Armageddon outta here
Preparing for a financial disaster might not be a bad idea
Dido Sandler
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A scene from Armageddon, the film that told the story of an asteroid heading towards Earth © Getty
Brexit negotiations fall off a cliff, causing a huge shock to the UK economy. Radical Labour then wins the next election and we are back in the 1970s, with a massive surge in public spending, interest rates and inflation, a balance of payments crisis, rocketing taxes and a run on the pound.
Clearly, a bad Brexit will not have the same global inflationary impact as the quadrupling oil price in the 1970s — a key catalyst then to the decade’s economic woes. Although some investment managers expect less profligacy from Labour than the party’s pronouncements suggest, when John McDonnell, the shadow chancellor, admits that he is planning for a possible sterling crisis, many feel that preparing for a financial apocalypse might not be a bad idea.
Life for the wealthy has become easier since the 1970s, yet in other ways more challenging. Workforces have become globally mobile, with money now transferred around the world at the flick of a button.
When former French president François Hollande introduced a 75 per cent tax on the super-rich, many wealthy French workers simply upped sticks and left, with London’s property market being one of the main beneficiaries.
In 1970s Britain, there were harsh foreign exchange controls preventing individuals taking their money out of the country. But they did not always work. Julian Chillingworth, chief investment officer of Rathbones, says Britons took flights to Jersey or Switzerland with suitcases stuffed with cash. “It was slightly embarrassing getting stopped in customs,” he says. “And people did get stopped.”
Nowadays, it would be very difficult for a government to limit financial flight, says Brian Tora, a consultant at JM Finn. But not imposible.
With better communications, however, has come transparency. In the 1970s, once assets were stashed safely offshore, they were difficult to trace. Whereas now, warns Rachel de Souza, partner in the private clients team at RSM, HM Revenue & Customs has the information to tax you on most worldwide income. More countries are adopting Common Reporting Standard rules, which have been brought in to tackle tax evasion.
To avoid HMRC’s clutches permanently, a wealthy investor would need to be out of the UK for five years, preferably living in a low-tax jurisdiction such as Switzerland.
Prime minister Theresa May at the European leader’s summit in October this year © Aurore Belot/AFP/Getty Images
Advisers have a host of sensible ideas to protect investors’ finances. De Souza suggests selling assets rich with capital gain to a third party or a company to lock in the gain at the present lower tax rate. The wealthy should also consider switching their investment mandate from income to growth, as capital gains tax should remain lower than income tax under a Labour administration.
Ben Simpson, chief executive of Menzies Wealth Management, says wealthy families should look into making gifts to kids, as no inheritance tax is payable if you survive seven years.
“Sometimes the simplest strategy is the best,” he says. And Jason Hollands, managing director of Tilney Bestinvest, recommends paying school fees upfront, to pre-empt the potential imposition of VAT — a key policy plank of a government under Labour leader Jeremy Corbyn.
Wealth managers are unfazed, however, about any potential hard left effect on investment performance. They typically hold only 10-15 per cent in UK equities in client portfolios.
Overseas income is usually taxed when crystallised. The UK markets reacted negatively to the vote for Brexit, but the aftermath was marked by a swift recovery.
Jim Wood-Smith, chief investment officer at Hawksmoor Investment Management, believes a Corbyn victory would provoke a similar reaction. “The markets will get over it,” he says.
“They got over hurricanes, got over North Korea sending a . . . ballistic missile over Japan.
They’re getting over a lot very quickly these days.”
St Helier in Jersey, where Britons in the 1970s took their cash to escape stringent foreign exchange controls © Matt Cardy/Getty Images
Most experts, however, would agree that the only certainty at present is the persistence of uncertainty. David Miller, executive director of Quilter Cheviot, says the wealthy should diversify across a range of assets, both paper and physical. They should look at property, gold, art, violins as well as securities in different areas of the world to insulate against government intervention or geopolitical shock, he says.
But even gold may not be safe. In the 1930s, President Roosevelt nationalised nearly all the physical gold held in the US. In times of financial Armageddon, even the investment of last resort might not be enough.
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