15 May 2020

Less income, inflation, school fee hikes and more tax: future concerns for private clients

Marcus Holden-Craufurd, Investment Director at JM Finn looks ahead at some of the primary concerns for private clients.

by Marcus Holden-Craufurd

Investment Director

Since the start of the crisis, we have seen fiscal action from global governments to support companies and their staff, in the hope that when the crisis abates, these companies will still exist and have suitable numbers of employees.  It is also hoped that in doing so, they will minimise their country’s unemployment costs and the knock-on effects that high unemployment can bring, including social unrest. Understandably, they do not wish for this money to pass through the company accounts and be handed to shareholders via dividends, so have instructed companies who are benefitting from these schemes to cease dividend payments. Other companies have followed suit in order to self-help. 

This will have a hugely derogatory effect on the availability of income paying equity and could continue for a while yet. When companies resume dividend payments, we may well also see them coming back at lower levels than offered previously, as the company continues on its recovery path. For clients who invest for income this will have a considerable impact on their cashflow and any forward planning must bear this in mind.

Governments have also cut interest rates during this period to encourage people to continue spending. Investible assets are priced relative to interest rates and therefore it follows that we have, as a consequence, seen a fall in savings returns and yields on debt instruments. Some commentators are suggesting a swift and sizeable bounce back in GDP in 2021, which may persuade central banks to raise rates again, but historically they have been late to do so, and could well be late again.

The amount of money that will be pumped into the system this time around is likely to put post-2008 Quantitative Easing (QE) in the shade. The implications for this enormous amount of additional global liquidity could have a marked effect in the longer term on all asset prices and this could lead to inflation, certainly in pockets. If this inflation out-paces interest rates, and therefore available income, it will be a difficult time to live off income alone for those only just getting by.

Another area which could well be significantly impacted by the current situation is for those people who fund their grandchildren’s education. These funds are often found from separate school fee accounts set up possibly in a form of a Trust and rely on the total return of the portfolio over a finite period, during which the grandchildren are being educated privately. In the short term, with the diminution of income that such portfolios are likely to suffer and with the recent fall in capital, the school fees currently being paid, which show little sign of coming down themselves, as schools smart from the lack of foreign students, will have an additional eroding effect on the portfolio. If the portfolio is not being utilised at the moment, I feel one should not be panicked just yet, as by the time it may be required, we may well be facing different conditions and on a more even keel once again. 

I do have some concern for schools, who over recent years have been in an arms race to ever improve facilities. This comes at a cost and the wonderful new facilities require upkeep and the debt taken on in order to construct, requires maintenance. The possible absence of overseas fee payers and expected increases in unemployment may lead to a few lean years for schools, not all of whom may come out the other side.

What has not been mentioned above, is how on earth does all this additional government borrowing get paid back?  The debt numbers continue to increase in the United Kingdom, as the Chancellor, who has impressed me so far, continues to do ‘all it takes’ in order to keep the economy going.  A country could decide to write off this debt, which when done in isolation would have a drastically negative effect on its currency and its future credit worthiness.  It could choose to never pay it off, using interest rates and other fiscal levers to stave off inflation in accordance with a broadly disliked economic concept called the Modern Monetary Theory. Historically the raising of taxation has been the solution and would seem the more obvious course of action. Conservative and Labour Governments will take different views on where best to increase the tax take, but inheritance tax and the broader succession planning mechanisms are never far from such thoughts of either party.

The solution to these issues will undoubtedly fall more into the remit of our Wealth Planning Team and there is still plenty of water to go under the bridge before the UK is in a position to start paying some of this debt back, but it should be a question we keep raising in the medium term; and is certainly one that Rishi Sunak will be having sleepless nights about, I would imagine.

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