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If I was chancellor: eight wealth managers take charge of the UK economy

Later this week George Osborne will deliver his Autumn Statement, setting the agenda on tax, public spending and the huge task of slashing the deficit. We ask eight wealth heads what they would do if put in charge of the UK's purse strings for a day.

If I was chancellor....

In less than a week the chancellor will deliver his Autumn Statement, setting the agenda on tax, government spending and the huge task of cutting the deficit. While George Osborne is busy finessing one of his most anticipated speeches of the year, we asked Wealth Manager readers what they would do if put in charge of the UK’s coffers for a day.

It is little surprise that tax cuts ranked highly, along with more efficient regulation of big banks and innovative ways of kick starting growth.

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Jeremy Batstone-Carr, chief economist, Charles Stanley

As chancellor I would be extremely relieved the £35 billion transfer from the Bank of England’s Asset Purchase facility over this and the next fiscal year allowed me sufficient latitude to avoid a near-term breach of my second fiscal rule (public sector net debt as a percentage of GDP to be falling, at a fixed date, in 2015-16) which had looked under pressure as growth projections for both this fiscal year and ensuing years have slipped.

This small piece of good news is hardly likely to get me off the hook though. The UK economy has been severely impacted by the global financial and economic crisis and I continue to wrestle with the legacy left me by the previous administration.

Estimates for both real and nominal GDP are some 15% below pre-crisis trend levels and despite welcome good news in terms of Q3 GDP this seems unlikely to be more than a flash in the pan.

Although under some pressure from Nick Clegg to drop plans for significant additional austerity measures at a time when the economy is struggling, thanks to the above I may now be able to avoid the loss of face associated with letting a key target slip and suffer a potentially adverse reaction in the financial markets.

Of course as chancellor I'd be alive to the vocal concerns of my colleagues that a strident commitment to cut debt risks further crushing the demand so necessary to get growth back on track.

Confirmation from the ONS that total governmental pension obligations as at end-December 2010 were some £5 trillion, or 342% of GDP, only serves to redouble my desire to pursue supply-side measures aimed at improving the country’s record on productivity.

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Charles MacKinnon, co-founder of Thurleigh Investment Managers

First I would change the income tax to a flat rate of 25% subject to a tax free allowance of £20,000. There would be no deductions, no allowances, no exemptions, no national insurance.

Second, I would change capital gains tax to a flat rate of 10%, subject to an allowance of £20,000 per annum.

Third, I would abolish all tax exemptions on all products: ISAs, SIPPs, VCT, EIS, insurance bonds, all would become completely tax transparent.

Fourth, I would remove the exemption from capital gains tax on houses, and I would also abolish inheritance tax.

With regard to investment products, I would institute a grading system for all “packaged” product such as Oeics, Sicavs, unit trusts and ETFs or investment trusts; every product that was available would have one of three grades:

  • Very Risky: if you buy this you have no right of redress against anyone if you suffer a total loss of your capital;
  • Risky: if you buy this you need to carefully consider the real possibility of significant loss of capital, and you should seek qualified advice before purchase;
  • Regular: if you buy this you will be exposed to normal market risks of loss of capital and income.

With respect to providers of investment advice, I would propose that anyone who receives a fee for investment advice has to obtain a licence from the government, and this licence has to be displayed on their letter head, and this licence clearly states the level of insurance that the individual or firm has against errors or omissions, and the maximum amount that an individual could expect to receive in the event of the bankruptcy of the adviser or in the event of the receipt of bad advice.

These changes would enable individuals to arrange their affairs to reflect their needs, and not to be distorted to reflect tax rates.

This would have a huge benefit, as a tax return would be two lines; how much income and how much capital gain, and so vast numbers of tax collectors could be dispensed with, along with vast numbers of tax lawyers and accountants, a net benefit to society? People would buy a house they wanted to live in, and give it to their children if they wanted to, not when they thought they only had seven years to live.

They would buy investments knowing that if they went wrong, it was their fault not someone else’s.

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Robert Farago, head of asset allocation, Schroders Private Banking

If I were chancellor for the day, I would pop into my time machine and go back a generation to rewrite the rules on the management of government finances. I would cut spending when times are good to provide the room for an increase in spending during downturns without pushing the country’s debt to the unsustainable level we are at today. And I would make sure Gordon Brown was not allowed anywhere near the Bank of England’s gold.

If this particular fantasy stops at me becoming the chancellor, then life is more difficult and I am not entirely convinced this is a job I want. My best hope is to force banks, pension funds and insurers to buy the long-term government debt that I will need to continue issuing in enormous quantities and help stoke the inflation that is my only way out of this mess. I can do my bit by putting up the price of public sector services like train fares and university fees. For my own portfolio, I will be buying inflation-protected bonds, gold and the odd hedge fund that can profit from the inevitable volatility that these policies will produce.

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Richard Mannion, national tax director, Smith & Williamson

I would announce a major review of the role of taxes in the UK in the 21st century asking ‘back to basics’ questions like:

  • Do we need to have inheritance tax, bearing in mind it produces so little in tax?
  • Would it be fairer to reduce taxes on income and gains and increase VAT and other taxes on spending, provided that necessities like food were protected?
  • How best to sort out the interaction between benefits and tax, so as to prevent a re-run of the child benefits fiasco and the 70% effective charge on each extra pound earned by those on the lowest incomes.
  • How best to deal with non-doms and foreign companies in a globally competitive market place.
  • Very importantly, I would resist making minor tweaks which add to the volume and complexity of the tax legislation
  • I'd also point out the importance of proper consultation before new rules are introduced so that knee-jerk reaction should be unnecessary. Appropriate consultation would minimise many of the ‘unforeseen consequences’ caused by recent rule changes (consider the proposed exchanging of employment rights for shares. This sounded an interesting idea at first sight but has since been shown to be fraught with tax and other legal issues that don’t appear to have been considered).

I would acknowledge that employees’ national insurance contribution (NIC) is in truth an additional tax on earnings (giving marginal rates of 32%, 42% and 52%), class 4 NIC is an additional tax on profits and employers’ NIC is a payroll tax. I would recommend that the review should consider whether those taxes should be scrapped and replaced by a higher basic rate of income tax (which applied to all sources of income) and higher taxes on spending.

In the meantime I would significantly increase the levels for investing in shares and securities via an ISA to encourage more people to build a nest egg and increase the flow of funds to business.

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Mouhammed Choukeir, chief investment officer, Kleinwort Benson

I would first focus on genuine reform of the UK’s banks, which are the lifeblood of the UK (and global) economy. Reform will also ensure long-term competiveness of the broader UK economy. Banks must lend responsibly, have adequate capital buffers and distribute capital around the economy efficiently.

These things were not taking place prior to the financial crisis, and arguably, are still not taking place. One root cause of the issue is cultural. Bankers – investment, commercial and retail – are still incentivised to take large risks by receiving large bonuses for upside performance but not equivalent penalties for poor performance; this is what breeds a culture of intolerable leverage and risk. The culture of many banks has not changed since the mortgage crisis.

Second, leverage remains extremely high for many households and businesses. I would expand the “funding for lending” scheme.

UK households and firms cannot healthily deleverage if they are not increasing real income. Real incomes increase through productivity, innovation and an increased volume of transactions (increased velocity) which are the consequences of businesses borrowing and putting capital to use. This might sound contradictory to the earlier claim that banks should not lend excessively, but it is not, they should lend prudently.

Evidence suggests the pendulum has swung too far to the opposite side in the UK. There are many good loans to be made that are not being made.

Ultimately, there are a limited number of ways to deleverage: grow, inflate, save more or restructure. By far, the best option is to grow (with a limited and balanced amount of the other three). The government has to help the economy grow. It must use its power to borrow (at historically low interest rates) and spend intelligently in the economy, such as on infrastructure spending and consumption generating wealth transfers. This will boost spending in the economy and thereby boost employment and real income creating a virtuous cycle.

To focus on austerity at this point in the economic and business cycle will only prolong the recession. Real incomes and employment must take precedence over fiscal responsibility until the economy has regained traction.

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Paul Knox, head of wealth advisory EMEA, J.P. Morgan Private Bank

The important thing for the chancellor this year is to ensure that any new proposals are well thought through and have undergone the right degree of consultation and consideration prior to announcement. I am sure he will be seeking to avoid a repeat of last year’s PBR where the outcry over the granny tax, pasty tax and restriction on relief for gifts to charities needed to be subsequently withdrawn.

In terms of changes, I would like to see:-

  1. A reduction in the CGT rate. The increase in the CGT rate from 18% to 28% broadly coincided with the introduction of the 50% income tax rate. As the income tax rate comes down to 45%, a corresponding reduction in the CGT rate to say 25% would seem a logical consideration.
  2. The government has already announced proposals to apply a new capital gains tax charge on high value residential real estate owned by companies as well as the imposition of an annual tax on these properties. There are numerous complexities with these provisions and either a deferral of the introduction of these rules or rebasing/ transitional provisions to take uncrystallised gains out of the scope of charge would be welcome.
  3. For many years, the philanthropy community have been calling for a new “lifetime legacy” tax relief for charitable donations which would allow donors to make lifetime donations to charities in but to retain an income stream from the gifts made. Such a relief has been a major success in the US and a major factor why philanthropy is so much more prevalent and advanced than in this country. The introduction of such a relief in the UK would bring in a new era of philanthropic giving in the UK.
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Dominic O’Connell, head of tax trust and estate planning, Coutts

In recent years it appears tax legislation has been growing at an exponential rate. Unfortunately annual changes are inevitable but the first question I would ask myself is whether proposed changes will simplify matters, and if not what can be done to mitigate any complexities that may arise?

For example, the proposed Child Benefit claw back has prompted reports that an estimated 500,000 people could be brought into the self assessment system and may also result in tax professionals having to ask personal questions that could be deemed intrusive but may be necessary to clarify individuals' potential entitlement.

Perhaps these more practical issues need to be considered and recognised earlier on in the process.

I would, in fact, continue with the current government's commitment of consulting on draft legislation. This approach has been generally welcomed by the tax and wealth planning professions and so I would ensure that I paid attention to the feedback and constructive criticism and, where practicable, incorporate amendments into the final legislation.

Many small and owner managed businesses are benefitting from recent tax changes, such as, the increase to the lifetime limit of capital gains that could qualify for entrepreneurs' relief, increases in the amount of tax relief available under the enterprise investment scheme and the introduction of the seed enterprise investment scheme.

These reliefs are encouraging, particularly in difficult economic times, and so I would continue with this trajectory of using tax breaks to promote embryonic businesses whilst being mindful of any other measures that may thwart their growth such as the proposed income tax relief cap.

In the 2011 Budget the chancellor announced that, once the Government’s package of non-UK domiciled reforms had been introduced, there would be no other substantive changes to the taxation of non-UK domiciles for the remainder of the parliament.

There are other areas that could benefit from such certainty including pensions where there has been repeated speculation of impending changes to the availability of tax relief.

I would therefore seek to give certainty in key areas so that individuals can arrange their affairs to better plan for their future a thing that has to be for the greater good.

However, there are two sides to such a deal and I would look to tax professionals and wealth planners not to promote aggressive, or overly esoteric, tax planning ideas and to broadly adhere to the spirit and intent of the legislation.

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Graham Coxell, Rowan Dartington

Given that in these times of austerity the feel good factor has gone, we need to re-ignite our emotional wellbeing as a country in a way the Olympics did.

  • Corporate and social responsibility and giving could be at the core of this in times of austerity. Gone are the days where we measure our self worth on purely material factors such as our financial wealth.

  • The well-being of people, I’m certain, is more than ever at the very core of our recovery as an economy and country. We continue to grow, but are very much encouraged to help others
  • Investment in people should be encouraged more fiscally at a well-being level, as well as at a professional development level.

  • As an entrepreneur, I do feel there should be more government help to early stage/start-up business’s rather than the current charitable foundations, or indeed banks, who are simply not lending.
  • I would appoint a true panel of experienced and successful entrepreneurs from around the country, allocate budgets for them to invest, within an agreed mandate, within their local community - a bit like a more structured Dragons’ Den.

    Clearly this will facilitate the government having ‘skin in the game’ for the businesses they support, which will I’m sure pay dividends (literally) in the future, but more importantly it devolves power to a local and experienced level.

  • Moving on to a more ‘normalised economists view,’ I would:

    • I’d also create real incentives for the housing market to get it moving and improve consumer confidence, as in the US. Extension of the Funding for Lending scheme would be a natural policy to support this, equivalent to the mortgage-backed quantitative easing of the US..
    • I’d also remove 45%-50% tax band to encourage higher earners to base themselves back in the UK
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    Brewin Dolphin, headed up by Jamie Matheson

    Welcoming the government response to the Kay review, Brewin Dolphin thinks the government should go beyond these warm words and do more to promote the principle of long term equity investment and to encourage savers in the Autumn Statement.

    We believe the current situation where equity investment is heavily penalised by stamp duty, while for example CFDs – synthetic short-term instruments with little social benefit are tax free - flies in the face of this support for Kay.

    The impact of stamp duty which is a constant drag on UK equity markets and falls heavily on long term savers and pension funds, should be spread more thinly across the panoply of investment instruments - we would strongly support reform in this regard and would be pleased to see a move on this in the Autumn Statement.

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