Musings on Mortality, and Year-End Tax Planning

The death of Steven Hawking at the age of 76 gives those who are trying to figure out how long we may live some cause for thought. He was given only a few years life expectancy soon after he was diagnosed at the age of 21 as having motor neurone disease. This problem of forecasting how long you may live is a key concern of many elderly people like myself as it has a big impact on investment and tax planning.

I am likewise living much longer than my doctors forecast 20 years ago. Despite one near death experience I have reached the age of 72 in reasonable condition, although I do get offered seats on tube trains of late. Do I really look that knackered?

But can I live another 7 years? That’s how long you need to do so to avoid tax on gifts. It can even be as long as 14 years if you have made gifts in prior periods. Now even allowing for the pessimism of doctors who seem to err on the downside on the principle that at least if their forecasts are wrong the patient may be pleased, I think tax planning will have to take another approach in my position.

Gifts of £3,000 per year are possible regardless, and gifts out of “surplus income” can also be made so now is the time of year to work out what you can do in this regard before the tax year ends. Of course it means that you need to have kept track of all your income and expenditure during the tax year which many people do not. If you have not, perhaps it’s time to start for the new tax year? The wealthiest man in the world at the time, John D. Rockefeller, was reported in his biography as keeping a pocket notebook with him at all times where he recorded the smallest expenditure. Perhaps no need to go to such extremes but the principle is worth following.

As it’s coming up to the end of the tax year, now is the time to review holdings and transactions that are not in ISAs or SIPPs in case you are likely to be paying capital gains tax. I get my accountant to work out my capital gains tax position a few weeks before the year end, then if I have gains exceeding the annual allowance (£11,300 for the current tax year), I sell any losing positions to reduce the liability. If I have gains less than that I might sell profitable holdings to maximise the use of the allowance. One can always buy any holdings back later that you prefer to keep them (more than a month later, or buy them in your spouse’s name).

This year, with the stock market being buoyant and not having made any big investment mistakes, I don’t seem to have much in the way of losses to realise. So I thought I would take a quick look at an EIS fund which was the subject of a mailing I received (EIS funds are also topical because of the Government consultation on future options for them). I previously expressed some doubts about EIS funds, but the one I received information on (Guinness AIM EIS) has been around for some time and AIM listed stocks should be less risky than unlisted investments. But when I look through the information on “historic” investments it lists the following: Chapel Down, Coral Products, Fishing Republic and Yu Energy which I do not view very positively although the last one is growing rapidly. The charges on the fund are high – 5% initial, 1.75% annual and a 20% performance fee.

You don’t get the EIS tax relief certificate until the funds are invested which could be a year or more after the closing date according to the prospectus. You also need to stay invested for at least three years to retain the income tax relief and bear in mind in any case that these are long-term investment vehicles. The immediate tax relief might be substantial but it could be a long time before there is a good return on your investment. If you die holding an EIS investment then the capital gains relief you obtained still applies (i.e. there is no tax due), but the complications of death are mind boggling on EIS investments. Anyone considering EIS investments should certainly consult an accountant who is expert in this area.

EIS funds might be one way of deferring capital gains tax liabilities, but I think I might pay the tax instead. Capital gains tax rates are currently low (10% or 20% on shares depending on your total taxable income), and there is no knowing what future Chancellors might do to change the rates and EIS rules.

There is one change in tax rates to bear in mind for the new tax year. This is that the dividend tax allowance reduces to £2,000 from April. So wealthy investors will be paying a lot more tax as a result of the dividend tax credit system being dismantled. Just to remind you, the companies you have invested in get taxed on their profits, and now you are also being taxed on the profits they distribute as dividends to you. So investors are being taxed twice on the same profits!

The conclusion is that you should avoid receiving dividends if possible. If you wish to hold high dividend paying stocks then put them in your ISAs or SIPPs. For direct holdings, it’s preferable to achieve gains by buying growth stocks rather than low growth mature companies that pay high dividends. You can always sell a few shares to generate cash income if needed. Alternatively buy such holdings indirectly in investment trusts and funds, who do not have to distribute the income, although it’s generally a good idea to avoid “income” funds. Such funds tend to underperform as Terry Smith recently pointed out. That’s probably because they tend to buy low-growth mature businesses which is a sure recipe for pedestrian stock market performance. High dividends do not compensate for lack of growth.

Another way to minimise dividend income taxes is to put money into Venture Capital Trusts. Dividends on those are tax free.

Lastly, don’t forget that giving money to registered charities can minimise your tax bill so that’s another subject to consider before the tax year end.

In conclusion, I would suggest three mottoes to follow: 1) Don’t bet on your life expectancy – it could be much longer, or shorter, than you think; 2) Keep your tax affairs simple; and 3) Encourage the Chancellor to simplify the tax system, and not keep changing the rules.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Chancellor’s Statement, EIS Funds and EMIS Results

The Chancellor’s Spring Statement yesterday was generally positive but there are some aspects that it’s worth talking about. Mr Hammond was right to be cautious because although new Government borrowing is falling, the total debt is still rising. It’s only forecast to fall as a proportion of national income by 2020-21 because of rising GDP. There is “light at the end of the tunnel” as the Chancellor put it, but it’s still some distance away.

GDP is only rising slowly and it is forecast by the Office of Budget Responsibility (OBR) to be rising at near 1.5% in the next few years which is not exactly rapid. The OBR also forecast that we will have to pay £41 billion to the EU after Brexit as a settlement of our obligations, although it will also free up £3bn or more per year that can be spent on other things, i.e. they suggest in the long term we will save money but the impact of changes in migration and trade terms might be more significant.

The Labour party wants the Chancellor to free up the purse strings and increase expenditure on the NHS and other areas. The Government could only do that by borrowing more which would not only increase the cost of their debt but would seem unwise given the economic outlook and the uncertain impact of Brexit. Because of an ageing population, but a growing one, more money will need to be spent on local authorities and the NHS anyway but the growth in productivity remains poor which ultimately determines the wealth of the nation.

Will the estimated figures have an impact on likely future interest rates (which have a significant impact on stock market investment)? Interest rates might need to rise somewhat to make Government debt continue to be attractive but it is not obvious that the economy is overheating as yet – inflation seems to be driven more by rising import prices as the pound has fallen rather than wage rises. The Government will no doubt be keen not to increase the cost of its debt, even if it has only indirect influence on the rate. Interest rates lower than real inflation are a good way for the Government to reduce its debts however much it prejudices savers.

One interesting mention for investors was a mention of a consultation on EIS funds that includes several options for more tax reliefs to encourage investors to put money into early stage “knowledge-intensive businesses”. That might include tax free dividends (only available on VCTs at present), or capital gains exemptions. I may write some more on this topic after reading the full consultation document which is here: https://www.gov.uk/government/consultations/financing-growth-in-innovative-firms-enterprise-investment-scheme-knowledge-intensive-fund-consultation . Investors interested in this subject should of course respond to HM Treasury’s consultation.

Some Venture Capital Trusts (VCTs) have fallen in price today. Perhaps because they might be perceived as less attractive to investors if such new EIS funds were introduced. But they would surely be very different beasts even if they might provide more competition for new investor subscriptions.

Comment: having invested in both EIS funds and directly in EIS qualifying companies in the past, I have vowed only to do the latter in future. Finding an experienced fund manager in early stage companies who can pick out the good EIS businesses is not easy and the lemons they pick ripen quickly (a common VC adage) while the good investments can take years to mature. If there is very generous tax relief (at a level where investors ignore the merits of the underlying investee companies because the tax reliefs are so generous it looks like they can’t lose money), then this will encourage all kinds of dubious promoters to enter the field.

One company that is sensitive to Government spending on the NHS is EMIS Group (EMIS). They announced their Final Results this morning. They previously warned in January that they had breached their service level obligations to the NHS and the cost might be “in the order of upper single digits of millions of pounds”. I commented on the company then and still hold some shares in it. The actual damage is a provision of £11.2 million in these accounts for a “financial settlement and costs to remedy past issues”. The share price rose today perhaps in relief that the news was not worse.

Few more details of the contract breach are provided and when I talked to my GP who uses EMIS-Web and used to be active in their user group, he knew nothing about any service failures. All rather odd.

Even excluding that item which is being treated as an exceptional cost, the figures were disappointing though. Revenue was only up 1% and adjusted earnings were down 4%. The CEO commits to a “robust management of legacy matters” and a commitment to being “more performance-led with greater accountability, improved operational execution and an increased focus on our customers”.

Dividend has been increased though which suggests some confidence in the future, putting the shares on a yield of 3.5% and a possible forecast p/e of 16, but the company certainly needs to show better signs of growth if the share price is to get back to where it used to be a couple of years ago.

The Government might spend more in the Autumn budget, but whether EMIS will see much benefit remains to be seen.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.