Take advantage of volatility in UK small caps
This article first appeared in the October edition of Professional Paraplanner magazine It’s been a...
It was perhaps inevitable that this Budget would be taken over by events out of its control. The Coronavirus is dominating headlines the world over and, naturally, the Government recognised that now was not the right time to be tinkering with taxation concerns and pension legislation.
So most of the comment from the Chancellor of the Exchequer concerned a commitment to ensure that the NHS had sufficient resources to cope with the escalation of the epidemic, along with some element of protection for both firms and workers who were directly affected by it.
A lot of the spending headlines were around the broader long term ‘Infrastructure Revolution’ with various announcements around spending on road, rail, broadband and housing, which are estimated to cost around £600bn by the middle of 2025. Money has also been allocated for investment in technology and carbon capture & storage.
All of this meant that there were just two key announcements for savers and investors.
The first concerned those affected by the tapered annual allowance for pension contributions. Broadly, the income levels at which people are affected was increased by £90,000, which means it is only an issue if your income is in excess of £240,000 (rather than £150,000).
The second – not announced in the speech but hidden in the full document – was that the Junior ISA allowance is to almost double, rising from the current £4,368 to £9,000 next tax year.
Commenting on the rise, Darius McDermott, managing director of FundCalibre, said: “The increase to Junior ISA limits came as a positive surprise.
“Investing £750 a month over a period of 18 years could result in enough money to not only pay for university fees, but also the purchase of a house – or a substantial deposit. Assuming 5% annual returns, an overall investment of £162,000 would grow to a pot of money worth £261,901.52*.
“Admittedly, few people could afford to save this amount of money for their children year in year out, especially if they are also trying to save for their own ISAs – the average Junior ISA subscription according to HMRC is just £1,421** – but it does give us all something to which we can aspire.”
Recently launched Investec Global Environment is a global equities fund that includes emerging markets, but which has a unique approach of only investing in companies that are contributing to the decarbonisation of the world economy. The portfolio has complete conviction, with just 20-40 holdings.
Investing in Britain’s smallest businesses, Liontrust UK Micro-Cap only invests in profitable companies. Each holding in the portfolio must have at least one intangible asset. These include a strong distribution network, high recurring revenues or a strong brand. The team also looks for director ownership of at least 3% of the company. Currently, almost a third of the fund is invested in technology companies***.
VT Gravis UK Infrastructure Income invests mainly in investment trusts exposed to different types of UK infrastructure: from hospitals, GP surgeries and schools to railways, roads wind and solar power. It has an income target of 5% per annum and offers an excellent way to invest in the growing need for infrastructure in the UK. It can invest in infrastructure debt, as well as equities.
Personal Allowance remains unchanged at £12,500.
The threshold above which higher earners start paying 40% tax is also unchanged at £50,000.
Both are due to increase in line with Consumer Price Index (CPI) in future years.
Standard lifetime allowance
The standard lifetime allowance for pensions will increase in line with the rise in the consumer prices index (CPI) for 2020/21 to £1,073,100.
There are no changes to pension annual allowances. The standard annual allowances remains at £40,000.
However, the high income annual allowances taper rules have been changed. Adjusted Income (the level at which income must be earned before the tapering starts) increases by £90,000 to £240,000, with the Threshold income also increasing to £200,000.
The ISA annual subscription limit for 2020/21 will remain unchanged at £20,000.
The annual subscription limit for Junior ISAs and Child Trust Funds for 2020/21 will be increased to £9,000.
The capital gains tax allowance has increased to £12,300.
Inheritance tax rates and exemptions
The IHT Nil Rate Band will remain frozen at £325,000 until 2021/2022 as previously announced.
Residence Nil Rate Band (RNRB)
The Residence Nil Rate Band will rise to £175,000 from April 2020 as previously announced.
Entrepreneur Relief has been amended with the Lifetime limit reducing from £10m to £1m.
Corporation Tax remains unchanged at 19%.
National Insurance Contribution Tax threshold increases from £8,632 to £9,500.
*£750 invested each month for 18 years, assuming annual returns of 5%
**Source: HMRC ISA statistics, April 2019
***Source: Fund factsheet, 29 February 2020