Monthly Archives

December 2024

Dec 20
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2024 – reflections on a positive year

By | Financial Planning

After a bumpy ride through the post-Covid World, investors may well look back at 2024 with a sense of relief. This year has seen the return of positive market conditions, where investors have been rewarded for taking investment risk, and market sentiment has proved strong enough to shrug off any immediate geopolitical concerns.

A good year for investors

Barring any major jolt before the end of the year, investors can reflect on a positive year, with equities, bonds and alternatives all seeing gains. Relative performance across asset classes has, however, seen a handful of major markets underperform, and adopting a global investment view, with a heavy exposure to the US, has been the key to success over the last 12 months.

With inflation returning to more modest levels, the prospect of lower interest rates, coupled with investor appetite for stocks involved in Artificial Intelligence propelled markets during the first half of the year. The positive momentum has continued, with a further spurt of outperformance seen from US indices after the US election result. Away from the US, the Nikkei 225 index in Japan broke through the psychologically important 40,000 level for the first time in March, after regaining levels not seen since 1989. It has recently regained this level once again, despite a sharp fall and recovery in August amidst a spike in the value of the Yen.  Looking closer to home, UK equities made modest returns, lagging those seen in the North America and Asia Pacific regions.

Political upheaval

2024 was always going to see politics take centre stage, given the number of countries holding major elections. It has proven to be a year of political change, with elections in the UK and US seeing incumbent parties voted out of office. With many predicting a US election that was too close to call, markets breathed a sigh of relief that a clear winner emerged. President elect Trump’s emphatic victory will herald both opportunities for further growth under a pro-business leader, and greater uncertainty over foreign policy decisions that will affect global stability. The clean sweep victory for the Republican party should provide a strong platform for Trump to push through his chosen policies.

Following a landslide victory in the General Election, the new Labour Government has endured a tumultuous honeymoon period. Throughout August and September, the new administration effectively talked down the prospects for the UK economy and warned that a tax raising Budget would be forthcoming, which was duly delivered on the eve of Hallo’ween.

France has endured months of political turmoil, and recently led to the fall of Michel Barnier as Prime Minister, and events in South Korea briefly spooked markets earlier this month, as the sitting President tried to impose martial law.

Whilst 2025 may not be impacted by global elections, unresolved issues remain, and politics will continue to influence global markets.  We expect Eurozone defence spending to be a prominent talking point, in particular given the hawkish words from incoming President Trump about NATO spending. US-China relations could sour if Trump imposes tariffs and rhetoric over Taiwan intensifies.

Higher tax take and a weakening economy

Rachel Reeves’ first Budget brought about a series of significant changes to the way assets and wealth are taxed. The far-reaching set of measures, which may be the most impactful for many years, have received a very mixed response, leaving businesses and the farming community deeply unimpressed.

Apart from the increase in Capital Gains Tax rates, which applied immediately after the budget, many of the changes will come into force in the next and future tax years. Pensions will be brought into the scope of Inheritance Tax from April 2027, which may well mean those in retirement with unused pension funds need to reconsider their plans. The changes to Agricultural and Business relief, which have been met with anger and resentment from the farming community and business owners, will come into force a year earlier, in April 2026. From a planning perspective, those with substantial pension or business assets should look to reassess their financial plans, and holders of agricultural property should begin to gather valuations of assets to see what action can be taken to reduce any likely Inheritance Tax charge.

The planned increase to Employer National Insurance from April 2025 is already being felt in the jobs market, and domestic consumer and business confidence remains at a low ebb. It is, therefore, of little surprise that the initial reading for October saw the UK economy shrink for a second consecutive month.

UK consumers remain under pressure from modest wage inflation and spiralling prices. Many homeowners will see existing fixed rate mortgage deals end in 2025, which will add further affordability pressures, and the end of the Stamp Duty relief for first time buyers in March could limit any further growth in the UK housing market.

We have often commented about our concerns for the health of the UK economy. Early indications are that the impact of the Budget will exert further pressure on an economy that has limped along for some time. The Bank of England would ordinarily look to give the economy a boost by cutting interest rates more aggressively; however, the likelihood of higher inflation in the first half of next year could see the pace of cuts slow as we head through 2025.

Festive wishes

As we draw a close on 2024, we look forward to a year that still presents opportunities for nimble investors. Our first Wealth Matters of 2025 will set out our predictions for the year ahead; however, at this point we take this opportunity of wishing our readers a very Happy Christmas and a healthy and prosperous 2025.

Dec 12
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Planning for changes in Business and Agricultural relief

By | Inheritance Tax

Measures to reform Agricultural Relief (AR) and Business Relief (BR) were amongst the most eye-catching of the announcements in the recent Budget. The reforms are far reaching and may have implications for those holding business assets, or agricultural land and property. The measures, which are effective from April 6th 2026, will limit the extent of tax relief that is currently available. As a consequence, individuals with substantial agricultural or business holdings may well need to reconsider their succession or exit plans.

The current reliefs

AR and BR provide the ability for families and businesses to transfer wealth and assets between generations, without incurring significant Inheritance Tax (IHT) liabilities. The reliefs allow up to 100% IHT exemption on qualifying agricultural or business assets.

AR applies to both land and buildings which are used for agricultural purposes, and 100% relief from IHT is available if ownership and operational conditions are met.

BR provides relief when holding qualifying business interests, including shares in unquoted companies.  BR also extends to ownership of unincorporated business interests, such as those held in a partnership. As with AR, 100% IHT relief is available for most business property.

In both instances, a qualifying holding period of at least two years is required. In the case of agricultural relief, the two-year period applies to property which is occupied by the owner or spouse, and remains held at date of death. A longer seven-year qualifying period applies to land which is occupied by someone else. For business property, qualifying shares need to be held for two years and continue to be held at date of death.

Changes in the 2024 Budget

The most significant reform announced in the recent Budget was the introduction of a cap on the combined amount of AR and BR available, which applies from April 2026. Under the new cap, only the first £1m of qualifying assets held by each individual will attract 100% relief from IHT. The new £1m cap covers qualifying property (be it for AR or BR) which are held at the date of death, and lifetime transfers of qualifying property within the seven years before death. In the case of lifetime transfers, the rules capture any transfers of qualifying property on or after 30th October 2024, where the individual making the transfer dies after 6th April 2026.

Once the £1m cap has been breached, qualifying assets above this level will only receive half of the IHT relief, which results in an effective IHT rate of 20% on qualifying assets held above £1m.

It is important to note that the Nil Rate Band and Residence Nil Rate Bands will remain unchanged, and these allowances will still be transferable between couples, so that a couple could potentially leave £1m of assets on the death of the second of the couple.

In respect of the new combined cap for BR and AR, the allowance is given to each individual and is not transferable between spouses. Depending on how assets are held, each of a married couple could leave £1m of assets that qualify for BR or AR to the next generation, in addition to the combined £1m nil-rate bands. In total, a maximum of £3m could, therefore, qualify for IHT exemption.

AIM-Listed Shares

Shares in companies listed on the Alternative Investment Market (AIM) currently qualify for 100% relief under BR, in the same manner as unquoted qualifying companies. From 2026, the relief on AIM shares will be reduced to 50%, leaving AIM shares subject to an IHT rate of 20%, assuming all nil rate bands have been used with other assets.

What the changes will mean in practice

It is fair to say the new proposals have been met with fierce resistance, in particular from the farming community. Whilst it is conceivable that the measures could be watered down in advance of the date of introduction in April 2026, it would be sensible for those holding business or agricultural assets to begin assessing their current position and consider any action that may be necessary to reduce the potential tax liability.

For anyone holding business or agricultural assets, it is important to obtain an updated valuation of these assets, so that the true value of the potential liability can be ascertained. Without an accurate valuation, it is difficult to make sensible decisions, and it is also appropriate to bear in mind that it is the valuation in the future that will be assessed for IHT and not today’s value. It may well, therefore, be sensible to factor in growth in the value of land or property over time.

Business owners may well need to reconsider their succession plans as a result of the change in legislation. It has often been the case that those holding qualifying business assets would simply hold the asset until date of death, when the shares would then be transferred to the next generation, without IHT applying (as the shares are qualifying) and the new owners who inherit the property also benefit from an uplift on the base cost to market value. Given the new rules, it may be necessary to reassess options, and depending on individual circumstances, making lifetime gits of assets may become more attractive. There are also alternative options, such as taking out life assurance, where the policy proceeds on a death claim are paid into trust, and then used to settle part or all the IHT liability.

Getting the right advice

The 2024 Autumn Budget has heralded significant changes in the way agricultural and business property is treated for IHT purposes. The proposed £1m combined cap from April 2026 presents significant challenges for families and businesses with substantial business and agricultural assets. Seeking professional advice is critical to navigate these complex and far-reaching reforms, and advice may need to cover both financial and legal aspects, as changes to existing wills or the way property ownership is structured may well be needed. Speak to one of our experienced advisers if you may be affected by the change in tax rules.

Dec 05
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Prospects for UK equities post Budget

By | Investments

Most investors instinctively feel comfortable investing in their domestic stock market. The FTSE100 index of leading UK shares is made up of familiar names, and within the largest quoted companies, investors can gain access to attractive dividend yields and modest valuations. The reality is, however, that investors in UK equities will have seen returns lag behind those achieved by their global counterparts over the medium term.

Diminishing influence

The story for 2024 has been all too familiar for UK equities. In the period from 1st January to 30th October – the day of the Budget speech – the FTSE100 index of UK shares produced a total return of 8.92%, compared to the S&P500 index of US shares, which returned 20.37% over the same period. The gap between the UK and US indices has widened further during November, as investors digested the impact of the Budget on the outlook for UK equities, and US shares enjoyed a boost from the clear Trump victory. Further evidence of a lack of investor confidence in the UK can be observed given the large outflows seen from UK equities in advance of the Budget.

The London Stock Exchange is one of the oldest known trading exchanges; however, the influence the UK can exert in a rapidly changing world is diminishing. Within the MSCI World Index, a composite index of the largest global companies, the UK now accounts for just 3.5% of the index weight, compared to 72% for the US.

The explosive growth in the largest US quoted companies has seen the market capitalisation of Apple, Nvidia and Microsoft all individually exceed the combined value of the largest 100 quoted companies in the UK.

One of the reasons for the lack of traction within UK equities is the absence of large-cap technology stocks. The market clamour for stocks involved in artificial intelligence and other high-growth areas has seen value equities, which offer solid cash flow and attractive dividend yields, fall out of favour. Indeed, the decision of British chip designer ARM Holdings, which decided to relist in New York rather than London, was further evidence that technology stocks that wish to gain wider investment exposure can do this more readily on the Nasdaq exchange.

Impact of the Budget on confidence

You could reasonably argue that the recent Budget has done little to boost the fortunes of domestic equities. Prior to the Budget speech, confidence in the prospects for the UK economy was already at a low point. Government ministers repeatedly warned of tough measures in the Finance Act and the Budget speech itself surprised many economists and commentators with the breadth of tax raised.

From a business perspective, additional costs from the hike in Employer’s National Insurance are likely to impact UK growth. Firms could look to trim expansion opportunities, or more likely pass the additional costs onto the consumer. Sectors such as leisure, hospitality and retail, where many workers receive the minimum wage, will see a direct increase in wage costs from April 2025, which will squeeze margins further.

This set of events have the potential to nudge inflation higher during 2025, and potentially force the Bank of England to re-shape the trajectory for UK interest rates. Whilst further rate cuts are expected, there is growing consensus that the pace and timing of the cuts may be slower than anticipated.

Consumer confidence remains weak, with the “cost of living” crisis still alive and kicking. The combination of mortgage rate resets for those coming off cheap fixed rate deals, higher energy costs and static tax bands, mean that consumers may shun big ticket items whilst focusing on essentials.

An improving outlook for the UK economy could increase investor appetite and boost the prospects for UK equities; however, the projected growth figures announced in the Budget suggest that GDP growth will remain subdued over the next five years. As a result, investors, who take a global approach to investment, may well look to other markets, where growth potential is more appealing.

Reasons to be cheerful

Given the current position, we have painted a rather negative picture of the prospects for both the UK economy and UK equities over the medium term. There are, however, reasons to invest in UK equities, particularly if the investor seeks a high level of dividend income. The current dividend yield on the FTSE100 is 3.70%, although companies offering yields well in excess of this level can be found. Seeking income from overseas investments can be more difficult, with the S&P500 index of US shares producing a dividend yield of just 1.19%.

UK equities are undoubtedly cheap when using certain metrics, with the FTSE100 standing at a considerable discount to the implied earnings growth of the S&P500 index. The UK also stands at a slight discount to Eurozone equities. Whilst you could argue that this suggests that the UK is attractively priced, it is entirely possible that the relative value on offer is by virtue of the modest outlook for growth. In other words, the UK could be “cheap for a reason”.

The UK still has a place

Despite the weaker outlook, it would be unwise to dismiss UK equities. We believe they command a place in a well-diversified investment portfolio, particularly for investors who are seeking income from equities, or value to counterbalance growth in a diversified approach. It would, however, be sensible to consider the composition of your investment portfolio, as holding excessive weights in the UK, without adequate global diversification, could limit the prospects for investment returns, and also introduce additional risk. Many traditional discretionary management services focus on UK equities, and we have seen examples where performance has lagged due to an overallocation to domestic positions.

Our experienced advisers can help review existing investment portfolios and provide independent advice on the current asset allocation, diversification and levels of risk. Speak to one of our advisers to discuss your portfolio in more detail.