News Updates - February & March
25th March 2021
Take advantage of ‘Free wills week’
As part of the scheme, the government has told lenders they must offer a five-year fixed-rate deal so borrowers can lock their repayments at a set level for the medium term. Inheritance tax bills can be managed by the effective use of wills, which can ensure assets are passed onto the correct beneficiaries and that the correct amounts are paid. Many experts in the estate planning field encourage families to create wills as soon as possible and in the UK March is designated to be free wills month, an initiative backed by a number of charities. Research from Which? found the number of people who made will during the first lockdown in early 2020 surged, with a 682 percent increase seen in April when compared to the previous year. Changing relationship trends are also set to impact IHT plans and unfortunately, the Government is somewhat lagging behind: "Fewer people are getting married, with ONS finding that cohabiting couple families are the fastest-growing family type. Sadly, the law hasn’t caught up with this fact, meaning that unmarried couples are largely unprotected if one should die. Unlike for married couples or those in a civil partnership, there is no legal right to property not jointly owned. If you have children together then this could mean that your partner risks not being able to stay in the family home or have enough money to bring up your children. To make sure they are protected, it’s crucial that you have a will in place expressing your wishes regarding children and assets. IHT bills can also be reduced or avoided all together if certain actions are taken. Putting assets, such as cash, property, or investments, into a trust can mean they’re no longer part of your estate for inheritance tax purposes. However, the rules around trusts are complicated and have changed over the years; for example, you could be taxed as you pay in or take money out, so make sure to seek advice if you’re considering this option.
Bonds away – look elsewhere for protection from equity volatility
This time last year, markets were in the grip of the coronavirus crisis. Stock markets were tanking and central banks were embarking on aggressive interest rate cuts and other stimulus measures to steady the financial system. It all sent bond prices rocketing, pushing yields to rock-bottom levels. Now, the issue for investors is that those bond prices have been falling back and yields are rising. Some hedge funds are raking in big returns. But other institutional investors are fretting that it could yet seriously destabilise markets. So what’s going on? In short: inflation. Serious consumer price rises themselves are not here yet — the global economy is still only tentatively creeping out of its coronavirus hibernation. But investors have good reason to think it could start to bite. Commodity prices have already shot higher in anticipation of a global economic recovery. Copper has hit its highest price point in a decade. Oil is back above $60 per barrel, having wiped out the coronavirus shock. Companies in the US and elsewhere are reporting shortages of goods and rising costs for raw materials. It all looks like a recipe for consumer price rises. This isn’t good news for bond holdings. By any sensible historical measure, bond prices are still sky high, thanks to the vast monetary stimulus launched by central banks seeking to soften the blow of the pandemic. But the pullback at the start of 2021 has been fierce as investors try to price in inflation before it happens. It is the worst start to a year in bonds since 2015. When bond prices fall, yields rise. In the US, 10-year yields have pierced 1.5% for the first time since the pandemic struck, with a particularly wild day’s trading on February 25. The UK, which not so long ago was flirting with cutting interest rates below zero, has seen a rapid rise in yields to around 0.8%. On top of this, the Budget revealed government plans to borrow even more than banks had previously expected. The classic split for an investment portfolio is 60% equities, 40% bonds. The premise is that as one asset class falls, the other usually rises. But this orthodoxy has been looking shaky for years, as yields have sunk so low that they offer little scope for further gains if stocks take a knock. HSBC believes the UK government bond market is exaggerating the risk of a rise in interest rates from the Bank of England, but it warns clients to buckle up for a “choppy ride” in gilts.
House prices dip but a surge could be on the cards
House prices in the UK edged downwards in February, but are predicted to hit record highs again after the stamp duty holiday was extended by Chancellor Rishi Sunak in this week's Budget. The average price of a home in the UK last month was £251,697, a marginal 0.1% drop compared to January. This still represented a significant 5.2% uptick compared to February 2020, thanks to the rush of buyers that have flooded into the market since last summer when the tax holiday was initially announced. Annual house price growth has now topped 5% for seven consecutive months. However, the year-on-year growth in February did not hit the highs of more than 7% annual growth seen between September and November. At the height of the market in November, the average house price was £252,890 according to Halifax. However, economists have been forced to tear up their forecasts for the rest of the year thanks to announcements in this week's Budget. Although the market appeared to cool in February, it is widely tipped to heat up again now that buyers will still be able to benefit from the stamp duty holiday in some form or another until the end of September. The stamp duty holiday will continue to apply to the first £500,000 of a home's purchase price until June 30, 2021. It will then taper off, applying to the first £250,000 until the end of September, before returning to £125,000 at the beginning of October. As many as 300,000 additional home purchases are expected to now benefit by the end of June deadline, according to Rightmove, following Rishi Sunak's announcement.
Pensions lifetime allowance frozen
The pensions lifetime allowance will be frozen at its existing level until April 2026, in a move that effectively decreases its value when inflation is taken into account. The Chancellor last week said the lifetime allowance would remain at its current £1,073,100 for the next five years, rather than increasing in line with inflation. The move will raise around £1bn between now and the 2025/26 tax year, and if CPI were to rise in line with official OBR forecasts, it would imply that without the policy, the lifetime allowance could increase by around £85,000 by 2025/26.The lifetime allowance is a limit on the amount that can be drawn from pension schemes – whether in lump sums or retirement income – and can be paid without triggering a tax charge. At its most generous the lifetime allowance stood at £1.8m in 2011/12, but was gradually reduced to £1m in 2016/17 before creeping back up to its current value. The policy fell flat with those working in the pension sector. Aegon pensions director Steven Cameron said freezing the lifetime allowance was likely to send the wrong signals to savers.
Cash ISAs see record amounts pulled from accounts
Today, the cash Isa is becoming unloved for the majority. Rates are pitiful – even more so than regular accounts. While the nation became one of accidental savers last year, you'd expect the reserves of cash Isas to have plumped as well. Instead, what has happened is the largest outflow of cash Isa money in a six month period on record. So is the cash Isa is now a dead duck and what is prompting such an exodus? There was £4.8billion withdrawn from bank and building society cash Isas in the final six months of 2020. This is the highest outflow in a half year period on record, according to Bank of England data analysed by AJ Bell. This is despite £72billion flowing into cash deposit accounts in the same period – more Britons managed to save in the pandemic, with the Office for National Statistics savings ratio measure setting a record high between April and June 2020, and still way above normal levels in the following three months. Meanwhile, the first half of 2020 saw the smallest amount of money enter cash Isas except for 2017, which was likely due to the new Personal Savings Allowance. The PSA was revealed in April 2016. For basic-rate taxpayers, £1,000 of savings interest can be paid tax-free, while for higher-rate taxpayers this is a lower £500. Essentially, with rock bottom savings rates on offer, the chances of nudging over these amounts at present is small. Based on the 0.35% interest rate currently on offer from the typical cash Isa, that would mean a basic-rate taxpayer would need £285,700 held in a cash Isa account before the wrapper delivers any tax benefit. For a higher rate taxpayer, the figure is £142,800. There could now be an argument to say that cash Isa saving is now really for wealthier people. Additional rate taxpayers do not have a PSA, and it means the Isa wrapper is a vital tool. In a clear case of the law of unintended consequences, a progressive tax policy introduced in 2016 has therefore tilted cash Isas towards being a product which is best suited to wealthier members of society.
Covid causes taxing times for expats
COVID-19 is having a potential unforeseen tax consequence on expats whose travel plans are disrupted as government close borders and impose self-isolation periods. The travel bans could have an impact on where expats pay tax. Many expats are concerned that if they are forced to alter their travel plans due to the coronavirus pandemic, they could become tax resident in a country which will tax them at higher rates. Some countries have safety valves to ease the stress for expats, like ignoring residency rules due to exceptional circumstances brought about by COVID-19. Others have allowed periods of grace for filing tax returns. HM Revenue & Customs understands that COVID-19 affects the travel plans of British expats and other non-residents and has resulted in many people spending more time in the UK than they had planned. New guidance clarifies that expats can disregard extra stays of up to 60 days if:
- A health professional orders you to self-isolate in the UK due to coronavirus
- Government advice stops you leaving the UK
- You cannot leave the UK due to the closure of international borders.
- Your employer asks you to temporarily return to the UK due to coronavirus.
These reasons are in addition to the normal exceptional circumstances allowed by HMRC, which are:
- Local or national emergencies
- Natural disasters
- An unexpected life-threatening illness or injury to yourself, your spouse or dependent child
HMRC drop late payment fines
Self-assessment taxpayers who pay their tax or set up a payment plan by April 1 won’t be charged a 5% late fee. But taxpayers are still urged to settle any outstanding amount as soon as possible, as you’re still charged interest. Normally, a 5% late payment penalty is charged on any unpaid tax that is still outstanding after 30 days. After this, you get charged another 5% of what you owe at six months, and another 5% again at 12 months. But because of the coronavirus pandemic, HMRC has agreed to waive the 5% payment penalty charged on unpaid tax that is still outstanding on 3 March, as long as you pay or set up payment plan by 11.59pm on April 1. A 5% late payment penalty fee will still be charged after 1 April, and again at six months and 12 months. Those who can’t afford to pay their tax bill in one lump can choose to spread their payments across monthly instalments through “Time to Pay” on the HMRC website. But again, you should be aware that interest worth 2.6% will still accrue on any outstanding payments, even if you’ve set up a plan.
London’s Landlords are feeling the burden of buy-to-lets
The coronavirus pandemic has had many unseen consequences. A year ago, we couldn’t have imagined that London would no longer be the hub of activity it once was. A shift towards remote working, increasing property prices and decreasing rental rates have had a significant impact on the buy-to-let market in the capital. According to CIA Landlord’s annual report, only six out of 33 London boroughs will prove profitable for landlords in 2021. It has taken a global pandemic to disrupt the order of things. The coronavirus pandemic has resulted in a seismic shift towards home working and a significant percentage of office workers want this to be the norm going forward. Now, many are starting to look outside of the capital for a place to live. As a result, London’s profitability for landlords has decreased by a whopping 48% since January 2020, according to CIA Landlord. However, landlords still need to pay their monthly mortgage costs, monthly fees for maintenance and letting agency fees, averaging £1,134 per month in 2021. But as Londoners move away from city rentals, the market is rapidly becoming unprofitable for buy-to-let investors. Coronavirus, the stamp duty holiday and fluctuating house prices have all led to uncertainty in the buy-to-let market. In reality, these changes have meant that location has become an even more important factor when choosing a buy-to-let property. Whereas central London used to offer the highest potential, the pandemic has meant that areas such as Brighton, Bangor, Portsmouth and Leeds are now the most profitable in the country.
The volume of articles by analysts warning of another stock market crash is growing. This may strike you as odd, because a few short weeks ago, plenty of analysts were talking up the forthcoming 2021 stock market rally instead. There is only one thing investors can do when faced with such conflicting views. Ignore them, and stick to their plan. Experts believe stocks and shares remain the best way to build long-term wealth for your retirement. It wouldn’t be uncharacteristic for the stock market to crash in this year. As we saw after the tech boom and financial crisis, a correction can last a couple of years. In the middle, there will be boomlets as well. Maybe we had one last year. That shouldn’t worry you. If your retirement is at least another 10 years away you have plenty of time to recover any losses. Also, remember you have the option to remain invested in retirement rather than scoop all your savings together and buy an annuity. This means your money could be in the market for another 30 years, and the longer the timescale, the lower the risk tends to be. There are good reasons why the stock market may crash again. There is a good argument that the euphoria after November’s vaccine breakthrough was overdone. We face a sticky route out of lockdown, as countries close their borders. But if markets do crash, you could see that as an opportunity to buy FTSE 100 shares at reduced prices. Possibly avoid the really high-risk sectors, such as airlines and hotels, but consider buying in banking, mining, technology, telecoms, energy, consumer staples, as well as lower-risk sectors such as healthcare and utilities. That might not be suitable for every investor, but it is certainly a robust possibility. Then simply hold on and let your dividends roll up, while waiting for the recovery. Like the stock market crash, that will come as well. They always do, given time.
Hundreds of thousands of savers face a retirement income lottery as providers are poised to put their pension pots into a hotchpotch of 'one-size-fits-all' investment funds. From now, over-55s who dip into their pension for the first time without getting financial advice – and who have not indicated a wish to manage their pension fund themselves – could have the remainder of their pot funnelled into one of four funds offered by their provider. The move is part of a new 'investment pathways' experiment launched by the financial regulator. It is designed to make it easier for savers who do not take financial advice to do the right thing with pensions. But some experts warn the new system could lead to poorer retirements for some and cause financial harm. They say people should pay for financial advice instead. Others warn that savers could be ripped off by pension providers who put their pots into expensive funds to boost their profits. Yet, the pathways will at least mean that investors get some form of guidance in putting their money to work in a fund. When over-55s raid their pension pots for the first time without financial advice, they will be questioned about what they plan to do with their money. They will be asked which of these four categories they fit into:
- I have no plans to touch my money in the next five years;
- I plan to use my money to set up a guaranteed income annuity within the next five years;
- I plan to start taking my money as income within the next five years;
- I plan to take out all my money within the next five years.
Depending on their answer, savers will have their pension funds funnelled into one of four default funds – labelled pathways 1, 2, 3 and 4. The regulator has tasked every pension firm to come up with four funds that fit the bill. Most experts agree there is no substitute for good financial advice in the approach to retirement – and, once retired, as savers manage their pensions and Isas. However, many savers either do not want advice or feel they can't afford it. Thus investment pathways are seen as an imperfect, poorer alternative, but one that will help avoid the worst pitfalls.
Tax rises on the horizon?
Chancellor Rishi Sunak will set out plans to boost the UK economy in his Budget next month. This could mean tax rises as the government looks to balance the books after borrowing a record £284.7billion following the coronavirus crisis. For this Budget, there has been talk of tax changes to repay the UK's borrowing and boost the coronavirus-hit economy, but there are fears that it could be too early to hit households with increased bills. The Conservative Party had a manifesto commitment, called the "triple tax lock", that pledged to not raise the rates of income tax, national insurance or value added tax. Mr Sunak is reported to want to keep to this, according to the Financial Times, but any changes - if any - won't be confirmed until the Budget. Here are some of the tax changes the Chancellor could make and how they could hit your wages and your wallet:
- Capital gains tax: Currently, everyone has a yearly allowance that lets them sell assets such as shares or a second property with the first £12,300 free of capital gains tax. Mr Sunak asked the Office for Tax Simplification (OTS) to review the current capital gains tax system last year. The OTS released its review in November 2020 and suggested the rate could be doubled from the current 10% for basic rate taxpayers to 20%. For high earners, they suggested doubling the rate from 20% to 40%. The OTS also proposed lowering the tax-free threshold and said the current system "distorts behaviour" as people try to lower their bills. Mr Sunak hasn't given any indication of changes.
- Inheritance tax: Currently, an individual can pass on £325,000 of their wealth tax-free to their loved ones. There is also a £175,000 allowance for their main home, giving an individual £500,000 in total. Families have to pay 40% inheritance tax on anything above this. HMRC also provides a gifting allowance of £3,000 that lets you pass down assets such as cash tax-free each year while you are alive. There is also a £1,000 allowance for parents, rising to £2,500, for grandparents, to contribute to a child's wedding. This means an older relative can see their loved ones enjoy hard-earned money that they would have passed on. But MPs on the all-party parliamentary group for inheritance and intergenerational fairness last year suggested putting a limit on how much can be given away tax-free in someone's lifetime.
- Corporation tax: Businesses currently pay corporation tax of 19% on their profits. It is the fourth lowest rate in the Organisation for Economic Co-operation and Development. But Mr Sunak is rumoured to be considering hiking the rate to 24%.
- Wealth tax: Academics and economists on The Wealth Tax Commission proposed a 5% levy on housing, pension, business, equity and savings wealth in December, and forecasted that it would raise £260billion. The levy would tax UK residents with assets worth half a million pounds or more - including their homes and pension. Mr Sunak is rumoured to have rejected these suggestions though.
- Pensions: All pension savers get tax relief on their contributions. The government takes what you would have paid in income tax and puts it in your pension instead. Basic rate taxpayers get a 20% boost and higher earners, those earning more than £50,000, get 40%. Additional rate taxpayers, who earn more than £150,000, can get 45% relief. There are rumours each year that this relief will be scaled back so savers only get the basic rate but there has been no suggestion that Mr Sunak will do this.
MPs demand more support for self-employed
The government is under mounting pressure to plug gaps in its emergency coronavirus wage subsidy schemes at the March budget to support millions of self-employed people and other workers excluded from furlough. MPs and campaign groups said the chancellor, Rishi Sunak, had repeatedly ducked opportunities to fix gaps in furlough and the self-employed income support scheme (SEISS) for almost a year since the Covid-19 pandemic began. Caroline Lucas, the Green party co-chair of the all-party parliamentary group Gaps in Support, said it was completely unacceptable that more than 3 million people had been completely left out. It is felt by campaigners that, while it was understandable at the beginning of the pandemic, when the Treasury had to act fast, that some new support schemes didn’t work as well as they should, it’s a scandal that over 10 months later, so many are still falling through the gaps. Campaign groups say the chancellor must now accept that there are genuine and problematic gaps in the schemes he designed, and make support for excluded groups a centrepiece of his budget announcement next month. The government’s flagship furlough scheme has topped up the wages of almost 10m jobs since its launch in March last year, while as many as 2.7m claims have been made to SEISS, the Treasury’s similar provision for self-employed people. However, experts have warned millions of people have missed out because they fail to meet eligibility criteria. About 3 million people have been excluded from the government’s support schemes, according to the Association of Independent Professionals and the Self-Employed (IPSE), including about 700,000 limited company directors and 200,000 people who had recently set out working for themselves and lacked documentation to receive wage subsidies. As many as one-in-five small-company bosses surveyed by the Federation of Small Business (FSB) have said they received no financial support at all from the government.