Newsletter – July 2020

Inheritance Tax (IHT) has come under the spotlight over the past few years; the Office of Tax Simplification have conducted a couple of reviews on the unpopular tax, which was left untouched in the Spring Budget. The good news is that, with expert planning, you can legitimately reduce the amount of IHT payable to HM Revenue & Customs and pass on assets to your family as intended.

IHT thresholds – know your numbers

For individuals, the current IHT nil-rate threshold is £325,000, and £650,000 for a married couple or civil partners. Any unused portion of the nil-rate band can be passed to a surviving spouse or civil partner on death. Beyond these thresholds, IHT is usually payable at a rate of40%.

Since April 2017, there has also been a main residence nil-rate band, which applies if you want to pass your main residence to a direct descendant (e.g. child or grandchild). For the 2020-21 tax year, this allowance is £175,000.

Added to the existing threshold of £325,000 this could potentially give rise to an overall IHT allowance of £500,000 for individuals, or £1m for those who are married or in civil partnerships. It’s important to note that larger estates will find that residence relief is tapered, reducing by £1 for every £2 by which the net estate’s value exceeds £2m.

Take professional advice

There are a variety of ways you can reduce IHT and we can help you decide what could work best for you. If you feel that your estate is likely to be subject to IHT you should obtain in-depth professional advice that looks at all aspects of your requirements, lifestyle and goals, and develops a financial strategy that meets your needs. 

For further information on Estate Planning please contact one of our advisers on 01252 626200 or download our free Key Guide:

You and yours – estate planning

Our full range of Key Guides can be found at:
www.polestarfa.co.uk/resources/key-guides

Action Fraud is warning the public to remain vigilant and take extra care when shopping online.

Despite retail and non-essential shops re-opening across the UK, many of us continue to shop online. Action Fraud, the UK’s national reporting centre for fraud and cyber crime, is warning the public to remain vigilant and take extra care online, after statistics show 16,352 people fell victim to online shopping and auction fraud during lockdown.

Since shops were forced to close due to the coronavirus outbreak on 23 March, Action Fraud has received reports of online shopping fraud totalling £16.6million in losses.

Members of the public have reported buying mobile phones (19%), vehicles (22%), electronics (10%) such as games consoles, AirPods and MacBooks , and footwear (4%) on sites such as eBay (18%), Facebook (18%), Gumtree (10%) and Depop (6%), only to have the items never arrive.

Nearly a quarter of victims (24%) were aged 18 to 26 residing in cities including London, Birmingham, Manchester, Leeds, Sheffield, Liverpool, Bristol and Nottingham.

To protect yourself from falling victim to online shopping or auction fraud, remember the following:

Where to shop

If you’re making a purchase from a company or seller you don’t know and trust, carry out some research first and ask a friend or family member for advice before completing the purchase.

Email accounts

Use a strong, separate password for your email account. Criminals can use your email to access other online accounts, such as those you use for online shopping.

Phishing

Some of the emails or texts you receive about amazing offers may contain links to fake websites. Not all links are bad, but, if you’re unsure, don’t use the link and type the website directly into your browser instead.

Payment method

If you decide to go ahead with the purchase, use a credit card if you have one. Other payment providers may not provide the same protection.

Do your research

For more information on how to shop online safely visit actionfraud.police.uk/shoponlinesafely.

Report

Remember, if you have been a victim of fraud or cyber crime, report it to Action Fraud online at www.actionfraud.police.uk or by calling 0300 123 2040.

By clicking on one of these links you are departing from the regulatory site of Polestar. Neither Polestar nor Quilter Financial Planning is responsible for the accuracy of the information contained within the linked site.

The cricket season may only now be slowly getting underway, but May saw the Chancellor score two centuries which, in different times, would have deeply worried investors.

Every month the Office for National Statistics (ONS) publishes a detailed summary of the public sector finances, showing how much the public sector has spent and how much income (mostly taxes) it has received in the preceding month. It is the sort of data that interests the more investment-oriented economists, but few others. 

May’s data was somewhat different and received national headlines. It showed the stark impact of the two months of the Covid-19 pandemic and the government’s wide-ranging ‘whatever-it-takes’ response:

The first of those centuries is tied to government borrowing. In the first two months of the 2020/21 financial year, the estimated figure stands at £103.7bn. To put that eye-watering number into perspective, it is six times the amount borrowed in the same period last year and the highest amount for any April/May period since ONS monthly records began in 1993. In terms of tax, £103.7bn is almost equal to the total amount of VAT the government is projected to collect in 2020/21.

If £103.7bn sounds like a millstone, then it is nothing – well, about 5% – compared with the government’s total debt, that is, its accumulated borrowing over many years. In May that reached £1,950.1bn (the £0.1 billions still count). That figure produced the second century because it was equal to 100.9% of the UK’s gross domestic product (GDP).

In other words, the UK’s debt was just slightly bigger than a year’s worth of the country’s entire output. The last time the 100% barrier was breached was in 1963, when the government was still in the business of paying down the debt it had incurred in the Second World War.

It sounds grim and will get worse, but at least for now the interest on all that debt is affordable. The government currently can borrow for 30 years at a fixed rate of about 0.7% and over 10 years at just 0.25%. If interest rates were to start rising, that is when the problems could begin, so HM Treasury will want to reduce the overall level of debt over time. And it will probably be a long, long time. Taxes will rise and manifesto promises may fall by the wayside. Some tax shelters could be watered down, as happened with entrepreneurs’ relief (now business asset disposal relief) in March, or even disappear.

We should learn more in the Autumn Budget. Meanwhile some pre-Budget tax planning could be a wise precaution.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice. 

The debate about the relative benefits of investments trusts and investment funds (unit trusts and OEICs) could be coming back into focus.

Investment trusts have a history going back over 150 years, long before the first unit trust appeared in 1931 or, later still, the birth of the open-ended investment company (OEIC).The major difference between investment trusts and their investment fund upstarts is the way in which they are structured:

• An investment trust is a limited company with a fixed number of shares which investors can buy or sell on the stock exchange. That fixed number means that investment trusts are often referred to as closed-ended.
• A unit trust or OEIC operates as an open-ended fund. Their managers can create or liquidate units/shares depending upon investor demand. A successful unit trust or OEIC can grow rapidly in size, whereas an investment trust generally cannot.

The tax rules for investment trusts are broadly similar to those for investment funds, but on the income front there is one difference which has suddenly assumed more importance. After deducting charges, the income from investments held by unit trusts and OEICs must be 100% distributed to their investors. 

In contrast, an investment trust can retain up to 15% of the income it receives. Over the years, investment trusts have used this distribution flexibility to create reserves to smooth the flow of dividends to their investors. As a result, some investment trusts can point to records of 40 or more consecutive years of dividend increases.

With many UK and overseas companies stopping dividend payments in the wake of the Covid-19 pandemic, dividend payments from many unit trusts and OEICs, particularly those that are income oriented, are set to fall. However, some investment trusts with an income reserve may choose to run down their rainy-day cash and maintain dividends to their investors.

Ultimately the income difference is simply a question of timing: the investment trust that maintains its dividend today, despite lower income from its investments, held back income it could have paid out earlier. Nevertheless, that conservative approach does have an obvious appeal in today’s conditions.

There are other aspects of investment trusts which give unit trusts and OEICs the edge, so do take professional advice before choosing or making a switch between the two. 

The value of your investment, and the income from it, can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The state pension triple lock may not survive much longer.

The impact of Covid-19 on earnings could mean a change in the way that state pensions are increased in each year. If nothing is done, it could give pensioners a large income boost, but cost the government dearly.

At present, the new (single tier) state pension and its predecessor, the basic state pension, both benefit from increases based on the ‘triple lock’. This was introduced by the Coalition government in 2010 and means that these two state pensions increase each April by the greater of:

• yearly CPI inflation to the previous September;
• average weekly earnings growth to the previous July; or
• 2.5%.

This basis means that for 2021, the increase is likely to be 2.5% because CPI inflation will be lower (it was 0.5% in May) and earnings could well be falling due to the impact of furloughing.

It is in 2022 that a potential problem emerges for the Treasury. The furlough scheme ends at the end of October 2020, and if the economy starts to recover, by July 2021 earnings could be back to near ‘normal’. The fact that by then some of the formerly furloughed employees will be unemployed makes no difference to average earnings figures.

Economists reckon that the difference between ‘normal’ average earnings in July 2021 and furlough-depressed average earnings in July 2020 could be significant. In its Covid-19 ‘reference scenario’ the Office for Budget Responsibility has estimated earnings growth of over 18% in 2021 (against a 7.3% fall for 2020). No Chancellor would want to fund such a large rise in state pensions, not only because of the expense, but also on grounds of intergenerational fairness.

The Treasury and many economists have long argued that the triple lock is an unnecessary cost, but politicians have always been wary of upsetting an important section of the electorate. This additional problem now created by Covid-19 gives the government the best justification it is ever likely to have to dispense with the lock. There are even suggestions that state pensions could be frozen for the next two years until the issue (hopefully) disappears.

State pensions play an important role in many people’s retirement income planning, but their payment is ultimately a state decision, as evidenced by the many changes of recent years (for example to starting age). For that reason, if no other, private provision remains a vital component of your retirement planning. 

The value of your investment, and the income from it, can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance. 

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The adoption in the UK of a transatlantic approach to income tax could appeal to a cash-strapped Chancellor.

“…only the little people pay taxes.”

That 1980s comment by the New York Hotel owner Leona Helmsley sums up an attitude that many taxpayers still believe to be true. Today the same idea often manifests itself in headlines suggesting that the chief executive pays a lower rate of tax than his (it’s usually his) cleaner. There is an element of truth in such assertions, as the wealthy generally have greater opportunity to plan when, where and how they receive their income.

The US has long attempted to address the problem with the Alternative Minimum Tax (AMT). The rationale behind AMT is simple: those with income above a certain threshold ($197,900 in 2020) must pay a minimum rate of tax on their income after deducting a flat exemption. If their tax bill calculated on a normal basis is lower than the one produced by applying the AMT rates, then it is the AMT amount that must be paid. There comes a point, therefore, at which tax planning has no benefit.

Two UK academics with links to leading think tanks recently published a paper examining the possibility of a UK version of AMT. With the help of anonymised HMRC data, the pair were able to show that the average effective rate of tax paid by one in ten people with income (including capital gains) of over £1m was lower than for somebody earning £15,000. The inclusion of capital gains is open to challenge and one reason why the result was produced – capital gains are more lightly taxed than income.

The headline proposal of the paper was that the UK government could raise £11bn a year – about the same as 2p on the basic rate of tax would produce – by applying an AMT rate of 35% to anyone with income (again including gains) above £100,000. For a government that was elected with a pledge not to increase income tax rates, AMT offers an interesting revenue raising opportunity.

If nothing else, these AMT proposals are a reminder that – at least for now – tax planning can save you money.

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

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

2020 so far has been a rollercoaster ride for investors. It started off well enough, but in the middle of February, Covid-19 prompted a rout that took markets deeply into the red by the end of the first quarter. Although it was not obvious at the time, by then the world’s central banks had in fact taken enough action to encourage a market recovery in the second quarter of the year.

There is a point to watch when looking at these quarterly numbers: contrary to what we might think, the rules of mathematics mean that a fall of 20% is not cancelled out by a subsequent rise of 20%. In fact, what is needed is a 25% rise (100 x 80% x 125% = 100). So the momentum of the second quarter has left even the best performers, such as the US S&P 500 index, marginally below where they began 2020.

The UK’s second quarter recovery was not as strong as many other major markets. That could reflect the relatively poor performance in dealing with the pandemic, the UK indices heavy weighting to banks and oil majors (neither popular) and their lack of technology companies. Across the Atlantic, it is the technology shares which have been the biggest drivers of market performance – Microsoft, Apple, Amazon, Facebook and Alphabet (Google’s parent company) are now the five largest companies in the S&P 500.

The bounce back in the second quarter is a reminder that trying to time investment can be a futile exercise. With hindsight – but only with hindsight – it is easy to spot that selling in early January and buying towards the end of March was the way to a fortune. If you lack such perfect vision, then the lesson so far in 2020 has been that volatility works in both directions. In such circumstances, it pays to take advice before taking an action. 

The value of your investment, and the income from it, can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance. 

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.