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February & March News Round Up

25th March 2021

February & March News Round Up

What the Budget means for you 

The Chancellor’s 2021 Budget focused on continued support as the UK moves towards what is hoped to be the end of the Covid pandemic this year. Homebuyers, businesses, employees and the self-employed are among those who should continue to benefit from these measures, though Sunak warned that businesses should prepare for a corporation tax rise – even if this won’t kick in until 2023. Here are the main measures in summary: 

Furlough to be extended: The Coronavirus Job Retention Scheme, known as furlough, will continue to be in place until the end of September. 

Self-employed furlough (SEISS) also extended: The self-employed equivalent of the furlough scheme is the Self-employed Income Support Scheme (SEISS). The Chancellor has extended this scheme to those newly self-employed, meaning that over 600,000 people can now claim a SEISS grant. The scheme is now open to those who filed their first self-employed tax return in 2019/20 or before. 

95% mortgages return: First-time buyers and existing buyers alike will find more 95% mortgages available, thanks to government guarantees to lenders. 

Stamp duty holiday extended again: Another extension has been added to the stamp duty land tax holiday, which will now finish at the end of June. After this, there will be a further stamp duty holiday on homes worth £250,000 or less, for another three months. After this, the system will return to normal, with stamp duty starting at £300,001 for first-time buyers and £125,000 for everyone else. 

New grant scheme for businesses as they reopen: There is a new £5 billion grant scheme for businesses, called ‘restart grants’, worth up to £18,000 per firm (but just £6,000 for most non-essential businesses). These will be available from April via local authorities. 

Business rates holiday extended: The retail, hospitality and leisure sectors will continue to be exempt from business rates until the end of June, with a further two-thirds discount applying for the remaining nine months of the 2021/22 tax year. 

Warning of corporation tax rise to come: The 2021 Budget wasn’t all generosity. Recognising that the huge levels of state support would need to be paid for eventually, Rishi Sunak announced that corporation tax would rise from 19% to 25% in April 2023. However, the smallest 1.5 million companies will continue to pay it at 19%. 

The lowdown on 95% mortgages 

When the chancellor, Rishi Sunak, announced his budget last week, he talked about the government’s goal of turning generation rent into “generation buy”. The measures he outlined to help would-be homebuyers had been heavily trailed – an extension to the stamp duty holiday he launched last year for England and Northern Ireland, and a new UK scheme to bring back 95% mortgages. But the budget documents brought more detail. We have looked at the small print to see what the measures will mean for homebuyers. The initiative aims to encourage banks and building societies to offer 95% mortgages again. It will do this by giving them the chance to buy a guarantee on the portion of the mortgage between 80% and 95%. If a borrower gets into financial difficulty and their property is repossessed, the government will cover that chunk of the lender’s losses. The scheme will open for new mortgage applications in April and run until the end of 2022. This scheme is for any “creditworthy” household struggling to save for a higher deposit. These will be standard residential mortgages – so no second homes or buy-to-lets – and the property has to cost £600,000 or less. The mortgages must be on a repayment basis, not interest-only. In terms of interest rates, we don’t know yet but experts are predicting they will come in at below 4%. As part of the scheme, the government has told lenders they must offer a five-year fixed-rate deal so borrowers can lock their repayments at a set level for the medium term. 

Help for flat owners stuck in cladding limbo 

New guidance has been released aimed at reducing the number of wall safety surveys being requested by banks and building societies on blocks of flats. Thousands of flat owners have been unable to sell or re-mortgage because they cannot get the checks done. The Royal Institute of Chartered Surveyors (RICS) said it would help lenders save time when the inspections were not needed. Most lenders are likely to follow the advice but there is no guarantee. To begin with, only those who owned flats in tall buildings with dangerous flammable cladding were affected. But after the government extended its advice to smaller properties in January 2020, mortgage lenders began demanding fire surveys from a much wider range of sellers. Hundreds of thousands of leaseholders have since been asked for EWS1 external wall safety forms when they sell or re-mortgage. This requires a specialist survey - but there haven't been enough qualified surveyors to do the checks, leaving thousands of owners "in limbo", according to the government. Some owners have also reported being asked for EWS1s when there appears to be little or no flammable materials attached to their building. RICS said its new guidance would clarify types of properties which will, and will not, require additional inspections to speed up mortgage approvals. The guidance is anticipated to result in a reduction in the number of EWS1 requests which will therefore allow more focus on the assessments of higher risk buildings, which should speed up the overall process whilst ensuring appropriate protection for lenders and purchasers. 

Stealth income tax raid 

The chancellor said action was necessary to begin fixing the public finances, which have been ravaged by the coronavirus pandemic. Sunak kept the promise in the Conservative party 2019 manifesto not to raise income tax, national insurance or VAT. But he announced he would freeze the thresholds at which the basic and higher rates of income tax are paid from April 2022 to April 2026, in a move that is likely to hit more than 2m people. The changes will bring 1.3m individuals into the income tax net by 2025-6 and lift 1m taxpayers into the higher tax bracket, according to the government’s Office for Budget Responsibility. Under the Budget plans, the Income Tax personal allowance - which rose dramatically under the Tories and Lib Dems - will rise slightly in April but then be frozen at £12,570 until 2025/26. So will the 40p tax rate threshold of £50,270. The freeze will only cost low earners around £13 in lost tax breaks in its first year but will pile up as the cumulative impact mounts. They go from raising £1.6bn for the Treasury in 2022-23, to £8.2bn in single year in 2025-26. The IFS think tank warned the UK could have more than 5million people in the 40p tax band by 2025 due to the freezes - up from 4.1million now and 3million in 2010. Meanwhile financial expert Sir Steve Webb has warned hundreds of thousands of families could lose their child benefit by 2025 as a threshold for starting to pay it back in tax remains at £50,000.

Dog funds 

The number of funds that have consistently underperformed in the markets they invest in this year has risen by a third, new data has shown. This is partly due to the gulf between the performance of growth versus value and income funds, which has been exacerbated by the pandemic. And the difference in performance levels is striking. While the average fund in the IA Global sector posted a 32.4% return, the best performer managed to make a 162.6% return, and the poorest ended up down 9.6%. This highlights the need to be super selective when choosing a fund manager to look after your cash and, once invested, how important it is to continue to regularly monitor your investments and check whether they are delivering value for money. Bestinvest’s Spot the Dog report, which has been exposing badly performing funds since it launched in 1994, named 119 market investment funds in its latest report, collectively representing £49.6bn in customer’s long-term savings. The research, which is released biannually, uses statistical fund performance data to identify funds that have performed badly compared to their benchmark. Fund giant Invesco retained the “top dog” spot for the sixth time in a row, with 11 funds worth £9.2bn of assets. Jupiter climbed up to second place, after acquiring Merian Global Investors last year, while St. James’s Place and Schroders came in third and fourth place, respectively. The highest count of consistent underachievers was found in the global equities sector, while North America had a prolific number of dog funds at 21. 

Investment opportunities amid global mining boom 

RioTinto will hand investors the largest dividend in its 148-year history as it cashes in on a mining bonanza. The company will pay out £6.5 billion, equal to 400p per share, after a surge in the price of steelmaking ingredient iron ore boosted profits by more than a third. Iron ore rose in value by almost 85% last year, climbing above $175 a tonne, as demand rocketed from China's steel industry. The country has been stockpiling the commodity as it plans to unleash a post-Covid economic boom. Rio's bumper pay-out came a day after fellow FTSE 100 miners BHP and Glencore promised to hand investors huge sums – £3.7billion and £1.2billion respectively – after they too benefited from rising commodity prices. The results have added to growing speculation that the market is entering another 'supercycle' that will see the prices of commodities soar. A construction boom in China, economic stimulus in the US, the green revolution and lower stocks of commodities are all forecast to bolster prices for years to come. Commentators believe this is another example of the strong pay-outs on offer in the sector and the likely ability, and intent for this to continue, especially as iron ore prices stay elevated, should help to underpin share prices. 

Gamestop and equity bubble fears 

The flood of retail investors piling into markets like the Redditors behind the Gamestop mania has been described as a “harbinger of over-exuberant markets” and evidence of potential equity bubbles brewing. Down on its luck video game retailer Gamestop took the investment industry by storm at the end of January after an army of amateur traders on Reddit targeted the stock, with the intent of sending its shares “to the moon” and letting Wall Street have it. What followed was a frenetic week of trading which saw other beaten up and shorted stocks US cinema chain AMC and out of fashion mobile phone company Blackberry take off.   At its peak Gamestop was up 1,500% at $483 a share compared to its $17 price tag at the start of the year. Hedge fund Melvin Capital, which was heavily short the stock, lost more than 50% last month. Since then, the dust has settled, and its shares are back down to $60 with some of the loss of momentum down to brokers Robin Hood, Charles Schwab and Etoro restricting trades as they struggled to cover their positions. Though the Gamestop bubble appears to have burst, the week of explosive trading activity has some investors worried valuations are looking frothy.  Ruffer Investment Company likened the situation to prior bubbles formed by speculative trading on margin in its January investment update.  The David and Goliath nature of the story has captured the imagination of the press but taking a step back it reveals some more interesting insights into market dynamics. Gamestop is not the only stock accused of being a speculative bubble. Tesla, which has seen its shares rocket 700% in the last year, has been flagged as being overvalued for months. The electric car maker was also at the centre of a squeeze a year ago which caused a massive headache for short sellers like former Jupiter Absolute Return manager James Clunie. Bitcoin has also been hailed as a speculative trade and its violent price swings in 2021 have prompted the Financial Conduct Authority to sound the alarm. But most experts don’t think it’s enough to destabilise the equity market. The speculation has been fairly tightly contained in a handful of stocks that had been well-scoped out by investors beforehand as being heavily shorted and ripe for a squeeze. The failure of this action to broaden out into silver for instance is, according to commentators,  encouraging as it suggests that the broader market is still more being driven by stimulus, sentiment around the economy re-opening and corporate earnings. 

The cost of un-used university housing 

The 2020/21 results of the National Student Accommodation Survey, published las week, and carried out by ‘Save the Student’ reveal the financial toll of the pandemic related to students’ living situations. Based on its calculations, ‘Save the Student’ estimates a total of nearly £1 billion (£933,270,890) has been spent by students on unused accommodation in the UK in the 2020/21 academic year so far. The UK-wide survey polled over 1,300 university students between 20 January 2021 and 8 February 2021, to explore the realities of how student living has been affected by the Covid-19 pandemic. Findings from the survey showed a 10% drop in students who view their accommodation as good value for money, with 1 in 2 students feeling their accommodation is poor value for money. With the uncertainties of the last few months resulting in the non-occupation of student accommodation, the survey found that 32% of students questioned had been offered a refund on their rent, of which 9% were offered a full discount, and 23% offered a partial one. There was also a notable difference in the number of students’ approaching their halls for rent rebates and those asking for rent rebates from private landlords. In university accommodation, as many as two-thirds have asked for a refund, compared to just under one in five students with private landlords. The figures show that overall very few students are currently living in university accommodation or private halls. 52% of students are still in the same living situations as originally planned, but a third of students in the survey had moved back home to live with their parents or guardians. The national survey shows that since the start of the 2020/21 academic year, around 43% of students have spent three months or less in their properties and revealed that if students had known what would happen this year, over two in five would have chosen their accommodation differently. Save the Student’s report calculated the cost of unused accommodation finding that on average students spent £1,621 on empty rooms to which they haven’t had full access to this academic year.

The end to the stamp duty holiday is no death knell to the property market 

The UK's housing market suffered from early Covid rules, as the Government introduced the first nationwide lockdown in spring. Measures kept people inside while industry leaders adapted to the pandemic. The market has had mixed success since then, but vaccination has introduced inspired some hope. UK health workers have now vaccinated more than 10 million people and nearly 30 percent of adults. At their current direction, the programmes should cover the first five priority cohorts laid out by the Joint Committee on Vaccination and Immunisation (JCVI) in the next two weeks, NHS leaders have said. As immunity spreads, the country can look forward to fewer Covid measures which should eventually revitalise the economy. Experts believe the path ahead for housing is uncertain, with several factors like to impact activity. Commentators believe the same appetite for homes remains, which has led lenders to axe interest rates. But house prices have started to dip, and how the market performs depends on several factors. With the market housing benefitting from Covid conditions in some respects, mortgage lenders have been gradually returning products with lower interest rates and higher loan to value ratios to the market every day. This trend looks set to continue while the appetite for new homes is strong, but long term, things are far from certain. There have already been signs that house prices are beginning to dip as the stamp duty relief deadline looms. Whether the market remains strong in the longer term depends on a range of different variables. New measures promised to help stimulate first-time buyer activity could counterbalance any lull from the stamp duty relief deadline, but the longer-term economic impact of the coronavirus crisis is still taking shape. The Government's efforts to vaccinate as many people as possible can only help the situation, and while many other factors are adding to the uncertainty right now, including Brexit and global economics, we remain optimistic about the next 12 months.

Tax on investments 

If you’re among the army of retail investors who have made big money trading in shares of GameStop and other previously downtrodden stocks, one thing is certain: The taxman will come.

Trading by small investors caught fire in 2020, as boredom brought on by pandemic lockdowns combined with convenient, no-fee mobile investing apps like Robinhood. In recent weeks, some of those investors, fuelled by social media chatter, have driven up the price of GameStop, a brick-and-mortar video game retailer that has been losing money. Their reasons for buying the stock vary, but some wanted to thwart the big investors that were betting that the share price would fall — otherwise known as shorting the stock. Trading in other mundane stocks, like Blackberry and the AMC theatre chain, has surged as well. Some individual investors may already have notched tens of thousands of dollars in profits — even millions, if online boasting is to be believed — as share prices soared. Here’s the thing: Those investors may have to pay hefty capital gains taxes. The gains are on paper, of course, until the holder sells the shares. And taxes for stock sales occurring this month wouldn’t be due until April 2022. If those investors want to cash in on their gains, they may be caught off guard by how much they owe the government, accountants say. Unlike with employment income, there’s no automatic deduction of taxes. Someone who bought and sold GameStop shares quickly, in the midst of the trading frenzy that began in early January, would probably pay very high tax rates. 

The gender pension gap 

Retirees seeking mortgages are suffering a gender pension gap that is seven times worse than the national average, according to new research by Responsible Life. The gender pension gap is the percentage difference between pension income for men and women. Responsible Life found that the average gender pension gap among retirees applying for a mortgage is 269.5% — compared with 40% for the population at large. The retirement mortgage specialist says this suggests a two-speed retirement in which wealthier couples own their homes outright and can live off pension income while a more vulnerable group of retirees who still have a borrowing requirement suffer a large gender pension gap that makes it very difficult to secure loans. More than half — 53.5% — of retired couples making a mortgage application have a gender pension gap of more than 100%, according to the research, and the worst gap that Responsible Life came across was a staggering 4,433%. The gender pension gap can be as damaging as the gender pay gap, particularly when it comes to borrowing against your home. That problem worsens the older you get, until couples unexpectedly find themselves unable to borrow what they think they can afford because sole survivorship suddenly becomes the dominating factor for lenders. Most studies on the gender pension gap focus on the average statistics between men and women or all ages but this analysis looks at the consequences of this problem for those at an age when it can be really damaging. As couples approach retirement, providers become less willing to lend. They are almost always reluctant to accept the sale of the property as a valid repayment plan should the mortgage payments become too much of a burden or unexpected costs including care costs begin to eat into their ability to pay.

What next for the silver surge? 

After squeezing hedge funds shorting GameStop stocks, the online mob is now hoping to do the same with the silver price. But this time, things aren’t quite so simple. Never, in the history of financial markets, has there been a commodity with as much potential as silver. And yet, never has a commodity disappointed its investors so consistently. It’s trading at the same price today as it was 40 years ago. It’s affectionately known to commentators as ‘the metal that always lets you down’. Like gold, silver is a monetary metal. A pound was once a pound of sterling silver; one US dollar was once an ounce of silver – and, perhaps as a result, the metal has a tendency to arouse a certain patriotic sentiment in some quarters. And so one investment case for silver is the same as the case for gold – it is an inflation hedge in an era of monetary debasement, it is nobody else’s liability. Meanwhile, silver has a plethora of exciting industrial uses, especially in multiple new technologies, from medical to electrical. Every smartphone has silver in it; every computer; every jet engine; every solar panel (demand for silver on photovoltaic cells has gone from one million ounces in 2000, to around 50 million ounces last year – about 5% of silver's annual supply). It finds widespread use in battery technology and in 3D printing. The question is not so much which modern technologies contain silver, as which don’t. Most silver is produced as a by-product of lead and zinc mining, which has suffered dramatic underinvestment over the last decade, leading to a paucity of major new discoveries. There are some pure silver mining plays, but, with two or three exceptions, most have struggled to make money in recent years, either through inept management or a flawed business model. The result is perennially disappointing share price performance with most trapped in a perpetual cycle of disappointment. Silver seems to have so much going for it. And yet, silver’s all-time high was $50 in 1980. It re-tested that level again in 2011 and failed. And here we are today at $30. The silver story has been about for as long as anyone can remember. It just never seems to deliver on its potential; not for any extended period anyway. For years it doesn't move; or, worse, it sinks. But when it runs, it really runs. And now this “it’s the next GME” narrative is out, it looks like another run has got started.

Chartered Financial Planner | North Laine Financial Management Limited | Brighton

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