The turbulent nature of recent years, not least the impact of the global pandemic, stock market volatility, the rising cost of living and rising inflation, has left no sector of the economy untouched, and so it is for wealth management.
There has been a marked change in the macroeconomic factors influencing capital wealth valuation, from the fiscal support policies introduced in the wake of the financial crisis, and latterly in response to the COVID-19 pandemic, to rising inflation rates and record-high taxation. Meanwhile, societal norms are evolving to champion a more considered approach to tax rates and planning, alongside greater enthusiasm for personal philanthropy and values-led investing. These changes are impacting significantly on personal wealth and asset protection.
How the pandemic has influenced private capital
Inflation has remained low for most of the last two decades. Since the financial crisis, this has been accompanied by low interest rates and fiscal stimulus packages rolled out by central banks – both factors that have recently been pushed further as governments and central banks have wrestled with the economic challenges of the pandemic.
This prolonged period of low inflation and low interest rates has been good news for those holding capital assets. This is demonstrated by valuations in a number of asset classes often held by clients, including residential property, forestry, and ‘growth’ companies – often in the tech space – earning remarkable valuations. This tendency is reflected further in capital markets, where the last year has seen a record level of merger and acquisition activity. While there will always be variation across sectors, the general themes have been very positive for private capital.
Due to the pandemic and other factors, however, inflation rates have started to climb. Ultimately, it would seem that we have now passed a tipping point, with inflation hitting levels not seen for a generation, driven by factors including a sharp hike in energy prices and unprecedented pressures on supply chains. As inflation increases, interest rates will inevitably follow suit. Concerns around this combination of factors has driven market volatility in the early weeks of 2022. International government stimulus packages, including the much heralded quantitative easing, have now substantially slowed or ceased altogether.
The effects of UK taxation
UK taxation is at a record high, and is set to rise further with the forthcoming increase in National Insurance contributions. Set against the rising tide of capital valuations, tax levels have perhaps not been as keenly felt as they might have been in a less stable economic environment.
On one hand, the tax taken from, for example, Inheritance Tax is at an all-time high, reflecting increasing values of estates. At the same time, levels of Stamp Duty Land Tax (SDLT) and Land and Buildings Transaction Tax (LBTT) act as a de facto wealth tax on higher value residential transactions.
The mood around tax planning has also evolved in this context. A combination of elaborate anti-avoidance measures, well publicised failures of tax planning schemes (some of which involved celebrities) are certainly important factors. But it may be that rising capital valuations have meant that the general desire for tax planning beyond the prudent has been less of a priority.
The evolution of ESG, philanthropy and values-led investment
For many, the deployment of wealth more in tune with positive ethical values is becoming increasingly important. Environmental, social and governance (ESG) considerations seem to have rapidly become ubiquitous when dealing with finances, as the benefits of impactful, ethical investment have struck a chord with people seeking to use their wealth to effect positive change. This is hugely welcome for a population grappling with unprecedented environmental challenges.
Furthermore, personal philanthropy continues to be a growing theme, demonstrated by the likes of the Microsoft founder Bill Gates and Leonard Blavatnik, the UK’s wealthiest person. The engagement of so many in ESG and philanthropy-focused activities must be easier when underpinned by a general rising tide in private wealth.
But, will changes in prevailing economic conditions impact upon these features in private wealth?
It would seem inevitable that higher inflation and interest rates alongside stricter fiscal and tax policies will act as headwinds for private wealth. For the sake of current and future generations, we must all hope the positive trends we are seeing in terms of ESG and philanthropy are now so embedded alongside the more values-led thinking of younger generations that they will continue to develop successfully, and reflect well on what private capital can achieve across society outwith the direction of the state.
We are entering a pivotal moment for private wealth, driven by shifts in the stable economic framework to which we have all become accustomed and a growing desire to use wealth to effect positive societal change. Planning prudently for the long-term has arguably never been as important, and we are here to help our clients and their families on every step of their journey.
For more information please contact Chris McGill, Partner in our private wealth and tax team, at [email protected].