Newsletter – April 2019

The importance of China’s stock market is set to quadruple in 2019.  

China has been at the forefront of the headlines recently, whether about the protracted trade dispute with the US, the alleged dangers of using Huawei’s 5G equipment or the first landing of a spacecraft on the far side of the moon. The ‘Middle Kingdom’, as China is sometimes called, is now the world’s second largest economy. If you adjust for the Chinese currency’s purchasing power – not something the Chinese like to do – their economy comes out at number one. 

For all its apparent might, China remains classified as an ‘emerging market’ in investment terms. The overall economy may be at, or close to, the top of the charts, but when you look at economic output per head, China drops down to a ranking into the 70s – much the same as Bulgaria. That difference in ranking underlines the degree of China’s scope for growth.

In March, China’s economic status gained another leg up with an announcement from MSCI. The MSCI Emerging Markets Index (EMI) sets the benchmark for an estimated $1,900bn of funds investing in emerging markets and included shares listed in China (so-called ‘A Shares’) for the first time in 2018. Previously it had only included shares in Chinese companies listed outside China, such as Alibaba, which is listed in New York. The 2018 move was an initial step, as MSCI only gave a 5% weighting to the A Shares, meaning that they formed a miniscule part of the EMI.

MSCI’s March 2019 announcement heralds a staged increase in that weighting, which will reach 20% by November, at which point A shares will be 3.3% of the EMI. Further increases are possible later, subject to market developments in China. If – and it is a big if – China A shares eventually gain a 100% weighting, then Chinese companies (wherever they are listed) will account for over 40% of the EMI, up from 31.3% currently, as the chart above shows.

The MSCI move on China is prompting many emerging market investment managers to reassess their Chinese holdings, probably with a view to increasing them. If you want to add to or create your exposure to Chinese investments, there are a variety of options that we would be happy to discuss. Polestar’s investment committee are constantly reviewing asset allocation weightings and, as noted in our recent “set and forget” bulletin, will be reviewing the emerging size if China’s accessible equity markets for future changes to that asset allocation. 

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The Chancellor’s Spring Statement was almost obscured by other events in mid-March. 

Ever since he announced a move to an Autumn Budget in 2016, Mr Hammond has made it clear that he wanted to avoid the Spring Statement counterpart becoming a mini-Budget. His vision was that in March he would be presenting a brief response to the latest forecasts from the Office for Budget Responsibility (OBR). As the Treasury website stressed, “there will now only be one major fiscal event each year”. 

Nevertheless, it is unlikely that either the Treasury or the Chancellor wanted the Spring Statement to be an event that was completely overshadowed by other parliamentary business occurring on the same day, as it was by the votes on whether to rule out a no-deal Brexit. Ironically, the Chancellor made his statement on the assumption of “a smooth and orderly exit from the EU”. 

There were virtually no new tax initiatives in the Statement, although there were hints that a ‘Deal Dividend’ would help in “keeping taxes low” as well as allow increased public expenditure. In the background papers published alongside the Statement, there were reminders that the tax screw continues to be tightened in some areas. For example, Mr Hammond promised a consultation paper putting flesh on two measures announced in the October Budget, designed to restrict two long-standing capital gains tax reliefs on residential property. 

The OBR’s calculations explain why Mr Hammond did not mention fresh tax cuts, as opposed to maintaining low tax levels. In this new 2019/20 financial year, government borrowing is projected to increase by £6.5bn and to still be £13.5bn by 2023/24. Income tax and national insurance contribution receipts have been rising faster than expected and are the main reason why the OBR’s overall finance figures looked rosier in March than last October.

As has been the case for some years now, if you want to see your tax bill reduce, the starting point is not to wait for government action, but to review your personal opportunities for improved tax planning. 

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

The controversy surrounding the loan charge deadline is a reminder of the dangers of aggressive tax planning.  

If you were offered a way of being paid a ‘salary’ that involved no income tax and no national insurance contributions (NICs), what would you think?

In the late 1990s and early 2000s, many contractors and consultants were offered the option of joining schemes which purported to make tax and NICs disappear. At the time, some decided the chance was too good to miss. Their choice was often in response to IR35, the HMRC crackdown on people sidestepping taxation as employees by claiming self-employment or operating via one-person companies. The schemes promoted had various structures, but one key factor was that they relied on earnings being replaced by low or nil-interest loans that were never intended to be repaid – hence the schemes often being described by HMRC as “Disguised Remuneration Schemes”.  

HMRC never approved these schemes but took their time to act against them. Blocking legislation for new loans was announced in 2010, by which time HMRC was already challenging some schemes through the courts. However, it was not until 2016 that the then Chancellor, George Osborne, introduced legislation that treated the amount of any loans outstanding at 5 April 2019 as income. It is that measure which has recently brought the subject into the headlines. HMRC has estimated that 50,000 people face a charge averaging £64,000. 

With hindsight, avoiding all tax and NICs on earnings now looks a deal too good to be true. That it seemed credible 15–20 years ago shows how attitudes to tax avoidance have changed since the turn of the century. It is also a reminder that if you are offered an avoidance scheme that appears to make your tax liability evaporate, it could be many years before you – or possibly even your executors – discover it does not. 

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

A recent report shows that life expectancy is still improving, but not as quickly as was once expected.  

“British life expectancy falls by SIX MONTHS for men and women”

That was one recent headline in response to the latest report of the Continuous Mortality Investigation (CMI) of the Institute and Faculty of Actuaries. While it was not inaccurate, like many such headlines it was open to misinterpretation. 

The CMI research suggested that mortality improvements had slowed down from over 2% a year between 2000 and 2011, to about 0.5% now. The CMI was not the first to notice the trend. The Office for National Statistics, some large insurance companies and pension providers have all made similar observations. Various possible reasons have been put forward, including a fading benefit from the reduction in smoking, the impact of austerity and the spread of obesity and diabetes.

The life expectancy for a pension scheme member aged 65 is now 21.9 years for man and 24.2 years for women, according to the CMI.  These are effectively averaged numbers, so there is roughly a 50/50 chance that today’s 65 year old pensioner will live longer, even if the CMI’s current calculations prove to be perfectly accurate in 20+ years’ time. 

Whether or not the CMI turns out to be 100% correct, there is little doubt that the timescales involved mean anyone retiring at 65 today needs to think in terms of drawing their pension for at least a couple of decades. If you are approaching retirement, that should serve as a reminder of the importance of establishing the right long term structure for drawing your future income. Make the wrong decision and it could be hanging over you for the next 20–30 years. 

Footnote: While the CMI uses age 65 as a benchmark, the relevance of that specific age is fading. State Pension Age is no longer 65 but is now about 65¼, on a path of phased increases that will reach 66 by 6 October next year.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Having taken the important and responsible step of making a Will, many people simply put it in a safe place and forget about it. However, there are times throughout your life when it makes sense to review and revise its contents.

Family changes

Over the years, family dynamics can change. You should review your Will if you get married, as marriage revokes a Will in England and Wales (but not Scotland). Whilst getting divorced doesn’t revoke a Will, in England and Wales an ex-husband or wife or civil partner would no longer benefit from it, so you may want to reconsider who gets what.

Whilst separation, judicial separation and separation orders don’t have an effect on your Will, you may no longer want your spouse to inherit or be your executor. Similarly, if you’ve named someone in your Will as a beneficiary or executor and they die, or you have had more children or grandchildren, then you may want to change the terms of your Will. You can also specify who should be the legal guardian of your children, so you might want to add or review these details at some point.

Asset changes

If you’ve acquired assets or disposed of them since you wrote your Will, then you may need to update the provisions you’ve made.

These days, it’s also important to consider your digital assets such as photos, emails, music downloads and the content stored in social media accounts. With more people regularly using services like online banking, PayPal, Facebook, Twitter, Amazon and YouTube, decisions need to be made as to what should happen to these too. 

If you’re making plans for your retirement and would like some professional advice, then please get in touch. 

Cybersecurity experts have revealed a list of the 12 most common subject lines used in phishing emails targeting businesses. 

The list shows that fraudsters are using a combination of personalisation and pressure in an attempt to deceive victims.

In many cases, the language contained in the subject line of the email mimics popular terms used in the workplace to give the illusion that an urgent response is required; the idea being that an employee is more likely to open and respond to an email from a work colleague or their boss rather than a message from a stranger.

The data has been compiled by cybersecurity company Barracuda following an analysis of 360,000 phishing emails in a three month period.

The top subject lines are based around the following key phrases:

• Request
• Follow up
• Urgent/Important
• Are you available?/Are you at your desk?
• Payment Status
• Hello
• Purchase
• Invoice Due
• Re:
• Direct Deposit
• Expenses
• Payroll

[Source: Barracuda / ZDNet]

How you can protect yourself:

1. Don’t click on the links or attachments in suspicious emails and never respond to messages that ask for your personal or financial details
2. Don’t assume an email is authentic, even if someone knows your basic details (such as your name or address). Remember criminals can spoof email addresses to appear as companies you know and trust
3. Every Report Matters – if you have been a victim of fraud, report it to Action Fraud online or by calling 0300 123 2040.

If you have been affected by this, or any other scam, report it to Action Fraud by calling 0300 123 2040, or by using the online reporting tool at www.actionfraud.police.uk

Nowadays, the only way many young people can afford a home of their own is by turning to the Bank of Mum and Dad for some additional financial help. The challenge facing parents prepared to lend or gift money to their children is to decide quite how best to do so.

Although it’s understandable that parents want to help their offspring, it’s important that they think about the long-term implications of giving money away, and don’t compromise their own financial security. Taking financial advice will help them consider their options.

A gift or a loan

Some parents give their children money to help them buy a property, others prefer to make them a loan. With a loan, it’s worth drawing up a contract that stipulates what the repayment terms are to be. This will help prevent future arguments as to whether the money was a loan or a gift, and means the parents know when their cash should be returned. If a parent loans their child money and the child pays interest to the parent, then this is treated as income for tax purposes.

Taking tax into account

A gift of money may have Inheritance Tax implications. Whilst a gift of up to £3,000 in a tax year is exempt from Inheritance Tax, (as is a gift of £5,000 made when a child marries), giving more than that could leave an IHT liability if the donor dies within seven years.

Taking advice before giving or loaning a child money will help ensure that the tax implications of doing so are fully explored. 

6 April marks the 20th birthday of the Individual Savings Account (ISA).  

When the ISA was introduced in 1999, many thought it to be little more than a rebranding of the two schemes it replaced: the Personal Equity Plan (PEP) and Tax Exempt Savings Account (TESSA). The following 20 years have proved ISAs to be much more.

The latest figures from HMRC (to 5 April 2018) show that over £610,000 million is invested in ISAs. Nearly 45% of that sum is held in cash ISAs, despite the ultra-low interest rates that have prevailed over the last ten years. Since 1999, successive Chancellors have tweaked many aspects of ISAs and extended the range to include variants such as Lifetime ISAs and Help to Buy ISAs. However, three factors have remained virtually constant throughout:

• Income, whether in the form of dividends or interest, is free of UK income tax. 
• Capital gains are similarly free of UK capital gains tax.
• There is nothing that the individual investor has to report to HMRC.

For some investors, the advent of the personal savings allowance and the dividend allowance have eroded or even eliminated the tax benefits of using an ISA. For others, the tax advantages have increased, not least because of the higher tax levels on dividends once the dividend allowance is exceeded. A growing band of investors are also seeing benefits of a change made several years ago that allows AIM shares to be included in ISAs, creating the possibility of an ISA that is free of inheritance tax.

The contribution ceiling for all ISA contributions (other than Junior ISAs) in 2019/20 is £20,000, the same as it has been for the past two tax years. A key to making the most of the benefits of ISAs is to maximise contributions. If you had done so over the last 20 tax years, you could by now have invested over £220,000 in a stocks and shares ISA. 

If you have been investing in ISAs over the years – if not the full 20 – now is probably a good time to review them, particularly if you are holding cash ISAs or have not altered your choice of investment funds from outset. Tax advantages can all too easily be countered by poor investment decisions. 

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

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.