Some further thoughts on the Budget

As I am sure you can imagine, since the Budget on 30th October, I have been poring over the provisions, trying to work out what general guidance I can give my clients before these changes come into effect.

I suppose that is the first thing to say; aside from the Capital Gains Tax changes, which came into effect on the day of the Budget, the most significant changes, as far as most of my clients are concerned, do not come into play until April 2027. This means there is absolutely no hurry to make dramatic changes to one’s financial planning just yet; we have plenty of time to fully digest what is coming and make planning adjustments accordingly. In addition, we are in a period of consultation, and it is possible that the final legislation will differ from what has been proposed.

For the majority of my clients, the most impactful announcement in the Budget was that most defined contribution pensions will now form part of one’s estate on death. The usual 100% exemption between spouses will still apply, but on the second death, the value of any remaining fund will be added to the deceased’s estate to determine how much inheritance tax (IHT) the beneficiaries will need to pay.

The addition of pension funds to estates could dramatically increase the number of estates that will fall into the IHT net and significantly increase the tax bills of those that already do.

The following is part of a submission by investment platform and pension provider A J Bell to the Chancellor on this subject:

The investment platform claims there are flaws in the proposals of Reeves and the Treasury Department to subject unspent pensions to IHT.

The firm said there are “simpler and fairer” alternatives.

AJ Bell suggested using a system similar to the current treatment of ISAs on death or relying on income tax at the beneficiary’s marginal rate.

AJ Bell CEO Michael Summersgill said: “The proposals set out by the government create huge complexity and will delay families from accessing money in a timely fashion following a bereavement. 

“In some cases, the proposals will be unworkable and will create financial gridlock in the probate process, especially where assets held in the pension can’t be sold quickly.

“Add to this the fact that the proposals could result in millions of people paying a minimum tax rate of 64 per cent on inherited pensions, and there is a real risk that confidence in pensions will be seriously eroded.”

There will many such representations I am sure and who knows whether they will have any affect.

But what if the proposals are as drafted? What actions might Clearwater recommend in the future?

The following are just my initial thoughts/observations and do not constitute specific advice:

1. If a client has fragmented pension provision (a number of different pots with different providers), it might become sensible to consolidate these arrangements into a single scheme. If it is going to be the responsibility of pension providers to pay any tax due, I can see this causing enormous probate delays. The simpler the process is for one’s beneficiaries, the better.

   
   It may well be worth incurring some additional fees (within reason) to achieve this objective.

1. On death under age 75, although any remaining pension fund will be subject to IHT, it will still escape income tax in the hands of beneficiaries, subject to certain limits and the death benefit options available.

2. Gifts out of income.
   
   If minimising IHT is a primary concern, then it might become sensible to create an income stream from pensions over and above the income required to meet the cost of one’s lifestyle and then simply give away this surplus.
   
   Regular gifts that meet certain criteria are immediately exempt from IHT, which may prove useful for passing funds on to beneficiaries over time.
   
   The effectiveness of this strategy will need to be balanced against the income tax levied on the pension withdrawals as they are taken.

3. These regular gifts could be used to fund a Whole Life Insurance Policy, the sum assured of which has been calculated to meet the IHT liability on the second death. Of course, this strategy will only work if premiums are maintained until the very end.

4. Taking one’s 25% tax-free lump sum before death will be important. This is because the lump sum in the hands of beneficiaries would lose its tax-free status, potentially suffering IHT at 40% AND income tax at the beneficiaries’ marginal rates.

5. Pension funds benefit from certain tax advantages that would be lost if one simply took out the 25% tax-free lump sum and placed it in say, a bank account. For this reason, the advice is likely to remain to keep the lump sum within the pension until one needs to spend it or it becomes prudent to give it away.  It might be sensible, however, to withdraw the lump sum gradually to maximise ISA contributions. ISAs enjoy similar tax advantages to pensions, but beneficiaries would not suffer income tax on death.

6. Tax-free lump sums could be invested in a General Investment Account (GIA), where any growth would potentially be subject to Capital Gains Tax (CGT). Beneficiaries would still suffer IHT on death, but CGT rates on withdrawals are currently taxed at a lower rate than income.

7. The GIAs mentioned above could be placed into trust to ensure that funds reach the right beneficiaries at the right time. Trusts bring complexity and cost into the equation, but they do have a valuable place in certain circumstances.  

8. It might also be worth looking at the respective merits of Onshore and Offshore Bonds, which can also be held in trust.

9. If one makes a gift of any size, even into certain types of trust, it becomes a Potentially Exempt Transfer (PET). It is potentially exempt because if one dies within seven years, the gift falls back into the estate for IHT. Gifts above the nil-rate threshold (currently £325,000) may benefit from taper relief. Any large gifts should be planned with the above in mind.

10. Annuities may become more attractive. If any remaining fund cannot be left behind tax-free, then the certainty of a guaranteed income in the form of an annuity might become more appealing to some than it is now.    

The above is far from an exhaustive list, but I hope it reassures you that there will be things we can do to mitigate at least partially some of the budget's harshest provisions. 

I will write again on this subject once the results of the consultation process are known; this is likely to be in the first quarter of 2025.

If you have any questions or concerns in the meantime, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

The US Election Result

Well. At least that’s over for another four years!

One unexpected bonus to the 2024 US Election is that we seem to have a clear outcome, quickly – one worry was that we might not have a verdict for days or weeks, like 2020 or 2000.

The American people have spoken. You might think that the answer they’ve given is controversial (although the other answer wasn’t exactly uncontroversial); but the results are the results.

Now look, Donald Trump was always going to claim victory before the final tally, but after winning Pennsylvania, Georgia and North Carolina, the weight of evidence is with him.

If we’ve learnt anything from 2016 it’s that the medium-term political direction is pointless to speculate about; President Trump’s first government wasn’t noted for the stability of its policy, its top team or its messaging.

His victory speech reflected that. We saw lots of talk about a brighter, greater future, coupled with long rambles about the famous people involved with his campaign – podcaster Joe Rogan, golfer Bryson DeChambeau, and of course Elon Musk.

Implications:

In the short-term (overnight), markets are copying the playbook from 2016 – traders are buying US Dollars, US Companies, both Large and small. And there’s Bitcoin – which wasn’t quite as prominent in 2016 but has now been embraced by the new President (sort of …). Source: Bloomberg

The thing is we aren’t day-traders, looking to make a quick buck. These overnight moves could all change by the end of the day; and couldn’t have been reasonably predicted beforehand. So, we aren’t taking any drastic action in portfolios. We don’t think there’s any to take.

History suggests that the great companies of the world, in which are all invested, will prosper regardless of whether it’s Republicans or Democrats at the helm.

The world hasn’t fundamentally changed compared to yesterday, and your investments with us will continue to be managed on a long-term basis, no matter who is in the White House.

There might well be changes in US growth, or debt, or trading relationships, or military involvement. Elon Musk might well be even more prominent in the future than we’d like him to be (for sanity’s sake).

But these things take time.

I hope you have found this interesting but if you have any questions about this or any other finance related matter, please do not hesitate to contact me.

Graham Ponting CFP Chartered MCSI

Managing Partner

The Budget – Brief Update

This is a brief update following my note on the Budget last week.

Firstly, I need to correct a couple of errors in my earlier e-mail. I was in too much of a hurry to get something out to you. The Capital Gains Tax rate changes actually came into immediate effect. It is the staggered change to Business Asset Disposal Relief that begins at the start of the new Tax Year. I also said the CGT changes were expected to bring in £25 billion, when it should, of course, have read £2.5 billion.    

However, the main reason for this update is to counsel caution regarding the changes to Inheritance Tax (IHT) and, in particular, the inclusion of private pensions in one’s estate for the purposes of calculating any IHT due.

If the rules change as proposed, the following situation could arise:

Assuming all IHT reliefs and exemptions have been covered by property and other assets, then the full value of an inherited pension will be subject to IHT at 40%. This means that a £100k inherited fund will net down to just £60k for one’s beneficiaries…..BUT it’s worse than that. When one’s beneficiaries want/need to access their net £60k inheritance, they will pay income tax at their marginal rate on any withdrawals. In the example above, this could mean up to another 45% tax hit if the beneficiaries wanted to take the money as a lump sum. The end result would be a net sum of just £33k from a £100k fund with £67k going to HMRC, an effective rate of 67%!

I have just been listening to an interview with Baroness Altman (an ex-pensions minister). She has expressed real concern that this could undermine confidence in the entire private pension system. People have made carefully considered decisions to build their pensions to provide for their old age, with anything left over being passed to their children. These people were not exploiting a loophole as Rachel Reeves would like us to believe; they were just being prudent and entirely within the rules.

I am cautioning against any knee-jerk reactions because the new changes do not come into effect until April 2027 and because there will be a consultation period in the meantime. I wonder if we might see a slight watering down of these proposals, maybe IHT being deducted but then no further income tax being due? This would give the Treasury funds when people die but would not unduly penalise people who have saved diligently for their retirement and their children’s future.

Many of you will be affected by this proposed change, but luckily, we have plenty of time to review your strategy with you and recommend any changes where appropriate.  

As more details become available, I will write again.  

I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

The Budget – Initial Thoughts

The waiting and the speculation are over, and we now know how the government intends to meet its public spending commitments.

The devil is always in the details when it comes to Budgets, and it may be some days before all the implications are known. However, you can be assured that a more detailed communication on how the announced changes will likely impact you and all my clients will follow over the next few days.

Having just listened to the speech, the headlines for financial planning clients appear to be as follows:

Capital Gains Tax (CGT)

CGT will rise from 20% to 24% at the higher tax rate. 

The lower CGT rate will rise from 10% to 18%. 

The new rules will come into effect on April 5, 2025, and are expected to raise £25 billion.

Under the current regime, higher-rate taxpayers pay 20% on gains from other assets and 24% on gains from selling a second property. The news, therefore, marks an increase of 4% for those making gains on share sales. 

Under the new rules, Reeves has stated that the tax-free allowance will remain the same. 

The annual allowance currently stands at £3,000 for individuals and £1,500 for Trusts, after Conservative Chancellor Jeremy Hunt used his 2022 Autumn Statement to cut the CGT threshold from £12,300 and £6150 respectively.

Gains on shares held in Pensions and ISAs remain exempt from CGT. 

As the new rules do not come into effect until April 2025, an opportunity exists to sell assets before then and pay tax at the current rates, but this needs to be considered very carefully and on an individual basis. The tax increase is relatively modest, and there is always the danger of allowing the ‘tax tail to wag the dog’.

Inheritance Tax

For our clients, the most significant change announced in the Budget is likely to be the news that, with effect from April 2027, Pensions passed on will be subject to IHT.

Pensions are currently exempt from IHT and not classed as part of your estate when you die.

‘We will close the loophole created by the previous government, made even bigger when the lifetime allowance was abolished, by bringing inherited pensions into inheritance tax from April 2027,’ Reeves said. 

The implications of this change are far-reaching, and I expect to write further when more details emerge.

I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

The upcoming Budget on 30th October

There has been much speculation in the press and social media about what taxes Rachel Reeves might raise in her first Budget, due at the end of next month. Some of this speculation has left many of my clients wondering whether there is anything they could be doing to protect themselves in advance.

The problem is that everything we may have heard or read is just speculation, and making major financial decisions based on what might happen is seldom wise.

One of the things clients have been particularly worried about is the possible threat to the 25% pension tax-free lump sum.  As a reminder, Labour put out the following statement on the 25% tax-free lump sum after Keir Starmer slipped up in a radio interview just prior to the election:

‘The ability to withdraw 25% of your pension as a tax-free lump sum is a permanent feature of the tax system, and Labour is not planning to change this.’

On this basis, and because they would need to offer protection to those with large lump sums already accrued, I don’t think this is a likely target. Impacting those of us with substantial lump sums already in our pensions would amount to ‘retrospective legislation,’ which would set a dangerous precedent. I can see a situation where future tax-free cash accrual is restricted, but that wouldn’t raise much tax now.

One of the major benefits of pension investments is that they currently sit outside of one's estate for Inheritance Tax (IHT) purposes; this means that your pension assets are potentially worth 40% more to your beneficiaries than any other assets you may hold. If you were tempted to take your lump sum and place it in a non-pension investment, you would immediately bring this money into your estate, and it would be taxed at 40% on your death. If you gift the money, this will eat into your £325k nil rate band, and the 7-year IHT clock will start ticking until that can be reinstated. Rest assured, if the IHT status of pension funds changes, we will contact all our clients after the budget to discuss the new best strategy for managing pension assets.

Regarding Capital Gains Tax (CGT), the Office for Budget Responsibility and HMRC have said that any increase will likely reduce the revenue raised. This doesn’t mean they won’t increase it, if just for political and ideological reasons. Investors could realise all gains now and force a 20% CGT tax liability this year, effectively rebasing investments to protect them from possibly higher rates down the line. However, this is not something I can recommend because, as I have said, it would be advice based on speculation.

As far as IHT is concerned, there isn’t much we can do about this (unless we die before the budget), so we will just have to roll with the punches and hope that a future Chancellor reverses any overly punitive changes.

I cannot guarantee that Reeves won’t do any or all the things you have heard or read about, but some of the seemingly obvious changes would be very difficult to implement in practice.  

In very short summary, the best we can do is to wait and see what the Budget holds before deciding whether any change in strategy is required.

I am about to go on holiday for a couple of weeks starting on 7th October, but I will be home in time for this much-anticipated Budget.

I have access to many tax experts, and once the dust has settled, I will be in touch again to explain what actions might be appropriate.

I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

What are Rachel Reeves Options for Raising £22bn in Taxes?

Despite the title's inference, I intend to refrain from entering into detailed speculation about what Rachel Reves might or might not do in her first budget on 30 October. Instead, I simply want to look at her options if we take the Labour Party’s election manifesto pledges on tax at face value.  

How much room for manoeuvre does Rachel Reeves have if these pledges are honoured?

Here’s how UK tax receipts looked in 2023/24 – about a trillion pounds in total, according to the latest ONS data:

Reeves has said she will not increase the big four — Income Tax, National Insurance VAT, and Corporation Tax — so what options are left?

It will be hard to find £20bn there – particularly when it’s dominated by Council Tax and Fuel Duty, which are politically challenging to increase.

I think a reform of Council Tax in some form has been well reported, but aside from that, increases in Capital Gains Tax (CGT) and Inheritance Tax (IHT), the most likely targets for a left-leaning administration, will need to be substantial if a meaningful amount of money for public services is to be raised. But, how would a significant increase in CGT fit in with Labour’s stated aim of driving growth? Penalising entrepreneurship does not seem a sensible way to go.

Labour could introduce brand new taxes of course, a Wealth Tax for example, but I think most experts are of the view this would be very difficult to implement and administer in such a short period of time.

Looking at the first chart, it’s obvious that Income Tax, NI, and VAT are the most significant contributors to the public coffers, and it seems to me that, sooner or later, someone will have to make changes there. I remember when I first started work, on a very modest salary, I might add, that the basic rate of Income Tax was 33%!

We won’t have long to wait to see what the new tax landscape will look like; 30th October will be upon us before we know it.  

I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

Warren Buffet has sold 50% of Berkshire Hathaway’s stake in Apple – should we be worried?

There were many stories in the market chaos of last week.

One of the big ones was what the Sage of Omaha, Warren Buffet was up to…

Warren Buffett’s Berkshire Hathaway investment fund always releases its quarterly results on a Saturday and when it did so two weekends ago, it came as something of a shock. The reason for the shock was that Berkshire’s report showed Buffett cut his stake in Apple by HALF (selling about ~$75 billion worth of shares).

Not terribly helpful for already nervous markets. It potentially matters to us because Apple is the largest single holding in most of ebi’s (our preferred investment partner) portfolios. Portfolio Vantage Earth 60 has exposure to Apple of approximately 1.4%, for example.

But I want to talk about the unintended consequences.

BECAUSE Buffett has sold Apple shares, all of the major stock indices (S&P 500, MSCI USA, Russell 1000, etc etc) will have to INCREASE their weight to Apple. They’ll be buying about an extra $40bn* worth come September.

So, if you own any of the normal US trackers, you’ll be increasing your Apple holding in about a month.

You see, the rules governing stock indices** say that when big long-term investors hold a lot of shares, these shouldn’t be considered as publicly available to buy.

And the weights in indices are defined by what’s publicly available – what the likes of you and I can buy.

While Warren (the literal definition of a big, long-term investor) was holding his Apple shares, he effectively had removed them from play—only 96% of Apple was publicly available.

With most companies, that sort of rounding doesn’t matter.

But Apple is worth $3.3 trillion. So adding back in 4% is actually the same as adding a whole Goldman Sachs, or Disney, or Uber. It just goes to show how absolutely huge Apple really is!

Although Warren Buffet's sale of $75 billion of Apple is significant, the company's market cap of $3.3 trillion does put it into perspective.

The following chart looks at Apple’s share price since 14th August last year. The impact of last week’s market turmoil can plainly be seen, as can the recovery when others will have seen the fall in price as a buying signal. It’s also worth noting that the share price is still up over 24% since this time last year.

In summary, when looked at in the proper context, the answer to the question posed in the title is no, we shouldn’t be worried.

*200 million shares, as per Piper Sandler research

**20 pages of rules for you here 😉 - https://www.spglobal.com/spdji/en/documents/index-policies/methodology-sp-float-adjustment.pdf

I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

Has the Fed got it wrong……again?

As most of you will know, the Bank of England (BoE) cut interest rates last week from 5.25% to 5.0%, a small but significant change. This was the first rate cut since the 2020 pandemic, when rates fell to a historic low of just 0.1% 

Since the end of 2021, interest rates around the globe have increased sharply in response to a significant spike in inflation, largely caused by rising energy prices and the unwinding of restrictions following COVID. As the rate of inflation eventually began to fall, central banks were expected to be able to take the brakes off, and interest rates would start coming down. At the beginning of the year, the first rate reductions were priced into global stock markets as expected in the Spring; however, stickier-than-anticipated inflation in the US has meant that we have all had to wait longer than we had hoped.

Deciding when to reduce interest rates is a difficult balance for central banks to achieve. Cut too soon, and inflation simply rears its head again as more money floods into the economy; cut too late, and unemployment can rise sharply, driving the economy into recession. Cooling inflation while keeping unemployment at historically low levels has been the ideal scenario, or what economists like to call a “soft landing.” 

The BoE cut rates last week, but the US Federal Reserve (the US central bank) did not. Following the Fed’s decision not to cut rates US economic indicators have moved sharply in the wrong direction, suggesting that the US could be headed for a recession, something the Fed will have desperately been trying to avoid.

The result of the worsening numbers in the US has been a global stock sell-off, and everyone is now asking, ‘Should the Fed have cut rates this month after all?’    

The following is taken from Portfolio Adviser magazine on Friday of last week.

‘Hiring in the US slowed sharply last month and the unemployment rate rose, stoking fears about the state of the world's largest economy.

Employers added 114,000 jobs in July, official figures showed, fewer than expected and far lower than in June.

Global stock markets are already on edge after earlier US data showed weaker manufacturing activity, and major companies such as Intel and Amazon published a string of disappointing financials.

The employment figures suggest the long-running jobs boom in the US might be coming to an end, as the highest borrowing costs in two decades weigh on the economy.

The three major share indexes in the US, which were hitting new records just a few weeks ago, have been on a downward slide in recent days. It has sparked fears which have also spread to international markets.

In Asia and Europe, most major indexes were down on Friday, with Japan's Nikkei 225 index tumbling, to close nearly 6% lower.

Neil Birrell, chief investment officer at Premier Miton Investors, said the US jobs data, which showed the unemployment rate rising to 4.3% from 4.1% in June, "couldn’t have been released at a more sensitive time".

"Markets are wobbling, concerns over Fed policy abound and corporate earnings are in the spotlight," he said. "The weak data will cause more angst, and concerns over the health of the economy will increase."

The Federal Reserve, unlike other central banks including the Bank of England, has held off cutting interest rates in recent months, pointing to relatively strong growth, as a healthy job market helps prop up consumer spending.

But the head of the bank, Jerome Powell, said this week that the labour market had cooled significantly over the last 12 months. Friday's report showed the unemployment rate rising to 4.3%, compared with 3.5% a year ago.

Mr Powell signalled it was likely to cut rates at its next meeting in September, warning he did not want to see further weakening in the labour market. 

But Seema Shah, chief global strategist at Principal Asset Management, said the latest figures raised questions about whether the Fed had waited too long. "Job gains have dropped below the 150,000 threshold that would be considered consistent with a solid economy," she said.

"A September rate cut is in the bag and the Fed will be hoping that they haven’t, once again, been too slow to act."

The most important thing to remember is that these market falls will be temporary, normal service will be resumed, and new highs will be tested.

I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

ebi Awards

As you will know, the majority of the portfolios our clients access through their pensions and investments are managed by ebi (ebi is an acronym that stands for ‘evidence based investments.’) and I am delighted to report that they have recently been recognised with a number of awards from industry bodies Professional Adviser and Defaqto (see below).

Professional Adviser

ebi won Best Model Portfolio Service at the Professional Adviser Awards 2024.  

Defaqto

Two of the Vantage Earth Managed Portfolio Service (MPS) Portfolios were recognised by Defaqto, an independent financial product and market intelligence firm, at the inaugural MPS Comparator Award Winners event.   

• MPS Comparator Growth         - Highly Commended - ebi  Vantage Earth 80

• MPS Comparator Adventurous - Highly Commended - ebi Vantage Earth 90

The Defaqto MPS Comparator Awards are given to individual MPS portfolios that exhibit market-leading risk-adjusted performance over five years to March 31st, 2024. Leading model portfolios within each comparator peer group achieve an award, either as the absolute winner or as one of the next four highly commended models.

I am obviously delighted that our investment partners have been recognised in this way, as it demonstrates to our clients that their investments are in good hands.

I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

Labour and the Pension 25% Tax-Free lump sum

Following Labour’s historic win in last night’s General Election, many of my clients will be pondering what changes might lie ahead for their taxes. Rachel Reeves, the incoming Chancellor, has ruled out increasing taxes on ‘working people’, but who does that actually exclude? – even King Charles works!

BUT, many other taxes could be increased to enable Labour to meet its spending commitments. I will resist the temptation to list the possibilities here because it would just be speculation. However, a radio interview Keir Starmer gave last week provided some welcome clarity on one possible option. In answer to a question, he appeared to suggest that the 25% tax-free lump sum that individuals can take from their personal pensions was under threat.

Amid confusion over Starmer's statement, the Labour leader’s office issued a statement clarifying the party’s position. The statement said;

‘The ability to withdraw 25% of your pension as a tax-free lump sum is a permanent feature of the tax system, and Labour is not planning to change this.’

The possible removal of the 25% tax-free lump sum has been a topic of conversation prior to every Budget since I came into financial services some 44 years ago, so this clarity at a time of great political change is extremely helpful for those planning their retirement.

I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner