Buying a second home

In accessing the purchase of a second home or an investment property, three key factors stand out: the cost of borrowing, the property market outlook and taxation. In addressing the first point, we suspect that the current Bank Rate is nearing its peak at 4.25%. With inflation expected to abate this year, we predict this rate could fall to 3% by the end of 2024. Ultimately this has a bearing on the housing market, where property prices have fallen 5% since August 2022.

In addition, taxation is also something that should not be ignored. For example, the second home Stamp Duty Land Tax surcharge currently stands at 3%, which seems unlikely to change under the current government. But this could be different were Labour to win the next election.

Expanding internationally or working overseas

Many considerations are important and in a post-Brexit environment, these include taxation and legal rules.

When working abroad or expanding a business internationally, foreign exchange markets also make a crucial difference to your earning potential. Sterling experienced a tumultuous period last year, having briefly slumped as low as $1.03 against the US dollar when domestic concerns surged during the Truss era. This meant the exchange rate was favourable for those earning a proportion of their income in dollars.

Although Sterling has since recovered somewhat, it remains historically weak. Looking ahead, our FX forecasts suggest that this dynamic will swing against the dollar. If so, the sterling value of overseas earnings will fall, so it may be worth speaking to our team about your exchange strategy in advance.

Giving financial support to the next generation

Personalised investment advice is crucial when making any financial decision. As a starting point, it’s important to define the time period in which the help is to be given. In general, when investing, taking more risks may help to maximise returns over the long term.

For more immediate support, picking the highest yielding low-risk option could mean spreading cash across multiple savings accounts (to be covered by government deposit guarantees). In a higher interest rate environment, cash returns are more attractive again. We suspect policy rates may be near their peak, but will not fall back to pre-Covid levels in the foreseeable future.

The other side of the coin is that long-term investments that rely on low funding costs to perform well could underperform in the coming years. Careful asset allocation is key; our private banking team can connect you with our Investment Wealth & Investment specialists to explore the options.

Starting a new business or side project

If you’re considering starting a side project or launching or expanding an existing business, the outlook for the economy is fundamental. 2023 is not set to be an easy year, but many of the storm clouds looming have dissipated thanks to declines in wholesale energy costs. Of course, the viability of the sector you plan to operate in is key.

Interest rate trends have made borrowing more expensive over the past year or so, but we estimate that rates are currently near their peak and may begin to come down towards the end of the year.

Lastly, you should consider if the political environment likely to business friendly. The next election will perhaps take place late next year and while a different government could alter the tax regime, but we do not foresee a hostile shift in the approach towards entrepreneurs.

Making a big purchase

When deciding whether to make a large purchase at a high financial cost, you should  first confirm the motivation for the purchase. Is it for investment purposes, a pure indulgence or is it a mixture of both? Investments need to be considered more carefully, particularly to ensure that the item is not overpriced or being bought at the top of the market.

Either way, consider how easily the item might be sold at a later stage, if required. Many people forget that making a large purchase involves ongoing outlays. For example, for purchases of valuable items, annual insurance costs can be considerable.

Whether to fund the purchase by borrowing also needs to be assessed. Liquidating other assets may be an option but this can trigger a tax liability, so it may be worth exploring ways to leverage your portfolio or improve your cash flow.
 

Important information:

Any opinions, forecasts or estimates do not necessarily reflect the view of Investec Bank plc ("Investec"), its subsidiaries or affiliates. This commentary does not have regard to the specific investment objectives, financial circumstances or particular needs of any recipient and it should not be regarded as a substitute for the exercise of investors' own judgement. Investors should seek their own financial, tax, legal and regulatory advice regarding the appropriateness or otherwise of investing in any investment strategies and should understand that past performance is not a guide to future performance and the value of any investments may fall as well as rise. This commentary is confidential and may not be disclosed or distributed to any third party without the prior written consent of Investec.

The value of investments and any income from them can go down as well as up and you may not get back the full amount of your initial investment. Your capital is at risk.