It is difficult to assess the impact of a no deal Brexit upon one’s personal finances. Expert opinion on the likely impact is deeply divided.
In the event of no deal by default on 12 April, Sterling is expected to weaken further and global large cap companies, whose business is largely outside the U.K.to benefit. To some extent this scenario is already priced into UK stocks with FTSE 100 stocks having gained 9.6% since 1 January amidst the ongoing political uncertainty.
If a last-minute deal can be reached, or no deal does not result in chaos, then domestically focused smaller companies are likely to be beneficiaries. This has been termed the “Brexit bounce” by some commentators.
So, looking for balance in a portfolio of investments to provide all weather protection is key. Investors should also take a longer-term view and unless funds are needed for immediate spending, staying invested is likely to be the better long-term strategy. To some extent, stock markets are already priced for disruption and slower growth, so keeping calm and continuing to invest, is likely to be beneficial over the long term.
With a new tax year starting next week tax-free ISA savings can be topped up with up to £20,000 for over 18s and £4,368 for Junior ISAs. Doing so at the start of the tax year enables more dividend income to be received tax free. Assuming an average yield of 3.5% on the FTSE All Share, a full year of dividends is worth £700 of extra potential income if invested in April. Investing early, before 12 April, would also enable funds to benefit from a “ Brexit bounce” should Britain’s exit be smoothed by a cross party consensus.
For those who worry that a no deal exit could create a sharp downturn in GDP growth and prospective earnings, which negates any short-term currency gains, the answer may be to drip their ISA investment in over a period. Most ISA platforms offer the option of a monthly payment by direct debit or bank transfer. This could mean investors avoid sharp losses if no deal sends international investors into a panic but they could miss out on any rise should a smooth exit be the outcome.
Change of Direction
One way in which the Parliamentary logjam may be resolved is through a General Election. If investors are concerned about uncertainty, due to a change of Government, then higher taxes may be foremost in their thoughts. Labour has been clear it will increase taxes on the rich, which they define as income of £80,000 and above. Tax allowances for the rich may also be pegged back.
Anyone with income in the higher rate tax bracket (£50,000 or £43,430 in Scotland) may wish to use up tax allowances for pension saving. For most people this is the lower of 100% of earned income or £40,000. Higher earners may also wish to mop up any pension savings allowance unused in the three previous years and maximise employer matching contributions, just in case higher rate tax relief reduces in future.
Capital gains tax (CGT) could also be a target for reform for any incoming Government. With a top rate of 20% on investments and 28% on property, it is one of our lowest tax rates.
Realising gains within the CGT tax free allowance of £12,000 after 5 April reduces the potential tax payable. If not used each year this allowance is lost. Capital losses realised can also be carried forward indefinitely and offset against future gains, so crystallising these sooner rather than later could also be a smart if the ballot box is used to resolve the Brexit deadlock.