Daily News Updates:
PWS Southport daily news and market updates keeping you up to date on coronavirus news and how global stock markets are reacting to the ongoing pandemic.
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Base rate held at 0.1%
The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 0.1%. The Bank also said it would maintain its current quantitative easing programme at £745billion.
This came as the BoE warned that it expects UK unemployment to jump by 7.5% by the end of the year. Andrew Bailey, Governor of the Bank of England, confirmed the bank is not looking to introduce negative interest rates now. He did not rule them out in the future.
Following the announcement, speculation about negative interest continued. The yield on a five-year Government Bond currently sits in negative territory. You could interpret this as the market saying interest rates in the UK will go negative at some point.
Costly Fund Management practices
Fund managers have had to switch more than 320,000 customers on to cheaper versions of their products. This is after they failed to justify their fees.
The Financial Conduct Authority (FCA) this year forced the industry to publish value assessment reports. Analysis of these shows the value to investors of the regulator’s action.
The reports compel investment companies to show how their funds provide value. The analysis found the industry was making excessive profits and that charges were not always clear to customers.
House prices reach record highs
Rishi Sunak’s emergency stamp duty holiday has sent property prices soaring to an all-time high.
The average cost of a home in the UK jumped 1.6% in July alone to £241,604, according to the latest figures from Halifax. That pushed the annual rate of gain to 3.8% after four months of falling prices.
Britain’s biggest mortgage lender said the property was in the throes of a “surprising spike” driven by a wave of demand since the end of the lockdown. The Chancellor announced in early July that stamp duty will be waived on the first £500,000 of any transaction until March saving buyers up to £15,000 in tax. The Halifax figures came as property portal Rightmove said it has seen record levels of traffic on its website.
Pent-up demand meeting a low supply of homes has exerted upwards pressure on house prices. The government’s initiative of a significant cut in stamp duty has further driven prices up.
However, looking further ahead, there is still a great deal of uncertainty around the lasting impact of the pandemic. The key question now is whether the post-lockdown jump in buyer interest will translate into a steady stream of sales.
As government support measures end, the resulting impact will start to become more clear. In particular, a weakening in labour market conditions could lead to downward pressure on prices in the medium-term.
Getting ready for likely CGT changes
It was inevitable that taxes will have to rise to pay for the support the Government has given the economy to steer it through lockdown and beyond.
The firing gun on this came a few weeks ago. First, Rishi Sunak commissioned a review into capital gains tax. Although nothing may come of the work, it is no coincidence it will finish before the Autumn Budget.
Rishi Sunak has refused to comment on whether he intended to break manifesto promises. In particular, these were not raising the rates of income tax, national insurance or VAT. However, it seems unlikely that he will incur the wrath of Tory supporters by going down this route. His mention of the need for a ‘sensible conversation’ on taxation suggests other taxes will be targeted instead. This leads us back to capital gains tax.
A conceivable way forward would be for Sunak to tax capital gains at the same rate as that applied to dividend income. Currently, any annual dividend income from shareholdings above £2,000 is taxed at 7.5%, 32.5 per cent or 38.1% based on the investors’ other income. These rates sit between current capital gains tax rates and income tax rates.
Capital gains tax on the sale of a main home would surely be a step too far.
Not everyone agrees raising CGT is a good idea. Professor Philip Booth, the senior academic fellow at the Institute of Economic Affairs, says it is a ‘complicated and damaging tax’ that should be abolished. Capital gains made within tax-friendly savings vehicles such as Isas and pensions are free from capital gains tax. Also, all withdrawals from ISAs are tax-free. So it makes sense for investors to utilise these capital gains tax-free zones as much as possible.
Investors could also consider crystallising gains between now and Sunak’s Budget in November. This would take advantage of their £12,300 tax-free capital gains allowance. The proceeds could then be used to fund an Isa or pension. Those who are married or in a civil partnership could transfer assets to the partner who is paying a lower rate of income tax.
The cost of social care tax
Everyone over 40 could start contributing towards the cost of care in later life. This is under radical plans being studied by ministers to finally end the crisis in social care.
Under the plan, over-40s would have to pay more in tax or national insurance. The money would pay for the help frail elderly people need if still at home, or to cover their stay in a care home. Another option would be to insure themselves against hefty bills.
The plans are being examined by Boris Johnson’s new health and social care taskforce and the Department of Health and Social Care (DHSC). They are gaining support as the government’s answer to the politically perilous question of who should pay for social care. Sources say the principle of over-40s meeting the cost of a reformed system of care is emerging as the government’s preferred option.
Social care is a devolved matter but the plans could apply to the whole of the UK as they may involve the tax system. Matt Hancock, the health and social care secretary, is a keen advocate of the plan. He has been championing it in discussions about the government’s proposals to overhaul social care. Officials say there is a “renewed urgency” in Downing Street and the DHSC to come up with a solution.
The system that officials are considering is a modified version of how Japan and Germany fund social care. Both are widely admired for having a sustainable way of financing social care to deal with the rising needs an ageing population brings.
In Japan, everyone starts contributing once they reach 40. In Germany, everyone pays something towards that cost from the time they start working, and pensioners contribute too. Currently, 1.5% of every person’s salary, and a further 1.5% from employers or pension funds, are ringfenced to pay for care in later life.
Adopting this approach could let Johnson say he has ended the situation where pensioners have to sell their homes to pay care home costs.