Brewin Dolphin Exeter's Autumn Statement – “Go For Growth”

Ahead of the autumn statement next Wednesday, Brewin Dolphin urges the Chancellor to focus upon growth, which includes creating a new Business EIS, pushing up the JISA allowance and an end to tinkering with pensions.

Tim Walker - Divisional Director and Head of Office, Brewin Dolphin Exeter

“Britain needs to be allowed to grow,” says Simon Blowey, Divisional Director of Financial Planning. “By softening HMRC’s stance on legitimate tax planning, allowing the pension system to settle down a bit so that savers can trust it and creating and supporting schemes that encourage taxpayer investment in British business, we believe the government can help it to do so.”

Tim Walker Head of Brewin Dolphin in Exeter, said: “The majority of our wish list would be a huge Christmas present for British families, much of which would cost the Chancellor very little. Let’s hope he listens before next week’s statement.”

Simon Blowey, Divisional Director Financial Planning at Brewin Dolphin, details his ideas for growth:

Surety on pensions:

“The welcome and revolutionary changes to pensions need time to bed in, be properly understood and simply communicated to savers – especially those nearing retirement who face some bewildering choices,” he said. “Let’s see some assurances from the government that there are no further big changes on the horizon.”

A less aggressive attitude from HMRC:

“A general anti-abuse rule has been established, but there is a danger that HMRC is still treating statutory reliefs such as EIS, VCT and BPRA planning with suspicion and this has investors running scared,” he said. "The Treasury needs to encourage, rather than hinder or frighten investors in such areas, and focus upon the wider public benefits as the underlying investments encourage huge economic generation.”

An increase in the Inheritance Tax threshold:

“With a nil rate band (NRB) increase of less than £100k in the last 15 years, 1 in 20 households are caught by IHT. By 2019 – now only four years away, it is predicted to be 1 in 10 households – scarcely the rich minority the tax was meant to hit. We would like to see the inheritance tax NRB raised to £500k per individual.”

Increasing the JISA allowance to £15,000:

“The current JISA allowance of £4,000 a year is far too low to encourage real saving for university fees,” Blowey said. “Increase the JISA allowance to match the NISA. This will encourage parents to really save for their children’s future – when this cash will be much needed.

A continuation of reliefs aimed at new business growth including:

A Business EIS

“A scheme similar to the individual EIS scheme would free up nearly half a £trillion in cash sitting on big company balance sheets and encourage investment in smaller companies. Such a scheme would bring invaluable knowledge and experience from within big business, as well as the cash investment,” he said. “The Centre for Entrepreneurs wants to promote corporate venturing by creating incentives for large firms to draw on their combined £488bn of capital for investment in SMEs.”

A rise in the VCT threshold:

“An increase in the VCT threshold from £200k to £500k would further encourage ‘investment in growth’ in smaller companies, so that UK Plc can re-energise economic growth.”

An extension of the SEIS scheme:

“With the successful Seed Enterprise Investment Schemes scheduled to come to an end in 2015, we would welcome a 5 year extension to tie-in with the next Parliament, avoiding political uncertainty. We would like to see an increase to the individual investor limit to £150k and company raised investment to £250k, demonstrating The Treasury’s support for entrepreneurial start-ups.”

More business-friendly measures:

“We would like to see the creation of a ‘Silicon Roundabout’ broad brush of business-friendly measures, to continue supporting the organically growing UK technology and science entrepreneurs. This would cement the UK’s position of global importance alongside the US’s Silicon Valley, attracting high value jobs to this growing sector.”

Other Brewin Dolphin experts suggest the following changes.

Stephen Williams, Divisional Director UK Equity Research suggests the following measure to ease the property market for new entrants:

 “We’d like to see the Chancellor radically reform stamp duty. It should be paid on the sale of a house, rather than the purchase, making it easier for first-time buyers to find sufficient money to buy a house and capped for the over-65s, to allow them to downsize more easily - which would in turn free up homes for struggling families.”

Ian Armstrong, oil and gas research expert wants to see changes in the tax position in the North Sea.

“The North Sea has been a political football and the Chancellor has made numerous changes to appease the Scots (as well as increase the Treasury’s coffers) so it is about time that he sorted out an attractive medium / long term tax regime,” he said.

“The larger producing fields, which get fewer special investment incentives, are hit with higher corporation tax than other UK companies (30% versus 24%) in addition to Petroleum Revenue Tax. This means they are effectively paying 81% marginal tax; making the North Sea one of the least attractive operating areas in the world.”

“A fuel price escalator should be re-instated to plug the gap in falling tax revenue from the North Sea if the Brent price falls to $75.

While Nik Stanojevic, Divisional Director UK Equity Research suggests the following possibilities for the Utilities sector:

“Looking ahead to the Autumn statement, investors would be keen to see any change of emphasis away from affordability toward security of supply and enough investment in new power generation to ensure that power cuts do not occur. National Grid, who is the UK’s electricity system operator, predicts that the reserve margin (excluding special supply / demand capacity payments) will fall from an already tight 4.1% this winter to around 2% next winter. The reserve margin is a measure of the system’s ability to deal with peak demand on the darkest coldest day – most utilities consider above 5% as comfortable.”

“However, given the popularity of the Miliband election promise, investors may be disappointed.”

As Nisa day approaches, don’t forget the rest of the tax ‘jigsaw puzzle’,

Savers who are anticipating the launch of the Nisa on July 1^st shouldn't forget the other options available to them to save tax, says leading wealth manager Brewin Dolphin.

Tim Walker - Brewin Dolphin Exeter

“It’s possible to shelter many more of your assets from the taxman than most realise, as long as you remember to put together all the pieces of the tax jigsaw puzzle,” says Tim Walker, Head of Office at Brewin Dolphin Exeter. “While the increased flexibility and rise in Isa limits is welcome, it is also important that savers consider other forms of tax planning.”

Here are some tips to complete the jigsaw puzzle:

·         Use your NISA Allowances

As well as the extra £5940 you can now put in this year’s Isa, you can also add to your child’s JISA (Junior ISA) or CTF (Child Trust Fund). The limit for these rises to £4000 on July 1^st, so make sure you use all you can. “Income and capital gains from ISAs are tax free, so consider using the allowance for your risk based investments rather than your cash,” suggests Mr Walker.

·         Make a pension contribution

The pension Lifetime Allowance (LTA) reduced to £1.25m on 6^th April this year. You need to ensure that you won’t exceed that or you will be hit with a hefty tax charge. Ignoring this, you’ve got £40,000 gross that you can put into your pension. You should check this year and contribute your maximum if your UK relevant earnings allow it. If you have neglected your pension in previous years you might also be able to add up to £50k a year for the last three years and get tax relief on that as well.

You can also make a Stakeholder contribution of up to £3600 gross for your children or non-working spouse and receive 20% tax relief on their pension.

For parents: if making a further pension payment brings your individual taxable income(s) below £50,000, you may be able to reclaim or retain child benefit.

·         Transfer your assets

Consider transferring income producing assets to your spouse or civil partner. If one of you is a lower-rate taxpayer than the other, work out the income from the asset per £1 and transfer enough to use up the lower tax band. The same applies for Capital Gains Tax, which is charged at 28% for high rate taxpayers and 18% for basic rate. Transfer assets with gains to the lower rate taxpayer and use up both of your allowances. Also remember to use y0ur annual exemption allowances for Inheritance Tax.

·         Invest into an EIS or VCT

For those with a higher risk appetite, an Enterprise Investment Scheme (EIS) or Venture Capital Trust (VCT) can offer some great tax incentives. 

http://www.brewin.co.uk/offices/exeter  

Tim Walker Head of Office – Divisional Director Brewin Dolphin, Exeter Office

Royal Mail and the history of privatisations

The privatisation of Royal Mail last week should present opportunities for private investors, as well as employees and institutions. The chance to buy shares at a discount, the scope for rapid growth following flotation and the injection of private capital and incentives, all contribute to potentially profitable outcomes and the sell-off of such a massive and socially critical institution – must not be held back from the general public – as suggested by some commentators.

Options for raising funds in the pipeline are the sale of its stake in; Royal Bank of Scotland, Lloyds Banking Group, following the rescue packages undertaken during the credit crunch. The Conservatives are in favour of crystallising value from these banking holdings, with George Osborne suggesting that the government could raise funds by selling its £70bn stake in RBS and Lloyds in the form of discounted shares.

Sid’s history

In the 1980s, Margaret Thatcher’s Government successfully developed the policy of selling nationalised industries into private ownership, or privatisation as it became known. However back then the notion of selling national assets to the public was largely untested and there was uncertainty whether the public would support the issues. There were concerns that private investors would not participate extensively in the offerings, leaving large institutional investors to pick up the shares at heavily deflated prices.

Thankfully, this turned out not to be the case. In 1984, BT was the first well known public sector company to be sold and private investors welcomed the offer. More than two million people participated; keen to purchase the discounted shares offered at a price of 130p.

The success of the government sell of BT paved the way for further privatisations during the 80’s and early 90s, the majority of which were floated successfully. The wave of sell offs then presented opportunities for investors; the question is now, how profitable were these issues to the investors that backed them?

We have calculated the returns of a cross section of the most well known privatisations since floatation and compared them to the FTSE 100 over the same period. In the large majority of cases returns were in excess of the benchmark and in some cases out-performance was considerably more.

  

See chart below:

[Returns are calculated at 10^th July 2013 assuming a buy and hold strategy and are based on a capital return basis, which excludes dividends. Holdings have been adjusted for corporate actions and merger and takeover activity. The returns assume shareholders held on to shares in demerged companies, and took all rights issues in cash. Where a takeover has occurred, returns include the cash value for the bid.]

This performance is impressive when you consider the renowned underinvestment in assets prior to privatisation, and the higher levels of staffing at the time of flotation. However, while not actually given away, they were deeply discounted floats and when the companies were exposed to the full force of competition; they certainly improved their performance, resulting in very rapid growth from a low base.

In the majority of cases returns were good with significant out-performance. Furthermore, many of the companies have an average dividend yield exceeding that of FTSE; therefore including income from dividends would have enhanced relative performance beyond that shown in the chart above.

A particularly profitable privatisation was British Gas, which was memorably sold to “Sid” in 1986. An investment of £100 in British Gas would now be worth £1,246, an increase of 1146% and that is not including any dividends.

Strong management assisted in transforming British Gas into a global integrated Oil & Gas company and investors have reaped the rewards. British Gas has had a series of corporate restructurings; in 1997 Centrica was demerged, and in 2000 Lattice was spun out and was later bought by National Grid. This has enabled investors to benefit from the outperformance of two of the UK’s largest utilities, Centrica and National Grid, which contributed to the staggering overall returns.

Many of the other privatised UK electricity, gas and water companies also performed well and have since been taken over by larger European utilities, or infrastructure funds resulting in investors receiving cash, usually on a premium valuation.

Investments in Severn Trent, Powergen and National Power would all have outperformed the market.

However, a buy and hold strategy for the duration would not have worked on all stocks, with the relative return from BT the most disappointing. An investment of £100 in BT at IPO would have been worth £113 at the end of 2011, although the shares did rise to over £10 during the dot-com boom.

Investors would have also underperformed the market had they participated in the British Airways float. Poor relative performance would have been made worse by the below market dividend yield. Why the underperformance? In contrast to British Gas, British Airways faced stiff competition from the industry. The swath of low budget airlines entering the market has restricted the potential for growth. Also British Airways has been troubled by their historically high cost base, left over from their state ownership days. Staff costs are still some of the highest in the industry.

So the Royal Mail will not be a dead cert and indeed we couldn’t even hazard a guess at its merits until we know the terms of the offer – but private investors should be able to share in the opportunity to put up their savings as risk capital for the development of the Royal Mail – if they choose.