December & January News Round Up
8th January 2021
Financial New Year Resolutions
Over half of people over 45 say they don’t set a new year’s resolution. But small changes today could make all the difference to your future. Here are three common goals for people at different stages of their saving and investing journey and how you can make them work for you too.
- A new saver’s starting point – clear debts, then build savings, then invest: The fourth most popular New Year’s resolution is to save more money. It’s a great goal, but don’t stuff that cash under your mattress. How you save is important. For example, small debts like overdrafts can carry hefty fees and interest rates. It’s usually a good idea to pay these off before building your cash pot. When you’re in a position to start saving, you’ll want to start on an emergency fund. An emergency fund should be in cash savings you can access easily. It’s there to cover unexpected costs like a broken boiler or car repairs or a short-term loss of income. Three to six months’ worth of essential expenses is usually a good place to start, but you might want more depending on your circumstances. If you’re in or close to retirement, it’s usually best to have closer to 1-3 years’ worth of expenses. Once your high-interest debts are paid and you have rainy day savings to fall back on, think about dividing your money into pots. Experts suggest a ‘Goldilocks’ approach to saving in the form of short, medium and long-term goals with pots to go alongside them.
- Make your long-term savings work harder: How often have you heard “if you just gave up your daily coffee you’ll have…”? But having financial stability and resilience doesn’t always mean giving up on the things you love. If you know that your morning coffee usually costs £2.50 per day, set up a monthly standing order to a savings account that matches the amount. Think about investing that money for the long-term (5 years or more) in something like a Stocks and Shares ISA or a pension. When you invest, you need to be comfortable with the value of your investments going down, as well as up. Unlike cash, you could get back less than you started with.
- Make better investment decisions: Spreading your money, diversifying, is one of the most important things when investing. Lots of us know we should do it, but how do you know you’re diverse enough? Start by checking you have the right mix of investments in your portfolio. Spreading your money across different assets and markets. Here’s a checklist to help you make sure you’re on the right track. Check:
- The types of investments you own – do you own some shares and bonds?
- The variety of sectors you own, like technology or retail
- The countries or regions you’re investing across
Popular thumbs up for a wealth tax but no green light for Rishi
More than 45% of Times readers would be happy to pay a wealth tax as long as it did not include the value of their main home. A poll of 2,000 readers of The Times and The Sunday Times found broad support for increased taxes on assets and second homes as a way to help the economy recover. However, the Government is being urged to reform the UK's tax system before pushing ahead with a controversial levy on wealth. Chancellor Rishi Sunak should focus on sorting out 'badly designed' charges such as pensions tax, council tax, inheritance tax and capital gains tax before introducing yet another levy, the Institute for Fiscal Studies (IFS) has warned. It comes after the Wealth Tax Commission, made up of economists, lawyers and academics, suggested a tax on people with assets of more than £500,000, or £1million for a couple, including their family home and pension. Furthermore, experts point out that valuing people's homes, pension policies and stakes in family businesses would be incredibly difficult. The tax would surely generate significant opposition, and risks sending out the wrong message. Government will be keen to project confidence and promote investment as the country seeks recovery from this crisis. A 'soak-the-rich' approach is unlikely to do much to achieve this. But a report by the IFS this week laid bare just how badly poorer communities have been affected by the pandemic, which could increase pressure to charge the wealthy.
The end in sight for leasehold sales?
Leasehold property sales could soon be scrapped in favour of commonhold, in accordance with recommendations made in The Law Commission’s ‘Residential leasehold and commonhold’ report in July 2020, after the government announced today that it is to establish a commonhold Council. The new council will be a partnership of leasehold groups, industry and government that will prepare homeowners and the market for the widespread take-up of commonhold. The commonhold model is widely used around the world and allows homeowners to own their property on a freehold basis, giving them greater control over the costs of home ownership. Blocks are jointly owned and managed, meaning when someone buys a flat or a house, it is truly theirs and any decisions about its future are theirs too. The creation of the Commonhold Council should help to reinvigorate commonhold, ensuring homeowners will be able to call their homes their own.
The government says that it will bring forward a response to the remaining Law Commission recommendations, including commonhold, in due course. Instead of a freeholder owning the land, flats would be commonhold which gives the owners of homes in shared buildings more autonomy and broader rights. The only legitimate income stream from the whole leasehold game is ground rents. Once you strip that out the whole business of ground rents comes to an end. Therefore, most commentators believe housebuilders will be quite amenable to commonhold.
Cannabis ETF inflows jump
Marijuana stocks and cannabis-related exchange traded funds climbed Wednesday as a Democratic victory in the Georgia Senate runoff election raised hopes of decriminalization in a more progressive-leaning federal government. The US election results have created an even stronger environment for cannabis investing, and there is significant momentum behind the industry as domestic and global catalysts continuously fall into place. The bets on decriminalization aren’t without merit. The Democratic-controlled House of Representatives previously passed a bill in December to decriminalize and tax marijuana at the federal level – marijuana use is still illegal on the federal level, but several states have already passed laws for legal possession and sale. The Senate Republicans, though, have not been so accommodating on federal decriminalization. The Democrat wins in Georgia will provide the party a narrow margin to pass more progressive cannabis legislation ahead, but Republicans can still filibuster such measures. In November, voters in New Jersey, Arizona, Montana and South Dakota legalized recreational marijuana in their states. That makes 15 states and Washington, D.C., that have legalized marijuana for adults — and 36 states that allow medicinal use of marijuana. Furthermore, incoming President Joe Biden has embraced the notion of decriminalizing possession at the federal level. This trend has captivated many investors, but volatility in individual stocks has means you could be in for a wild ride as the emerging cannabis industry struggles through its growing pains. After all, many dot-com stocks didn’t make it thanks to misreading the market or being out-maneuvered out by competitors. For those interested in playing this broader trend, then, a basket of marijuana stocks rounded up in an ETF could be just the ticket.
Business leaders warn of no-deal Brexit
Business leaders have warned that a Brexit “tidal wave” of red tape is going to hit British industry on 1 January even if a trade deal is struck in the coming days. The Confederation of British Industry deputy director general Josh Hardie pleaded with the UK and EU to redouble efforts to get businesses prepared, saying speed was now of the essence. He said he was confident there would be a trade deal in the coming days, because to walk the UK and 27 EU countries over a cliff edge on 1 January would be a failure of politics. As survey after survey shows businesses do not have the full information they need to be prepared for Brexit, Hardie urged the UK and EU to inform businesses what any trade deal would require them to do to be Brexit-compliant crossing from Dover to Calais, or any other UK-EU border. Business concerns come a week after a five-mile lorry queue developed on the approach road to the Eurotunnel in Folkestone as the French rehearsed Brexit checks. The CBI have called on the EU to state whether it will reciprocate on some of the “flexibility” being shown by the UK, which has decided to ease in Brexit customs and regulatory checks over six months to mitigate disruption. The CBI added that some critical information needed by business to prepare was outside the scope of the free trade agreement and needed to be agreed swiftly, including arrangements on cross-border data transfer, permits for business travel for engineers servicing machinery, and in particular rules of origin, which will determine what goods are defined as “British” and eligible for sale in the EU in a trade deal. Either way a cohesive and concerted government and business effort to mitigate the queues and chaos will be critical in the countdown to 1 January and in the immediate aftermath.
The stamp duty stampede – what next?
The UK’s surging housing market could go into sharp reverse next year if the stamp duty holiday is not extended, risking a damaging slump, the government has been told. The £3.8bn stamp duty giveaway unveiled in July has been credited with fuelling a mini-boom in the property market, but it is due to finish on 31 March 2021 – the same date that the furlough programme and several financial support schemes are also scheduled to end. Experts believe ministers may be forced to extend the holiday to avoid a damaging downturn. Some believe that the end of the holiday in March will insert a cliff edge in demand at the exact moment we expect employment and incomes to be suffering most. If it is not extended, the argument goes, there is the risk that the surge in transactions and prices this year will be reversed in 2021. The stamp duty holiday means buyers of homes up to a value of £500,000 in England and Northern Ireland pay no stamp duty, with a reduced rate for homes above that. For someone buying a £500,000 property, the saving is worth £15,000. Previously the “nil rate band” for residential property purchases was £125,000. The warning coincided with government property market data that showed the number of stamp duty transactions in the third quarter was 68% higher than in the previous three months, and the amount of money raised from the tax was 27% higher. HM Revenue & Customs said this reflected the easing of the lockdown measures earlier this year and the introduction of the duty holiday. There have already been a number of warnings about what may happen when the stamp duty holiday ends, plus calls from various quarters for an extension. Some commentators have predicted that when the cut expires, transactions will fall almost as low as at the height of the first Covid-19 lockdown. Furthermore, the slump in demand is likely to coincide with a rise in forced sales as the ending of the furlough scheme brings a sharp rise in unemployment.
Will vaccines provide a market booster?
Ten days later Pfizer and BioNTech announced that their coronavirus vaccine had been stunningly successful in trials. Moderna followed a week later, and then AstraZeneca and Oxford University. The stock market looks ahead and it’s not hard to see that a vaccinated world will improve the fortunes of beaten-down sectors. How much improvement, and how quickly? Answers are impossible, but stock market investors are clearly betting on normal life being restored at speed, at least at the level of individual companies. There’s even some talk of some “Roaring Twenties” years as consumers come out of hibernation. Stock markets are prone to wild swings – and one should note that easyJet’s and Wetherspoon’s share prices, for example, are still about a third lower than they were on 1 January. But amid the din of conflicting signals, the rapid rebound thesis can’t be entirely dismissed. It could happen. Look at last week’s events in the retail industry. On one hand, the spectacular failures of Arcadia and Debenhams threaten 25,000 jobs. On the other, shoppers queued for hours to get into Primark stores and the big supermarket chains said trading had been excellent in recent weeks (one reason why they’re now returning their business rates relief). There is demand and cash out there. Add vaccines into the mix and it’s possible to imagine a mini-boom. There may still be 2.6 million unemployed in mid-2021 – as Rishi Sunak, the chancellor, warned in his spending review last month – but those who kept their jobs will be feeling financially safer than they have done in ages. Their debts will probably be lower because they didn’t have a summer holiday and lockdown was a frugal experience. House prices have not collapsed and interest rates look likely to stay low. Why not spend? You can see why share prices in consumer-facing companies are reacting.
What next for Capital Gains Tax?
Alarm bells will be ringing for many taxpayers and their advisers following the report published by the Office of Tax Simplification (OTS) on 11 November 2020. Its recommendations, which are made independently to the Government, have the potential to increase capital gains tax (CGT) revenues by billions of pounds and could aid the Government in funding its response to the current pandemic. There is also a counter argument that a reduction in rates, whether temporary or permanent, could assist by providing an economic stimulus. There is real concern that the proposed changes, if brought into law, could lead to significant tax increases, both in terms of headline rates and also in terms of reliefs available. This may result in changes to investment behaviour as well as changes to the structuring of family businesses and in wealth planning generally. The OTS has suggested that:
- CGT rates should be more closely aligned with the higher rates of income tax so that the tax system is more ‘neutral’. The report anticipates that doing this could result in an additional £14 billion of tax revenue per year. This assumes that taxpayers carry on as before and that no other changes are made to soften the effect that the increased rates would have; and
- the annual exempt amount (AEA) be reduced from £12,300 to £5,000. This would bring more individuals within the CGT tax net but could also deter affected taxpayers from realising similar levels of gain. In order to make tax compliance easier for affected taxpayers, the OTS has recommended that investment managers be required to report CGT information to taxpayers and to HMRC.
This is the first report from the OTS as part of a two-stage review of the UK’s CGT regime. A second report, which is expected in early 2021, will explore technical and administrative issues in greater detail once the OTS has considered the responses to its second call for evidence. Given the content of the first report, the second report is likely to receive a lot of attention.