Autumn Budget review: Charles Stanley client update

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Transcript

Garry White

Hello. We've now had one of the most anticipated budgets in many years. Rachel Reeves has laid out Labour's stall for the next five years, with fiscal changes and changes to taxation. I'm joined today to discuss all these issues with, three of our very senior members of staff.

With me, I have Paul Abberley, our Chief Executive, Abbas Owainati, Head of Asset Allocation and Simon Davis, Director of Financial Planning.

So, Paul, there was lots of ideas floated in the media ahead of the event. And, I thought it was actually quite well media managed because some of the more, I would say extreme measures to approach - There was talk about wealth tax. There was talk of reducing the amount of tax-free money people can take out of their pension pot.

So, with your knowledge of Charles Stanley clients, how should they feel about this budget? Should they be pleased? Should they be concerned? Should they take action?

Paul Abberley

Well, it felt like if you'd gone to the dentist and been told you're going to have two wisdom teeth removed, and then when you turned up on the day the dentist said, you know, good news, I you need to take out one of those teeth, you'd sort of think, well, that's good.

It felt like that yesterday afternoon. And I think that's a good tactic, isn't it, to get people's expectations low, so when you actually announce it, it doesn't feel quite so bad. But of course, you would still leave that dentist with toothache. And I think there is some challenges, I think, for clients in terms of the content of the budget. From a positive viewpoint, what you often find with budgets, of course, is the Chancellor will say, and from midnight tonight and then the door’s slammed.

In fairness, some of these measures have been given year 18 months before they're impacted. And that does give clients time to absorb, think and indeed plan in terms of any changes that they might have to the management of their savings and wealth, and wealth going forward. I think the broader impact on clients also, of course, is the impact on the UK economy and I think the jury's very much out on whether this budget contributes to changing the vector of potential economic growth and productivity in the UK. Clearly, there's a move in the direction of the state, away from the private sector with, I think 44% of GNP planned to be in the state sector rather than the private sector going forward.

By changing the, the fiscal rules, it's created the potential for a lot more investment. And I think everyone would agree that investment in infrastructure is required. The challenge, of course, is to deliver that efficiently. Will that money be carefully and well spent? So, there's a lot of open questions, I think, about whether this budget contributes to a better economic growth picture for the UK, from which everyone will benefit, or whether it's going to feel, frankly, like more managed decline.

Garry White

So, Abass, the market had a lot of time to prepare. There was most of these measures that were announced. It was others that that didn't happen. How did they end up reacting?

Abbas Owainati

Thank you Garry, it’s nice to say that the initial market reaction to the budget has been fairly muted. The UK budget was largely as expected, but the scale of current spending, capital spending and taxation has increased much larger than previously expected. The bond market has taken well to the initial budget announcement with only a modest increase in bond yields across the longer end of the curve, which is, of course, fairly positive. Now, this was indeed only made achievable by the changes to the fiscal rules, which the government had ruled out, not least, also incorporating the benefits of financial investments of governments, such as student loans into their debt accounts to allow for more capacity for investments going forward.

The Office for Budget Responsibility have put forward the forecasts on the back of this, UK budget. We do see a near-term pick-up in growth, so, the UK economy is likely to grow as much as 2% next year. This is half a percent stronger than previously expected. However, growth does start to slow back to trend in subsequent years, and over a five-year average, we're looking at 1.7% of growth in the UK.

This puts the UK halfway across the G7 pack. So just as an example, growth does pick up in the short term however, and not necessarily assistance beyond that. I would also like to make the point that, this is not a cost-free budget for the worker as well. So, whilst for a lot of a lot of the policies of targeting corporations and businesses, we do expect to see some of those National Insurance contributions for the employer pass through to lower real wages in the future.

It's likely that a lot of businesses will pass through this tax burden through lower wage increases in subsequent years. And then this brings us to the impact of inflation and the Office for Budget Responsibility also put forward their inflation expectations going forward. As we know, CPI currently is at 1.7%. The OBR are predicting inflation rises to as much as 2.6% next year, and this is due to both direct and indirect impacts of the budget.

The direct impacts are clearly from fiscal stimulus creating, stronger demand, but the indirect impacts are more reflective of some of those National Insurance contributions leading to actual higher consumer prices. And so, all in all, this has resulted in a shift in interest rate expectations and the bond market over the last day has, priced out one fewer rate cut, really reflecting, the inflation, inflationary pressures, likely ahead. This is very consistent with, some of the comments at the press conference at the OBR yesterday, which suggested the 25-basis point lower, rate, rate path going forward.

I would say that, looking ahead, the Bank of England are set to cut rates next week. We don't expect there to be any changes in that announcement. So, a 25-basis point cut to come through next week. However, beyond that, the December decision becomes less clear. And of course, the Bank of England will be publishing their very own growth and inflation expectations and forecasts on the back of the budget announcement. So, we look forward to observing that.

Elsewhere, looking at the equity markets, I'd say that the FTSE 100 ultimately has a global footprint. So, we didn't see any noticeable moves there. The FTSE 250 did react positively initially to the announcements yesterday. However, they did give back some of their gains over the course of the day. It was predominantly the homebuilders which reacted to the repricing and bond rates and future interest rates. And finally, on a brighter note, we did see AIM stocks, rally 4%, a real relief in the AIM market very much reflecting the Chancellor of the Exchequer his decision to reduce the relief to 50% from inheritance tax and not to completely abolish that.

I would say, all in all, the Chancellor of the Exchequer has successfully struck a balance between higher tax rates, higher spending and borrowing to invest in the economy and I think the key focus going forward will be whether these investments and the capital spending promised will create some crowding in from the private sector and whether that will boost growth. Ultimately, we will have to wait a couple of years to see the results of that.

Garry White

And talking about inheritance tax at the end, that brings us nicely onto Simon. There’re changes in inheritance tax, capital gains taxes. There's quite a lot for you to be working on.

Simon Davis

There is. Thank you Abass and Paul. Yes, the Budget to my mind, having now seen quite a few Budgets just has really shone a spotlight on the need for every individual and families to have a financial plan in place and one that's adaptable. And that can be, changed according to whatever arises, be that obviously family circumstances, but also what the legislative environment is, and that includes the taxation environments.

So, any good financial plan you need to keep on your toes and what we've seen yesterday is going to be a good example of needing to review your finances and to best position yourself. And, certainly, you know, what we do in financial planning at Charles Stanley, we have that ability to look across the legislation and taxation environment. So, we can consider capital gains tax, inheritance tax, pension, ISAs, how you create a tax efficient income stream. And there's an absolute wealth of, matters to discuss as a result of this budget.

Garry White

And now quite a good time because it's the start of the Labour government. So, we sort of see the direction of travel for the next five years. So, now is a good time to sit down and get things sorted.

Simon Davis

Totally. As many said, now the budget's out of the way, we've got the direction of travel. And as Paul was alluding to, we do have a wee bit of time before the legislation kicks in and that's important because that allows us to sit down with our clients and have a discussion and work out, you know, we've got a good idea of what their objectives are. But, you know, how do we now best meet those given this new environment and, there will be a lot of discussions and in any Budget like this where we've seen changes to lots of taxation regimes, it becomes very bespoke, and specific to you and your circumstances. So, I'll go on to talk about what the changes are but that how that translates into what's relevant for you and everybody else, becomes is a very personal and detailed discussion.

Garry White

So, which of the changes do you think are going to be most significant for clients? Which are going to cause you the most work?

Simon Davis

Yeah that's right. There's the old adage - more change leads to more work, but which is which is a good thing in our world. So, the answer to that is, across the board. At Charles Stanley we deal with wealthy individuals and families so, they are going to be affected by all these changes. If we start with, with pensions, labour stuck to their previously announced guidance that they weren't going to reintroduce the lifetime allowance, which Jeremy Hunt, removed in March 2023. There was much speculation about the removal of 25% lump sum - they've kept that in place. So, pensions still remain a very tax efficient way for all of us to save. However, as I certainly say to the younger members in the team, you never want all your money in the pension because it's subject to so many future legislation changes. And the big change we've seen in pensions is the unused pension funds on death, will now form part of your estate.

So, the advice for our clients to date where it's suitable has been to leave the pensions, because they can leave that for their children, and it's free of inheritance tax. From April 2027 that's no longer to be the case. So, the pension will be assessed as part of your estate. So, for those clients who have large pensions, we now need to discuss whether they start to take the tax-free cash out, whether they take income, in what format they take the income, or whether they just leave it and just accept as a taxable asset.

So, we've got a change to discuss with our clients there. Sort of jumping slightly one of the matter, planning matters that could come up with pensions with the jump in the employer's National Insurance 13.8% to 15% employer pension contributions are now even more tax effective.

And as individuals or as employees, there is a facility to, with many employers to take, opt for salary sacrifice or bonus sacrifice and that can be an efficient way of boosting your pension savings, and most employers are flexible in that regard. So yeah, big changes ahead on the pensions now. This is one of the technical consultations that we've got to read through.

But the main draw on that in relation to the inheritance tax is that's focused purely on how the government will collect the inheritance tax due on the pension. And interestingly, the current sort of broad scope of administering estate falls to personal representatives and they have the liability for submitting calculation and payments with pensions. The strong proposal here, is that I'm sure will go through, is that the pension scheme administrator, alongside the personal representatives, is going to be, liable for, calculation and payments. So, what that will likely mean, subject to the output of this consultation, is this, pension providers will not be releasing pensions to absolutely certain that all taxes have been paid. So that's, that's a big area of discussion for us.

Secondly, and in no particular order, the, changes related to inheritance tax. We've seen the changes as alluded to, to the business relief provisions. So, we're now seeing for business relief and agricultural property relief a combined allowance of £1 million, on which you will get relief at 100% from IHT. Thereafter you have the relief will only be at 50%. So, you'll be paying IHT at 20% on sums above, above a million, for AIM shares, however, that £1 million allowance does not apply, and they will be subject to IHT at 20%. So still better than 40% but not as effective as was the case or will be the case. And again, it comes down to my earlier point, you need to sit down with clients and discuss the order of events for those clients who are looking at IHT mitigation strategies and how they structure those. So, we'll have a number of discussions with, with clients around that and that area.

Capital gains tax obviously was that was a good example of sort of spooking everybody into higher rates. And then it came in at a rate which was a lot lower than probably people anticipated. And nonetheless, it has it has crept up and with the allowance having been, dropped considerably by the Tory government actually in previous years, you now only have a £3,000 pound allowance. So, beyond your ISAs and pensions, what do you do in terms of trying to structure your, your portfolio to tax efficiently. And, we are seeing an increasing trend towards, insurance bonds, investment bonds, whereby you can invest your money, you defer to capital gains tax, and you defer dividend tax. So, for additional rate taxpayers who are paying dividend taxes of 39% and then capital gains tax of 24%, what we need to do is sit down and work. You know, if Abass and his team are generating returns then how much are you going to lose of that to tax and that becomes now quite an important part of the planning process.

So again, much to talk about. I'm fortunate to have a wide, sort of group of clients. I have, high earning partners in the city and in the West End, I have business owners and then retirees. And in each category, we'll have different uses for these points that I allude to.

But there was positive news, the ISA allowance has remained at £20,000, which is a significant allowance and clearly has become even more effective for everybody. And they've kept that through to 2030. So, that was that was a positive. And they're keen to support for those clients who have the capacity for risk, enterprise investment schemes and venture capital trusts. So that was that was another positive.

So yeah, in conclusion, there's much to chew upon and there'll be a lot of actions to take many of our clients.

Garry White

Yes. I like that different action for different clients. So, it's important that they sit down with someone like you and just work through the changes, because some of it's quite significant, really.

Simon Davis

It is yeah. And we saw the old politician's favourite trick of what we call fiscal drag. You know, inheritance tax, the nil rate band has been £325,000 since 2009. It's now being it was frozen that level to 2028. It's now frozen to 2030. Well, the guys on my left are the numbers guys but you know, 3% inflation that £325,000 is in today's money is just over £200,000. So, you can see how that fiscal drag for those estates is huge over the long run, it's enormous. So, that drives the need to have those discussions and plan.

Garry White

Super, thanks very much, Simon.

I think we'll conclude that there unless anyone has anything else that they'd like to add. Thanks very much for joining us for this webinar from Charles Stanley. As we have said today, with some significant changes in the budget, but we've got a direction of travel now for the next five years to allow some good planning.

And a good financial plan is essential for anybody and a good, flexible financial plan just because of events we've seen this week. So, talk to your usual Charles Stanley representatives. They'll be delighted to talk to you and thanks for joining in this webinar.