Majestic Wine, Brexit, Proxy Voting and Inheritance Tax Simplification

Majestic Wine (WINE) issued their interim results yesterday (22/11/2018). I no longer hold the shares but I am a customer of theirs. The financial results were disappointing with adjusted earnings down 63% and reported profit turned into a loss from a £1.5 million profit in the previous half year. Their explanation is increased marketing expenditure particularly on Naked Wines. Revenue overall was up 5.4% but what is the point in generating more revenue at a loss? As a customer I seem to be receiving fewer marketing communications from the company. No pre-Christmas promotion so far for example. Does this explain part of their difficulty?

Their “adjustments” that enabled them to report adjusted profits are, shall we say, interesting. It includes an adjustment for “en primeur” orders where title has not passed to the customer as it has not even shipped from the supplier so cannot be recognised as a sale. They also throw in a whole mass of acquisition and restructuring costs in their adjustments.

Needless to say, they are burning cash at a great rate, including putting more into inventory (see below), so I am not convinced they have a sound strategy. The share price dropped on these results despite the announcement being full of positive comments about the future.

One might call this “reporting dissonance” where the fine phrases and positive comments about future prospects do not match the hard financial facts.

Brexit

One interesting comment in the Majestic results was that they are stockpiling wine above their normal levels “to mitigate any supply chain Brexit disruption in March 2019”. That should really annoy the chattering classes in London if their booze supplies are disrupted and they cannot obtain their favourite tipples.

But we do now have an expanded (7 pages to 26) publication explaining the proposed UK’s relationship with the EU after the Withdrawal Transition period. You can find it here: https://www.gov.uk/government/publications/progress-on-the-uks-exit-from-and-future-relationship-with-the-european-union .

You’ve probably heard the phrase “gesture politics” which refers to how politicians make grandiose gestures with little real impact. This “Political Declaration” as it is called is surely one of the grandest of all gestures. It commits neither side to anything very specific although there are lots of fine words in there.

But it does cover some areas that I complained about in the Withdrawal Agreement. It’s the kind of political statement that is aimed to appeal to all sides of the political debate in the UK over Brexit plus EU bureaucrats and politicians. But it does not resolve clearly and unambiguously the issue of no border controls in Northern Ireland and our future trading relationship with the EU, or the Gibraltar issue that Spain is complaining about. Mrs May might just get where she wants to be at this rate, but whether she can do enough to win the support of the electorate, and even more importantly, the votes in Parliament, remains to be seen.

Proxy Voting

As a past shareholder in US companies, I always used to think their proxy voting system worked well. But apparently not according to an article in the FT this week. Under the headline “SEC urged to shake up proxy voting system” it reported that it was expensive, complex and prone to error. It actually took two months to calculate if a proxy vote on a board appointment at Procter & Gamble was won or lost. I was aware that the US system was prone to “over-voting” where more shares are voted that the company has in issue, but just as in the UK the turnout of retail investors in the vote is now very low at 29%. Companies, or people fighting a proxy battle, cannot get through to the end investors or beneficial owners and lending of shares by institutional investors also causes many shares not to be voted.

In summary the system is too complex and prone to error. The SEC is to undertake a review on how it could be improved. We surely need a similar initiative in the UK and the solution is a well-designed electronic system where every shareholder is on the register of a company, including those holding shares in nominee accounts.

Inheritance Tax

I mentioned in a previous article that the Office of Tax Simplification (OTS) is looking at Inheritance Tax. They got a lot of submissions to their public consultation apparently and have now published a “first” report on the subject. See: https://www.gov.uk/government/publications/office-of-tax-simplification-inheritance-tax-review . Here are some initial comments:

It is surprising to read that the average amount of tax paid, as a percentage of an estates value, increases up to the £2 million level and then levels off at about 20%. But if your estate is worth more than £8 million then the percentage decreases. In other words, the very wealthy pay less tax. These figures are explained by high levels of exempt transfers to spouses but particularly for the rich, the extensive use of reliefs. This is surely a case of the very wealthy employing clever tax advisors while the middle classes whose wealth can reside mainly in expensive houses find it more difficult to avoid. This just demonstrates that the tax is not exactly rational nor equitable.

The OTS received many negative comments about the complexity of IHT returns and these on the issue of Lifetime Gifts:

  • The various gift rules and exemptions can be complex and confusing and are not always well understood, especially those relating to the tapering of the tax rate for gifts given in the seven years before death.
  • The financial limits for the various exemptions have not kept pace with inflation (it being recognised that increases would have an Exchequer cost).
  • For many, it is difficult to either maintain or reconstruct records of lifetime Gifts.

The complexity of the Inheritance Tax forms that executors are expected to complete is acknowledged as an issue and the recommendation is that these should be replaced by a digital system. Pending such a system being implemented the current paper forms should be changed and the guidance that is provided simplified.

At present inheritance tax must be paid within 6 months but forms only need to be returned within 12 months. There is also the problem of having to pay the tax before the assets may have been realised. All the OTS says on these issues is that HMRC should explore potential solutions.

They also suggest some possible simplifications of the IHT regulations for Trusts. But in general this report only suggest relatively modest changes to the administration of estates rather than a proper simplification of this area of taxation. Perhaps there will be more in future reports.

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.

Inheritance Tax Review

The Office of Tax Simplification (OTS) have published two items that will be of interest to investors. Firstly they have called for evidence to support a review of Inheritance Tax (IHT) and secondly a note on “routes to simplification” of the taxation of savings income. The latter is horribly complex so I will deal with that later in a separate post.

Inheritance tax is slightly less complex but since recent Chancellors decided to use it as a sop to the middle classes with such rules as the ability to leave property to children and grandchildren of up to £1 million, it’s been getting a lot more complex. It’s now reached the level where few people understand it and what effect it may have even when their tax affairs are otherwise relatively simple.

Part of the problem has been rising property prices. More than 14,700 homes were sold for more than £1 million last year according to Lloyds, and a lot of those will have been in London and the South-East. The Government sees it as a popular political stance to enable such homes to be passed on to children, rather like one can pass on certain pensions now, while not requiring their sale to meet medical or social care in later life.

Rather than simply raise the inheritance tax threshold, to stop the rapid increase in the number of people who are liable for inheritance tax (although that’s still less than 5%), the clever folks in the Treasury devised alternative rule changes that ameliorated the impact of increasing property wealth for certain sections of the population (e.g. property owners). But those who have to act as executors and deal with probate are faced with increased complexity.

You can see the impact of rising property prices if you know that IHT is charged at 40% and applies to assets as little as £325,000 (that’s where the nil rate band ends) – so almost everyone living in London may pay it if they have no close relations or other “allowable” exceptions such as business assets.

It’s not just property that causes complications though. Unlisted companies such as AIM stocks are business assets and hence with typical private investor share portfolios now often holding a significant proportion of such shares these complicate the calculation. That is particularly so as not all AIM shares qualify and they need to have been held for some years.

The OTS are keen to hear from individuals as well as professionals with an interest in this area. There is an easy on-line survey you can complete here: https://www.gov.uk/government/consultations/inheritance-tax-review-call-for-evidence-and-survey

Please help them by responding. You can also send comments to them via email to: ots@ots.gsi.gov.uk . You might suggest to them that the present arrangements seem to generate work for tax accountants while baffling the general public but at the same time generating very little in revenue to HMRC. It’s certainly a tax that requires simplification. The original objective of inheritance tax seems to have been the socially beneficial aspect of preventing large wealth being passed on and accumulating through the generations. But at present the rich mainly avoid it – they set up trusts or move to another country. Meanwhile the middle classes tend to pay it and suffer the absurd complexity at the same time.

Here are some personal suggestions from me for simplification:

  1. The nil rate band should be raised to £2 million – effectively covering most normal family homes and avoiding the need to sell the house to meet IHT liabilities for children still in occupation. The Osborne changes that permitted property to be passed on should be scrapped.
  2. The IHT exception for AIM shares should be abandoned. The complexities of what may or may not qualify for that make planning difficult and potential savings on IHT are a poor reason or motivation for buying high-risk AIM shares. The desire to encourage investment in early stage companies is hardly a justification for most retail investors as they can rarely buy AIM company shares in IPOs and management/founders have other tax incentives such as entrepreneur relief. If such encouragement is required then other tax concessions (e.g. on capital gains) might be better.
  3. The seven-year rule for exemption of gifts is actually more complex than it first appears to be and can extend more than 7 years if multiple gifts are made I understand. Together with the tapering of such relief, it can become difficult to predict the likely liability particularly as forecasting when the donor might die is usually not easy. I suggest this relief be restructured to provide more certainty about the tax liability and it’s worth considering switching to a tax on gifts received.
  4. The existing IHT rate of 40% should be reduced as it encourages complex, and expensive, tax planning. A lower rate of tax might actually encourage more people to pay it rather than go to the trouble of setting up complex plans to avoid it.

In summary IHT has become too complex and needs to be simplified. However it’s worth bearing in mind that individuals have often planned their financial affairs based on existing tax rules. Abrupt changes to tax rules and allowance should be avoided.

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.