularly for larger estates:

Value of estate

Old Proposal

New Legislation

Up to £50,000 or exempt from requiring a grant of probate

Nil

Nil

£50,001 - £300,000

£300

£250

£300,001 - £500,000

£1,000

£750

£500,001 - £1,000,000

£4,000

£2,500

£1,000,000 - £1,600,000

£8,000

£4,000

£1,600,001 - £2,000,000

£12,000

£5,000

Over £2,000,000

£20,000

£6,000


 
 
 
State pension equality means increases for all  
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The government has revived plans to raise probate fees in England and Wales.

State Pension Age

Having reached this landmark, the next stage of SPA increases has already started. For both men and women, the state pension will become payable for anyone born between 6 December 1953 and 5 January 1954 on 6 March 2019. The SPA will then be increased to reach age 66 by October 2020.

The SPA is scheduled to rise again as existing legislation already covers the increase from 66 to 67, phased in over two years from April 2026. The same legislation provides for a step up to 68, starting in April 2044.

However, in July 2017 the Department for Work and Pensions announced it would accept the recommendations of the Cridland Review – this brings the start of the move to a SPA of 68 forward to April 2037. Legislation for this change has been deferred until after the next SPA review in 2023 – raising the SPA in the current political conditions could prove difficult for the government – but if your SPA will be at least 68 if you were born after 5 April 1971.
 
 
 
State pension sees rise thanks to the triple lock  
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A 2.6% rise in the single tier state pension was announced in the 2018 Budget.

The increase to the single tier state pension, and its predecessor the basic state pension, will apply from next April. Other state pensions, such as the State Earnings Related Pensions Scheme (SERPS), will rise by 2.4%.

The higher increases for the two main pension benefits are the result of the ‘triple lock’, which requires the annual uplift to be greatest of:

• CPI inflation (2.4% in September 2018);
• Earnings inflation (2.6% for average weekly earnings to July 2018); and
• 2.5%.

The increased payment – £4.30 a week for the single tier pension – is often presented as extra money for pensioners. However, it is doing little more than maintaining the state pension’s buying power against inflation.

Earnings and CPI inflation have been roughly in line with each other for some time, which can be linked to any discussion about the lack of real wage growth. Had September’s annual inflation figure come in at 2.6%, as expected by many pundits, it would once again have been the triple lock winner, albeit matched by earnings.
 
 
 
Inflation eating into the value of savings  
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Inflation eating into the value of savings


Source: ONS, Bank of England

At the end of September, the US bank, Goldman Sachs, launched a new online easy-access savings account in the UK under the name of Marcus. It has offered a similar account in its home territory since 2016, gaining over 1.5 million customers according to the bank’s second quarter results. In the UK, 50,000 Marcus accounts were opened in the first fortnight after its introduction.

Marcus gained heavy press coverage at launch, not least because the interest rate on offer was – and at the time of writing, still is – top of the instant access league tables. The headline rate is 1.5%, but that is not quite the whole story. The rate is actually a variable 1.35%, plus a 0.15% ‘bonus’ payable for the first 12 months. However, even the 1.35% would leave Marcus very close to the top of the league tables.
 
 
 
The risks of late estate planning  
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Imagine you are named as the executor and a beneficiary of your wife’s wealthy aunt. You learn that she is suffering from terminal cancer and has ‘a very impaired lifespan’. What do you do?

This is what happened in the case of Nader and others v Revenue & Customs. The executor/beneficiary, a Dr Nader, decided to consult a leading firm of accountants about inheritance tax (IHT) mitigation options for Miss Dickins (the aunt).

The accountants put forward an offshore trust-based scheme, provided by a third party, which would remove the IHT liability on £1,000,000 of Miss Dickins’ estate. The scheme was highly complex, involving multiple trusts and short-term loans. It cost a total of £100,000 in fees and its first stage was triggered on 6 December 2010, three weeks before Miss Dickins’ death.

Dr Nader received grant of probate on 4 July 2011 and a little over a month later the scheme was wound up, with IHT-free payments being made to Miss Dickins’ beneficiaries. However, subsequently HMRC opened an enquiry into the IHT return and by February 2015 – a little over four years after Miss Dickins’ demise – tax demands were issued to the beneficiaries.
 
 
 
Unmarried couples lack the rights of married couples  
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Two recent events have shone different lights on the government’s view of unmarried couples.

Marriage Rates in England and Wales


As the graph shows, marriage has been drifting out of fashion for close to 50 years. There are now over 3.3 million unmarried couples in the UK, of which nearly half have children.

In spite of this major social change, governments have largely maintained sharp legislative distinctions between the married and unmarried. When they have conflated the two, it is usually to swell the Exchequer’s coffers, for example when applying the high income child benefit charge to unmarried couples with children.
 
 
 
The Budget: an end to austerity?  
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The 2018 Budget – delivered on a Monday for the first time since 1962 – produced a number of surprises, not least some high-profile ‘giveaways’.

Announcements in the Budget included:

• A £650 increase in the personal allowance to £12,500 for 2019/20, the level originally pencilled in for 2020/21.
• A £3,650 increase in the higher rate threshold to £50,000, again targeted for 2020/21.
• A £25,000 increase in the pension lifetime allowance to £1,055,000 from April 2019.
• A one-third reduction in business rates on smaller retail premises, starting from next April.
• An increase in the annual investment allowance (AIA), from £200,000 to £1,000,000, from January.

However, Mr Hammond’s generosity was not all it appeared. For instance, the personal allowance and higher rate threshold will both be frozen in 2020/21, while the business rates reduction and higher AIA will only last for two years. The Chancellor also kept many tax thresholds and allowances unchanged.
 
 
 
The third quarter of 2018 showed mixed results for global stock markets.  
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Index

2018 Change

FTSE 100

-0.7%

FTSE All-Share

-0.5%

Dow Jones Industrial

+7.0%

Standard & Poor’s 500

 +9.0%

Nikkei 225

+ 6.0%

Euro Stoxx 50 (€)

-3.0%

Shanghai Composite

-14.7%

MSCI Emerging Markets (£)

-6.2%


In the US, shares have continued to power ahead, despite another rise in interest rates in late September and Mr Trump’s trade battles. It has been a different story in emerging markets, which have suffered from two key US factors: a strong dollar and those rising interest rates.

Japan has also performed well, with the Nikkei 225 reaching a 27-year high at the end of September. Meanwhile, Europe ended September on a down note, with worries about Italian government borrowing resurfacing just as the month closed. And for all the traumas of Brexit, the UK is marginally ahead of the rest of Europe across the first nine months of the year.

 
 
 
More people working past 65  
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Do you fancy working once you have reached age 65? The trend of rising employment levels is not limited to working-age people, according to the latest employment statistics from the Office for National Statistics. A

Employment at 65 and beyond 1993-2018
Source: ONS 11/9/2018 B

The data reveals a growing number of people have working beyond what is still often thought of as male pension age since the start of the millennium. From May to July 2018, 10.7% of the population aged 65 or over were in employment. Women aged 65 or over are less likely to be working, but the proportion who are has increased to 8.1% from 4.7% in July 2008.

In fact, 65 will be women’s state pension age (SPA) from November 2018, but only briefly. From December 2018 the next phase of SPA increases begins, reaching a SPA of 66 for both men and women by October 2020. These increases, with yet more rises by March 2028, make it almost certain the percentages will increase further.

 
 
 
A different view on tax reform  
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A leading think tank has proposed a radical shake up of the UK tax system.

The Institute for Public Policy Research (IPPR) is a centre-left think tank that has a long history of influencing Labour Party policy. So, its ideas on tax reform published in the final report of its ‘Commission on Economic Justice’ A are of more than just academic interest.

Income tax and national insurance – The IPPR propose combining income tax and national insurance contributions (NICs) into a single tax, applicable to all income, including investment income. They would replace the current system of incremental tax bands with a gradually rising rate applied to all taxable income, capped at a maximum 50% marginal rate above £100,000. Their proposal would smooth out inconsistent marginal rates, as the graph shows.


Source: IPPR

 
 
 
Class 2 NICs here to stay  
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The Chancellor has changed his mind – again – on National Insurance Contributions (NICs) for the self-employed. The Treasury has revealed that Class 2 NICs will remain for at least the rest of this Parliament.

The Treasury’s justification was that, without Class 2 NICs, “A significant number of self-employed individuals on the lowest profits would have seen the voluntary payment they make to maintain access to the state pension rise substantially.” A

This means that over three million people will continue to pay the tax, providing more revenue for the Chancellor at a time that he certainly needs it. However, as many as 300,000 self-employed people earning less than the Small Profits Threshold (£6,032 a year) could have seen their NIC payments rise from £2.95 a week to £14.65 a week. B

Mr Hammond originally proposed a reform of National Insurance Contributions (NICs) for the self-employed in his March 2017 Budget. The 2017 proposal was to increase the main rate of Class 4, from 9% to 10% in 2018/19 and again to 11% in 2019/20, bringing it closer to the employee rate of 12%.

 
 
 
Losing interest in cash ISAs  
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The popularity of cash ISAs is continuing to wane, according to new statistics from HMRC. With inflation persistently above interest rates, it’s not hard to imagine why.

The bank of England recently increased the interest rate to 0.75%, A but inflation was 2.7% B in August 2018. This means, if you are holding cash in an ISA or considering topping up an existing account, you need ask yourself two questions:

1. What interest rate are you earning? You could be earning less than the current 0.75% base rate, particularly if the account is not open to new investors.

2. Do you need a cash ISA at all? The personal savings allowance means you can earn interest of £1,000 tax-free per tax year if you are a basic rate taxpayer, or £500 if you pay tax at the higher rate.

For a variety of reasons, not least cheap funding available from the Bank of England, competition in the cash ISA market has waned. For example, the Halifax is offering only 0.6% to new ISA investors for 12 months (and just 0.2% thereafter – the rate for existing Instant ISA Saver investors). C Also, last month National Savings & Investments cut the rate on its Direct ISA to 0.75%, defying August’s increase in the Bank of England base rate.

 
 
 
Trick or treat? The Chancellor calls the 2018 Budget for late October  
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The 2018 Budget has been set for Monday 29 October, setting a deadline for speculation and proposals. Mr Hammond, however, has indicated that he won’t end the long spell of austerity measures, despite improving public finances.

Proposals raised by think tanks and professional bodies include overhauls of income and inheritance tax, ‘pension tax relief simplification’, and scrapping entrepreneur’s relief to help fund NHS costs.

But every proposal is overshadowed by Brexit, and the uncertainty of what will happen on 29 March 2019.

What’s coming?

Alongside measures announced in the draft Finance Bill, the following areas could see change:

The NHS – The NHS Foundations’s ten-year plan may not be published in time for the Budget, so the Chancellor could be limited to general spending priorities. Mr Hammond said a digital services tax or ‘Google tax’ is coming – with or without European allies. This income could be dedicated to the NHS.

Inheritance tax (IHT) – The IHT review from the Office of Tax Simplification (OTS) may be published ahead of the Budget. It was tasked to look at making IHT less complex, focusing especially on trusts, administrative issues and business and agricultural property reliefs. Calls for a complete overhaul in favour of a ‘lifetime receipts’, ‘property’ or ‘wealth tax’ seem unlikely from a Conservative government.

Stamp duty – After introducing new reliefs for first-time buyers, focus has shifted to ‘last time’ buyers, with calls to incentivise older homeowners to downsize. The Prime Minister has also indicated that an additional 1-3% duty could be levied on foreign property buyers to help control rising house prices and tackle homelessness.

 
 
 
The record S&P 500 bull run  
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The US stock market set a new record for the longest-ever bull market in August.

The record S&P 500 bull run
S&P 500 Index Performance

Wednesday 22 August 2019 saw the S&P 500 drop – by less than 0.1% – after 3,453 days, making it the longest-ever bull run (a period of rising share prices) for the index, which is used by professional investors’ as a yardstick for the US stock market.

The previous record was set between 1990 and 2000, a period that saw the dot-com boom, followed shortly after the start of the new millennium by the tech bust.

The current rally has been helped by a strong performance from technology stocks, notably the ‘FAANGs’ (Facebook, Apple, Amazon, Netflix and Google (now called Alphabet)). It has also been aided by a period of ultra-low interest – the US Federal Reserve’s main rate was set to a historic low in December 2008 and did not rise above 1% until June 2017. In the last year US companies have also benefitted from Donald Trump’s corporate tax cuts, which have boosted earnings figures.
 
 
 
Student loan interest rates increase  
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The rates charged on student loans rose at the start of September.

The revised terms for interest on, and repayment of, student loans were published in August, along with the A level results for the year. From 1 September, the main interest rates for Plan 2 loans, taken out by students and recent graduates in England and Wales, are:

Period

Interest Rate

During study and until the April after leaving the course.

6.3%

From the April after leaving the course (maximum 30 years).

On a sliding scale, rising from:
3.3%, where income is £25,725 or less; up to
6.3%, where income is £46,305 or more.


Plan 1 student loans, taken out by students in Scotland and Northern Ireland (and students in England and Wales whose course started before 1 September 2012), carry a 1.75% interest rate.

Both rates represent an increase – 0.2% for Plan 2 and 0.25% for Plan 1. The first was driven by an increase in the RPI for March 2018 against March 2017, and the second by last month’s base rate rise.

The income threshold at which loan repayments start to be made will also rise from 6 April 2019, to £25,725 for Plan 2 RPI-linked loans and £18,935 for the older Plan 1 loans. The repayment level will be held at 9% of the excess income, meaning the cheaper loans will require higher repayments.
 
 
 
Slowing down our old age  
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A paper published in August by the Office for National Statistics (ONS) casts new light on life expectancies in the UK.

Base Rates since April 2008

Life expectancy has been increasing in the UK for a long time, as the graph shows. In 1980, the average life expectancy at birth was 70.6 years for a man and 76.6 years for a woman. In 2016 this had increased to 79.2 years for a man and 82.9 years for a woman.

What the graph also reveals is that the rate of improvement in life expectancy has been slowing down. The ONS data shows a marked deceleration in the 21st century.

Between 2011 to 2016, women’s life expectancy at birth increased by 0.2 years compared with an increase of 1.2 years over the period from 2006 to 2011. For men, the corresponding increases were 0.4 years and 1.6 years. There was a similar effect for life expectancy at age 65, which rose by only 0.1 years for women and 0.3 years for men between 2011 and 2016, against 1 year and 1.1 years in the previous five years.

For the layman, this welter of data can be confusing, especially as the press coverage is not always well informed. A few important things to understand are:

The ONS life expectancy data imply that, on average, a man who was 65 years old in 2012 will live until 83.7, while a woman who was 65 years old in 2012 will survive until 86. The expected age at death also rises with age attained.
 
 
 
Interest rates creeping up after nine years  
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The Bank of England increased the base interest rate in August to 0.75% – the second increase in 12 months.

Base Rates since April 2008
Source: Bank of England August 2018

The Bank’s decision to raise the rate to its highest level in nearly nine and a half years was no great surprise to the investment community. Of more interest to the experts were the comments the Bank offered on the long-term trend of base rates relative to inflation. The Bank gave a theoretical estimate of the base rate needed to maintain inflation and economic growth in a fully functioning economy, rather than another forecast of where rates might be in a year’s time.

The Bank said an interest rate of 0%–1% above the rate of inflation, with a ‘modal rate’ of 0.25%, would achieve this equilibrium. In today’s economic environment, with an inflation target of 2%, this would mean a base rate of around 2.25%. That implies:

The equilibrium rate will be a long time coming – several 0.25% increases would be required and the Bank has repeatedly said any changes will be gradual.

 
 
 
Record inheritance tax revenues ahead of simplification review  
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2017/18 produced record inheritance tax (IHT) receipts according to HMRC data published in July.

The latest release of the annual statistics revealed IHT produced £5.228 billion for the Exchequer in 2017/18, an increase of two thirds over just five years. As the graph shows, IHT revenue has been rising rapidly since Treasury receipts hit a low in 2009/10, owing to the impacts of the financial crisis and the introduction of the transferable nil rate band.

The Office for Budget Responsibility (OBR) expects the growth to continue, although the rate of increase will slow for the next few years because of the introduction from April 2017 of the residence nil rate band.

The Rising IHT Take

 
 
 
Is the LISA’s short life about to end?  
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The Lifetime ISA (LISA) may not survive after low uptake by providers and fresh criticisms from parliament.

The LISA has been reviewed by the Treasury Select Committee, which was critical of, “its complexity, its perverse incentives, its lack of complementarity with the pension saving landscape and its apparent lack of popularity with the industry and pension savers”. The Committee concluded by recommending “The Government should abolish it.”

The LISA was announced by the previous Chancellor, George Osborne, in his final Budget in Spring 2016. It was intended to appeal to savers under 40 by combining a first-time buyer’s deposit saving scheme and a pension arrangement, stretching the ISA idea into a very new shape.

Despite reservations from the Financial Conduct Authority about the regulatory implications, and reluctance from the savings industry, Philip Hammond launched the LISA in April 2017. Progress has been limited since then as there is still only one provider of cash LISAs. There is a wider choice of stocks and shares LISAs, but these are generally not suitable as deposit saving arrangements.

 
 
 
OBR forecasts present need for tax increases in the Budget  
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The long-term outlook for government finances suggests tax increases are inevitable.

Government Borrowing and Debt

The Office for Budget Responsibility (OBR) produces medium-term financial forecasts alongside the Budget and Spring Statement, but that is not its only task. It is also required to take a longer-term view of the public finances, producing a Fiscal Sustainability Report every two years.

The latest version of the report was published in mid-July and did not make for comforting reading. The graph is a good summary of the bad news:

• The black lines show the projected government borrowing as a percentage of the size of the UK economy. In 2017/18 annual borrowing was 1.9% of Gross Domestic Product (GDP). By 2067/68 it becomes 85.6%.

• The red line shows the total amount of government debt, also as a proportion of the UK economy. As at May 2018, total borrowing was 85.0% of Gross Domestic Product (GDP). By 2067/68 it becomes 282.8%.

In the report, the OBR says, “Needless to say, in practice policy would need to change long before [2067/68] to prevent this outcome.” That means reduce expenditure and/or increased taxation.
 
 
 
Residential letting to get more difficult  
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Draft legislation released in July contains more bad news for those renting out residential property.

The Finance Bill 2018/19 draft legislation published just before the summer holidays has confirmed the following measures:

• From 6 April 2019, the rules for rent-a-room relief (which exempts up to £7,500 a year of income from tax) will be revised. A new ‘shared occupancy test’ means the relief will no longer apply if the entire property is rented out for the tenancy period. This will mean an end to going on holiday and letting out your home tax-free during sporting events, such as Wimbledon.

• From 1 March 2019, the window for filing and paying stamp duty in England will shrink to just 14 days from the date of sale. Past experience suggests Scotland and Wales will follow suit.

• From 6 April 2020, for residential property sales giving rise to taxable gains, a tax return must be made and the capital gains tax (CGT) paid within 30 days of the sale. Any adjustments would then need to be made via a self-assessment return.

Over the past few years, the Treasury has turned its attention to the private rented sector. As such, landlords must already comply with several new rules, including: the wear-and-tear allowance for furnished lettings being replaced with a tighter expenditure-based regime; the phased replacement of full income tax relief on finance interest costs with a basic rate tax credit; a 3% stamp duty surcharge for second residential properties; and an 8% capital gains tax surcharge on residential property.
 
 
 
2018 proves volatile after the smooth sailing of 2017  
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The first six months of 2018 were unpredictable times for investors as global stock markets suffered a sudden bout of volatility.

six months of 2018 were unpredictable times for investors as global stock markets
Source: LSE

The unpredictability came as a major surprise after the general stability of 2017. Once the dust had settled there was a mixture of good and bad news.

The UK markets were inevitably led by Brexit, with negotiations mainly at the intra- rather than inter-government level. The other perennial British topic, the weather, produced the Beast from the East, depressing economic activity in the first quarter.

 
 
 
Is a flat rate scheme coming to pension tax relief?  
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The prospect of a flat rate of tax relief on pension contributions has resurfaced in the national press.

The cost of pension relief has been chipped back in recent years, mainly by reducing the annual allowance. However, a report in The Times in early July suggested the Treasury is looking at flat rate tax relief, which would give the same rate of tax relief on contributions, regardless of personal income tax rates. The Times reported a flat rate of 25% is being considered, meaning a gross pension contribution of £100 would require a net outlay of £75 instead if the current £80.

The 25% rate would be an effective tax cut for the majority of pension contributors, who pay basic rate tax, but would potentially save the Exchequer about £4 billion a year. It is estimated that a flat rate of 28% would cost the Treasury the same as today’s mix of 20%, 40% and 45% reliefs.

It is hardly surprising that the Treasury is re-examining pension tax relief, given it is looking for an extra £20.5 billion for NHS funding. Tax relief on pension contributions cost the Exchequer £38.6 billion in 2016/17 according to HMRC’s latest estimate, as well as over £16.2 billion of national insurance contribution (NIC) relief on employer contributions.

It remains to be seen if such a change will be announced in the Budget. Currently, the politics of such a move seem between difficult and impossible, and the Chancellor will remember the backlash he faced when he attempted to raise NICs. A proposal to end higher rate tax relief could meet with similar resistance, especially as it would likely coincide with the next rise in automatic enrolment pension contributions. However, a recent Treasury Select Committee report recommended the Government give “serious consideration” to the introduction of flat rate relief.

 
 
 
Saudi Arabia: the next emerging market  
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The June 2018 review of constituents for the main Emerging Markets Index has produced a few surprises.

The MSCI Emerging Markets Index is one of the most important global stock market indices. JP Morgan, the US investment bank, estimates that nearly $1,500 billion is either benchmarked against the index or directly tracks it, so there can be considerable implications for stock markets if the constituent countries of the Index change.

Last year’s MSCI review saw Chinese mainland shares promoted to the Index, with that process now starting to take effect.

The 2018 review heralds two potential new arrivals in the MSCI Emerging Markets from May 2019:

• Saudi Arabia should join the Index in a two-stage process (as is now happening with China). The first stage follows the May 2019 half-yearly index review, and the second as part of the August 2019 quarterly review. Saudi Arabia will initially account for 2.6% of the Index, but it could become more important when Saudi Aramco, the state oil company, is partially floated, probably next year.

• Argentina is set to return to the Index, having been demoted to ‘Frontier Market’ status in 2009. Ironically, the MSCI announcement almost exactly coincided with confirmation that that IMF had agreed $50 billion of stand-by credit for the country.
At present Argentina represents almost a fifth of MSCI's Frontier Markets Index, so if it does move across, there will be a significant rebalancing of that index.

 
 
 
Top earners increase their share of tax payments  
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HMRC’s latest statistics provide an insight into the income tax paying population.



The figures reveal changes in the distribution of tax revenue over the last decade, with a growing share now coming from higher earners.

The pie chart shows the proportion of 2018/19 tax expected to be paid by taxpayers in various bands of income. For example, the smallest wedge shows that the bottom 50% of income tax payers (those with annual income of up to £25,500) will provide 9.5% of all income tax receipts.

At the opposite end of the scale, the largest wedge is the top 1% (with incomes of at least £177,000) who will supply 27.9% of the £185 billion of income tax the Treasury hopes to receive for the current tax year. In other words, over a quarter of income tax comes from ‘the 1%’.

The Exchequer’s dependence on a small group of wealthy taxpayers is nothing new. However, the concentration has grown since the start of the decade. For example, in 2010/11 – when additional rate tax first appeared at the 50% rate – the contribution from the top 1% was 25.0%. For the top 10% of taxpayers (with income of at least £57,500 in 2018/19), the tax share has risen from 53.5% in 2010/11 to 59.7% this tax year. Over the same period the bottom 50% have seen their share drop from 11.3% to 9.5%.

 
 
 
Understanding what goes in to the FTSE100  
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The latest quarterly review of the FTSE 100 revealed common misunderstandings about how the index is drawn up.

Every quarter FTSE Russell, which operates all the FTSE indices, decides which companies are promoted or demoted from the FTSE 100 index.

There had been speculation that the June review would see Marks & Spencer (M&S) replaced by Ocado. The high street chain has been a member of the Footsie since the index first appeared in 1984, so for the bricks and mortar shopping experience to be supplanted by an online-only retailer that did not arrive on the stock market until 2010 made for a good headline.

However, M&S did not check out of the FTSE100 and survives until the next quarterly review. What the journalists missed is that a company listed in the FTSE 100 is only ejected if its ranking drops below 110. Similarly, promotion into the FTSE100 requires a ranking of 90 or higher.

These rules are designed to avoid a large quarterly churn at the bottom tier of the index, and it works – only one other company, GVC Holdings, entered the index in June.

 
 
 
National Savings & Investments focusing on smaller investors  
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National Savings & Investments (NS&I) has introduced limits on its offerings for wealthier savers.

In mid-June NS&I announced a revision to the terms of its popular Guaranteed Growth and Guaranteed Income Bonds. The interest rates were left unchanged, but the maximum investment per person, per issue was cut by 99%, from £1 million to £10,000.

NS&I ostensibly exists to help small savers, but in recent years it has raised investment limits – for example to £50,000 on premiums bonds – to meet the funding levels set by the government. In the past NS&I has also emphasised tax-free savings certificates, which were of most appeal to top rate taxpayers.

Fortunately for existing investors, their former investment limits will continue to apply if they reinvest. The dramatic reduction means that NS&I will no longer offer an easy solution for anyone seeking fixed rates on large sums of capital without having to worry about the £85,000 FSCS deposit protection ceiling.

Fortunately for existing investors, their former investment limits will continue to apply if they reinvest. The dramatic reduction means that NS&I will no longer offer an easy solution for anyone seeking fixed rates on large sums of capital without having to worry about the £85,000 FSCS deposit protection ceiling.

 
 
 
Interest rates for the Eurozone and US diverge  
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Important interest rate announcements were made in June, both in the UK and the US.

The US Federal Reserve announced its seventh 0.25% increase in interest rates since December 2015, taking the level to 1.75%-2.00%. The rise had already been incorporated in market prices by the time it arrived, so of more interest were the press release and other papers which accompanied the announcement. These pointed to two more rate rises in 2018, and possibly three more in 2019. They also dropped a long-standing reference to interest rates remaining, “below levels that are expected to prevail in the longer run”.

The following day the European Central Bank (ECB) decided to leave rates unchanged, again a widely anticipated move – the ECB has kept its main interest rate at zero since March 2016.

The market again focused on the background papers, which revealed the ECB’s tapering of its quantitative easing (QE – so-called money printing) programme, will come to an end in December and that interest rates were expected to be unchanged, “at least through the summer of 2019”. The first part was no surprise, but the statement on interest rates was not expected. The markets reacted accordingly, pushing the Euro down against the US dollar.

Controlling market shocks

The relationship between central banks and investment markets is a curious one these days as the banks go out of their way to make sure markets are kept informed. As a result, the markets are now more interested in the next-but one action. The market responses to these recent rate announcements are two good examples.

 
 
 
A savings tax review  
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The way savings are taxed is being reviewed by the Office of Tax Simplification (OTS).

The OTS is looking at the way in which savings and investment income is taxed, which can be very complicated. According to its paper, published in May 2018, “the interactions between the [tax] rates and allowances is sufficiently complex at the margins that HMRC’s self-assessment computer software has sometimes failed to get it right”.

The complex marginal rules mean that, “many taxpayers continue to worry about the tax treatment of their savings income even when they do not in fact have anything further to pay, and there are also many specific complexities which taxpayers find difficult and confusing”.

To make matters worse, the OTS also found that 95% of people do not pay tax on savings income, thanks to a combination of the personal savings allowance (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers) and the dividend allowance (£2,000).

 
 
 
Pension transfers skyrocket  
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Transfers out of private sector final salaries boomed in 2017.

There was a dramatic increase in the value of number of transfers out of defined benefit (usually final salary) pension schemes in 2017. A recent Freedom of Information (FoI) request to the Financial Conduct Authority (FCA) revealed that the £20,800 million was transferred last year, up from £7,900 million in 2016. There were 92,000 transfers, compared to 61,000 in 2016.

The increase in transfers stems from a variety of factors:

• A growing awareness of the planning opportunities introduced by pension flexibilities, which can make the traditional defined benefit scheme look outdated and rigid.
• The significant sums involved: the average transfer last year amounted to £226,000.
• Employers quietly welcoming transfers as a way of reducing their pension scheme liabilities, which have grown rapidly because of ultra-low interest rates and improving pensioner lifespans.
• The proportion of defined benefit schemes closing to existing employees steadily increasing, leaving more people with preserved pension benefits, even if they have not changed jobs.
• Since 2009, investment markets being generally benign or buoyant, helped by the same economic measures that have pushed, and held, down interest rates. The absence of any major market declines has reduced the visibility of one of the major transfer risks: exchanging a quasi-guaranteed benefit for one reliant on investment performance.

 
 
 
Mainland Chinese stocks join the MSCI index  
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Important changes affecting Chinese market indices took effect in June 2018, which could affect emerging market funds.

On 1 June 2018, the index provider MSCI added 233 domestic Chinese stocks to its emerging market and global indices. MSCI has some of the most widely used indices for measuring the performance of emerging markets, with the MSCI Emerging Market index suite providing benchmarks for over $1,900 billion of assets. This popularity means that markets can move when any revisions are made to MSCI indexes.

Previously, MSCI’s indices had only included Chinese companies with share listings outside the Chinese mainland, e.g. in Hong Kong. Although the Chinese mainland stock market is the second largest in the world, MSCI previously considered the market to have too many drawbacks to merit inclusion. The Chinese authorities have worked on the issues that concerned MSCI, such as ownership restrictions and limited liquidity, resulting in MSCI’s change of heart.

The inclusion of the 233 Chinese shares will have little initial impact on the MSCI Emerging Market Index as their total weighting will be less than 1%. However, this is likely to grow as MSCI continues to monitor the market, include more Chinese companies and reweight its indices. In theory China could ultimately represent 40% of the Emerging Markets index.

 
 
 
Interest rate rises prove hard to predict  
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The Bank of England did not raise interest rates in May, despite earlier suggestions that it would.

About four years ago a member of the Treasury Select Committee compared Mark Carney, the Governor of the Bank of England, to “an unreliable boyfriend”. The remark was prompted by Mr Carney’s record of talking about future interest rates increases that never became reality. The epithet came back to haunt the Governor last month.

The Bank had been hinting strongly that rates would rise in May, and by early April the money markets were effectively putting the odds on a May increase at 90%. However, a combination of surprisingly bad economic numbers – growth fell to just 0.1% in the first quarter – and downbeat business surveys prompted a rethink. By the time the Bank announced the rate would be held at 0.5% on 10 May, nobody was surprised.

The next opportunity for changes to the interest rate will come on 2 August 2018, when the Bank publishes its next Quarterly Inflation Report. The medium-term expectation is still that interest rates will rise, unless something disastrous happens to the UK economy. For its part, in May the Bank repeated its familiar mantra that, “any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent”.

If you have investments in fixed interest funds, now could be a good time to review those holdings. As the graph shows, the yield on 10-year government bonds is already around double the low hit in the wake of the Brexit vote. It could rise further – depressing bond prices – if the Governor becomes more reliable in his rate rise forecasts.
 
 
 
Can a revised tax system re-balance intergenerational fairness?  
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A new report has proposed taxing the baby boomers to help resolve major issues around intergenerational fairness.

The report, published by the Intergenerational Commission in May, offers ten policy recommendations which would represent a radical overhaul of the UK tax system.

Examples include replacing inheritance tax with “a lifetime receipts tax that is levied on recipients with fewer exemptions, a lower tax-free allowance (£125,000) and lower tax rates (20% and 30%)”, and replacing council tax with a “progressive property tax” levied on owners rather than occupants, with a marginal rate of 1.7% on property value over £600,000.

The Commission was set up by the Resolution Foundation to examine the issue of fairness between the generations, and has been examining whether the baby boomer generation (1946-1965) has left generation X (1966-1980) and the millennials (1981-2000) to pick up the bill.

Their report found the post-war generation has the advantage, based on a range of measures including home ownership, earnings progression, personal debt and pension wealth.

As with most think tank reports, this grand plan is unlikely to be put in place. However, some of the proposals could see the light of day, as ministers look for solutions to the problem.
 
 
 
Taking early advice on your tax return  
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HMRC is starting the tax year with their annual reminder to submit your tax return.

HMRC’s reminder might seem early, but its statistics show that 750,000 people (6.5%) missed the deadline for 2016/17, potentially facing an immediate £100 penalty, even if they had no outstanding tax to pay. Anyone with a 2016/17 return still outstanding could also be clocking up additional penalties of up to £10 per day.

HMRC cancelled more than a third of all the penalties initially levied in 2014 and 2015 according to statistics obtained under a Freedom of Information Request. However, it is best not to incur the fine in the first instance, even if you have what HMRC calls a ‘reasonable excuse’.

You have until the end of October 2018 to submit a paper tax return and 31 January 2019 if you file your return online. According to HMRC, 9.92 million out of 11.43 million tax returns for 2016/17 were filed online by 31 January 2018, while 0.77 million were made on paper.

 
 
 
Repayment threshold increases for student debt  
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The income threshold at which student loan repayments begin rose on 6 April 2018.

English and Welsh students who started their courses after 31 August 2012 can now earn £25,000 a year – up from £21,000 – before they have to start repaying their student loans. The increase could provide a saving of £360 a year, with repayment rates at 9%.

Although the change was heralded as good news, that is not the whole story:

• Automatic enrolment pension contributions nearly tripled at the same time. For those earning £29,000 or more, this increase more than wipes out the savings from the repayment threshold increase.

• Interest rates for student loans have not changed. Before graduation, interest remains at RPI + 3% (currently 6.1%, and 6.3% from September 2018). After graduation interest is charged at RPI for those earning up to £25,000, rising on a sliding scale up to RPI + 3% for those earning £45,000 or more.

• As with any loan, lower repayment levels mean a longer payment period. Although student loans are capped at 30 years, after which the debt is written off.

• The Institute for Fiscal Studies estimates that the higher threshold will cost the taxpayer £2.3 billion a year, and that the government will end up writing off about 45% of total student debt.
 
 
 
How useful is the Dow?  
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The Dow Jones industrial Average – the Dow – is a well-known part of the investment market, often quoted by news sources. But what does it mean, and is it useful when making investment decisions?

The Dow was created in 1896, and is arguably still used today mainly thanks to history or habit.

There are several issues with the Dow, such as:

• The index only tracks 30 shares.
• It has a large absolute value – around 25,000 – which means movements sound bigger than they are. ‘Dow falls 500 points’ has more impact than, ‘Dow falls 2%’, even if the two measures are identical.
• A committee chooses which shares the Dow tracks – where most main indices choose their constituents by market capitalisation – so it has some surprising absences, such as Alphabet (Google’s holding company) and Facebook.
• Almost uniquely, the Dow is weighted by share price rather than company stock market value, which has some strange effects. Because a high share price means a larger weighting, Boeing (with a share price around $320) has nearly double the weight of Apple (with a share price around $170), even though Apple is the largest US company and over four times the size of Boeing.

When China recently announced proposed tariffs on imported aircraft aimed at Boeing, this had a disproportionate effect on the Dow, as Boeing shares (over 9% of the Index) fell.
 
 
 
Increasing inheritance benefits for couples  
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Couples could now save an extra £20,000 of inheritance tax (IHT), as the residence nil rate band (RNRB) increased in April 2018.

The RNRB was increased at start of the new tax year and it is due to increase by £25,000 in each of the next two years, reaching £175,000 in 2020/21. It will be indexed to the Consumer Price Index after that.

The RNRB was introduced to give married couples and civil partners an eventual total IHT exemption of £1 million. This new band was introduced rather than increasing the existing nil rate band, which has been at £325,000 since 2009.

Whilst the increase is good news, the RNRB creates a lot of complexity for the taxpayer. A good example is that the £125,000 band is reduced by £1 for each £2 of estate over £2 million. So, in 2018/19 your RNRB is lost completely if your estate exceeds £2.25 million.

However, the estate value is calculated at death, so if gifts are made only days before death to reduce the estate below the £2 million threshold, the RNRB is not lost – a potential tax saving of up to £50,000 at present. A surviving spouse or civil partner can also double that saving by inheriting any unused RNRB from their partner.
 
 
 
The pressure is dropping on inflation  
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UK inflation is falling faster than expected, as the March figure for the Consumer Price Index (CPI) was 2.5%.

CPI Inflation the last five years to March 2018

This March figure, published in mid-April, surprised forecasters, who had predicted annual inflation would remain at 2.7%, as in February. That February figure was itself a surprise, as the forecasts had predicted 2.8%.

The drop for March may be the result of one-off factors, so it should be treated with caution. One issue is the way individual categories can distort the final figure. In March, alcoholic drinks and tobacco saw the sharpest drop price – from 5.8% to 3.5%. These both saw two sets of tax increases in 2017, because of the double Budgets, whereas in 2018, the Chancellor moved to a Spring Statement and did not change any taxes. It was the classic one-off.

 
 
 
International investments and Brexit  
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With Brexit now less than a year away, how insular are your investments?

Brexit – or more accurately the start of the transition/implementation period of the UK leaving the EU – begins on 29 March 2019. By the end of the following year, the UK’s remaining links to the EU are due to be cut.

Since June 2016, when the Brexit referendum took place, the FTSE 100 has been one of the world’s poorest performing major indices. So it is perhaps no coincidence that, in March 2018, a survey by the Bank of America (BoA) of 163 global investment managers found the UK stock market was least popular of 22 wide-ranging investment asset classes.

If you live and work in the UK, then naturally enough you tend to think in terms of UK-based investments, be they shares, bonds or property. The BoA survey is a reminder that taking such a parochial view of investments may come at a price.

Diversification is one way investment professionals limit risk and potentially increase returns. For example, the most recent report from the Pensions Regulator showed that in 2017 the average UK defined benefit pension scheme had only one fifth of its total shareholdings in UK quoted shares.
 
 
 
What does the pension lifetime allowance buy?  
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It is worth looking at what your pension pot could buy for your retirement.

The importance of pension contributions has been bolstered by the rollout of auto-enrolment pension schemes. However, it is not as clear what your savings will give you when you come to retire.

For example, Louise, a healthy, non-smoking 65-year-old, reaches retirement with £1,000,000 in her pension plan. If she uses the entire fund to buy herself an inflation-proofed income, what will be her first monthly pension payment before tax is deducted?

A. £2,500
B. £3,000
C. £3,500
D. £4,000

The answer is A, based on current pension annuity rates. After tax, if Louise has no other income, her monthly payment will be about £2,200. Include a 2/3 widow’s pension and the gross amount drops by about £400 a month (roughly £320 after tax).

This may be a surprise as the National Living Wage is nearly £1,200 a month for a 35-hour week. Especially when you remember Louise forgoes a tax-free lump sum of up to £250,000 in favour of a higher income.

The income of £2,500 a month (£30,000 a year) is only 3% of the pension pot, but it is RPI-linked. Importantly, because it is an annuity payment, it is also guaranteed throughout life – however long that may be.
 
 
 
Taking the early view on ISAs  
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There are advantages to planning your ISA investments around the start of the tax year.

With ISAs all the taxation benefits occur after investment is made, yet the focus is often on year-end contributions. Various articles on ISAs filled the weekend press in March, and are set to re-emerge like a financial sign of spring in 12 months’ time.

For other investments, such as venture capital trusts and pensions, there is a logic in waiting until the end of the tax year – you have a better idea of your income for the year and hence your tax position. The same is not necessarily true of ISAs.

Indeed, it is sensible to contribute to ISAs as early in the tax year as possible, to get the tax benefits for as long a period as possible. As a reminder these are:

• No UK tax on dividends, an important factor as the dividend allowance has been cut from £5,000 to £2,000 for 2018/19.
• No UK tax on interest earned.
• No UK capital gains tax on any profits realised.
• Nothing to report to HMRC on your tax return.
• Allowing a surviving spouse or civil partner to inherit your ISA benefits, effectively treating your ISAs as joint investments.

Making an ISA contribution does not necessarily mean paying in cash. It can include selling an existing investment you hold personally and repurchasing it within an ISA. You may crystallise some capital gains in the process, but at the start of the tax year you almost certainly still have your full £11,700 annual exemption available.
 
 
 
New risk criteria for venture capital schemes  
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Important changes for venture capital schemes and enterprise investment have recently come into effect.

New ‘risk-to-capital’ conditions apply to investments in venture capital trusts (VCTs), enterprise investment schemes (EISs) and seed enterprise investment schemes (SEISs). The changes took effect on 15 March 2018, when the Finance Act 2018 received Royal Assent.

Broadly speaking, an EIS or SEIS company, or a company in which a VCT is investing must both:

1. Have objectives “to grow and develop its trade in the long term”.

2. Carry a “significant risk that there will be a loss of capital of an amount greater than the net investment return”.

The changes are intended to end venture capital schemes – particularly EISs – which often did little more than return the investor’s original capital at the end of the tax relief clawback period. Such schemes were usually asset-backed, typically focusing on pubs, ship ownership/chartering or film production, where pre-sales were in place.

For many years the Treasury tried to exclude such ‘safe’ trades, only for other low-risk options to emerge. The new risk-to-capital condition, and its somewhat subjective criteria, is designed to put an end to this cycle.

 
 
 
A simple Spring Statement  
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The Chancellor’s Spring Statement on 13 March was, as promised, a low-key event.

Last autumn, Mr Hammond announced he would have only one ‘fiscal event’ each year – an autumn Budget. The Spring Statement would become a response to revised projections from the Office for Budget Responsibility (OBR).

The Treasury has had to provide an economic commentary at least twice a year since the Industry Act 1975 was passed. Many Chancellors have taken this to mean they can have two Budgets a year – one formal Budget and another informal mini-Budget.

On 13 March the Chancellor stuck firmly to the principle of one annual fiscal event and did not announce any new spending or tax measures. It still took Mr Hammond 25 minutes to deliver his speech, however, owing to 13 new consultation papers.

Amongst the consultations were several focusing on the digital economy and the loss of tax revenue, particularly from traders based outside the UK. One paper will also review “the future role of cash”, with hints that copper coins and the £50 note may not survive much longer.

 
 
 
A turbulent February for stock markets  
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February saw a dramatic return of volatility to global stock markets.

On Friday 2 February, after most of the world’s share markets had finished for the week, the Dow Jones Index dropped by 666 points in a day. Never mind all the beastly connotations of that number, in fact it was a drop of about 2.5%. The professional’s measure of the US stock market, the S&P 500, fell 2.1%.

As might be expected, the following week was unsettled, with the Dow losing over 1,000 points on both Monday and Thursday and other global equity markets experiencing similar shocks.

There were a variety of suggestions about the sudden return of volatility to a market which had spent the previous year seemingly asleep. Some blamed monthly figures released on 2 February showing higher than expected US wage growth of 2.9% C. These were read as a possible inflation threat, that would prompt a more rapid rise in interest rates. The fact that such monthly figures are notoriously volatile was, for once, ignored.

Markets recovered their poise in the following weeks. However, the press’s attentions had moved on: a large fall always gains more attention than a similar rise, especially if the rise is more gradual. For long-term investors, the big picture can therefore be lost in the noise of short term headlines. For example, the performance of the main indices in the first two months of 2018:

Index

29/12/2017

31/1/2018

28/2/2018

Year to Date Change

FTSE 100

7687.77

7533.55

7231.91

-5.9%

S&P 500

2673.61

2823.81

2713.83

+1.5%

Euro Stoxx 50

3503.96

3609.29

3438.96

-1.9%

Nikkei 225

22764.94

23098.29

22068.24

-3.1%

MSCI EM (£)

1602.278

1650.679

1622.978

+1.3%

MSCI All-World ($)

2106.89

2214.11

2140.57

+1.6%


 
 
 
Reminders for the new tax year  
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The start of the new tax year on 6 April marks several changes to tax and related matters that could make you richer… or poorer.

The absence of a Spring Budget does not mean that the usual raft of changes at the start of the new tax year have disappeared. Most of the important changes were announced in the Autumn Budget, in November 2017. However, Scotland has also recently approved a new set of income tax rates and bands.

Here is a list of the more important changes that take effect for 2018/19:

• The personal allowance rises by £350 to £11,850. However, the allowance will still be phased out at £1 per £2 of income over £100,000, leaving an effective 60% (61.5% in Scotland) tax band for between £100,000 and £123,700.

• The higher rate threshold will rise by £1,350 to £46,350.

• Scotland will see several changes to income tax. A new ‘starter rate’ of 19% applies to the first £2,000 of taxable income and an ‘intermediate rate’ of 21% applies to taxable income between £12,150 and £31,580. The higher rate threshold will increase by £430 to £43,430 and the higher rate will rise by 1% to 41%.

• National Insurance Thresholds rise, with the starting point for Class 1 (employers and employees) and Class 4 (self-employed) becoming £8,424 a year. For employees and the self employed the upper limit for full rate contributions will also rise in line with the non-Scottish higher rate threshold (to £46,350).

• The dividend allowance will fall from £5,000 a year to £2,000 a year, reducing a higher rate taxpayer’s net income by up to £975.

• Company car scale rates will generally rise by 2% for petrol vehicles and 3% for diesels. The proportionate increase in tax can be more than those numbers suggest. For example, on a BMW 320d the charge rises from 24% to 27%, increasing the tax payable by one-eighth.

• The pension lifetime allowance will increase for the first time since 2010, albeit only by £30,000 to £1,030,000.

• Pension automatic enrolment minimum contributions will rise. In most instances that will mean a doubling for employers and a 150% increase for employees.
 
 
 
A refund for power of attorney  
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You may be due a refund if you have registered a power of attorney in recent years.

It is not often the government offers a refund because of overcharging, but last month it emerged that the Office of the Public Guardian (OPG) had been levying excessive fees for four years. The fees related to the cost of registration of a power of attorney, whether it was an enduring power of attorney or either of its lasting power of attorney successors – dealing with health and welfare or property and financial matters.

The OPG was meant to cover its costs with attorney registration charges, but instead ended up with an £89 million surplus. As such, this sum is being returned to those who registered a power in England or Wales between 1 April 2013 and 31 March 2017. The maximum refund is £54, and most claims can be made via an online form at www.gov.uk/power-of-attorney-refund.

If the person who granted the power of attorney has died, then that individual’s executor must make a claim by email. Figures obtained via a Freedom of Information request show that up to 1.8 million people may be due a refund.
 
 
 
An improvement to the ISA inheritance rules  
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The rules for inheriting ISAs will change from 6 April.

It was announced by George Osborne in 2014 that ISAs would become inheritable by surviving spouses and civil partners. At the time, nobody – not even the Treasury – was clear what the then chancellor meant.

The plans for ISA ’inheritance’, when they eventually emerged, were far from simple. Although a surviving spouse or civil partner could effectively take over the investments in their deceased partner’s ISA, the process revolved around the ISA’s value at the date of death, not when the transfer took place.

To make matters worse, the ISA tax rules ceased to apply at death, but started up again once the survivor’s inherited ISA was in place. It made an administratively complex structure of a straightforward idea.

Last November regulations were approved to simplify the process considerably, thanks to much lobbying and a protracted development of legislation. Now, for deaths occurring after 5 April 2018, in most circumstances:

• The ISA tax advantages of UK income tax and capital gains tax exemptions will continue throughout the period of estate administration.

• The inherited ISA can include any increase in value during that period.
 
 
 
Dividends expected to slow after strong 2017  
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A recently released report shows dividend payments in the UK grew more than 10% in 2017.

The report included good news for investors, as UK listed companies paid out £94.4 billion of dividends in 2017. This was up 10.5% on the previous year and a new record. However, the headline figures do not tell the whole story:

• In the final quarter of 2017 year-on-year dividend growth was just 1.1%.

• The top five dividend payers accounted for £36 out of every £100 paid, with the next ten delivering £24. The rest of the market made up the remaining £40, emphasising the concentration of dividend payers.

• Nearly half of all special dividends – one-off payments often associated with mergers or asset sales – was attributable to National Grid’s UK gas distribution disposal, totalling £6.7 billion.

• Dividends (excluding special payments) from the Top 100 companies grew by 10.0%, while the Mid 250 achieved a 14.6% increase.

• The strongest dividend growth came from the mining sector, with an increase of 162%. There was an element of smoke and mirrors about this as some big mining firms that had suspended dividends in the commodity downturn – such as Glencore and Anglo American – resumed payouts.
 
 
 
PRIIPS – the latest acronym for retail investors to learn  
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New regulations are producing some strange figures in investor information documents.

There is a new acronym causing furrowed brows among investment managers, financial advisers and regulators: PRIIPS. PRIIPS are ‘Packaged Retail and Insurance-based Investment Products’, which includes most fund and investment-related products aimed at retail investors. Since 1 January 2018, a new set of EU regulations have set out what a new Key Information Document (KID) must tell potential PRIIP investors.

The idea behind KIDs is a sensible one. For some years collective funds, such as unit trusts, have had to produce a KIID (Key Investor Information Document), but there was no equivalent document for other personal investment products. This meant comparisons between different products were somewhere between difficult and impossible. The new KID was designed to provide a common set of information on risks, performance scenarios, costs and other factors in a standardised way. The aim was to make investors’ lives easier.

In practice there have been some glitches. Firstly, the transitional rules mean that KIIDs (not KIDs) can still be provided by investment managers until the end of 2019. The extra “I” adds plenty of difference – for example the old KIID includes past performance data, whereas the new KID does not. To make matters worse, the new KID rules can produce some strangely optimistic numbers covering four future ‘performance scenarios’.
 
 
 
HMRC counts the cost of tax reliefs  
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HMRC has published its annual assessment of the cost of tax reliefs.

The cost of pension relief

Every January HMRC publishes a table of ‘Estimated costs of principal tax reliefs’. Any Chancellor facing a budget deficit is bound to run his eyes down the list to see where the money is not coming in. After that assessment, they may well ponder whether some tweaking could benefit the Exchequer’s coffers without causing too much of a political outcry.

This year’s list has a familiar look to it in terms of the most expensive reliefs. At a cost of over £101 billion the largest factor by far is the personal allowance. The next three largest are equally untouchable for a Chancellor – national insurance contribution (NIC) thresholds and the capital gains tax exemption for main residences. Fifth largest is income tax relief for pension schemes, costing an estimated £24 billion in 2017/18.
 
 
 
Still time for year end pension contributions  
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This is the time of year to review your pension contributions.

February and March are rightly popular times for reviewing and making pension contributions. By this stage you should have a good idea of what your income for the tax year will be and how much you may be able to contribute as a one-off payment before 6 April arrives.

In this tax year, there are several changes to note:

• Thursday 5 April will be the last day on which you can make a contribution to mop up any unused annual allowance from 2014/15. To do so you will need to first use up your annual allowance for the current tax year.

• The money purchase annual allowance was reduced from £10,000 to £4,000 at the start of this tax year, although the legislation achieving this did not arrive until November. If you have used the new pensions flexibility to draw benefits this may limit the amount you can contribute.

• From 6 April 2018, the lifetime allowance rises by 3% to £1,030,000. At the margin that modest increase may permit more benefits to be taken without triggering tax charges.

• From 6 April 2018, automatic enrolment contribution levels increase, with the total of employee and employer payments rising by about 150%. There will be another increase of around 60% the following year.
 
 
 
The new Spring Statement replaces the Budget  
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There will be no Spring Budget this March, but that does not mean the Chancellor is staying silent.

On 13 March, the Chancellor will present a Spring Statement to the House of Commons, not a Budget. The next Budget should be in the autumn, probably November. The rationale for the revised schedule is to give more time to develop legislation and avoid the situation of changes taking effect from 6 April, but not reaching the statute book until three months or more later.

This problem was made worse in 2017, when the snap election meant most of the March Budget measures were put on hold. Some that took effect from 6 April 2017 – such as the reduction in the money purchase annual allowance – were in a Finance Act that only received Royal Assent on 16 November.

Despite the new schedule, there seem to be plenty of people expecting a Spring Budget in March, perhaps because 2017 was an unusual year – with two budgets and three Finance Bills. However, 2018 should be much quieter on the tax front (assuming there is not another surprise election).
 
 
 
Deadline approaching for using your ISA allowances  
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Investors and their advisers should start to turn their focus to the end of the tax year on 5 April.

ISA contributions have historically always been focused on the end of the tax year. This is the case even though it would make more sense to invest at the start of the tax year, to maximise the period of tax shelter.

This time of year, the personal finance pages start to fill with stories about ISAs, often including tales of ISA millionaires. For all the coverage, these remain a rare breed, but they serve as a reminder that regular saving over a long term can create meaningful amounts of capital.

The past couple of years have seen total ISA contributions falling primarily due to a sharp drop in the popularity of cash ISAs. These have seen contributions fallen by over a third between 2014/15 and 2016/17 for two good reasons:

1. Ultra-low interest rates and limited competition between banks have made prospective returns look miserable, particularly as inflation has picked up; and
2. The introduction of the personal savings allowance in 2016/17 has meant many depositors no longer need an ISA to escape tax on their deposit interest.

 
 
 
A rewarding 2017 for shares  
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The world’s share markets were a profitable place to be in 2017.

Index

2017 Change

FTSE 100

+7.6%

FTSE All-Share

+9.0%

Dow Jones Industrial

+25.1%

Standard & Poor’s 500

 +19.4%

Nikkei 225

+ 19.1%

Euro Stoxx 50 (€)

+ 6.5%

Shanghai Composite

+6.6%

MSCI Emerging Markets (£)

+22.7%


2017 had its fair share of dramas. There was the unending reality show of Donald Trump and his tweets. On this side of the Atlantic the ongoing saga was Brexit and the “strong and stable” government that was promised, but somehow never materialised. North Korean rockets were a regular headline feature, as was the growing assertiveness of China under Xi Jinping. Europe had a crop of elections to worry about, ending with Germany being without a government since September and Catalonia seemingly back at square one.

And yet world stock markets had a very good year. In sterling terms, the MSCI World Index was up 20.11%. This was not just the impact of the strong performance of the USA, which accounts for just over half of the World Index: strip out Uncle Sam’s influence and the rest of the world returned 21.03%.
 
 
 
The slow climb of US interest rates, a quarter percentage at a time…  
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The US central bank increased interest rates again in December.



While the Bank of England managed just one interest rate rise in 2017, to end the year at 0.5%, its counterpart in the US notched up three increases, finishing at 1.25%-1.50%. The trio of Federal Reserve increases were all well telegraphed, so much so that by the time each arrived, the focus was on when the next 0.25% addition would occur.

That was the case with December’s increase, the last overseen by Janet Yellen as Chair of the Federal Reserve before Jay Powell, the Trump nominee, takes over. The conclusion from the analysts who delve into the Fed’s reports is that three rate increases are expected in 2018. However, the composition of the Federal Open Market Committee, which makes the interest rate decision, will be changing significantly in 2018, so this number is by no means set in stone.
 
 
 
The next steps in automatic enrolment  
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The government has published a review on automatic enrolment in workplace pensions which makes important proposals for employers.

Automatic enrolment of employees in workplace pensions has been a greater success than many predicted when it was introduced in October 2012. To date over nine million employees have been automatically enrolled into a workplace pension and more than 900,000 employers have complied with their auto enrolment responsibilities. Total annual contributions into workplace pensions reached a ten-year high of £87 billion in 2016.

With the framework now firmly in place, the government has turned its attention to the next developments for workplace pensions. Its main ideas are:

• The minimum age at which automatic enrolment begins should be reduced from 22 to 18. This would bring another 900,000 young people into auto enrolment.

• The contribution structure would change so that once the earnings trigger (£10,000 for 2017/18 and 2018/19) is reached, the contribution percentage paid by employers and employees would be based upon all earnings, not earnings exceeding the lower earnings limit (£5,876 in 2017/18 and £6,032 in 2018/19). The upper earnings limit (£45,000 in 2017/18 and £46,350 in 2018/19) would still apply to cap contributions. In current terms, the effect would be to increase contributions for an individual earning £26,000 by nearly one third.

• The government will test “targeted interventions … to identify the most effective options to increase pension saving among self-employed people”. Only 16% of the self-employed were contributing to a pension in 2015/16, a large gap in pension coverage given they now number 4.8 million (15% of the workforce).
 
 
 
HMRC v Airbnb – rent-a-room relief in the spotlight  
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An HMRC paper promised in the Budget could be bad news if you use Airbnb.

The government has set out a call for evidence relating to rent-a-room relief in response to the rise in short term rentals facilitated by Airbnb and its competitors. Rent-a-room relief is typical of some of the neglected parts of the UK income tax system. Introduced nearly 26 years ago, it has subsequently changed only three times, despite governments pursuing the goal of increasing the supply of low cost rented accommodation ever since.

In 1992 the relief effectively meant there was no tax to pay on rental income of up to £3,250 a year for letting a room (or rooms) in your own home. After five years the relief level was put up to £4,250, where it remained for the next 19 years. That period of benign neglect ended in 2016 when the relief was given a boost to £7,500 by one of George Osborne’s final measures as Chancellor. Now, to judge by the call for evidence issued by HMRC in December, his successor, Philip Hammond, appears to be wondering whether the large increase was such a good idea.

When the relief first appeared, it set no minimum letting period, so it applied whether you let a room to 52 different weekly tenants or throughout the year to just one. At the time, the notion of weekly renting to different tenants was at best fanciful – that was what hotels did, not homeowners. Just over a quarter of a century later, Airbnb and its competitors have made a reality of rapidly revolving tenants. Rent-a-room relief is now being used for holiday and event short stays as well as more traditional forms of letting.
 
 
 
The Scottish version of income tax unveiled  
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Last month saw another Budget – for Scotland, this time.

The Scottish Budget in the middle of December contained potential omens for the whole of the UK with its proposed changes to income tax bands and thresholds. In the foreword to the main Budget document, Derek Mackay, the Scottish Cabinet Secretary for Finance and the Constitution said he believed his income tax measures would make the system in Scotland, “fairer and more progressive”.

Whether or not that is true, Mr Mackay has certainly made it more complicated, as the table of proposed tax rates and bands for 2018/19 shows:

Scotland   UK Excluding Scotland
Taxable Income
£
Tax Rate
%
Band Name Taxable Income
£
Tax Rate
%
0-2,000 19 Starter N/A N/A
2,001-12,150 20 Basic 0-34,500 20
12,151-32,423 21 Intermediate N/A 20
32,424-150,000* 41 Higher 34,500-150,000* 40
Over 150,000* 46 Top/Additional Over 150,000* 45

* If earnings exceed £100,000 the Personal Allowance is reduced by £1 for every £2 earned over £100,000.

The proposed structure will result in 70% of all Scottish income tax payers paying less than they do for the current financial year, according to Mr Mackay, although some of this achievement is down to the Westminster Chancellor raising the UK-wide personal allowance by £350. Nevertheless, the other 30% will pay enough extra tax to mean a boost of £164m to the Scottish government’s income in 2018/19. The difference in bands and rates may look modest enough, but Scottish residents earning £50,000 a year will end up paying £9,015 of income tax in 2018/19 against £8,360 for their English, Welsh and Northern Irish counterparts.
 
 
 
Fancy your chances at 1 in 24,500…?  
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National Savings & Investments have increased their interest rates – and boosted a chance of winning.

National Savings & Investments (NS&I) beat many of its banking competitors by announcing a 0.25% increase in its variable rate products. These took effect from 1 December and are shown in the table below for taxable products open to new investment:

Product

Old rate

New rate

Direct ISA

0.75% tax-free/AER

1.00% tax-free/AER

Direct Saver

0.70% gross/AER

0.95% gross/AER

Income Bonds

0.75% gross/AER

1.00% gross/AER

Investment A/C

0.45% gross/AER

0.70% gross/AER

Junior ISA

2.00% gross/AER

2.25% gross/AER


None of the non-ISA rates are especially competitive. For example, at the time of writing the best instant access rates were around 1.3%. The Direct ISA is nearer the top of the league tables, although the recently launched Junior ISA lags behind.

The Premium Bond prize fund interest rate was also boosted by 0.25%, from 1.15% to 1.40%. NS&I used the increased prize fund to improve the odds of winning a monthly prize from 30,000:1 to 24,500:1. The mix of prizes was not changed: 90% of the prize fund will continue to be paid in prizes of £100 or less. According to NS&I this will mean that in December 2017, 982 out of every 1,000 Premium Bond prize winners will receive the near-ubiquitous £25 prize.
 
 
 
Venture capital schemes and the Budget  
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The Autumn Budget included a raft of measures focused on venture capital schemes.

The writing was always on the wall after a Treasury consultation issued in August posed the leading question, “Are there areas where the cost effectiveness of current tax reliefs could be improved, for example reducing lower risk ‘capital preservation’ investments in the venture capital schemes?”

The Autumn Budget gave the expected answer ‘yes’ by revealing a new “risk to capital” condition. Broadly speaking, this will require venture capital trusts (VCTs), enterprise investment schemes (EISs) and seed enterprise investment scheme (SEISs) to invest only in companies where “there is significant risk of loss of capital”. The new rule will apply from when the Finance Bill 2017-18 receives Royal Assent, probably in early spring 2018. Full details are awaited, but it appears that all existing schemes will be affected if new investments are made.

This is an area that the Treasury has visited may times over the years, with the latest example a ban on investment in any form of energy generation activity, which took effect from the start of 2016/17.
 
 
 
The quiet NIC increases  
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The first Budget of 2017 in March hit a serious obstacle when the Chancellor attempted to raise national insurance contributions (NICs) for the self-employed. This time around he was subtler in his approach.

When Mr Hammond announced an increase to Class 4 NICs in the spring Budget, partly to offset the end of Class 2 contributions from April 2018, it nearly cost him his job. His backbenchers and the popular press rose up against this new imposition on white van man and his ilk. Within a week the Chancellor had backed down.

This autumn the government adopted different tactics. In a written statement issued three weeks before the Budget, the Exchequer Secretary to the Treasury announced that the proposed National Insurance Contributions Bill would be delayed until 2018, with the result that the abolition of Class 2 NICs (currently £2.85 a week) would be deferred for 12 months. The net effect may have been an increase in NICs for the self-employed, but there was barely a murmur in the press.

In his Budget, the chancellor added 10p a week to the Class 2 rate and raised the upper threshold for the full NICs rate for the self-employed (and employees) by £1,350. The net result is that in 2018/19 the self employed will pay more NICs than under the spring Budget plans if their income is less than £23,764 (but at least £8,424).
 
 
 
The only way is up – after 3,773 days…  
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November marked the first rise in the Bank of England Base Rate in over ten years.

Base Rates Since May 2007
Source: Bank of England

At the start of November, the Bank of England raised its base rate for the first time since 5 July 2007. Just over a decade ago, the previous increase was 0.25%, from 5.5% to 5.75%. This time around the increase was the same, but represented a doubling in the base rate.

The move had been widely expected after several senior Bank officials dropped heavy hints that an increase was likely before the end of the year. In the run up to the announcement, the markets assumed a 0.5% rate as a done deal and focused on whether the rate increase would be “one and done” or the start of a series of rate rises.
 
 
 
The buy-to-let Budget headline you didn’t see  
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The Autumn Budget contained more bad news for many buy-to-let investors which went largely unnoticed.

April 2018 will see the next step down in mortgage interest relief for investors in buy-to-let (BTL) residential properties. The amount of interest that can be offset against rental income drops from 75% to 50%, with a corresponding increase to 50% in the element that qualifies for a 20% tax credit.

If you pay tax at more than basic rate, that means more interest on which you effectively receive only 20% relief rather than 40% or 45%. It could also mean an increase in your gross income, which might trigger other undesirable tax consequences, such as a phasing down or out of your personal allowance.

The mortgage interest changes have encouraged BTL investors to buy new properties via specially-established companies, sometimes also transferring existing properties into the same company. Using a company can create a double capital gains tax charge – once in the company and a second time on the shareholder.

So far, however, the impact of this has been abated by the fact that corporate capital gains still benefit from indexation relief. That relief means only gains above inflation (measured on the more favourable Retail Prices Index – RPI) suffer corporation tax (currently 19%). As the example shows, even when inflation is relatively low, indexation can provide a real tax advantage.
 
 
 
A different ending for Japan’s election gamble  
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Not all snap elections turn out the same way...

A right of centre Prime Minister calls an election before the end of the government’s term to take advantage of rising poll numbers and seeming disarray amongst the opposition parties. What could possibly go wrong?

In the UK, the answer was close to everything. Japan, as often happens, is a different matter. Last month, Prime Minister Shinzo Abe went to the polls a year early, seeking a mandate to continue his tough stance to North Korea and “Abenomics”, his three-part economic policy (which includes a sales tax hike in 2019).

Initially, it looked as if Abe had miscalculated, but by the time the polls closed on 22 October, he and his coalition partners had secured a “super majority” – more than two thirds of the seats in the House of Representatives. Abe could now become Japan’s longest-serving prime minister, as the next election is four years away, after the Tokyo Olympics.

The news of Abe’s victory was welcomed by the Japanese stock market, which is relieved that “Abenomics” will continue. Economists expect this will mean more financial stimulus, with ultra-low interest rates for the foreseeable future. Such a backdrop ought to be good news for Japanese shares, which have risen over the past five years that Abe has been in power.
 
 
 
Almost but not quite – near miss on inflation helps boost interest rate  
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September inflation was just low enough to spare Mark Carney writing to the Chancellor. And helped spur the first interest rate rise in a decade.


Source: National Statistics

Each year the Chancellor of the day gives the Bank of England an inflation target to meet. Ever since Gordon Brown changed the inflation index used to the Consumer Prices Index (CPI), that target has been 2%. The Bank is given a leeway of 1%, so provided the annual CPI figure is between 1% and 3%, it is deemed to be meeting its target.

Once either boundary is crossed, the Governor of the Bank of England must write a letter to the Chancellor explaining why inflation is off target. Three months’ later the Governor must repeat the process unless inflation has returned to its allotted corridor.

Some economists thought that last month that the Governor, Mark Carney, would be picking up his pen to explain to Philip Hammond why inflation was running at over 3%. It would not have been Mr Carney’s first letter – as the graph shows, he has also had to exercise his correspondence skills in explanation of a sub-1% rate: the last of those letters was sent at the end of 2016.
 
 
 
Rise in popularity for venture capital trusts  
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New figures from HMRC show a large jump in VCT investments in 2016/17.

In September HM Revenue & Customs (HMRC) issued updated statistics on the funds raised by venture capital trusts (VCTs). These showed that investment during last tax year reached £570m, an increase of over 28% on 2015/16. This was the highest level of VCT capital raising since the 2005/06.

The rising popularity of VCTs, despite their high risk nature, is due to a variety of factors

• The reductions in the both the lifetime allowance and the annual allowance in recent years have made pension contributions no longer a tax-efficient option for a growing number of high earners. At worst a contribution could attract no income tax relief, but still produce a retirement benefit that suffers up to 55% tax.

• HMRC’s successful campaigns against artificial tax avoidance schemes and a changing public attitude have discouraged the use of aggressive, loophole-seeking arrangements.

• The VCT market has matured, with a steady pattern of fund mergers creating larger, more liquid VCTs with fixed costs spread more thinly. The sector now has assets under management of over £3.6bn.
 
 
 
A pensioners’ bonanza?  
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State pensions will rise by 3% next April, but it’s not all strictly good news.

On the day that a CPI inflation rate of 3% was announced, the BBC website covering the rise had a picture of pensioners “dancing for joy”. The supposed reason for their jollity was that the 3% September inflation figure was the one that would be used to fix state pension increases from April 2018.

The BBC’s response was understandable, but simplistic. Pensioners will be no better off because their increased income is, in theory, matched by increased prices. In practice they may be marginally better or worse off, depending upon how their spending pattern compares with the “shopping basket” used to calculate the CPI. The twelve components of that index showed annual inflation ranging from 4.3% (alcoholic drinks and tobacco) to 1.4% (miscellaneous goods and services).

…and on private pensions?

At least state pensions have inflation linking. Such protection is by no means certain among private pensions. Most large occupational final salary schemes offer inflation-proofing to their pensioners, although outside the public sector schemes increases may be capped. In the past, many people drawing benefits from personal pensions and similar arrangements have chosen to buy an annuity with no inflation protection. While the initial (level) income was much higher, its real value was steadily eroded by inflation. For example, £1 in September 2007 now has a buying power of 78.7p, based on CPI inflation.
 
 
 
Has your income risen by 14.3% over the past year?  
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Statistics show that dividends from UK shares are still rising rapidly.


Source: Capita Asset Services. Overall 2017e figure is Capita estimate

The latest quarterly ‘UK Dividend Monitor’ from Capita Asset Services paints a rosy picture for income-seeking investors in UK shares. As Capita noted, “Companies are very cash-generative, which is strongly supporting dividend payments... The easy gains from the pound’s devaluation, where dividends declared in dollars or euros were translated at much more favourable exchange rates, are now behind us, but the profits of those companies with a UK cost-base and overseas markets for their goods and services can continue to benefit.”

Capita’s number crunchers calculated that in the third quarter of 2017:

• Total dividends from UK shares were 14.3% higher than in the third quarter of 2016.
• Special (one-off) dividends rose by two fifths, year-on-year.
• Stripping out the special payments, underlying (regular) dividends were 13.2% higher.
• Whereas sterling’s weakness boosted dividend increases in the first two quarters, it made virtually no difference in the latest figures. Adjusted for currency, underlying dividends were up 12.9%, the fastest quarterly rise since 2012.
 
 
 
Markets rise against the grain in Q3  
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The third quarter of 2017 has ended and despite the heavy political news, investment returns were generally positive.

Index

Change 30 June – 29 September

FTSE 100

+0.8%

FTSE All-Share

+1.2%

Dow Jones Industrial

+4.9%

Standard & Poor’s 500

 +4.0%

Nikkei 225

+7.7%

Euro Stoxx 50 (€)

+ 4.4%

Shanghai Composite

+3.9%

MSCI Emerging Markets (£)

+3.6%


Think about the third quarter of this year – July to September – and you might think markets had suffered a hard three months. In the UK there was the backwash from the general election, the slowly-moving Brexit talks and inflation nudging 3%.

Across the Atlantic Donald Trump was failing to pass legislation while twittering about an attack on North Korea. Europe had its own surprise at the end of the quarter, with Angela Merkel winning a less than decisive election that will probably end in a three-way coalition government.

Just for good measure, in Japan a snap general election was called for October by Shinzo Abe, hoping to exploit a weak opposition (now where have you heard that before…?).
 
 
 
Venture capital schemes: changes afoot?  
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A consultation paper issued in August could mean changes to venture capital schemes.

At the start of the holiday season the Treasury issued an open consultation paper entitled “Financing growth in innovative firms”. Its focus was on what has become known as ‘patient capital’, which the Treasury defined as “long-term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses”.

The paper considered existing investment incentives, such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs), which have been around for many years. Under the heading of “Relative costs of current interventions” the Treasury noted that “Industry estimates suggest that the majority of EIS funds had a capital preservation objective in tax year 2015/16, and around a quarter of VCTs have investment objectives characteristic of lower risk capital preservation”.

The paper then went on to ask a leading question: “Are there areas where the cost effectiveness of current tax reliefs could be improved, for example reducing lower risk ‘capital preservation’ investments in the venture capital schemes?”.

A little over a month after the paper was published, a curious thing happened. One VCT, withdrew a new share issue which it had launched just six days earlier. The decision to pull the issue “…was made in light of ongoing discussions in respect of investment in asset-based businesses following publication …of the consultation document”.
 
 
 
Gearing up for the Autumn Budget  
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The Chancellor has announced the date of his first Autumn Budget as Wednesday 22 November.

The second Budget of 2017 will be both Mr Hammond’s first Autumn Budget and the first Budget after the general election.

Traditionally, the first Budget of a new parliament is the chance for a Chancellor to administer the “medicine” of tax increases. Doing so at this stage gives the electorate the maximum time to forget the measures before returning to the polls. However, on this occasion the Chancellor will probably be more constrained. Mr Hammond does not have carte blanche, even though in theory the government has a majority for Budget legislation, thanks to support from the DUP. His own backbenchers can block the best made plans, as the Spring Budget climb down on class 4 national insurance contributions (NICs) showed. So, what can we expect on 22 November?

Less space for manoeuvre

The answer is less clear than usual. For many years the contents of the Spring Budget have been widely trailed in the preceding Autumn Statement. In 2017 there has been no such statement ahead of the Autumn Budget – the first of the new Spring Statements will not arrive until 2018.

The latest government finance figures suggest that the Chancellor will be borrowing less than was projected in March, giving him some wriggle room. However, there are many demands on any spare cash he can find, from replacing the lost extra class 4 NICs income to addressing calls for higher public sector pay and reduced tuition fees.
 
 
 
Markets look to an early interest rate rise  
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The Bank of England has signalled that interest rates may rise soon.

Early in September, the money markets were expecting the first Bank of England interest rate rise to occur in late 2018, at the earliest. A little more than a week later, the markets’ view was that there was a near 50% probability of a 0.25% base rate increase by November, with a rate rise a virtual certainty by the following February.

There are two main reasons for the markets’ U-turn:

• The August inflation figures (2.9% for the CPI, 3.9% for the RPI) were higher than expected. These prompted the Bank to say that CPI inflation “is now expected to rise to above 3% in October”. At that level, Mark Carney, the Bank’s Governor, will have to write a letter to the Chancellor explaining why inflation is more than 1% above target.

• At its September meeting, the Bank of England’s rate-setting Monetary Policy Committee (MPC) gave a clear warning that developments were pointing to a tightening of monetary policy “by a somewhat greater extent over the forecast period than current market expectations”. The likelihood of an imminent rate rise does not mean that further rate rises will follow at every meeting of the MPC, taking rates back up to historically ‘normal’ levels. The Bank has regularly said this will not be the case and in September it stated that “any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent”.
 
 
 
Cash ISAs losing favour  
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New statistics from HM Revenue & Customs (HMRC) show that cash withdrawals from individual savings accounts (ISAs) are probably more than matching fresh contributions.

In the world of ISAs, cash ISAs have long attracted more contributions than their stocks and shares counterpart. However, the pattern has started to change, as the graph below shows.

ISA Contributions 2008-2017
Source: HMRC

In the last tax year, contributions to cash ISAs fell by a third according to the latest HMRC data. They still amounted to over £39 billion, but the total held in cash ISAs increased by just £1.26 billion between April 2016 and April 2017. Once a year’s interest is allowed for, even at current miniscule rates, that suggests more money was withdrawn from existing ISAs than flowed in through new contributions.

 
 
 
A sleeping dragon wakes on tax avoidance  
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HM Revenue & Customs (HMRC) has come closer to using its weapon of last resort against tax avoidance schemes.

“Whack a mole” used to be a good summary of the battle between the extreme end of the tax avoidance industry and HMRC (together with its predecessor, the Inland Revenue). First, some ‘creative’ minds would dream up a scheme that weaved through the labyrinthine tax legislation to make a tax liability disappear. When the tax authorities became aware of the situation, more legislation would be produced to close the loopholes being exploited. The ‘creatives’ would then move on to another tax-evaporating idea, sometimes even exploiting the anti-avoidance laws used to block a previous scheme.

In July 2013 the then Chancellor George Osborne took what was seen as a controversial step to end this merry-go-round by introducing the general anti-abuse rule (GAAR). As its name suggests, the aim of the GAAR was to prevent the letter of the law being manipulated to prevent the spirit of the law applying.

The GAAR incorporates a “double reasonableness” test which basically required HMRC to show that the arrangement undertaken could not be “reasonably regarded as a reasonable course of action”. The question of what represented a ‘reasonable course of action’ is determined by the GAAR Advisory Panel, which consists of three tax experts.

 
 
 
A Junior ISA with a minor interest rate  
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National Savings & Investments (NS&I) have launched their first Junior ISA.

The Junior ISA (JISA) was introduced in 2011 as a replacement for the Child Trust Fund. It had a slow start, but momentum has built and, according to the latest figures from HM Revenue & Customs (HMRC), JISAs now hold over £2,750 million of investments for children under age 18.

While long a player in the main cash ISA market, NS&I never offered a junior version until last month, with its new launch. The plan’s main features are:

• A variable interest rate of 2% (against 0.75% for NS&I’s Direct ISA);

• Transfers in (from JISAs and Child Trust Funds) are allowed (again a difference from the new contributions-only Direct ISA);

• No penalties on transfer out (although access to cash is normally not possible before age 18); and

• Online operation only.
 
 
 
Self-employed struggle to save  
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Self-employment is the dream of many, especially as the goal of retirement seems to creep further out of reach. Being your own boss sounds great. But there are drawbacks. Around two million of the country’s self-employed workers are unable to save any money each month, leaving them vulnerable to financial shocks.

The same body of workers spend more on bills than the UK average and only 4% enjoy the benefit of income protection insurance cover which would kick in if they were unable to work.

These worrying findings about the self-employed sector were revealed in insurer LV=’s second instalment of its Income Roulette report, a study of debt, savings and protection among 9,000 people.

The results show that four-in-ten (41%) self-employed people can’t afford to save any money each month and a further one-in-ten (11%) saves less than £50. A third of respondents said they could not survive for more than three months if they lost their income. This means they fall short of the Money Advice Service’s recommended amount of savings that should to be kept in reserve to maintain a level of financial resilience if an emergency strikes.
 
 
 
August share falls – a cautionary tale  
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August provided a reminder that even in seemingly quiet times, the value of individual shares can be volatile.

August 2017 Share Price Graph

August is traditionally a month when the turnover on stock exchanges slows down because many people are on holiday. In the jargon, trading can be “thin”. That doesn’t mean, however, that nothing much happens, as the graph above shows. While the FTSE 100 (top line in blue) merely wobbled, there were some major movements going on for individual companies, both within and outside the index.

The bottom line in red on the graph shows the dramatic fall of one FTSE 100 constituent, Provident Financial Group, best known for its doorstep lending business. Provident released its second profit warning in August and scrapped its dividend payment which, as the graph indicates, had not been widely expected. This month the company will be ejected from the FTSE 100 because its value has fallen so much.

The story behind the middle black line is similar. It shows the fate of Dixons Carphone, which was a member of the FTSE 100 until demotion in March of this year. Dixons Carphone, the High Street electronics retailer, revised down its profit forecast, bemoaning the reluctance of smartphone owners to update their handsets as regularly as they once did. The announcement was again off the radar, with the inevitable result on the share price.
 
 
 
What’s your inflation yardstick?  
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Inflation was in the news last month in various guises.

August was a month when inflation hit the headlines several times trailing a cloud of acronyms:

• The Bank of England Quarterly Inflation Report (QIR) revealed that the Bank now expects inflation (as measured by the Consumer Prices Index – CPI) “to peak around 3% in October”. The Bank expects inflation will still be above its 2% central target by the end of the first quarter of 2020. This forecast assumes that interest rates will rise by 0.5% over the period, in line with market expectations. The Bank is relatively unconcerned about missing its target, saying that the overshoot “reflects entirely the effects of the referendum-related fall in sterling”.

• Shortly before the QIR was published, news emerged that CPIH, the inflation measure favoured by the Office for National Statistics (ONS), had been approved as a National Statistic by the Office for Statistics Regulation. CPIH is a variant of the more widely quoted CPI, the “H” being shorthand for the addition of owner occupiers’ housing costs (including council tax). CPIH could ultimately replace both the CPI and the now discredited RPI. The ONS view of the RPI is that it “is a flawed measure of inflation with serious shortcomings and we do not recommend its use.”

• In mid-August, the ONS issued inflation statistics for July, showing CPI and CPIH both running at an annual 2.6%, but RPI 1% higher. The July RPI is an important number, because it sets the basis for next year’s rail fare increases (although the government could change its mind and choose something below 3.6%).

 
 
 
More tax transparency with offshore letters  
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HM Revenue & Customs (HMRC) wants to remind you of its interest in your offshore investments.

Globalisation is not just about trade and investment flows. One of the significant changes to tax in recent years has been a move towards globalisation of tax. A prime example is the development of Common Report Standards (CRS) by the Organisation for Economic Cooperation and Development (OECD).

If you hold investments abroad, then this welter of abbreviations could explain some recent correspondence you have received. Under CRS, over 100 jurisdictions have agreed to automatic exchange of tax information. More than 50 early adopters, including HMRC, will start to exchange information by the end of this September. HMRC’s view is that CRS “dramatically increases international tax transparency.”

In advance of the first round of CRS information exchange, the government introduced legislation requiring certain financial institutions, financial advisers, solicitors and tax advisers to send a standard HMRC “notification letter” to any UK clients for whom they have provided overseas financial advice, services or referral. The deadline for issuing these letters is 31 August 2017.
 
 
 
When I’m 68…: state pension age rising again  
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The government has announced plans for a further increase in state pension age.

On the day before parliament shut up shop for its summer holidays, David Gauke, the Secretary of State for Work and Pensions, announced that the government had decided state pension age (SPA) should be increased to 68 between April 2037 and April 2039. The timing is seven years earlier than currently legislated for in the Pensions Act 2007. As a result, if you were born between 6 April 1970 and 5 April 1978, the age at which you can draw your state pension is set to rise.

Despite some of the newspaper headlines, the announcement came as no real surprise. Earlier this year John Cridland had published a final report, commissioned by the Department for Work and Pensions (DWP), which recommended just such a move in the state pension age. The DWP had been statutorily due to reveal its decision on raising the SPA by 7 May, but wriggled out of the obligation, claiming it was hidebound by pre-election purdah rules.
 
 
 
Dividends keep growing for 2017  
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UK companies paid out a record amount in dividends in the second quarter of this year.

At a time when there is much heated debate about whether the Bank of England should double its base rate to 0.5%, it can be easy to forget the much higher income yield available from UK shares. While most interest rates remain at sub-inflation levels, the UK stock market has an average dividend yield of about 3.6% and, as new data recently released show, those dividends are growing strongly.

Research undertaken by Capita, the share registrars, revealed that in the second quarter of 2017:

• UK companies paid a record £33.3bn in dividends, up 14.5% on the second quarter of 2016.

• If special (one-off) dividends are excluded, the total falls to £28.6bn, still a record and a year-on-year increase of 12.6%.
 
 
 
Pension flexibility two years on – the report card  
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The Financial Conduct Authority (FCA) has examined the impact of pension flexibility and is worried about the lack of advice.

Pension flexibility came into effect in April 2015. In theory, since then it has been possible from age 55 onwards to withdraw your entire money purchase pension fund as a lump sum, albeit generally 75% would be taxable as income. When the proposals first emerged there were concerns expressed that the temptation to take a pot of cash and spend it would be too great for many. The FCA has been examining what has actually happened since 2015 and in July published an interim report on its findings.

The FCA found that over half of the pension pots accessed since April 2015 had been withdrawn in full. While this grabbed the headlines, it does not tell the whole story: 60% of those pots were worth less than £10,000, while another 30% were below £30,000. That does not suggest the worries about people blowing their pension funds on a new Lamborghini have been realised. Indeed, the opposite seems to have happened: over half of those who fully cashed in their pension reinvested the proceeds in other savings or investments. However, as the FCA noted, such a move can “…give rise to direct harm if consumers pay too much tax, or miss out on investment growth or other benefits”.
 
 
 
Finance Acts 2017: the sequel?  
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The long-running saga of the final spring Budget and subsequent Finance Bills is one step nearer the end.

The Chancellor’s spring Budget was thrown into disarray by the snap election. It was billed as the last spring Budget, since from now on all Budgets will be autumn events. However, only about a fifth of the Budget’s proposals made it onto the statute book before Parliament shut up shop ahead of the election. The question of what would happen to the four fifths lost in action has been up in the air ever since.

It was (and is) an important question because large parts of the missing legislation were originally intended to take effect for this tax year from 6 April 2017. A good example is the proposed 60% reduction in the money purchase annual allowance (MPAA) to £4,000, which could affect you if you both draw pension income and your (and/or your employer) also make pension contributions. In theory, the current £10,000 limit still applies, but in practice acting on such a premise could be an expensive mistake should the proposed change eventually be enacted with an April 2017 start date.
 
 
 
Investment round up – 2017 half-year report  
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The first six months of 2017 have presented investors with an interesting half year.

Index

2017 Change to 30 June

FTSE 100

+2.4%

FTSE All-Share

+3.3%

Dow Jones Industrial

+8.0%

Standard & Poor’s 500

 +8.2%

Nikkei 225

-1.1%

Euro Stoxx 50 (€)

+ 4.6%

Shanghai Composite

+2.9%

MSCI Emerging Markets (£)

+11.5%


Think about the first six months of 2017 in the UK. There were several serious terrorist attacks, Article 50 was triggered to start the formal Brexit process, the Budget less than perfectly executed and, to round matters off, a snap election was called which delivered no overall majority to the winners. A challenging half year, to put it mildly. So, what happened to the UK stock market over the period?

 
 
 
No summer Budget, but…  
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The general election left the future of many spring Budget announcements up in the air, but that situation may soon change.

When Theresa May announced her snap election in April, it threw a major spanner in the previous month’s Budget. There was no time to pass the 776 pages of Finance Bill before parliament shut down. The result was that about 80% of the Bill was removed and its uncontroversial residue passed through parliament in a few days. At the time it was anticipated that following the election the Chancellor – not necessarily Mr Hammond – would reveal a Summer Budget, just as his predecessor did in 2015. The second Budget of the year was expected to reinstate the lost measures and add a few more that were best left until after the polls closed.

It did not quite work out that way, as we all know. Mr Hammond has remained in place at 11 Downing Street and in June told Andrew Marr “…there’s not going to be a sort of summer Budget or anything like that, there will be a regular Budget in November as we had always planned…”. Shortly after that appearance, the background notes to the Queen’s Speech revealed that there would indeed be a Summer Finance Bill, even if there was no Budget.

 
 
 
China becomes an emerging market as MSCI finally opens up  
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China-listed shares are finally to be included in the leading emerging markets index.

As we as highlighted in May, China has the world’s second largest equity market, but at present shares listed on the Chinese stock exchanges don’t figure in the MSCI Emerging Markets Index. The MSCI index is the most important equity index for emerging markets, with an estimated $1,600 billion of funds using it as a benchmark. While the index already has a 28% China weighting, this relates to Chinese companies listed on stock exchanges outside China, notably Hong Kong and in the United States.

For each of the last three years, MSCI has reviewed whether conditions in the Chinese stock markets were appropriate to warrant including shares listed on them in the emerging markets index. In 2014, 2015 and 2016 the answer was no. Various technical reasons were given and each time the Chinese authorities made adjustments in the hope that next year MSCI would change its mind. Last month, the answer finally switched to yes.

 
 
 
Getting our hopes up for an interest rate rise?  
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Last month saw the first suggestions that interest rates could increase soon.


Source: The Federal Reserve

In June, the US central bank, the Federal Reserve, increased short term interest rates for the second time this year and the fourth time since December 2015. The 0.25% increase to 1.00% − 1.25% had been well signalled by Fed officials, so there was no surprise. As seems to be the case these days, the focus was more on whether the next rate rise was still three months away or might be deferred.

The day after the US interest rate decision it was the turn for the UK central bank, the Bank of England, to make its annoucement. This was universally expected to be another “no change”, leaving base rate at the 0.25% fixed amidst post-referendum concerns last August. The rate did remain unmoved, but there was nevertheless a major surprise: three out of the eight people charged with setting the rate voted for an increase. According to Reuters, this was the nearest the Bank has come to raising interest rates since 2007.
 
 
 
Mr Carney prepares to write a letter as inflation rises  
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The latest inflation numbers show prices rising at their fastest rate for nearly four years.

The May inflation data came as a surprise to many pundits. The expectation had been for inflation, as measured by the Consumer Prices Index (CPI), to remain at April’s level of 2.7%. Instead, National Statistics revealed that annual inflation had reached 2.9% (3.7% on the Retail Prices Index yardstick).

Two years after the FTSE 100 came into being, the FTSE 250 appeared. This captured the performance of the 250 UK listed companied that ranked below the Footsie’s larger constituents. The FTSE 250 was launched with an initial value of 1,412.6, an odd-looking number which becomes more understandable when you know that was the reading on the FTSE at the FTSE 250’s birth.


Source: ONS

In May, the FTSE 250 hit one of those round numbers which cause a brief flurry of comment: 20,000. That is equivalent to an average annual return of 8.8%, again excluding dividends. The difference in performance between the two can largely be explained by the difference in the industry concentrations in the two indices, as illustrated in the chart below.

 
 
 
FTSE at 20,000  
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No, it’s not a mistake, but it is not the FTSE 100, either.

The most frequently quoted index of UK share prices is the FTSE 100 index, or the “Footsie” as it is frequently described. The FTSE 100 index was launched at the end of 1983, with the aim of giving a yardstick to the value of the largest 100 companies listed on the London Stock Exchange. It started life with an initial value of 1,000 and is now about 7,500, equivalent to an average annual return of about 6.2% excluding dividends.

Two years after the FTSE 100 came into being, the FTSE 250 appeared. This captured the performance of the 250 UK listed companied that ranked below the Footsie’s larger constituents. The FTSE 250 was launched with an initial value of 1,412.6, an odd-looking number which becomes more understandable when you know that was the reading on the FTSE at the FTSE 250’s birth.

In May, the FTSE 250 hit one of those round numbers which cause a brief flurry of comment: 20,000. That is equivalent to an average annual return of 8.8%, again excluding dividends. The difference in performance between the two can largely be explained by the difference in the industry concentrations in the two indices, as illustrated in the chart below.

 
 
 
Revisiting social care in the election campaign  
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The general election campaign provided a reminder that the issue of funding social care remains unresolved.

Who pays how much for long term care in England came to the fore last month. It is one of those subjects which successive governments have repeatedly kicked down the road. Nearly 20 years ago the then Labour government established a Royal Commission to examine the problem. Its proposals that personal care should be free were rejected. Ever since, there have been further reviews and reports, all of which have met a similar fate.

The last (2011) set of recommendations, from Sir Andrew Dilnot’s review, were accepted (with several modifications) before the start date was summarily deferred for four years to April 2020, shortly after the 2015 election. It was these reforms that the Conservative manifesto proposed to abandon completely, causing much controversy. Within four days, the Prime Minister had been prompted into something which looked remarkably like a U-turn, even if she said it was only a clarification.
 
 
 
The Bank of England has a slight change of heart  
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The latest Quarterly Inflation Report (QIR) from the Bank of England has been published and shows that ‘the Old Lady’ has changed her mind a little. But the market projections for short-term interest rates don’t make for helpful reading for those with cash deposits.

The QIR was published in May, a few days before the Office for National Statistics revealed that in April, CPI inflation was running at 2.7%, 0.7% above the Bank’s target. The Bank shouldn’t have been surprised to see the higher inflation number. It’s QIR projected a short-term increase, with inflation reaching 2.8% in the final quarter of this year. Thereafter the Bank’s central projection is in for a gentle decline in the pace of price increases that will still leave inflation above target in the early part of 2020.

International Interest Rates

Why isn’t the Bank raising interest rates?

In his opening remarks when presenting the QIR, Mark Carney, the Bank’s Governor, said “The projected inflation overshoot entirely reflects the effects on import prices of the fall in sterling since late November 2015 – a depreciation caused by market expectations of a material adjustment to the UK’s medium term prospects as it leaves the EU.” This explains why the Bank is not raising interest rates, which would be its usual response to above-target inflation.
 
 
 
And after the election…  
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There is unfinished business for the new government to deal with.

Past performance is not a reliable indicator of future performance. However, when it comes to general elections, there is plenty of history to suggest that tax increases are more likely in the first Budget to occur after the polls have closed. From a politician’s viewpoint, it makes sense to deliver the medicine immediately, as that leaves the longest gap before the next election. For example, it was in the summer Budget after the May 2015 election that the new dividend tax rules, reduced tax relief on buy-to-let properties and 3.5% increase in insurance premium tax were announced.

In the post-election environment, whoever ends up as Chancellor will be presenting a new Finance Bill, probably in July. There is a raft of measures to reinstate because so many were dropped from the March Finance Bill in the rush to get it passed before parliament shut down. When reviving the spring Budget, the Chancellor will almost inevitably wish to add some new tax legislation based on what was (or, as important, was not) stated in their party’s manifesto.
 
 
 
2017 election: income tax revisited  
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The 2017 election manifestos offered little good news on the future of income tax.

Judging by the manifestos of the three main political parties, the days of appealing to voters by cutting income tax (and its alter ego, national insurance) are over:

• The Conservatives repeated their 2015 manifesto promise of a personal allowance of £12,500 and a higher rate threshold of £50,000 (outside Scotland) by 2020. The way inflation is picking up, that pledge means little more than keeping pace with prices, which is already built into the legislation. Although there were references to “low taxes”, the previous manifesto’s promises to freeze rates for income tax and national insurance had disappeared. Given the problems Mr Hammond encountered with his March Budget, the silence is unsurprising.

• The Labour Party manifesto promised no personal national insurance increases and no income tax increases for those with income of up to £80,000. Beyond that point, Labour wanted to apply a 45% rate (which currently starts at £150,000). There would also be the return of a 50% top rate, beginning at £123,000. The odd-looking starting point is driven by the fact that this is the income level at which all the personal allowance is lost.

• The Liberal Democrats adopted a simple approach in their manifesto: an immediate 1% increase in basic, higher and additional rates of tax. However, the party suggested that in the longer term this would be replaced by “a dedicated health and care tax…possibly based on a reform of national insurance contributions”.
 
 
 
China: fourth time lucky?  
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One of the major index providers is reviewing the constituents of its important global market indices.

Which country can boast the world’s second largest stock market and third largest fixed interest market?

You might be tempted to say Japan, but while you would be in the right part of the world, you would have chosen the wrong country. The second biggest share market and third biggest bond market both belong to China. However, to date, China’s internal markets have not figured in the main investment indices. There have been various reasons for these exclusions, but the main one has been capital controls. China still restricts flow of its currency and has recently tightened its rules to limit back door export of its currency, the Renminbi.

Now, for the fourth time in as many years, MSCI, the leading emerging markets index provider, is consulting on whether and how to include mainland Chinese shares in its emerging markets indices. Chinese shares listed away from the mainland, e.g. in Hong Kong, already account for 27% of the MSCI Emerging Market Index. MSCI’s latest proposal is to include only mainland Chinese shares accessible from Hong Kong, initially with a very small weighting. Ultimately, China could account for around 40% of the MSCI Emerging Market Index – hence the decision to start slowly.
 
 
 
Probate fees changes – an election casualty few will mourn  
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The election has put a stop to planned increases in probate fees for England and Wales.

Once a general election is called, there is usually a period known in parliamentary jargon as a ‘wash up’, during which outstanding legislation is passed, modified and passed or simply killed off, all in a matter of days. Unsurprisingly it is the more controversial proposals which generally get buried, as the timescale requires cooperation from the opposition to rush law onto the statute book.

Theresa May’s decision to call an election at seven weeks’ notice meant that all the outstanding legislation – including a 762-page Finance Bill – had to be dealt with in the space of a fortnight. One of the pieces of legislation which was dropped was “The Non-Contentious Probate Fees Order 2017”. It had reached the draft regulation stage, at which point it was proving to be anything but non-contentious.

The order would have restructured probate fees in England and Wales, moving them from a flat fee of up to £215 to a variable fee that started at £300 for estates valued at between £50,000 and £300,000 to a £20,000 fee for estates worth over £2,000,000.
 
 
 
The NASDAQ hits 6,000  
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The market most associated with US technology shares reached a new high in April.

The NASDAQ hits 6,000

You may be old enough to remember that the end of the 20th century was marked by a surge in the value of technology shares in the United States. Many of these were traded on the NASDAQ market, which became synonymous with the “tech boom”. The main NASDAQ Composite Index peaked on 10 March 2000 at 5,132.52, having been a little under 1,500 in October 1998.

As the graph shows, that meteoric rise was followed by an equally dramatic reversal: the “tech boom” turned into a “tech bust”. The experience was traumatic for those investors who joined the ride late in 1999 and reinforced the NASDAQ’s reputation as being not a place for widows and orphans to invest their money. The March 2000 peak survived as an all-time high for over 15 years, before being overtaken in summer 2015. By early 2016, the NASDAQ had fallen back below 4,500, driven by fears about China. These proved short-lived and last month, the index breached the 6,000 level for the first time.
 
 
 
A round-up of Budget non-starters  
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The Spring Budget has become a victim of the snap election.

Philip Hammond has not had much luck with what he said would be his first and last Spring Budget. His proposal to increase Class 4 national insurance contributions from April 2018 survived only a week before being dropped. Then when the Finance Bill was published in March, he won the dubious accolade of producing the longest ever Bill, at 722 pages. Just over a month later, the early election forced him to cull over half the Bill’s contents so that he could push a slim-line consensus version through before Parliament shut up shop.

As a result, several important changes that were pending have now disappeared. For example:

• The reduction in the money purchase annual allowance from £10,000 to £4,000 from 6 April 2017. This could have created problems for people who phase their retirement, both drawing pension benefits and contributing to a pension.

• The cut in the dividend allowance from £5,000 to £2,000 from 6 April 2018.

• The introduction of making tax digital. This was due to begin for traders with income above the VAT threshold level from 6 April 2018, with others starting one year later.

• The pension advice allowance. There was to have been a new tax exemption from 6 April 2017 for up to £500 per tax year for employee pension advice, paid for by an employer. The old, more restricted £150 allowance now remains in place.

• The property and trading allowance of £1,000 each from 2017/18. These new allowances were aimed at keeping small amounts of trading income and property income out of tax.
 
 
 
State pensions: not quite what was advertised  
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Most people reaching state pension age today are receiving less than the new state pension.

A Freedom of Information (FoI) request from the Sunday Times revealed an interesting fact about the new state pension, which started life just over a year ago on 6 April 2016. The newspaper asked how many people who had reached state pension age (SPA) since that date had received at least the new state pension (originally £155.65 a week, now £159.55).

The response from the Department for Work and Pensions (DWP) was that between 6 April 2016 and 31 August 2016 – so roughly in the first five months – 41% of people reaching their SPA (65 for men, about 62 and a half for women) had pensions at least equal to the new state pension. Or, to put it another way, 59% got less than the headline ‘single-tier’ amount which the government so heavily promoted.

It was always the case that what was promoted as a ‘flat rate’ pension was going to produce anything but that for many people, with the numbers receiving less than the full amount gradually declining as the new scheme matured. According to the DWP’s own calculations, by 2020 slightly under half of new state pensioners will receive less than the full rate, while by 2030 that proportion shrinks to just under 20%.
 
 
 
Another notch up in State Pension Age  
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An independent review has recommended bringing forward the move to a state pension age of 68.

There was a time when men received their state pension from age 65 and women from age 60. Those numbers may still be locked in your memory, but they are heading towards their own retirement.

Currently a woman’s state pension age (SPA) is about 63, on its way to 65 by November 2018. A month later both sexes will see their (equalised) SPA gradually rise to 66 by October 2020. The following increase, to an SPA of 67, takes place between April 2026 and April 2028.

In March an independent report prepared for the government made proposals about the next step up, to an SPA of age 68. The report, by John Cridland, proposed that the change should occur between 2037 and 2039, seven years earlier than provided for in the existing legislation. If the government accepts the suggestion, then you will be affected if you have not yet reached your 47th birthday.
 
 
 
Introducing the new NS&I bond – is that it?  
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The Budget confirmed the rate on the new National Savings & Investments Bond 2.2%.

That is the fixed rate on the “welcome break for hard-pressed savers” which Mr Hammond confirmed in last month’s Budget. The new NS&I three year fixed rate bond will be available from April for a period of 12 months. The maximum investment will be £3,000, although unlike its widely popular pre-election predecessor, it will be available to anyone aged 16 or over.

2.2% is a ‘market-leading’ rate, as the Chancellor promised in his Autumn Statement. At the time of writing, the best three year fixed rate on offer elsewhere was 1.9%. In the government’s accounts, the new bond is shown as a ‘spend’ item, with a total cost of £290 million. That sum reflects the fact that the Treasury could borrow money at a much lower interest rate and administrative cost from institutional investors.
 
 
 
US interest rates go up, but the UK bides its time  
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The US central bank, the Federal Reserve, has increased interest rates for a third time.

US interest rates go up, but the UK bides its time

This might look like a piece of modern art, but it’s not. The illustration above is what has become known as the “dot plot”. Each dot represents where a member of the US Federal Reserve’s rate-setting committee expects short term interest rates to be at the end of the year. For example, the longest line of dots in 2017 shows that nine members expect an end of year rate of around 1.35%, while the most popular ‘longer run’ estimate is 3.0%.

In March the Federal Reserve raised its main interest rate by a well-publicised 0.25% to a band between 0.75% and 1.00%. The general view now is that 2017 will see two more increases – hence the 1.35% (actually 1.375%) line on the dot plot.
 
 
 
Time to review your salary sacrifice arrangements?  
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New rules for taxing many salary sacrifice arrangements come into force from 6 April.

One of the employment trends of recent years has been to make employee remuneration more flexible. Instead of pay and, if you were lucky, a company car and healthcare, ‘cafeteria remuneration’ has become common, giving employees the choice of sacrificing pay for a wide range of benefits from extra holiday to gym membership and mobile phones. Employers and employees have both gained from these arrangements:

• The employer saved on national insurance contributions (NICs) at a rate of 13.8% of pay, although some – or even all – of that reduced bill may have been passed on to the employee.

• The employee also saved NICs, generally at 12% if they were basic rate taxpayers and 2% if they paid higher or additional rates.

• Crucially, the taxable value of the benefit was less than the pay forgone. In some instances, such as the mobile phone or gym membership, the tax liability was nil.

The main loser from salary sacrifice arrangements has been HM Treasury, so it was little surprise when George Osborne signalled a review in last year’s Budget. This produced a consultative document that has now been transformed into draft legislation.
 
 
 
Spring News Letter 2017  
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Our Spring 2017 News Letter is available for download.

Please click on one of the links to the right to downloand our Spring 2017 News Letter.

 
 
 
The dividend allowance cut – what’s the damage?  
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One of the few surprises in the March Budget was a cut to the dividend allowance to come in 2018/19.

The dividend allowance first saw the light of day in the post-election Budget of July 2015. It was designed primarily to discourage self-employed business owners from using incorporation as a way of avoiding national insurance contributions (NICs). Ironically one of the first effects it had was to dramatically increase the government tax take on dividends. HM Revenue & Customs has provisionally estimated that £10.7 billion of dividend income was brought forward into 2015/16 to avoid the higher rates of tax that were to apply to dividends from 2016/17 onwards.

The Chancellor’s announcement of a cut in the dividend allowance from the current £5,000 to £2,000 from 2018/19 will not result in any such pre-emptive surge in dividend payments, but it will add to the Exchequer’s income.

While Mr Hammond justified the move on the same incorporation-deterring grounds as his predecessor, the collateral damage to ordinary investors is much greater than was Mr Osborne’s announcement. The table below shows the crossover dividend levels at which investors will pay more tax in 2018/19 than they did under the old rules in 2015/16.
 
 
 
A boost to ISAs on the horizon  
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New regulations promise another improvement to ISAs soon.

Recent statistics issued by the Investment Association (IA) point to a declining interest in individual savings accounts (ISAs). In 2016 the IA recorded only two months in which new money flowing into ISAs exceeded existing money flowing out. Not surprisingly, the two months of net inflow were March and April, with the traditional end of tax year rush.

The tax advantages of ISAs remain unchanged, but for some investors the arrival of the dividend allowance and personal savings allowance last April mean that an ISA offers no immediate tax benefit over direct investment. As a reminder, under an ISA:

• Interest and dividends are free of UK income tax;

• There is no tax on capital gains;

• Withdrawals can be made of any amount at any time, with no tax charge;

• Unlike pensions, the contribution limit is straightforward (£15,240 in 2016/17, £20,000 in 2017/18 in total to all ISAs) and there is no equivalent of the lifetime allowance limiting the tax-efficient size of the fund. Indeed, some long term savers already have ISAs valued at more than the current pension lifetime allowance of £1 million.

• There is nothing to report personally to HM Revenue & Customs.

 
 
 
6 April reminders  
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Tax year beginning planning can be just as valuable as its more familiar year end counterpart.

The run up to 5 April, with the Budget (and often Easter) intervening, can be a frenetic time for personal financial planning. All tends to go quiet once the new tax year begins, but the reality is that there are many planning points that are worth considering at the start of the tax year rather than leaving it until the end.

• ISA contributions (£20,000 maximum in 2017/18) are best made at the start of the year rather than the end, as it means the tax benefits are enjoyed for nearly a year longer.

• A similar argument applies to pension contributions, although if your income for the year ahead is uncertain, the case for delay is stronger.

• The dividend allowance is £5,000 per tax year, so it is worth checking early on how much dividend income you are likely to receive and whether that prompts any investment changes. If you are married or in a civil partnership, that might mean transferring assets between the two of you.

• Similar considerations of who holds what apply to deposit accounts and the personal savings allowance of up to £1,000 a year each.

• The many thresholds built into the income tax system are a driver to working out what might be your total income in the tax year as soon as possible. If you know in April you are likely to be near a threshold by next March, you have that much more time to plan accordingly.
 
 
 
Time to welcome the Lifetime ISA  
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6 April marks the launch of a new ISA variant, the Lifetime ISA (LISA).

One of the last surprises produced by George Osborne in his final Budget was the announcement of the Lifetime ISA. Shortly after Mr Osborne was replaced it began to look as if the LISA, as it inevitably became known, would suffer the same fate. However, in September the idea re-emerged from the Treasury, with an unchanged launch date of 6 April 2017.

The key points about the LISA are:

• It will only be available to you if you are aged between 18 and 39.

• The maximum contribution will be £4,000, which will count towards your £20,000 ISA contribution limit for 2017/18.

• Contributions made before age 50 will receive a 25% “government bonus”, so if you contribute the maximum, there will be a £1,000 government top-up.

• Investment rules are broadly the same as a normal ISA, meaning no UK income tax or capital gains tax.

• Withdrawals are subject to a charge of 25% of the amount taken unless:

o You are aged at least 60; or
o The funds are being used to buy your first home (maximum value £450,000); or
o You are terminally ill and have less than 12 months to live.
 
 
 
The rising dividend and the falling pound  
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Recently released figures show that UK dividends grew faster than inflation in 2016.

The number crunchers at Capita Asset Services, one of the UK’s main share registrars, have been working out how much was paid out in dividends by UK listed companies in 2016. The number they have come up with is £84.7bn, an increase of 6.6% (£5.2bn) on the 2015 figure and well ahead of the rate of inflation. Dig down into the data and some interesting facts emerge:

• Capita reckons that £4.8bn of that £5.2bn rise is due to the impact of the weaker pound.

• Special dividends – one-off payments often associated with mergers or asset sales – more than doubled in 2016 to £6.1bn.

• The top five dividend payers accounted for nearly £4 out of every £10 of dividends paid, with Royal Dutch Shell alone paying more than £1 out of every £8.

• Dividends from the Top 100 companies grew at only 2.2%, while the next group of companies, the Mid 250, achieved a 5% increase.

• Dividend growth was by no means universal: 13 of the 39 industry sectors recorded a reduced or unchanged dividend over the year, a higher than normal number.

 
 
 
National Savings lose lustre with interest rates cut  
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National Savings & Investments are cutting interest rates from 1 May.

National Savings and Investments (NS&I) has announced that it will be cutting interest on four of its variable rate products from 1 May. It says the cuts follow on from the Bank of England’s base rate cut to 0.25%, a reduction which occurred last August. Clearly NS&I has been in no rush to react.

The changes will leave Income Bonds and the Direct ISA both paying just 0.75% interest, well below the latest (January) 2.6% rate of RPI inflation. The cuts will once again remove NS&I from the top rungs of the league tables where, unusually, they have been for some months. By shaving 0.25% off its current rates on these two products, NS&I will be cutting the income payable by a quarter – one of the curious knock-on effects of a world of ultra-low interest rates.

 
 
 
HMRC, the ultra-rich and the not-so-rich  
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Parliament’s Public Accounts Committee thinks that the “government must take a tougher stance on taxing the very wealthy.”

In 2009, HM Revenue & Customs (HMRC) set a specialist team to focus on the tax affairs of high net worth individuals (HNWIs is the jargon). At the time, HNWIs were defined as people with net assets exceeding £20m, although in 2016 the threshold was cut to £10m. The latest figures (for 2014/15) shows that this select group of around 6,500 individuals paid £3.5bn in income and capital gains tax – over £535,000 a head.

That might sound like a healthy contribution to government finances, but a report from the House of Commons Public Accounts Committee (PAC) issued in January was highly critical of HMRC’s efforts in handling their richest clients, each of which is allocated a dedicated “customer relationship manager”. The PAC felt that HMRC was not tough enough in dealing with tax evasion and avoidance by HNWIs, even though at any one time a third of the group were subject to open enquiries into their tax affairs. There was a call for more prosecutions: in the five years to 31 March 2016, HMRC completed investigations into 72 HNWIs for potential tax fraud, but only two of these were criminal cases, of which one was successfully prosecuted.

One worrying suggestion from the PAC was that HNWIs should be required to provide details of their assets on their tax returns, a feature of some other countries’ tax systems. The PAC notes that “HMRC has been looking at what further information HNWIs could be required to report to help improve its understanding of their wealth. The Department told us the issue is currently being considered by ministers.”

 
 
 
The end of the tax year: 5 April reminders  
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As the end of the tax year nears, remember the 5 April is a multi-faceted deadline.

In 2017, the tax year ends on Wednesday 5 April, over a week before Easter. The Budget is almost a month earlier (8 March), but that should not affect most tax yearend actions. As a reminder, here are some of this year’s points to consider – and act on, if required by 5 April:

• If your pension benefits were worth over £1.25m in total on 5 April 2014, you have until 5 April 2017 to claim individual protection.

• If you reached state pension age before 6 April 2016, 5 April is the deadline for making Class 3A voluntary contributions to top up your state pension.

• 5 April is the last day for making pension contributions to exploit up to £50,000 of unused annual allowance from 2013/14.

• If your employer offers salary sacrifice arrangements, the new, harsher, tax rules will apply immediately for any starting after 5 April. Arrangements which begin before 6 April 2017 will enjoy the old tax rules for another year (another four years for sacrifice involving cars, accommodation and school fees).

 
 
 
Pension transfer values up 15%  
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It was not only UK share values that rose during 2016.

Xafinity transfer value index 2016

Note: the Xafinity Transfer Value Index tracks the transfer value that would be provided by an example defined benefit pension scheme to a member aged 64 who is currently entitled to a pension of £10,000 each year starting at age 65 (and which increases each year in line with inflation). Different schemes calculate transfer values in different ways. A given individual may therefore receive a transfer value from their scheme that is significantly different from that shown.

Transfer values from final salary pension schemes ended 2016 15% higher than where they started, according to Xafinity Consulting, a pension and employee benefit consultant. The increase was largely due to changes in long-term interest rates: as rates fall, so transfer values increase (and vice versa). Long-term rates dropped sharply in the wake of the Brexit vote, but then marginally backtracked in the final quarter – hence the slight decline in transfer values recorded by the Index.

 
 
 
The rising cost of age and health  
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The government’s financial watchdog, the Office for Budget Responsibility (OBR), has been mulling over future healthcare and pension costs.

In January, as is often the case, the media was headlining stories about delays in A&E, cancelled operations and bed-blocking caused by lack of long-term care facilities. Coincidentally, in the middle of the month the OBR published its Fiscal Sustainability Report. This had originally been due in June last year, but its publication was put on hold after the Brexit vote.

The report is a long term look at future government cash flow and the consequences for public sector debt, starting at the point five years out where normal Budget projections end. It does not make attractive reading for the next generations of Chancellor. The first sentence of the press release accompanying the report says “Rising health care costs could make it harder for the Chancellor to balance the budget in the next Parliament and put the public finances on a sustainable path over the longer term in the absence of further tax increases or cuts in other public spending.”

The cuts and/or tax increases the OBR reckons could be necessary are more than mere Budget tweaks. To get government debt back to a sustainable level (40% of Gross Domestic Product) by 2066/67 would require additional tax increases and/or spending cuts of either:

• A permanent one-off £75bn (in today’s terms) in 2021/22; or

• £27bn (again in today’s terms) in the early 2020s and in each successive decade.

 
 
 
Is a return to inflation on the cards?  
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December’s inflation figure was the highest since July 2015.

CPI Inflation - The Last Five Years to December 2016

For much of 2015, inflation barely existed. On the government’s chosen measure, the Consumer Prices Index (CPI), annual inflation oscillated between 0.3% and -0.1%. 2016 was a rather different story: the starting point was 0.3%, but by December prices were rising by 1.6% a year.

The sharp rise over the year is mainly the result of the weakness of the pound since the Brexit vote and rising oil prices – it is easy to forget that we started 2016 with supermarkets selling petrol at 99.9p a litre and diesel at 99.8p. Looking ahead, there is general agreement that inflation will continue on an upward path. The Bank of England’s most recent inflation report estimated 2017 would end with inflation at 2.7% and not return to its 2% target until 2020. Some commentators are more pessimistic.

 
 
 
Another pension annual allowance cut  
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The Autumn Statement revealed plans for another annual allowance cut.

When pensions flexibility was announced in March 2014, it did not take long for tax planners to realise that it offered an interesting opportunity to “pay” the over-55s. The idea was that, instead of pay which is subject to national insurance contributions (NICs) and full income tax, contributions to a pension could be made from which the employee immediately drew benefits. As a result, NICs would disappear and income tax would be reduced by a quarter because of the tax-free lump sum.

Before pension flexibility became reality, the Treasury acted to limit the scope for such creative remuneration by introducing a £10,000 money purchase annual allowance (MPAA) to apply in such cases. In the Autumn Statement, the Chancellor announced another turn of the MPAA screw: from 2017/18, it will be reduced to just £4,000, saving the government an estimated £70m a year.

 
 
 
Attention staff: the cafeteria is closing  
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The Autumn Statement confirmed plans to limit the scope for salary sacrifice arrangements.

In recent years, the number of employers offering ‘cafeteria’ remuneration has steadily increased. Under the system, employees can swap pay for benefits, which can range from anything from mobile phones through to company cars or gym membership.

The advantage of visiting the cafeteria depends on what is chosen from the menu. In some instances – mobile phones for example – pay that is subject to income tax and employees’ and employer’s national insurance contributions (NICs) becomes a benefit free of both tax and NICs.

The party on the other side of this disappearing trick, HM Treasury, has now decided enough is enough. Over the summer, HM Revenue & Customs issued a consultation paper on countering the effects of salary sacrifice and the Autumn Statement confirmed that most of the proposals in the document will take effect from 6 April 2017. Broadly speaking, if you give up salary for a benefit, then from 2017/18 you will be taxed on the greater of:

• the salary foregone; and
• the statutory value of the benefits
 
 
 
Deposit protection limits to rise next year  
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It looks likely that the deposit protection limit will rise at the end of January.

At the start of 2016, the maximum amount of a bank or building society deposit covered by the Financial Services Compensation Scheme (FSCS) was cut from £85,000 to £75,000. The reduction was a consequence of the review rules in the European Deposit Guarantee Schemes Directive (EDGSD). That Directive placed a minimum level of €100,000 (or the local currency equivalent) on deposit protection and requires non-Eurozone member states like the UK to reassess their cover level every five years in the light of prevailing exchange rates.

When the last review took place in summer 2015, the pound was trading around €1.40, so the Prudential Regulation Authority (PRA) had little choice but to lower the ceiling, although it did introduce transitional measures deferring the main impact until the end of the year.

In winter 2016, following the Brexit vote, the pound has fallen about a sixth and is trading at around €1.17. Although the next EDGSD review is not due until mid-2020, the PRA has taken advantage of a clause in the Directive to re-review the protection level. The Directive says that non-euro limits are to be adjusted “following unforeseen events such as currency fluctuations”.
 
 
 
Putting a price on unpaid work  
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The Office for National Statistics has been examining the value of unpaid work.

Every three months the news headlines draw attention to how much UK gross domestic product (GDP) has changed over the past quarter – the last reading was +0.5%, better than many experts had predicted in the wake of the Brexit vote. However, GDP is a slippery concept and some activity is deliberately excluded from the measure.

In November the Office for National Statistics (ONS) looked at one of those excluded areas – the unpaid work which households carry out for themselves or other households. Such work covers a range of activities, from housework and cooking through to driving ‘mum’s/dad’s taxi’ and volunteering. The ONS puts the value of all such unpaid work at just over £1,000bn in 2014, which is more than half of the GDP for the year of £1.8 bn.

ONS says that on average men do 16 hours of unpaid work each week, worth about £166, whereas women do 26 hours, worth about £260. If you want to see how much your (or your partner’s) unpaid work is worth, the ONS has developed a simple calculator available at https://www.ons.gov.uk/visualisations/dvc376/index.html.
 
 
 
The Trump card has been dealt  
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What are the investment consequences of the surprise US election result?

The arrival of Donald Trump marks a change of direction for the US government from the near status quo that Hillary Clinton was offering. Quite what the new direction is remains unclear.

On the one hand, the president-elect has said he will cut taxes for both individuals and companies. US corporation tax could fall from 35% to 15%, with a special 10% rate to encourage the likes of Apple and Microsoft to repatriate profits currently stockpiled overseas. Mr Trump has also spoken about boosting investment in infrastructure, by way of tax credits rather than direct government investment. The consensus is that both measures would be good for growth, which helps explain why the US stock markets rallied after the election result.

On the other hand, the cuts to tax and infrastructure boost appear to be relying upon increased government borrowing for finance rather than reductions in other government expenditure. That has already pushed up yields on US government bonds sharply, helped by an expectation of growth-induced higher inflation. An increase in short term rates from the Federal Reserve at its mid-December meeting now looks very likely.
 
 
 
Chancellor aims to launch LISA next April  
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The previous Chancellor’s plans to launch a Lifetime ISA (LISA) have been given a fresh breath of life.

In his final Budget last March, one of the surprises George Osborne produced was the Lifetime ISA, known as the LISA to everyone except HM Treasury. As a reminder, LISA’s main features were to be:

• It would only be available for those aged between 18 and 39;
• The maximum contribution would be £4,000 a year;
• Contributions made before 50 would attract a 25% government bonus;
• Returns would be free of UK income and capital gains tax, as with a normal ISA; and
• Funds could be withdrawn penalty-free for either the purchase of a first home or from age 60 onwards. Otherwise a penalty would normally apply, equal to a 5% charge plus the government bonus.

LISA was meant to start life in April 2017, but potential providers quickly criticised its complexity and the lack of firm detail. Some said they would not make the April 2017 start date. Everything then went very quiet.
 
 
 
What role does property play in retirement planning?  
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There has been a difference of opinion on the role of property in retirement planning between the Bank of England’s Chief Economist and a former Deputy Governor.

Andy Haldane, Chief Economist at the Bank of England, caused a few raised eyebrows recently when in a Sunday Times interview he suggested that “property is a better bet for retirement than a pension”. His argument was largely based on the notion that if demand for housing continues to outstrip supply, as it has done for many years, then house prices are “relentlessly heading north”.

By coincidence, not long after Mr Haldane’s comments were published the new Chief Executive of the Financial Conduct Authority, Andrew Bailey, gave a speech which covered the same topic. Mr Bailey was previously a Deputy Governor at the Bank of England, but he disagreed with the Bank’s Chief Economist: “There is an argument that pension saving would be assisted by people holding more housing in their stock of pension assets, based on the real appreciation in the value of housing. I don’t subscribe to this argument.”

One of the reasons he gave was that “…given the scale of uncertainty over long-run real [inflation-adjusted] returns on assets, I would not favour over-weighing to any one asset class, while recognising that a balanced investment portfolio can be exposed to property.” In other words, do not put all, or most, of your eggs in one basket. You probably already have considerable exposure to the residential property market through the ownership of your home.
 
 
 
The Autumn Statement: the date’s been set  
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The Treasury has confirmed that the Autumn Statement will be on 23 November.

When George Osborne was replaced as Chancellor in July, his successor, Philip Hammond, deliberately avoided taking any action. He left the immediate economic response to Mark Carney and the Monetary Policy Committee at the Bank of England, which duly cut interest rates to 0.25% and announced £70bn more quantitative easing (QE) in early August.

Mr Hammond did say that he would consider a “fiscal reset” in the Autumn Statement if data available by then suggested it was necessary. We already know that the new Chancellor has abandoned his predecessor’s goal of a budget surplus by 2019/20, but beyond that what form a ‘reset’ could take is unclear.

 
 
 
A better quarter  
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The third quarter of 2016 was not the meltdown it threatened to be after the referendum.

The final days of the second quarter of 2016 were dominated by the fall-out from the outcome of the referendum on 23 June. It was, to put it mildly, a volatile time for investment markets.

However, for all the gloom and uncertainty around at the end of June, the third quarter of 2016 has treated investors kindly, as the table below shows:

Index

Q3 2016 Change

FTSE 100

+6.1%

FTSE All-Share

+6.8%

Dow Jones Industrial

+2.1%

Standard & Poor’s 500

+3.3%

Nikkei 225

+5.6%

Euro Stoxx 50 (€)

+4.8%

Shanghai Composite

+2.6%

MSCI Emerging Markets (£)

+11.5%

 
 
 
Cash defies low interest rates  
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New statistics from HMRC show that cash is still a popular ISA investment, despite ultra-low interest rates.

In early summer, the Financial Conduct Authority published a report looking at easy access cash interest rates for savings account and cash ISAs. The regulator surveyed the lowest rates on offer from 32 major providers and summarised its findings in the following table:

Range of lowest interest rates available on easy access cash ISAs at 1 April 2016

 

Branch access

No branch access

 

Open accounts

Closed accounts

Open accounts

Closed accounts

Maximum

1.40

1.50

1.40

1.50

Minimum

0.10

0.05

0.50

0.25

Median

0.70

0.50

1.00

0.75

 

 

 


As these figures are now six months and one base rate cut out of date, the current numbers are likely to be even lower.

In spite of these low rates, recently released statistics from HMRC show that in the last tax year nearly £3 out of every £4 of ISA subscriptions were placed in the cash component.
 
 
 
Another Chinese export  
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The next stage of the opening up of the Chinese stock markets has been agreed.

Many major companies incorporated in China have dual share classes:

• A Shares, which is the main share category, are denominated in renminbi, the Chinese currency. They are listed on the Chinese stock exchanges, the major ones being Shanghai and Shenzhen, which were established in December 1990. Before 2002, A shares could only be purchased by mainland China investors.

• H Shares are the Hong Kong listed shares of Chinese incorporated companies. These started to appear in 1993 and are denominated in Hong Kong dollars (which has long been pegged to the US dollar). The more open nature of Hong Kong’s markets meant that for a long while H shares were the main way in which foreign investors obtained access to Chinese companies.

In late 2014, the Shanghai-Hong Kong Stock Connect program (“Stock Connect”) was launched, allowing Hong Kong investors to trade in A shares listed in Shanghai (and vice versa with H shares). The programme was subject to quotas, typical of China’s cautious approach to liberalising markets.
 
 
 
HMRC plans another turn of the anti-avoidance screw  
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In August, HMRC published a consultation document on adding a new weapon to its anti-avoidance armoury: penalties on ‘enablers’.

While many were enjoying their holidays, HM Revenue & Customs (HMRC) released yet another paper examining ways of “strengthening tax avoidance sanctions and deterrents”.

Over recent years, HMRC has been gaining the upper hand in its unending battle with promoters of aggressive tax avoidance schemes:

• There is now a broad requirement on promoters to provide details of schemes to HMRC under the disclosure of tax avoidance scheme (DOTAS) rules.

• A General Anti-Abuse Rule (GAAR) was introduced in 2013. The latest Finance Bill, still stuck in the parliamentary process, contains measures creating tax-geared penalties for cases caught by the GAAR.

• The 2014 introduction of accelerated payment notice legislation, effectively removing the cash flow advantage of many schemes, has raised over £2.5bn, with more than 50,000 notices issued.
 
 
 
Pensions freedom: taking too much or too little  
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New statistics have been published showing just how much has been withdrawn in the first year of pensions freedom.

In August, the Association of British Insurers (ABI) published data showing how much had been withdrawn from pension arrangements in the 12 months to April 2016, the first year in which the pension flexibility reforms introduced by George Osborne had full effect. In total:

• £4.3bn was paid out in 300,000 lump sum payments, with an average payment of £14,500; and

• £3.9bn was extracted via 1.03m drawdown payments, with an average payment of £3,800.

The headline of the press release from the ABI said “Majority take sensible approach, but signs some withdrawing too much too soon”. Indeed, the ABI statistics showed that in the first quarter of 2016, over half of all withdrawal rates were less than 1%, whereas fewer than 1 in 23 had withdrawal rates of 10% or more.
 
 
 
The six figure pension fund  
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The fall in interest rates is boosting some pension transfer values.

Pension scheme deficits have been hitting the headlines again, and not just those of BHS. The Bank of England’s efforts to bolster the post-referendum economy have been to blame. On one widely quoted measure – the Pension Protection Fund’s PPF7800 Index – the overall deficit for private sector benefit schemes covered by the PPF was £408bn in July 2016, an increase of over £170bn in the space of just 12 months.

The reason is the fall in long term interest rates, which are the basis for valuing final salary pension scheme liabilities: as rates fall, the value put on the liabilities rises. Unfortunately for many schemes, the other side of the balance sheet – the investments assets – do not rise in value as rapidly, hence the deficit (liabilities – assets) widens.
 
 
 
Interest rates now at 0.25%...  
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The Bank of England halved its base rate in August. By the end of the year, it could be lower still.

At its first formal meeting after the Brexit vote, in early July the Bank of England’s interest rate setters (the Monetary Policy Committee) surprised some economists by not cutting rates. The (non-) move resurrected criticism of Mark Carney, the Bank’s Governor, as “an unreliable boyfriend”.

In August, the surprise came from the opposite direction. Not only did the Bank cut interest rates, but it also announced more quantitative easing (QE – buying of government and corporate bonds) and new low rate loans of up to £100bn to banks and building societies to encourage lending. As if that were not enough, the bank also said “if the incoming data proves broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate…during the course of the year”. Fortunately, Mr Carney has made clear he does not favour negative interest rates, but another cut will take him very close to what used to be called the ‘zero bound’. Savings rates have been dropping for some time, but this has not stopped deposit-taking institutions from cutting further, in some cases by more than the 0.25% reduction made by the Bank of England. One of the most attractive interest-paying current accounts has announced a 1.5% reduction in interest payable.
 
 
 
Just how much interest are(n’t) you earning?  
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The Bank of England may have finally ended speculation and dropped the interest rate from 0.5% to a new low of 0.25%, but there are plenty of savings accounts already paying less.

Last month the Financial Conduct Authority (FCA) published “sunlight remedy” data, showing the lowest interest rates (as at 1 April 2016) offered by 32 providers of easy access cash savings accounts and easy access cash ISAs – typical homes for rainy day money. The tables largely tell their own story:

Range of lowest interest rates (%) available on easy access cash savings accounts at 1 April 2016

 

 

Branch access

No branch access

 

 

Open accounts

Closed accounts

Open accounts

Closed accounts

Maximum

 

1.40

1.40

1.50

1.41

Minimum

 

0.00

0.00

0.05

0.00

Median

 

0.25

0.10

0.60

0.25


Range of lowest interest rates (%) available on easy access cash ISAs at 1 April 2016

 

Branch access

No branch access

 

Open accounts

Closed accounts

Open accounts

Closed accounts

Maximum

1.40

1.50

1.40

1.50

Minimum

0.10

0.05

0.50

0.25

Median

0.70

0.50

1.00

0.75


The regulator noted that at least half of the providers in their sample offered a lowest interest rate of 0.10% or less on branch-based closed easy access cash savings accounts. That means no more than £1 of interest each year (before tax) for every £1,000 invested. For the corresponding ISA accounts, at least half of the providers paid no more than 0.5%.
 
 
 
It’s not all bad news on the pound  
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The Brexit-induced decline in the value of the pound has brought some good news for investors.



“The Brexit vote has completely changed the picture for dividends this year and beyond.”

So said Capita, one of the UK’s main share registrars in its second quarter Dividend Monitor. In the first quarter edition, Capita had forecast a decline for 2016 of 1.7% in the underlying dividends of UK listed companies, i.e. dividends other than one-off special payments. The drop in the value of the pound has made Capita revise its forecast to a 0.5% increase for the year. In terms of total dividends, it now sees these rising by 3.8%.

The reversal in fortunes reflects the fact that many of the largest UK-listed companies, such as HSBC, BP and Royal Dutch Shell, report their results in US dollars and set dividends in the same currency. Thus if the dollar rises about 10% against the pound, an unchanged dividend becomes worth 10% more when it’s converted into sterling.
 
 
 
Property fund lock-ins  
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July saw several major property funds suspend dealings.

One of the unexpected outcomes of the UK’s vote to leave the European Union on 23 June has been that at least eight property funds have suspended dealings, meaning that investors cannot cash in their holdings. Some other funds have applied large discounts to prices for those wanting to realise their investment immediately.

Both moves make sense in terms of protecting the interests of all of the funds’ investors, not just those who want a swift exit. Commercial property cannot be sold rapidly, unlike the shares and bonds that underlie most collective funds. After an event like the Brexit vote, even knowing what the value of a property is can be difficult. Market circumstances will have changed, but there will be virtually no sales data to show what the effect has been.

Property fund suspensions also occurred in 2008, in the wake of the financial crisis, so the situation is nothing new. The Financial Conduct Authority rules require suspensions to be reviewed at least every 28 days, but place no limit on how long a suspension can last.
 
 
 
A new Chancellor takes the reins  
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The UK now has a new Prime Minister and a new Chancellor, but will tax policy change?

If you went on an overseas holiday in the second week of July, you left the UK with David Cameron as Prime Minister and George Osborne as Chancellor, but by your return the country was in the hands of Theresa May and Philip Hammond respectively. A week is truly a long time in politics.

As with the consequences of Brexit on the economy, it is too early to say what the impact of the new government will have on tax policy. However, a few interesting indicators have already emerged:

• In her first speech outside Downing Street, Mrs May said “When it comes to taxes, we’ll prioritise not the wealthy, but you.”

• The new Chancellor has said that he will not introduce an emergency Budget, but instead wait until the Autumn Statement to review developments and then set out his plans.

• The Prime Minister and her Chancellor have both ruled out trying to achieve no Budget deficit in 2019/20, a goal which George Osborne had himself abandoned after the Brexit vote. However, cutting the deficit remains firmly on the agenda.

• Mr Osborne’s post-Brexit pledge to cut corporation tax to under 15% has not been endorsed by Mr Hammond.
 
 
 
Single-tier or No-tier pensions?  
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The Department for Work & Pensions (DWP) is writing to over 100,000 people with bad news about their state pension.

The new single-tier state pension was launched in April of this year, but the way in which it was introduced has drawn much criticism. The heavy emphasis given in DWP publicity to the flat amount of about £155 a week in DWP publicity meant that some of the downsides of the new pension system received little, if any, attention. This prompted the House of Commons Work and Pensions Select Committee to say in a recent report that government communications were “contributing to confusion about the new system.”

The DWP has now announced that it will be sending individual letters to over 100,000 people telling them that they will not qualify for any state pension, never mind £155 a week. Their loss is the result of a change to the qualifying requirements for a state pension. Under the previous system, only one full year’s National Insurance contributions/credits was required to accrue some (albeit small) entitlement to state pension. Under the single-tier system, there is no entitlement until ten years’ contributions/credits have been clocked up.

The ten year qualifying period is just one example of how some people have been disadvantaged by the move to the single-tier system. If you were a member of a final salary pension scheme between 1978/79 and 1987/88 you could also be on the losing side because under the old rules your guaranteed minimum pension (GMP) would have been inflation-proofed by the state, but it is not under the single-tier.
 
 
 
Going for gold with your SIPP  
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The Royal Mint is offering gold bars to SIPP investors.

The rules on what investments can be held within a self-invested personal pension (SIPP) are simple: you can choose anything. However – and it is a very significant however – certain assets, such as art and residential property, are classed as “taxable property” and attract such large tax charges as to make them unviable.

One surprising specific exclusion from the list of taxable property is investment grade gold bullion – gold that is at least 99.5% pure and in the form of bars or wafers. Hitherto if you wanted to add gold to your SIPP – and your SIPP manager permitted such investments – purchases had to be made via bullion dealers. Now the Royal Mint has announced that some of its gold products (not coins) have been approved by HM Revenue & Customs as eligible for SIPP investment.

You, or more accurately, your SIPP provider, will not physically hold any gold purchased: it will remain in “The Vault”, a secure storage facility at the Royal Mint, at a cost of between 0.6% and 1.2% a year. That fee underlines one of the disadvantages of gold investment: not only does bullion not produce any income, but it incurs an ongoing cost for the investor.
 
 
 
Chinese shares almost in from the cold  
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An important decision on the leading emerging markets index has been announced.

Which country has the second largest set of stock markets after the US? Is it:

A. UK
B. Japan
C. Germany
D. China

The answer is that China ranks number two, which might come as a surprise. However, at present the shares listed on China’s mainland stock exchanges – so-called A Shares – are subject to various constraints on foreign ownership. As a result, China’s onshore market has not figured in many stock market indices, including the all-important MSCI Emerging Markets Index.

Last year MSCI examined the rules and practices in China and decided it was not yet time to add A-Shares to its leading index. Twelve months on there has been another review and, despite some progress by the Chinese authorities, MSCI again said no, not yet. MSCI’s next review will be in June 2017, but the index provider gave itself some wriggle room by saying that it did not rule out an earlier introduction of China to its indices if significant positive developments occurred earlier.

The general feeling remains that it is just a matter of time before Chinese A-Shares come in from the unindexed cold. When they do, the move will be gradual because to give full weight to China immediately would be too disruptive. The current estimate is that China could eventually account for about 40% of the MSCI Emerging Markets Index.
 
 
 
Retirement choices shrink as annuities withdrawn  
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One of the UK’s biggest insurance companies has withdrawn from the advisory annuity market.

The pension freedom reforms revealed in the 2014 Budget claimed another victim last month as the Prudential announced it would no longer provide annuities via financial advisers. Earlier in the year two specialist annuity providers merged in the face of declining business levels and stricter solvency rules.

The reduction in competition, leaving little more than a handful of companies actively seeking pension annuity business, comes at an unfortunate time. One of the perhaps surprising consequences of the Brexit vote has been a fall in long term UK government bond yields. The drop reflects a ‘flight to safety’ and has already had a knock-on effect in reducing annuity rates still further.

The post-Brexit economic outlook suggests that there is little prospect of yields recovering in the near future. In some economists’ scenarios the Bank of England may soon resort to more quantitative easing (QE) in an effort to stimulate growth, a move which would force gilt yields down another notch. As the experience of Japan, Switzerland and the Eurozone shows, long term gilt yields of about 1.75% still have plenty of room to decline.
 
 
 
A volatile first half for 2016 investments  
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The first half of 2016 has been marked by volatility – especially in the final week.

June, or to be more accurate, the final five working days of June, proved to be a volatile time for share markets around the world. After two of the four constituent parts of the UK voted for Brexit, markets far away from the UK reacted with knee-jerk falls to the prospect of continued uncertainty. The headlines were dire: “£45 billion wiped off shares” was one example (from a paper that supported Leave).

At such times the investment ‘noise’ can be as deafening as it is distracting. It pays to step back a little and gain some more perspective. As 30 June marked the half way stage through the year, a look at how the first six months of 2016 panned out is a good starting point.

The results may be a surprise:

Index

H1 2016 Change

FTSE 100

+4.2%

FTSE All-Share

+2.1%

Dow Jones Industrial

+2.9%

Standard & Poor’s 500

+2.7%

Nikkei 225

-18.2%

Euro Stoxx 50 (€)

-12.3%

Shanghai Composite

- 17.2%

MSCI Emerging Markets (£)

+15.8%


The fact that over the six months the FTSE 100 has increased is not what the casual observer would have expected. While there was considerable volatility immediately after the Brexit result emerged, the FTSE 100 rebounded strongly, regaining its 23 June level by close on 28 June. That reflects the international nature of its constituents – one recent estimate is that the average Footsie company obtains only about 20% of their revenues from the UK. That fact, combined with a weakening pound translating into stronger sterling profits, helps explain the resilience of the FTSE 100. The FTSE 250, covering the next 250 listed companies, is much more heavily oriented to the UK and suffered accordingly. By the end of June, the FTSE 250 had fallen 6.1% from its pre-vote level, even after a strong recovery in the final couple of days of the month.
 
 
 
Are your children eyeing up their inheritance already?  
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Recent research shows that UK household savings are forecast to fall to their lowest rate in over 50 years.

Savings Ratio 2000-2015


A report produced by the Centre for Economics and Social Research (CEBR) has forecast that UK household savings will fall to just 3.8% of disposable income this year, its lowest level since 1963. The ratio was nearly 12% as recently as 2010, as the graph above shows.

The same research found that nearly two thirds of the over-55s felt “confident and supported”, while just over a third of 35-44 year-olds felt the same way. The corollary was that 61% of the younger age group thought they were not saving enough for their future while 45% of the 55+ baby boomers took the same view.

The falling savings ratio has a variety of causes including the low/no wage growth many have experienced since 2008 and the increasing cost of housing. It helps to explain government initiatives, such as the Lifetime ISA, aimed at encouraging the under-40s to save.
 
 
 
Your bank rewards may be less than interesting  
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Not everything your bank pays you counts towards the personal savings allowance.

When the personal savings allowance (PSA) was first announced in the March 2015 Budget, it all sounded quite straightforward:

• If you were a basic rate taxpayer, you had a £1,000 allowance to set against savings income;

• If you were a higher rate taxpayer, your allowance was halved, but your potential tax saving was still the same; and

• If you were one of the 333,000 additional rate taxpayers, you had no allowance.

The reality has turned out to be rather different. For a start, the allowance is not a true allowance at all, but a nil rate band. Now another glitch has emerged as the relevant Finance Bill legislation works its way through parliament.

If you have one of those bank or building society accounts that give you regular reward payments, then those sums cannot be offset against your PSA. To be offset against the PSA, what you need the bank to pay you is interest, which counts as ‘savings income’, not a reward, which is an ‘annual payment’, not ‘savings income’. Alternatively, income from fixed interest unit trusts and OEICs can be offset against the PSA. However, for the current tax year, such interest is paid after deduction of 20% tax, meaning a reclaim may be necessary. From 6 April 2017, fixed interest fund distributions will be paid gross – as bank and building society interest is in 2016/17.
 
 
 
A happy ending for a cautionary investment tale?  
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The Treasury has issued a consultation paper on changes to the taxation of single premium investment bonds following a long-running tax tribunal case.

Single premium investment bonds have long been a popular way of investing for both individuals and trustees. One of their plus points for many investors is that there is generally nothing to put on a tax return and no immediate tax to pay unless the total amount withdrawn on a regular or cumulative basis exceeds 5% a year of the original investment. This so-called 5% rule does not mean withdrawals are exempt from tax, as they are brought into the calculations when the bond is fully encashed or the life assured dies.

The 5% rule was introduced in the 1970s to simplify matters and replace a formula which could produce taxable amounts greater than the amount withdrawn. However, the simplification came with a sting in the tail for the unadvised: a large partial encashment early in a bond’s life could produce a substantial tax charge, even if the bond were showing no underlying profit.

This anomaly eventually prompted a tax tribunal case in which an unadvised Dutchman, Mr Lobler, who had moved to England found himself facing an effective tax rate of 779%. The First Tier Tribunal found in favour of HM Revenue & Customs with “heavy hearts”, but the Upper Tier Tribunal reversed the decision with the help of some creative thinking.

The Treasury has now issued a consultation on ways to prevent such unwarranted tax charges arising in the future. It has made three suggestions, all of which preserve the principle of the 5% rule, but aim to prevent unrealistic tax charges for large partial withdrawals.
 
 
 
Staying ahead of auto-enrolment penalties  
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It is not only BHS which is keeping the Pensions Regulator busy.

The Pensions Regulator (TPR) has been in the headlines recently following the demise of BHS and the issues surrounding the store group’s £571m pension deficit.

The BHS pension problem stems in part from the type of scheme it used to offer its employees – a final salary pension scheme. Over the years, strengthened legislation and poor investment performance have prompted most private sector employers to close such schemes to new members and now, increasingly, even to existing members.

The disappearance of the final salary pension was one of the reasons behind the introduction of automatic enrolment in workplace pensions. The aim was not to replace the old final salary scheme – that would have been too costly – but to ensure that there was at least some pension provision on top of the modest amount the state provides.

So there is a little irony in the fact that TPR is not only having to deal with the BHS fallout, but also the failure of employers to carry out their auto-enrolment duties. TPR’s latest review of auto-enrolment compliance revealed:

• In the first quarter of 2016 the regulator issued 3,057 Compliance Notices, bringing the total since October 2012 to 7,834.

• 806 £400 Fixed Penalty Notices were sent out, three times as many as had been served in the previous 39 months. These penalties can be up to £10,000 a day for large employers (500 or more employees) and even for small employers (5-49 employees) accrue at £500 a day.
 
How your income tax bill really has gone up  
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Independent research shows that if you feel you’re paying more income tax than you used to, you’re probably right.

The Institute for Fiscal Studies (IFS) is an independent body that has established a reputation for objectivity in tax matters. Its former head, Robert Chote, is now in charge of the Office for Budget Responsibility (OBR), which vets the Budget numbers.

Recently the IFS looked at how the pattern of income tax payments has changed over the years and would change further by 2020. It drew some interesting conclusions:

• Between 2007/8 and 2015/16, the proportion of the adult population paying income tax dropped from 65.7% to 56.2%. This was due to the combination of large increases in the personal allowance and generally low earnings growth.

• While the number of taxpayers was falling, the share of total income tax paid by the top 1% of taxpayers was rising from 24.4% to 27.5%. This reflects the introduction of the additional rate and other measures such as the phasing out of the personal allowance, pension tax reforms and non-indexation of the higher rate threshold.

• Since 2007/8 the increasing income tax burden on wealthier taxpayers “has been largely as a result of explicit policy choice” rather than a rising share of income. In the IFS view “it seems unlikely that this trend will unwind substantially over the next five years.”

• At best, the government’s pledge to raise the higher rate threshold to £50,000 by 2020/21 “is only expected to hold constant the number of higher rate taxpayers” while those with incomes over £100,000 will continue to suffer from a frozen threshold for the phasing out of personal allowance and, at £150,000, the start of additional rate tax.
 
What will you get for £168?  
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Recent research has revealed how much it costs to make sure your wishes are met on death.

Do you have a will?

If you have, is it up to date? If you do not have a will, then your estate will be distributed under the laws of intestacy, which differ between England & Wales, Northern Ireland and Scotland. In some cases intestacy produces the ‘right’ results, but in others it can achieve the exact opposite and create unnecessary inheritance tax liabilities.

If you do have a will, then you escape the intestacy issues, but you – or more accurately, your executors – may face other problems if the will is not up to date. In theory a will can be amended after death by way of a deed of variation, but in practice this will not always be possible. If one person gains from a proposed change, another inevitably loses and they need to agree. Unsurprisingly, not every family member is always willing to forgo all or part of their inheritance.

Putting off making or revising a will can be a false economy. Just how false has been underlined by some recent research from the Legal Services Board. This revealed that the average cost of a standard will was £168 and that even a complex will had an average cost of only £38 more. The costs involved in sorting out an estate with no will or a ‘wrong’ will are usually considerably higher – if anything can be done.
 
Watch the dividend  
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Dividend growth is slowing in the UK.

Shortly after the end of each quarter, Capita, one of the UK’s largest share registrars, publishes a dividend monitor. This gives a useful snapshot of the dividend payments from UK-listed companies over the previous three months. The latest edition, covering the first quarter of 2016, makes interesting reading if you are an investor in UK equity income funds:

• Year-on-year dividends rose 6.4%, but this was largely due to some generous special (one-off) dividend payments. Strip these out and underlying dividends grew by just 1.3%, pretty much in line with RPI inflation.

• The small positive growth in dividends was entirely due to the weakness of sterling against the US dollar, which Capita reckons accounted for £350m of the quarter’s £14,200m in dividend payments. Many of the FTSE 100’s largest companies, such as Shell, HSBC and Astra Zeneca, use the dollar as their accounting (and dividend) currency.

• During the first three months of 2016 dividend cuts of £2,700m were announced, but most of these will not bite until later in the year.
 
Offshore funds and onshore myths  
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The ‘Panama Papers’ have created a media frenzy about offshore investment. Not everything you read was necessarily accurate.

Offshore investment made front page headlines last month, with the leak of 11.5 million documents from a law firm in Panama. The fact that there was link to the Prime Minister gave the story legs, but unfortunately that also meant more opportunity for misinformation and outright error.

One trap that too many commentators (and a few politicians) fell into was to conflate offshore investment with tax avoidance (or evasion) by the wealthy. While it is almost certainly probable that some names on the Panamanian list had this in mind, offshore investment has a much wider and often less tax-driven appeal.

For example, one of the biggest areas of fund growth in recent years has been index-tracking exchange traded funds (ETFs). These are used by both institutional and individual investors to gain exposure to a wide range of share and bond markets, as well as some commodities, such as gold. Many of the ETFs purchased by UK investors are based in the offshore centres of Dublin or Luxembourg. These locations were originally chosen because they were established centres for fund management and offered administrative and other advantages for continent-wide sales over, for example, setting up in the UK.
 
Inflation picks up – just a little  
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The March inflation number was the highest since December 2014.

CPI Inflation since 2010

UK inflation picked up in March, reaching the dizzy heights of 0.5% on the Consumer Price Index (CPI) and 1.6% on the Retail Prices Index (RPI - which is no longer an official statistic, despite being widely used by government). The CPI figure is still well short of the Bank of England’s central target of 2.0% which, as the graph shows, was last seen in December 2013.

Last year the CPI spent more time at or below zero than in positive territory, so the March 2016 number looks to be significant. Taken in isolation, this is less likely. Naturally enough, annual inflation statistics look across a 12-month period. In March this was a problem because of the timing of Easter, which was early. As a result, the March 2016 inflation data included the Easter bump in air fares, which rose by 22.9% between February and March 2016. There was no such jump in 2015 because Easter fell at a different point in April. In the next couple of months the process will unwind.
 
National Savings wields the axe  
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National Savings & Investments (NS&I) are cutting interest rates.

National Savings & Investments (NS&I) has announced that it will be cutting interest on five of its variable rate products, mostly from June. It blames the cuts in part on the fact that for 2016/17 the Treasury has set NS&I a lower net funding target than for 2015/16. There is an element of smoke and mirrors about this, as last year NS&I had the 65+ bonds on sale at rates widely seen as a pre-election carrot.

The changes will leave Income Bonds and the Direct ISA both paying just 1.00% interest, well below the latest (March) 1.6% rate of RPI inflation. The cuts will take NS&I out of the top rungs of the league tables and are a reminder of one of the more unwelcome side effects of ultra-low interest rates. NS&I are shaving 0.25% off its current rates on these two products, but that will represent a drop in income of a fifth.

Premium Bonds will suffer a smaller cut, with the annual prize fund dropping from 1.35% to 1.25%. To deal with this – which equates to a 7.4% drop in total prize payments – two changes are being made:

• The odds of a winning monthly draw will worsen from 26,000:1 to 30,000:1.

• The distribution of prizes will alter, with fewer big payouts. NS&I estimates that the number of prizes of £5,000 and above will drop from 204 in March 2016 to 88 in June 2016.
 
Income tax changes  
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The burden of income tax was reduced slightly in the Budget, but anomalies remain.

Higher Rate Threshold and Taxpayers

The personal allowance will rise from £11,000 to £11,500 in 2016/17 and the higher rate threshold – the starting point for 40% tax – will rise by £2,000 to £45,000. While the Treasury described the increase in the higher rate threshold as “the biggest above inflation cash increase to this threshold since it was introduced by Lord Lawson in 1989”, that does not tell the whole story in a zero inflation environment.

According to the Institute for Fiscal Studies, if there had been no reforms to the higher rate tax threshold rules since 2010, the number of higher rate taxpayers would now be 36% (1.8m) less than is currently the case. And higher rate tax is not the end of the story, by any means:

• The starting point for additional rate has been frozen at £150,000 since it was introduced in April 2010. Similarly, the income level at which child benefit starts to be taxed has remained at £50,000.

• The higher personal allowance will widen the band above £100,000 of income in which an effective tax rate of 60% applies – in 2017/18 it will reach up to £123,000. Ironically, tax payers (but not the Exchequer) would be better off if the additional rate tax (at 45%) started at £100,000.
 
Is LISA the back door to pension reform?  
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The announcement of the Lifetime ISA suggests that the Chancellor has not given up on his ideas for reforming the taxation of pensions.

Shortly before the Budget there was an unofficial announcement that the much leaked (but equally unofficial) plans for pension tax reform would not be making an appearance. Most commentators thought the Chancellor had not abandoned his plans, but merely put them on hold to avoid antagonising anyone ahead of June’s European referendum. The response to the original consultation on pension tax reform, published on Budget Day, was notable for including no comment on next steps.

However, Budget Day also saw the surprise announcement of a new ISA variant, the Lifetime ISA (destined to be LISA, even if the Treasury eschewed such a label). Available from April 2017 to those aged under 40, the LISA will:

• Have a maximum contribution of £4,000 a year, which counts towards the overall ISA allowance;

• Benefit from a government bonus equal to 25% of the amount contributed (maximum £1,000) up until age 50;

• Permit penalty-free access from age 60, or earlier, provided the amount withdrawn is used towards the purchase of a first home in the UK with a maximum value of £450,000. Other withdrawals before age 60 will generally mean the government bonus and any growth on it is lost and will also be subject to a 5% charge. However, the Treasury is consulting on allowing penalty-free access before 60 “for other specific life events”.

 
A capital gains tax cut – but only for some  
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The Chancellor made a surprise decision to cut capital gains tax (CGT) in his Budget – but not for everyone.

Cast your mind back to June 2010, when George Osborne presented his first “Emergency Budget” as Chancellor. One of his tax raising actions was to introduce a two tier system of CGT. Instead of being subject to a flat rate of 18%, gains became treated as the top slice of income, with basic rate taxpayers continuing to pay 18% and higher and additional rate taxpayers subject to an increased charge of 28%. At the time the Treasury justified the move by saying “…to partly fund the increase to the personal allowance, increase fairness and reduce tax avoidance the government will reform CGT to align it more closely with income tax rates.”

Coming back to this year’s Spring Budget – Mr Osborne’s eighth – and CGT rates have generally been cut by 8% from the start of 2016/17 to 10% and 20% respectively. On this occasion the Treasury says that “The government wants to ensure that companies have the opportunity to access the capital they need to grow and create jobs, and wants the next generation to be backed by a strong investment culture.”

 
More anti-avoidance measures  
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The Chancellor hopes to raise another £12bn from anti-avoidance measures announced in the Budget.

A Budget would not be a Budget without the announcement of a range of new measures to counter tax avoidance and tax evasion. The latest Budget did not disappoint. Among the targets under the heading of “Avoidance, Evasion, Imbalances, and Operational Measures” were:

  • Legislation to tackle ‘historic’ disguised remuneration schemes. This will levy a new tax charge on loans paid through disguised remuneration schemes (typically employee benefit trusts  ̶  EBTs) which have not been taxed and remain outstanding on 5 April 2019. 
  • The current exemption from employer’s national insurance contributions for termination payments (“golden handshakes”) will be restricted to the income tax-free amount of £30,000 from April 2018.
  • From April 2017 public sector bodies will decide whether the IR35 rules apply when hiring an individual who works through their own personal service company. At present the decision is the individual’s.

 
Another investment quarter passes  
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The first quarter of the year is over. For all the excitement over the last three months, from end to end, not much happened.

Do you remember back to the first half of February, when markets were full of doom and gloom and the FTSE was threatening to drop below 5,500 and the Dow Jones below 15,000? It has been a rollercoaster of a quarter, but the overall movement in the UK and US markets has been small, as the table below shows.

Index

Q1 2016 Change

FTSE 100

- 1.1%

FTSE All-Share

-  1.4%

Dow Jones Industrial

- 2.2%

Standard & Poor’s 500

- 0.7%

Nikkei 225

-12.0%

Euro Stoxx 50 (€)

- 8.0%

Hang Seng

-  5.2%

MSCI Emerging Markets (£)

+8.1%


 
Brexit: are we in for a stormy summer?  
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The date of 23 June has been set for the EU referendum. It could be a volatile run into summer.

£ v US Dollar: A stumbling few months


Source: uk.finance.yahoo.com

February was the month that Brexit (UK exit from the EU) started to hit the headlines in a big way. The Prime Minister finished his negotiations after the traditional late night arguments and confirmed that the remain-or-leave question would be asked on Thursday 23 June.

One measure of global investors’ concern about the impending vote can be seen in the performance of sterling. Shortly before Christmas it was trading at over $1.50 to the US dollar. By the end of February, it had sunk below $1.40. It was a similar story for the pound against the euro: having started December at over €1.40, by the end of February the rate had fallen to about around €1.27.
 
Breaking the PAYE code  
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Your latest PAYE code may look a little strange.

It’s the time of year when HM Revenue & Customs (HMRC) sends out PAYE codes for the new tax year. Usually that means adjustments for:

• An increase in the personal allowance, which in 2016/17 will rise by £400 to £11,000;

• Changes in any benefit values, notably car benefit which could increase quite sharply if you have a low emission car; and

• Collecting tax due from earlier years and, unless you have requested otherwise, tax due for the current year on certain investment income.

Reports suggest that HMRC has started to allow for the dividend tax changes and the personal savings allowance in setting 2016/17 codes. However, the results can be confusing, not least because HMRC’s starting point will be the dividend and interest on the last tax return which they received from you (hopefully 2014/15).
 
Year Start planning: time to get ahead?  
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As we near the end of the tax year, now is the time to consider not only year end planning, but also planning for the new tax year.

It is one of the features of the political cycle that the more difficult and less palatable legislation tends to come at the start of a parliamentary term rather than as an election nears. Tax changes are very much a case in point: the rises come soon after an election, the cuts shortly before the election. When 2016/17 starts there will be a number of important tax changes scheduled to take effect which need to be built into your financial planning:

• Lifetime allowance The lifetime allowance effectively sets the maximum tax-efficient value of all your pension benefits. It started life in 2006 at £1.5m, reached a maximum of £1.8m and will be cut from £1.25m to £1m on 6 April 2016. It will be possible to claim some transitional protection, although final details are still awaited.

• Annual allowance The annual allowance effectively sets the maximum tax-efficient annual input to all your pension benefits, regardless of source. It started life in 2006 at £215,000, reached a maximum of £255,000 and is now £40,000. From 6 April 2016 a new tapered annual allowance will be introduced, which may affect you if your total income (not just earnings) exceeds £110,000. The taper will mean that your annual allowance could be as low as £10,000.

• Dividend taxation The new tax rules for dividends begin on 6 April. If your dividend income is less than £5,000 you will have no tax to pay, but if you have substantial dividend income – perhaps from a shareholding in a private company – then your dividend tax bill could increase.

 
The Third Budget in 12 months    

This Budget looked as if it would be a difficult one for the Chancellor, faced as he was with disappointing economic numbers and the need to avoid ruffling feathers ahead of June’s in/out referendum. What was to have been the big announcement – reform of pensions – was kicked into the long grass a few weeks ago. Nevertheless, Mr Osborne did spring a few surprises, including some tax reductions.

How will this Budget affect you? If you are – or want to be – a saver, then there is plenty to consider. From April 2017 a new ISA, the Lifetime ISA, will be launched for the under-40s. It looks as if it is a close relation of the recently abandoned pensions ISA. Also from 2017/18, the normal ISA contribution limit – unchanged for 2016/17 – will rise to £20,000.

Capital gains tax (CGT) rates will fall from 2016/17 to 20% and 10%, although the current rates of 28% and 18% will continue to apply to residential property (another buy-to-let attack) and carried interests. There will be a new entrepreneurs’ relief (effectively 10% CGT) for external long term investors in unlisted companies.

Other important changes for included:

• Increases in the personal allowance for 2017/18 to £11,500 and the higher rate threshold to £45,000.

• A restructuring of stamp duty land tax (SDLT) on commercial properties.

• A major revamp of business rates, permanently doubling the Small Business Rate Relief.

As usual, we are on hand to help you if you would like to discuss any of the issues raised in the Spring Budget in further details. We will be pleased to hear from you.

 
Automatic enrolment: the number of fines is increasing  
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The Pensions Regulator is finding a growing number of automatic enrolment failures.

The Pensions Regulator (TPR) recently issued its latest “Compliance and enforcement” bulletin, looking at progress to the end of 2015. This showed that as the size of employers drawn into the scope of auto-enrolment has shrunk, so have the TPR’s actions and fines grown:

• In the final quarter of 2015, TPR issued 2,596 compliance notices, which it describes as giving employers “a ‘nudge’ to encourage them to meet their duties”. In the previous three years, the average had been under 200 a quarter.

• TPR served 78 Unpaid Contribution Notices in the last three months of 2015. Once again the average for the previous three years was much lower – about 12 a quarter.

• Further up the non-compliance scale, TPR levied 1,021 £400 Fixed Penalty Notices for non-compliance: in the previous three years it had only issued 573 in total.

• TPR also imposed 24 escalating daily penalties (which can run up to £10,000) for failure to comply with a statutory notice. In the first three years of automatic enrolment only seven were issued.
 
Keep an eye on your cash  
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The latest inflation figure has crept up again, but interest rates haven’t followed.

Between December 2015 and January 2016, overall prices as measured by the Consumer Prices Index (CPI) fell by 0.8%. However, prices normally fall between Christmas and the New Year as the sales get under way and the festive travel price hikes are unwound. The latest turn of year drop was 0.1% smaller than that between 2014 and 2015, with the result that annual inflation nudged up by 0.1% to 0.3%, the highest since January 2015.

The low level of inflation prompted another of the regular letters between Mark Carney, Governor of the Bank of England, and the Chancellor explaining why the inflation target (2%±1%) had again been missed. Mr Carney gave the same main reasons as he had previously: “falls in commodity prices; the past appreciation of sterling; and, to a lesser degree, below-average growth of domestic wage costs”.

The Bank’s latest projection for inflation, published in February, is that it is unlikely to reach the 2% central target until around the end of next year, based on the current market forecasts of future interest rates. These in turn suggest that base rate - 0.5% since March 2009 - will not reach 1% until around the end of 2018. In his letter to George Osborne, Mr Carney even said that “were … downside risks to materialise” the Bank could “…cut Bank Rate further towards zero from its current level of 0.5%.”
 
A volatile start to 2016  
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January was a rollercoaster ride for share markets around the world.

INDEX

JANUARY CHANGE

FTSE 100

- 2.5%

FTSE All-Share

-  3.2%

Dow Jones Industrial

- 5.5%

Standard & Poor’s 500

- 5.1%

Nikkei 225

-  8.0%

Euro Stoxx 50 (€)

-11.2%

Shanghai Composite

- 22.7%

MSCI Emerging Markets (£)

-2.9%


January provided a very volatile start to the year for investors in the world’s share markets. By the 20th the main stock market indices in both the US and UK were down close to 10% from the start of 2016. There were a wide variety of reasons given for the fall, from more doubts about Chinese growth, through falling oil prices, to concern that the US Federal Reserve had acted too soon in raising interest rates.
 
The slippery slide of oil prices  
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The fall in the price of oil is having some curious side effects.

Brent Crude Price fall over last 6 years
Source: DigitalLook.com

Petrol and diesel fell to under a £1 a litre in January as the supermarkets battled for customers. The drop was due to the precipitous decline in the price of oil, which started in mid-2014, when oil was over $100 a barrel, and took another step down in late 2015, to $30 territory. It might feel like good news, but the slip-sliding price has not been entirely beneficial:

• Some of the major oil-producing countries, such as Saudi Arabia, have had to raid their sovereign wealth funds to make up for the loss of revenue. Sales of shares by these funds have been at least partially blamed for global stock market turbulence seen recently.

• UK government revenue from North Sea Oil taxation is fast disappearing as $30 is an uneconomic price for drilling in such hostile conditions. Mothballed rigs are reported to be accumulating in the Cromarty Firth.
 
The latest pension tax relief rumours  
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There have been more press reports that the Chancellor will reform tax relief for pension contributions in his March Budget.

In last July’s Budget the Chancellor launched a consultation on ‘tax incentivised saving’. It was a curious sort of consultation, in as much as it dwelt largely on the tax cost of the existing pension system but made few proposals about how it could be reformed. The expectation was that we would see more detail alongside the Autumn Statement. In fact, all we learned in November was that an answer would have to await next month’s Budget.

Inevitably rumours and speculation have now started to circulate about what Mr Osborne might do. The latest suggest that he has abandoned the idea of turning pensions into ISAs (no tax relief for contributions, but no tax on benefits). Instead the Treasury is reported to be considering a single flat rate of tax relief, irrespective of the contributor’s marginal income tax rate(s). The hints are that this might be set between 25% and 33%.

Such a change would be good news if you are a basic rate taxpayer, but not if you pay 40% or 45% tax. From the Chancellor’s viewpoint a flat rate approach to tax relief could save billions in tax relief while still benefiting the majority of people putting money into pensions: at present basic rate taxpayers make half of all pension contributions but receive only 30% of the pension tax relief given.
 
Interest rates: “the turn of the year”  
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The Governor of the Bank of England has made another interest rate pronouncement.

Almost since he started the job in July 2013, Mark Carney has used his position of Governor of the Bank of England to talk about when UK interest rates will begin to increase. So far he has largely managed to prove that central bankers, however powerful, possess no greater forecasting ability than most other financial experts.

The latest proof of this takes us back to last July, when Mr Carney told an audience assembled in Lincoln Cathedral that “it would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historical averages. In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”

The comment was widely interpreted as meaning the Bank of England was likely to start raising interest rates as 2016 got under way. However, although Mr Carney’s transatlantic colleagues at the Federal Reserve began their rate rises in December, a UK move is now unlikely in the short term. In a speech at Queen Mary University on 19 January, tellingly entitled “The turn of the year” Mr Carney referred to his summer statement and said “Well the year has turned, and, in my view, the decision proved straightforward: now is not yet the time to raise interest rates.”
 
Venture capital trusts changes in 2016  
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This year’s venture capital trusts (VCT) offerings are the first under a changed set of investment rules.

VCTs offer several attractive tax benefits:

• Income tax relief at 30% is available on new share subscriptions for investments up to £200,000 per tax year;

• Dividends are free of income tax; and

• Any gains are free from capital gains tax.

Unsurprisingly such generous tax breaks do not come without strings attached, the most significant being a five-year term to avoid clawback of income tax relief and strict investment rules. Last year several important changes were made to those investment criteria in response to revised EU state aid rules:

• Age limits now generally apply to the companies raising capital for the first time under VCTs. These are ten years for ‘knowledge-intensive’ companies and seven years for other companies.

• The maximum that can be raised by a company under VCT and other tax-incentivised schemes is £12m (£20m for ‘knowledge-intensive’ companies) in total. The previous annual limit of £5m also continues to apply. The new overall cap will limit ‘follow-on’ investments.

• A company receiving funds from a VCT can no longer use the money to acquire a business.
 
Another mixed year for world stock markets  
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There were mixed results from the world’s main share markets in 2015, with the US and UK very little changed.

Index

2015 Change

FTSE 100

- 4.9%

FTSE All-Share

-  2.5%

Dow Jones Industrial

- 2.2%

Standard & Poor’s 500

- 0.7%

Nikkei 225

+ 9.1%

Euro Stoxx 50 (€)

+ 3.9%

Hang Seng

-  7.2%

MSCI Emerging Markets (£)

-12.2%


Drilling into the raw numbers reveals a few interesting insights:

• Although the FTSE 100 fell nearly 5%, this was mainly due to the dominance of the index by multinational commodity and energy companies. The FTSE250, which covers medium sized companies with more of a domestic focus, rose by over 8%.

• Once dividends are taken into account, the FTSE All-Share – the broadest measure of UK shares – produced a positive return of about 1%.
 
US interest rates: we have lift off  
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A long-awaited event happened in mid-December.

The mid-December front pages of the national press were pre-occupied with the launch of a rocket from Kazakhstan containing Tim Peake, the UK’s first European Space Agency astronaut. At virtually the same time, the business pages were pre-occupied with another fanfare-laden lift off: a rise in US interest rates.

The transatlantic interest rate rise was the first increase since June 2006 and the first change in rates since the US Federal Reserve brought them down to a 0%-0.25% range in December 2008. The market had originally been anticipating a rise in September, but the Fed stayed its hand, worried about the ructions in Chinese financial markets. In December there were no such concerns.
 
Selling your pension annuity  
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The government has set out further details about the secondary annuity market.

In last March’s Budget the Chancellor launched a consultation considering how existing pension annuity holders would be able to sell their annuity in return for a taxable lump sum. The logic behind the idea was to give existing pensioners the same flexibility as is available to those now reaching retirement.

The creation of a secondary annuity market raised some complex issues and by the second Budget of 2015 the Chancellor had decided that implementation would be delayed until April 2017. Even then, the most obvious purchasers – the original annuity providers – will face restrictions on buying back their own annuities. In most instances sales will have to be arranged through intermediaries, adding to the costs.
 
The 65+ Guaranteed Bond matures  
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National Savings & Investments (NS&I) has announced reinvestment terms for the 65+ bonds that were so popular a year ago.

In his March 2014 Budget, the Chancellor promised that in January 2015 NS&I would launch “market-leading savings bonds for people aged 65 and over” When the rates were eventually confirmed, they were indeed market-leading – 2.8% for one year and 4% for three years. Some commentators saw the offering as being more influenced by pensioners’ propensity to vote in elections than the need to raise government finance as cheaply as possible.

The one year bonds are now starting to reach maturity. This time around the Chancellor has said nothing about providing “certainty and a good return for those who have saved all their lives and now mostly rely on their savings for income”. Instead he has left NS&I to reveal that anyone wanting to reinvest for another year can choose a Guaranteed Bonus Bond, paying 1.45% - just over half the 65+ bond rate. There is the option to invest for longer terms, up to five years, but half a decade will only fix an interest rate of 2.55%. Even in an environment of very low interest rates, the returns offered by NS&I are uncompetitive: the market leaders pay at least 0.5% more.
 
Another non-allowance for personal savings  
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More details have emerged about the forthcoming personal savings allowance.

Draft clauses of the Finance Bill 2016 were issued in December, helping to keep tax aficionados amused over the festive season. They were accompanied by a raft of explanatory material, but there were still plenty of questions left unanswered.

One change to tax from 6 April did become clearer: the introduction of the new personal savings allowance (PSA). This was announced in the March 2015 Budget, but very limited information was given about how it would work in practice. The draft clauses and background notes have now told us:

• If you pay no more than basic rate tax, the allowance will be £1,000, allowing you to earn up to £1,000 of interest (and certain other savings income) in 2016/17 with no tax liability.

• If you pay any higher rate tax, then the allowance will be £500. This cliff edge approach will leave a small number of just-higher-rate taxpayers worse off than those with greater or smaller incomes.

• If you pay any additional rate tax, then the allowance will be nil – another cliff edge, but arguably with less impact.
 
Autumn Statement 2015  
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The Chancellor has announced the date of the Autumn Statement.

In late July, the Chancellor announced that the results of the Spending Review would be announced on 25 November. At the time he made no reference to the Autumn Statement, probably because the focus was still on his July Budget. However, in the beginning of September an exchange between Mr. Osborne and the Office for Budget Responsibility revealed, much as expected, that 25 November will also see the publication of the Autumn Statement.

In recent years the Autumn Statement has increasingly become more like a second Budget – last year’s was particularly notable in this regard. This time around there may not be quite such a Budget overlay, if only because the Chancellor has already presented two budgets in 2015. In July’s he announced most of the income tax details for next tax year, revising figures he had put forward in March. It is difficult to imagine he will make further changes on this front.
 
HMRC accelerates to £1bn of collections  
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HM Revenue & Customs’ (HMRC’s) accelerated payments programme has now collected £1bn from users of tax avoidance schemes.

Last year HMRC gained the power to demand upfront tax payment from users of tax avoidance schemes subject to the Disclosure of Tax Avoidance Schemes (DOTAS) rules or the General Anti-Abuse Rule, or where a similar scheme had already been defeated in the courts. In 2015, the power was extended to schemes involving National Insurance Contributions.

In August 2014 HMRC started sending out ‘Accelerated Payment Notices’ and to date it has issued over 25,000. By the end of next year, HMRC anticipates it will have issued around 64,000 notices. Anyone receiving such a notice has 90 days to pay up or make representations to HMRC if they consider the notice is incorrect. So far those choosing to pay up have put £1bn into the HMRC coffers. By March 2020 HMRC is projecting that it will have collected £5.5bn of brought forward payments.

HMRC would have to repay some of that money if the courts decide in favour of any litigating scheme users. However, as HMRC regularly reminds taxpayers, the taxman wins 80% of avoidance cases and many people choose to settle before embarking on the expensive path of litigation.
 
Buy-to-let: a future tax trap?  
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A close reading of the summer Finance Bill has highlighted a further tax consequence of the government’s moves to limit tax relief for interest on buy-to-let mortgages.

The July Budget included an attack on individual investors in buy-to-let residential property. As well as abolishing the 10% wear-and-tear relief for furnished lettings from next April, the Chancellor also announced a deferred and staged reduction in the maximum amount of tax relief on finance costs. At present all interest for purchasing buy-to-let housing is fully tax-relievable against rental income, so if you are a higher rate taxpayer, the interest you pay benefits from 40% tax relief. In 2017/18, 75% of your interest will be fully relievable and a quarter will be relieved at only basic rate. In 2018/19 the split becomes 50/50 and in 2019/20, 25/75. By 2020/21 the tax relief you will receive will be limited to basic rate on all interest.

The way this will be achieved has now been made clear in the Finance Bill. The basic rate relief will be given as a tax credit rather than allowing a proportion of the interest to be offset against rental income. This may sound an arcane difference, but it could be costly for some buy-to-let investors because it increases their total net income figure. The example below shows the effect on child benefit tax, but there are similar consequences for phasing out of the personal allowance and loss of the forthcoming personal savings allowance.
 
A difficult quarter for share markets  
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It was not just the poor weather that made it a bad summer for investors.

Index

Third Quarter Change

FTSE 100

- 7.04%

FTSE All-Share

-  6.57%

Dow Jones Industrial

-7.58%

Standard & Poor’s 500

-6.94%

Nikkei 225

-14.07%

Euro Stoxx 50 (€)

-9.45%

Hang Seng

-20.59%

MSCI Emerging Markets (£)

-15.42%


It was the worst quarter for investors since 2011, but as ever, the raw numbers do not tell the whole story:

• The fall in the FTSE 100 has much to do with its exposure to mining and energy companies, which have suffered as commodity prices have fallen.

• UK Companies outside the FTSE 100 have fared better. The FTSE 250, which is a yardstick for mid-sized companies, fell by less than 5% ¬– hence the lower drop for the broader FTSE All-Share than the FTSE 100.

• Sterling weakened against the main global currencies in the third quarter, reducing the impact of the fall in overseas markets.
 
The Fed interest rate rise – the dog that didn’t bark  
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A long-awaited meeting of the US Federal Reserve did not result in an interest rate rise.

2 p.m. New York time on Thursday 17 September had been much anticipated by investment professionals around the world. It was the hour when the Federal Reserve Open Market Committee would release its meeting statement, revealing its latest interest rate decision. Ahead of the announcement there had been much speculation that an interest rate ‘lift-off’ would happen. Even the head of the Federal Reserve, Janet Yellen, had hinted as much.

When the time arrived, there was something of an anti-climax. The decision was to keep rates on hold, which at first sight might have been expected to be good news. However, the market thought differently:

• 13 of the 17 members of the Federal Reserve Board (Fed) still thought 2015 was the year in which to start raising interest rates. So the waiting game continues.
• The statement said “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” This prompted a familiar market worry: what does the Fed know that we don’t?
 
That August feeling  
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The summer holiday month was anything but relaxing for investors in UK shares.

As well as being the title of an Edna O’Brien novel, “August is a wicked month” probably sums up how many investors felt about the month. It was all going rather unexcitingly around the middle of the month, when the combination of a devaluation of the Chinese currency, the renminbi, and a plummeting Chinese stock market prompted share markets around the world to drop sharply.

In the UK, the usual “billions wiped off shares” headlines emerged, although when the market rallied in the closing days of the month, there were no corresponding “billions added to shares” headlines. As the graph below shows, over August the FTSE 100 (the red line) fell by 6.7%, having at one stage been down nearly 12%. The rollercoaster ride was less marked for the FTSE 250, which fell 3.2% over the month, with its biggest drop 8.3%.

FTSE 100 v FTSE 250 August 2015
 
Venture Capital Trusts and dividend reinvestment  
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The Finance Bill is giving venture capital pause for thought.

One of the attractive features of venture capital trusts (VCTs) is that their dividends are normally free of personal tax – something which will become more appealing from the 2016/17 tax year, when the new dividend tax rules begin. Many VCTs have automatic reinvestment schemes which allow you to use the dividend to buy more shares in the trust. With some exceptions, usually the shares are newly issued rather than bought in the market, meaning that the amount reinvested qualifies for 30% income tax relief as a fresh VCT subscription.

However, changes to the rules for VCTs which were announced in the Summer Budget have prompted some trusts to stop their dividend reinvestment schemes at short notice. The trusts involved typically say they want to consider the impact of the proposed changes on their investment strategies. One area which looks to be moving off-limits for VCTs is investment in management buyouts, a strategy that has proved popular with some schemes.
 
Villas and estates  
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New EU rules about succession came into force on 17 August.

If you own a holiday home on the continent, new EU regulations on cross-border succession could be important to you, even though the UK has opted out of the legislation. The new regulations will allow you to choose for your overseas property to be inherited under the laws applying in your country of ‘habitual residence’ or nationality. As a result, for example, in theory the English owner of a French villa can avoid the forced heirship rules that would otherwise apply to French assets.

The regulations only affect the succession rules, not estate taxes. Thus the executors of the French villa owner will still have to deal with the interaction between the French ‘droits de succession’ (at up to 60% for unrelated beneficiaries) and UK inheritance tax (at up to 40%). However, double taxation agreements will mean that, in effect, only the higher of the two tax charges is paid.
 
Another inflation measure  
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The latest inflation figures showed virtually zero inflation and nothing to worry about…or did they?

The July Consumer Prices Index (CPI) was marginally higher than expected at 0.1%. However the reading marked the sixth consecutive month in which the CPI had been within 0.1% of zero. So has inflation disappeared?

The answer’s not that simple. While the government’s favoured measure of inflation, the CPI, is dormant, one of the other yardsticks watched by economists is showing signs of life. ‘Core inflation’, which is the CPI excluding the volatile elements of energy, food, alcoholic beverages and tobacco, jumped 0.4% in July to an annual 1.2%. Although the Bank of England’s inflation target is set in terms of the CPI (2.0% ± 1%), the interest rate setters on the Monetary Policy Committee will have noted the core increase.

A very similar situation exists across the Atlantic. Annual consumer price inflation in July was 0.2% in the US, but core inflation was 1.8%. In both cases it is two of the elements stripped out to create the core figure which are causing the difference – energy and food. Both sets of commodities have been falling in price under global influences – they are beyond the control even of central banks.
 
More detail on dividend changes  
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HMRC has issued a factsheet about next year’s dividend tax changes.

The Summer Budget announcement of a change to the rules on dividend taxation from next April caused many furrowed brows. The situation was not helped by the very limited detail available from HMRC on the new regime and no legislation in the Finance Bill published in July.

Last month things became a little clearer when HMRC published a “Dividend Allowance Factsheet” which it developed in conjunction with the Tax Faculty of the Institute of Chartered Accountants of England and Wales. This revealed that the new £5,000 Dividend Allowance will not be a true allowance, but rather (yet another) 0% tax band. The difference may sound academic, but it is significant. It will mean, to quote the factsheet, “The Dividend Allowance will not reduce your total income for tax purposes”.

To see the effect, suppose someone had income before dividends in 2016/17 of £2,000 below the starting point for higher rate tax. If they receive dividends of no more than £5,000, there will be no tax to pay on those dividends. Any dividends above £5,000 will attract 32.5% tax – the new dividend higher rate – not the new 7.5% dividend basic rate. Had the Dividend Allowance been a true allowance, then the £2,000 of unused basic rate band would have been available to use first before higher rate applied.
 
Chinese whimpers not whispers…  
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The Chinese mainland stock markets have had a torrid two months.

Shanghai Composite Index

On 9 June MSCI, a major provider of global stock market indices, announced that this year it would not be including in its Emerging Markets Index mainland China shares (A-shares) listed in Shanghai and Shenzhen. The decision had been widely awaited and the two Chinese stock markets had rallied strongly, partly in anticipation that MSCI would say ‘yes’, which would have prompted a surge of buying from tracker funds.

With hindsight – a very useful tool for investment – MSCI’s ‘no’ looks to have been the point at which Chinese investors – mainly private individuals, not institutions – took fright. As the graph shows, the Shanghai market dropped sharply after the MSCI news and despite a few brief rallies and the best efforts of the Chinese authorities, remains down substantially from its early June peak.
 
The trouble with averages  
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Knowing what the average is may not be as helpful as you think.

One of the facts which often appears in personal finance surveys is that people tend to underestimate how long they will live. At a time when retirement provision is increasingly becoming a personal rather than state responsibility, that could mean running out of money before running out of life.

If you want an idea of what the average life expectancy for your age is, there are plenty of websites to help you. One of the simplest – and arguably most independent – comes from the Office for National Statistics (http://visual.ons.gov.uk/how-long-will-my-pension-need-to-last/), using the basis underlying UK population projections. For example, if you are a 55 year-old man, the site will tell you that your average life expectancy is 86 years. If you are a woman of the same age, you can add another three years to that figure.

All well and good, but these are averages and that means there is roughly a 50% chance you will live longer. Just how much longer could be a significant period. The ONS number crunchers say that a 55 year-old man has a 1 in 4 chance of reaching age 95 and again a woman can add another three years, bringing her to 98. There is 17.2% chance – roughly 1 in 6 – that the longer-living sex will survive until 100: for men the odds are 10.9% – still about 1 in 11.
 
Doffing the care cost cap  
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The proposal for a care cost cap in England has been put on hold.

Back in 2011, the Dilnot Commission proposed a cap of £35,000 on lifetime personal liability for care costs. The Commission’s report was the latest in a long line of government enquiries into the thorny issue of funding long term care in England and at one point looked destined to join its predecessors in the long grass. However, while the then government did not accept Dilnot’s £35,000 figure, it did eventually propose a £72,000 ceiling on personal costs from April 2016. The necessary framework was legislated for in the Care Act 2014, along with a number of other important changes, notably a large increase in the upper capital limit for means testing to £118,000.

Less than ten months before these new rules were due to take effect, the Department of Health made a Friday announcement that they would be put on hold until April 2020. In a letter to the Chair of the Local Government Association, the Minister of State for Community and Social Care said “A time of consolidation is not the right moment to be implementing expensive new commitments such as this”. The comment is all the stranger when you remember that in March 2013 the Chancellor extended a freeze on the inheritance tax nil rate band for three years as “part of the package to fund a cap on reasonable care costs”. In the Summer Budget that freeze was extended for another three years to April 2021.
 
Interest rates to rise  
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The Governor of the Bank of England (BoE) is hinting at interest rate rises again.

“It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historical averages. In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”

Those measured words, delivered by the BoE Governor Mark Carney in a lecture at Lincoln Cathedral, were the latest indication that the 0.5% base rate, born in March 2009, may not survive until its seventh birthday. Mr Carney has some unfortunate form in talking about interest rate rises, but in that all-too-dangerous phrase, this time it’s different.

For a start, the rate of inflation will begin to pick up towards the end of the year, as last year’s sharp fuel price cuts drop out of the yearly figures. At the same time earnings growth has been increasing – the latest statistics show an annual increase (including bonuses) of 3.2%. Unemployment remains at relatively low levels and the figures for overall economic growth released in late July showed that the economy had bounced back from the first quarter’s disappointing 0.4% growth.
 
Deposit protection to fall  
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The compensation for lost deposits is to be cut by £10,000.

On the first Friday in July, a few days before the Budget, the Prudential Regulatory Authority (PRA) announced that the level of Financial Services Compensation Scheme (FSCS) protection for depositors was to be cut with immediate effect from £85,000 to £75,000. The PRA, which is part of the Bank of England, blamed the change on the requirements of the European Deposit Guarantee Schemes Directive.

The Directive says that non-Eurozone countries must recalculate their deposit protection limit every five years, setting it at the equivalent in their domestic currency to €100,000, albeit with some judicious rounding permitted. As sterling has strengthened considerably against the euro since mid-2010, the protection given to deposits has dropped.

However, as the Directive only sets a minimum, the Treasury did make some concessions:

• If your deposits were previously protected by the FSCS, you will continue to be covered at the old £85,000 level until the end of the year. Thus for most practical purposes the new limit will not bite until 1 January 2016.
 
1 in 6 pay more than basic rate tax  
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HMRC have updated their income tax payer data.

Tax Payers By Numbers 2015-16

HMRC regularly updates data on income tax payers and last month it produced a revised set of numbers. These give an interesting insight into the drivers behind tax policy, and in particular, the emphasis on reducing tax avoidance.

• HMRC estimates there will be 29.7 million income taxpayers in 2015/16, 1.6 million fewer than in 2010/11, despite increased employment. The drop is mainly due to the significant increases in the personal allowance over recent years combined with low earnings growth.

• Of that near 20 million, almost 5 million will be higher or additional rate taxpayers at the margin – just over 1 in 6 of all taxpayers. In 2005/06 – with additional rate tax not yet invented – the proportion of higher rate taxpayers was less than 1 in 8.
 
Deflation arrives  
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The official rate of inflation fell below zero in April: prices are now dropping year on year.

The April reading for the Consumer Prices Index (CPI) was an annual rate of -0.1%, which is the lowest level since the index was officially launched in 1990. On an unofficial ‘back-tested’ estimated you have to go back to 1960 to find a similar figure.

Negative inflation – deflation in the economist’s jargon – had been in the offing for some time, but the consensus forecast for the April inflation figure was that it would stay at the 0% recorded in February and March. What seemed to have made the difference in April was the timing of Easter and its effect on transport costs. The year’s peak Easter air and sea fares missed the data collection dates for the inflation number crunchers, helping to keep down that element of the index.

The Retail Prices Index (RPI) – no longer an official inflation measure – was still in positive territory at +0.9%. Similarly ‘core inflation’, which strips out the volatile elements such as fuel from the CPI, was +0.8%, down from 1% in March.
 
Mary Poppins’ Pension  
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Pension automatic enrolment is getting closer to home.

The roll out of automatic enrolment of employees into pension schemes started back in October 2012 with the largest employers. The logic was that these big organisations would have the necessary resources to start the process quickly and efficiently. Since those early days, the size of employers required to introduce automatic enrolment has been shrinking. As of this month, the threshold fell to fewer than 30 employees.

This is the minimum threshold and embraces nearly 800,000 small and micro employers. In this group, the precise timing (“staging date”) for when automatic enrolment must be offered is driven by PAYE coding letters, which can have unusual effects. For example, two employers working from the same premises might have staging dates two years apart.

The first sub-30 group (with the last two letters of PAYE reference numbers 92, A1-A9, B1 – B9, AA-AZ, BA-BW, M1-M9, MA-MZ, Z1-Z9, ZA-ZZ, 0A-Z, 1A-1Z or 2A-2Z) have now reached their staging date of 1 June 2015. That has prompted some press coverage about the employment of nannies. Parents who employ nannies directly fall within the automatic enrolment rules, even if the recruitment of the nanny was originally via an agency.

The initial pension cost will be modest – generally 1% of earnings above £5,824 – but the rate will rise to 2% in October 2017 and 3% a year later. For a nanny in London that could mean employer pension contributions of more than £1,000 a year from autumn 2018.
 
Interest rate rise: now it’s 2016  
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The latest Quarterly Inflation Report from the Bank of England suggests there will no base rate rise this year.

“Free beer tomorrow” is a sign that used to be spotted in some pubs before they were closed down or became eateries rather than drinking establishments. Of course, tomorrow was always one day away, so free beer was an illusion. It feels the same with increases to the Bank of England’s (BoE) base rate, which has been stuck at 0.5% since March 2009.

“Interest rate rises next year” has become a variant on “free beer tomorrow”, with learned predictions from pundits, experts and even the Bank of England’s Governor, Mark Carney, proving to be mere shibboleths. In presenting the Bank’s latest Quarterly Inflation Report, Mr Carney deliberately avoided making himself a hostage to fortune, saying that the Bank “… has long expected that these (economic) headwinds will likely merit not only a more gradual rate of increase in Bank Rate than in previous cycles, but also require levels of Bank Rate to remain below average historical levels for some time to come”.

Look inside the Report itself and there is a graph showing how the money market (not the Bank) expects official interest rates to move over the next three years. At the same time, the BoE avoids confirming that the market’s figures are built into the Bank’s economic forecasts. As of May 2015 the market reading was that “…Bank Rate is expected to rise from early 2016, but to only 1.4% in three years’ time”.
 
Get ready for the second Budget of the year  
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Last month’s unexpected election result has been followed by the more anticipated announcement of a second 2015 Budget. Quite what it will be about is unclear for now – the Treasury’s press release gave little more than the date.

In terms of what was in the Conservative manifesto on tax, there are two measures that could be fleshed out next month that were not mentioned in the March Budget:

• More changes were proposed to the pension annual allowance, following the Budget statement that the lifetime allowance would be further reduced to £1 million from 2016/17. The manifesto suggested that for those with income of over £150,000, the allowance would be reduced by £1 for each £2 of excess income, subject to a minimum of £10,000 if income exceeds £210,000.

• The cut in the annual allowance was intended to fund a new main residence inheritance tax allowance of £175,000 transferable between spouses and civil partners on gifts to children or grandchildren.

The allowance would be phased out for estates above £2m, again at the rate of £1 for each £2 excess. It would be much easier just to increase the nil rate band to £500,000. This may yet happen, as the manifesto proposals met with some criticism on various grounds, e.g. discouragement of trading down. Either of these ideas could disrupt your existing financial planning, so do make sure you keep in contact with us for post-Budget news.
 
Zero Inflation  
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Annual inflation has been zero for two months.

CPI Inflation since January 2010

Both the February and March readings for annual Consumer Prices Index (CPI) were a big fat zero, the lowest level since the index formally started in 1997. Were it not for rounding, the March figure would have been negative – something we could see for April.

The flat-lining in prices is mainly down to year on year declines in two major components of the Index:

• Food and non-alcoholic beverages were 3% cheaper than a year ago in March; and
• Transport was down 1.9% over the year.

Together these components account for a little over a quarter of the index, hence the headline figure. One number that financial analysts look at is still in positive territory: core inflation. This measure is the CPI stripped of its volatile and tax-driven elements (food, energy, alcohol and tobacco). It stands at +1.0% and gives some comfort for economists worried about deflation (falling prices) leading to an economic slowdown.
 
A ‘mistake’ rectified  
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A lesson in why it pays to take advice has ended with a creative decision from a tax tribunal.

It is unfortunately all too common for the UK’s labyrinthine tax legislation to create some unwelcome tax traps for the unadvised. One of the best/worst examples is the tax treatment of single premium life assurance policies, usually referred to as investment bonds.

The rules on these were revamped many years ago to make small regular encashments free of any immediate tax charge. Very broadly summarized, if withdrawals in a year are not more than 5% of the original amount invested, any tax liability is deferred – the so-called “5%” rule. The corollary is that the excess over 5% is immediately taxable, regardless of whether the policy is showing an overall profit.

It was the corollary which caught out Joost Lobler. He invested about $1,406,000 in offshore investment bonds in March 2006 and less than a year later withdrew $746,485 to repay a loan used in part to finance the bond purchase. In February 2008, he withdrew another $690,171. The end result of these two withdrawals was that under the 5% rule, Mr Lobler was deemed to have received taxable income of $1.3m and was liable to pay $560,000 in tax, even though his overall investment was showing a gain of under $70,000. Had Mr Lobler arranged the withdrawals in a different way (cashing in whole mini-policies rather than partially cashing all policies) his tax bill would have been probably less than $30,000.
 
A Budget is not a Finance Act  
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Not all the contents of the March Budget reached the statue book.

Democratic scrutiny is not always what it seems. Consider this year’s (first?) Budget, presented by the Chancellor on 18 March. It was followed by the issue of a 300+ page Finance Bill on 24 March, which then went through three readings, a committee stage and a report stage in both the House of Commons and the House of Lords before receiving Royal Assent on 26 March.

The same frantic progress occurred five years ago, when the Budget and the election crashed into each other and, with fixed term parliaments, this juxtaposition looks set to be a five-yearly problem. One result which has drawn little comment is the failure of some of Mr Osborne’s announcements to reach the Finance Act 2015. For example:

Income tax The £200 increases to the personal allowance in 2016/17 and 2017/18 became law, but the personal savings allowance, exempting £1,000 of interest from tax for a basic rate taxpayer (£500 if you pay higher rate) did not.

Pensions Although the Chancellor announced a cut in the lifetime allowance to £1m from 2016/17, a move Labour had already proposed, this change was not in the Finance Act. However, the cut is now virtually certain for the next Finance Bill, along with measures to restrict contribution tax relief proposed by both Labour and the Conservatives, albeit on different bases.
 
Child Trust Fund to JISA transfers  
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At long last it has become possible to transfer Child Trust Funds to Junior ISAs.

One of the first acts of the coalition in May 2010 was to announce an end to the Child Trust Fund (CTF), with no government payments to newborns after 2 January 2011. In November 2011, Junior ISAs (JISAs) were launched as a replacement, but crucially there were no government payments involved.

Children eligible for CTFs (born between 1 September 2002 and 2 January 2011) could not invest in JISAs, which left them – and their parents – in something of a limbo land, as the focus of financial service companies was on the new product, JISAs.

It is a fitting end to this story that one of the final acts of the coalition government was to pass two pieces of legislation which, since 6 April 2015, have allowed a CTF to be transferred into a JISA. If you have a child (or grandchild) with a CTF, a transfer may well be worth considering. CTFs started life in 2004 with very low contribution limits and both their charging structure and investment choice reflected this. Although contribution limits have increased and now match the £4,080 annual figure for JISAs, the old structures have tended to stay in place. A transfer to a JISA could therefore cut costs and broaden investment options. To find out more, please contact us.
 
ISAs inheritability becomes law  
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ISAs can now be inherited in limited circumstances.

In last December’s Autumn Statement, one of George Osborne’s surprise announcements was that ISAs would become inheritable by surviving spouses and civil partners. As pension funds can now pass down through generations, the ISA move was a logical step. It was also one of those measures which all Chancellors like: a change which sounds very beneficial, but actually costs little.

The announcement initially caused some confusion because it appeared almost to have been as unexpected to HMRC as anyone else. Eventually some clarity emerged and in the early part of 2015 HMRC issued draft regulations. Two points stood out:

• Inheritance would not mean simply changing the name of the ISA’s owner. Instead the mechanism would operate by saying the surviving spouse/civil partner could make a contribution equal to the value of the deceased’s ISA at the date of death. That is not too difficult for cash ISAs, but for stocks and shares ISAs fluctuating values could create problems: the contribution permitted may be more or less than the ISA’s value by the time estate is wound up.

• Although shares and fund holdings could be transferred as part of the contribution, the transfer had to be to an ISA with the deceased’s ISA provider unless they were no longer accepting new contributions.
 
Income tax changes  
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It almost goes without saying now that any Budget or Autumn Statement will include an announcement about an increase in the personal allowance.
The 2015 Budget was no exception: Mr Osborne announced (and the Finance Act 2015 legislates for) a £200 increase in the personal allowance in both 2016/17 and 2017/18. This will take the personal allowance up to £11,000. At the same time the basic rate band will increase by £115 in 2016/17 and £400 in 2017/18 to £32,000.

Add the new higher personal allowance to the improved basic rate band and in 2017/18 the starting point for higher rate tax will be £43,000. The Treasury noted that “this is the first above inflation increase in the higher rate threshold for seven years”, but omitted to add that the higher rate threshold was £575 higher in 2009/10.

The latest statistics from HMRC show that in 2014/15, almost one in six taxpayers paid 40% or 45% income tax. In 2009/10 the corresponding proportion of 40% taxpayers (there was no additional rate) was just over one in ten. If you needed a reminder of the importance of personal tax planning, rather than relying on manifesto promises and government largesse, look no further.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.
 
Selling your pension annuity  
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The Budget confirmed that the government is exploring ways to create a market in pension annuities.

One of the criticisms of the wide-ranging reforms to pensions that take effect on 6 April 2015 is that they only apply to those who have not yet started to draw benefits. As was well-leaked in the run up to the Budget, the Chancellor plans to address this anomaly by allowing people with an existing pension annuity to sell it for cash, which they can then use under the new rules.

A consultation paper issued alongside the Budget highlighted the issues surrounding what seems like a simple idea:

• The government does not currently believe that your annuity should be sold back to the original insurance provider, in part for consumer protection reasons. You would thus have to sell your annuity to a third party.
• Individuals will not be able to buy secondhand annuities “owing to the complexity and difficulty in determining a fair price”, according to the paper.
• Any sale will depend upon the consent of the original annuity provider and, probably, any secondary beneficiaries (e.g. a surviving spouse).
• It will not be possible to sell annuities held by occupational scheme trustees.
• Any withdrawal of the sale proceeds, whether as a lump sum or a series of payments, would be fully taxable as income. The purchaser of the annuity would also be treated as receiving taxable income in the two years from April 2016, when sales should begin.
 
A savings tax cut  
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A new personal savings allowance will come into existence in April 2016.

“Today I introduce a new Personal Savings Allowance that will take 95% of taxpayers out of savings tax altogether”. So said the Chancellor in his Budget speech. While not inaccurate, there was much behind the announcement which went unmentioned.

What the Budget paperwork revealed is that from 2016/17 there will be a new Personal Savings Allowance, set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers (if you are an additional rate taxpayer, the allowance will not apply). The measure was not contained in the Finance Act 2015, so will have to be introduced after the election.

The new allowance applies to savings income, which is primarily interest from deposits and fixed interest securities : it does not cover dividends or rental income. At best, the new allowance will reduce the relative appeal of a cash ISA, which also offers tax-free interest, but generally with more restrictions and less choice than other savings accounts. This may explain why the Chancellor announced a relaxation in the rules for cash ISAs, probably effective from autumn 2015. This will allow cash ISA savers to withdraw and replace money within the same tax year without it counting towards their annual subscription.
 
Further help to buy from the government  
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A Help to Buy ISA will be launched in the autumn, aimed at helping first time buyers get onto the housing ladder.

One of the rabbits which did not escape from Mr Osborne’s hat before the Budget was the announcement of a new Help to Buy ISA for first time buyers. The main features of the new ISA are planned as follows:

• It will be available to any potential first time buyer, aged 16 or over, probably from autumn 2015.
• The format will be that of a cash ISA, so anyone who chooses the Help to Buy ISA will usually not be able to contribute to another cash ISA in the same tax year.
• The maximum contributions will be an initial £1,000 and £200 a month.
• The government will pay a tax-free bonus of 25% of accumulated savings, provided that the proceeds are used to buy a first home. The maximum bonus will be £3,000 (on £12,000 of savings) and the minimum £400 (on £1,600 of savings).
 
Pension tax: a post-election change - whoever wins  
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The lifetime allowance is to be cut again.

The lifetime allowance (LTA) is a key component of the pension tax rules. It effectively sets the normal maximum value of retirement/death benefits, beyond which a tax charge of up to 55% may apply. When the current ‘simplified’ (sic) pension tax rules started life in April 2006, the LTA was set at £1.5m, with increases to £1.8m scheduled through to 2010/11.

However, after 2010/11 there were no more LTA increases. Instead there were cuts in 2012 (to £1.5m) and 2014 (to the current £1.25m). The Chancellor announced a third LTA reduction in the Budget, taking the allowance down to £1m in 2016/17. Two years later, the LTA will become index-linked, albeit to the CPI rather than the RPI or earnings. As the graph below shows, had the original £1.5m had been RPI-linked from the start, by April 2016 it would have been around double the actual level.

Lifetime allowance - half of what it should be
 
Back to square one for the FTSE 100  
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The FTSE 100 index has finally surpassed its previous peak.

FTSE 100: 1999 – 2015

Where were you on Friday 30 December 1999?

The chances are that, if you remember, you were preparing for a millennium party due the following day. It is most unlikely that you noticed the closing level of the FTSE 100 (Footsie) on that Friday, which in any case was a shortened trading day on the London Stock Exchange. Yet the day’s, year’s and for that matter decade’s final Footsie reading of 6930.2 marked an all-time high for the index which was only topped on 24 February 2015.

The 15+ years it has taken for the Footsie to regain its millennial peak prompted plenty of comment, some of which suggested the performance highlighted what poor returns investing in shares offered. Alas, not all of the coverage has been well informed:

• The FTSE 100 index does not measure total investment returns, only capital returns. If you allow for reinvested dividends (received net for basic rate taxpayers), an investor in the end-1999 Footsie would, by 24 February 2015, be showing an overall return of about 67%.

• In terms of dividend income, this would have increased by a virtually identical amount: at the end of 1999 the Footsie had a yield of 2.04%, whereas on 24 February its yield was 3.39%.
 
Tax avoidance and evasion – do you know the difference?  
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Tax avoidance and evasion made the front pages of the press again in February, with the distinction between the two lost on most journalists.

Let us make two things clear for a start:

• Tax avoidance – planning your affairs within the framework of the tax legislation to reduce your tax liability – is legal.

• Tax evasion – not paying tax due by withholding information from HMRC or other means – is illegal.

Tax avoidance ranges from such simple actions as investing in a fund via an ISA rather than directly to complex schemes designed to exploit loopholes in the tax law. At the benign end of the scale, HMRC will not be interested in what you do. At the aggressive end of the scale, HMRC are likely to deny you tax relief under its recently acquired accelerated payments powers and then leave you (and your fellow scheme users) to challenge their view in the courts.
 
Pensioner Bonds get an extended lease of life  
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The Chancellor has announced increased availability for Pensioner Bonds.

When National Savings & Investments (NS&I) finally launched the Pensioners’ Bond on 15 January 2015, there was a very predictable surge of interest. The sheer weight of applications brought problems to NS&I’s administration systems, despite its Chief Executive saying “We expect these Bonds to be on sale for months not weeks and would like to reassure savers that there is no need to rush to invest”.

It turns out she was rather optimistic, as by 8 February £7.5bn of the bonds had been sold out of an initial £10bn offering. This prompted the Chancellor to announce (on the Andrew Marr Show) that the bonds would remain on sale until 15 May “so that everyone who wants to invest can do so.” The government is now expecting to raise £15bn, most of it probably transferred out of existing bank and building society accounts.
 
Budget 2015  
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Was this George Osborne’s last Budget?

This year’s Budget was pretty political – which is no great surprise given the forthcoming general election in May. There can be little doubt that a number of the Chancellor’s measures were designed to attract voters. Non-pension savers, for example, were offered a new personal savings allowance, which is worth up to £200 a year and are to be given more flexibility and investment options for their ISAs after the election. The Budget is also likely to be good news for existing pension annuity owners, who are to be allowed to sell their income in return for a lump sum.

House prices and the difficulties of getting onto the property ladder are rarely out of the news these days and the Chancellor has proposed to give those who aspire to own their own home a helping hand – a new Help to Buy ISA. This scheme, due to start in August 2015, will see the government provide a £50 bonus for every £200 of monthly savings deposited in this ISA, up to a maximum of £3,000 on £12,000 of savings.

Unfortunately, the Budget can’t all be good news for everyone. Those who have not yet retired received a bit of a blow in the form of a further reduction in the lifetime allowance, which the Chancellor has cut down to £1 million – a measure proposed by the Shadow Chancellor in February.

So, we heard lots of interesting announcements in this Budget but whether these proposals become legislation very much depends on the outcome of the election.
 
0.5% base rates: the story continues  
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5 March marked the sixth anniversary of 0.5% base rates
.

Euro vs Swiss Franc Graph Jan 15

When base rate fell to 0.5% back in the dark days of March 2009, there were no expectations that such a low figure would endure well into the next decade. The cut to an historic low was seen as a temporary measure, soon to be reversed as normality returned to the financial world.

Six years on, near zero interest rates remain the order of the day in many leading economies: the corresponding US rate is 0.25%, the Eurozone rate is 0.05% and in Japan 0% rules. By staying put, the UK base rate has now emerged as the highest. Until last month the Bank of England’s view was that cutting rates any further would not be possible because of the problems it would cause the financial system.
 
Auto-enrolment: the penalties begin  
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The latest report from the Pensions Regulator (TPR) on pension auto-enrolment carries important warnings.

TPR issues quarterly reports on the progress of pension automatic enrolment. These have generally been unexciting affairs until the latest edition, covering the final quarter of 2014. Suddenly, it seems that things are not running quite as smoothly.

In the last three months of 2014:

• TPR issued 1,139 compliance notices demanding that an employer “remedy a contravention” of at least one duty under the auto-enrolment provisions. From October 2012, when auto-enrolment started, to September 2014 the regulator had issued just 177 compliance notices.

• In response to those who ignored earlier compliance notices, TPR also sent out 166 Fixed Penalty Notices (£400 fines). In the previous two years it had issued just three such notices.

• Seven “Unpaid Contributions Notices” were sent to employers who had either paid pension contributions late or not paid them at all. Only one had been issued in the previous eight quarters.
 
A currency-dominated month  
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January saw plenty of excitement on the currency front.

The first month of 2015 saw plenty of excitement regarding foreign exchanges.

At 10.30 am on 15 January the Swiss Central Bank surprised the foreign exchange markets by announcing that it would no longer attempt to keep the Swiss Franc pegged at a rate of €1.20. The peg had been in being since 2011 with the aim of curtailing speculation and protecting Swiss exporters. As the graph shows, when the peg was removed the euro fell sharply against the Swiss Franc and has since settled at close to parity.

Euro vs Swiss Franc Graph Jan 15
 
Tax year end planning: pensions  
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The new tax rules are due from 6 April, but there is still plenty to consider before then.

The current tax year has been a transitional one on the pension front. It has seen the annual allowance reduced by 20% to £40,000 and the lifetime allowance cut by a sixth to £1.25m. There has also been a raft of temporary transitional provisions introduced ahead of the new regime for 2015/16 onwards.

The key area to consider for both this and next tax year is whether to make some one-off contributions. There has been much political discussion about changing tax relief on contributions:

• The Labour Party has said that it will reduce higher rate tax relief on contributions to fund job creation. More details should soon emerge in their manifesto.

• The Liberal Democrats, and in particular the current Pensions Minister, Steve Webb, are considering a single flat rate of relief on pension contributions between 20% and 30%.

• The Conservatives have made no announcements, but a leading think tank closely associated with the party has also proposed moving to a flat rate relief system.
 
Tax year end planning: investments  
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The Budget is on 18 March and the tax year ends on Easter Sunday (5 April).

This year’s Budget will take place within a fortnight of Parliament winding up ahead of the general election on 7 May. That means little time to pass legislation, so there may be another Budget (of some sort) after the election – as occurred in 2010. So when you’re undertaking year end planning for 2014/15, you also need to keep an eye on possible pre-election tactics, too.

Among the items to review on the investment front are:

• Individual savings accounts (ISAs) The maximum ISA investment in 2014/15 is £15,000 and, following last year’s Budget changes, there are no restrictions on how much of this limit you can invest in cash (although currently available interest rates are something of a disincentive). Unused ISA allowances cannot be carried forward, so you should normally contribute as much as possible each tax year. A change of government might see some erosion of tax benefits of ISAs. In 2013 the Treasury examined the option of capping their value and the idea could be revisited by a new Chancellor.
 
Inheriting your partner’s Individual savings account  
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More details have emerged about how ISAs can be inherited.

One of the rabbit-out-the-hat features of December’s Autumn Statement was the announcement that if you outlived your spouse or civil partner you could ‘inherit’ their ISA. It sounded an attractive option, but the idea was far from developed when Mr Osborne made it public at the end of last year.

The Treasury and HMRC have now issued further information and a set of draft regulations. The effect of the regulations in their current form will be to:

• Permit a surviving spouse/civil partner to make an additional ISA subscription equal to the value of the deceased spouse’s/partner’s ISA at the date of their death;

• Allow non-cash holdings (e.g. unit trusts, OEICs and shares) in the deceased spouse’s/partner’s ISA to form part or all of the subscription; and

• Set a time limit for the subscriptions, broadly 180 days after administration of the estate is complete or, in the case of cash assets, three years from the date of death, if later.
 
Is the government wising up to pensions?  
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The Treasury has rebranded its ‘guidance guarantee’.

The ‘guidance guarantee’ was one feature of the new pension tax regime on which the Chancellor placed considerable emphasis when he made his surprise Budget announcement last March. The initial consultation paper said “…choice on its own is not enough. Consumers need to be able to make informed decisions. We will therefore guarantee that individuals approaching retirement will receive free and impartial face-to-face guidance to help them make the choices that best suit their needs.”

Although Mr Osborne used the word ‘advice’ in his Budget speech, it became clear very soon that free advice was not being offered. Similarly the ‘face-to-face’ aspect was quickly watered down to less expensive forms of communication, such as a telephone based service. Initially the government said that the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS) would be the two main bodies to supply the guidance. However, in October, less than six months before the new rules begin, the MAS was replaced by the Citizens Advice Bureau.
 
A mixed year for equity markets    
There were mixed results from the world’s main share markets in 2014, with the US coming up trumps.
Index 2014 Change  
FTSE 100 - 2.7%  
FTSE All-Share - 2.1%  
Dow Jones Industrial + 7.5%  
Standard & Poor’s 500 +11.3%  
Nikkei 225 + 7.3%  
Euro Stoxx 50 + 1.2%  
Hang Seng + 1.3%  
MSCI Emerging Markets (£) + 1.3%  
     
As ever, the raw numbers do not tell the whole story:
• Once dividends are taken into account, the UK market achieved a small positive overall return.
• In a change from 2013, there was little difference between the performance of the large company dominated FTSE 100, the FTSE 250 containing medium-sized companies and the FTSE Small Cap, which covers the smallest companies.
 
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A few dates for your calendar  
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The first half of 2015 promises to be an interesting and potentially volatile time for investors.

Have you completed that chore of updating the new calendar that hangs in the kitchen listing dental appointments, hairdresser visits and the other trivia of life? If not, you might like to add the following to the menu for the first half of 2015: January Lithuania became the 19th member of the Eurozone at the start of the month.

On 22 January Mario Draghi, the head of the European Central Bank, could finally announce the start of quantitative easing (QE) in the Eurozone. Then, three days later, Greece could take its first step towards leaving the Eurozone as a snap election due on the 25th may well see Syriza, a far left anti-austerity party, top the polls. By the end of the year a similar situation could occur in Spain, where a new left wing political party, Podemos, is leading the polls.
 
Pension changes become law  
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The Taxation of Pensions Bill received Royal Assent just before Parliament upped sticks for the festive season.

The second stage of Mr Osborne’s radical revision of money purchase pensions became law on 17 December, the day before Parliament ended business ahead of Christmas. For such a significant piece of legislation, the Taxation of Pensions Act 2014 went through the parliamentary process at some speed: the first reading was in the middle of October.
 
1 in 100 – inflation still falling - Inflation has reached a 12 year low.  
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Inflation, as measured by the Consumer Prices Index, hit a 12 year low in November of just 1%, surprising analysts. As the graph shows, inflation has been dropping almost uninterrupted since mid-2013 and is now a long, long way from its 5.2% peak, recorded in September 2011.

The Office for National Statistics, which calculates the inflation numbers, says that one of the reasons for the low figure is that food and petrol/diesel prices, which normally push up the CPI annual rate are currently reducing it by 0.4%. In the year to November, prices for “fuels and lubricants” are down 5.9%, while “food and non-alcoholic Beverages” are 1.7% cheaper.
 
Pensioner bond terms are finally announced    
In last March’s Budget, the Chancellor announced that National Savings would launch a new Pensioner Bond with “market leading” rates. He said that for costings purposes, the assumed rates were 2.8% gross fixed for one year and 4.0% gross, fixed for three years. However, as the bonds were not due to launch until this month, Mr Osborne said that rates would be confirmed in the Autumn Statement.

The Autumn Statement came and went with no mention of Pensioner Bonds, an omission which made some people suspect that the ‘market leading’ aspect was going to be watered down. When the Treasury finally said that the rates would be announced at 4.00 pm on a Friday, that scepticism was strengthened. Such a slot is usually reserved for bad news – it made it difficult for the weekend personal finance pages to provide coverage.
 
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Explaining the Single-Tier State Pension  
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The Department for Work and Pensions has just launched a new campaign to explain the new single-tier state pension.

The new single-tier state pension, which will replace both the basic state pension and the state second pension (S2P) is now only 16 months away.
While the focus of late has been on increased flexibility for private pensions, the state pension reform is in some respects more significant, if only because it will affect many more people.
 
The Inter-Generational Pension Plan  
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The government has amended the Taxation of Pensions Bill, paving the way for inheritable pensions.

At the end of September the Chancellor surprised many people by announcing at the Conservative Party conference new rules for treatment of money purchase death benefits from April 2016. Among those caught on the hop was the Treasury, which issued a rushed press release that was widely criticised as confusing matters further.
 
Interest Rate Rises Back on Hold  
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The bank of England’s latest Quarterly Inflation Report (QIR) suggests an interest rate rise will not now occur until well after the General Election.  
The Chancellor is paying off some very old government debt  
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It was a good headline for the Treasury’s press release: “Chancellor Osborne to repay part of our First World War debt.” The reality, however, was slightly different.  
The Chancellor's Pre-Christmas Surprise on Stamp Duty  
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Mr Osborne made his mark with the Autumn Statement this month There were very few leaks about the Autumn Statement until the final days, when stories that the Treasury was considering an overhaul of stamp duty started to appear. It transpired that this time around the rumour mill was accurate.  
Autumn Statement 2014    

HIGHLIGHTS

The Autumn Statement looked very like a mini-Budget, with several major new provisions and a raft of other measures.
The key points included the following:

- Residential stamp duty land tax (SDLT) has been restructured with effect from midnight on 3 December. Buyers will now pay a rate of duty on the portion of the purchase amount that falls within each band (like income tax).

- The rates and thresholds of SDLT have been adjusted accordingly: there is no tax on the first £125,000 of any residential property transaction, with the top rate at 12% on the slice of value above £1.5 million. Commercial SDLT rates remain unchanged.

- Spouses and civil partners will be able to inherit their deceased spouses’ or partners’ ISAs and ISA allowances for deaths from 3 December 2014.

- The tax treatment of pension annuity payments to dependants will be brought into line with the treatment of ‘flexi-access’ withdrawals. So, if an individual dies before the age of 75, their surviving beneficiary’s income will be tax free.

- Non-domiciled tax payers will have to pay more to be on the remittance basis of taxation. The government is consulting on making a remittance basis election apply for a minimum of three years.

- There are a very large number of anti-avoidance measures, including one to counter tax avoidance by multinational companies that earn profits in the UK but use avoidance techniques to divert these profits offshore. This diverted profits tax will be 25%, applied from 1 April 2015.

- Other measures include freezing fuel duty and the abolition of air passenger duty forchildren under 12 from 1 May 2015 (and for under-16s a year later).

 
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Full Autumn Statement 2014
     
 
     
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