Budget Update – 3rd March 2021

The Chancellor has just finished presenting his budget speech to the house. The Buckingham Gate team is now busy analysing the budget document in detail and searching for any devil in the details. We will report back on any significant findings that become clear in the coming days, however, as expected, today’s budget was rather benign from a personal financial planning point of view.

Some of the key announcements and our commentary can be found below:

Income Tax

Both the personal allowance and higher rate threshold will be increased to £12,570 and £50,270 respectively from April 2021, but then both allowances will be frozen until 2026. While this is better than some had anticipated (it was widely reported that there would be no increase this year for example), the length of the freeze until 2026 is longer than expected.

This is effectively a ‘stealth tax’ and follows a long-standing tradition of governments simply not index linking allowances rather than reducing them in nominal terms. This is a theme that continues below.

Capital Gains Tax

The annual exempt amount will remain frozen at the current level of £12,300 until April 2026.

Pension Lifetime Allowance

The pensions lifetime allowance will remain frozen at the current level of £1,073,100 until April 2026.

Inheritance Tax

The Nil Rate Band and Residence Nil Rate Band will remain frozen at the current level of £325,000 and £175,000 respectively until April 2026. The level of assets at which the taper to the Residence Nil Rate Band kicks in will also remain at £2 million.

Investing

The ISA and Junior ISA allowances will remain at current levels for the time being.

Commentary

All in all, this is a very quiet budget from a personal financial planning perspective (although do bear in mind the very, very significant interventions for individuals and businesses to assist the recovery from Covid-19).

The main headline from a personal finance point of view is no change, for a long time. Most allowances have been frozen at current levels until 2026! As such, this is a fairly extended period of ‘stealth taxation’. If we assume inflation runs at around 2-3% per annum, this could see the real value of these allowances reduced by around 10-15% in the period up to the end of the freeze.

What is very interesting to us however, is the fact that these allowances have been frozen all the way up to 2026, especially in relation to Capital Gains and Inheritance Tax. Despite heavy media speculation of a big shake up in both areas, today’s policy announcements suggest that the Government can see the current regime in both areas still existing in 2026 at the least.

That is not to say that these things won’t change in the future (of course these kinds of long term policy decisions are often tweaked along the way) however, it does seem that any imminent changes are unlikely given that the Government is legislating based on the current system for the next 5 years!

All in all, keep calm and carry on is our message from today’s announcements.

If you have any questions, please get in touch.

Yours sincerely,
Buckingham Gate Chartered Financial Planners

Lies, Damn Lies and Speculation

As budget day approaches, the volume of rumour, speculation and mistruth is stepping up in traditional fashion.

Of course, there are the old favourites (you know, the things that the media report ‘might’ happen in the budget every single year, but never seem to actually occur) such as the removal of the 25% tax-free cash on pensions and restrictions to pension tax relief (for what it’s worth, I don’t believe we are likely to see either at this coming budget).

Then we have the two new rumours that seem to be doing the rounds, namely the alignment of Capital Gains Tax rates with Income Tax rates and some kind of root and branch reform of Inheritance Tax.

For what it’s worth, once again, I believe that both are unlikely to materialise in a few weeks’ time. The reason for this is that almost all suggestions in this respect would require pretty much a complete rewrite of that particular part of the tax system and a whole raft of changes to HMRC IT systems – projects that could take years to complete at the best of times.

That’s not to say that we won’t see some changes to the tax system (the freezing of the personal allowance and basic rate tax band are looking likely at this stage) however, the point is that no one (myself included) really knows other than the Chancellor himself, and even he would not have completely made his mind up at this stage because the budget document is often only finalised in the days leading up to the budget announcement itself.

What I am trying to get at is that it’s important not to delay planning because of what ‘might’ be coming in the budget. There will always be some big financial event on the horizon to wait for (after this budget, I suspect there will be another in the autumn and then in the spring again).

If you are planning on taking some action that might be impacted by a forthcoming budget, can it be a good idea to accelerate that action – yes absolutely. After all, if you are planning on doing something anyway, why not get it done and then you know where you stand.

However, I would strongly discourage people from delaying action based on what might be included in this budget or the next one or the one after that. I have seen too many examples of families learning this lesson the hard way.

It is frustrating enough looking back and thinking that you should have done something historically that you have never thought of before. But, when you look back on today a year from now, how would you feel if you knew that you should have taken action, but didn’t for whatever reason.

The old rules of financial planning say that we plan based on current and known future tax changes and then we adjust the plan to take any future unknown changes into account. That rule is just as valid in the run up to a budget as at any other time of the year in my view!

A Message From Matt – 11th December 2020

So how is it that we have already arrived at the end of 2020?

I think this year has been the ‘fastest, slowest’ year I have ever experienced. In some senses 2020 really seems to have dragged on. It seems forever since I saw my family or friends properly and I am sure we are all looking forward to hopefully getting back to this kind of thing as we move into the Spring next year and beyond!

In other ways, 2020 has flown by.

I know we say it every year, but the last 12 months seem to have gone by in the blink of an eye. Perhaps it is the fact that much of this year has felt like a bit of a groundhog day? The big ticket events that punctuate our years and photo albums (birthday celebrations, weddings, overseas holidays) have largely been absent and so the months have seemed to blur into one a little bit.

I think it is fair to say that 2020 will not go down as one of most people’s favourite years, but, being the eternal optimist, I do like to look at the positive in all of this.

First of all, we have learned a lot, both individually and collectively. The ingenuity of the human race never ceases to amaze me and 2020 is testament to the power of our collective minds. Not only have we developed and rolled out the vaccine in record time, we have also celebrated several other scientific and technological achievements which have pushed us forward, despite the challenges of the pandemic.

Although crisis sometimes brings out the worst in us, it can also bring out the best of us. I am sure we have all seen acts of incredible kindness and selflessness in 2020 – let’s hope we can carry some of that sentiment forward with us.

Finally, on a more local level, I could not be more pleased with how we have adapted and thrived as a business and as a team during the past 12 months. Have there been challenges and failures and frustrations – of course there have, but I feel that we have far more to celebrate than commiserate as a team this year.

This will be my last blog post of 2020 as I am taking an extended Christmas break, having taken relatively little holiday all year to help guide the business through what has been the most tumultuous of years.

I would like to close by thanking each and every one of you, our clients, from the bottom of my heart. I am always grateful for every client that chooses to join us on this journey, but I cannot express how incredible it has been to have your support during this year above all others.

You are the reason that I get to do what I love each and every day and I am not sure that many people get to say that in this world.

Wishing you all a very merry festive season and a happy, healthy and prosperous 2021!

Yours sincerely,
Matt Smith, Director, Buckingham Gate Chartered Financial Planners

A Message From Matt – 27th November 2020

I have mixed emotions as we approach December. On the one hand, as I mentioned during our client event last week, I feel that there is a lot to be optimistic about as we head into 2021. On the other hand though, it does feel like we have a fair few hurdles to jump over before we get there. Before we look at those though, let’s focus on the positive…
 
First of all, we have not one, not two, but now three viable vaccine candidates in the pipeline and although none of them has thus far received regulatory approval, it seems almost inevitable that at least one or two of them will in due course.
 
The arrival of the vaccine hopefully signals the beginning of the end of the pandemic which has caused so much pain and disruption on both a financial and emotional level. 
 
Furthermore, we now have a clear result in the US election and hopefully we will see an outcome (not necessarily a deal, but an outcome – I have always maintained that certainty, even bad certainty, is better than uncertainty) of the Brexit process before the year is out. 
 
All of the above has removed a lot of uncertainty from the world, hopefully creating a more stable foundation for us as individuals and for stock markets as we head towards the new year.
 
So far so good. But it is not all sunshine and rainbows.

First of all, although the vaccine seems to be on the way now, it is clearly going to take some time for the rollout. In a way this makes things harder to bear as rather than waiting for an unknown, we now know we have the vaccine, and it is ‘out there’ and so we are simply waiting for it to arrive. Knowing something exists, but not being able to benefit from it yet, I personally find quite frustrating – perhaps it is just the entrepreneur in me wanting to make things move faster!
 
Then, we had the announcement yesterday of the new tier system. On the basis that the vast majority of us seem to have ended up in tier 2 or 3, it feels to me very much like we are heading out of lockdown on the 2nd December and going straight into …… wait for it …..lockdown.
 
Finally, we have the issues surrounding Christmas. Christmas is an incredibly important time of the year for me for all sorts of reasons, not least because of the chance to see extended family and friends. It will come as no surprise to those who know me that I was disappointed to learn that we can only have 3 households in our bubble over the festive season. Although this was not at all unexpected, it is nonetheless disappointing.
 
Please don’t get me wrong, I understand the reasons behind the decisions and of course I wish to protect my vulnerable family members as much as the next person, but it is still a disappointment for me not to have the usual mass meet up over the holidays.
 
So, perhaps rather unusually, it seems to me as if the longer term is somewhat clearer and easier to predict, with more uncertainty existing in the shorter term.
 
-In the longer term we now know with a fair degree of certainty:
-That we will have a vaccine
-That we can begin to return to some normality at some point
-That we can hope to return to our offices and workplaces at some point
-That we have a more stable political environment moving into 2021
-That the economy can hopefully recover
 
I think if I could summarise the final quarter of 2020, it would be that we have moved from wondering ‘IF’ things will happen and it is now just a matter of ‘WHEN’.
 
However, in the short term we have to deal with:
 
-What tier is my area in now and where will we be in the coming weeks?
-How on earth am I going to negotiate the social minefield of picking just 2 other households to spend the festive season with?
-What will the Brexit deal look like?
-When will the vaccine deployment begin?
-Will we actually have ‘significant normality’ by Easter, having already been promised ‘significant normality’ by the government on at least 2 or 3 previous occasions that have now come and gone.
 
So … an interesting dichotomy and a feeling that I am not sure I have experienced before where the medium / longer-term looks very clear in my mind, whereas the next 3 months are very hazy indeed!
 
Unfortunately, I don’t have the answers to any of this uncertainty, but I do know that it will pass, and probably faster than we imagine. Just remember that the darkest hour is before the dawn and this too shall pass!

Yours sincerely,
Matt Smith, Director

Portfolio Update – Post Election December 2019

Following last week’s General Election result, we have taken the decision to increase exposure to the UK equity market for the majority of our portfolios. For the first time in over a decade, we have a government that has a free hand politically and provides much greater certainty that the UK’s exit from the EU will happen sooner rather than later.
Stock markets and sterling both rose at the end of last week following the election results, but the last couple of days have shown that there is still a long way to go before Brexit is delivered. The introduction of a legal provision by the Government barring an extension to trade deal negotiations has increased the prospect of a no-deal Brexit, and this has seen the FTSE 250 and sterling lose momentum from their gains last week.
The increase in the allocation to UK equities comes at the expense of US equity holdings which appear quite expensive when compared to other markets, and with an impeachment trial and Presidential election due in 2020, the US will be entering its own period of political uncertainty.

Buckingham Gate Portfolio Review – December 2019

Lindsell Train UK Equity : The importance of liquidity

The demise of the Woodford Equity Income fund has shown just how important it is for a fund to be able to manage it’s outflows. For those who need reminding, the fund had suffered from a run of redemption’s over a period of time and was suspended in early June when it was unable to meet the request from Kent County Council to withdraw its investment of circa £250 million in the fund.

The reputational damage incurred has since led to the decision to remove Neil Woodford as manager of the fund in October and an announcement that the process of winding up the fund would begin in January 2020. This leaves the reputation of Neil Woodford, once considered as one of the most successful fund managers during his tenure with Invesco Perpetual, in tatters and seems very unlikely that he will ever recover from this and return to a position where he is trusted to manage other people’s money.

The fallout from the implosion of this fund has seen analysts much more focused on liquidity risk than ever before, and one of the casualties of this enhanced inspection has been the Lindsell Train UK Equity fund. Following our latest portfolio review in early November, Square Mile have taken the decision to downgrade the fund over liquidity concerns and it was removed from all of the Buckingham Gate portfolios on the 18th November 2019 and replaced with the Liontrust Special Situations fund.

The Lindell Train UK Equity fund has long been considered one of the most successful UK Equity funds, and under the management of Nick Train since it’s inception in July 2006, has generated a return of 377% compared to 119% from the FTSE All Share over the same period. However, performance over the last six months has been poor, and the fund has seen significant withdrawals over recent months with September seeing its largest ever monthly outflow of £374 million. While these withdrawals can be explained by a lack of appetite of investors for UK equity markets as a whole due to Brexit etc, the level of withdrawals and the structure of the Lindsell Train fund are causes of concern.

While there are a great deal of differences in the investment approaches adopted by Neil Woodford and Nick Train, there are similarities in that they both have the courage of their convictions in choosing the companies that they invest in. Nick Train’s investment process has been characterised by a low turnover approach and the ability to invest heavily in companies that he believes in. This highly concentrated portfolio approach has been one of the main reasons for his success, but also has the potential to be his downfall.

Square Mile’s analysts are very concerned that the large concentration of assets in the fund’s top 10 holdings could see the fund struggle to sell these at a cost effective price should significant outflows persist.

It is important to reiterate that Square Mile have no immediate concerns about the ongoing viability of the fund, and it has consistently met its performance objectives and redemption requests. However, the fall from grace of the Woodford Equity Income fund has made analysts very mindful of history repeating itself and are keen to look at other investment strategies that may work better in current market conditions.

There is absolutely no way of telling if this will be a good or bad decision for the portfolios in the future, but it is clear that Square Mile are very conscious of avoiding the trap that what has worked in the past will continue to work in the future.

If you have any questions on the above, please do not hesitate to get in touch with us by calling 020 3478 2160 or emailing [email protected]

Investment Portfolio Update – October 2019

I am writing today to keep you up to date on how we are positioning portfolios in the run up to the potential Brexit deadline of 31st October (although keeping in mind this is not the first Brexit deadline we have seen, and may not be the last) and in light of some weakening economic data.

The slowdown in the global economy continues and the chances of a recession developing are increasing. Some countries such as Germany are probably already in recession, that is have a shrinking economy. However, even if recessionary conditions spread to other nations, we expect the extent of the economic contraction to be shallow and well short of what occurred in 2008/9. Nonetheless, the knock to companies’ profits would be felt by the stock market and equity prices would fall. 

Against this backdrop, equity yields are generous when compared to virtually every other financial asset. We are by no means certain that a recession will develop in the US and if that pivotal economy can continue to grow, equity markets have the potential to make further modest gains over the next couple of years. Therefore, rather than reducing equity exposure, we are making changes to the portfolio to limit the damage that a recession might bring.

Yields on government bonds around the world are at tiny levels. UK gilt yields are now virtually non-existent and the government is able to borrow at long term interest rates of well below 1%. 

On such yields, any capital gain potential if a recession does strike will be small. US bonds yields are more generous at a little below 2%. This means that if the US falls into recession, US Treasury bonds can potentially deliver a worthwhile capital gain. Thus, US government bonds appear to be a better option for the portfolio. 

As we have no wish to take any currency risk on this position, we are buying the sterling hedged Vanguard US Government Bond Index fund. If global growth rebounds, the price of this fund is likely to fall, however, the equity positions held in the portfolio should gain to a far greater extent.

We will of course be watching events closely over the coming weeks and I shall write again if we feel that any further changes are required in the portfolios.

If you have any questions on the above, please do not hesitate to get in touch with us.

Kind regards
The Buckingham Gate Investment Committee

Office Of Tax Simplification IHT Review – Some Interesting Insights

There were a few interesting insights to be gleaned from the OTS Inheritance Tax Review, in addition to the much-covered suggestions for changes to the IHT regime.

First is the seemingly profound under-use of the ‘gifts from regular income exemption’. We have often made the point that this is the most underutilised and misunderstood IHT exemption and figures from the OTS seem to confirm this point.

In the 15/16 tax year, there were only 579 claims in total for the gifts from income exemption with well over half of these claims being for less than £25,000.

As such, it could be argued that there is a huge missed opportunity out there for additional IHT savings, without the hassle of the 7-year rule. Of course, the OTS has made some suggestions to abolish the gifts from income exemption, but for now it lives on and it might be wise to make hay while the sun shines.

Another notable point raised in the review is the fact that of the estates that paid IHT in the 15/16 year, only 20% had any form of lifetime gifting within the 7-year cycle.

Now of course in some cases, this would simply have been unaffordable, however surely there are a host of missed opportunities for IHT savings in the 80% of estates which had engaged in no gifting at all.