In February 2021, we were in the midst of lockdown and our newsletter looked at opportunities for our clients around the Tax Year-End. As we enter Summer 2021, we hope you are beginning to enjoy a little bit of normality with shops, gyms, and restaurants reopening, giving us all a little more freedom to visit family and friends. It also appears that the rollout of vaccinations in the UK has been successful so far.
This newsletter will provide an update on market conditions and investments, along with some tax planning tips.
The market downturn in February/March 2020 was one of the most severe in recent history, but we also experienced one of the fastest recoveries.
Some of the defining moments in the market turnaround were led by the vaccine rollout that started at the end of last year, a Brexit deal being agreed, as well as the US presidential election outcome.
To provide some context of how the market recovered, we will use the FTSE 100 index as an illustration of UK stock market performance since the start of the COVID-19 pandemic.
The FTSE 100 hit 7609.80 at its highest point in 2020, on 15th January 2020. Fast forward only a couple of months, and entering lockdown, it dropped significantly to 5080.60 on the 17th of March. However, we have since witnessed a significant recovery in the UK’s top 100 companies, with the FTSE 100 valued at 7044.34 (25 May 2021). This is equivalent to a recovery of 38.65% from its low point in March 2020.
Similar recoveries have occurred across Global Markets, and this may be reflected in your own investment performance over the same period. In most cases, investments have fully recovered any losses and are now higher than they were before the COVID-19 pandemic impact.
The drop and recovery we have experienced in investment markets reinforces important lessons for long-term investors:
- Don’t panic and sell investments when the market crashes.
- It’s hard to predict the time it may take for investments to recover from events such as these.
- The importance of reviewing your long term objectives to ensure your longer-term needs can still be achieved
Looking ahead there are still uncertainties in economies across the world and there may be some further impact to be felt until the pandemic is fully under control. Investment markets, however, don’t always move in the same direction as economies, as shown by the recovery in investment values as we have described. Our view is that it remains important to have a well-managed, diversified portfolio that can adapt to the changing world as a result of the pandemic.
As already mentioned, our February Newsletter provided a summary of tax year-end opportunities. However, it is important to consider tax planning throughout the year as, in general, taking action with your finances earlier in the year may have greater benefit.
Therefore, in each newsletter, we aim to provide you with a tax-saving tip on how to plan your finances effectively.
The ISA allowance is probably the most well-known tax-free allowance available. You can invest £20,000 each year into an ISA, via a Cash ISA, Stocks & Shares ISA, or a mixture of both. You can pay into both types of ISA each tax year up to the allowance, but you can’t pay into two of the same type in one tax year, i.e. you can’t pay into two Cash ISAs for example. You can invest lump sums or make regular contributions.
The key benefit of ISAs is that all returns received within the ISA, whether that be interest, dividends, or capital growth, are free from tax.
Therefore, if you can maximise your allowance, we would advise you to do so early in the tax year so that you benefit from these tax-free returns more quickly. This in turn can help the growth of your assets over both the short and long term.
The returns offered by Cash ISAs are limited by interest rates, which at present are very low, resulting in poor returns. As an example, the best rate of interest from an instant access Cash ISA at the time of writing is 0.46% pa. Slightly higher rates of interest are available from Fixed Term Cash ISAs, but there is a downside in locking money into a low-interest rate if rates improve. So, although there is no risk to the value of your capital, Cash ISAs provide very little return for you at present.
Alternatively, if you have longer-term objectives for your savings and you have little need to access the capital, you could consider investing in a Stocks & Shares ISA. This could provide your capital with potentially greater growth and outperform interest rates. There is a wide range of investments that can be held in an ISA and these can be tailored specifically to your needs and preferences. However, investing in a Stocks & Shares ISA involves risk to your capital.
It is also worth noting that an ISA allowance can be inherited on death. This called an Additional Permitted Subscription (APS). It was introduced to allow a widow(er) to continue to benefit from tax-free income and growth on an amount equal to the value of any ISA their deceased spouse/civil partner held at the time of their death. This additional allowance must be used within three years of the date of death, or within 180 days of the completion of the administration of the estate, whichever is later. The additional allowance can be used with the same ISA provider or any ISA provider of the surviving spouse’s choosing, in either a Cash or Stocks & Shares ISA.
This additional allowance is separate to, and independent of, the £20,000 annual ISA allowance.
Our best piece of advice here, which is always worth remembering, is that when it comes to allowances, you either use them or lose them.
Inheritance Tax Planning & Investment Planning
Finally in the March 2020 budget, the Chancellor announced that the Inheritance Tax Nil Rate Band (£325,000) would be frozen until April 2026. It has been at this level since 2009. As property prices and investments have risen substantially over this period, more people are being affected by Inheritance Tax.
On 25th May, one of our Financial Planners, Jonathan McDowall, held a live webinar along with our Tax Team and covered this topic.
This webinar is approximately 45 minutes long and discusses:
- The use of Family Investment Companies in Inheritance Tax planning
- The use of Trusts in Inheritance Tax planning
- Selecting effective investments to use within IHT planning solutions.
The webinar provides a useful insight into some of the planning methods that you can use to mitigate Inheritance Tax. Of course, your own position must be reviewed to assess whether you may be affected by this tax and to identify the most effective methods for you to reduce the impact of Inheritance Tax on your assets. Please contact us, if you wish to discuss this matter.
Henderson Loggie Financial Planning