Obviously It’s been anything but a slack fortnight at the office. With 5 major events occurring, which have repercussions for investors, I thought it would be best to wait until all 5 unknowns were in before I commented. Individually, each of these domestic and international geo-political events will shape how we manage our investment portfolios and how we help clients plan their finances, both now and into the future.
Plan | Save | Grow | Spend | Gift | Pass
But firstly I would like to extend our condolences to the families of the two clients we suddenly lost this week. After almost 38 years building long-term client relationships it’s inevitable that some must come to an end. Currently we are helping the families of 8 of our clients who have passed away in recent months.
Hopefully our previous financial planning and long-term client relationships will help at this difficult time.
The 5 known unknowns
“There are known knowns, things we know that we know; and there are known unknowns, things that we know we don’t know. But there are also unknown unknowns, things we do not know we don’t know.”
Donald Rumsfeld – United States Secretary of Defense.
Two weeks ago we knew there was a UK budget to come, a new Conservative leader to be chosen, a new President of the US, a further interest rate decision to be made in the US and also an interest rate decision due from the Bank of England. All those changes would move both domestic and global shares in some way. Some outcomes were expected, some were binary decisions which were too close to call and some were just plain unexpected.
“The results in no particular order are,” well in chronological order actually, but I’ve always wanted to say that.
The first Labour budget (by a woman)
Nothing interesting about that because around 50% of the population are actually women. Not many though are former Bank of England economists – not even Rachel Reeves. Budgets create timeframes. Some changes happen immediately, some commence with the change of the tax year and some are promised for the future. Here are the changes in order of appearance.
Right Now
CGT rates were increased as expected. Unexpectedly the basic rate band (10% to 18%) was lifted higher than the higher rate band was lifted (20% to just 24%). That reduced differential was a relief. Only 10% of client investments are held in General Accounts and therefore subject to Capital Gains Tax. We manage £33 million in ISAs, which are thankfully unaffected. We will continue to ensure those clients with General Accounts continue to protect their savings by utilising their £20,000 ISA allowance each year.
2025
PAYE: Clients who are employers will see higher payroll costs from April. For those businesses already struggling it will result in one thing. They will be forced to make redundancies or increase prices. Some UK businesses will see profitability eroded, which will down-value their future share-price. Decisions will need to be made on some of our holdings.
NWW: National working wage wage will be increased by 77p an hour. It doesn’t sound much but is a rise of 6.7% for employers. Now you could suspect it would have little effect. How many UK employees are on the minimum wage anyway? But like a tide that rises 6.7%, it will lift all boats. Every worker in the UK who earns a moderate amount more than the minimum wage will be asking where their wage rise is. The effect will cascade as individuals will suspect their lower paid colleagues will also have got the lift in income. Once again we will need to evaluate which UK shares we hold going forward.
2026
We have helped clients to reduce their IHT liability by recommending investment into our AIM portfolio. Assets held within this portfolio were not subject to IHT after they have been held for 2 years. From April 2026, this tax exemption will be reduced by half. Thereafter assets held in our AIM portfolio will be subject to tax at 20%, rather than the full rate of 40%. Certainly an increase in IHT for several families, but half benefit is better than no benefit. We will continue to offer our AIM portfolio, which will become more important to clients in the future, because of the next change below.
2027
Unspent pension funds will be subject to IHT. Thankfully this change doesn’t come into effect immediately. Why April 2027? Because it is a devilishly difficult thing to do. Prior to the budget I believed subjecting pension funds to IHT was just not plausible. When excess drawdown funds were subject to IHT in the past, the residual fund was taxed at a heady 55%. The intention now is to tax at the lower rate of 40% as HMRC will grab the funds directly from the pension scheme administrators, avoiding the requirement for the beneficiary to withdraw the funds to pay the tax. Without this direct manoeuvre, the beneficiary would be taxed on the withdrawal (up to 45%), then with what’s left after income tax has been taken, paying the 40% IHT!
The main change is “unspent pension funds”. Every individual in the UK saving into a private pension, irrespective of their age, irrespective of whether they have accessed their tax-free cash or any pension income is included. Yes that probably means you too!
Public sector pensions (civil service, NHS, local government, teachers, lecturers, police force, fire service, the judiciary etc.) are unaffected by this Marxist 40% IHT grab.
2029
Commercial Pickups that can carry 1 tonne will not enjoy lower company van tax and will be classed as cars. Note to self… Our company owned Defender will need to go or my personal tax will rise from £4200 to £13400 per year.
There are other proposed changes, but this is a summary of those that will shortly penalise many of us.
Kemi Badenoch is the new leader of the Conservative Party.
As investment managers this will have no effect on us and does not need to be taken account of. Neither Kemi, nor any future leader of the Conservative Party in the short-term, will probably cause us to change investment tack. Nigel Farage is more likely to help us as investors somewhere down the line.
The Donald is POTUS again.
We are already seeing the markets react to his up-coming presidency. In 2016 the rise to Christmas was christened “The Trump Bump”, this time it’s called “The Trump Trade”. The predominately Democrat media continue to do him no favours, extenuating his character flaws and overall rudeness, but the markets once again are happy with his “America 1st” policies. We have all already benefitted from our high American equity investment position which we rebalanced into prior to the election. We don’t listen to the polls here, we simply look at the betting. Kamala was 10/1 against, even though the media would have you believe it was always neck and neck. With tariffs on the way, we need to reassess large European exporters to the US. For UK exporters we can be ever hopeful that we recover our “special relationship” with the POTUS, rather than being subjected to a continuation of Biden’s abusive, pro Ireland, relationship.
FED Interest Rate Reduction -0.25%.
Interest rate falls present businesses with lower borrowing costs. They act as a tailwind. At the start of 2022 global stock-market falls were caused directly by un-ceasing interest rate rises around the world. That head-wind has well and truly turned into a tail-wind which should power returns for 12 months or so. The FED is independent of Government and so should be able to continue to its stated path of interest rate reduction. If the US Government borrows heavily, that could stoke inflation once again and reduce the tail-wind. We will remain vigilant to US borrowing policy and the level of unemployment in the US.
Bank of England Interest Rate Reduction -0.25%
As I have said in the preceding paragraph, reduction in borrowing costs benefits business. More profitable businesses are better for investors. The head of the FED is Jerome Powell – a strong character to oppose pressure from Trump. Here in the UK we have Andrew Bailey. I’m not as confident in his ability, but more importantly neither are fellow UK investment professionals. You see prior to this job at the BOE he held the top spot at the FCA. We remember the previous scandals he prescribed over. It is clear that Labours budget will be hugely inflationary. Post budget, the Governments borrowing cost have risen by 1/3rd%. This reflects less confidence in the ability of the UK to service its £2.75 trillion debt.
As investment managers the new UK reality suggests UK domestic companies have become less attractive.
In Conclusion
The new US government should be good for investors, the UK anti-investment government is already flexing its prohibitive taxation muscles against UK tax-payers. Their approach to increasing the payroll tax on UK businesses suggests lower profits and returns. Their employment plans suggest it will become even less attractive to be a UK employer. The tailwind from falling interest rates is more likely to continue in the US than here. It’s little wonder large UK pension funds have a total of only 4% in UK assets! They also however have a mighty chunk in UK Government Gilts which just dropped in value by a further 2% or so. Some good news, some bad news, some mixed news. As always we continue to monitor and do all we can to increase the growth our savings have enjoyed.
And never forget…
Enjoy yourself, it’s later than you think.
Once again nothing contained in this blog constitutes financial advice.
Although as a financial adviser, principally responsible for optimizing return on on our investments and your outlook will predictably be essentially capitalistic, please keep your blogs politically impartial. Additionally, as an Irish citizen, I was puzzled by your reference to “Biden’s abusive, pro Ireland, relationship”?
Good blog Howard and hopefully things are on the up!
I have to disagree with Rory though. I believe your blogs actually hit the right tone between perceived political sensitivity and truth about what is actually happening in the World. Like many of the pundits though, I do believe a ‘golden age’ is beckoning for the US which is timely given their huge deficit.
It’s also widely reported that Biden had ‘no interest’ in signing a US UK trade deal at any point…think that’s what you’re referencing.
Keep on keeping on.
S
Thanks as ever Howard for your diligence on our behalf. I didn’t vote in the election for the first time ever, because my postal vote didn’t arrive in time and I was in California!