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UK inflation is running at 11.1% (the highest in 40 years) and the tax burden is also the highest in over 70 years. Public stock markets in the US, UK and other western countries have fallen or held largely flat in 2022, with uncertainty still looming over the global economy in 2023 as we continue to face challenges such as the war in Ukraine. With issues like these high on investors’ minds, how can you best protect your wealth? In this article, our team at Bure Valley Group offers some reflections. To find out more about our EIS and other investment opportunities in our exclusive investor network, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:
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Watch out for taxes
The Autumn Statement in November 2022 did not announce any clear tax rises, but its measures are widely expected to raise the UK tax burden in the coming years. Higher earners should be especially mindful of the additional rate (45% income tax) which will start applying to earnings over £125,140 in April 2023 (instead of the current £150,000). The Annual Exempt Amount for capital gains tax will also go down from £12,300 per year to £6,000 at this time, and later to £3,000 in 2024. The tax-free dividend allowance will also reduce to £1,000 and then £500 at these times, respectively (down from the current £2,000 per year).
There is still time and options available in 2022-23 for high net worth individuals (HNIs) to try and mitigate the impact of these changes. One idea is to leverage pensions. A UK taxpayer can contribute up to £40,000 per year into his/her pension (or up to 100% of earnings for the year – whichever is lower). The contributions then receive tax relief at the individual’s highest marginal rate of income tax – i.e. 45% for an additional rate taxpayer. This could be a powerful way to not only boost a future retirement fund but also save on income tax in the short term. Another option is to make full use of your £20,000 annual ISA allowance, wherein you can generate dividends, capital gains and interest without tax. Your partner/spouse is also entitled to an ISA allowance, so you might consider transferring assets between each of you to take full advantage of unused tax and ISA allowances – especially before the April 2023 deadline.
Plan for inflation, but not too much
Inflation is currently in double-digit figures in the UK, eroding the spending power of each £1 and undermining the real returns from investors’ portfolios. The latter have come to feel pressure to change their investment strategies in 2022 to try and mitigate the damage – perhaps considering assets they might not otherwise have done (e.g. inflation-linked investments). Whilst inflation is certainly a challenge for UK investors in 2022-23, we encourage investors not to panic and not to overhaul their portfolios based on short-term events in the economy.
Bear in mind that the Bank of England has a 2% inflation target, which may be difficult for it to achieve right now. However, its legitimacy rests heavily on keeping the economy under control and it is unlikely that current inflation levels will be sustained for a long time. Indeed, analysts widely expect UK inflation to come down in 2023 as the initial market shocks over the Russian invasion of Ukraine gradually subside (assuming there are no further escalations, of course). If you are tempted to exit many of your investments and “retreat to cash” due to inflation and the uncertainty currently in the market, remember that this also comes with its own risks. Cash is especially vulnerable to inflation due to interest rates (from savings accounts) failing to keep up with inflation. Rather, investors can protect their wealth best by remaining true to the long-term investment strategy agreed with their financial adviser.
Consider early-stage investments
With this said, some investors may benefit from re-examining their strategy if their goals, risk tolerance or life circumstances have changed. Perhaps a portfolio also needs rebalancing in light of recent performance. If so, one option to guard against inflation might be to consider a range of startup investments for your portfolio. Early stage companies are higher risk compared to large established stocks, yet the potential returns can be significant – offering investors the chance to beat inflation not just in “normal” times, but also in unusual conditions like in 2022-23. Opportunities offered under the Enterprise Investment Scheme (EIS), for instance, might be of particular interest to investors due to the generous tax benefits on offer such as loss relief and up-front income tax relief. Working with a trusted investor network can be especially helpful to browse a range of pre-vetted startup projects alongside other experienced investors.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827