We thought it would be helpful to send some initial thoughts following the budget. Business owners and those with significant pension assets are now faced with a completely different situation, which could affect ongoing planning. 

Here is a summary of some of the most significant changes announced.

Pensions

Rumours about changes to tax-free cash, pension tax relief, and the lifetime allowance were unfounded. Instead, the government announced it would bring unspent pension pots into the inheritance tax (IHT) scope starting April 2027.

This is a huge change for those with pension assets and will likely lead to a massive increase in tax revenue over the coming years. The usual spouse/civil partner exemption should still apply, which makes it particularly important to have an up-to-date expression of wish on file.

Strategies to improve your tax situation are already being developed internally, and we will communicate these with you individually.

Business Asset Disposal Relief (BADR)

Business Asset Disposal Relief (BADR), formerly Entrepreneurs Relief, will remain at 10% this tax year before rising to 14% on 6 April 2025 and 18% from 6 April 2026. The lifetime limit will be maintained at £1 million, while the lifetime limit of Investors’ Relief will be reduced from £10 million to £1 million.

This change will result in business owners paying considerably more tax when selling their businesses. Many may consider bringing forward a disposal before the 18% kicks in.

Agricultural relief and business relief

This is a tax on the sale of farms and unlisted businesses (typically family-owned assets). Historically, these have been able to pass to the next generation without a tax charge. The logic behind this was that the businesses would then be able to continue. If a large tax charge is due, the business asset may need to be sold if no other assets are available to pay the tax charge.

From 6 April 2026, 100% relief will remain for the first £1 million of combined agricultural and business assets. Above £1 million, the relief will be 50%; this would mean IHT at 20% above £1 million. Thus, it is more important to make a plan to pay any potential inheritance tax bills using alternative assets.

Capital Gains Tax (CGT)

While the CGT threshold (£3,000) remains unchanged, tax rates will increase. The new rates take effect immediately. 

• The lower rate will rise from 10% to 18%.

• The higher rate will increase from 20% to 24%.

This aligns CGT rates paid on non-property and property assets.

As always, we will consider these new rates before making any capital gains chargeable decisions on clients' investments.

Second Homes

The Additional Dwelling Stamp Duty Land Tax (SDLT) rate will increase from 3% to 5% starting immediately. This will affect those looking to enter or increase their holdings in the buy-to-let market or purchase a holiday home.

Summary

The announced changes need to be passed through legislation as part of a new finance bill. We should find out more about the intricate details of each change as the days and weeks pass. The changes highlight the importance of having an up-to-date financial plan. We will assist our clients with any planning that needs to be done following these changes. 

Risk warning

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.  

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

According to the Association of British Insurers, every year 1 million people in the UK find themselves unable to work due to a serious injury or illness. Although many of us would like to think “that will never  happen to me” or “it is not something I am worried about at the moment”, it is of course often only seriously considered in a moment of hindsight when it is too late. A large amount of employed individuals tend to benefit in some way from their employer in times of need, but for those who are self-employed it is left to you to personally organise any cover that you may need. 

Income Protection​ 

Income protection, (sometimes known as permanent health insurance), insures part of your earnings against illness or accidental injury. It ensures you continue to receive a regular income until you retire or are able to  return to work. ​It is not possible to insure yourself for your entire gross income; insurers feel that you need some incentive to get back to work! Income protection is usually based on a percentage of your earnings; up to 60% is the norm. 

Life Cover​ 

The most basic type of life insurance is called term insurance. With term insurance, you choose the amount you want to be insured for and the period for which you want cover. ​If you die within the term, the policy pays out to your beneficiaries. If you do not die during the term, the policy does not pay out and the premiums you have paid are not returned to you. ​Family income benefit is similar to the above, with the slight difference that the insured amount would be paid monthly/annually for the term of the policy rather than one big lump pay out. 

Nothing contained in this article constitutes or should be construed to constitute investment, legal, tax or other advice. The information contained in this article shall in no way be construed to constitute a recommendation with respect to the purchase or sale of any investment.

Investors love good stories. In recent years, many of these stories have centred around innovations that have fundamentally changed the way we live our lives. Some examples might include the release of the original Apple iPhone in 2007, the delivery of Tesla’s first electric cars in 2012 and the launch of Amazon Prime’s same-day delivery service in 2015 . No doubt, many of you will have had conversations with friends and family around the successes, failures, and prospects of some of the world’s largest firms and the goods and services they offer. In this note, we take a deeper look at the ‘Big Five’ tech companies – Amazon, Apple, Alphabet (Google), Facebook and Microsoft – through the lens of the long-term investor.

In what has been a turbulent year thus far, some larger firms have come through the first - and hopefully last - wave of the ongoing pandemic relatively unscathed. Those investors putting their nest eggs entirely in any combination of the ‘Big Five’ would appear to have done astonishingly well relative to something sensible like the MSCI All-Country World Index, which constitutes 3,000 of the world’s largest firms . At time of writing, Amazon’s share price has fared best, increasing 75% since the beginning of the year.

 Figure 1: The 'Big Five' have held up well so far this year

Data source: Morningstar Direct © All rights reserved. Returns in GBP from 01/01/2020 to 22/07/2020.

These types of firms tend to struggle to stay out of the headlines for one reason or another. Perhaps as a result, many of the investment funds found in ‘top buy’ lists - such as the one on AJ Bell’s Youinvest platform - have overweight positions in one or more of these stocks. The final column in the table below shows the weight of each ‘Big Five’ stock as it stands in the MSCI All-Country World Index.

If an investor were to adopt a purely passive investment strategy that owned each company as its proportional share of the world market, the final column would be that investor’s top 5 portfolio holdings at time of writing. Many of today’s most popular funds are making big bets on one or more of these companies, anticipating that the past will repeat itself moving forwards.

Table 1: AJ Bell's top traded funds in the past week

Data source: Morningstar Direct © All rights reserved. AJ Bell for top traded funds between 15/07/20 – 22/07/20.

Sticking to the long-term view

The challenge for these managers, and others making similarly large bets, is that these are portfolios that will be needed to meet the needs of individuals over lifelong investment horizons, which for the vast majority of people means decades, not years. With the benefit of hindsight, managers who have placed their faith in these firms have stellar track records since Facebook’s IPO in 2012, as the table below highlights.

Table 2: ‘Big Five’ performance since Facebook’s IPO

Data source: Morningstar Direct © All rights reserved. Returns from Jun-12 to Jun-20.

An interesting exercise would be to investigate the outcomes of these firms over a longer period of time, for example 30-years seems more prudent. This is somewhat difficult given that 30-years ago, 3 of these firms did not exist, Mark Zuckerberg was 6-years old, Apple came in at 96th on Fortune’s 500 list of America’s largest firms and Microsoft had just launched Microsoft Office .

A partial solution to this problem is to perform the exercise from the perspective of an investor in 1996, which is the start of Financial Times’ public market capitalisation record . The ‘Class of 96 Big Five’ consisted of General Electric, Royal Dutch Shell, Coca-Cola, Nippon Telegraph and Telephone and Exxon Mobil. The chart below shows the outcomes of each firm over the past 26-years. A hypothetical investor with their assets invested in either Coca-Cola or Exxon would have just about beaten the market over this period, those in Royal Dutch Shell, Nippon Telegraph and Telephone and General Electric were not so lucky.

This experiment is illustrative only, one look at the chart below is enough to see that almost no investor would want to stomach the roller coaster ride they would have been on in any one of these single-stock portfolios.

Figure 2: The winners do not necessarily keep winning

Data source: Morningstar Direct © All rights reserved

Summary

The beauty of the approach you have adopted is that judgemental calls such as these are left to the aggregate view of all investors in the marketplace. No firm is immune to the risks and rewards of capitalism; be it competition from Costco or Walmart taking some of Amazon’s market share, publishing laws causing Facebook to apply heavy restrictions on its users or some breakthrough smartphone entering the marketplace that is years ahead of Apple – remember Nokia?

Rather than supposing that firms who have done well recently will continue to do well, systematic investors can rest easy knowing that they will participate in the upside of the next ‘Big Five’, the ‘Big Five’ after that and each subsequent ‘Big Five’. Those who can block out the noise of good stories and jumping on bandwagons are usually rewarded in this game.

Figure 3: Your eggs are in many baskets

Source: Albion Strategic Consulting. For demonstrative purposes only.

Risk Warning This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.

The tapered annual allowance can be quite complicated to get your head around. We've put together a simple example to show how it works.

The table below aims to illustrate an individual affected by the  tapered rules: 

The tapered annual allowance rules kicked in on 6th April 2016, when those with taxable earnings over £210,000 per annum were limited to pension contributions of £10,000 gross each tax year. ​This was a controversial piece of legislation and also  quite complicated.  The rules were altered from 6th  April 2020, whereby those earning in excess of £312,000 are now limited to an annual allowance of £4,000. ​This has made planning for self-employed individuals quite tricky, especially for those that have a tax year end of 31st March each year. ​Some good news, the carry forward rules still apply to those affected by the taper. 

Nothing contained in this article constitutes or should be construed to constitute investment, legal, tax or other advice. The information contained in this article shall in no way be construed to constitute a recommendation with respect to the purchase or sale of any investment.

One of the hardest concepts to grasp in investing is that a ‘good’ company is not always a better investment opportunity than a ‘bad’ company. If we believe that markets work pretty well – not unreasonable given that few investment professionals beat the market over time - and that they incorporate all public information into prices pretty quickly and efficiently, all of the ‘good’ and ‘bad’ news should already be reflected in these prices.  A ‘good’ company will have to do better than the aggregate expectation set by the market for its share price to rise and vice versa.  If a ‘bad’ company is in fact a less healthy company, it may have a higher expected long-term return, as risk and return are related.  

It is perhaps evident that if the market incorporates the aggregate forward-looking views of all investors, it becomes very difficult to choose which companies, sectors, and geographic markets are likely to do best, going forward.  In an uncertain world, where stock prices could move rapidly, and with magnitude, on the release of new information - which is itself a random process – then it makes good sense to ensure that an investment portfolio remains well diversified across companies, sectors and geographies.  Take a look at the chart below that illustrates how deeply diversified a globally equity portfolio can be.

 Figure 1: If you do not know which stocks are going to outperform well, own them all

Source: Albion Strategic Consulting. Data: Morningstar Direct © 2020. All rights reserved.

The concentration risk in the US’s S&P500, is quite different.  

Figure 2: The US’s S&P500 is increasingly concentrated in a few names. 

Source: Albion Strategic Consulting. Data: Morningstar Direct © 2020. All rights reserved.

Given that all the future promise of a company is already reflected in its price today, it is quite a risk betting a large part of your assets on just a few names, concentrated, for example, in the technology sector.  The top 8 technology stocks in the US now have a larger market capitalisation than every other non-US market except for Japan.  Dominance of companies, sectors and markets ebb and flow over time.  Who is the next Amazon?  What regulatory pressures could these dominant companies face?  Is Donald Trump’s recent rage against Twitter the start?  No-one knows.  By remaining diversified, you will own the next wave of market leaders as they emerge and dilute the impact of ebbing companies.  Whilst it is always tempting to look back with the benefit of our hindsight goggles and wish we had owned more (take your pick), US tech stocks, other growth stocks, gold etc., what matters is what is in front of us, not what is behind us.  

‘The safest port in a sea of uncertainty is diversification.’

Larry E. Swedroe, Investment Author

Risk Warning This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.