Rising inheritances and deficit may hasten IHT change

In 2018, Chancellor Philip Hammond asked the Office of Tax Simplification to review Inheritance Tax*. However, subsequent events have meant that the tax regime for transfers of wealth between generations has not been revised, though Mr Hammond’s next-but-one successor Rishi Sunak could yet dust-off two OTS reports**.

A big deficit caused by the pandemic points to unwelcome tax rises. Some economists see tax on transfers of wealth as a way to generate revenue without stifling the economy, whilst also acting to improve social mobility. One influential think- tank recently explored inheritance and inequality.

The Institute for Fiscal Studies’ April 2021 paper, Inheritance and inequality over the life cycle: what will they mean for younger generations? identifies trends that could influence policymakers’ thinking on taxation of wealth transfer, whether during someone’s lifetime or after death. One key finding is that inheritances have formed a rising part of national income for the past five decades.

Inequality of inheritance

The IFS calculates that inheritances for those born in the 1960s will on average equal 9% of their other lifetime income, compared with 16% for those born in the 1980s. If this trend of rising levels of inherited wealth continues, the gap between rich and poor families can only widen; a more stringent version of IHT could mitigate that.

A major impact clearly stems from parental wealth. The IFS projects that people within each of the two age groups having parents in the top one-fifth on the wealth scale will receive average inheritances that deliver a lifetime income boost of 17% or 29%, respectively, but only 2% or 5% if their parents are in the bottom one-fifth on the wealth scale.

So, the younger group will receive a greater boost from inheritance than the older one and within both groups those with wealthier parents will benefit far more, heightening inequality. With social levelling-up prominent on a financially-stretched government’s agenda, IHT changes could prove costly for the better-off. It’s sensible to prepare for all scenarios, taking expert advice on strategy.

*5gov.uk, 2018, **6gov.uk, 2019

Scottish Budget Update

On 28 January 2021, Scottish Cabinet Secretary for Finance, Kate Forbes, set out the government’s proposed spending and tax plans for 2021/22. Speaking almost a year after Scotland’s first COVID-19 case was identified, she told MSPs that the “pandemic has shaken our society and economy to the core.”

Ms Forbes stated that the Budget would address “three key priorities” for Scotland’s future, these being:

• Creating jobs and supporting a sustainable recovery
• Responding to the health pandemic
• Tackling inequalities.

She added that certain assumptions had been made when drawing up the Budget, due to the fact that the UK Budget was not taking place until March.

The economy and business

To support businesses and economic recovery from the coronavirus crisis, the Finance Secretary announced measures including:

• Total investment of £1.1bn in jobs and skills support
• The launch of a five year £100m Green Jobs Fund and commitment to establish a Green Jobs Workforce Academy
• Doubling of the Local Authority Discretionary Fund to £60m

Personal taxation

The Finance Secretary told MSPs that now was the time for “stability, certainty and targeted support” so there would be no changes to Income Tax rates. The thresholds for each tax band would, however, increase in line with inflation, as follows:

• Starter rate of 19% payable on earnings over £12,570, up to £14,667
• Basic rate of 20% to be charged on earnings over £14,667, up to £25,296
• Intermediate rate of 21% to be paid on earnings from £25,296, up to £43,662
• Higher rate of 41% on earnings over £43,662, up to £150,000
• Top rate of 46% on earnings over £150,000.

Meanwhile, the cut to Land and Buildings Transaction Tax (LBTT) for homebuyers, which was announced during the first lockdown, is due to end on 1 April. The Scottish Government has been under
pressure to extend the tax ‘holiday’ after Chancellor Rishi Sunak announced that the equivalent scheme in England is to be extended until the end of June, but at the time of writing, this has not occurred.

COVID-19 and healthcare

Ms Forbes expressed gratitude for the dedication of Scotland’s health workers throughout the pandemic, saying “When the history of this pandemic is written, our NHS and social care staff will be recognised as the undisputed heroes they are. I’m sure I speak for everyone in this chamber – everyone in this country in fact – when I offer them our heartfelt thanks.”

In recognition of the ongoing severity of the pandemic, Ms Forbes announced:

• £869m to support Scotland’s response to COVID-19
• £1.9bn for primary care
• £143.5m in funding to tackle alcohol and drugs issues – a £50m increase
• £1.1bn spending on mental health services – a £139m increase

Tackling inequality

Education, the Finance Secretary stated, is the best way of addressing inequality and she announced:

• £2.7bn across education and skills, including £1.9bn for universities and colleges
• Support for Gaelic education to remain steady at £25.2m
• £39.8m for the early learning and childcare (ELC) programme.

Transport, infrastructure and connectivity Aiming to reduce Scotland’s reliance on cars and to offer a more environmentally sustainable form of mass transport, a £1.6bn investment
in the country’s bus and rail services was announced, in addition to the following:

• Increase in spending on motorway and trunk roads from £748.9m to £825.9m
• £10.5m for the National Islands Plan, which is designed to tackle depopulation and improve transport links
• £102.7m for digital connectivity, up from £63.4m.

Closing Comments

In closing her Budget speech, Ms Forbes said, “Now, with large-scale vaccination, focused firstly on the most vulnerable, there is some light at the end of the tunnel. This Budget seeks to
build on that hope, and by focusing on how we continue to protect, recover, rebuild and renew our country, it seeks to make that light at the end of the tunnel shine that bit brighter.”

Vaccines Put A Spring In Investors’ Step

The arrival of spring is generally a time of great optimism and this year more than ever we are all certainly in need of a fresh bout of positivity. Thankfully for investors, there do seem to be increasingly hopeful signs on the horizon, with a growing belief we are now at least starting on the road to economic recovery.

Reasons to be cheerful

The successful development and rapid rollout of COVID-19 vaccines has provided hope that we will soon be able to live with the virus. As well as protecting vaccinated individuals, there are encouraging signs the immunisation programme will slow transmission in the community. This has raised hopes of a significant, vaccine-powered revival in economic activity later this year.

Global growth rebound

This vaccine-fuelled optimism is reflected in recent economic forecasts with the International Monetary Fund’s latest projections suggesting the global economy is set to expand by 5.5% in 2021. This represents an upward revision of 0.3% compared to the organisation’s previous forecast made last October.

Vaccine-induced euphoria also saw equity funds enjoy a strong quarterly inflow during the final three months of last year.

Negative rates?

A further boost to equity investments could stem from negative interest rates. Although it remains unclear whether or not such a policy will be introduced, in early February the Bank of England gave banks and building societies six months to prepare for such a possibility. If enacted, sub-zero rates would reduce the incentive to save in cash deposits and thereby potentially increase demand for shares, placing even greater emphasis on investment portfolios.

Time for a spring clean

While the economic outlook remains uncertain there are positive signs for investors and this means ensuring your investment portfolio is working hard for you is more important than ever. It could therefore be the perfect opportunity to review your portfolio and rebalance the allocation of asset classes, if necessary, in order to ensure your investments are well-diversified and performing in line with your long-term requirements and objectives.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Glimmers of hope for the New Year

Woman looking into the sunset

Over the past year, our vulnerabilities have been starkly exposed by coronavirus, and the pandemic continues to present an array of challenges on many different levels. Economic frailties have also been laid bare but, as we enter a new year, shoots of optimism are beginning to emerge, with rising hopes of recovery in 2021 and beyond.

A gradual recovery

The International Monetary Fund’s (IMF) final 2020 assessment of global economic prospects was entitled ‘A Long and Difficult Ascent’. This provides an apt description of the current situation, with the international soothsayer’s predictions pointing to a moderate rebound in 2021 with a continuing gradual recovery over the following few years.

Reasons to be cheerful

While the IMF forecast does highlight continuing risks and uncertainties, which largely centre on the future path of the pandemic, there are reasons for some guarded optimism. Continuing progress in the search for COVID-19 vaccines and the economic stimuli promised by US President elect Joe Biden, for instance, should both have a positive impact on market sentiment during 2021.

Look to the future

Whatever the future holds though, the key to successful investing will inevitably remain embracing a long-term philosophy that is based on sound financial planning principles. In practice, this means maintaining a diversified investment portfolio which suits your attitude to risk and resisting any urge to panic trade. It also means looking forwards, focusing on future key trends and longer term investment themes.

Advice remains paramount

Another key component for investor success will undoubtedly be the provision of expert advice and the construction of a tailored plan setting out realistic and achievable financial goals. Indeed, given the heightened market turbulence and uncertainty, it has arguably never been more important to obtain professional financial advice. So, get in touch and we’ll help you navigate your way through the opportunities and challenges that emerge as the new year unfolds.

New Year’s resolution? Get to know your pension age(s)

Did you know that the phased increases to State Pension age (SPA) reached 66 for both men and women in October 2020 and it’s set to rise further? The minimum age for taking funds from a personal pension is also set to rise in 2028. Getting to know your pension ages, and what you can expect to receive, is vital in creating your retirement plan.

Your State Pension – age 66, 67 or older?

To find out your State Pension age, visit the government website https://www.gov.uk/state-pension-age

The State Pension is paid to anyone who has made at least ten years’ worth of National Insurance contributions during their working lifetime. The maximum payment is currently £175.20 a week (£9,110.40 a year), but how much you get depends on how many years you contributed for. Some people who have accrued Additional State Pension may get more than this ‘maximum’. To check your State Pension forecast, go to https://www.gov.uk/check-state-pension.

Personal pensions

Currently, savers who pay into either a workplace or individual personal pension can access their pension pot at age 55. In September 2020, the government confirmed this would rise to 57 in 2028. The change, which has been prompted by increased life expectancy, will mean that those who are currently 47 or under and wish to pursue this option will have to wait an extra couple of years.


Getting to know your pension ages, and what you can expect to receive, is vital in creating your retirement plan


 

COVID heightens intergenerational issues

One effect of the pandemic has been to divide segments of the population, whether by age, where they live or what they do for a living. When divisions occur, tensions can develop, not least between the generations.

There is now rising concern about the economic impact of the pandemic upon Generation Z. A summary of youth unemployment statistics published in October revealed, ‘581,000 young people aged 16-24 were unemployed in June-August 2020, an increase of 35,000 from the previous quarter and an increase of 87,000 from the year before.’

Students stranded in halls of residence whilst learning online may feel more resentful over tuition fees and worsening job prospects. Many young people are also worried about whether they will ever leave the rental sector, as saving for the deposit for a home can be difficult while paying rent.

The Intergenerational Foundation (IF) says, ‘Younger generations are under pressure like never before. IF was established to draw policy-makers’ attention to this, and to get a fairer deal for young people. It concentrates on policies in housing, health and higher education, employment, taxation, pensions, voting, transport and environmental degradation.’

Empathy is the power of connection

COVID has brought added worries for elderly people, too. One concern has been poor access to banking services and cash, with branch and ATM numbers declining due to lower usage. As Age UK puts it, ‘We are hurtling towards a cashless society with no real consideration for the many people who will be left behind.’

Many older people recognise the challenges that upcoming generations face; often they do something about it by helping grandchildren at important life stages, if concern about funding their own future care allows. Those unable to assist hope government will support key elements of young adult lives – a challenge when national finances have been battered by the pandemic.

It’s about family
Although the pandemic has certainly heightened intergenerational issues, it has also highlighted health, social, emotional and financial vulnerabilities – and impacted every generation. Plenty of people have reflected on the balance in their lives and the importance of feeling connected. It’s reminded us that it’s good to talk and not to be afraid to start a conversation.

Although generational divides exist, we’re in this together and although we’ve had to endure time apart, in a strange way it’s brought us all together.

If you are in a position where you want to engage your family with a conversation about finances, we understand your apprehension because money can sometimes be a contentious issue. ‘Wealth transfer’ is such an abstract term for such an emotional topic, but we can help break down those barriers and get your family talking in a positive and  productive way.

Coronavirus – a black swan event?

When the COVID-19 pandemic struck, the severity of its impact on global societies and economies was shocking. Yet critics are insisting that the repercussions could (and should) have been foreseen. Does this make it a ‘black swan’ event?

Originally coined by financial theorist and writer Nassim Nicholas Taleb, the term ‘black swan’ has come to denote any event that:

• Is extremely rare
• Has a severe impact
• Is unpredictable (although some may claim in hindsight that it could have been predicted).

Historic black swans

Examples of black swans from history include the Spanish flu outbreak (1918), Wall Street Crash (1929), ‘Black Monday’ (1987), the terrorist attacks on the World Trade Center (2001), the SARS outbreak (2003) and, more recently, the global financial crisis (2008).

Black swan – or not?

While it may seem a textbook case on the surface, some are arguing that COVID-19 does not constitute a black swan event. Severe impact? Undoubtedly. Rare? Perhaps. But unpredictable? Maybe not.

History shows us that significant outbreaks of infectious diseases do happen. What’s more, Bill Gates, George W. Bush, Barack” “Obama – and Taleb himself – have all previously issued dire warnings about what could happen if we failed to prepare for future pandemics. Can we really say, then, that the coronavirus pandemic was completely unpredictable?

The COVID difference?

Those who say it is a black swan event have pointed to the unique brutality and speed with which the virus spread around the world and hit financial markets. In the words of one financial commentator: “It has been incredibly fast-paced, faster than ’29, faster than ’87. The speed and ferocity has been utterly breathtaking.”
Even so, Taleb himself suggests that coronavirus does not fit his description of a black swan event. Yes, it has had a severe impact on the global economy and people’s lives. But there are also multiple examples of serious global outbreaks from the 21st century alone – Ebola, SARS and the H1N1 influenza pandemic all spring to mind.

Weathering the storm

Black swan event or not, you can rely on us for advice and guidance on weathering any storms that lie ahead.”

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Are you on your best investor behaviour?

In uncertain times, where we’ve witnessed periods of stock market volatility, it’s easy to let emotions influence investment decisions, but a good strategy for investors to adopt is not to react hastily. Human instinct is to be responsive, so traversing these behavioural biases can be challenging, but once mastered, resisting the urge to flight can be rewarding.

Unlike prehistoric times, when the fight or flight reaction meant the difference between life and death in the face of a carnivorous dinosaur on the prowl, survival depended on quick pattern recognition and decisive action. As an investor, controlling these hard-wired behavioural biases and learning to resist the urge to panic, can bear fruit.

Take stock market volatility in March this year as an example. Retail investors sold investment funds worth £10bn in just one month3, with many selling just as the stock market was falling to its lowest level in eight years. In doing so, they missed out on the subsequent market bounce of almost 30%. If hindsight is a marvellous thing, by its very definition, foresight is insight gained by looking forward. In other words, when it comes to investing, look forward, because markets tend to bounce back over time, though it can’t be guaranteed.

Different drivers

A number of factors lead people to respond differently to market occurrences – what your objectives are, your risk tolerance,” “beliefs, preferences, emotions and past experiences, can all result in different investor behaviour. One event, such as a market fall, can lead to different behaviours; ceasing investing until markets stabilise, selling in case it’s the beginning of a market downturn, or contrarian investors may see the correction as an opportunity to invest. Some beliefs could lead to successful investment outcomes, others could result in behavioural biases that are counterproductive and endanger the prospect of successfully achieving your objectives.

Managing behavioural biases

As humans, we all suffer from some biases. The best defence mechanism to safeguard from knee-jerk reactions and defend against the influence of your biases, is to follow a robust, objective and disciplined process, and that’s where we come in. In addition to having a well-thought-out investment process, investing with a clear idea of what you want to achieve, will determine how we structure your investments. Whether you are building your retirement nest egg or a fund to put children through university, you have a better chance of achieving your goals if they are used to frame all investment decision-making.

Foresight
You can rely on us; we take the time to understand your objectives, apply a rigorous investment process and advise you on the investment strategies and products most appropriate for you.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Where now for the global economy?

With the release of Q2 data over the summer, the full extent of the impact COVID-19 has had on the global economy became apparent, as a succession of countries reported record falls in output, with lockdowns causing inevitable and acute economic disruption.

Although uncertainties surrounding the pandemic are still inflicting economic stress across the globe, there are signs that the worst may be over. Many economists believe the sharpest declines are now consigned to history, but the likely pace of recovery remains unclear.

On home shores
Preliminary Q2 gross domestic product (GDP) statistics show the UK economy was hit particularly hard, with a 20.4% reduction in output in Q2 compared with Q1. The country’s largest ever quarterly decline pushed the UK into its first technical recession since the financial crisis.

Around the globe
Output across the Eurozone shrank a record 12.1% during Q2, with Spain suffering the largest decline, its economy shrinking by 18.5%. France and Italy were also badly hit, with quarterly declines of 13.8% and 12.4%, respectively.

Preliminary estimates for the US suggest the world’s largest economy shrank at an annualised rate of 32.9% in Q2, the sharpest decline since government records began in 1947.

In Japan, the world’s third-largest economy, GDP fell by 7.8% in Q2, which represents the fastest quarterly rate of decline since” “comparable figures were first recorded back in 1980.

A tentative recovery?

Despite Q2 data for advanced economies painting a bleak picture, a recovery of some sorts may be in the offing. In the UK, the Office for National Statistics said the decline was concentrated in April at the height of lockdown, with the economy bouncing back in June as restrictions eased.

Recovery seems underway in China; the economy returned to growth during Q2, the world’s second-largest economy growing 3.2%. This follows a historic 6.8% Q1 slump, China’s first contraction since at least 1992 when records began.

The International Monetary Fund (IMF) predicts the global economy will shrink 4.9% this year, a downgrade from previous projections. This downgrade reflects the likelihood of social distancing restrictions persisting for a longer period and the subsequent impact on consumer spending. Voluntary social distancing by people wary of exposing themselves to the risk of infection is also expected to make consumers cautious.

“The strength of this recovery is highly uncertain”

Next year, the IMF predict the global economy will expand by 5.4%; however, they stress there is a higher-than-usual degree of uncertainty surrounding its predictions. IMF Chief Economist Gita Gopinath commented: “The strength of this recovery is highly uncertain. On the one hand, you could get positive news, you could have better news on vaccines and on treatments and greater policy support, and that can trigger a faster recovery. But on the other hand, there are important downside risks, too,” “which is that the virus could come back up. You could have financial tightening that could lead to debt distress. So, there are both upsides and downsides.”

It seems the only real certainty at the moment is that these are likely to remain uncertain times. Rest assured, we remain on hand to navigate any uncertainty together.”

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Global Economy Braced

The pandemic has inflicted enormous human costs right across the globe. The worldwide response, which has involved governments imposing a range of lockdown measures, will inevitably have a huge impact on global economic activity.

Contraction across Europe

The release of first quarter GDP data provided a foretaste of the economic damage the pandemic is set to wreak. In the UK, for example, output fell by 2% across the first three months of 2020, with the economy shrinking by a staggering 5.8% in March alone.

Data for the 19-country Eurozone showed an even larger decline, with output across the bloc falling by a record 3.8% in the January– March period. France and Italy both plunged into recession, with quarterly contractions of 5.8% and4.7%, respectively, while the German economy also slipped into recession with first quarter GDP down 2.2%.

US and Japan economies shrinking According to preliminary estimates, the US economy shrank at an annualised rate of 4.8% in the first quarter, ending a record streak of expansion stretching back to 2014. And the Japanese economy, which was already struggling following a sales tax hike last October, also fell, contracting at an annualised rate of 3.4% in the opening three months of 2020.

China’s economy also reeling

The growth rate in China fell sharply as well, with the world’s second-largest economy shrinking at an annualised rate of 6.8% during the first quarter. The Chinese authorities have now abandoned setting a growth target, which may be an acknowledgement of the challenges facing its struggling economy amid heightened international hostilities due to the COVID-19 fallout.

‘Sharpest downturn since 1930s’

Continuing uncertainties surrounding the future spread of COVID-19 and the likelihood of developing a successful vaccine obviously make it difficult to predict the future path of the global economy. However, the International Monetary Fund’s latest assessment suggests we are facing the steepest economic downturn since the Great Depression.

Potential rebound?

While the IMF has stressed that its predictions are marked by ‘a higher- than-usual degree of uncertainty’, it is forecasting a rebound next year with the global economy expected to grow at a rate of 5.4% as activity normalises. However, if a second outbreak did occur, that could effectively keep the world in recession for a second consecutive year.”

Source: IMF, 2020