The squeeze

Given Labour’s ambitions to spend more on public services, but with untrammelled borrowing out of the question ever since Liz Truss’s dalliance with bond markets, higher taxes are inevitable.

However, new Chancellor of the Exchequer Rachel Reeves has not given much away about how much she’ll take – the manifesto mentions ‘only’ £7–8 billion or so of estimated revenues, mainly from closing loopholes on non-doms and imposing VAT on private school fees. While a staggering sum in its own right, it nonetheless pales in comparison to the overall tax haul and will certainly not be enough to move many of Labour’s preferred dials.

We can therefore surmise that further hikes lie down the line. Some have speculated that capital gains tax could be increased, perhaps in the autumn. If so, it would plausibly happen overnight, minimising any warning to crystallise profits at a lower rate. Other rumours include the possibility of closing loopholes relating to agricultural land and inheritance tax.

On this particular front, we think it generally unwise to take pre-emptive action which could prove a mis-step. It rarely pays off to boldly rearrange your assets on the basis of what others might decide. Broader conversations centred around your financial goals are usually the best way forward.

Besides, it may well be the case that the young government opts to prove its fiscal discipline. Waiting a year or so might buy it headroom for spending in a future budget, especially if international borrowers conclude that the UK really is one of the world’s safest havens for the time being.

Counting the uncountable

But whatever ‘dullness dividend’ accrues to British assets, it will ultimately have to be weighed against the cumulative effects of Labour policies over the coming years.

In this respect, Angela Merkel’s Germany serves as a warning – her decade-plus as Chancellor was hailed as a model of sensible Teutonic order. But no sooner had she stepped down than the bill of her anti-nuclear energy policy came due – in rubles.

We cannot know in advance whether Labour’s clean energy ambitions or indeed any other of their manifesto pledges will be successful or self-sabotaging, but they will undoubtedly have an effect. The point is that although the short-term political outcome is clear, long-term uncertainty remains.

Indeed, supply-side reforms may represent the juiciest low-hanging fruit for Labour to pluck. Development of nuclear power plants, prisons, film studios, department stores and of course houses have all been blocked over the past 20 years or so. Giving the green light costs nothing to the Treasury and may well spur increases in productivity.

But Labour’s interventionist instinct is all too visible in a battery of new regulations to be foisted on businesses. With costs not easily quantified, such measures are typically subject to less analysis than those with numbers attached (whether plausible or not), yet their long-term effects could be substantial.

And that is before we even consider what lies downstream of cultural policies. After all, the Enlightenment was never in any manifesto, but measures to set it back have featured in many.

Looking rosy?

Back in 2010, the Conservative–Lib Dem coalition made the most of a note left in the Treasury apologising for there being ‘no money left’. Now, a fresh intake of Labour spin doctors is putting out a twist on that blame game, insisting that they’re the victims of an economic hospital pass. Is that fair?

It’s true that interest rates are relatively high and public debt is a chastening 100% of GDP, but the picture is not unremittingly bleak. UK growth has recently been the highest of all G7 nations, inflation is down to its 2% target, and manufacturing activity is expanding, in stark contrast to sharp industrial declines in France, Italy and Germany.

Looking ahead, Capital Economics forecasts GDP growth of 1.2% in 2024 and 1.5% in both 2025 and 2026, above the consensus view. This is in part due to the anticipated productivity benefits of artificial intelligence.

All in all, it may well be that both Emmanuel Macron and Rishi Sunak rue their summer snap elections, albeit for different reasons.

Debt timebomb?

We can be reassured that Rachel Reeves seems to have taken on board the lesson of the Liz Truss ‘Mini-Budget Moment’ back in 2022, that borrowing for the purpose of uncapped public spending does not make for happy lenders.

Somewhat surprisingly, however, this episode does not seem to have made its mark internationally. Neither US political party seems keen to get to grips with public debt, while in France the Popular Front is insisting on hundreds of billions of euros of splurging, all while public debt is well over 100% of GDP. Are we due some sort of Financial Crisis redux?

At least the US has the privileged status of having the world’s reserve currency and largest economy. We have the sense, though, that public debt will carry on rising until it can’t, much like the periodic bouts of brinkmanship that arise over the US debt ceiling. As Churchill is supposed to have said, ‘you can always count on Americans to do the right thing – after they’ve tried everything else’.

France, meanwhile, has the reprieve of its political quagmire. Mélenchon’s alliance fell short of enough seats to force its way. French government bond yields have actually fallen slightly, grateful for the stasis which may grip the Fifth Republic for perhaps the next 12 months.

Furthermore, we should remind ourselves that while public debt is indeed a drag on present growth through interest payments, global net borrowing is precisely zero – we owe it to each other.

Hotter, colder

Nonetheless, a low-octane governmental baton pass such as the one we have just managed in the UK remains something to be envied. Though we are sadly not strangers to political violence or indeed assassination attempts, we have thankfully not had to pre-emptively deploy tens of thousands of riot police, neither have we witnessed candidates writing off elections as rigged.

Are we just lucky to have rarely suffered from such febrile political atmospheres, or is there something to our much-maligned electoral system that inoculates against it?

Though lambasted for its lack of proportionality, our First Past The Post (FPTP) electoral system has the infinitely greater virtue of producing (most of the time) decisive yet fragile majorities. These enable governments to legislate without compromise or back-room dealing, while preserving the all-important ability of the electorate to calmly send them packing overnight.

A curious parallel with investing is visible here – in both electoral systems and markets, error correction is paramount. As Hayek observed, markets enable individuals to make conjectures about prices of goods and services – conjectures containing dispersed knowledge of supply, demand and so on.

Each of these conjectures no doubt contains errors – as none of us is infallible and the world changes unpredictably. Well-functioning markets constantly correct those errors, providing bleeding-edge estimates of perceived value. Poorly functioning markets – those which brook no price disagreement – fail to reflect wider knowledge.

An argument for investing in index-tracking funds, therefore, is that they maximise this error-correcting potential. Perhaps there is a sense in which active managers are to portfolios what central planners are to economies.

Ultimately, both markets and governments make mistakes. It is therefore unrealistic to say ‘things can only get better’. But with sound systems of error correction, we can happily and irrefutably conclude that things can always get better.

Watch our latest Economic Update

Important information

As a bank, we do not have a political position and our clients have a wide range of views on politics.

Investments can go up and down in value and you may not get back the full amount originally invested.

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What Labour has said

The Labour manifesto is light on detail but commits to not raising income tax, VAT or national insurance. These are the three biggest revenue generators, so it begs the question as to where funds will come from for any increased public spending. The manifesto sets out revenue raising measures including a significant £5bn chunk from reducing tax avoidance, but it’s likely that more will be needed.

With major taxes protected, CGT is potentially a target. In early June, Rachel Reeves said she had ‘no plans’ to raise CGT, but that falls short of a commitment and has largely served to fuel speculation that she may well do so.

Labour has already appointed a panel of tax experts to assist and advise. They include Edward Troup, former director at HM Treasury, ex First Permanent Secretary at HMRC and adviser to Kenneth Clarke in the 1990s. Troup is on record as wanting to increase taxes for the baby boomer generation, saying that today’s pensioners have it ‘ridiculously good’. A CGT hike could be part of his playbook.

How and when might a CGT rise happen?

Any CGT hike that is introduced will, inevitably, be done at short notice to prevent people from making pre-emptive sales to avoid the higher rates. CGT is driven by the date of the transaction, so it’s perfectly possible to change the rates mid-year.

In theory, it would therefore be possible for Rachel Reeves to introduce a CGT increase almost as soon as she takes office. The incoming 2010 Conservative government was elected on 6 May and George Osborne raised the CGT rate on 23 June. However, an immediate hike would require a very swift 180 degree turn from Ms Reeves on ‘no plans’ to raise CGT. She has also said that she wants to give the Office of Budget Responsibility ten weeks to review her plans, so any Budget event could not be before mid-September.

Should I take action now?

At present, any assets held at death are inherited at market value for CGT purposes. While wholesale reform of CGT, including this feature, is not impossible, it seems unlikely without consultation. Thus, if you have an asset which you are likely to hold all your life and which is standing at a gain, then it could make sense to do nothing.

CGT is triggered when the owner loses beneficial ownership of the asset. This can occur before the sale is completed. Thus, if you are in the process of disposing of a property, the trigger date for CGT is the exchange of contracts rather than completion. It follows that if you are part way through a sale, it would be sensible to proceed to exchange as soon as possible.

If you have an unrealised capital gain on an asset you are likely to realise before death, then the options involve triggering a CGT disposal in order to ensure that the gain is taxed at current rates. There are a number of ways to do this.

The most straightforward route would be a sale. For liquid assets – stocks, shares, etc. – this is quick and easy. It is less so for real estate assets. The decision to sell requires consideration of whether the risk of paying tax at higher rates under a new tax regime outweighs the benefit of paying tax in the future (essentially the time value of money) plus transaction costs and reinvestment risks. The lower the transaction costs and time value the greater the incentive to sell now.

So, if you intended to sell a liquid portfolio of equities in six months, the transaction costs are low and, in fact, the capital gain would still fall into the 2024/25 tax year. Your tax would therefore still fall due on 31 January 2026 and the time value would be nil. In those circumstances it might be wise to sell now. However, for an investment property which you had no immediate plan or need to sell, the tax would fall due within 60 days of completion and the transaction and reinvestment costs are high (legal fees, stamp duty, etc.), so holding on may make more sense.

Selling is not the only way to create a CGT disposal. A gift can be completed quickly and is also treated as a disposal, with the donee acquiring the asset at market value for future CGT purposes. The gain is taxed even though you have received no proceeds from the transaction. The tax is still payable in the normal way, and so you would need to ensure that you understood the market value of the asset and had the liquid funds to meet the tax liability.

Similarly, a gift into trust could create a CGT disposal, so that trustees acquire the asset at market value, effectively rebasing it for CGT purposes. There are other tax implications involved in establishing a trust which need to be weighed up carefully.

Inevitably the uncertainty makes it difficult to plan. Beyond the immediate thought process set out above, the doubt over the future of CGT reinforces our view that holding investments within a diverse range of structures will offer the best protection. If you hold assets in an ISA, pension, investment bond and general investment account as well as rental property, then a change to the taxation of one pot should not materially impact the whole financial plan.

Ultimately, anyone taking action to try to accelerate gains and avoid CGT increases should think about whether disposals make sense commercially as well as for tax purposes. The old maxim about tax tails wagging commercial dogs is probably over-used, but makes even more sense when the tax tail in question is speculative.

Clare Munro is our Senior Tax Advisor. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.

Important information

Tax laws are subject to change and taxation will vary depending on individual circumstances.

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Many of the world’s great businesses started with family money. Virgin Records owes its existence to a loan from Richard Branson’s Auntie Joyce. Mark Zuckerberg’s Facebook empire is said to have started with a $100,000 loan from his father. The list of such loans is long, and it may be getting longer.

According to the Centre for Entrepreneurs, today’s youth launch twice as many businesses as the baby boomer generation did. Last year a record 900,000 companies were started in the UK. These included 82,000 new online retailers and 21,000 new takeaway and street food stalls. 

Cautionary tale

Sadly, many of these will fail. My friend David Molian at Cranfield School of Management told me a story recently about a retired businessman — let’s call him “Richard” — who had risen to head up the US subsidiary of a well-known UK firm. 

A son from his first marriage fancied his abilities as an entrepreneur, and Richard backed his new e-commerce venture with an injection of £100,000 in the form of equity, giving him a substantial minority shareholding. The start-up began well, but within 18 months faltered and ran low on cash. 

Richard pumped in a further £150,000 in loans. His second wife was less than happy. Richard’s son made some unwise decisions. Three years later the business was declared insolvent. Creditors and shareholders received nothing.

“[The father] had spent a lifetime as a careful steward of corporate assets. His son saw himself as a buccaneering risk-taker. It took a long time to heal the personal rupture caused by the business failure,” says Molian.

Thinking like a banker

Wanting to give your kids a helping hand is only natural: lots of parents want to help their children on to the property ladder; many will have paid for the private education, too. Investing in a child’s business can be a tougher ask, though. Thinking like a professional banker can help. 

If you’re facing such a request, ask to see a business plan. It will give you a sense of the scale of your child’s ambition, and might even excite you. Writing up their research on the proposition, the market opportunity and the costings can encourage them to think through the challenges more thoroughly. 

Research shows that if you are an entrepreneur your children are 60 per cent more likely to be entrepreneurial. If you have business experience you can give valuable advice at this start-up stage. This assumes your children are prepared to take it on board – a big assumption perhaps!

One of the biggest mistakes the Bank of Mum and Dad makes is not to be clear about the terms of the financial arrangement. Is this a gift or a loan? If it is a loan, how much is it? What are the repayment terms? What is the interest rate? And what happens in the event of a default? Will there be any assets to claim against if the business fails?

Written agreements

Draft a written agreement that sets out the loan conditions. If it’s a big loan, don’t be afraid to enlist the assistance of a solicitor. Should the business fail, as many do, a formal legal agreement could help ensure you are recognised as a creditor. 

Research suggests that default rates for unmanaged loans between family and friends drop significantly if a signed agreement is in place with a monthly payment plan and automated electronic bank payments. 

Your child may ask you to “invest”, as Richard’s did. As with any equity investment there is a need to establish a return expectation. How and when will you realise a profit? Will there be a dividend or growth in the value of your share? A written agreement is even more necessary in this scenario because others may co-invest later as the business grows (hopefully), diluting your initial shareholding. You need a clear sense of your position. 

And, while you may just only be getting over the shock of the initial sum, consider how far you are willing to go beyond that first investment. Business angels have a rule of thumb: when you make an investment set aside the same amount again as contingency. Over-optimistic company founders almost invariably return for more money.

IHT planning

If your money is a gift you might consider it part of your inheritance planning strategy. Many clients tell us they have given a cash advance to one child and need to equalise the inheritance — often by carving that figure out of the will so that their other children do not feel hard done by. 

There are other ways to help your child’s business venture besides handing over cash. The loan of a garage, for example, free accommodation, or your time. I know one retired father who helped his son launch an electronic game — producing, packing and posting items, and working out the search algorithms to earn a “best buy” spot on the Amazon site. 

And, while it was hard work, it brought the father and son closer together.   

Be warned: it can go the other way. You can become an unpaid labourer. Time has value. As with any financial loan or gift, be clear about the terms and limits. 

Prudent giving

Most importantly, ensure you can afford whatever you give — be it money or time. Remember, the more sacrificial this is for you, the greater the risk of you feeling upset if you feel it is not appreciated or squandered.  

It can be infuriating if you are going short on luxuries to support your child’s venture and then discover them spending money on what you consider to be non-essentials. Similarly, it can be painful for your son or daughter if they feel they are working really hard and every time they want to relax and spoil themselves you are scowling in the background.

Ultimately, no two families are alike and emotions can run high. Being a branch manager of the Bank of Mum and Dad is not an easy job. A more formal approach may take some of the emotion out of the equation for some families. For others, it might heighten it. 

Yes, there is risk in supporting the next generation of entrepreneurs through the tough stages of business start-up and growth. But many businesses do succeed, and nothing can make most parents prouder than the thought that they have played a role in that success. Entrepreneurs always remember those who put trust in them at the journey’s start.

Shirley Coe is a senior private banker at Weatherbys Private Bank  

*Featured on the Financial Times website on 6th June 2024: Beware the Bank of Mum and Dad’s grey areas.

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Landing a windfall can bring with it all kinds of feelings and emotions, not always one of joy at your newfound riches. Many business owners, for instance, will have dreamt of what they would do with their life-changing cash windfall but then find themselves overwhelmed by the reality. ‘Sudden wealth syndrome’, as it is called, can leave many feeling isolated or overburdened, while an inheritance, which involves a loved one passing away can be an incredibly difficult time for all. When emotions run high, you may need to buy yourself some time.

With wealth comes an element of responsibility to preserve it and even grow further in the future and this is where Weatherbys can help.

Building a financial plan

Regardless of how you have inherited your windfall, a financial plan will help you and it’s core should be a cash flow forecast. Not only will a clear cash flow plan help you to save and eventually spend your money in the most tax-efficient manner,  but it will also help you answer an important question: how long will it last?

As part of any cash flow plan, we would always recommend that you have some cash at your disposal. Everyone’s circumstances are different of course, but we suggest you have an emergency wealth pot of typically three months of expenditure up to whatever allows you to sleep at night in a deposit account that you can access readily.

Buying reflection time

Besides a safety cash pot, there are other reasons why people who have landed a financial windfall may want to sit on cash. It buys them valuable time and provides them with liquidity (they can get their hands on their cash quickly), security of capital and flexibility. For example, going through a divorce can be a stressful and emotional experience yet it comes with financial ramifications. Beware those who want you to act swiftly – take the time to consider your options.

Taking advice around your cash deposits reduces the risk of making hasty or ill-informed decisions. With any windfall, there could be tax implications, while it may be beneficial to review existing debt arrangements. Again, investing in cash can be a short-term strategy that ties you over until you are clear on how you want your financial future to pan out.

Higher interest rates…but for how long?

Cash’s crown may have slipped during years of ultra-low interest rates that followed the financial crisis, but those days are over. In recent years, the Bank of England has been raising rates to combat rising inflation, and today, the Base Rate stands at 5.25 per cent compared to 0.25 per cent at the end of 2021. Subsequently, the rates on many deposit accounts have risen considerably and although consensus suggests that interest rates may have peaked, now is the perfect time to review your cash deposits to ensure you are making the most of the 2,000 per cent rise in Base Rate since its all-time low.

Deposit accounts with flexibility

We offer a range of deposit accounts from instant access to loyalty savers’ (that typically pay higher rates of interest). Depending on your circumstances, we can lend you money using your deposit account as security if you need access to your cash before the notice period matures. We review our deposit rates frequently to ensure they provide a fair return to both our savers and borrowers – for example, our 250-day notice account currently pays 5.1 per cent AER.

Security is key

Security is very important for depositors, particularly those with cash savings that exceed the Financial Services Compensation Scheme’s protection limit of £85,000. It’s why we maintain a strong balance sheet with a conservative loan-to-deposit ratio, which means we have far greater levels of deposits than we do outstanding loans. The majority of any surplus cash on our balance sheet is held with the Bank of England and can be accessed instantly.

Cash alternatives

Cash used as a short-term strategy is an attractive option but cash is not necessarily king, especially during periods of high inflation because it loses value over time eroding its purchasing power. Investors looking to preserve the purchasing power of their wealth may need to be prepared to take on some risk – and be comfortable seeing the value of their money fluctuate. This still leaves them the conundrum of where to invest in an uncertain environment.

We believe the best way to invest is straightforwardly, agnostically and by getting value for money. We can help our clients manage their core wealth by accessing global stock markets at the lowest possible cost. We are advocates of soundly engineered portfolios constructed using low-cost global tracker funds. No tactical tilts, no exotic assets and no management fees – just simplicity and transparency. Our global tracker portfolios (GTPs) are globally diversified and carefully constructed to provide you with just such a solution.

Another cash alternative is investing in gilts. Gilts are one of the safest forms of investment because they are issued by the UK government and they are currently offering potentially attractive yields (net of tax). The Weatherbys Gilt Portfolio is a low-risk alternative to term deposits and could have a role to play in your financial plans, particularly if you need access to some of your money within the next two years.

Case study one

Jennifer was recently divorced from her husband of more than 20 years. Having received a significant settlement, Jennifer needed to generate a level of income to maintain her and her family’s lifestyle for the foreseeable future. Although she had saved some money in some ISAs, she would not describe herself as a sophisticated investor.

We helped Jennifer first to build her understanding and confidence in financial decision-making before making any recommendations. Using tax-efficient financial solutions, we structured her divorce settlement to not only meet her ongoing needs but also to include an investment portfolio with the potential to grow over time, taking a moderate level of risk. Through our ongoing personal relationship with Jennifer, we will review her financial position regularly and modify our plan should her personal and family situation change.

Case study two

Having built a successful IT business over two decades, John decided to accept an offer from a larger rival through a trade sale. He hadn’t been expecting to sell at this stage but reckoned that such offers don’t come around too often. Although he was very happy with the sale, he was unsure what his next ‘career’ move would be but had designs to retrain in another line of work in the healthcare sector. Security for his family was a priority, as was paying a tax bill due in 2025, but he was unsure about making financial decisions without first understanding what he might be investing in and why.

Placing his money for the short term in a range of deposits, John then undertook a programme of financial education. Subsequently, John decided against investing large sums into property, preferring instead to invest in a diversified portfolio that would generate a certain income stream and give him peace of mind. With that in place, John had the time to retrain for a second career without any financial worries lingering in the background.

Get in touch

We offer a range of deposit accounts to help you manage your money over the short, medium and long term. No matter how complex your needs are, your Private Banker will work with you to identify the most suitable accounts and, if required, create a deposit portfolio that best fits your requirements.

Important information

Please note, the value of investments can go down as well as up, and you may get back less than you originally invested.

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The UK economy has experienced three years of inflation being far too high – well above the 2 per cent target, but it is now plausible that over the coming year or so it will be too low.

Inflation has declined from a peak of 11.1 per cent in October 2022 to 3.4 per cent in February this year, and I have been surprised by how quickly it has come down recently. There is a very good chance that it will fall below the 2 per cent target in April. And while many investors expect inflation to drift back up towards the 2 per cent target level, we believe it will fall to around 0.5 per cent by the end of this year.

When will interest rates be cut?

The Bank of England has publicly said that it is debating the best time to cut interest rates. If our inflation forecast is correct, that could be quite soon. We, along with many, have pencilled in a first interest rate cut in June. But what happens next is key.

If inflation does fall below 1 per cent later this year, the Bank will likely have to cut interest rates further than many expect. We believe that the current rate of 5.25 per cent could fall to 3 per cent at some point next year.

Watch the full recording

What is the outlook for the UK economy?

I am very confident that the mild recession we had at the end of last year is over. All the evidence suggests that the UK economy is gaining momentum.

The housing market is an important barometer for the wider economy, particularly when interest rates are moving up and down. House prices have started to tick up, which is positive and gives us an indication of where the rest of the economy is going.

Economic activity will receive a further boost if, as we believe, inflation falls markedly and interest rates continue to come down. This needs to be put into context – the economy isn’t going to go gangbusters. However, given there has been no growth for two years, we can say that an economic recovery is already underway – and we believe that it will be stronger than many anticipate.

What type of economy will the next UK government inherit?

While the economic backdrop is becoming more favourable for the current government, whoever wins the UK general election will still face a challenging economic and fiscal situation.

The next government will have to cope with a higher interest rate environment than we have seen for more than 15 years. Plus, there will be less scope to use fiscal policy to achieve political aims.

Cutting public spending is one solution, but it seems less politically palatable, especially for the Labour Party; it would likely opt to increase taxes instead. I suspect that the Conservative Party would conclude the same, albeit not to the same degree. We anticipate that whoever wins will raise taxes in one form or another to fund more public spending.

How will the US presidential election affect the US economy?

Unlike Europe and the UK, the US economy has been less affected by higher interest rates because many US households have 30-year fixed-rate mortgages. This means that rate hikes take longer to seep through into the economy.

While there is a slowdown coming, we believe the US economy will remain relatively strong and grow by around just over 2 per cent on average per year.

Turning to the US presidential election, it looks like a very close call between Biden and Trump, but of course no one knows what the outcome will be. One scenario, should Trump win, is whether he follows through on his comments to impose 10 per cent tariffs on all imports coming into the US and 60 per cent tariffs on all imports coming from China. It is hard to see how such tariffs would not be detrimental to the US economy as a whole. They would essentially lead to higher inflation (so households’ real incomes would be lower) and prevent the Fed from cutting interest rates as far as it otherwise might.

Important information

Capital Economics is an independent consultancy firm. Past performance is not a guide to future returns. Please note that the value of investments can go down as well as up, and you may get back less than you originally invested.

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Following concerns from various rural and coastal communities, Jeremy Hunt has abolished the Furnished Holiday Lettings tax regime. Originally introduced to assist the British tourism economy, properties which qualified as furnished holiday lets have had a number of tax advantages by comparison with standard buy-to-let investments. Significantly, furnished holiday lets were excluded from the restriction on deductibility of finance costs from rental income which affects general investment property.

Like normal buy to lets, those with furnished holiday lets can now expect to pay tax on their gross rental profits, with a deduction of 20% of the finance charges against the tax rather than a reduction of the profit. As highly geared buy-to-let investors have found, this can push the rental business from profitability to losses. The full impact of the changes has yet to be announced but will take effect from April 2025.

The context for the change is, firstly, the pressure from tourist areas, especially in the West Country, for measures to stop the short-term lettings market from undermining the provision of housing for locals. The thinking is that this has been driven, at least in part, by the disparity between the tax treatment of general property investment versus furnished holiday lets, which has encouraged a move away from long-term lets into short-term ones. It remains to be seen whether this levelling of the playing field will deliver more rural housing, but in the meantime it could affect estate and farming clients who have diversified into provision of holiday accommodation.

On capital gains, Jeremy Hunt has reduced the upper rate of capital gains tax currently paid on property sales from 28% to 24%. The aim is to encourage second and investment property owners to sell up and deliver more housing onto the market. The lower rate of 18% paid by basic rate taxpayers on property transactions will remain the same. Most residential property disposals are covered by main residence relief, so this will do nothing to encourage downsizers who may have been hoping for some sort of stamp duty land tax relief.

Stamp duty land tax relief did feature in the Budget speech, but only to abolish multiple dwellings relief where a lower rate of duty is paid on purchases of several properties in a single transaction. Property developers may be affected, although contracts exchanged before Budget day are protected as are any transactions that complete pre 1 June 2024.

Non-domiciles

Most of the noise around the taxation of non-domiciled people has come from the opposition rather than the Conservatives, although George Osborne had a go at limiting the scope of the available exemptions in 2017, and in doing so closed down the indefinite tax advantages which many had enjoyed previously.

Jeremy Hunt is going further. His measure abolishes the remittance basis of taxation under which non-UK domiciles can keep offshore income outside the UK tax net. Instead he proposes a simpler regime based on residence, rather than the arguably opaque legal concept of domicile. Individuals who opt into the new regime will not pay UK tax on any foreign income and gains arising in their first four years of tax residence, provided they have been non-tax resident for the last 10 years. This new regime will commence on 6 April 2025 and applies UK wide. Transitional provisions will apply, in particular to encourage current non-doms to repatriate capital at a reduced tax rate and allowing for rebasing of overseas assets to market value at 5 April 2019.

Jeremy Hunt’s approach may well take the fire out of Labour’s plans to abolish non-dom status, but he seems to have steered a course between removal of the perceived anomalous status of non-doms and maintaining a tax system with enough benefits to attract high net worth contributors to the economy. It could also encourage those who have been long-term non-residents to return.

Inheritance tax

Unmentioned in the Chancellor’s speech, but in among the HMRC website documents, was a proposal to move to a residence-based regime for inheritance tax. This would contrast with the present system which depends on the legal concept of domicile until a person has been tax resident for 15 years. It would involve a wholesale review of the present IHT regime, so is unlikely to happen soon, but, whereas the income tax measures might encourage UK domiciled returners to the UK, an IHT system based on residence might prompt them to stay offshore. Others looking to mitigate their IHT liabilities might want to join them.

Making work pay

The much trumpeted 2% cut to National Insurance Contributions was announced. It’s not clear how much working people actually appreciate the benefits of this cut; apparently the 2% cut announced in the autumn had no impact on polls. However, doubling down on it may make a meaningful difference to workers’ pay packets where the original 2% did not. It also restricts the benefits to working age people as anyone above state pension age is not liable to pay contributions. Neither are contributions due on investment or property income, and so older people, arguably the Conservatives’ natural voting turf, will not benefit.

Jeremy Hunt has also announced the reform of the anomaly whereby child benefit starts to be withdrawn from parents when one of the couple earns over £50,000, even though a dual income household where both parties earn £49,999 can claim the benefit in full. To deal with it properly requires an ability for HMRC to look at total household income, which is going to take time. In the interim, Hunt has gone some way to addressing the fairness issue by increasing the threshold at which the benefit is withdrawn to £60,000 with the taper applying between £60,000 and £80,000 salaries.

British ISA

We already have a range of ISAs – general, junior, lifetime, help-to-buy – and Jeremy Hunt is adding another. This one is for British investments and will allow investors to put £5,000 per year into a new British ISA in addition to the normal £20,000 ISA allowance.

While we can see why a Chancellor might want to encourage investment in British stocks, it’s difficult to see how the eligible investments for this new ISA will be defined. A consultation on the design and implementation of the new ISA has just opened and accepts contributions until 6 June 2024.

Alongside this, a new range of ‘British Savings Bonds’, a fixed interest investment, are to be distributed through National Savings & Investments.

Other matters

Among the matters for business, Jeremy Hunt has extended business rate reliefs, particularly for creative and hospitality industries, and raised the VAT threshold from £85,000 to £90,000 to relieve the administrative burden on small businesses.

Finally, business class and first class flights are to be the subject of an increase in the rates of Air Passenger Duty.

Summary

So, overall, the Chancellor seems to have done his best to wring tax savings out of the back of the nation’s sofa, arguably mending a few anomalies on the way. It’s probably no surprise that he hasn’t managed to conjure any significant tax rabbits from non-existent hats. However, it won’t have escaped taxpayers’ notice that he hasn’t addressed the increasing clamour to halt the freezes on thresholds for income tax, among others, which are pushing increasing numbers into higher rate tax liabilities.

Clare Munro is our Senior Tax Adviser. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.

Important information

This article does not constitute advice.  Tax laws are subject to change and taxation will vary depending on individual circumstances.

The post Spring Budget 2024: What it means for you appeared first on Weatherbys Private Bank.

As we outline below, there are two significant changes to the rules if you are considering contributing to your pension before this tax year end.

Boosting your pension pot got easier – no Lifetime allowance charge and higher annual allowance

The Lifetime Allowance (LTA) charge, which capped the level of tax-advantaged pension savings that could be accumulated over a lifetime, has been abolished from the 2023/24 tax year.  Previously if you had a substantial pension pot you may have been reluctant to make further contributions for fear of exceeding the £1,073,100 limit and incurring a tax charge.  Abolition of the Lifetime Allowance charge could enable you to contribute to what remains a highly tax-efficient structure. The second big change is that the maximum amount you can contribute to a pension each year has increased for 2023/24 to £60,000 from £40,000.

The old Lifetime Allowance remains relevant for calculating tax free cash and death benefits.  If you have claimed any form of Fixed Protection, that will allow you a higher level of tax free cash, but otherwise the tax free cash that you can withdraw from your fund is limited to 25% of £1,073,100 or £268,275.  It means that, if your pot grows to more than £1,073,100, or your higher protected allowance, anything paid as a lump sum above that limit will be taxable at your marginal income tax rate.

Pension Tax Relief before 6 April 2024

Tax relief is given for those contributions made in the tax year, which is why you must act before the end of the tax year on 5 April. To qualify you must be a so-called ‘relevant UK individual’ under the age of 75. Typically, that means that you need to be a UK resident or to have relevant UK earnings. This is usually employment income or self-employment income including income from furnished holiday lets – but not investment or general property income.

How much can you contribute?

For most people, the contributions which can attract relief will be driven by their earned income. The exception is that anyone can make a gross contribution of £3,600 (so £2,880 net) even if they have no income. In such circumstances, the basic rate relief is not clawed back.

Otherwise, the amount that anyone can save in a pension in a tax year is limited to the lower of their relevant earnings (earned income) and the available annual allowance. The available annual allowance is made up of the current year’s £60,000, plus any unused annual allowance from the previous three years. Importantly, you need to have been a member of a registered pension scheme during each of the previous three years to carry this allowance forward to the current tax year. As we mentioned above, the annual allowance increased from £40,000 to £60,000 for this tax year but any unused relief from previous tax years will be at the previous lower limit.

Case Study– how does it work in practice?

Take Bridget, who earns £200,000 per year and who hasn’t made any contributions to her Self-Invested Personal Pension (SIPP) for the past three years due to concerns about the Lifetime Allowance limit.

Should she want to top up her pension, her maximum contributions would be:

Bridget could contribute a total of £180,000 to her pension scheme before 6 April 2024 with the benefit of tax relief. Unused relief is used on a ‘first in first out’ basis. So, if Bridget only contributes £100,000 to her pension, she will use the current year’s relief, plus £40,000 from 2020/21.

You can only get relief based on your earnings for the current tax year. Let’s say Bridget earned £80,000 rather than £200,000; her capacity to make pension contributions in 2023/24 would be limited to £80,000.  In this case, she would use her 2023/24 allowance, plus £20,000 of the unused capacity carried forward from 2020/21. The remaining £20,000 annual allowance from 2020/21 would be lost.

Clearly getting the income tax relief is important and if you intend to use previous years’ pension relief capacity, it makes sense to get financial planning advice to ensure that you get the numbers right.  In particular, there are situations where the full annual allowance is not available and advice on contribution levels is critical.

• For those that earn more than £260,000 a year, the annual allowance is tapered down to a minimum of £10,000
• For those who’ve taken certain pension benefits, the Money Purchase Annual Allowance of £10,000 applies instead of the full £60,000.

Are more pension contributions right for me?

So what does this all mean for pension contributions in the 2023/24 tax year?

Pension saving is, first and foremost, a means of providing for retirement.  To encourage us to save for retirement, the Government gives tax relief for pension contributions on entry to the fund, on growth and partially on withdrawal.  In addition, the fund does not form part of your estate for IHT purposes. 

That all makes pensions highly attractive if you’re paying additional rate tax or if you are caught by one of the system’s tax rate ‘cliff edges’ – losing your personal allowance, for example.

There remains a good deal of uncertainty around the tax position of pensions and pension holders; a change of government could yet see a wholesale transformation of the tax relief environment.  If your pension savings have plenty of room for growth before hitting the old Lifetime Allowance, then making contributions should be a straightforward decision in favour of tax efficiency.

If your fund is at or near the old Lifetime Allowance, the possibility of a reintroduction of a cap on lifetime pension saving needs to be weighed against the other incentives, but the 2023 changes to pension relief limits create top up opportunities which weren’t there a year ago.

Action now

Whatever your pension position, we would welcome a discussion with you about the deadline for contributions this year and how we can help you to build retirement wealth.  Please call your private banking team or submit an enquiry using the button below.

Clare Munro is our Senior Tax Advisor. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.

Important information

This article does not constitute advice.  Tax laws are subject to change and taxation will vary depending on individual circumstances.

The post Pensions – how taking advice now could make a difference of £1000s appeared first on Weatherbys Private Bank.

In general, capital gains tax is charged at 20% when you sell an asset at a profit. However, assets which are considered ‘wasting assets’ with a useful life of 50 years or less fall outside the capital gains tax regime. Clearly there are many cars still on the road after 50 years, but broadly speaking, cars are mechanical structures which deteriorate over time and are not expected to last that long. Consequently, cars are considered wasting assets and are exempt from capital gains tax. That might sound good, but it also means that losses from car sales are not allowable. As most cars are sold at a loss, you can see why the capital gains tax exemption makes sense from HMRC’s viewpoint.

Sadly, there is no equivalent exemption from inheritance tax. If you are ‘domiciled’ in the UK, meaning that the UK is your permanent home, HMRC will want 40% of your worldwide estate over £325,000 on your death. Car collections form part of that worldwide estate and, in the absence of any planning, will need to be valued for probate purposes and included in the IHT calculation that is submitted to HMRC.

It is, of course, possible to make a gift of your cars during your lifetime and, if you survive for seven years from the date of the gift, then the gift is exempt from inheritance tax. The title to a car can be changed easily using the V5 form and so, in theory, this is an easy piece of estate planning. What makes it more complicated are the rules which prevent you from making gifts ‘with strings attached’. So, just as for inheritance tax purposes you cannot transfer your house to your children and continue to live in it, you cannot transfer your cars to your beneficiaries and continue to use and keep them as you did before. If you do, it’s called a ‘gift with reservation’ and it doesn’t work for inheritance tax.

The answer is that you should pay your beneficiaries a market rent for use of the car after making the gift. The rent will be taxable income for them, but they may find that the income tax liability is a good deal cheaper than paying the inheritance tax, particularly if your car has a pampered life and doesn’t go out very often. The rental values for classic cars are unlikely to bear much resemblance to those you’d find at a normal car hire company, so you might need to take some advice. Simply accepting an occasional lift in the gifted car will not cause the gift to be ineffective.

On the other hand, the matter of where to store the cars can be problematic. If you have special garage accommodation for your collection, moving the cars to your child’s house may not be practical. Bear in mind that HMRC may want sight of your insurance policy and the insurers will need accurate information on the whereabouts of the cars. So, if you keep the vehicles in their existing garage, you can expect HMRC to apply the gift with reservation provisions to stop your gift working for IHT purposes.

If, having made a gift of a car or two, you don’t survive for seven years after the gift, then additional tax may be due on your death. If the car’s value is less than the £325,000 nil rate band and you have not made other gifts in the seven years leading up to your death, then no further tax is due on the gift. Note, however, that the value of the car at the date of the gift is deducted from the £325,000 which is available for the rest of your estate. If, on the other hand, the value of the car is more than £325,000, then additional tax becomes due. So, for example, if you gift a car worth £500,000 and die after 5 years, then inheritance tax is due on the excess over £325,000, i.e. £175,000. The tax at 40% would be £70,000, but a tapering of the tax applies after three years, so for someone dying between 5 and 6 years after the gift, there is a 60% reduction. So rather than paying £70,000, the beneficiary would pay £28,000, an effective rate of 16% on the £175,000 which was subject to inheritance tax.

Another point to remember is that the growth in value of any car which is successfully gifted is outside your estate. So, even if you die within seven years of the gift, the value taxed is the original value at the point of gift, not the market value at the date of your death.

Finally, there is an exemption from both IHT and CGT for assets which are of national, scientific, historic or architectural interest. Usually this applies to buildings and gardens but could in theory apply to collections of historic vehicles. Inevitably the exemption comes with conditions, so the asset must remain in the UK and must be available for public access. When the car is transferred, following a death for example, the exemption will be withdrawn unless the new owner agrees to the conditions.

All in all, there is much to be said for thinking about estate planning for your car collection, but the inheritance tax rules are complicated, so drive carefully!

Clare Munro is our Senior Tax Advisor. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.

Important information
Tax laws are subject to change and taxation will vary depending on individual circumstances.

*Featured on the Walton-on-Thames Aston Martin blog (February 2024): The winding road to tax planning for car collections.

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Yes, is the positive and truthful answer. This time last year, we were staring down the barrel of dark recessions, rising inflation and higher interest rates. But those recessions never materialised. This year we see the economy recovering as inflation and interest rates fall. We don’t even expect this year’s major political elections to disrupt the economy too much.

Does last month’s surprise rise in inflation derail your forecasts?

No, I believe that was a blip, rather than set a new trend. I also believe inflation will rise again next month. But thereafter, there will be a steep fall, particularly in the UK. I suspect that by the middle of the year, inflation will be back to the 2 per cent targets in the UK, the eurozone and the US – with the UK getting there first in April.

Watch the full recording

Did central banks need to raise interest rates?

Some central bankers argued inflation that started to appear in 2021 was transitory and it would have subsided, without any action. There is some truth to that – the global factors such as energy and food inflation have fallen back very sharply. However, elements of domestic inflation have endured for longer and been higher than people expected. This was triggered by the big surge in global prices, which fed through into domestic economies. So, you have some elements of inflation that are transitory and others that are trends. The bottom line is inflation would not have fallen back as far as it has done, without the sharp rises in interest rates we have seen.

Could issues in the Red Sea cause a spike in inflation?

This is a risk that I’m most worried about. With ships rerouted, companies are having to pay more for fuel, insurance and labour. This has fed through into a 200 per cent jump in shipping container costs already. That said, it is not as bad as it was during the pandemic; it doesn’t dramatically change the inflation picture and we don’t see this feeding through into the prices of goods in shops. If the situation worsens, I’d still expect inflation to fall, albeit more slowly, but we are not crystallising this thought in any of our forecasts yet.

How have we avoided a severe degree of economic pain?

It’s been such a good and favourable result. Quite remarkable frankly because everyone was expecting a deep recession with a big rise in unemployment. What has happened is that instead of weak economic demand bringing price pressures down, supply has rebounded much quicker. This means prices can be lower or rise less rapidly without causing too much economic pain. We haven’t got away completely scot-free. Economies have been stagnating, it is just that they haven’t been shrinking.

Is there still a risk of recession?

There is but we need to put it into context. Some economies may be in recession right now, certainly in Europe, but it’s how painful recessions are that count. The bigger picture is that there has not been a huge collapse in economic activity. As I mentioned before, economies are stagnating rather than going backwards.

When will interest rates be cut and when they do, by how much?

It depends on the economy and how far inflation falls but we believe we are getting close to seeing the first interest rate cuts. I think the US is probably going to be the first to move, with an interest cut as early as March. Europe may follow in April, with the UK the last to the party sometime in June. Interest rates need to get down to a level of 3 per cent in the UK because that’s where the economy can grow at a decent rate and inflation can be stable at around 2 per cent. We think it could be a pretty fast move and expect to see rates in the UK fall to 3 per cent sometime next year.

Will a cut in interest rates lead to a rebound in economic activity?

Falling inflation itself boosts the real wages of households and the real spending power of businesses. That’s already happening. People are going to feel that their money can stretch a bit further over the next year or two. At the same time, the drag from higher interest rates is starting to fade, while a cut in rates will boost spending power. That’s why we think that in the second half of this year, we will see economies emerge from a period of stagnation with the outlook looking a little bit rosier.

How will the UK election affect the economy?

We know based on polling, the Government is far behind. They will need to do all they can to improve the mood and we expect to see some tax cuts this Spring. That is another reason why economic recovery will get going in the second half of the year. After the election, there’s less scope for the Government to influence economies in the near term. Whoever wins is going to be faced with an unfavourable public finances situation – they will have to keep a tight hand on the purse. I don’t think the result will dramatically change the outlook for the UK economy over the next three or four years. That will be dictated more by interest rates and global trends – as it will in the US when it goes to the polls in November.

The Weatherbys view

At Weatherbys we believe it is important to stay abreast of economic developments, but not to make plans entirely dependent on forecasts. We are in the fourth year of a new decade and we have experienced a pandemic, conflict in Europe (which is ongoing), rising inflation and higher interest rates. Yet, financial markets have seemingly shrugged it all off and risen to new heights.

We build investment portfolios that are all-weather affairs, designed to perform solidly whatever happens – rather than going all-in on a particular expectation of what the future holds. Our position is that you are much better off putting a bit of thought into financial planning and taking broad advice where it is needed on matters of income, retirement and your broader estate – not needlessly fine-tuning a portfolio and twitching on market news.

As ever, we remain at your disposal to solve whatever financial quandaries may be weighing on your mind.

Important information
Capital Economics is an independent consultancy firm. Past performance is not a guide to future returns. Please note that the value of investments can go down as well as up, and you may get back less than you originally invested.

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The answer can be glimpsed through the extraordinary coup that played out at OpenAI, the once non-profit whose proto-robot conversationalist got everyone talking. Its board sensationally defenestrated CEO Sam Altman, only to reinstate him within days.

To make head or tail of this, you have to understand two warring schools of thought. Both agree that AI could usher in a new era of superintelligence – but they take very different stances on whether it’s a good thing or not.

The ‘doom-mongering’ wing asserts that this technology poses an existential risk to humanity. We’re just months away, they claim, from hitting the threshold of computing power beyond which a budding HAL 9000 could exponentially re-engineer itself to sublimity and ultimately close the pod bay doors for all of us.

Preventing this nightmare scenario is the number one priority for the ‘effective altruists’ who think it plausible. What started out as a utilitarian project for more rational philanthropy has become singularly focused on slowing AI development until it can be safely ‘aligned’ to human interests.

OpenAI’s board – apparently of this mindset – concluded that, despite Altman’s public requests for regulation, progress was disconcertingly fast. They showed him the door.

Meanwhile, an opposing movement insists that such fears are founded on sand – in more ways than one. ‘Effective accelerationists’ (styled ‘e/acc’) say regulation will only benefit monopolists and the West’s rivals – far better, they cry, to charge full steam ahead.

The history of knowledge

With Altman back at the helm of OpenAI following a staff revolt, are we now hurtling towards the dawn of omniscient machines?

No – at least not yet. While generative AI is remarkable – with enormous potential for good and ill – these programmes are not about to become digital demigods.

To understand why, we must step back and consider the history of knowledge.

For thousands of years, human life was precarious, often violent, and commonly a drudge. But that all changed with the Enlightenment.

As a ‘clockwork’ understanding of the physical world built more reliable bridges and accurate ballistics, it became hopeless to cleave to ancestral authority. ‘Nullius in verba’ (‘Take nobody’s word for it’) went the motto of the newly formed Royal Society, and the Industrial Revolution was set in motion.

Crucially, it was not natural resources that lit the spark – after all, fossil fuels had been lying dormant the whole time. Instead, it was a new mode of generating knowledge that made all the difference.

But empiricism became, ironically, almost as sacrosanct as received wisdom had been. It is still the prevailing philosophy of science today, despite its defects.

Pseudo-rationality

The central flaw in the empirical approach is an unhealthy deference to data. The implicit assumption is that past performance is indeed a guide to future performance – the very opposite of the investment regulator’s refrain.

Self-described rationalists enjoin us to ‘be more Bayesian’ – to ‘update our prior beliefs’ according to new evidence. On the face of it, this sounds eminently sensible. But it is a beguiling folly.

The problem is that a data-driven mindset is prone to extrapolating patterns that may well not hold, by neglecting the importance of explanatory reasoning. Outside the cleanly delineated borders of game theory, people can, and habitually do, find ways to change the rules.

Karl Popper showed that induction is but a seductive fallacy, yet we are still swamped by articles drawing universal conclusions from mere snippets of history. Samples can’t hold a candle to better conjectures – that is, better explanations of how and why things have been the way they have been. Unlike the data, conjectures can stretch beyond the past tense into what could be.

Investment philosophy

What’s all this got to do with generative AI? Or investments, for that matter?

The crux is that the programs themselves are empirical. They ‘predict’ the best response to a prompt by maximising its statistical resemblance to training data.

They cannot, therefore, make creative leaps beyond those already taken – unlike, say, Newton, who, when ‘prompted’ by a falling apple, inscribed the laws of the heavens.

Furthermore, the effective altruists themselves are dogmatically Bayesian. This is precisely why they fear a silicon overlord so much – they think that ChatGPT and its brethren have the same epistemological software as the human brain.

If that were true, then it really would be only a matter of sufficient number-crunching power to forge an artificial mind. But it is a misconception.

It is the same misconception made by those who think the future is a mere extension of the past and make detailed, otherwise highly intelligent plans which do not survive contact with reality.

And now we return to the world of investments. For it is the same category of error made by those attempting to pick future winners. Some asset managers do enjoy success in this regard, but no more than we would expect through sheer chance. Information not already reflected in market values is extremely hard to come by.

Moreover, natural disasters and human behaviour are both unforeseeable. But as time goes on, only the unpredictable influence of the latter can grow without end – if more and more of the future is determined by choice.

Should that happen, more and more wealth would be generated too – gold spun from knowledge. People find new ways to solve problems and eke out more from less. They do not merely consume.

Ingenuity through explanatory knowledge is the reason why artificial general intelligence (AGI) is still a long way off, why prophesy (including stock-picking) is impossible, and why the case for investing rests emphatically not on a hopeful projection of the past, but on a joint ticket with human progress – on our freedom to err and improve in peace.

It’s also why the better our investments do, the more uncertain they’ll become. If we’re lucky, our futures will become more and more unforeseeable – as we make our own luck.

More insights

For more insights on Artificial Intelligence, explore our Creating The Future video collection – hear from experts on how it may shape health, education, work, security and much more.

Important information

Investments can go up and down in value and you may not get back the full amount originally invested

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