Economic growth in the UK has remained relatively strong despite Brexit but, of course, as yet Brexit negotiations have not yet formally commenced – the starting date has, at the time of writing, just been announced as the 29th March – and the final outcome in so many respects is unlikely to become clear until we are comfortably in the next decade. Against that background, the Office for Budget Responsibility has a particularly difficult task and all predictions for economic growth, for borrowing and productivity, to name but several areas, are subject to significant future change.
The Chancellor is, however, benefiting from a gradual fall in the borrowing requirement so that the need to raise new funds through the gilt edged market is reducing somewhat. This is good news particularly as overseas holders of gilts have been reducing the scale of their investment (the lure of a stronger dollar, reinforced by the prospects of gradually rising US interest rates, is increasingly strong). This does however imply a continuation of relatively lower UK interest rates for longer unless and until Sterling’s weakness in foreign exchange markets becomes too great to ignore.
In all, we anticipate that general austerity will continue, despite ‘tweaks’ in certain areas, giving the chancellor some room for manoeuvre if conditions require it in a few years’ time.
We would now like to comment on certain aspects of the Budget in so far as they affect investors, as follows:
Individual Savings Accounts
The annual allowance increases this April to £20,000 per annum. This is a substantial increase so that ISAs now offer increasingly significant income and capital gains tax benefits. There is a strong case to be made for utilising the allowance early in the tax year.
The new Lifetime ISA commences in April, for adults under the age of 40. The terms remain as announced last year, while the Junior ISA Allowance rises to £4,128.
The VAT rate remains unchanged at 20% for a further period.
As previously announced, the income tax allowance rises to £11,500 from April and it is due to increase to £12,500 by 2019/20. The higher rate threshold rises from £43,000 to £45,000 and is set increase to £50,000 by 2020 for those living in England and Wales. In Scotland, the higher rate threshold is frozen at £43,000. The additional rate limit continues to remain fixed at £150,000.
Disappointing from an investors standpoint, the dividend allowance, introduced at £5,000 a year ago, is being reduced to just £2,000. Investors with significant dividend income outside tax shelters are increasingly incentivised to use ISAs and, for married couples, to split dividend income between them to ensure maximum use of allowances and lower tax rates.
Once again, the IHT nil rate bands remain at £325,000. Further, annual gift allowances are also unchanged and have been so for many years.
An additional £100,000 allowance is being introduced from the 6th April for those who pass their property to direct descendants. While the details of this still remain unclear, it is a useful concession to those with valuable residences and the allowance is due to increase further in future years if the original timescale is maintained.
As an aside, from this May, probate fees will increase significantly. For example, for estates worth between £500,000 and £1,000,000 the fee will be £4,000, rising to £20,000 where estates are in excess of £2,000,000.
Capital Gains Tax
Here, the annual allowance is rising from £11,100 to £11,300 in the new tax year. Gains in excess of that figure are added to income and taxed either 10% or 20%, depending upon the investor’s income tax rate. However, if such gains result from sales of buy to let properties, the figures are 18% and 28% respectively.
The maximum individual investment remains at £50,000.
National Savings is to launch a new 3 year savings bond in April paying just 2.2%. That is of course roughly equal to current inflation levels and investors can save up to £3,000 in it.
The annual allowance continues to be capped at £40,000 (or less if one’s income is below that figure), while the Money Purchase Annual Allowance is reducing from £10,000 to £4,000 for those who have already taken benefits.
Those with no earnings can continue to contribute £2,880 per annum which is also ‘topped up’ within the pension fund by the addition of basic rate income tax relief.
The rate of corporation tax falls to 19% as promised and it is due to fall to 17% by 2020. Not many years ago, the rate was 28% so the reduction to date, together with that planned, is significant for many businesses.
While for many the budget will be remembered for the row over the proposed, but subsequently cancelled, National Insurance increase for the self-employed, and for the sharp reduction in dividend allowance, we note that the Insurance Premium Tax which was introduced a few years ago at 6% will have doubled by June when the rate rises to 12%. On the other hand, fuel duty has remained unchanged for 7 years now.
In future years, budgets are moving to the Autumn. In this year of transition we are having two, the second in roughly 8 months’ time.
The Developing Investment Outlook
In many ways, there have been few fundamental changes to the broad investment outlook since our New Year newsletter. Interest rates in the US predictably increased by a small margin earlier this month while one (out of 9) members of the UK Monetary Policy Committee voted for an increase in the UK base rate this month. Our view remains that any UK base rate increase looks to be quite a number of months away unless there is a further precipitate fall in the value of sterling.
Interest rates set by central banks are a key indicator for investment markets. Continuing low rates in the US, the UK, Europe and Japan continue to demonstrate the need for economic stimulus although growth and inflation are clearly on an upward trend in the US and the UK, and for that matter in the Eurozone. All of this points to the continuation of a sound backdrop for equity investment. As a consequence, stock markets are at relatively high levels (in the US and the UK in particular) but we continue to believe that sound value for the medium term investor remains available in many markets.
Long term fixed interest investors have enjoyed the benefit of falling interest rates for some decades now: this trend does not look set to continue further and indeed we have seen corrections in the values of long duration fixed interest investments in particular. We believe that, where income is not a key requirement, fixed interest should remain relatively underweight in portfolios.
A few words on the Brexit process are perhaps in order. The now not so united United Kingdom is on the point of invoking Article 50 imminently. That clause provides a two year timescale for negotiations which, by EU standards, looks almost hopelessly optimistic, but perhaps the bones of an agreement will be achieved in that time. This matters because the negotiations can only be extended beyond the 2 year timescale if all the 27 remaining members agree to it. If they do not, EU treaties simply cease to apply to the UK and this would have significant implications for the economy, including unemployment. However, while this would prove negative for the governments’ finances, and therefore for tax payers, many UK companies will continue to benefit from their very substantial global earnings.
Perhaps the key point to remember is that the 27 remaining EU countries each have a veto over the conditions of exit including trade, tariffs, movement of people and barriers to entry. The European parliament also has to ratify the outcome while it is hard to escape the thought that internal politics among the 27 remaining states, where several election fall due over the two year timescale, could have a significant impact on the outcome.
We conclude that the value of the pound in foreign exchange markets could prove volatile (on both the upside should a good Brexit outcome emerge and on the downside): our principal view is that investors will benefit from sensibly and globally diversified portfolios focused on their individual requirements.