Monthly Archives: February 2017

HMRC, the ultra-rich and the not so rich
February 2017

Parliament’s Public Accounts Committee thinks that the “government must take a tougher stance on taxing the very wealthy.”

In 2009, HM Revenue & Customs (HMRC) set a specialist team to focus on the tax affairs of high net worth individuals (HNWIs is the jargon).  At the time, HNWIs were defined as people with net assets exceeding £20m, although in 2016 the threshold was cut to £10m.  The latest figures (for 2014/15) shows that this select group of around 6,500 individuals paid £3.5bn in income and capital gains tax – over £535,000 a head.

That might sound like a healthy contribution to government finances, but a report from the House of Commons Public Accounts Committee (PAC) issued in January was highly critical of HMRC’s efforts in handling their richest clients, each of which is allocated a dedicated “customer relationship manager”.  The PAC felt that HMRC was not tough enough in dealing with tax evasion and avoidance by HNWIs, even though at any one time a third of the group were subject to open enquiries into their tax affairs.  There was a call for more prosecutions: in the five years to 31 March 2016, HMRC completed investigations into 72 HNWIs for potential tax fraud, but only two of these were criminal cases, of which one was successfully prosecuted.

One worrying suggestion from the PAC was that HNWIs should be required to provide details of their assets on their tax returns, a feature of some other countries’ tax systems.  The PAC notes that “HMRC has been looking at what further information HNWIs could be required to report to help improve its understanding of their wealth.  The Department told us the issue is currently being considered by ministers.”

If you are thinking that you don’t count as a HNWI, do not imagine that HMRC is neglecting you.  Two years after the HNWI Unit was set up, the Affluent Unit was established, which now covers people with income of over £150,000 and/or net assets of £1m or more.  The latter criterion is significant: rising house prices and strong investment markets have swollen the potential members of this second tier.

As we near the tax year end, make sure that you talk to us about any tax planning before taking action – or hearing from a unit of HMRC…

The value of your tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Is a return to inflation on the cards?
February 2017

December’s inflation figure was the highest since July 2015.

For much of 2015, inflation barely existed.  On the government’s chosen measure, the Consumer Prices Index (CPI), annual inflation oscillated between 0.3% and -0.1%.  2016 was a rather different story: the starting point was 0.3%, but by December prices were rising by 1.6% a year.

The sharp rise over the year is mainly the result of the weakness of the pound since the Brexit vote and rising oil prices – it is easy to forget that we started 2016 with supermarkets selling petrol at 99.9p a litre and diesel at 99.8p.  Looking ahead, there is general agreement that inflation will continue on an upward path.  The Bank of England’s most recent inflation report estimated that 2017 would end with inflation at 2.7% and not return to its 2% target until 2020.  Some commentators are more pessimistic.

While the latest figures show that food prices are still falling year-on-year, the other eleven categories making up the CPI are all now in positive territory, as they have been since October.  One indicator of what is coming down the line is that prices for materials and fuels paid by UK manufacturers for processing (so-called input prices) rose 15.8% in 2016.

The re-emergence of inflation is unlikely to mean any immediate rise in short term interest rates.  The Bank of England has so far expressed the view that it will “look through” an increase stemming from external factors beyond its control, such as oil and currency volatility. For investors, the message is one that should never have been forgotten: when considering investment returns, strip out the effects of inflation.  A 2% interest rate represents a loss if inflation is running at 2.5%.

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

 

The end of the tax year: 5 April reminders
February 2017

As the end of the tax year nears, remember the 5 April is a multi-faceted deadline.

In 2017, the tax year ends on Wednesday 5 April, over a week before Easter. The Budget is almost a month earlier (8 March), but that should not affect most tax year end actions. As a reminder, here are some of this year’s points to consider, and act on if necessary, by 5 April:

  • If your pension benefits were worth over £1.25m in total on 5 April 2014, you have until 5 April 2017 to claim individual protection.
  • If you reached state pension age before 6 April 2016, 5 April is the deadline for making Class 3A voluntary contributions to top up your state pension.
  • 5 April is the last day for making pension contributions to exploit up to £50,000 of unused annual allowance from 2013/14.
  • If your employer offers salary sacrifice arrangements, the new, harsher, tax rules will apply immediately for any starting after 5 April. Arrangements which begin before 6 April 2017 will enjoy the old tax rules for another year (another four years for sacrifice involving cars, accommodation and school fees).
  • Any of the £3,000 annual exemption for inheritance tax that was unused in 2015/16 will be lost unless you make gifts covering both this tax year’s exemption in full and the unused balance from the previous year.
  • If you have started to draw a flexible income from your pension arrangements, the maximum further tax-efficient pension contribution you can make will fall from £10,000 to £4,000 on 6 April.
  • Your annual capital gains tax exemption of £11,100 will disappear on 5 April.
  • 5 April is the final day to make ISA contributions of up to £15,240 for the current tax year.

If any of these strike a chord, do please talk to us: just because there is a deadline, does not mean you have to act.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Auto Enrolment: seven million and counting
February 2017

Automatic enrolment has reached a new landmark, but the path from 2017 onwards could be challenging.

When automatic enrolment (AE) into workplace pensions started in October 2012, there were some doubts about how successful it would be.  A little over four years later, few would argue that AE has not been a success, at least so far.

The latest data from The Pensions Regulator (TPR) shows that more than seven million people have now been put into a pension by their employer because of AE.  More than 340,000 employers have so far complied with the AE responsibilities.  The earliest were the largest employers and the stage has now been reached where AE is focussed on small and micro employers (sub-30 employees).

Such is the skew towards small employer sizes in the UK, that 2017 will see over 700,000 employers embark on their AE responsibilities, double the number so far.  There are already signs that compliance among smaller employers is becoming an issue.  In the third quarter of 2016, TPR issued over 15,000 compliance notices against the 11,000 it had issued in total over the previous 15 quarters.  It was a similar story on the imposition of penalties, with the number in the most serious category − escalating penalty notices of up to £10,000 a day − three and a half times the previous 15 quarters’ total.

In 2017, the Department for Work and Pensions will be undertaking a review of the AE process, which could eventually see new measures to extend AE to the self-employed and those with multiple low-paid jobs.  The review will not explicitly propose increased levels of contributions, although most pension experts think that the current ceiling of 8%, due to be reached in April 2019, is too low.  At present the total contribution is just 2%, split equally between employer and employee, which may explain why few people have opted out.  Next year, when employees’ contributions treble and employers’ double, could see a reaction against AE.

AE is a step on the road to adequate pension provision, but on its own will not be adequate for many people, particularly those who have only a limited time remaining in which to contribute.

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

Another good year for sterling investors in the world stock markets
February 2017

At first sight, the results from the world’s main share markets in 2016 appear mixed, but that’s before currency effects are considered.

 

Drilling into the raw numbers reveals a few interesting insights:

  • The FTSE 100 rise was the first for three years and was mainly due to the dominance of the index by multinational companies whose overseas earnings became more valuable as Sterling declined after the Brexit vote on 23 June.  The FTSE 250, which has a greater exposure to UK focussed (medium sized) companies, rose by just 3.7%.
  • Sterling had a bad year, which significantly boosted the returns for UK investors in foreign markets.  The pound was down 19.4% against the Japanese Yen, 13.8% against the Euro and 16.7% against the dollar.  Thus investments in European and Japanese markets were more profitable than an investment in the FTSE 100, despite what the (local currency-based) index numbers suggest.  Once again, the wisdom of investment diversification has been illustrated.
  • Emerging markets turned in widely different returns, a reminder that looking at just one global emerging markets index (or, indeed, choosing a fund which tracks one overall index) can be misleading.  Brazil, which performed badly in 2015 as the markets and its currency weakened in the wake of political scandals, was a star performer in 2016, returning over 90% to sterling based investors.

2017 is likely to throw up some further surprises.

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