“May you live in interesting times” says the ancient Chinese curse and surely this has never felt more truthful. From the election of President Donald Trump to ongoing clashes with Russia to economic turmoil in Latin America, there have been huge uncertainties in the world economy of late.
In the UK, the Brexit saga rumbles on. As we creep ever closer to separation from the European Union, it is still unclear what deal, if any, will be negotiated and how this will impact our economy.
When looking to forecast legacy incomes over the next five years it is impossible to discount the Brexit effect. It is, without question, one of the biggest challenges facing the legacy market. But how will incomes be affected?
We don’t yet know what form Brexit will take. Will it be a hard Brexit, will it be the dreaded ‘no deal’ scenario, or could Britain still negotiate favourable terms? When looking to make projections it is prudent to consider all these options as a possibility.
Our legacy forecasting model is structured to track the number of bequests received by charities and the average value of these bequests. The number of charitable bequests is closely linked to the death rate but is also directly related to other factors including the number of wills made and marketing by charities. The Office of National Statistics predicts that over the next 45 years the death rate will increase, and we believe that this will have a positive impact on the number of bequests received by charities.
Given that most wills will have been written before the end of our 5-year forecast period we do not predict that any outcome, positive or negative, will really affect the number of bequests in the short term. However, the value of any legacy that is left in a will is much more volatile, and this is where the Brexit effect is most likely to be felt.
With legacy values intrinsically linked to macroeconomic factors, whatever the outcome, Brexit will have a vital bearing on the legacy market. Share prices, inflation and growth in GDP all impact legacy values but the most important influence is house prices. Our analysis proves that the average residual bequest value correlates closely with increases and decreases in average house prices.
UK legacy income has seen reasonably good growth over the last five years and even over the last two (since Brexit). This is partly due to the time lags for such events to feed through to incomes. It’s also because Sterling fell significantly after the referendum, which stimulated business growth, especially for large exporters. Income has also been helped by the rising number of deaths over the past five years.
Oxford Economics (whose macroeconomic forecasts we use) assume that there will be some form of deal agreed by the UK and the EU, and that we will leave the EU in March 2019 as planned. They are in fact reasonably sanguine about economic prospects for the next five years, although there will be a slowdown 2018 – 2020 and house prices, in particular, will stagnate. National house prices are predicted to increase by 10.5% over the five years to 2022/23 (just 2% p.a.) but in some areas, such as London, they are likely to fall.
After reasonable growth in the economy over the period 2013/14 – 2017/18, all key elements of the economy affecting legacy income will deteriorate over the period 2018/19 – 2022/23. Legacy income growth will, therefore, slow from 6.2% p.a. in the last five years to just 2.4% p.a. over the next five.
Although growth will be subdued, the outlook is not entirely gloomy. Total legacy incomes will continue to grow, from £3bn in 2017/18 to £3.4bn in 2022/23, and cumulatively over the five years, total income will be £15.8bn.
The worst-case scenario for legacy income would be for the UK to crash out of the EU with no deal. In this hypothesis, the economy would be very badly affected, with house prices and share prices both falling significantly (particularly in 2019 and 2020). Should we leave without a deal it has been predicted that UK house prices could fall by more than 20%. Under this scenario, legacy income at the end of the forecast period would be about the same as it was in 2017/18.
Although it seems unlikely in the current political climate, if the Government were able to negotiate a considerably stronger deal than currently anticipated, then house prices are projected to increase by 18% and cumulative legacy income over five years would increase from £15.8bn to £16.5bn (a growth of 3.7% p.a.). However, if the UK crashes out of the EU with no deal, we predict that this figure will fall to £14.6bn. In other words, there is an almost £2bn difference between the optimistic and pessimistic scenarios.
The impact of the UK’s decision to leave the EU upon the legacy market may not be fully understood for several decades but it is important for our clients to be mindful of all possible eventualities and prepared for any outcome. For now, we continue to live in interesting times whilst we watch and wait for the outcome.
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