All change as the new tax year kicks in

The increased ISA allowance and lower rates for CGT (capital gains tax) will be very welcome. For those that can afford to put £20,000 into an ISA each year, there is the opportunity to build up a substantial sum sheltered from tax on investment returns.

The trend of reducing the amount that can be put into a pension (via lifetime allowance reductions and limits on annual contributions) and increasing ISA allowances may be partially motivated by a desire from Government to bring forward tax collection.

The lifetime ISA will also be popular with younger people struggling to save for the deposit on a house. Restrictions on withdrawals will mean it is not ideal for all, but for most the bonus will make it very attractive. Indeed, tax-free funds, including the Government bonus, can be used to buy a first home worth up to £450,000.

This limit seriously narrows opportunities for Londoners, with an average house price in the capital now above this figure, but younger people trying to get onto the

property ladder in Yorkshire, where the average property costs below £150,000, should welcome the initiative.

The lower rate of CGT should also prompt people with concentrated portfolios to consider again whether it is worth reducing large holdings in order to better diversify their risks.

Returns on individual equities are subject to a lot of company specific risk (e.g. as BP investors found out with the oil leak in the Gulf of Mexico). By holding a large number of different shares spread across market sectors these risks can be greatly reduced, but when rebalancing involves a large tax bill the trade off becomes complicated.

Whilst in most cases it is best to keep each position under 5 per cent of one’s overall portfolio, paying CGT to reduce positions a bit larger than this may not be worthwhile

unless there are good reasons to believe the new holding will offer better returns. However where the position is say 20 per cent or more of the total, the case for paying a bit of tax in order to reduce risk becomes a lot more compelling.

As CGT rates fall more people should take the opportunity to rebalance their portfolios; no doubt Mr Osborne is hoping they do.

The Chancellor continues to reduce the attraction of buy-to-let; the extra 3 per cent stamp duty on second homes has kicked in with the new tax year. In the next tax year the ability to set mortgage interest against letting income for tax will start to be removed.

Furthermore, buy-to-let investments will not qualify for the new lower CGT rates. A rush in buy-to-let buyers was reported before the end of the tax year, so there is a chance that there will be a sharp drop in such purchases now the new stamp duty rate applies and house prices will soften in response.

What would Brexit mean?

The possibility of a British exit from the EU is also a wildcard for investors. At the moment we believe that voters will opt for the relative safety of what they know rather than take a leap into the unknown, but we admit that a lot can happen before the vote and the shortage of previous such votes make behaviour difficult to predict.

If a Brexit begins to look likely or actually happens, what would the market impact be? We think the domestic demand for Gilts is so strong from the pension and insurance industry that yields would remain low and any short-term increase would be a buying opportunity. Sterling might suffer rather more.

Until a clear picture emerged, capital inflows could be expected to be very limited and foreign investors would be very likely to withdraw money.

Equities would probably be more mixed; most large multinationals would be positioned to cope and any fall in Sterling would boost the value of overseas earnings. For UK based exporters it could be more of a shock and whilst most could probably adjust to a new regime over time, in the short-term there could be considerable uncertainty even if they got a helping hand from currency weakness.

A further complication is that a Brexit would undoubtedly lead Scottish politicians to call for another referendum; maybe Yorkshire would be next to ask for independence!