What it could mean for tax and estate planning

In such uncertain times, with the threat of a general election at any moment with more than a few potential outcomes, you could be forgiven for not paying much attention to last week’s Queen’s Speech, setting out how Boris Johnson’s government intends to shape the future of the UK post-Brexit.

Nevertheless, we have taken a look at the ‘associated background briefing’ to see if we can fathom what an ongoing Johnson administration might mean for those in tax and estate planning. While there isn’t a great deal of meat on the bone, there are still some items to note.

The background briefing mentions investment in growth multiple times and paints a rosy picture of economic conditions, with no mention of a potential recession after Brexit: “With a strong fiscal position, day-to-day spending under control, and a record low cost of borrowing, we can afford to invest more in growing our economy.” This is encouraging talk for all, especially the small businesses that are reliant on tax efficient schemes and government-driven incentives such as the Enterprise Investment Scheme and Venture Capital Trusts, to fund their scale-up journeys.

The government specifically refers to some sectors that have traditionally received investment through these incentives and that could drive the investment potential of companies in this space: Fintech, for example, is identified as an area in which the UK should be supported as a world leader.  

The Environment Bill places a strong focus on protecting the environment and the Financial Services Bill refers to, “Ensuring the financial services sector is supported to help meet the Government’s commitments on climate change”. Could this mean new legislative drivers for clean energy? Business Relief, peer to peer lenders and debt-based securities issuers are already well-embedded in this market place and well-placed to take advantage of any new incentives for green investments.

Another government focus is, “enabling the UK to be a world leader in the licensing and regulation of innovative medicines and devices, ensuring patients have access to the best possible treatments and supporting our domestic life sciences industry… Extending our global lead in personalised medicine and Artificial Intelligence in health.” This is certainly a field in which small, innovative companies can make huge and valuable breakthroughs, hence its popularity among some EIS and VCT managers.

Johnson already placed a spotlight on the sector in September by announcing a £200 million investment programme to support the very best and most innovative life sciences companies. The expectation is that this will leverage a further £400 million in private sector investment and will help ensure the UK life sciences sector remains dynamic and robust. 

In fact, the background briefing highlights “our world-leading excellence in science” as, “the foundation on which we can build the UK’s future prosperity and productivity, and tackle some of the greatest challenges facing society.”  It’s not surprising then that Johnson’s government is “committed to making the UK a global science superpower and a magnet for brilliant people and businesses from across the world.” Here, there is even a little more detail, with reference to, “setting out plans in the autumn to significantly boost public R&D funding, providing a framework that gives long-term certainty to the scientific community, and; backing a new approach to funding emerging fields of research and technology, broadly modelled on the US Advanced Research Projects Agency.” Could this introduce a competitive or complementary funding route to EIS and VCT? Or could it simply be a fast track for companies to meet the criteria specified for knowledge-intensive company (KIC) eligibility and then to reap the funding benefits?

After all, it is R&D activity that is a major part of the KIC qualification criteria and the government’s stated ambition is to reach 2.4% of GDP spent on R&D by 2027. The background briefing reports that every £1 of public expenditure on R&D leverages around £1.40 of additional private investment, thereby generating even greater returns for the UK.

This expenditure is already underway, starting this year with an increase in public spending on R&D by £7 billion over 5 years – the biggest increase in public funding of R&D on record.

But it’s not all new, young and exciting. There is also mention of later life concerns, with pensions and adult social care. As with much of the content of the Queen’s speech, there is a nod to some of the most high profile issues currently consuming the electorate. In pension terms, these include bringing in greater pensions protections for individuals and, “providing a framework for the establishment, operation and regulation of collective money purchase schemes (commonly known as Collective Defined Contribution (DCD) pensions).”

These have been seen as a solution to the UK’s binary legal framework for occupational pensions. Employers are now very wary of Defined Benefit pensions that expose them to unforeseen changes in longevity assumptions and investment conditions that have left some companies dangerously short of resources many years later. Currently the only option is to offer a traditional DC scheme, which leaves members at retirement needing to choose between an insurance company annuity or flexi-access drawdown, both of which can be problematic. 

With a DCD, members can access the benefits of a trust structure where investment decisions and the rate at which pensions for life can be paid from the trust assets are decided on the basis of pooled investment and mortality risk. Employers are responsible only for paying their agreed rate of contributions with no exposure to the future risk of unexpected deficits that they are required to make up if the assumptions used to calculate the benefits provided from the plan turn out to have been over-optimistic. 

Any increase in the types of pension available from individual companies, could potentially give later life planners a great opportunity to advise pension savers at a much earlier stage in their saving journey. It might also reduce further the popularity of annuities and simplify the individuals’ drawdown requirements.

Adult social care is a worrying potential black hole for many as they approach later life and the background briefing produces stark statistics that demonstrate why: 

“Care costs are unpredictable and can be very high, which can make it difficult for people to prepare. A person aged 65 can expect to have care costs of around £40,000 on average over later life. Around one in ten people will have care costs of more than £100,000 before accommodation costs, while around one in four will have no costs at all. This means many people risk spending the majority of the wealth for which they have worked hard to save. If they need care they will only get financial help with their costs when they have spent all but £23,350 of their life savings. Most people are unprepared for this, because the reality of care costs is not widely understood. The number of people aged below 65 who have care needs is also growing.”

The government commitment is to “bring forward substantive proposals to fix the crisis in adult social care, giving people the dignity and security they deserve.”

The statement that the government has given local authorities access to up to £3.9 billion more dedicated funding for adult social care this year, plus confirmation that councils will be provided with access to an additional £1 billion for adult and children’s social care next year, is encouraging news. While there is no information on where these cash boosts will come from, they could bring a reduction in demand for care fees planning and annuities, depending, of course, on how much of the funding shortfall the new cash covers.

While the background briefing provides brief information on plenty of new UK bills, there are strong indicators that the EU legislation baby will not simply be thrown out with the bathwater: It is intended that the Financial Services Bill, “will build on the extensive secondary legislation that the Government brought forward under the EU (Withdrawal) Act 2018 to ensure the effective operation of retained EU law, and thereby support the financial services sector.” There is also a commitment to implement the Basel standards to strengthen the regulation of global banks, in line with previous G20 commitments.

The implementation of further levels of Basel controls on banks is a worthy consumer protection and indeed an effort to shore up the security of the international banking system with higher capital adequacy requirements and risk assessment measures. However, it is likely to further restrict funding to smaller, younger, riskier enterprises to which it is more costly for banks to lend.

This leaves the many alternative finance providers that have filled this space, in a good position to grow further. Managers of Business Relief products in particular have benefited from undertaking specialist secured lending services and those issuing debt based securities and peer to peer loans have also taken advantage by building their services in the alternative finance sector.

Nevertheless, no matter how much EU legislation will remain after Brexit, the mooted Trade Bill makes no bones about “establishing a new independent UK body, to protect UK firms against unfair trade practices and ensuring the UK Government has legal powers to gather and share trade information as evidence to support UK firms against surges in imports and unfair practices.”

There is a suggestion that our future lies not with close ties to the EU, but in fact that a more productive focus might be placed further afield: “The EU estimates that 90 per cent of future global economic growth is expected to be generated outside Europe – a third of it in China alone. The Trade Bill will ensure we are ready to take advantage of trade opportunities with these significant markets after we have left the EU, benefitting UK businesses and consumers.“

There is also tacit recognition of the potential loss of skills that Brexit could result in with a drive to improve education standards and participation, bringing, “renewed focus to further and technical education, and will ensure our post-16 education system is well funded and organised in a way that enables young people and adults to gain the skills required for success and to help the economy.” 

The section outlining the Immigration and Social Security Co-ordination (EU Withdrawal) Bill also offers reassurance of the recognition of the importance of overseas talent: “Paving the way for a new points-based immigration system, which will be based on people’s skills and contributions to the UK, so that we attract the brightest and best people from the whole world following the UK’s departure from the EU.” This includes introducing, “a fast-track immigration scheme for top scientists and researchers.”

But the stark reality of the situation is clear: “Free movement as it currently stands will end on 31 October.“

So, there isn’t that much to go on, and what there is, has certainly been informed by a degree of political expediency. But there are clear growth intentions, an obvious requirement of post-Brexit Britain, and a driver for government initiatives that could be beneficial for the country’s individuals and investors.