At the start of the pandemic, I began providing you with regular market news and updates which may have been of interest to you and I will be continuing to do this monthly, and more frequently at times. I will cover a range of subjects which include topical matters, market insights and news about Absolute. If you wish to discuss any aspect of the information provided, or if you would like an update on your own investment portfolio, then I would encourage you to get in touch with your financial adviser directly.
This week markets have seen some volatility, yesterday with US stocks suffering their biggest one-day fall for three months, although that still only took them back to where they were trading at the beginning of last week. Since the US markets opened today, the majority have bounced as data showed the US unemployment rate dropped more than expected in August, and European markets followed suit. European shares have now overcome their early losses, with bank stocks leading gains on merger talks between two major Spanish lenders, while markets anticipate the European Central Bank maintaining easy monetary policy at a meeting next week. Similarly, here in the UK, the FTSE 100 reversed its early losses as gains in mining and financial stocks gained.
As always, we would encourage you not to be concerned by short term market movements, and instead focus upon the longer term. The market falls we experienced in the early part of this year were undoubtedly unnerving. However, an investor who pulled out of their US shares due to the economic toll of the coronavirus pandemic and increasing unemployment would have paid a price; the S&P 500 is near record highs and up 7% year to date, including an 11.5% gain since the start of July.
Tax matters The IFS and Government ministers have cautioned against tax increases now that would blow the recovery off course and put the economy at risk. Near term increases to income tax, national insurance (NICs) and VAT therefore would seem to be unlikely. Nothing is impossible of course, but changes to these taxes seem to be unlikely. Despite the sense of all this the Chancellor will also have in mind (well, one would expect he would) his commitment to sustainable public finances. And, remember, he did hint at a rise in NICs for the self-employed when he introduced the Self-Employed Income Support Scheme (SEISS): “…I must be honest and point out that in devising this scheme – in response to many calls for support – it is now much harder to justify the inconsistent contributions between people of different employment statuses”.
Much of the latest conjecture has been about capital taxes and corporation tax though.
So, what has been talked about and what are the chances of changes being made ‘any time soon’?
Corporation tax first. One of the rumours is that the tax could be pushed up from 19% to 24%. Of course, it could happen. The last few months have taught us that anything can indeed happen. But will it, given the need for the UK to be seen as a ‘destination’ for businesses? This is especially so given the expected, at the very least short to medium term, negative connotations of Brexit. Of course, this will all depend on the ‘deal’ done between the EU and the UK, but regardless of your sentiment in relation to said Brexit, it’s hard to see how terms of trade with the EU are going to improve.
There has also been some talk over the 2% digital services tax (DST) introduced from April this year. Will it be increased – the projected yield is not massive – or will it be ditched? Both possibilities have been mentioned in the press. However, the DST was always intended by Government to ultimately be a temporary tax, to be replaced by a comprehensive global solution.
Capital taxes next. Well, the Office of Tax Simplification (OTS) are right in the middle of this. They have made their recommendations in relation to inheritance tax (IHT) and one of those was to remove re-basing for capital gains tax (CGT) if the asset passing on death is also free of IHT. There are also the more radical APPGIIF (All Party Parliamentary Group for Intergenerational and Inheritance Fairness) proposals. Some IHT change at some point is likely, but as a tax raiser (if that’s the supposed prime driver for change) IHT increases are unlikely to ‘shoot the lights out’. IHT raises around £5bn a year so even if the yield were doubled it would only reach the level that CGT currently generates – at the top end of estimates.
So, how about CGT? Well the OTS are currently reviewing it and the Chancellor only recently asked them to. Most of the recent talk in the press was about charging capital gains to income tax. This could be a strong runner – perhaps with even little strong political resistance from the right wing of the Conservative Party. We had 20 years of charging capital gains to income tax from 1988, though we also had indexation (inflationary) relief. So, a return to that might not be impossible. That would pretty much double the rate of CGT for most people. But, here’s the thing, over 50% of the total CGT paid is paid by around 5,000 people – not a huge group to annoy by such an increase!
If it’s believed that this is a strong likelihood for a Budget change then what should you do, if anything?
Any re-basing (focussed on ‘starting afresh’ under a new higher tax regime) that can be done without triggering a CGT liability, i.e. within the annual exemption, should certainly be considered – please discuss this with me first as there are certain conditions.
But triggering a liability (even at today’s lower rates) to potentially save tax in the future would take a little more thought – especially since nothing is certain and no one will know for sure until any change is announced. A ‘cost/benefit’ and ‘risk/return’ analysis will definitely be necessary.
CGT rates were aligned to income tax rates in the past, for almost 20 years. It is not quite as straightforward as it seems as there was back in the day indexation relief and taper relief, which could reduce the overall level of tax but alignment to income tax rates in some way is not beyond the realm of possibility.
As always, please do get in touch if you wish to discuss any aspect of your financial plan, or any of the above news.
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