13th March 2020

4 minutes reading time

Blackfinch Group: Budget Commentary

Budget Commentary 2020

This was most certainly a budget of two halves, one aimed at tackling the virus outbreak and another committing to enormous fiscal spending to boost economic growth.

On the day, the morning saw an emergency 0.5% rate cut from the Bank of England, as well as some disappointing economic growth figures from the Office for National Statistics. Similarly, what followed was very different to the planned breakout budget that the Tories had been looking forward to following their majority gained at the December general election.

Delivered by Rishi Sunak, it was akin to a baptism of fire for the Chancellor just 27 days after assuming one of the most powerful roles in government. The delivery started with him looking visibly nervous. However, by the end he was really in his stride. He pledged to spend almost unprecedented amounts across various sectors and confirmed the government’s action plan to tackle the risks presented to the economy from coronavirus.

Commitment to Business Including Support Around Coronavirus

The amount of spending makes this unlike previous conservative party budgets, as historically the party has tended to favour the opposite approach. We welcome the committed £30bn of public spending to support the economy during the coronavirus outbreak. We also take comfort from the aid offered to small UK businesses that are affected by the virus, particularly those in the retail, leisure and hospitality industries. Business rates have been frozen for small businesses and those same businesses will see statutory sick pay related to the virus refunded to them.

A striking £40bn has been added to public spending over the course of this parliament, including a significant allocation towards roads, motorways and state-of-the-art broadband to reach 95% of the country. £12bn has been allocated to an affordable homes construction programme in addition to a specific fund allocated to remove dangerous cladding from high-rise buildings.

Growth Targets, Market Reaction and Wealth Management Outlook

The 2021 growth target of 1.8% does seem a little optimistic in our view, especially given that the true extent of the economic impact caused by the virus is still unknown. Inflation is forecast to rise to 1.8% in 2021. However, the likelihood of notable economic downturn or even a technical recession is far more likely to be deflationary rather than inflationary in our opinion.

Following the budget announcement, initial market reaction was muted, notwithstanding the healthy rises in construction, fixed-line communication and property investment companies.

Based on initial UK market reactions, the globally diversified, multi-asset portfolios within the Blackfinch Wealth Managed Portfolio Service have been largely unaffected by this budget. While the portfolios do have exposure to assets impacted by the budget, their overall contribution to portfolio performance is not significant. Returns will continue to be driven by macro events and much broader market sentiment.

Key Tax Reliefs Maintained, Promoting Tax-Efficient Investing

In the area of tax-efficient investing, good news came, as we had suspected, from the outcome of the Office of Tax Simplification’s report, with no change to Business Relief qualification rules. Both our Adapt AIM and Adapt IHT portfolios remain open for business as usual. In light of the ongoing market volatility, the Adapt IHT Portfolios serve as a very useful haven for clients’ money where they do not wish to have exposure to such volatility. Our current offer of a lifetime 0% annual management charge on the portfolios applies to all applications received by 15th June 2020.

Meanwhile, rules around the Enterprise Investment Scheme (EIS) and Venture Capital Trust have not changed. We see this as the Government inviting clients to help the UK economy by investing in the small, high-growth companies for which the UK is renowned and helping to back talented entrepreneurs.

With regard to Entrepreneur’s Relief (ER), the Budget brought news that was a relief itself, as it had been rumoured that ER could be scrapped altogether. The new rules announced mean that a business owner can still receive ER and pay the reduced rate of 10% Capital Gains Tax when selling their shares in their business, up to a lifetime limit of £1m.

There will be clients selling shares who do not wish to pay higher rates of CGT. In this scenario an EIS could be very useful. It will enable them to defer the CGT throughout the life of the investment. They could then either manage it out using future CGT allowances or remain invested until death when CGT uplift would apply.

As ER is also still applicable to the vast majority of businesses in the UK, it is a valuable tax break. Accordingly, making sure that clients will be eligible for it is worthwhile. If ER is in doubt due to the level of cash within a business, you may wish to consider the Thrive Corporate Management Service. A bespoke tax-efficient solution for businesses, it may be able to support their aims.

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