Just as we think things have brightened, out comes the inflation figure at 4% versus the expected 3.9%. That was blamed on tobacco and alcohol – the latter also as duty rose on wine last autumn, based on alcohol strengths.
It is as if the government doesn’t realise that increasing taxes on products increases inflation… wait for the impact of significant increases in the Minimum Wage in April – already the jobs’ market has reacted with fewer vacancies and growth in applicant numbers but yes, it will raise prices again. (Remember that government is the biggest employer too so unless public spending increases in line, then there will have to be cuts in other places and job cuts as well). Tim Martin at Wetherspoon’s has already noted how the Minimum Wage will impact prices there (compared to say supermarkets for alcohol).
As I keep repeating, government can reduce prices of goods and services (ie the taxes in them) so then inflation falls and unsurprisingly, people don’t then need so much income to pay for them… Truly it is not rocket science and government can target sectors needing economic boost – eg cutting VAT on hospitality or construction (if that is needed) and fuelling UK spending rather than perhaps imported growth. It should stop doling-out special cash benefit payments too (which don’t impact inflation one iota) but again, cut prices so the poorest benefit by having lower costs (so they don’t need the payments). How about scrapping energy VAT and household and car insurance premium tax too.
What do higher interest costs do to nations? Well, pity the US with its $34trillion of national debt, up from $20trillion just seven years ago and rising at about $2trillion annually… our own is bad enough at £2.67trillion and equal to 100% of all of our annual economic output (‘only’ up from £1.63trillion in 2010 or increasing by £327million every day on that trajectory, though we had covid in that time). Ouch.
However, the market reacted badly after it was becoming a little more optimistic, seeing this uptick as a likely deferral of interest rate reductions. Bonds have also reversed recent gains as yields have risen. Things have stabilised again thankfully with US markets climbing new heights and raising other markets too.
More good news
Only a small holding for us but Wincanton has agreed a takeover and the shares have jumped 48% adding £170,000 to aggregate client values. It all helps.
As ‘promised’ would happen, our first for the year but another of our closed-ended funds has also had good news – Abrdn Property Trust has had merger terms offered by Custodian Property Income REIT. It may not complete and whilst the target has jumped, the offeror has also fallen so a relatively neutral outcome for our overall client funds presently. They are now ‘in play’ however so something else may materialise. The Abrdn Trust is trading at a deep discount to its underlying asset value so some shareholders may not agree but want liquidation instead, a far superior value outcome even if ‘sad’.
Then our second, JP Morgan Multi-Asset Growth and Income Trust proposes to be taken-in by its sister ‘Income and Growth’ Fund. The former trades at a small discount and the latter a premium (and it has been issuing new shares as a result). This should result in a small but welcome uplift for our investors based on the assets involved.
I have talked before about Rolls Royce Plc, a direct equity which became our largest ever direct shareholding. Ordinarily, to manage the risk we trim on rises but for this one, we rode the wave and it rewarded significantly in 2023, being the largest gaining European big company share. We have been trimming it back to size since, carefully selecting a good price (we hope) and of course, it is putting that cash to good use in tomorrow’s assets which is more important than basking in past successes.
Of course, it is never always so rosy and some investments will go the other way but that is why we spread clients’ assets as widely as we do. I am reminded too that however good, strong and prosperous something looks today whilst it is in the sun, it doesn’t always follow that this will continue for ever (fans of the US market would do well to heed that). I was checking a newer clients’ strategy for capital gains and some legacy assets they bought included Aviva – a good company but overpriced previously. They are a credible £4.33 or so today but on 24 April 1998 they were £14.07. Dividends have been good but that’s a capital loss of 69%. We started buying at much lower prices and chased them all the way to the bottom (£3.03 in March 2020) but whilst we have enjoyed a great recovery, we shall be smarting on some earlier ones, I am sure. The decision (the skill?) is – what do we do today for tomorrow!
The Economy
So December’s retail sales slumped the most since 2021 (only two years ago…). However, that was because the previous month they were up lots as people bought early for Christmas it seems. That should help counter the ‘inflation’ and ‘interest rate’ wobbles earlier, a tad anyway. Sterling slipped-back a little after it rose on the inflation uptick. Since, some good news in that December’s Public Borrowing was ‘only’ £7.8billion against the OBR’s expectations of £14billion (how could it be so wrong?). Effectively that means more taxes collected and less public spending… whether that forms a core part of the Chancellor’s proposed £10billlion tax giveaway possibility, I don’t know, or maybe instead, it could now be £20billion we are told.
Meantime, as requested by the Treasury, I have submitted my suggestions for tax policy changes to the Office of Budget Responsibility for the Budget on 6 March. I wonder if any of our suggestions will be considered!
So if the Conservatives are talking about reducing taxes this year (long overdue) and Labour has said it won’t increase them if it is elected… but what should investors do if the runes suggest a change of regime? We have a few ideas.
A tax conundrum
So presently, Capital Gains Tax, compared to Income Tax, is a generous 20% on anything (second residential properties are likely to be 28%). Allowances have been savaged by the Chancellor and are due to fall even more, so more folk will pay CGT (or more people will have to do Tax Returns and/or pay professional tax consultants like us to help them, to declare piffling CGT now).
So, an investor with gains and a portfolio of assets can consider whether he wants to pay the tax at 20% or possibly look to see what other assets he has sitting at a loss which he can sell (even ‘Bed and ISA’ or ‘Bed and Spouse’ to keep a hold of them) so that he reduces the profit and pays less tax. That said, do make sure you use your £6,000 allowance each this tax year, if you can, regardless (and hide as much cash as you can in your annual allowances for Pensions and ISAs which grow free from all tax).
So already, you can see that by offsetting a loss against a residential property gain it is more valuable than against other gains. Now then, this is where it becomes complicated. So if there is a swing to the governmental left and CGT rates are ratcheted-up to meet Income Tax rates (up to 45%) then ‘pregnant losses’ you hold would become even more valuable versus using them ‘now’ to save ‘only 20%’. If tax rises do not come to pass, if you have made a taxable gain this year, you still have three years after the disposal to make an EIS investment and claw-back all the CGT you have paid. Maybe paying CGT isn’t so bad after all, even if you have to find the money to do so. Aside from residential property disposals where tax is due 60 days after the sale, CGT is due 31st January the year after the sale.
Then finally, what if you have assets with big gains, second homes or what… better to sell soon (or maybe after 5 April) and pay 20% say before Sir Keir has even an outside chance to double (or more) the CGT you pay?
Child Trust Funds
Do you know a child with a dormant one of these? Apparently there are almost one million young adults with over £1.7billion unclaimed, according to The Share Foundation. Children born between 1/9/02 and 2/11/11 qualified. The government bolstered each account with one or two £250 payments.
There are around 6.3million accounts and in April 2021 the total value was £10billion as of course parents etc could contribute too. Parents lose control of accounts when the youngster turns 18 (though through ‘health’ perhaps 100,000 would never have capacity to manage their own affairs). It may well be right for all these unclaimed funds to continue being managed but the provider must place the assets in a ‘Protected Account’ pending instructions. Some review is wise it is suggested!
Gambling – is self-select investing the same?
An investor who had £220,000 in his pension did not take any advice and started to trade his account like a speculators’ haven, turning it into £3,000 and leaving him in desperate stakes. The Pension company has no responsibility in that it cannot control what an unadvised investor chooses to do.
Pensioner urges Hargreaves to create safeguards after he ‘gambled’ away Sipp – FTAdviser
Yes, there are rules on ‘vulnerable clients’ but that cannot control the instructions or decisions an investor makes if they are not willing to take or pay for advice and ongoing care and management.
Very occasionally we turn-away a prospect if they tell us they want to do something with which we ‘don’t agree’ (they could turn into a complaint claim against us if they lost-out doing foolish things too!). That is then up to them but our view is there is little point seeking advice if what the adviser is going to suggest is wholly contradictory to some speculative activity you want to undertake (eg buying leveraged cryptocurrency products, say, as you are in love with the concept).
However, this goes one further. If you have an investment, not only are you unlikely to have the time to monitor it but if you don’t have an adviser/manager who oversees it, upon what basis do you make your decisions to buy and hold something? Do you trust yourself to do the ‘best’ thing or do you react to emotional outbursts on the financial markets and euphoric tips or the latest spivvy ideas from slick salesmen? Do you just buy yesterday’s top performers (whereas it is tomorrow’s you need to find!) when they may then be very expensive and riding for a fall, or what? Newspaper tips? Friends down the pub? Your own nuances and behavioural or personality likes or dislikes? The latest themes and trends across the media?
For that unfortunate man, how much would it have saved him if he had instead instructed a firm like ourselves to take custody of and manage his pot for him, using our expertise, decades of experience and systems etc. He would have paid a comparative pittance to what he lost and we would have been there to protect him from himself – the biggest risk of all. Sadly, yes, individual investors too can exhibit such traits – they encash ‘everything’ when psychologically it isn’t the best thing for them to do at all and then within a short while, that nest egg has well, just gone.
My best wishes
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers
