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Budget Comments – Follow Up

 Here are some more comments on the Chancellor’s Budget to follow on from my previous blog post.

Certainly one big issue for those trying to plan for their mortality is the statement that pensions will be brought into Inheritance Tax. AJ Bell have published a good summary of the current position which I reproduce here: “Under current rules, defined contribution pensions can be inherited tax-free if you die before age 75 and are taxed in the same way as income if you die after age 75. But Labour has announced plans that inherited pensions will count towards inheritance tax on death.

Applying any new tax on death will come with substantial challenges, which is why the changes aren’t being brought in until 2027, with a consultation period on how the rules will work having been opened. A major obstacle centres around how to treat people who have made decisions about their retirement pot based on the pensions death tax rules as they are today. Anyone who made larger contributions into their defined contribution pension to make the most of the existing rules will also now be wondering what could happen to their pot when they die. If all of a sudden that money became subject to a new pensions death tax, those people would, understandably, feel like the rug had been pulled from under them. We need to await more detail on this change”.

Certainly I plan to respond to any consultation on this issue when it appears (I can’t find it at present – where is it?). One problem I see is that SIPPs are usually written in trust, i.e. the owner on death of the pensioner is the trust and the nominated beneficiaries not the estate of the deceased. So how is this legally going to work?

There have been many criticisms of the Budget and interest rates have been rising as a result of the increases in Government expenditure. The Budget was worded so as not to scare many people immediately but the bad news is now sinking in now the detail has become more apparent. Farming families are particularly irate as only very small farms will be capable of being passed on without hefty IHT bills.

Well that’s some bad news and today’s other bad news is I have just been told one of our close neighbours has died. He was quite decrepit of late but even so this is a bit of a surprise. I hope he has taken good advice on IHT where clearly the position is getting ever more complex. I will certainly be taking expert advice on this when the details become clear.

P.S. The pension/IHT consultation is here:  https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment

This will require some consideration but I will certainly be responding to it and I will ask ShareSoc and UKSA to get involved too. Whoever wrote this proposal up simply has not thought this through properly. The legal implications are a nightmare. Make sure you respond to the consultation if you are affected by this.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

Budget Comments    

I shall just make a few comments on the Chancellor’s Budget announcements yesterday. There are many free analyses on the web from the national press and investment companies.

Many of the advance rumours turned out to be true although the worst predictions did not materialise. My stock market portfolio went up by 1.4% on budget day mainly from rises in small/mid cap shares although most of that disappeared this morning.

There was clearly some panicking about potential rises in capital gains tax before the budget causing people to crystalise gains. Yes there are rises – The main rates of CGT are currently charged at a lower rate of 10% and a higher rate of 20%, and these will be increased to 18% and 24% respectively from 30 October 2024. These new rates will match the residential property rates, which are not changing. So there will be some impacts on my personal tax bill as I pay capital gains tax on some share sales in some years. But I can always postpone selling shares to avoid the tax or move them over time into our ISAs where the generous £20,000 annual investment allowance remains in place.

But what about Business Property relief against IHT available on some AIM shares you ask? Removal of this was seen as likely to badly damage the AIM market. This is the key paragraph in the Chancellor’s statement: “The government will reform agricultural property relief and business property relief from April 2026. In addition to existing nil-rate bands and exemptions, the 100% rate of relief will continue for the first £1 million of combined agricultural and business assets to help protect family farms and businesses, and will be 50% thereafter. The government will also reduce the rate of business property relief to 50% in all circumstances for shares designated as “not listed” on the markets of a recognised stock exchange, such as AIM”. This will affect around 0.3% of estates each year including mine.

There is a new limit on Agricultural Property Relief and Business Property Relief – no Inheritance Tax will be payable on the first £1million of combined agricultural and business property, to help protect family businesses and farms. Thereafter, Inheritance Tax will be payable at half the standard rate (meaning 20%). For quoted shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM, this same rate will apply at all times. Carried interest will now be taxed within the Income Tax framework, but at 72.5% of an individual’s marginal rate. Furthermore, the rate for Business Asset Disposal Relief (Entrepreneurs Relief) and Investors’ Relief will increase from 14% to 18%.

I don’t own any farms, but Jeremy Clarkson is not happy. He said on Twitter (X): Farmers. I know that you have been shafted today. But please don’t despair. Just look after yourselves for five short years and this shower will be gone”.

Comment: clearly many wealthy individuals invest in farms as a tax avoidance wheeze. These are businesses that often lose money and are lifestyle choices to a large extent. I have little sympathy for encouraging such businesses. The money would be better invested in new high-tech productive companies.

The government is also removing the opportunity for individuals to use pensions as a vehicle for inheritance tax planning by bringing unspent pots into the scope of inheritance tax from April 2027, which will affect around 8% of estates each year. This is another change that will impact me – or to be more exact, my offspring.

Bearing in mind that the Chancellor chose to raise £40 billion in new taxes, the most damage has fallen on employers National Insurance and the freezing of allowances which will bring more individuals into the tax regime. However the promise is that the freezes in threshold rates for National Insurance and Income Tax set in the previous government will end. From April 2028, these personal tax thresholds will be uprated in line with inflation. Let us hope the Government remembers that promise.

The rise in employers National Insurance and the minimum wage will hit retail and hospitality businesses so watch out for the impact on such shares – generally you have to be very careful with those in modern times anyway.

There is of course still no indexation of capital gains so we will still be paying tax on illusory gains.

The Chancellor Rachel Reeves commenced her speech in Parliament with the usual political platitudes and rhetoric. She spent most of her time criticising the previous Conservative Government rather that outlining her plans for a brighter future. Higher taxes will clearly damage future economic growth. What is the extra money to be spent on? On defence is one thing and on the NHS but I am deeply sceptical that the NHS can benefit from more cash. The problem in the NHS is incompetent management. More cash might simply be wasted.

For full details of the Autumn 2024 budget see: https://www.gov.uk/government/publications/autumn-budget-2024

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

Good Medical News

I developed Alopecia Totalis (total baldness) about 40 years ago. Until recently there has been no effective treatment for it. But now NICE have approved a treatment for it on the NHS – see https://www.nice.org.uk/news/articles/thousands-could-benefit-from-treatment-for-severe-alopecia

My eyebrows grew back after taking immunosuppressive drugs for my kidney transplant which I would not recommend for others as they are nephrotoxic so the drug Ritlecitinib looks to be a positive improvement.

Whether it’s worth my while taking it after so many years of accepting being bald is debatable but it could be a great benefit to younger people who are likely to be more concerned with their appearance. However there are some side effects from taking the drug so some care needs to be taken.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Pension Tax Relief and Winter Fuel Payments

The Government has already announced that the Winter Fuel Payment is to be axed for most people currently eligible. Only those receiving Pension Credit or other means-tested benefits will receive the payments in future. That means my household will lose £200 per year.

I can well afford that and I think it’s a pity that all such payments have not been scrapped. It’s an unnecessary complication of the tax and benefits system. Those who are so poor that they have been relying on this benefit should be compensated by a general uplift in other state pension benefits.

The next target for Government attack is tax reliefs on pension contributions. This currently costs the Government £48.7 billion per annum, not a small sum!

The main beneficiary of this tax relief are the high earners as it’s given at their marginal tax rate. The original justification for this tax relief was to encourage pension savings in private schemes so people were less reliant on the state in their old age. Pension scheme promoters no doubt thought this was worth promoting as it increased the funds under management. But does it really make sense?

And why should the wealthy gain so much when people paying little or no tax lose out? If you save in other ways, e.g. via bank deposits or ISAs, no such tax relief is available. So why on pension scheme contributions?

You may have guessed by now that I think this relief is too generous. If we want to encourage people to save then they should be urged to purchase stock market shares for the longer term. Pension scheme contributions are locked up and managed by well paid fund managers who actually take a hefty cut of any likely returns, and they have typically been investing funds in bonds of late giving lower returns.

I should declare an interest here. I retired from a full-time job almost 30 years ago and have not been contributing to pension schemes since then. I do have a self-select SIPP which is in drawdown and is managed by me. I preferred to have it under my control and make the investment decisions. As a result my pension has grown in size rather than been eroded by payments and charges. I have saved the high fees that would have been charged by a conventional pension fund manager.

The Government needs to encourage more people to take control of their own money and investment activity. Reducing tax relief on pension contributions so as to focus on the costs of managed pension schemes might just do that.

If you think my personal photograph on this blog makes me appear too young to have been retired for 30 years, you’re right. It’s based on an old photo suitably “improved”. I must get around to replacing it sometime.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Share Buybacks and a Pattern of Islands

Last week’s Investors Chronicle contained an article that said “The FTSE-100’s record highs have been driven by share buybacks rather than any newfound enthusiasm for UK-listed companies by institutions or DIY investors….”. It suggested that UK funds were still suffering big outflows as investors continued to pile into North American equity funds. I can quite believe it. The herd mentality is clearly in play here.

In the last 3 months the FTSE-100 is up 9% while the FTSE-AIM All-share is up only 3.3%. The expected rebound in small cap shares is still very selective although I have been buying some of them.

I am not travelling much of late but instead I read travel books for some excitement. I reviewed Brazilian Adventure in a previous blog post on the 2nd May. This is a reprint by publishers Eland Publishing Ltd (see https://www.travelbooks.co.uk/ ) who specialise in reprinting old travel books. The latest book from them I have just finished reading is “A Pattern of Islands” by Arthur Grimble. This is the story of someone who joined the colonial services in 1913 as a cadet. He was posted to the Gilbert and Ellice islands with his wife and stayed there for many years, becoming district commissioner in due course. He learned the local language and became an expert on their culture and superstitions.

It’s a marvellous evocation of native life in the South Pacific and the dying days of empire. I recall my parents owned a copy of the book probably from their book club making it a “book of the month”, but I don’t recall reading it before.  

The book contains useful tips on how to survive when the nearest doctor was hundreds of miles and many days distant. You can also learn how to kill an octopus – let it catch you and then bite it in a certain place when it promptly dies.

I recommend it for some summer holiday reading. Yes summer is almost upon us and we will have to start watering the garden soon. My younger grandsons went to the seaside (Herne Bay) yesterday but found the sea very cold as yet so soon gave up paddling.

I hoped to see the Northern Lights last night but they were certainly not obvious – probably too much background light in London. I have seen them before when I visited Michigan.  

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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The Importance of Buying Trusts at a Discount

The AIC have published an article explaining the importance of buying investment trusts when they are trading at a high discount. They say:

“Investing when the average investment trust discount is more than 10% may lead to significantly better returns over the subsequent five years, according to new research from the Association of Investment Companies (AIC).

The AIC’s analysis of investment trust returns since 2008 shows that when the average discount exceeded 10%, the average investment trust generated a return of 89.3% over the following five years. However, when the average discount was less than 5%, the average return was 56.1% over the next five years”.

In simple terms this is indicating that buying trusts when they are cheap in relation to their underlying assets, i.e. at a discount to Net Asset Value, is a good idea. Discounts tend to follow the mood of the market so being a contrarian is obviously helpful.

For the full AIC article see https://www.theaic.co.uk/aic/news/press-releases/double-digit-investment-trust-discounts-can-mean-higher-returns-over

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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ShareSoc Newsletters and SIPP Dangers

Another good newsletter issued by ShareSoc this month. Go here to sign up for it (you need to be a full member to get it): https://www.sharesoc.org/upgrade-to-save/

It covers yet another case where investors who hold funds in a SIPP may be prejudiced by an administrator charging fees to the SIPP funds. The latest case is that of Rowanmoor but the latest news on Hartley Pensions is also covered in the newsletter.

The moral is that you should only invest in a SIPP with a financially stable organisation and I suggest preferably one that is listed so you can easily monitor their financial stability – such as AJ Bell Youinvest or Hargreaves Lansdown.

The newsletter also covers the latest news for Woodford investors and the disappointing progress from the Digitisation Taskforce to improve the position of nominee shareholders – or at least make them no worse which is at high risk of happening if everyone is stuffed into a corporate nominee in the name of dematerialisation.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Impossible to Vote!

I have just spent many minutes trying to vote my shares in the Baronsmead VCTs. I received letters giving me a web address for proxy voting and a CIN and “access code” but for some of my multiple holdings on the register the access code is blank. Even when supplied access is rejected in one case.

It’s getting more and more difficult to vote my shareholdings. Similar technical problems arose recently when trying to vote my shares in AJ Bell in the Signal Shares App.

I am generally most diligent in voting all my shareholdings but complexity and technical problems are frustrating doing so. It’s most annoying that companies no longer send out simple proxy voting forms.

Note these are holdings on the share register, either certificated ones or personal crest holdings, so these problems are inexcusable.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Fundsmith Annual Report

Terry Smith has published his Annual Report for holders of the Fundsmith Equity Fund (I am a holder). Total Return last year was 12.4% which I consider a good result but was less than the MSCI World Index of 16.8% probably because of being underweight in large US tech stocks where mania continued unabated.

Terry emphasises the long-term track record of the fund and puts that down to the superior return on capital of the fund holdings in comparison with those of the S&P 500 and FTSE 100 (32% last year versus 18% and 17%). He says “….. if you own shares in companies during a period of inflation it is better to own those with high returns and gross margins” and “Consistently high returns on capital are one sign we look for when seeking companies to invest in”. I completely agree with him on that.

He also argues the fashion for investing in bonds is misplaced as equities have provided better returns since 1928 which includes such periods as the Great Depression, World War Two, the 1987 market crash, Dotcom meltdown, 2008-9 financial crisis and the Covid pandemic.

He also makes some prescient comments on the enthusiasm for AI products and points out it will be difficult to predict the winners in that market.

The newsletter is worth reading for the wisdom of Terry Smith. See Fundsmith Annual Report: https://www.fundsmith.co.uk/media/31plodnq/2023-fef-annual-letter-to-shareholders.pdf

I see no reason to change my holding in Fundsmith.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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CTY + JGGI AGMs and Market Trends

Yesterday saw a big improvement in my stock market portfolio valuation (up over 2% on the day). That makes a change from recent trends. Even some of the property REITs I hold picked up despite bank rate being unchanged.

In the last year I have been buying shares in BP and Shell on the basis that oil and gas will still be required for many years to come. This proved to be a big mistake on Tuesday when the share price of BP dropped by over 4% on results that were way worse than forecast. Shell did rather better later in the week but is it not very disappointing that analysts are unable to accurately forecast so much as a quarter ahead for such large and well researched companies? I am still in profit on my BP holdings but I will clearly have to review them.  

I attended the AGMs of City of London Investment Trust (CTY) and JPMorgan Global Growth and Income Trust (JGGI) this week. These were both “hybrid” meetings so I attended on-line. I’ll only cover them briefly as there were no surprises. CTY achieved a total return of 4.6% last year which slightly underperformed their benchmark. But they now have a 57 year record of dividend increases. I have held the shares since 2011 with limited trading in the meantime. Overall return has been 10.9% per annum which I consider satisfactory for a share I don’t need to constantly monitor and an on-going charge of only 0.37%. However stock selection last year had a negative impact.

They hold BP and Shell but sold BHP last year and bought Glencore instead. Long standing manager Job Curtis does not yet see a turning point in property.

The JGGI AGM was held in Edinburgh (they plan to alternate location) after the merger with Scottish Investment Trust. This was said to be “a transformational year” as the size of the trust has tripled due to the mergers and strong investment performance. They achieved a total return of 19.1% last year. Their aim is for long-term capital growth combined with a yield of 4%.

Their biggest holdings are companies like Amazon, United Health, Microsoft, CME, Coca-Cola, TSMC, Vinci, Uber and Mastercard and they have been buying Nvidia.

Questions were raised about them paying dividends out of capital, i.e. uncovered by earnings. But I see no problem with that as most of the profits arise from capital growth. But there were negative comments though from the lack of a resolution to clearly approve the dividend policy. I think they should improve that resolution next year.

Both the CTY and JGGI AGMs were useful events in terms of understanding the investment strategies and I am happy to continue holding the shares.

Lastly a postscript on the conviction of Sam Bankman-Fried (see previous blog post). Is it not astonishing that the SEC managed to prosecute and secure this conviction in just a few months when the FCA takes years to secure fraud convictions in the UK? The FTX bankruptcy filing took place in November 2022. There is clearly a much more effective legal framework in the USA to pursue, and hence deter, financial fraud.

What could have been a horribly complex legal case was dealt with quickly and efficiently in the USA.

Roger Lawson (Twitter https://twitter.com/RogerWLawson  )

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