The last time I met up with Graeme Clark, Courtiers Head of Private Clients and Paul Kemsley, Senior Private Client Manager, inflation had hit a 41-year high, while Jeremy Hunt had just given notice of a cocktail of tax rises to take effect in April. When I sat down with them recently for the latest Adviser Review, inflation stood at 10.1%, while the Chancellor’s tax-raising measures were edging ever closer.
If that wasn’t enough to drive the conversation and keep the Private Client Team busy and on its toes, interest rates had drifted even higher, while house prices had weakened. And a Spring Budget on 15 March will soon be upon us. There was some good news in that markets had staged something of a recovery.
With inflation coming down only slowly, but still above 10%, rising prices are certainly having an impact, said Paul. “Clients want that added level of comfort and security that they’ve got enough to accommodate the increase in their costs and that might mean needing to tweak their income a bit,” he said.
Graeme acknowledged that for clients’ investments to grow at a rate to match the current level of inflation was a real challenge.
Cash is king?
With interest rates having risen in recent months, Graeme agreed that bank and building society accounts had become more attractive. However, he believed these rates are temporary and will come down again.
Paul said it was established practice for Advisers to assess the needs of clients to hold some cash as an emergency fund, but that even with the higher rates on offer at the moment these didn’t come anywhere near to matching inflation. Many Courtiers clients stay with the company for 20 or 30 years and are more interested in long-term returns. Over that sort of time period, “our view is that investing in equities will be the better inflation hedge,” said Graeme.
Graeme said that holding lots of cash in banks or building society accounts also had its complications, including Financial Services Compensation Scheme deposit protection limits (£85,000 per person per bank/building society), different terms and conditions for different accounts, and rates that can suddenly change. “A lot of clients don’t have the inclination to deal with all that.”
Although there are some indications that inflation may have peaked, the same cannot be said for taxes. Not only have many allowances and thresholds been frozen, but as we informed you last Autumn, a number of tax rates are set to rise in April. On top of this, there’s the uncertainty over what’ll be in the Spring Budget on 15 March.
Graeme highlighted the rise in Capital Gains Tax (CGT) announced in November’s Autumn Statement as “the biggest of the coming changes”. Although cutting the allowance from £12,300 to £6,000 in April “is not going to make a huge difference in the great scheme of things for Courtiers clients,” Graeme said, “the big change” would be if CGT rates are harmonised to income tax rates. Currently, he agreed the tax system “is skewed towards CGT” with rates of 10% for basic rate taxpayers, and 20% for higher and additional rate taxpayers (with an additional 8% if the asset disposed of is property) compared to 20%, 40% and 45% for income.
“This would make dividends and generating income an attractive alternative.” The type of tax planning that Courtiers carries out for its clients might also need to be altered.
Certain products might become more attractive, said Graeme, particularly offshore bonds. These allow people to defer tax and are subject to the income tax regime rather than the CGT tax regime.
The March Budget
Although, ahead of the Budget on 15 March there’s the usual clamour to cut taxes, Paul judged this as “unlikely”. He said he expects to see clarification on help with energy bills. There might also be measures aimed at simplifying ISAs.
Measures to encourage people who’ve retired to return to work by raising the Lifetime Allowance for pension contributions from its current level of £1,073,100 might also feature. And there could be measures aimed at increasing the number of people in work. These might include bringing forward the dates for the rising of the State Pension Age and more financial support for childcare. We’ll be providing an immediate response to the Budget, as well as more detailed analysis in the days that follow. Look out for coverage.
After the collapse in the markets in October, the subsequent recovery has been welcome news for clients, said Paul. The vast majority of clients recognise there will be periods when markets experience a downturn, he said as he explained how the annual review process and stress testing of client portfolios helped to educate clients that there’s the potential for a market downturn at some point. Clients were aware first “not to panic” and second “it’s more than likely that the markets will recover.”
Graeme said there can be a tendency for some clients to want to take on more risk when markets are rising. This has the potential to backfire, he warned, especially when markets are approaching their peak. “Our job as Advisers is to stand back with clients, and say ‘Okay this has happened, this is what you need as a return to achieve your goals and objectives, why take more risk?’ Or maybe we suggest you do need to take more risk to achieve those goals.”
Paul acknowledged that (as covered in a recent article) house prices are expected to fall this year. However, he said the impact should not be overstated and that unless clients are looking to sell this shouldn’t be an issue. Graeme added that predictions of an 8% or 10% fall were only averages and that there were pockets of the country, such as around Henley-on-Thames where the housing market would remain strong.
In a recent article, Courtiers CEO Jamie Shepperd talked about how Courtiers is constantly evolving to meet the needs of clients. Asked for an example within the Private Client department, Graeme pointed to the recent appointment of two new Advisers. Graeme added that many clients were “grateful” for the help they received from their Adviser in meeting the requirement for many trusts to be registered for the first time. “This was an extension of the many services that we offer,” explained Paul.
It’s February, a time when a lot of Graeme and Paul’s thoughts and those of their fellow Advisers turn towards the end of the tax year. The weeks and months leading up to 5 April are important because they present tax planning opportunities, a subject we covered last year. Graeme said, “the three main ones” are maximising pension contributions, topping up ISA subscriptions and Capital Gains Tax.
With a number of taxes going up in April and many thresholds and allowances frozen, taking advantage of these opportunities is if anything even more important this year than in previous years.
Please contact us if you’d like any information about these tax planning opportunities, or if you’d like to discuss anything else raised in this article.