In Rishi Sunak’s recent spending review, published on 25th November 2020, we saw a glimpse of what might come down the track in years to come – higher taxes.
Although the Office of Budget Responsibility announced that the economy has not contracted as much as it had previously expected (11% rather than 13%,) we are still looking at public borrowing of £394bn this year.
Furthermore, most economic commentators are of the opinion that the economy will be too fragile to impose many tax hikes in next year’s March Budget. But it is widely believed we will see some serious increases in taxes by 2022.
Bagehot in the Economist says that Sunak has an ‘ingrained enthusiasm for balancing budgets and limiting expenditure’ which could be described as a ‘chip off the old Thatcherite block”.
So, with this in mind what can, and should we do? My hunch is that if Sunak listens to his economic advisers; our wealth creators – the entrepreneurs who employ people and build businesses – will fare reasonably well – so what can we do now if we are not business risk takers – to jump on this expected bandwagon……?
By investing into trading businesses and developing projects!
There are lots of reliefs for investors in businesses which are unlisted (other than on the Alternative Investment Market – AIM) which are unlikely to be attacked – and developing projects so it is likely we have one or two years – to ‘get our ducks in a row’.
One business which has recognised this opportunity is Stellar, formed in 2007 by Jonathan Gain – our podcast professional of the week.
Although formed without Covid 19 in mind, Jonathan recognised what he calls an Inheritance Economy – the transfer of wealth over the next thirty years of £5.5 trillion. This succession of wealth, he sees, as an opportunity – and if it was an opportunity in 2007, how much more is it now, as we head towards rising taxes?
Of most concern to those expecting to inherit is the 40% of tax on the transfer of wealth on death – inheritance tax. Of course, there are reliefs which most of us know about.
The three best known reliefs are outright gifts made more than seven years before death, gifts to a charity and gifts to a spouse. But what if you don’t want to make gifts now – for fear of living longer than the means you have retained – or you do not have a spouse?
One much overlooked relief is Business Relief – which works be reducing the value of what is being transferred on death by as much as 100%.
Furthermore, this relief does not have to be claimed – ie it does not work by paying the tax first and then claiming it back. It is available immediately since the value which is entered onto form IHT 400 when obtaining probate is accompanied by a Schedule IHT 413 which determines whether a business or project qualifies for the relief and if it does the value of what is being transferred and taxed is reduced by up to its entire value – with no tax to pay upfront!
Stellar is not a tax advisor; (whereas GFOS is!) it is an investment manager – but rather than specialise in listed securities it is a specialist in identifying good business projects and companies which qualify for Business Relief and which could also provide the investor with reliefs from other taxes as well, depending on how the investment is structured.
Business Relief is a relief from Inheritance Tax on all unquoted businesses and in businesses listed on AIM which qualify. These businesses must trade but provided they satisfy the criteria can be substantial. However, Stellar is of the opinion that there are many undervalued businesses of small to medium size which are below the radar, and which can deliver, if chosen wisely, excellent returns.
Projects such as the development of hotels and golf clubs can also qualify and have the added advantage of being asset backed.
Although companies quoted on AIM, unquoted businesses and development projects are considered by many to be risky – with an experienced investment manager and a wide diversification they can produce exceptional returns, and given the low rates of interest and turbulent trading conditions we have had over the last year that begins to look attractive despite the obvious benefit of tax reliefs.
Of course, there is always the danger that the Chancellor will, in due course try to clip the wings of the entrepreneur, but as I said earlier, he would be unwise to cut the benefits of the entrepreneur too severely for fear of biting off the hand that feeds it.
However, it has to be said that we have already seen him reduce Entrepreneurs CGT relief from £10million to £1million which to my mind is short-sighted, so we cannot rule changes out, but Sunak also needs reminding that he needs to keep his own loyal voters onside and be reminded how little this relief really brings into the Chequer in comparison to the big three revenue generators; income tax, VAT and national insurance.
But, Inheritance Tax, for those wealthy individuals who do not wish to give it all away before they die is a very expensive tax indeed at a rate of 40% of the CAPITAL transferred, so well worth looking into in 2021!
At this point may I say that 2020 is drawing to a close so we will not be publishing a newsletter until 2021; on 12th January 2021, when I will be kicking off the year with some new year’s resolutions on how to network efficiently and effectively without wasting time and money
My research and experience has led me to create Caroline’s Club which enables you to network without going to conferences, without wasting time listening to speeches and where you do not need to collect business cards – because all the details have already been captured for you.
At Caroline’s Club we create audio brochures – about who you are and what you do in our podcasts and encourage our members to share Client Stories in our zoom meetings.
There are also lots of new ideas which we are working on in conjunction with our Private Client Professional Members which we will introduce to you over the forthcoming year
If you would like to serve your clients better and network more effectively and efficiently join Caroline’s Club, simply register and sign up to our Client Stories Zoom meetings on https://carolines.club.