As some of you may know the former (?) Tory Chancellor was / may be Philip Hammond who was also known as spreadsheet Phil as he apparently has a fondness for spreadsheets. Now regular readers will know that I have a fondness for generating income from my investments and compounding the returns. Now while I try to do this as much as possible in tax free wrappers which are generously provided by the government. Outside of those one is potentially liable for income and capital gains tax on assets held outside of these tax free wrappers.
Now until recently, income on UK Shares benefited from something called the tax credit, which basically accounted for basic rate tax and one therefore only had to pay tax on income if your income in total, after taking account of the personal allowance, exceeded the higher rate threshold. That tax credit was abolished by the previous Chancellor George Osborne, who at the time he introduced a 7.5% basic tax rate on dividends rising to 32.5% and 38.1% for higher rate and additional rate tax payers and also introduced a £5,000 dividend allowance to make up for this loss of the tax credit. This however failed to fully make up for the loss of the tax credit as this change was one of the biggest revenue raisers in his budget at that time. Since then Philip Hammond decided that this allowance was too generous and proposed to cut it to £2,000, although I note that the legislation required to get this change into law was not passed before the election. I have however seen comments to suggest that this will be forthcoming post the election, assuming the Tories are returned.
As the legislation is likely to be passed (as discussed above) the allowances and tax rates for the current tax year are as follows:
Tax Free Allowance £5,000 (going to £2,000) £11,300
Basic Rate 7.5% 10% (18% on residential property - why?)
Higher Rate 32.5% 20% (28% on residential property)
Additional Rate 38.1% 20% (28% on residential property)
My question to Philip Hammond, or whoever is the next Chancellor, is why is investment income on shares treated & taxed differently and unfavourably compared with Capital Gains on share investments?
Supplementary question - I presume the higher capital gains tax on residential property is designed to discourage buy to let landlords? This has in fact encouraged some to register as a business instead, but that's another story.
So in conclusion my suggestion would be why not align these allowances and rates for the sake of simplicity and for equal treatment of capital & income? Now in my mind that would mean giving a £11,300 dividend income (& maybe include residential property income within this) and align the tax rates at 10% & 20%. This might go some way to replacing the loss of the tax credit & greatly simplify the current messy system they have introduced. No doubt they won't like that as it will probably cost them money. Alternatively I guess there would be a risk they could bring the Capital Gains Tax allowance down to the level of the income allowance to raise more money perhaps? Therefore not sure I'll send this idea to Spreadsheet Phil, strong and stable Theresa or my local Tory MP.
Which is said to be an old Chinese curse, but this week could equally apply to the UK Prime Minister given the latest shenanigans in the BREXIT process and there is even talk now of an early election (click image above for more details).
Investors probably feel it has been applied to them too as in addition to the fall out from the BREXIT legal challenge we have the US election result to look forward to as well as the possibility of a rate rise in December from the US Federal Reserve. That is of course assuming that markets don't have another rapid downward lurch which scares them off from doing this again as it did last time they were thinking of doing this. We saw the Non Farm Payrolls data yesterday which were slightly light of consensus at 161,000 jobs created although this did bring the headline unemployment rate down to 4.9%. This puts that indicator just below its 12 month moving average which reverses the move above the average we saw last month hence negating the recession indicator in the short term, but this will need watching in the months ahead.
Meanwhile in the UK market we got hit harder this week by these concerns and thus the headline indices like the FTSE All Share and FTSE 100 fell by around 4% on the week while Mid and Small caps only fell by around 2%, although they may play catch up next week. In terms of the timing indicators at the end of October these were still showing bullish trends with most of the indices around 8% above their moving averages with the exception of the Mid 250 which was only around 4% above. Thus for now the bullish trends on these measures remain in tact, but we'll have to see where we end up by the end of November.
Personally I have been getting a bit more cautious about markets recently and the recent moves and news flow have done little to reverse that caution. However, it is probably still not worth taking too much avoiding action unless you have lots of speculative positions or are running with gearing. We may see more of a shake out in the short term but once the dust settles post the US election then seasonality might kick in with a year end rally perhaps. As discussed above, given my current caution on markets I wouldn't get carried away with any rally and would probably view it, if we see it, as an opportunity to take some risk off and get a bit more defensive. So mind how you go out there and watch out for fireworks today in the UK and next week in markets too, mind how you go.
Further to my recent post about The Economic Machine and How it Works and some reality TV content. No if you have finished watching the reality shows this weekend or not as the case may be then I have another recommendation for you.
In this case it was something I was pleased to stumble across on the BBC I-Player this weekend. To be honest given how much the BBC is part of the establishment, I'm surprised they are showing this but good for them. It is a Film by Adam Curtis who previously did the excellent expose on the history of Oil and the Middle East called Bitter Lake.
This latest documentary follows on well from the Bitter Lake one and is called HyperNormalisation. It continues some of the themes he explored before discussing how the "authorities" try to distort the truth by using disinformation etc. It is quite a long film but is broken into sections so you can leave it and come back to it as the I-Player lets you resume from where you got to. Amongst other things it helps to explain how Syria came to be the mess it is today, the related rise of suicide bombers and takes in Israel. Palestine and Libya along the way. The list of people featured includes Donald Trump, Larry Fink, President Putin, Ronald Reagan, George Bush, Tony Blair, Colonel Gaddafi & Saddam Hussein - enjoy?