Monthly Archives: October 2017

Stocks in Focus: British American Tobacco

This week I’m looking at British American Tobacco (BAT), which is a leading company in the global tobacco industry. I last wrote about BAT a year ago following its offer to acquire the 57.8% of Reynolds (a US-focussed peer) that it did not already own. The deal was approved by shareholders earlier this year, taking BAT back into the $130bn US market after a 12-year absence.

Shortly after the takeover, the US Food and Drug Administration announced that it aims to reduce nicotine in cigarettes to non addictive levels, causing investors to become more cautious of the tobacco sector. However, the management of BAT reassured investors that the news was not unexpected to the company, and that they continue to focus more on the ‘Next Generation Products’ (NGP) part of the business. The NGP products, which BAT have invested more than $1bn into developing, include Vapour Products like e-cigarettes and Tobacco Heating Products, offering consumers alternatives thought to be healthier than traditional cigarettes. Management have since announced that they will be integrating NGP into their existing business infrastructure, hoping to strengthen an area that is fast becoming a key part of their mainstream business.

Although it is likely that traditional tobacco sales volumes will continue on a downward trend, BAT seem well placed to offer alternatives to consumers, with demand for e-cigarettes continuing to grow. In the meantime, cost cutting and consolidation have enabled earnings and dividends to continue to rise in recent years. Looking forward, investors need to consider whether this can continue – to what extent are NGP products an opportunity and to what extent are falling sales in traditional cigarettes and ongoing regulatory pressures a threat?


Thatcher’s gift

Often written about and commented upon by the media is the subject of Inheritance Tax and increasingly there is a feeling that the true implications of this tax are misunderstood.

We have a tax which is levied at 40% on everything you leave behind in excess of the standard nil rate band currently £325,000. Yet there is no need to pay the tax if you plan properly.

It would be fair to say Inheritance Tax could be viewed as an aspirational tax as it seems that there are many who presently care little about this tax, as they don’t believe the tax applies to them. Whether or not they aspire to build an estate with real value or not it seems more and more of us are rapidly falling within the grasp of this iniquitous tax. The time for action is now and not to wait until it is too late to undertake any meaningful planning.

So whilst some of us sob into our gin and tonics about the real possibility of having to pay Inheritance Tax on our modest estates, it would be fair to say HMRC are rubbing their hands with glee. They have recently reported record receipts for Inheritance Tax. In 2014/2015 the tax take for this tax was £3.8 billion and in 2015/2016 this had increased significantly to £4.8 billion this is an increase of an eye watering 22%.  Pretty cool numbers for what is seen as a tax only the rich need to be concerned about.

The question is whether this is really a tax that affects only the wealthy or does its grasp reach further? The Office for Budget Responsibility forecast that over 450,000 families will in 2016/17 have to face the prospect of paying tax on their inheritances. (Interestingly records from the Office of National Statistics show that 525,000 people died in England and Wales in 2016). These numbers suggest we all have to address the possibility we may be subject to Inheritance Tax.

Planning your financial affairs can be easy or complicated the choice is yours. We have over the years witnessed some very sophisticated tax planning arrangements designed to reduce Inheritance Tax.

One of the latest cases was M L Salinger and J L Kirby v HMRC (2016). They appealed against HMRC’s determination that Inheritance Tax was due on the estate. The appeal was upheld. The arrangement involved the transfer of a reversionary interest into an offshore trust. The taxpayer’s standpoint was that the reversionary interest had no transfer value as no consideration was given. The First Tier Tribunal had to decide upon two questions and as noted their considered decisions on these two questions favoured the taxpayer over HMRC.

This is all very interesting and hopefully good news for the beneficiaries. But they had to fight against the initial verdict and then launch an appeal all of which will have delayed distributions from the estate. Defending cases such as this one is not without cost or uneasiness for the eventual beneficiaries, and HMRC rarely lose cases.

The good news is this tax, which in truth penalises the sensible savers can be reduced or even negated without the need to create complex tax shelters such  as the one described. It is probably good advice not to invite scrutiny by HMRC

The simplest way to avoid Inheritance Tax is to make sure your estate is worth less than the nil rate band which is £325,000 or £650,000 if there is an unused spouse or civil partner allowance you can use. If you are an unmarried couple you still have your separate nil rate bands but this cannot be combined upon death.

Other opportunities are:

  • The new residential nil rate band which has the potential to remove £1 million nil rate band by the year 2021 However, even with this new Inheritance Tax break the actual numbers who will eventually benefit from this tax break are limited.
  1. The new allowance is reduced by £1 for every £2 by which the estate is in excess of £2million.
  2. The clue is in the name, you have to have owned a property that was at one time your home. If you don’t own a property you cannot benefit
  3. It only applies to property left to direct descendants. So to a couple who are not married and not being direct lineal descendants they therefore do not qualify for the residential tax break.
  4. If the property is worth less than £175,000 (or £350,000 for a couple) the nil rate residential allowance has a limited advantage.
  •  You can make a gift of any size now and as long as you survive a period in excess of seven years the gift is deemed to no longer be within your estate. But should you die within the seven years the gift falls back into your estate. Nevertheless gifts between spouses, civil partners and charities are always treated as being tax free.
  • You have an annual allowance of £3,000 each tax year which you can gift. There is also a marriage allowance of up to £5,000
  • You can make gifts out of income as long as these gifts are regular in nature and do not impoverish the person making the payments.
  • You can place a life insurance policy to cover  your potential Inheritance Tax liability into trust and use this to pay the liability
  • Equity release can be used to avoid Inheritance Tax.  However this is an option you should treat with great care.
  • Business Property relief and Agricultural property relief is available and also has the potential to reduce an estates exposure to Inheritance Tax
  • Having a properly written Will is a must although is does not in itself reduce the liability to Inheritance Tax. There is the possibility with careful planning and good legal advice to pass the Inheritance Tax allowances down the generations.
  • When you take out a Lasting Power of Attorney for Property and Financial Affairs you should ensure your Attorney(s) has the powers needed to continue any gifting you normally would have made.

The earlier one plans the more effective it can be and yes this is a tax which is more and more likely to affect all of us.

For more information about our services, simply complete our enquiry form, send us an email or call our Cambridge office on 01223 720208 or our Norwich office on 01603 692732.

The following subsidiary of the NW Brown Group is authorised and regulated by the Financial Conduct Authority to provide regulated services: NW Brown & Company Limited (191123).

Stocks in Focus: Centrica

At its recent conference, the Conservative Party revived its plans to protect families on standard variable tariffs. SVTs are the expensive plans that customers are automatically moved to when their cheaper fixed deals end. The government aims to cut gas and electricity costs by £100 a year for 17 million families and the draft energy bill published last week gives energy regulator Ofgem the power to cap SVTs. However, no action will be taken until the new legislation has been passed by Parliament and a decision has been taken on how the actual price cap is calculated – it is unclear how long this will take.

For Centrica, the parent company of British Gas and the biggest energy supplier in the UK, a price cap will certainly make market conditions challenging. The majority of British Gas clients are on SVTs and a cap will result in a fall in revenue, which in turn may put pressure on the company’s dividends. Unsurprisingly, it argues that capped prices will reduce competition in the industry, reduce choice for customers and potentially impact customer service – as supported by the Competition and Markets authority.

Nevertheless, Centrica has demonstrated its fortitude in being able to navigate this regulatory clampdown through a diversified product offering, its cost efficiency strategy and a focus on quality rather than quantity of its customer base. The share price has been weak since the cap was first announced and long-term shareholders need to consider whether this is an opportunity or a threat. Beyond this, the Labour Party’s plans to nationalise several industries, including the utilities sector, give market participants more to think about. For his part, Centrica’s CEO has signalled confidence in the business by buying shares in the company last week.

NW Brown September 2017 Market Review

This edition of the Market Review considers whether markets will continue to climb a “wall of worry”.

September 2017 Market Review

Points of View: Insurance

This week I have been looking at the unfolding 2017 hurricane season and the effects that Harvey, Irma and Maria could have on the US economy and the broader insurance sector.  These events have caused devastation across the Caribbean, Texas and Florida.  The financial impact that they will have is difficult to judge this early on.  However, total losses are expected to be between $80 and $125 billion.  Over the short term there will be a negative impact to the US economy. US jobs data has already shown that the number of jobs created by the economy has contracted for the first time since 2010 and the hurricanes have been seen as a large contributor. However, economic activity is expected to return as insurance policies pay out, property is rebuilt and damaged items such as cars are replaced.

Closer to home the impact will be felt by Lloyd’s Insurers, the London based, global insurance market. They have estimated that Harvey and Irma will cause around $4.5bn in losses to their members.  This is expected to lead to an underwriting loss for the year but CEO, Inga Beale, has stated that this is to be expected in such events and that “this is what we are here for”.

Natural disasters are both good and bad for those insurers covering this market. On one hand, they will suffer some large capital pay-outs in the short term. On the other hand, such events inevitably help push future premiums up. This is especially relevant at the moment given that the lack of disasters in recent years has driven premiums down to a level that has caused problems in the market.

Stocks in Focus: Shell

This week I am writing on Royal Dutch Shell, a company I last wrote about in 2015, when it agreed to buy BG for a consideration of £47bn.

The integration of BG’s assets remains on track and with synergies from this deal and leveraging efficiencies, Shell has stripped $10bn of annual operating costs from its business.  On top of this, the enlarged company is continuing to drive down its debt ahead of targets and has reduced capital expenditure by $20bn.

While the integration of BG’s assets is running to plan, Shell cannot rest on its laurels.  A switch from fossil fuels to more clean energy sources over the long term will put pressure on demand.  One example of this is the move of car manufacturers towards producing electric vehicles (EV) or hybrids.  To counter the move away from fossil fuels, many of the big oil and gas companies are investing heavily in renewable energy solutions.  Shell has committed to invest up to $1bn per annum in “new energy” by 2020, including an investment in hydrogen production to rival the EV market.  While this is a fraction of their overall capital expenditure it shows that the company is trying to future-proof its business as the demand for oil inevitably falls.

Shell also highlights that there will need to be a stable source of electricity when wind and solar are not available.  The management see gas providing this stability and have increased their liquefied natural gas (LNG) capabilities with the purchase of BG.

The success of Shell compared with its peers will be determined by how well it manages this switch to renewable energy sources.  Any heavy investment now would be a drag on cash and the adoption rate for electric vehicles, for example, may be slower than anticipated.  However if Shell delays investing in renewable energy it risks being left behind in a declining sector.