The pandemic is the main trigger for these policy upheavals but it has accelerated trends that were already there. Quite simply, the government has become even more important and taxes will need to rise to pay for its extended role. 

This isn’t happening just in the UK, either. Worldwide, governments are expected to solve problems that were previously left to markets or were of lower priority. States have picked up the tab for greater medical spending and welfare support on a huge and unprecedented scale. 

China’s industrial policy has driven western governments to recognise that they need similar strategies, inevitably involving much more intervention. The mixed economy is back. 

The same goes for climate change, with a sudden wider acceptance of the need for a strategy. And all this has become possible, or at least easier (apparently), through the availability of cheap money; rock-bottom interest rates. 

In the UK, the government has decided it needs to spend what it has to with Keynesian policies on a wartime scale, supporting people, protecting them against unemployment and propping up businesses — with an estimated cost of more than £400bn. 

Prompted by the need to convey messages of stability and responsibility to the bond markets, chancellor Rishi Sunak has set in train some huge tax rises over the next few years. But, in the light of his optimistic assumptions and remaining uncertainties about both the pandemic and therefore the economy, the path looks rocky. 

 Sunak hopes to balance the government’s books in 2025/26, mainly by raising corporation tax to 25 per cent and freezing the income tax personal allowance and higher-rate threshold. This reverses years of Conservative strategies and will mean lots of people eventually paying much more tax. But he may have to go a lot further if balancing the books really matters. 

The government will be supporting the economy and people until the autumn — extending furlough and self-employed support, as well as the extra £20 weekly Universal Credit payment, to 30 September. The cost of extending UC even further would be enormous, but might Sunak relent under great pressure?  

Industrial strategy

The industrial strategy is squarely aimed at encouraging investment to get the economy going. The headline initiative is the corporation tax ‘super-deduction’ of 130 per cent for companies’ investment in qualifying plant and machinery. There are other capital allowance provisions and a range of initiatives like freeports, industrial and regional grants, and even a UK infrastructure bank.  

But whether these initiatives will generate the much-needed burst of growth to produce the projected tax revenues must be open to doubt. The UK has settled into being a low-investment economy for at least the past decade and the pandemic has eroded confidence.  

The other side of the equation is the aforementioned tax rises. As well as freezing the personal allowance, and higher-rate and National Insurance Contribution thresholds, which will bring in an estimated £8.2bn for 2025/26, a raft of other thresholds and allowances has been paused, including the pensions lifetime allowance and the Isa annual limits. 

The big earner is expected to be the corporation tax increase for accounting periods ending in 2023/24, with the tax take thought to reach £17.2bn for 2025/26. Whether this will yield what the Treasury expects depends on whether the economy picks up in the wake of Covid and helped by the incentives. 

And will the government manage to keep a lid on its spending? A £4bn annual spending cut is built in
to projections. I think it seems optimistic. It will be hard to resist spending more on the NHS, schools and defence.   

Interest is the largest item of expenditure and that’s mostly outside the chancellor’s control. He will be tempted to borrow and borrow, rather than hiking still more taxes. The trouble is that increased economic activity and therefore inflation are already pushing up interest rates. Just a 1 per cent rise in gilt yields adds £10bn a year to the interest bill, according to one projection. Rocky times ahead — politically as well as economically.

 Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum 

The post Danby Bloch: Crucial turning point in government’s economic policy appeared first on Money Marketing.

Now it seems the FCA has weighed in on the question of how to solve this problem — at least indirectly.

You can see the FCA’s thinking on the issue from its Defined Benefit Advice Assessment Tool instructions. It’s all about the various things to consider when advising on DB transfers, but there is a very clear read-across to its thinking on taking income from pensions.

The instructions say advisers assessing whether a client should transfer funds from a DB pension must find out their “attitude to transfer risk”. This is “the client’s behavioural and emotional response to the risks and benefits of giving up ‘guaranteed’ benefits (or safeguarded benefits) for those which are flexible and not guaranteed”.

Trade-off

The read-across to the choice between buying an annuity and taking drawdown is clear. It is almost the same trade-off between wanting a guaranteed lifetime income and wanting flexibility. You might call it ‘attitude to drawdown’. With so few advisers now doing DB transfers, this is the main significance of these instructions to the wider advice community.

An annuity provides a guaranteed set lifetime income regardless of how long you live, uncorrelated with the stockmarket and not normally requiring any investment management, bother or expense. But an annuity is inflexible and indeed irreversible.

In contrast, drawdown allows you to have access when you need it, scope for investment growth depending on how the market goes and possible freedom from inheritance tax. But it involves the bother and expense of managing the process and the investments, possible losses and the chance you will run out of money before you die.

This isn’t to say an annuity and DB pension income are exactly the same. Plainly they aren’t. For example, unlike most annuities people are likely to buy, the income from a DB pension is more or less protected against inflation. But there is an obvious analogy.

What is more, many DB transfer decisions turn out to be all-or-nothing choices — the whole transfer value has to be transferred, or none of it. The options are nothing like so binary with the annuity-versus-drawdown decision and clients can choose some of both solutions.

The obvious strategy is to analyse clients’ expenditure between core and discretionary — at least at its most basic — and consider annuitising the income to cover core spending and using flexible drawdown for discretionary needs.

The FCA is keen for advisers assessing the merits of DB transfers to probe their client’s attitudes very carefully and methodically. The same would be true of the drawdown-versus-annuity question.

The regulator is especially keen for advisers to ask a good balance of questions that would elicit a range of responses from different clients, and that they don’t ask the sorts of question that would lead clients to answer in a particular way.

Simple tick-box questions about flexibility and tax efficiency are unlikely to pass muster. The adviser should challenge their client to think clearly about what they really want. Why does the client need such flexibility to meet essential spending patterns? What about the chances of losing out towards the end of their life? Will the client want to manage their money over the whole of a very long retirement?

Flexibility and certainty are competing needs — clients must think about their priorities.

The key risks to think about with DB transfers — and they are broadly the same for deciding on the balance between drawdown and annuity solutions — are:

• Investment risk — clients will have less income in retirement than they expect because of lower-than-anticipated investment performance
• Longevity risk — clients will run out of money before they die because they have previously drawn unsustainable amounts
• Inflation risk — clients will find rising prices erode the value of their capital and therefore their sustainable withdrawals.

There is also the risk they are no longer able to cope with managing their affairs.

It is hard to see how clients and advisers can evaluate these choices and have meaningful discussions about retirement without some kind of cashflow modelling. It won’t give a precise forecast of the future, but it will get both parties to think about the probable outcomes of their choices and make better decisions.

Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum

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People in their 20s and 30s, for instance, are two and a half times more likely to work in vulnerable industries like retail and hospitality, and their finances are mostly much more precarious than their older relatives, according to the Intergenerational Foundation.

In contrast, many older people, including advisers’ most prosperous clients, have actually accumulated more wealth in the last year thanks to both rising asset values – at least so far – and reduced expenditure.

So it is not surprising that when Platforum undertook a research project in 2020 for wealth manager Charles Stanley, we discovered clients have become even more interested in providing tangible help to younger relatives. Family and family financial planning has become really important.

Intergenerational advice ‘pertinent’ in Covid crisis

As in so many other areas – working from home and the use of technology, for instance – the pandemic is a moment of inflection, when an existing and sometimes mild trend has taken off on a sharp upwards trajectory. Several drivers have impacted on people’s attitudes and circumstances all at once.

Many of the young are in trouble. Jobs have been lost, businesses have failed, the mortgage market has tightened, parents and other relatives have died or fallen seriously ill. Someone has to help, and where older generations can assist, they often will.

But it is not always easy. Advisers require people skills and experience of a high order to negotiate the emotional reefs that can lie under the seemingly calm waters of a family’s complicated dynamics.

The trusted adviser can help clients decide how they can provide funds, how much they can afford, where to find the resources and how best to structure the assistance – gift, loan or trust arrangements. Technical knowledge is essential, but emotional intelligence is even more crucial.

Isolation from close relatives and life in lockdown have intensified people’s feelings about their families – how much they are missed and what they need. It can prompt feelings of mortality and insecurity and has nudged many more people to think of the attractions of making lifetime gifts – for the benefit of both donors and recipients.

Yet for some individuals and families, lockdown has also nurtured feelings of distrust, envy, resentment and jealousy. Often clients say they want to be fair to their various family members – but fairness means different things to different people.

Advisers have to steer clients through the potential difficulties where, for example, one child is successful and another has done much less well in life. Uneven distributions of assets can lead to conflict, but equality all round may not work out well either.

Advisers should consider the attractions of intergenerational planning, particularly securing the clients of tomorrow.

Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum

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A quick recap of BADR if you need one: you will only pay 10 per cent CGT on disposal of a qualifying business asset. If you are disposing of company shares or securities, its main activities must be trading (for example, not an investment business) or it should be the holding company of a trading group.

You have to be an employee or director of the company, or of a company in the same group. What’s more, you should have owned at least 5 per cent of the shares and voting rights in the company, as well as at least 5 per cent of its profits on distribution, assets on winding-up or disposal proceeds if the company is sold.

You must have fulfilled these conditions for at least two years up to the date of the disposal. There are various special rules if you acquired shares under an enterprise management incentive arrangement.

Budget 2020: Entrepreneurs’ relief cut from £10m to £1m

If you are selling all or part of an unincorporated business, you must have been a sole trader or business partner and owned your interest in the outfit for at least two years.

You can claim BADR many times and there are no age qualifications, but there is a limit to the total value of gains to which the relief applies. This cumulative lifetime limit is now £1m – right up until the current tax year, the ceiling was £10m but chancellor Sunak changed it in his March 2019 Budget.

Now, the OTS is recommending BADR should be further restricted by:

• Increasing the minimum qualifying shareholding to 25 per cent of the company instead of the current 5 per cent.
• Raising the minimum holding period of the shares or business assets to 10 years.
• Reintroducing a minimum age limit – possibly linked to the lowest retirement age under pension freedoms (i.e. currently age 55).

These proposals are all in the context of other recommendations, including the possible alignment of CGT and income tax rates, a substantial cut to the annual exempt amount, removal of the uplift of values on death, rebasing assets values to 2000, and extending holdover relief to more assets.

The OTS case for further restrictions on BADR is mainly based on its alleged incentives for taxpayers to distort their behaviour to avoid tax. The OTS is also of the view BADR does not incentivise entrepreneurs to set up new businesses.

The history of BADR is checkered – as is the whole CGT record. Back when CGT was first introduced in 1965, there was a tax relief for business assets called retirement relief, which relieved from tax some of the gains on the disposal of business assets when people reached retirement age, regardless of whether they actually retired.

Tony Wickenden: Are advisers ready for potential CGT reform?

This was then replaced by taper relief and then, in 2008, Labour chancellor Alistair Darling introduced entrepreneurs’ relief – with its generous £10m lifetime limit on qualifying gains and no age qualification. The idea was to encourage serial entrepreneurs.

The case for BADR is that it is an effective means to stimulate risk-taking. In fact, little or no serious research was carried out before the introduction of entrepreneurs’ relief in 2008 or in 2019 when it was cut back and even now when it is under attack again. Time and again chancellors, and now the OTS, talk of incentives with hardly any evidence to back their claims one way or the other.

The OTS does consider there is a strong case for the existence of a relief for retiring business owners as an alternative to a pension. So, if chancellor Sunak does follow its recommendations, we could swing back to the features of the old retirement relief.

One consequence would be that business owners get incentivised to hang onto their businesses, in many cases long after they should have sold them. And they will be encouraged to consider their business as their pension – hardly a recipe for retirement security.

If he increases the minimum holding to 25 per cent, thousands of smaller shareholders will be cut out of the relief.

The chancellor should pause before making any further changes to BADR. In considering its recommendations, the OTS drew on data from 2016/17 when a high proportion of the CGT paid related to assets that would have qualified for entrepreneurs’ relief. But that was when it covered gains of up to £10m – and now with the limit now a 10th of that, the situation is bound to have changed very markedly.

CGT is likely to change in the near future and the chances are that rates will go up in the wake of Covid-19. The pandemic has accelerated many developments in financial services; one of them is that advisers will be urging clients to consider making disposals sooner rather than later.

Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum

The post Danby Bloch: Reforming the ‘bad relief’ is a bad idea appeared first on Money Marketing.

It was crafted by Messrs James Stamp and John Baker in London in the first decade of the reign of George lll. Date marked 1769, it is a fairly standard design.

At roughly 50p a gram, the scrap-silver value of the tankard’s 750 grams is about £375.

That said, Georgian silver is mostly worth more than the pure metal and, judging by the asking price of several very similar objects in design, date and size, I might get somewhere between £1,000 and £2,000 for it.

But the difference between what you can sell something for, to a dealer or at auction, and what you might have to pay for it can range from 30 per cent to 100 per cent.

My tankard has been a poor investment, especially over the 30 years I have owned it. In 1990 a smart West End jeweller valued it for insurance at £2,500. Insurance values tend to be ambitious, so I conclude it has stayed roughly the same in nominal terms. If it had just kept pace with 2.8 per cent annual average inflation, however, it would now be worth £5,725.

Deciding for the best

What should I do with this unprofitable investment? Someday it will form part of my taxable estate and someone will have to find 40 per cent of its value.

I could sell it or gift it. The tankard counts as a chattel (tangible moveable property), so such a disposal would come under the special capital gains tax exemption for chattels if there were a gain. But the proceeds of sale or the value as a gift would, sadly, be less than £6,000 (the chattel’s exempt figure), so I wouldn’t need to enter the transaction in my tax return — although it would be sensible to make a record of the gift for inheritance tax, in case I keeled over in the following seven years.

If the object were worth more than £6,000 but not more than £15,000, some complex arithmetic means I would have to multiply the excess over £6,000 by five-thirds to calculate the maximum chargeable gain. On values over £15,000 the normal CGT rules apply.

Would my children want such an item? And whom should I give it to? Neither of them greatly enjoys cleaning silver, and they have told me that having an item so eminently nickable in their home is not something they want. That was my mother’s view too; on inheriting it, she promptly put it in the bank where it stayed for several decades.

The grandchildren might appreciate the tankard and other family things but are probably still a little young to have a fixed view.

Possessions often cause massive quarrels in families. Disputes can come to the boil after a death, but they may bubble along in the years before. Financial advisers of decades’ standing will tell you of epic fights over jewellery, pictures, even toy-soldier collections. I remember a client telling me how she always felt her children eyed up all her possessions whenever they came to visit her — so much so that she made a list of every item and earmarked them specifically for each of her potential heirs.

Nevertheless, if material things have the power to make people miserable, they can also bestow happiness. I hugely enjoy drinking from my tankard from time to time — although it is a little ostentatious. It would be a fine thing for it to stay in the family for a little longer and perhaps for many more generations too. So it won’t be me who sells it.

There is a growing awareness of family continuity and identity, and it isn’t all due to Ancestry.com and TV shows such as Who Do You Think You Are? The role of advisers in helping clients to manage the difficulties of passing on money, and possessions like my tankard, is both worthwhile and important.

Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum

The post Danby Bloch: Keeping the peace in family financial planning appeared first on Money Marketing.

The recommendations are presented as recommendations with some alternatives. It is vital for both investors and business owners that chancellor Rishi Sunak does not make the wrong choices.

The chances of CGT changes in the near future look high. We know the chancellor wants to balance the national books in the long term but without dampening down any recovery in the face of Covid-19 and Brexit.

Raising CGT rates alongside some other tweaks could generate a lot more revenue, with almost no short-term impact on the real economy. The tax is an easy target, affecting relatively few people (1.5 million over a 10-year period).

So, what are some of the recommendations?

Aligning CGT and income tax rates

The idea of aligning CGT rates to income tax rates has grabbed the headlines and elicited a surprising amount of support. Indeed, there is a serious danger it will become the new orthodoxy.

The main accusations are that income and gains are essentially the same and taxing them at different rates distorts taxpayer behaviour, especially by senior business management and business owners. But here are some reasons why CGT rates should be lower than income tax rates, especially for ordinary investors in shares and funds.

A high proportion of gains reflects a reduction in the value of money – inflation – rather than an increase in the value of investments. With this in mind, the OTS recommends there be some relief for inflation if the government decides to align gains and income tax rates.

CGT may be the best place to begin increasing taxes

But inflation-linking leads to lots more complexity, especially with collectives-based saving schemes. Taper relief may be a bit simpler but it distorts behaviour and doesn’t really do the job.

Most disposals of assets – businesses and property – are lumpy, even though the gains typically accrue over many years. So people who are normally basic rate taxpayers tend to be pushed well into higher rates, even though they would pay those rates if the gain had been spread over the years of ownership. Top-slicing relief on life assurance bonds reflects this need up to a point.

Most of the distortions the OTS has identified refer to the activities of highly paid employees benefiting from certain share incentive schemes and some other supposed behaviours of business owners. It seems perverse to introduce changes that will affect many ordinary investors in funds and shares because of the behaviour of a separate group of taxpayers. Surely it would be better to look at the specific issues with share schemes and business owners.

Cutting the annual exempt amount

Raising the rates of CGT and cutting the annual exempt amount – another recommendation – is sure to make investors even more reluctant to shift out of poorly-performing portfolios that don’t reflect their risk profile or objectives.

CGT is a barrier to good investment management and an encouragement to maintain the status quo. For instance, it wouldn’t encourage investors to switch into more sustainable investments.

MMI 2020: Covid-19 ‘catalyst for ESG’

Higher rates of CGT would also encourage funds and other tax shelters over individual shares. The report gives the example of the potential tax efficiency of a family investment company. The shareholders would aim to build up their assets in the family company to take advantage of lower rates that apply to capital gains.

The report omits to say this would be even more true of investors’ behaviour towards collectives like funds and offshore bonds, which can be kept for years, with trading going on under their shelter. But the disincentive from switching to new and perhaps cheaper and better providers would be even greater – with a stultifying effect on the innovation and competitiveness of the market.

Change position on death

Another recommendation is to change the CGT position on death – broadly meaning the inheritor of an asset would take it over at the deceased’s base acquisition value. The interplay with inheritance tax might make this a step too far. But the proposal to bring forward base values from March 1982 to 2000 would be welcome.

It would be a pity if the chancellor were to think there is a consensus in favour of aligning CGT and income tax rates. Why not write to him and to your MP to suggest it would be a very bad plan?

Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum

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Almost eight out of 10 financial advisers say they are now using cashflow modelling and three-quarters of these claim to carry out the exercise each year for clients in retirement, according to research by Platforum earlier this year. However, other data shows that some of their practices and approaches could be improved.

Cashflow modelling ought to be at the heart of virtually all financial planning. First and foremost, it can stimulate clients to think about their futures. Most of us find thinking about the future can be rather uncomfortable. It is hard to predict how much we will want to spend and even where we will want to spend our money. We mostly don’t know how long we will remain in reasonable health and certainly we don’t know how long we will live.

The future of cashflow modelling

So it is helpful to have a tool that almost forces us to confront the issues of where we will want to live, how long we will want to keep working – if at all – and how we will spend our time and money.

Setting a budget is an iterative process and it may need working through several scenarios.

Realistic projections

Another key purpose of cashflow modelling is to assess how realistic clients’ projected expenditure is in relation to their resources. Will the income be enough to cover their expected and desired levels of expenditure?

Finally, cashflow modelling is probably the only reliable way to assess a client’s capacity for loss. There’s not much point in asking a client whether they could cope with, say, a 20 per cent drop in the value of their portfolio unless they can see and understand its implications for their future income and standard of living.

But this valuable technique will live up to its considerable promise only if it is carried out with a good deal more skill and logic than are often apparent today. Critics point to several serious weaknesses in how many – possibly most – advisers do cashflow modelling.

Cashflow modelling is potentially misleading if the adviser bases the projections on a scarily optimistic estimate of how long the client might live. That shouldn’t be the median life expectancy; half the population will live longer than the median. A healthy 65-year-old has a fair chance of living to age 95 or even 100. The only safe method is to project to age 105 or later.

The old approach is to aggregate clients’ expenditure to see if the income will be enough to cover it. A more useful approach is to analyse expenditure according to how much is core and what proportion is more discretionary.

Projecting unrealistic growth rates is another serious criticism of much caseload modelling practice. The temptation is to project a fixed and arbitrary rate – often an annual 4 per cent. A frighteningly high proportion of advisers project growth rates at this level or higher.

Some advisers also make the elementary mistake of applying this somewhat optimistic expected growth rate regardless of the portfolio in which the client is actually invested. An extreme example could be a very low-risk client who is invested in a portfolio that almost entirely consists of bonds or cash. Clearly such an investment strategy would generate a long-term growth rate that would be very different from a portfolio that mainly consisted of equities.

First rules

So the first rule of cashflow modelling is to align the expected return for the model to the expected return from the portfolio in which the client is actually invested. And the second rule is to be realistic about the expected returns.

Likewise with inflation. The government is aiming for CPI inflation of 2 per cent. It is even achieving that at present – and it seems a reasonable rate for now. But a key criticism of most cashflow modelling is that in its traditional form it is based on a single set of assumptions with a single simple outcome: the client either seems to have enough money throughout their life or they don’t.

Leader: Cashflow modelling must offer answers, not just questions

This approach can be varied with some useful alternative scenarios that might, for instance, involve a big early loss or a lower growth rate – but it won’t provide an idea of the probability of meeting the client’s aims.

Stochastic modelling isn’t perfect; nothing that aims to make predictions about the future can be. But it does give an indication of the likelihood of an outcome in percentage terms rather than as an apparently deterministic forecast.

So a client can get a feel for how much a particular course, such as cutting the equity weighting in a portfolio or making a lump-sum lifetime gift to a granddaughter, will increase their chances of running out of money before they die.

Cashflow modelling has the capacity to be the core tool for most financial planning – but only if advisers can up their game.

Danby Bloch is  head of editorial strategy at Platforum

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Clients are asking advisers about the possible knock-on effects to their own finances, but they are mostly putting a high priority on helping others.

One colleague said it was the biggest single reason clients had been drawing extra cash sums this year, and others agreed this was indeed a trend in 2020 and beyond.

Questions to financial advisers starting with ‘Can I afford to…?’ are very common at almost any stage in a client’s life – and now the key question is ‘Can we afford to help our children and grandchildren?’

The inputs for deciding whether a client can afford to provide immediate and unexpected help are like most other unexpected reductions in wealth, such as substantial investment losses. And the implications are also similar.

If the client is still working, they may have the option of working longer or earning more. Otherwise – and especially after retirement – the issue is the extent to which the fall in the client’s assets will impact on future income and the financial margin for safety.

It isn’t possible to be definitive about the answer because the question ‘Can I afford to give away £x?’ calls for a guess about the future. So the best way to help the client think about the possibilities is to use a cashflow planning tool with stochastic modelling.

Giving away a capital sum is analogous to determining the extent to which they could sustain a capital loss to their investment portfolio – the capacity-for-loss issue. The financial planner would need to employ realistic assumptions about the client’s future income and capital needs as well as future investment returns, levels and stability of income and inflation. And the stochastic modelling would test the many possible scenarios to assess the likely chances of the client covering their future expenditure needs if they made the big gift.

The whole exercise must be regarded as a best guess. For example, the prediction might be that giving away £50,000 to their daughter who was in financial trouble might mean there would now be, say, a 60 per cent chance of the client meeting their retirement income goals instead of the current 80 per cent likelihood. The client then has to make some decisions. They might conclude that a 60 per cent chance was good enough, possibly even too pessimistic. Or they might think they could afford to give the daughter only £30,000, which would increase the chances of meeting their retirement goal to, say, about 70 per cent.

But they might decide that even 70 per cent was not acceptable and look for other solutions. For example, they could retire later if they were still working, cut their expected standard of living in retirement, make the transaction a loan for at least a proportion, or increase their level of saving into the pension now to make good the possible future shortfall.

Intergenerational planning

Another person could afford to give their daughter £100,000, and it might make little or no difference to their future income and security because of their large amounts of income and wealth in relation to their current and future needs and wants. However, if this relatively rich person had two other children to whom they should be equally generous, the prospect of giving away £300,000 might be more worrying.

But if the client can make large transfers easily and without risk, the question arises of why they don’t give away more. The reasons for making gifts would be the pleasure giving and receiving often generates, as well as the satisfaction of saving inheritance tax. Making such a suggestion to a client – who might not have considered it – can make for some very effective intergenerational financial planning.

There may, however, be good reasons why the parent is not willing to make large gifts to the next generation or beyond. These could range from the potential recipient’s incompetence with money to the possibility of their relationship breaking down. In such cases, trust solutions are likely to be preferable.

Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum

The post Danby Bloch: Helping clients help their children appeared first on Money Marketing.

The tax threats had all the hallmarks of the Treasury floating some serious proposals that were “due to form the centrepiece of the Budget in November”. The chancellor announced a review of CGT back in July, so we know the Treasury and HM Revenue and Customs have been considering the tax in some depth.

The Treasury may well regard CGT as low-hanging fruit because gains are taxed at much lower rates than income. The tax rate on gains (other than on residential property) is only 10 per cent to the extent they fall within the basic-rate tax band, and it is only 20 per cent if the gain falls within the higher- or additional-rate bands – a lot better than having to pay 40 per cent or 45 per cent on income.

Furthermore, the first £12,300 of net gains realised in a year are exempt. Gains on second homes and buy-to-let property are currently subject to tax rates that are 8 per cent higher – 18 per cent in the basic-rate band and 28 per cent above that.

Is Sunak’s Capital Gains Tax review overdue?

Increased taxes

The idea floated in the press was that investors should pay tax on their capital gains at the same rate as they pay on their income. Capital gains are added on top of a person’s taxable income for the year to calculate the rate(s) of tax they would incur on the gain. There’s a precedent: a Conservative chancellor, Nigel Lawson, introduced the regime for several years, back when Margaret Thatcher was prime minister.

The Labour Party at the last election was keen to reduce the £12,300 annual exempt amount, but this hasn’t figured as a proposal so far. It exists, at least in part, for administrative reasons to keep thousands of small gains out of the tax net because they would clog up the system for little extra revenue.

A key question is when the chancellor is likely to introduce an increase in CGT rates.

Most economists expect Rishi Sunak to have to increase taxes at some point to start paying off some of the huge debt that is being built up to keep the economy going during and after the pandemic.

A plausible argument could be made that an increase to CGT would probably have a minimal immediate impact on the wider economy because it hits capital. However, if the chancellor wants to start the process of increasing taxes, CGT may be the best place to begin.

Potential plans

An obvious date for an increase in CGT following an announcement in the November Budget would be the start of the next tax year on 6 April 2021. HMRC would have time to prepare; the tax is based on an annual basis and the process of actually collecting the extra tax would start 18 months later for most gains. The announcement would prompt thousands of taxpayers to realise gains at the old rates in the last few months of 2020/21, but that might provide a welcome tax windfall.

Waiting until April 2022 to introduce an increase would give investors even more time to take advantage of the old regime and would postpone the impact of the tax for a further year – uncomfortably close to the next election. Introducing the increases to be effective immediately from Budget day would be tricky although probably just about feasible.

The basic strategy for investors should be to try to realise gains before any change is introduced and to postpone realising losses until after it comes in. That way they would pay the lower rate on the gains and get more relief on the losses. But, of course, there are always special circumstances and it doesn’t do to let the tax tail wag the investment dog – investment logic is usually more important than tax logic.

It would also make sense to use the £12,300 annual exempt amount, and to invest the maximum possible in Isas.

The potential CGT rise just adds another reason – in addition to the temporary stamp duty cut – for people who are already selling their BTL property or second home to get it done before the end of the tax year to avoid the possible extra 12 per cent or 17 per cent tax on gains.

However, for investors in shares and funds, the possible extra tax on gains is actually greater – from a benign 10 or 20 per cent to 40 per cent or even 45 per cent – albeit they usually have more flexibility about how they make their disposals.

The truly pessimistic will aim to act before November. Otherwise it may be best to wait until the Budget and see what happens then.

Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum

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In terms of Covid-19, the risks concern such questions as whether to stay indoors or go out, whom to visit, and if and when to re-engage the cleaner. Then, with death and illness so salient, many of us find ourselves contemplating these possibilities more frequently than ever. And, of course, the pandemic has affected the investment market and the value of our savings.

We tend to think of investment risk in a single dimension – the possibility of losing capital values for which the proxy is typically volatility and possibly maximum drawdown. But risk has more than one dimension, especially when it comes to taking capital and income from a pension or other portfolio to fund annual expenditure. Many clients find it hard to understand that changes in the value of their capital will impact on changes in their future income.

Cashflow planning can demonstrate the likelihood of clients’ money running out at some point in the future, based on various scenarios and assumptions about investment returns. Clients may therefore get an indirect sense of the security of their future income, but not necessarily a clear idea.

Maybe the answer is for advisers to pay more attention to finding out about investors’ attitude to risk with regard to the security of their income – not just their capital.

Different incomes

Some income is more dependable and secure than others. In most respects the most satisfactory income my wife and I receive is from our two state pensions and her teacher’s pension.

Pretty much every other source of income feels (and actually is) less secure. Dividends feel reasonably dependable, or at least more regular than capital gains, but recent experience undermines investors’ faith in such ‘natural’ income. And, nowadays, safe cash and fixed-interest investments produce negligible income returns.

The one exception is the widely but perhaps wrongly despised annuity, where a client can swap a capital sum for a guaranteed lifetime income.

Do clients really get to consider the relative merits of a lifetime guaranteed income from an annuity in relation to the flexibility of pension fund withdrawals – at least as part of their strategy? With such an income underpin, clients can afford to take more risk and get potentially higher long-term returns from their other assets.

The choice between capital and income withdrawals, and guaranteed annuity payments, is similar to the decision whether to transfer from a defined benefit pension to a defined contribution pension – and should be considered as carefully. As the pandemic has reminded us, there is more than one dimension of risk.

Different dimensions

How I feel about my future income and capital does not easily fit into a uni-dimensional risk scale of one to 10, or even one to 100. It is far more complicated than that because there are several dimensions of investment risk – just as there are several dimensions of pandemic risk.

There is the risk of losing money I can probably afford to lose, but which would keep me awake at night if it looked as if I had lost it: psychological tolerance of risk. That might change with familiarity with investing, coaching from an adviser and happy experience.

Novelty, friends’ and relations’ doom-mongering, and some unfortunate investments could all tip it the other way. I am more relaxed about the pandemic now that I am used to it, but it might have been different if a family member or I had caught it.

There is also the risk of losing money I can’t afford to lose if I want to maintain a lifestyle I have decided is reasonable: ‘capacity for loss’, in compliance speak.

The peculiarity of financial planning at the moment is there are simple and widely used techniques for measuring risk tolerance and so they receive most attention when setting clients’ risk profiles, and therefore portfolios. There’s a danger that the more useful and critical capacity-for-loss discussions are given less importance.

Risk with investing is much like risk in a pandemic. It needs talking about and probably at some length; a questionnaire is just a starting point for discussions.

But of course we are now nearly half a year on from the start of the pandemic – in our house we have been locked down since early March – and we aren’t anything like as panicky as we were in the very earliest days when we carefully wiped down everything that came into the house from Ocado, Amazon and the Royal Mail. We know much more and we have simply got used to the possible threat, but of course we could be overconfident now.

There are so many types and dimensions of risk, and different ways to experience and assess it. What’s more, our circumstances and our perception of them do not stand still, especially now. So talking about risk with clients should be a continuing dialogue around change.

Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum

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The chancellor presented investors, businesses and employers generally with an agenda that they need to take seriously. Clients will want to discuss it all and advisers should be prepared, even if much of it is out of their usual scope.

The Summer Statement arrived on 8 July roughly halfway between the chancellor’s March Budget and his full Autumn Budget, when there will be even more spending plans and tax changes.

Government finances are in seriously deep deficit. In May this year, for the first time since 1963, total government debt exceeded 100 per cent of GDP the UK’s economic output for the whole year.

Should you be tempted back into the residential property market by the temporary cut in stamp duty?

Early signs are of hugely increased activity by residential property buyers mainly with the unwinding of the lockdown.

From 8 July 2020 to 31 March 2021, there is to be no stamp duty land tax on the first £500,000 slice of property value in England and Northern Ireland. This should take nine tenths of properties out of SDLT and create a tax saving of up to £15,000 on the rest, although the 3 per cent additional rate will still apply to second homes etc.

At the time of writing the rest of the UK home countries had not joined in – but it seems likely Wales and Scotland won’t be far behind with similar moves.

Whether the SDLT temporary cut should be taken as a seriously strong buying signal is a moot point. The saving is pretty small in overall percentage terms; the tax tail should not wag the investment dog.

Will the new green homes grant make spending on energy saving on homes and buy to let property worthwhile?

A resounding yes is the answer for most people – assuming there are no nasties in the small print of the scheme when it appears. The green homes grant will provide at least £2 for every £1 up to £5,000 per household to homeowners and landlords who spend on making their residential properties more energy efficient and it’s up to £10,000 for those on the lowest incomes.

For example, a homeowner installing a cavity wall and floor insulation costing £4,000, will only pay £1,320 and the government will then cover the remaining £2,680. But don’t spend the money till the new rules come out.

How should restaurant and accommodation businesses treat the temporary cut in VAT?

A reduced (5 per cent) rate of VAT will apply across the UK from 15 July 2020 to 12 January 2021 to supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises. The cut will also apply to supplies of accommodation and admission to attractions like zoos.

Businesses in all these areas will have to decide whether they need to cut their prices to tempt the punters in or to keep their net prices to consumers more or less the same and try to rebuild their profitability.

Markets and businesses differ from each other and some may come under consumer and competitive pressure to cut their net prices, but those who can will aim to keep their prices up and try to rebuild their capital base.

Should employers take on new trainees and apprentices to get the new subsidies?

Employers with the capacity could find it worthwhile to provide effective training for people who will give value in the longer term.

In particular, the ‘kickstart scheme’ aims to provide six-month work placements for those aged 16-24, on universal credit and at risk of long-term unemployment. Government funding for each job will cover up to £6,500 for 100 per cent of the relevant national minimum wage for 25 hours a week plus the associated employer NICs and employer minimum auto-enrolment contributions.

Should employers retain employees who have been on furlough so they can claim the new job retention bonus?

The bonus is worth getting but it won’t cover all the costs of keeping an employee on furlough from August onwards or of employing them when the scheme comes to an end. So the decision should probably be based on whether the business can afford to keep the employee without the bonus and regard the extra sum of money as welcome assistance.

The job retention bonus will provide a one-off payment of £1,000 to UK employers for every previously furloughed employee who remains continuously employed through to the end of January 2021. Employees must earn more than £520 per month on average between the end of the furlough scheme and the end of January 2021.

Maybe brave advisers could consider taking clients out to restaurants early in the weeks of August to take advantage of the £10 per diner subsidy on food and soft drinks. A possible topic for conversation might be the upcoming tax increases to help pay for all this largesse.

Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum

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