The return to economic growth in the UK, which commenced in 2013, continued last year and now appears to be increasingly well established. The number of people in work in the UK is at a record high and wages are growing in real terms. Despite sharp increases in the personal allowance so that many more people on low incomes are paying little or no income tax, the total tax received is rising. This in turn is helping the government to reduce the annual budget deficit. Furthermore, falling fuel prices in particular provide a direct benefit to consumers.
While there are many positives, the government deficit remains high and with the current minimal level of inflation unlikely to endure for any great length of time, our view is that the UK economy is, along with many others, far from fully healed, hence the overall cautious nature of the Budget.
You will find a market commentary section at the end of this Newsletter and in the meantime I would like to take this opportunity to draw your attention to the following budget outcomes:
Individual Savings Accounts
The annual allowance rises from £15,000 to £15,240 in the new tax year. Also, from an as yet unspecified date this autumn, ISA savers facing an unexpected cash need will be able to withdraw funds invested in a given tax year and then replace them later in that same tax year, a feature that has not previously been available.
More significantly, surviving spouses and civil partners will be entitled to an extra one off ISA allowance enabling them to inherit the ISA proceeds from their deceased partner, a step that will aid tax simplicity for the survivor.
A new Help to Buy ISA is being created to assist first time buyers to save a lump sum for the purpose of a house deposit. While the benefit it relatively limited in scale, it will clearly be of help, particularly to those looking to buy property in less expensive areas of the country.
Finally on ISAs, the Junior ISA allowance rises from £3,840 to £4,080. Where funds are available to build up Junior ISAs annually, there is now a worthwhile savings arrangement for the very young.
VAT at 20%
Once again the VAT rate remains unchanged.
The personal allowance for those born after 6th April 1948 rises from £10,000 to £10,600. Bearing in mind that the allowance was just £6,475 in 2010/11, a significant number of low and average income earners now benefit.
The basic rate tax band falls from £31,865 to £31,785 in 2015/16, once again to compensate for the increase in the personal allowance. The higher tax rate remains unchanged at 40%, rising to 45% for those with incomes in excess of £150,000.
A new personal savings income tax allowance will be created from April 2016. This will exempt the first £1,000 of savings income from income tax for basic rate taxpayers and the first £500 for higher rate taxpayers. This may impact on the need for Cash ISAs for some depositors: food for thought in a year’s time!
The first £325,000 of one’s estate is tax free, the annual allowance continues at £3,000 as does the small gifts arrangement at £250. In effect, nothing changes.
The Chancellor did however announce the intention of reviewing the use of Deeds of Variation, commencing with a consultation scheduled for this Autumn. At present, such variations enable recipients of legacies to pass them onto others, in the process often skipping a generation and potentially saving future IHT in the process. How the review will play out remains to be seen.
Capital Gains Tax
The annual exemption rises from £11,000 to £11,100 in 2015/16.
The maximum individual investment in Premium Bonds rises to £50,000 from the 1st June 2016.
In the meantime, the new Pensioner Bond, launched in January, offering returns of 2.8% on a one year bond and 4% on a three year bond, remains open for a further period.
A very considerable number of pension changes have now come into effect, many of which provide pension savers with welcome options and of course added responsibility to use those options wisely. On the other side of the coin, those with larger pension pots, where value is approaching or exceeds £1 million, and those with substantial income from final salary schemes, need to consider most carefully how to deal with the reducing Lifetime Allowance arrangement.
Given the opportunities available through effective pension planning on the one hand, and the complexities on the other, which very much vary from one individual to another, our opinion is that case by case review is essential and that to help with this, taking qualified advice is a prerequisite.
Measures taken include reducing tax on North Sea oil operators to provide some relief given falling oil prices, smoothing the tax affairs of farmers over a number of years to lessen the impact of commodity price volatility and of course increasing the bank levy. While the latter has populist appeal, weakening a banking system which is still emerging from past problems, it may not be a good way to encourage business lending.
The observations on taxation in this newsletter clearly do not represent a comprehensive guide but hopefully they will provide some food for thought, particularly perhaps in the area of pension planning.
The financial crash towards the end of the last decade in one sense seems remote simply as a consequence of the passage of time. However, the impact of the crash lingers across the globe and is principally reflected in continuing low interest rates, essentially, to ease the way towards economic recovery. In effect, the global crash has been followed by the creation of a flood of money pumped into economies by central banks, simply in order to avoid the crash developing into a severe depression.
This principal aim has been achieved and, remarkably, it has to date been achieved without triggering a corresponding flood of inflationary pressure in leading economies. In fact, and aided over most of the last year by falling oil and energy prices, inflation is at low or even negative levels in different parts of the developed world.
Matters are however moving on, recovery is taking hold in the USA in particular, and in the UK, while Japan and the Eurozone, who came later to the money creation policy, are lagging behind. The Eurozone is of course also troubled by the effective insolvency of Greece, resolution of which, however achieved, is sure to be painful for some. What is abundantly clear is that levels of indebtedness across both the developed and the developing world remain unsustainably high and in order to keep economic recovery on track where it is taking hold, and to encourage further recovery elsewhere, interest rates need, in the absence of a return to significant inflation, to remain at extremely low levels. Therefore even though rates in the USA may pick up very slightly this year, we believe it to be increasingly clear that rates will remain lower for longer until such time as growth is firmly entrenched on a much wider scale than we have seen so far.
We conclude that this broad background favours equity investors as it is an environment in which companies will find opportunities to use cheap finance to profitably develop their businesses. While equities can on occasion be volatile, we believe that seekers of growing income and growing capital need to focus on this area as far as sensibly possible, subject to individual risk tolerance, to achieve the best outcome. Equity valuations do already reflect this in part at least but in our opinion reasonable opportunities remain.
Our view is that fixed interest investment, which does not offer any significant yield premium (and in some cases equity funds yield more), will simply tick along producing a level of interest payments (of course tax free in ISAs and pensions) but without really being able to offer any long term protection of capital either in real or inflation adjusted terms. Indeed, when at some point in the future a widespread trend to higher interest rates does begin to develop then fixed interest values will be at risk.
All of these thoughts lead us to conclude that the policy that we have held for some years now, ie overweighting equities within portfolios at the expense of fixed interest and in particular of cash, represents the most appropriate approach for all but the most timid investor.
2015/2016 ISA INVESTMENT
As mentioned earlier in this Newsletter, you are now able to invest a total of £15,240 into an ISA investment for the 2015/2016 tax year. As you are aware, an ISA is an extremely tax efficient savings vehicle and by investing early in the new tax year you will benefit from tax free growth for the whole year.