Newsletter – October 2017

From 2016, HM Revenue & Customs (HMRC) is getting an unprecedented amount of information about people’s overseas accounts, structures, trusts, and investments from more than 100 jurisdictions worldwide, thanks to agreements to increase global tax transparency.

This gives HMRC unprecedented levels of information to check that, as in most cases, the right tax has been paid.

If you have already declared all of your past and present income or gains to HMRC, including from overseas, you do not need to worry. But if you are in any doubt, HMRC recommends that you read the following HMRC_FactSheet to help you decide now what to do next.

New statistics from HM Revenue & Customs (HMRC) show that cash withdrawals from individual savings accounts (ISAs) are probably more than matching fresh contributions. 

In the world of ISAs, cash ISAs have long attracted more contributions than their stocks and shares counterpart. However, the pattern has started to change, as the graph below shows.

In the last tax year, contributions to cash ISAs fell by a third according to the latest HMRC data. They still amounted to over £39 billion, but the total held in cash ISAs increased by just £1.26 billion between April 2016 and April 2017. Once a year’s interest is allowed for, even at current miniscule rates, that suggests more money was withdrawn from existing ISAs than flowed in through new contributions.

There are some good reasons why cash ISAs are going out of favour:

• ISA interest rates have been low for some years. The top rates for instant access are just over 1.0%, while the best five year fixed term rate is 2.15%. Neither compares well with inflation, currently at 2.9% on the CPI yardstick and 3.9%, as measured by the RPI.
• The introduction of the personal savings allowance (PSA) in 2016/17 has meant that many people have no tax to pay on the interest they earn from non-ISA accounts. If you are a basic rate taxpayer, £1,000 of interest is tax free, while if you pay tax at 40%, £500 of interest suffers no tax. If you are an additional rate taxpayer, you do not receive a PSA.
• For wealthier investors, the reforms to dividend taxation – and the likely reduction in the dividend allowance from £5,000 to £2,000 next April – has made the tax shelter offered for dividends by stocks and shares ISAs relatively more attractive.

If you hold money in cash ISAs, it may make sense to review whether you should continue to do so. You could find yourself earning more interest outside an ISA or gaining more tax benefits from a stocks and shares ISA. For a discussion on your options, please talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The Bank of England has signalled that interest rates may rise soon.       

Early in September, the money markets were expecting the first Bank of England interest rate rise to occur in late 2018, at the earliest. A little more than a week later, the markets’ view was that there was a near 50% probability of a 0.25% base rate increase by November, with a rate rise a virtual certainty by the following February.

There are two main reasons for the markets’ U-turn:

• The August inflation figures (2.9% for the CPI, 3.9% for the RPI) were higher than expected. These prompted the Bank to say that CPI inflation “is now expected to rise to above 3% in October”. At that level, Mark Carney, the Bank’s Governor, will have to write a letter to the Chancellor explaining why inflation is more than 1% above target.
• At its September meeting, the Bank of England’s rate-setting Monetary Policy Committee (MPC) gave a clear warning that developments were pointing to a tightening of monetary policy “by a somewhat greater extent over the forecast period than current market expectations”.

The likelihood of an imminent rate rise does not mean that further rate rises will follow at every meeting of the MPC, taking rates back up to historically ‘normal’ levels. The Bank has regularly said this will not be the case and in September it stated that “any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent”.

Outside the money markets, other markets immediately reacted to the new interest rate picture in a predictable way: the pound rose on the foreign exchange markets, while the prices of government bonds (gilts) and UK shares fell. 

A rise in UK rates looks set to be accompanied by further Interest rate increases in the United States and the announcement of a tapering of quantitative easing in the eurozone (although euro interest rates are unlikely to move).

The prospect of a new interest rate environment makes it an appropriate time to review your investments and consider what changes, if any, need to be made. The sooner you start on this process, the better: as September showed, market movements can come suddenly. 

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The Chancellor has announced the date of his first Autumn Budget as Wednesday 22 November. 

The second Budget of 2017 will be both Mr Hammond’s first Autumn Budget and the first Budget after the general election.

Traditionally, the first Budget of a new parliament is the chance for a Chancellor to administer the “medicine” of tax increases. Doing so at this stage gives the electorate the maximum time to forget the measures before returning to the polls. However, on this occasion the Chancellor will probably be more constrained. Mr Hammond does not have carte blanche, even though in theory the government has a majority for Budget legislation, thanks to support from the DUP. His own backbenchers can block the best made plans, as the Spring Budget climb down on class 4 national insurance contributions (NICs) showed. So, what can we expect on 22 November?

Less space for manoeuvre

The answer is less clear than usual. For many years the contents of the Spring Budget have been widely trailed in the preceding Autumn Statement. In 2017 there has been no such statement ahead of the Autumn Budget – the first of the new Spring Statements will not arrive until 2018.

The latest government finance figures suggest that the Chancellor will be borrowing less than was projected in March, giving him some wriggle room. However, there are many demands on any spare cash he can find, from replacing the lost extra class 4 NICs income to addressing calls for higher public sector pay and reduced tuition fees.

In the summer, David Gauke, the secretary of state for work and pensions and former Treasury minister, told a conference that he did not foresee any “fundamental” changes to pensions tax relief.

Nevertheless, there remains a possibility that the Chancellor could make some further tweaks to the rules on pension relief, such as another reduction in the annual allowance. If you are considering a pension contribution in this tax year, making it before 22 November could be a wise precaution, but do check with us first on how you are affected by the existing rules.  

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

A consultation paper issued in August could mean changes to venture capital schemes.

At the start of the holiday season the Treasury issued an open consultation paper entitled “Financing growth in innovative firms”. Its focus was on what has become known as ‘patient capital’, which the Treasury defined as “long-term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses”.

The paper considered existing investment incentives, such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs), which have been around for many years. Under the heading of “Relative costs of current interventions” the Treasury noted that “Industry estimates suggest that the majority of EIS funds had a capital preservation objective in tax year 2015/16, and around a quarter of VCTs have investment objectives characteristic of lower risk capital preservation”.

The paper then went on to ask a leading question: “Are there areas where the cost effectiveness of current tax reliefs could be improved, for example reducing lower risk ‘capital preservation’ investments in the venture capital schemes?”

A little over a month after the paper was published, a curious thing happened. One VCT, withdrew a new share issue which it had launched just six days earlier. The decision to pull the issue “…was made in light of ongoing discussions in respect of investment in asset-based businesses following publication …of the consultation document”.

At the time of writing none of the other open VCT issues had been withdrawn, but if you are considering VCT (or EIS) investment now or later this year, please contact us for an update on the situation. VCT are classed as high risk investment and only suitable for a small number of investors.  

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Fraudsters are posing as officials from the Financial Conduct Authority (FCA) and are cold calling people stating that they are eligible for a Payment Protection Insurance (PPI) claim. 

There may be an increase in these types of frauds following the FCA announcement and new campaign urging people to make a decision about making a PPI complaint before the deadline on 29th August 2019. PPI was usually sold with products that you need to make repayments on, like a loan, credit card or mortgage.

As well as cold calls, scammers are using text messages to convince victims that their PPI claim is legitimate when in fact this may not be the case.

The fraudsters tell you how much PPI you can claim back but emphasise that an advance fee payment is required in order to make the claim successful.  You should never take up offers of PPI claims on the spot from cold calls and text messages.

If you use a third party organisation to assist with your claim, you can check to see if they are legitimate by carrying out independent research on the company, as well as checking the FCA’s website (www.fca.org.uk) for the company’s details or by calling them on 0800 101 88 00 (Monday to Sunday, 8am to 10pm).

If you have been affected by this, or any other scam, report it to Action Fraud by calling 0300 123 2040, or by using the online reporting tool at www.actionfraud.police.uk

The third quarter of 2017 has ended and despite the heavy political news, investment returns were generally positive.

Think about the third quarter of this year – July to September – and you might think markets had suffered a hard three months. In the UK there was the backwash from the general election, the slowly-moving Brexit talks and inflation nudging 3%.

Across the Atlantic Donald Trump was failing to pass legislation while twittering about an attack on North Korea. Europe had its own surprise at the end of the quarter, with Angela Merkel winning a less than decisive election that will probably end in a three-way coalition government.

Just for good measure, in Japan a snap general election was called for October by Shinzo Abe, hoping to exploit a weak opposition (now where have you heard that before…?).

Meanwhile the US, UK and Eurozone central banks were each in their own way signalling that the days of ultra-easy money are coming to an end, with ‘normalisation’ of interest rates a long term goal.

For all that political and financial noise, the main share markets were up over the quarter, a reminder once again that the markets make their own judgements about what’s important in the ebb and flow of news. 

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.