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Dec 20
0

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
0

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
0

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.

Nov 28
0

Pension Death Benefit changes

By | Pensions

Amongst the more impactful announcements within the Autumn Budget were the proposed changes to the treatment of death benefits paid from a registered pension scheme. From 6th April 2027, most death benefits and unused pension funds held at date of death will form part of an individual’s estate for Inheritance Tax (IHT) purposes.

This is a significant change from the tax-advantaged position that currently applies. At present, unused pension funds, or remaining pension funds held in Flexi-Access Drawdown, can be passed to beneficiaries at the discretion of the pension trustees, outside of their estate for IHT purposes. This effectively allows unused pension funds to be cascaded through generations and is an effective estate planning tool.

Threat of double taxation

Not only could unused pension fund death benefits be subject to IHT, depending on the individual’s other assets, it appears that the existing tax rules for those drawing death benefits from a beneficiary’s drawdown pot will remain in place. If the pension holder dies before the age of 75, the beneficiary can draw down on the inherited pot without income tax applying to the payments, irrespective of whether the beneficiary draws ad hoc lump sums or a regular income. The situation is very different if an individual dies after the age of 75, where the beneficiary is taxed at their marginal rate of income tax on monies drawn from the pension. From April 2027, the value of the pension could potentially be subject to IHT at 40%, and funds drawn from the inherited pension could then also be subject to higher rate income tax (40%) or additional rate income tax (45%), once drawn, in the hands of the beneficiary. This could potentially lead to a total tax burden of 67% if the pension fund suffers IHT and the beneficiary drawing the pension is an additional rate (45%) taxpayer.

Spousal exemption remains

The position from April 2027 will remain unchanged when pension benefits are paid to a spouse or civil partner, as this will be covered by the IHT spousal exemption. Pensions left in favour of a surviving spouse will not be subject to IHT; however, just as is currently the case with assets other than pensions, the IHT liability will usually arise on the second of a married couple to pass.

Consultation process

It is important to note that the proposed changes do not come into force for another 2 years and 4 months. We therefore feel it would not be sensible to take knee-jerk decisions to adjust your financial plans.

The Government have launched a consultation with industry stakeholders, which will run until January 2025, to iron out how the new rules will work in practice. Any significant change to the proposals is unlikely; however, major logistical challenges remain on how the tax will be collected, and by whom. As the legislation seems to suggest that IHT on pensions will be due within six months of death, this will place considerable pressure on executors and pension scheme administrators to liaise and pay the right amount of tax due, to avoid interest being charged. Many legal experts are suggesting such changes may well introduce further delays to the probate process, meaning that beneficiaries have a longer wait before receiving funds from the estate.

The importance of holistic planning

Whilst no immediate action may be needed, it is important to begin to understand the implications of the new rules on unused pension funds and death benefits you hold. For those with unused pension funds, it will be important to review pension values to determine whether the change in rules alters the potential IHT liability on your estate.

There are a range of options that individuals who are holding unused pension funds could consider in order to mitigate a potential liability. These could include crystallising the pension and making gifts of the Tax-free Cash element, drawing additional income from a Flexi-Access Drawdown arrangement and making gifts out of surplus income or purchasing an annuity. You could also consider planning with other assets held outside of a pension, which could be invested to mitigate the potential IHT liability or look to protection policies.

It is clear that a holistic approach, which is tailored to the individual, will be key to effective planning, as the most appropriate option in each case will depend on the precise composition of assets held, family circumstances, financial objectives and attitude to risk.

The advisers at FAS always take a holistic approach to financial planning. We look at a wide range of aspects of an individual’s financial position, and as an independent firm, we can consider solutions from across the marketplace without restriction. If you have questions relating to the changes announced in the Budget, speak to one of our experienced advisers who will be happy to help.

Nov 21
0

Outlook for US markets post election

By | Investments

Positive early reaction

In the immediate aftermath of the election, US equities saw strong trading, with the S&P500 index pushing through the 6,000 level for the first time. A factor boosting the short-term positivity may well be the absence of uncertainty over the election result, which brought about market volatility in the aftermath of the 2020 election.

Whilst equities have reacted positively, bond yields have risen, as investors flee from US Treasuries. This reaction is understandable, as the likely policies a second Trump term will bring, such as tax cuts and increased tariffs, may well be inflationary. This could undo the work of the Federal Reserve, who have been successful in reducing inflation, so that it rests just above the Federal Reserve target. Markets have been anticipating a series of US interest rate cuts during 2025, which would help support a slowing economy. Depending on the speed and size of expansionary plans laid out by the Trump administration, the pace of interest rate cuts could slow, meaning interest rates remain higher for longer. This impacts the US housing market and could weaken consumer confidence.

A second Trump term may well herald a series of tax cuts, including those borne by business. This could improve US corporate profitability and potentially support higher valuations. An extension to personal tax cuts introduced in 2017, which are due to expire next year, is likely, which could ease some of the cost-of-living pressures currently facing US households.

America first policies

Trump consistently proposed the introduction of international trade tariffs during his election campaign, to refocus on domestic production, employment, and growth.

The extent to which tariffs are imposed remains open to question, as some of the more extreme claims made prior to the election could simply be used as bargaining chips; however, any extension of import tariffs has the potential to drive the price of goods and services higher, leading to higher inflation and a possible fall in consumer confidence. Countries are, of course, able to retaliate by imposing their own tariffs on US goods and services, leading to a trade war. This could dampen global growth, and lead to further friction, particularly with countries with significant export markets, such as China.

It is possible that mid-sized and smaller US companies could see higher demand for domestic goods and services due to higher tariffs, although weakness in consumer confidence and higher prices could offset any benefit to US domestic suppliers.

Trump and global conflict

On balance, the second Trump term increases the potential for market volatility due to geopolitical instability. The World waits to see actions Trump could take in respect of the Russian invasion of Ukraine. Such decisions could have wider implications for the future of NATO and could see European nations increase spending on defence. Should the conflict end, this could well secure energy supplies going forward and remove the risk to potential supply shocks that caused market concern at the outset of the conflict.

Commodity prices may also be influenced by events in the Middle East. The ongoing tensions in the region have yet to cause significant concern to global equities and commodity markets over the course of this year; however, actions taken by the new administration could increase tension and any significant escalation could see oil production fall, potentially leading to higher prices.

Sector winners and losers

A range of sectors of the US economy are likely to be direct beneficiaries of policies introduced by the Trump administration, whilst others could face a more difficult future. Banks and Financials may well benefit from lower government regulation and red tape, and if US interest rates stay a little higher for longer, this could boost profitability. Oil and Gas producers may also be big winners, given the suggestions that Trump will look to expand US production. On the other hand, the renewable energy sector has already come under pressure since the election result, as Trump may well reduce tax credits and other incentives that have driven the boom in renewables across the US.

The largest US tech stocks have contributed a considerable proportion of the growth seen in US markets over the last year, and these tech giants have seen significant inflows at the expense of more traditional sectors of the economy. The difference in performance between high growth and value stocks has been clear, and this gap may well narrow following the US election result. The outcome may also benefit mid and smaller sized US companies, which have underperformed the mega-cap global giants.

Implications for portfolio asset allocation

In the wake of the US election result, equity markets have rallied on the expectation of corporate tax cuts and deregulation, coupled with relief that the election result was clear cut, without the uncertainty seen following the result in 2020. Treasury markets have given a less positive reaction to the Trump re-election. Given that policy decisions are likely to increase borrowing and fuel inflation, bonds have come under pressure, as inflationary fears have the potential to derail the Federal Reserve’s intended path for US interest rates.

2024 has proved fruitful for investors, and the outlook for 2025 appears robust; however, decisions taken by the second Trump administration in respect of both domestic and foreign policy may well increase volatility, as well as opening opportunities. As we head into more uncertainty, it would be an appropriate time to review existing investment portfolios to consider the asset allocation and strategy adopted. Speak to one of our experienced advisers to discuss your exposure to US equities and how the election result could impact market sentiment.

Nov 07
0

How to plan around Budget CGT rate hikes

By | Tax Planning

One of the key measures announced in last week’s Budget was a hike in the rate of Capital Gains Tax (CGT) paid on disposal of investments. The move had been widely flagged by the media and commentators; however, predictions of a significant jump in the rate of CGT have proven to be wide of the mark.

With effect from 30th October, gains made on the disposal of investments will be subject to new rates of CGT, depending on the overall tax position of the individual making the gain. For those within the basic rate tax band, the rate of CGT has increased from 10% to 18% and for those in the higher and additional tax bands, the rate has increased from 20% to 24%. The new rates are aligned with the rates that already applied to the sale of residential property, which remain unchanged.

Not as bad as predicted

In the weeks leading up to the Budget statement, commentators were speculating that the rate of CGT could see a large increase, with predictions of rates between 30% and 40% being forecast. On the face of it, the new CGT rates are, therefore, not as painful for investors as could have been the case.

The annual exempt amount, i.e. the net gain an individual can make in a tax year without paying CGT, remains at £3,000, with 50% of the annual exempt amount being available to trustees. The exempt amount had already been reduced from £12,300 to £6,000 and again to £3,000 in previous Budget statements. Investors should look to make use of the annual CGT exemption each tax year, as unused exempt amounts cannot be carried forward to another tax year. When the net balance of gains and losses in a tax year creates an overall loss, the loss amount can be carried forward indefinitely and be used to offset gains above the annual exempt amount in the future, as long as the loss has been reported to HMRC.

It is also important to note that CGT is effectively wiped out on death, and thankfully the Budget did not contain any change to this rule, as this would, in effect, lead to the potential for estates to face double taxation. As investments held on death are uplifted to their value at probate, beneficiaries receive the assets with a new purchase cost equivalent to the probate value.

Time to review your portfolio

For those holding investments outside of a tax-efficient wrapper, such as an Individual Savings Account (ISA), the hike in CGT rate should be a clarion call for investors to review their existing investment portfolios and consider how they are structured. As gains made from disposals of assets within an ISA are exempt from CGT, the increased rate of CGT further enhances the benefit of holding assets within an ISA wrapper. Investments held within an ISA also benefit from exemption from Income Tax, too. The Budget statement confirmed that the ISA allowance will remain fixed at £20,000 per tax year for the remainder of the parliament, and this provides the opportunity for investors to use the annual ISA allowance going forward with a degree of confidence.

For those seeking to shelter funds from CGT, alternative investment wrappers, such as Investment Bonds, now look increasingly attractive. Gains on Investment Bonds are subject to Income Tax, and not Capital Gains Tax, and investors can freely change investments inside the

Bond wrapper without triggering a charge to CGT.

As a result of the increase to CGT rates on investment gains, it may be appropriate to review how your investments are structured, to see whether greater tax-efficiency can be achieved from a combination of ISA and Investment Bond wrappers, rather than standard General Investment Accounts.

Business owners see hike in rates from April

Business owners looking to dispose of business assets will also see higher rates of CGT applied from April 2025, although a relief that reduces the rate paid by a business owner on the sale of a business remains available.

Formerly known as Entrepreneur’s Relief, Business Asset Disposal Relief (BADR) allows business owners and sole traders to sell their business with lower rates of CGT applying on disposal. To qualify for BADR, the business owner needs to prove ownership throughout the two-year period prior to disposal or in the case of a shareholder, needs to be beneficially entitled to 5% of profits distributed on winding up of the company or 5% of the sale proceeds. BADR will continue to apply to the first £1m of qualifying gains during an individual’s lifetime, with gains above this level charged at the standard rate of CGT.

Until 5th April 2025, the current rate of CGT of just 10% will continue to apply to claims under BADR; however, this will increase to 14% from 6th April 2025 and 18% from 6th April 2026. Once the rate of CGT payable through BADR reaches this level, it will align with the CGT rate that applies to basic rate taxpayers. It does, however, still provide a small discount against the headline CGT rate of 24% that applies to higher rate taxpayers.

Planning Opportunities

The change to CGT rates should prompt investors to undertake a review of their existing investments to look for opportunities to reduce the potential tax liability in the future. Use of the annual ISA allowance, alternative structures such as Investment Bonds and other tax efficient investments, such as Venture Capital Trusts, can reduce an overall tax liability. For business owners looking to sell their business, higher rates of tax will apply from April; however, powerful tax planning tools remain available, such as the ability to make employer pension contributions, that could help achieve a more favourable outcome and reduce the overall tax burden.

Our expert advisers can provide independent advice on the options open to you. Speak to one of the team to start a conversation.

Oct 31
1

Budget Briefing

By | Budget

Whilst not delivering some of the more outlandish predictions that had been suggested in the media over recent weeks, the measures announced in the Budget statement certainly provide opportunities for effective financial planning in a number of areas. We will delve more deeply into these planning opportunities in future issues of Wealth Matters; however, for now, we provide our summary of the key measures announced.

Employer’s National Insurance

The rate of National Insurance (NI) paid by employers will increase from 13.8% to 15% from 6th April 2025. In addition, the salary threshold at which employers begin to pay NI has been reduced from £9,100 a year to £5,000 a year. Small businesses will see an extension to the employment allowance. There have been no other changes to NI, with the main rate payable by employees remaining at 8% on earnings between £12,570 and £50,270.

The increased rate of employer NI from April 2025 is likely to enhance the attractiveness of salary sacrifice arrangements, and the ability for company directors to make employer contributions into a personal pension.

Capital Gains Tax

The rates of Capital Gains Tax (CGT) applicable to the sale of non-residential property assets will increase from 10% (for basic rate taxpayers) to 18% and from 20% (for higher and additional rate taxpayers) to 24%, with the changes effective immediately. The new rates for gains on share disposals match the rates that currently apply to residential property gains, which remain unchanged. The hike in CGT rates is lower than many people had anticipated, which reinforces the need to carefully consider whether to dispose of assets that may give rise to a CGT liability.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) will gradually become less attractive over the course of the parliament. Currently business owners who sell all or part of their business can benefit from a rate of 10% on all gains up to a lifetime limit of £1m. The rate will increase from 10% to 14% from 6th April 2025, and again to 18% from 6th April 2026, aligning this rate with the rate of Capital Gains Tax payable by basic rate taxpayers.

Inheritance Tax

The Government has announced the intention to bring pensions into the Inheritance Tax (IHT) regime from 2027. The Budget statement is light on detail, and clearly further clarification is needed, particularly in respect of the tax treatment that applies when beneficiaries draw from an inherited pension. The impact of the new rules will no doubt become apparent during the consultation process.

In addition to the proposed changes to pension death benefits, the Chancellor announced a new combined limit of £1m for assets that qualify for Agricultural Relief and Business Property Relief. Expected to come into force in April 2026, qualifying assets under £1m will continue to benefit from 100% relief from IHT; however qualifying assets above this level will only benefit from 50% relief, leaving such assets subject to an effective rate of IHT of 20%. This is a punitive move for those holding agricultural assets or family businesses.

The IHT rate payable on qualifying shares quoted on the Alternative Investment Market (AIM) will be set at an effective IHT rate of 20%. Previously, qualifying assets listed on AIM have been covered by the Business Relief exemption.

All other IHT bands remain unchanged, although the freeze on thresholds has been extended until 2030. The main nil-rate band will continue at £325,000 with the additional £175,000 being available in respect of a residence bequeathed to a direct lineal descendent. These allowances remain transferable between spouses, so that the surviving spouse can continue to pass up to £1m without an IHT liability. With increasing asset prices, the number of estates liable to IHT is set to increase over the course of the parliament.

Pensions

Apart from the proposals to bring pensions under the IHT regime from 2027, there were no other major changes to pension rules announced in the Budget. Existing rules on tax relief remain unaltered, as does the current maximum level of Tax-Free Cash available (£268,275). Additionally, there have been no changes to the pension annual allowance.

Personal Tax Thresholds

Whilst Personal Tax thresholds will remain frozen until 2028, the Chancellor confirmed that the Personal Allowance for Income Tax will increase in line with inflation from the 2028/29 Tax Year and beyond.

Stamp Duty Land Tax

The rate of Stamp Duty charged on second or additional properties will increase from 3% to 5% with effect from Thursday 31st October. The Budget Statement also appears to rule out any extension to the temporary Stamp Duty discount for first-time buyers which is due to end in March 2025.

Individual Savings Accounts

The annual subscription limits for Individual Savings Accounts (ISAs) will remain frozen at £20,000 until April 2030. The limits for Lifetime ISA and Junior ISA will also remain frozen at £4,000 and £9,000 per tax year, respectively. The British ISA, a policy idea announced by the previous Government, has been scrapped.

Summary

Taken in the round, the measures announced are not as painful as many had been predicting in the weeks leading up to the Budget statement. Our initial assessment of the Budget statement does present interesting planning opportunities, which we will cover in more detail in future editions of Wealth Matters. Contact our experienced advisers if you would like to discuss the impact of the Budget on your financial plans.

Oct 24
0

Getting your affairs in order

By | Financial Planning

Getting your affairs in order is a crucial aspect of financial planning that extends beyond managing investments and ensuring tax efficiency. Many are totally unprepared for unforeseen scenarios such as death or loss of mental capacity which could place their financial wellbeing and family members at risk. We look at the importance of preparing a will, or reviewing an existing will, making an Expression of Wish over existing personal pension death benefits, and preparing a Lasting Power of Attorney.

Make your wishes clear

Writing a will puts the control over your wishes in your hands. Leaving a will that states clearly who should get your possessions and property when you die can prevent unnecessary distress for your loved ones after you’ve gone. It also removes most of the complexity that comes with sorting out a person’s estate after their death, which is a particularly stressful period at the best of times.

Writing a will is particularly important for anyone who has children or other family members that depend on you financially, or if you would like to leave some of your possessions to people who are not considered part of your immediate family.

If you die without leaving a valid will, this is called ‘intestacy’. This means that if you live in England or Wales (the rules are different in Scotland), everything you own will be shared out under the legal framework. This could potentially lead to unwelcome outcomes. For example, if you’re married, your husband or wife could inherit all your estate even if you were separated at the time of your death, and your children might not get anything. Another potential pitfall awaits partners who are not married or in a civil partnership. Under the laws of intestacy your partner will not be legally entitled to anything when you die, no matter how long you were together.

Pension Expression of Wish

In conjunction with preparing a will, it is also important to ensure that an Expression of Wish for any existing pension arrangements is similarly up to date.

On the death of anyone holding a personal pension arrangement, it is a common misconception that the residual pension will pass in accordance with their will. This is not the case, and the pension trustees can choose who will benefit from the pension arrangement. They will, however, consider an Expression of Wish left by the deceased pension holder, which sets out how the pension holder would like the benefits to pass in the event of their death, when deciding who receives benefits from a pension.

Whilst a will and expression of wish can help ensure your affairs are dealt with in the event of your passing, it is also important to consider how you would manage your affairs if you were to lose capacity to take decisions. Sadly, an increasing number of people are affected by illnesses such as Alzheimer’s or dementia, which can mean that individuals are no longer able to make decisions for themselves.

Lasting Power of Attorney

Setting up a Lasting Power of Attorney (LPA) is straightforward and can make sure your loved ones can make the important decisions about your health and your financial wealth on your behalf, should you become incapacitated through ill health or accident.

An LPA is a legal document that lets you appoint individuals you trust to make decisions on your behalf, should you become unable to make those decisions for yourself in the future. There are two different types of LPA, one covering Property & Affairs (e.g. property, investments and assets) and Health & Welfare (which covers healthcare and medical treatment).

You can choose to set up one or both types of LPA, and you can nominate the same person or elect to have different attorneys for each. Preparing an LPA doesn’t mean that you instantly lose control of the decisions that affect you. For the Property & Affairs LPA, you can be specific about when the attorney can take control when preparing the LPA, and in respect of the Health & Welfare LPA, this can only be used once capacity to make decisions has been lost.

All LPAs must be registered at the Office of the Public Guardian, which is the government body responsible for the registration of LPAs before they can be used.

If you lose mental capacity and don’t have an LPA arranged, this can leave loved ones with significant worry and could potentially lead to difficulties in dealing with the individual’s personal finances. Should this situation occur, an application will need to be made to the Court of Protection, for an individual to become your appointed ‘deputy’, who can then make financial decisions on your behalf. The Court has the final say as to who is appointed, and this may not align with your wishes.

The process of making a Court application is long-winded, with applications taking many months to be heard and then approved. This could lead to significant issues for ongoing financial transactions, such as investment management, or the purchase or sale of a property. Anyone with investments, or complex financial affairs are at greatest risk if capacity is lost, with Directors and Business Owners at particular risk if they lose capacity without an LPA in place.

Take the time to review your affairs

Take a few moments to review your affairs and consider what would happen in the event of your passing, or loss of capacity. As part of our holistic planning service, we remind our clients to make a will, or review an existing will, refresh their expression of wish and make an LPA. Speak to one of our experienced financial planners who will be pleased to provide more details on why it is so important to get your affairs in order.

Oct 17
0

Making best use of compound returns

By | Investments

The success of any investment strategy is determined by the performance of the investments selected, and the length of time that the investments are held. Maths also plays an important part in contributing towards the returns achieved, as growth, which is accumulated or reinvested, benefits from a compounding effect, which helps accelerate investment returns over time.

In simple terms, compound returns are earned on both the capital investment and investment growth already achieved. This additional “growth on growth” has a cumulative effect and helps investments grow exponentially. Whilst incredibly powerful, the impact of compound investment returns reinforces the need to ensure that your investment funds perform well. If funds underperform over a sustained period, this can lead to substantially lower returns, when considering investment strategies that are in place for many years, such as a pension.

To demonstrate the impact of compound returns, take the example of Alice, whose pension plan is valued at £100,000. She plans to retire in 20 years’ time and does not expect to contribute further to this plan. If the investment achieves a rate of return of 3% per annum compound, the value at the end of the 20-year investment period would be £175,000. Increasing the investment return to 5% per annum compound would see the value at the end of the 20-year investment period increase to £252,000. Achieving an even higher return of 7% per annum compound would see the value at the end of the 20-year investment period rise significantly higher to £361,000.

As demonstrated on the graph, the rate of growth accelerates due to the impact of compound returns. By achieving compound returns of 7% per annum, rather than 3% per annum, at the end of the 20-year investment period, the value of Alice’s plan would stand at more than double the value that would have been achieved if returns were only 3% per annum.

This simple example demonstrates the power of compound returns; however, other real-world factors need to be considered. It is important to reflect on the eroding impact of inflation on investment returns, particularly over a longer timeframe, such as a working lifetime. The spending power of money falls over time, and this factor needs to be considered when undertaking calculations on future investment returns. The annual return achieved from risk assets, such as equities, bonds, and property, will also fluctuate from year to year, and examples using a fixed linear rate of return are unlikely to prove accurate. Finally, the impact of tax and charges on investment returns also need to be factored in.

Why performance needs to be reviewed

Given the cumulative effect of underperformance, it is important to keep any portfolio strategy and investment fund selection under close review. We often meet with new clients who have held the same investments within a pension, investment bond or Individual Savings Account (ISA) for an extended period, and in many cases, the performance of the portfolio held has lagged the performance of other funds investing in a similar portfolio of assets, with broadly the same level of investment risk.

This is particularly true when we undertake analysis of legacy investment products, which were purchased some time ago. The financial services industry is constantly evolving, and many historic investment products offer a limited range of investment options, which can hinder growth over the longer term. We often see other drawbacks with legacy products, such as high charges and exit penalties.

Taking an independent view of the universe of investment funds is, in our opinion, a vital component that helps drive investment returns. Products offered by restricted advisers tend to offer investors a limited menu of fund options from which to select, with many of the choices often limited to in-house investment funds. Whilst some of these funds may perform well compared to sector peers, it is often the case that we see sustained underperformance, the effect of which becomes more apparent over time due to the compounding effect. Even small marginal gains in performance can compound into a significant difference in outcome. For example, on an investment of £100,000 held over 40 years, a slight increase in return achieved, from 4% per annum to 4.5% per annum, would result in additional growth of over £94,000 being achieved (before the effect of charges and tax).

Compound returns are a powerful factor that is hard to ignore; however, investors need to give sufficient time for the compounding effect to impact investment returns, as the effect becomes more powerful, the longer an investment is in place. This is particularly true when long term regular savings, such as pension contributions made over many years, benefit from the power of compounding.

How to take advantage of compound returns

Compounding is a powerful driver of investment returns, and investors should be aware of the need to review their investment portfolio regularly, so that changes to underperforming assets can be made. As the examples have shown, even a small difference in performance over time can have a major impact. It would also be wise to consider investment product selection, as legacy investments can hinder growth over time due to limited fund choice and higher charges.

Speak to one of our experienced advisers to review your existing investment or pension plans. We can analyse investment performance and where appropriate recommend changes that aim to take full advantage of the power of compound returns.

Oct 10
0

Using protection for estate planning

By | Inheritance Tax

Inheritance Tax (IHT) planning was once only considered necessary for the very wealthy; however, largely because of increases in property and asset prices, many more estates are now liable to IHT. The most recent data from HMRC showed that IHT receipts were £3.5bn for the three months to August 2024, an increase of 10% over the same period last year. Whilst this upward trend is likely to continue, careful financial planning can help reduce or eliminate an IHT liability and leave a greater proportion of an estate to beneficiaries.

IHT legislation

Existing tax legislation provides each individual with a ‘nil rate band’ of £325,000 which is exempt from IHT. Married couples can use two nil rate bands on second death meaning that estates valued at less than £650,000 will pay no tax. This can be further extended by the ‘main residence nil rate band’ which can be claimed in respect of the main family home, of £175,000 per individual, as long as the home is left to a direct descendant.  The main residence band can also be transferred between married couples, and as a result, a total of £350,000 can be covered by the main residence band on second death.

Any amount exceeding the total ‘nil rate band’ is taxed at 40%, which can have a major impact on the legacy you leave to your beneficiaries. There are, however, a range of financial tools available to help mitigate a potential IHT liability.

IHT mitigation via life assurance

Amongst the IHT mitigation strategies available for consideration, life assurance could be a sensible option that is worth considering. A specific type of life assurance policy, known as a Whole of Life policy, is used for this purpose. Unlike traditional term assurance policies that provide cover for a set period, Whole of Life protection is designed to cover the life insured for the rest of their life, as long as the insurance premiums continue to be paid.

Whole of Life cover can either be taken out on a single life assured, or jointly. For married couples, where their estates are left to each other on the first to die, the IHT liability will generally arise on the second death, and therefore joint policies are often established on a “joint life, second death” basis.

The key planning element when using a Whole of Life policy is to ensure that the policy is written into trust, so that the payment on death does not aggregate with the individual’s other assets when their estate is assessed for IHT purposes. On death, the trustees use the policy proceeds to pay towards the IHT liability on the estate, which could potentially be covered in full.

Depending on the policy options chosen, the life assurance premiums can be guaranteed, in other words they remain unchanged for the life of the policy, or reviewable. Choosing the latter option will lead to cheaper premiums in the early years of the policy, but premiums will increase over time. The level of premium payable will be determined by an underwriting process, where the premium takes into account the age, health and lifestyle of the applicant. In most cases the policy will not pay out in the event of death within the first 12 months of the policy.

It is important to ensure that premiums remain affordable throughout the life of the policy. As a result, we often provide advice to help clients generate an income stream from existing investments, which can be used to pay the monthly or annual premiums.

Selecting cover options

When we sit down with clients to look at IHT planning options, we stress the importance that determining the value of an estate is just a “snapshot” of the current position of their existing assets. Of course, the value of an estate can shift significantly over time, either due to increases in the value of investments or property or further inheritance received. It could also be reduced, due to the eroding costs of long-term care, or other planning measures undertaken, such as direct gifting to family members.

It is also important to appreciate that IHT legislation can alter over time, and although the nil rate band hasn’t increased since 2009, the introduction of the main residence band in 2016 is a good example of how changes in legislation can impact on existing planning measures put in place.

Some Whole of Life policies allow the sum assured to be increased over and above increases in prices generally, which is an option that is available in most cases. That being said, given the relative inflexibility of Whole of Life policies, it may be appropriate to consider using protection policies as part of a broader strategy to mitigate a potential IHT liability.

The power of independent advice

Although IHT receipts are increasing, by planning ahead, the impact of this tax can be avoided or even eliminated. Our experienced holistic planners can fully assess the potential IHT liability on your estate and consider the options, including protection policies written in trust, as part of a broader financial planning strategy. Speak to one of the adviser team to discuss what action may be appropriate to meet your circumstances.