Keeping it real on returns How you think about investment returns may need to change as inflation soars. If you could choose between a 3% investment return or a 7% investment return, which would you pick? The answer seems obvious, so let’s add some context. Which is better – a 3% investment return when inflation is 2% or a 7% investment return when inflation is 9%? Once you allow for inflation, the 3% investment return is more attractive as it outpaces inflation; the 7% return means lost buying power over time. Consider the real rate of return In an inflationary environment you need to think of investment returns in ‘real’ terms, removing the eroding effect of inflation. So, in the example, the 3% return becomes a real return of 1% (3% – 2%) and the 7% return is actually –2% (7% – 9%). Taking this approach means shortterm, deposit-based investments are much less attractive, despite interest rate increases. The past 13 years of near zero interest rates, combined with low inflation, have encouraged investors to focus on the capital growth element of investment returns, favouring technology-related companies. Inflation and rising interest rates have reduced the appeal of distant profits and the other component of investment return, income, has now become important. However, inflation is not all bad news for investors. Many companies aim to keep their dividends growing at least in line with inflation over the longer term. Link Group, a leading share registrar which monitors dividend payments, recently said that it expected regular dividend growth of over 15% this year. If you want to protect your capital from the ravages of inflation, there are plenty of potential options, but none is without risk, so advice is important. B Investments do not offer the same level of capital security as deposit accounts. The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. Are you a trustee? A new measure to prevent money laundering means trustees must now register with HMRC. The government has introduced a new requirement for trustees to register details of their trust(s) with HMRC as part of its continuing anti-fraud strategy. For most existing trusts, the deadline registration date is 1 September 2022. New trusts will need to register within 90 days. Once registered, any changes to the trust must be reported by the trustees, also within 90 days. Certain types of trust, such as property co-ownership trusts, are exempt, but many trusts that do not currently pay tax must be registered. The treatment of trusts linked to life assurance policies is particularly complex and has prompted HMRC to regularly update and expand its guidance. While a trust holding a simple term assurance policy that only pays out on death will not need to register, the treatment of investment-oriented policies is less clear cut. TAX INVESTMENT TAX Could you join the one in five? If you are not a higher rate taxpayer now, you may be soon. The combination of high inflation and frozen tax thresholds is a toxic mix for taxpayers. Figures from HMRC and the Office for Budget Responsibility show that the four-year freeze to the UK-wide higher rate tax threshold will create over two million new higher rate taxpayers by 2025/26. In Scotland, the freeze only applies to savings and dividend income, but the Scottish higher rate threshold for other income (primarily earnings) is lower at £43,662 and the rate 1% higher. Mitigate the hike If you are – or will soon be – a higher rate taxpayer, there are plenty of tax planning points you should review with us, including: ■ Ensure that you take full advantage of all your tax allowances, such as the dividend allowance and the personal savings allowance. ■ Explore the many opportunities presented by independent taxation if you are married or in a civil partnership. ■ Maximise ISA investments – the UK taxfreedom of ISAs is more valuable once you pay higher rate tax. ■ Review investments – investment returns in the form of capital gains (maximum rate 20% other than for residential property and a £12,300 annual exempt amount) will normally incur much less tax than income. ■ Business owners may have scope to change the structure or adjust the way profits are extracted. ■ The higher rate of 40% (or 41% in Scotland) income tax also means that you can receive 40%/41% in Scotland on pension contributions. However, beware the pension annual and lifetime allowance tax traps. B Investments do not offer the same level of capital security as deposit accounts. The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. For ISAs investors do not pay any personal tax on income or gains. The Financial Conduct Authority does not regulate tax advice or deposit accounts. Tax treatment varies according to individual circumstances and is subject to change. Credit: FGC/ Shutterstock.com
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