The UK Wealth Advisory business of Stonehage Fleming, working with aspiring and wealthy clients to develop and implement strategies to protect and manage their wealth.
What differentiates us is our strategic approach. We devote time and energy to really understanding your objectives as experience has shown how important this is.
A wealth strategy sets out your objectives – what you are really trying to achieve for yourself, for your family and for others. This provides the strong foundation for all the advice we give.
Our clients include those who consider their affairs to be straightforward as well as those with the most complex needs. The breadth and depth of our technical expertise allows us to advise UK residents, domiciled and non-domiciled, as well as arrivers and levers in support of UK-based assets.
We are authorised in the UK to provide regulated advice across investments, pensions and insurance.
With high expectations to easy austerity and deliver eye catching solutions to a number of long term problem areas such as housing and the NHS, and against the backdrop of significant lower growth forecasts from the independent Office of Budget Responsibility, Philip Hammond was always going to face a difficult balancing act. With 24 hours reflection, the general view is that he has done a reasonable job. From our clients’ perspective there is minimal impact with the wider economic outlook likely to impact wealth strategies more than any legislative change announced yesterday.
In terms of the legislative and tax changes, the anticipated increases in personal allowances and the higher rate tax band were included and, perhaps surprisingly, no changes to pension tax relief or annual allowances. The Pension Lifetime Allowance was increased in line with inflation to £1.03m the first increase since 2010. Higher earners whilst seeing little of benefit have not been penalised further.
The most headline grabbing change was the removal of stamp duty for first time buyers up to £300,000. It will assist relatively few people – the biggest challenge to home ownership remains saving for the deposit -, but it will be of some benefit to clients seeking to help children onto the property ladder.
Changes to the VCT and EIS regime following the Patient Capital Review were largely as expected and continued the trend we have seen over recent years to target these reliefs at genuinely risky, growth investments. There was no reduction in the rate of the 30% tax relief, fear of which had caused many VCT providers to bring forward their cash raisings. Nevertheless we expect the VCT sector to take stock for a period before raising more money. They will require some time to adjust to shorter time frames in which to invest cash, tighter rules on what will count as qualifying assets and various other small changes to the rules.
On the other hand, there was support for EIS and particularly ‘knowledge intensive’ companies. The amount that can be benefit from tax relief on EIS increased to £2million provided anything over £1million is in knowledge intensive sectors. The maximum amount that a knowledge intensive company can raise increased from £5million to £10million.
These tax changes however are very much at the margin in the context of the wider economic challenges. The OBR reduced their forecast for growth in the UK in large part due to a reduction in their assumptions on productivity growth, an ongoing challenge for the UK since the financial crisis. Whatever your view on the long term merits or otherwise of Brexit, the current uncertainty is weighing on business investment and confidence which further hampers productivity growth. It is difficult to forecast with so much uncertainty about what rules will govern trade and services. Nevertheless, the forecasts and actual growth rates for the UK are now amongst the lowest for the G8 at a time when the rest of the world is growing strongly and finally emerging from the very low levels of growth which have characterised the world since the crisis. Investment strategies for protecting and growing wealth need to take advantage of that global momentum.
For our UK clients facing greater economic, political and legislative uncertainty, a good financial plan can help understand the impact of the various scenarios on your wealth. We will continue to work with our clients to help navigate through that uncertainty and support your lifestyle and wider goals.
Now we have had 24 hours to digest the content of this Budget, we can begin to see how it can inform our wealth strategies and future planning for clients. After all the hype about pensions, there was little change but it does set a direction of travel. Assuming there is no major political fall out after the EU referendum, we can expect more radical change to move away from pensions towards the Lifetime ISA later in this parliament.
In the medium term, there are two key areas that might drive our thinking. Firstly, what the latest economic forecasts might tell us about the health of the economy. Secondly, the impact of the changes and increasing complexity in the personal taxation system which now sees additional allowances for dividends, interest, property and trading.
Let us look firstly at the economic outlook. In the Autumn Statement, the Chancellor was given more room for manoeuvre by forecasts from the Office of Budget Responsibility which were generally considered optimistic. This time around a downgrade in short term growth forecasts combined with significantly more pessimistic assumptions on longer term productivity have fundamentally altered the outlook. It is difficult to believe that the real economy has changed so much in a three month period. As we know with our own cash flow planning for clients, long term forecasts can set a direction and frame a plan but they are not a promise of absolute outcomes. Yet, boxed in by his own fiscal promises, the Chancellor is forced into reacting to these forecasts with more cuts or tax rises. He has pushed these back to the end of the parliament potentially more in hope than expectation that things will get better.
The EU referendum has the potential to derail any forecasts and will inevitably add to market volatility in the short term. But aside from a major upset there, our central house view remains for a period of low growth and continued low inflation, broadly consistent with the OBR’s latest outlook.
In this low return environment, taxes represent a bigger drag on wealth preservation. And here we can welcome some of the initiatives for encouraging savings and investments. They might not represent big wins for the already wealthy or retired, but certainly offer planning opportunities for the next generation and can also play a key part of generational planning.
The Lifetime ISA clearly sets a path towards ISAs replacing pensions. Much research shows that the public don’t like or trust pensions which they see as remote and complex, whereas the ISA brand is seen as accessible and well liked. If this can encourage greater engagement of young people in planning for their futures, it is a good thing.
The increase in the ISA allowance to £20,000 from April next year is a significant benefit, allowing clients to accumulate significant tax free retirement income and partly offsets the reduction in the pension annual allowance. And finally a reduction in CGT to 20% combined with the dividend and interest allowances can, with good planning, reduce the effective tax rate in retirement. The reduction in CGT may offer opportunities for certain clients to defer prior year gains into EIS and pay at the lower rate on exit from EIS after 3 years.
The only forecast which is certain is that there will be more change. Each tweak to the tax or regulatory system adds cost to the industry which inevitably gets passed on to consumers. But in today’s environment of low returns and complex tax, maximising the use of reliefs and allowances across the family is critical to wealth preservation and income generation in retirement.
Investors looking at the quarter-end equity market return may be forgiven for thinking that Q1 2016 has been rather dull. However, this has masked a period of elevated volatility which saw broad equity markets fall 11%, before staging a recovery from these lows to end largely where they started. Sterling investors enjoyed better performance numbers for the quarter where they had global equity exposure as the pound weakened in the face of Brexit concerns.
The volatility is driven by a nervousness among market participants and has challenged many an active manager over the quarter. Long term investors or those who took advantage of the sell-off to cautiously add to long term portfolios will have finished the quarter in reasonable shape.
At the start of the year we outlined our expectations for 2016, and central to this was the view that the US would not enter a recession. Whilst recent economic data points to relatively lacklustre growth, it continues to support our ‘o recession’ view and in fact the data has improved modestly over the past few months. Economic cycles are typically curtailed by central bankers being forced to tighten monetary policy as overinvestment and overheating leads to inflation. We do not see evidence of these developments at present. In fact, the US Federal Reserve has adjusted their stance to a more dovish one, forecasting only two rate increases this year against the four initially anticipated. We also see other central banks, most notably the Bank of Japan (BoJ) and the European Central Bank (ECB), continuing to use monetary policy tools to help stimulate their economies. Despite their substantial efforts, inflation remains elusive and growth sluggish. There are now some question marks over the efficacy of these tools, in particular negative interest rates, and this could present a challenge for the BoJ and ECB in the coming months.
In addition to concerns about how the financial sector will contend with negative interest rates, recent announcements have counterintuitively led to Yen and Euro strength, rather than the weakness being targeted. In the UK, we see increasing levels of uncertainty surrounding the upcoming referendum in June on Britain’s membership of the European Union. Whilst the polls suggest that the vote to remain will hold sway, the exit campaign has been gaining momentum and we anticipate increasing levels of volatility with respect to Sterling as we approach June and further weakness should the polls tighten and an exit seem a more likely outcome.
At the end of 2015 concerns about Chinese growth were elevated, but in the past few months these have moderated, helped by Renminbi appreciation. As we’ve noted before, China has a material influence on the global economy, and yet the opacity of information makes it very difficult to assess. We see significant structural challenges which need to be overcome (in addition to ongoing political risk), but also opportunity. The structural issues include high levels of debt and the challenge of transitioning the economy from manufacturing and infrastructure-led to a more consumption driven model. However, a consumer base with growing spending power should provide ongoing positive support to global growth, and Chinese authorities have significant reserves to provide economic support if required.
So what of the outlook? Well as for much of the recent past, we are faced with an interesting mix of positives and negatives. Monetary policy remains very accommodative and whilst the US has moved to start tightening policy, we anticipate a slow and cautious approach to future rate increases. Growth, despite much monetary policy assistance, remains tepid which doesn’t provide great support to the fundamentals underpinning equity markets. However while oil and commodity prices remain low, it is positive for the consumer and also helps keep a lid on inflation and eases the pressure on the Fed with respect to rate increases.
In short, no major change from our core view that we are not heading for recession in the near term but growth will continue to be sluggish and returns relatively low. The outcomes are unlikely to be hugely exciting but unfortunately with so much uncertainty around we may suffer more quarters like the last where the journey is more dramatic than the end destination. With the EU referendum coming up, this will be particularly relevant in the next few months – hold onto your hats!