General Election Comment

Over the past few weeks, one of the Investment Houses we use, have written that currency markets appear to be anticipating a softer, or perhaps more pragmatic route for Brexit after the General Election. It looks like Mister Market got it right once again.

They go on to say that the result of last night is decisive and produces a government which is capable of making and implementing decisions. This will significantly reduce the levels of uncertainty that UK businesses have faced and those who trade with them abroad, which had subdued activity levels over the past three years and led to a slowing in business investment.

That’s good news for investors, both inside and outside the UK.

UK stocks, across the board, have already risen this morning by 2% in early trade, partly aided by President Trump indicating that a US-China phase-1 trade deal would be signed imminently.

£-Sterling has rallied by about 2% against both the US-$ and the €-Euro. This is also good news, for overseas purchases, in that the buying power of £1 has increased. Holidays, and imports will cost less in Sterling terms. On the other hand, it does mean that the rise of foreign stock markets overnight looks less impressive when translated back to sterling. Still, even in £-Sterling terms they are up. Our return from a UK underweight position in our investment portfolios last year to being invested to target level ensures a positive performance contribution from the election outcome bounce in the UK’s stock market.

The outlook for portfolios also looks more positive this morning. The UK domestic picture now has less risk for investors and business leaders which should help stabilise business revenues and their appetite to resurrect mothballed capital investment projects. That is also helped by the improving global outlook, which took a big leap forward last night with the US and China finally agreeing a trade deal ‘in principle’. This news will have has mostly been buried in the UK by the election news flow but will be extremely important to the large number of UK businesses exporting goods and services. Incidentally, it also explains the bounce in Asian stock markets overnight than the UK’s election outcome.

The Investment House comments above confirm what we, ourselves have always said, that Markets don’t like uncertainty. Whether you agree or disagree with the Election outcome, the Markets know that decisions will be made and can price the outcome accordingly

Investing in your child’s future

For clients wanting to invest for their children’s future in something more adventurous than a child savings account, there are three main options: a Junior Isa, a Junior pension or a Bare Trust investment account.

The purpose of these accounts varies significantly, and there are considerable differences in how they can be accessed, tax treatment, limits on investments and how the accounts are managed.

Children, Win, Success, Video Game, Play

Jisa

Jisas are often the first option that springs to mind when we talk about investing for children. Like all Isas, Jisas benefit from tax-free growth, with no income or capital gains tax to be paid.

This includes when the account is funded by parents, and, unlike some other accounts, even when the income for the year exceeds £100.

Children can have a cash Jisa and a stocks and shares Jisa. It is possible to hold one of each type, and transfers can be made freely from one to the other.

However, unlike adult Isas it is not possible to open a new account of the same type each year and leave the old one open.

If a stocks and shares Jisa is held and you want to pay into one with a different provider then the existing Jisa must be transferred to them first.

Accounts can be opened by the parent or legal guardian of any child resident in the UK aged under 18.

Remember that children born in the UK between September 1 2002 and January 2 2011 were eligible for child trust funds and although these accounts can no longer be opened they can continue to be held until the child reaches age 18.

It is not permitted for a CTF and a Jisa to be held for the same child, however since April 2015 it has been possible to transfer a CTF to a Jisa if the transfer is made as part of the Jisa account opening process.

Subscription limits for both Jisas and CTFs are £4,368 for the 2019-20 tax year.

Junior pensions

Turning to pensions now and the option of setting up a scheme for a child.

This is definitely one for the long game, and primarily used by wealthy clients who have exhausted the Jisa allowance for their offspring.

It is possible to pay in £2,880 a year, which will be topped up to £3,600 under relief at source, even when there are no earnings.

As a registered pension scheme, the investments can grow tax-free and the benefits of compounding will be substantial, given the funds cannot be accessed for a time frame of potentially 50 year or more.

It would usually be the parent or legal guardian who would set up the pension and make the investment decisions, but some providers may allow grandparents or other adult family members to do so.  

Another use for junior pensions is where a child is a beneficiary after a family member’s death and has funds designated to flexi-access drawdown in their name.

Bare trust investment accounts

A child cannot legally own shares, so the easiest way to open an investment account for them is to have a bare trust account.

A bare trust document can be very simple, setting out the initial donor, trustees and who the beneficiary is.

Unlike the other type of accounts we have looked at, a bare trust does not have to be managed by the child’s parents.

They are therefore a popular option for grandparents setting up accounts for the benefit of their grandchildren that they can invest and manage.

Bare trusts also allow withdrawals at any age, as long as it is for the beneficiary’s benefit, so grandparents could invest and make withdrawals to pay school fees as appropriate.

On turning age 16 (18 in the rest of the UK) the child-turned-adult has absolute entitlement to all the capital and income, but it is not an automatic handover to take over managing the assets.

The trustees can continue looking after the fund indefinitely,  but what changes is the now-adult beneficiary can demand the capital and/or income at any time. If they are comfortable looking after their own affairs then the trust effectively ends and it becomes an adult investment account.

As it is not a tax wrapper like a pension or Isa, there is no limit on the amount that can be invested in a bare trust account.

Income and capital gains within the account are chargeable to tax, but are treated as belonging to the beneficiary.

A child has the same personal allowances as an adult, that is personal allowance, personal savings allowance and a starting rate for savings of 0 per cent, meaning up to £18,500 of income a year could be tax free plus a capital gains allowance of £12,000.

One crucial point to be aware of though is that if a parent puts money into the bare trust account and the income exceeds £100 a year (or £200 if both parents pay in), then the income is taxed on the parents.

This is why bare trust dealing accounts are most commonly used for grandparents to make gifts, rather than parents.

If you would like more information on any of the above options, please give us a call.

The Five Main Types of ISAs


THE ISA FAMILY

  1. The Basic ISA 6 – April 1999

The original ISA has two investment components: stocks and shares or cash. These are now interchangeable, so you can transfer from a stocks and shares ISA to a cash ISA, or vice versa. 

Available from age 18 (16 and 17-year-olds may start one but only choose the cash component.)

2. The Junior ISA (JISA) – November 2011

Available to children under 18 who do not already have a Child Trust Fund (CTF) account. Both cash and stocks and shares variants are available.

Available from ages less than 18. Investors cannot also have a Child Trust Fund (CTF). JISAs are available to any child born before 1 September 2002, after 2 January 2011, or born between those dates and whose CTF funds have been transferred into a JISA.

3. The Help to Buy ISA – Dec 2015

In practice this is a variant of a cash component basic ISA. Aimed at first-time buyers, its main benefits revolve around home purchase. It has now been overshadowed by the Lifetime ISA (see below) and will be withdrawn from 1 December 2019, although existing investors will be able to continue making contributions.

Available from age 16 and over. No new plans can be started after 30 November 2019. Help to Buy bonus must be claimed by 1 December 2030.

4. The Innovative Finance ISA – April 201

These relatively new ISAs are limited to investments in cash and two specialist, higher risk lending areas (peer-to-peer loans and ‘crowdfunding debentures’).

Available from age 18 and over.

5. The Lifetime ISAs (LISA) – Apr 201

The LISA is aimed at encouraging saving for first home purchase or retirement by adults under the age of 40. It provides a government bonus, but comes with penalties if funds are withdrawn before age 60, other than for a first home purchase. To date few providers have chosen to offer LISAs.

Available from age 18 to 39. Contributions cannot be made after age 50.

INVESTMENT LIMITS

The maximum overall investment across all ISAs in 2019/20 is £20,000

There are sub-limits for Help to Buy ISAs and LISAs:

 1. The maximum Help to Buy subscription is an initial £1,000, plus £200 a month for the duration of the tax year in which it was opened.

2. For LISAs the maximum subscription is £4,000 in each tax year.

3. For JISAs, the maximum contribution is £4,368 in 2019/20. In addition, a 16- or 17-year-old can subscribe £20,000 to a cash component basic ISA (including a Help to Buy ISA)

 Subscribers may only open one of each type of ISA in any one tax year. This means in 2019/20, subject to eligibility:

  1. A basic ISA with a stocks and shares component
  2. A basic ISA with a cash component or a Help to Buy ISA (a small number of providers incorporate both types within the one ISA wrapper)
  3. An Innovative Finance ISA
  4. A LISA

If an ISA is transferred in full, the one-ISA-per-type-per-year rule still applies.

PASSING IT ON

ISA rules were amended in 2014 to allow the value of any ISA to be inherited and used as an ‘additional permitted subscription’ (APS) by a surviving spouse or civil partner.

Since April 2018, generally the ISA tax benefits remain during the administration period and all investments, plus any subsequent growth or return, form part of the APS.

So the ISA’s tax advantages can outlive the original ISA owner, with their ISA holdings and tax benefits normally being transferable in full to the survivor.

If you would like any further information about ISAs please give us a call

The European Election

This may be of no interest if, as expected, we leave the EU. But on the off chance we don’t…

The European election is a curious double election going on at the same time. Voters get to vote for parties, to decide how many MEPs of each party get in from each member state. The parties are numerous and diverse with many of them rooted in the national politics of the country concerned. The parties propose a list of named candidates and the order of their possible election. It is a proportional system where the more votes a party gains the more candidates it gets elected.

Simultaneously, so-called Spitzenkadidaten hold debates for the powerful post of President of the Commission. These candidates represent various Europe wide alliances of parties participating in the election proper. At this level, the election is fought between Europe wide coalitions of parties. The traditional groups of the EPP (Christian Democrat style centre right parties) and the PES, European Socialists (Social Democrat parties) now fight it out against European Greens, European Liberals (ALDE), the Alliance of Conservatives and Reformists (ACRE), the European Left and various other parties not part of those six groupings. Voters do not get a vote on the post of President.

The candidates for the powerful post of President of the Commission are battling for the right to fashion an EU agenda and to propose and write the legislation the EU will undertake. The Commission has sole right to propose laws. It runs the budgets and represents the EU internationally. After the Parliamentary election, the member states will work out who to propose to the Parliament as Commission President. It does not have to be one of the Spitzenkadidaten, but it does have to be someone who can command a majority in the 751 seat Parliament. The European Council, the meeting of member states governments, is charged by Treaty to “take into account” the results of the Parliamentary election (Treaty Article 17.7) and to create a qualified majority of votes around the Council table for a Presidential nominee to put to the Parliament. The Parliament has to approve by simple majority.

The events that follow the election include the appointment of an entire new Commission with roles for each Commissioner, and the fashion of any policy changes that the new Commission and Parliament may wish. Commissioners are proposed by member states governments, but the newly elected President of the Commission will have views on their suitability and the Parliament has to approve the Commission as a whole. There is intense lobbying over which roles any given Commissioner may receive as well as over the actual names in some cases that states recommend.

Given the likely balance of forces in the new Parliament, there remains a considerable force for business as usual, with a larger and noisier Parliamentary opposition to what is going on.

The populists may agree that they want some fiscal relaxation by the EU, though Germany’s AFD is unlikely to support that. They might agree they want more power returned to member states, and more action taken on the EU’s common external borders over migration and security. The new Commission will need to make difficult decisions about how serious the challenge to the EU plan now is and whether they need to be more accommodating than the outgoing government. There is likely to be much noise and argument before a new President and Commission is agreed and a new programme of work announced. This could be a little unsettling for markets. Thereafter, there may be more of a debate over whether some change of fiscal stance is needed and whether there can be the moves towards a Euro area larger budget with more transfers of money as some would like.

With thanks to Charles Stanley & Co. Limited who are one of the oldest firms on the London Stock Exchange. Its origins lie in a banking partnership established in Sheffield in January 1792.

A Word of Warning

Just a word of warning to all my readers. The Financial Conduct Authority has warned about high-risk innovative finance Isas (Ifisas) being advertised alongside cash ISAs. 

In a statement published on its website the regulator confirmed it had seen evidence the two products were being promoted together, and it warned  investments held in Ifisas were “high-risk”, with the money ultimately being invested in products such as mini-bonds or peer-to-peer investments.

The City watchdog warned these types of investments might not be covered by the Financial Services Compensation Scheme and investors might therefore struggle to reclaim any money lost. 

The FCA warned: “Anyone considering investing in an Ifisa should carefully consider where their money is being invested before purchasing an Ifisa.” 

Innovative finance Isas were introduced by former chancellor George Osborne in his 2015 Summer Budget to help investment in small businesses and to allow investors to hold P2P assets in a tax-free wrapper.

But they have not taken off in the same way as the lifetime Isa, which Mr Osborne announced in 2016 to help younger savers put money aside for a house deposit and retirement.

During 2017/18 only 31,000 Ifisas were subscribed to, compared to 166,000 Lisas, 2.8m stocks and shares Isas and 7.8m cash Isas.

Earlier this year mini-bond provider London Capital & Finance collapsed putting the funds of more than 14,000 bondholders at risk.

Because mini-bonds are unregulated investments the FSCS confirmed it would not accept any claims from LCF investors, with the company’s administrators instead hoping to recover funds on behalf of those affected. 

In the most recent update from administrators Smith & Williamson, they estimated bondholders would see as little as 20% of their investments returned to them. An investigation into LCF by the Serious Fraud Office remains ongoing. 

If you have any doubts or concerns, give us a ring and we’ll be pleased to have a chat with you.

How Important will Next Week Be?

As readers will undoubtedly know, it’s all set up to be a very important week in parliament this week with Theresa May’s next meaningful vote scheduled for tomorrow – and subsequent votes on Wednesday and Thursday depending on the outcomes.

All that uncertainty means that there are still a number of different possible outcomes for the UK despite the fact that we’re due to leave the EU on the 29th of March. No news there though, but what might this mean for investors? Bravely – some might even say foolishly – The Sunday Telegraph Money has been trying to work out what might be hot and what’s not when it comes to investment, getting tips from different experts on which investments might do well in different scenarios  such as a softer Brexit, no deal, revoke article 50 etc.

It’s not all negative of course, it’s just a matter of looking for which businesses and approaches might do better under different circumstances. As professional advisers will advocate to clients, investment is a long term process.

However dramatic the short term political, economic and market considerations may be, we need to remember the considerable benefits and value of long term investment and the risk of trying to predict short term movements.

I’m happy to say that the investments we arrange for our clients have been and are all based on a diversified global portfolio, intended to provide growth or income over the medium to long term.