Archive: Oct 2018

  1. Capital Gains Tax on Second Homes Liability and Planning

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    More people are selling second properties. This could give rise to substantial CGT liabilities. How are those CGT liabilities calculated? Advance planning can reduce those CGT liabilities.

    It would seem that some of the tax measures announced by George Osborne in his Budget in 2015 are beginning to take effect.  More and more people are selling their buy-to-let investments.  This naturally leads into considerations on potential capital gains tax (CGT) liabilities.

    Capital gains tax is payable on the profit made from the sale of property that is not the taxpayer’s principal private residence, as well as assets such as shares (that are not held inside a pension or ISA).

    Whilst no CGT is payable on the profits arising on the sale of a private residence, CGT is a reality on the sale of a buy-to-let property. After deduction of the CGT annual exempt amount, tax will be payable on the gain at 18% (to the extent it falls within the investor’s basic rate tax band) and 28% (to the extent it takes him or her into higher rate tax).  It should be noted that the top rate of CGT on residential property is therefore 28% – even for 45% income tax payers.

    And we can expect that HMRC is taking a keen interest in these transactions.

    It has been reported that HMRC is apparently cracking down on those who sell a second home or buy-to-let property but fail to pay tax on the profits.

    In this regard, apparently HMRC is to write to 1,500 people it has identified as having sold a property in the 2015/16 tax year but not declared a profit on which capital gains tax would potentially be payable.  The letter will ask recipients to explain why they have not declared the gain and paid any tax.  Failure to respond to the letter or provide an adequate explanation could result in a formal investigation and fines.

    As mentioned earlier there has been an increase in sales of buy-to-let properties after a series of tax changes, that began to come into force in April 2016, reduced their attraction to investors.

    The question is, is there any way in which the CGT tax bill can be reduced?

    The tax is levied on the capital gain that arises on disposal – this is the difference between the purchase price of the property and the price at which it is sold.

    Each individual has an annual capital gains tax exemption of £11,700 in 2018/19.  This is £23,400 per couple where the property is in joint ownership.  This, of course, is an investor’s total annual exemption and so, if the investor also has taxable capital gains elsewhere, these will count towards it. Losses from, say, the sale of shares or another property can be offset against gains.

    Furthermore, the investor can deduct from the gross gain any costs incurred in the process of buying and selling the property, such as legal fees, agents’ fees and SDLT.  It is also possible to deduct the cost of improvements, such as a kitchen extension or putting in a new bathroom.

    It is not possible to deduct mortgage interest, repair costs or the cost of replacing items, (known as running repairs).  However, in the case of buy-to-let properties, such costs will typically have been claimed against income in the year they were incurred. Matters can get complicated if an item is replaced with one of a higher specification, (in which case part of the cost can be offset against income and the other part against any gain.)

    If a property has been the principal private residence of the investor for part but not all of the time it has been owned by the investor, in principle, CGT will only be charged on the pro rata gain for the period during which the property was not the investor’s principal private residence. It is also possible to claim an exemption for the last 18 months of ownership whether the property was occupied or not.

    If a property that has been occupied as a private residence has been let out, it is possible to make use of lettings relief, which will reduce the gain by £40,000 — or the amount of the gain that is chargeable, whichever is lower. For investors who have more than one home that they have used as a private residence, they can nominate which will qualify for principal private residence relief. It does not have to be the one where they have lived most of the time.

    Generally, it would make sense to nominate the one expected to make the largest gain when the property is sold.  The problem here is that the investor needs to act quickly as they only have two years from when a new home is bought to make the nomination.

    Unmarried couples can each nominate a different home as their main residence and therefore benefit from two “principal private residence” exemptions. This does not apply to married couples or civil partners.

    When is the tax due

    The deadline for paying CGT is the last day of January after the end of the tax year in which the taxpayer realises the gain. For example, if the taxpayer sold a property on 1 August 2017 (in the 2017/18 tax year) the deadline to pay the tax due would be 31 January 2019.

    There are plans to change the rules to require tax to be declared and some paid on account on such properties within 30 days of sale. This is expected to come into force on 6 April 2020.

    Example – Frank

    Frank bought a house on 1 February 2006, for £120,000, lived there until 31 July 2010, and let it until it was sold on 31 January 2018 for £260,000. He will have made a profit of £140,000 over the 12 years he owned it.

    He is entitled to the principal private residence (PPR) relief for the time it was his main residence — in this case, the initial 54 months. A further relief is available for the final 18 months before it was sold, allowing him to claim PPR relief for 72 of the 144 months of ownership.

    Deducting £70,000 from the total gain of £140,000 (72/144ths) leaves £70,000 that is subject to capital gains tax (CGT) — assuming no other capital expenditure that could be used to reduce the gain further.

    Because Frank had let the house, a further £40,000 letting relief can then be deducted, reducing the gain to £30,000. From this he can deduct the annual CGT exemption in the tax year the property was sold — £11,300 in this case — pushing the taxable gain down to £18,700.

    If he were a higher or additional rate taxpayer, Frank would pay 28% tax, giving a bill of £5,236. If the gain kept Frank in basic rate tax, he would pay 18% or £3,366.

  2. How much should you be saving for your retirement?

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    How much should you be saving for your retirement?

    In most cases, the answer to this question is more than you’re putting in now! The minimum that you should be putting aside for your retirement plans, if you’re free of unsecured debts like credit cards and loans, is 12.5% of your income.

    But why 12.5%? Because it’s the first hour of an eight-hour working day, so the first hour you work every day goes to paying yourself before anyone else, including HMRC. That’s not the maximum proportion I recommend – it’s the minimum. If you’re nowhere near 12.5%, then it’s a case of trying to build up to it.

    An important step in doing that is to cut out all unnecessary expenses and follow my Bank Account System to reduce your outgoings.

    Mindset matters

    There’s no hiding that 12.5% is a chunk of anyone’s income, and we need to enjoy life now as well as in the future; we want to take holidays, have a great Christmas with the kids, enjoy new experiences – retirement is not the target of our life.

    12.5% is a starting point. Some people will think, ‘no problem’. Others will think I’m off the planet, because every month they have more days left over than pay cheque.

    That comes back to step 2 of my book The Money Plan: get financially well organised. You’ve got to know what you want in life and have a plan in place to get there. You’ve got to get your mindset right, which is why I spend about one-third of The Money Plan on financial mindset. It’s that important.

    If you are miles away from your targets, go through your expenditure items and see if you can squeeze them down. Look at all payments coming out of your account and ask the holy trinity of questions about each: do I need this, do I want this, can I get a similar experience for less elsewhere?

    You’ve got to plan for your future, and 12.5% is just the start; if you’re in your 50s or 60s with little in your pension pot, you’ve got to make big sacrifices to put more away so you can make your pension income last longer in your retirement.

    With that said, I’m realistic. If your employer pays a significant contribution to your pension, say 10% or even 15%, then that can make a big difference. You might even decide to redirect your savings onto your mortgage.

    The 40/40/20 principle

    After all unsecured debts are repaid and the financial fundamentals such as emergency cash, a will and power of attorneys are in place, I refer to what’s left over between your income and expenditure as a snowball, a surplus.

    A good way to be financially organised is to take that snowball and allocate it 40/40/20: 40% goes to overpaying your mortgage, 40% goes into your retirement plan, and 20% goes back to you to enjoy today.  I repay 20% back to enjoying today because I strongly believe that although we need to plan to ensure we have sufficient income for when we decide to stop working and retire, we should not live our life for our retirement – for the last quarter of our life, the 40/40/20 rule helps us achieve this financial balance in life.

  3. Working Beyond 65

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    The proportion of those aged over 65 still working is close to 11%.

    Source ONS 11/9/2018

    The latest unemployment figures, for the May to July 2018 period, showed the employment rate for those aged 16-64 was 75.5%, slightly lower than in the previous three months, but up 0.2% year-on-year. A closer look at the figures shows that the total numbers employed rose by 261,000 between May-July 2017 and May-July 2018. Of this increase, 99,000 were aged 65 and over – an annual increase of 8.5% in the employed over age 65.

    Drill further into the data and, as the graph above shows, the overall increase in workers aged 65 and over is being driven by a growth in the number of women working into (theoretical) retirement. This hit a record level of 8.1% in the latest period: ten years ago, it was only 6.4%.

    The graph shows a clear upward drift for both sexes from the start of the millennium. There are many reasons behind this trend, but one is undoubtedly that some people are having to work to finance their lifestyle, a point worth making to any client reluctant to review their pension provision.

  4. Get Smart About Credit (DEBT) Day

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    We’re a nation built on credit, but we don’t have to be. We’re creatures of habit, and it’s become normal for us to get credit cards and use them. I’d like to see that change.

    In the US, the third Thursday every October is Get Smart About Credit Day, and we should piggyback on that here. It could be called Get Smart About Debt Day, because that’s exactly what credit is, it’s not our credit, it’s our DEBT!

    Whatever you want to call it, use the day to begin the process of climbing out of debt with my simple tips.

    Get organised

    The first thing you must do is to take your head out of the sand. Yes, it’s tough, it can be unpleasant if you’re not really sure of your situation right now – but facing up to things is the only way to start.

    Step 2 of my book The Money Plan is to get financially well organised, so it’s time to make a spreadsheet. Call your credit card providers or go online, and get the information you need: the balance, minimum monthly payment and the interest rate of each credit card or debt you have. If it’s a loan, you also need to know the term (duration) of the loan.  If you struggle with this, go to my site and download my free Debt Organisation Template.

    Next, try to get the best interest rate you can with each provider. Call them and see if they can reduce the rate you’re paying, especially if you can get a better rate elsewhere, tell them and see what they say?

    Consolidation is no consolation

    I’m not a fan of debt consolidation, which is loading all your debts onto one credit card or loan, even if it’s an interest-free arrangement. We’re emotional beings, and whether you’re five years old or 65 years old, we like to get a pat on the back.

    As adults, unless you’ve got a great boss, we rarely get one, so we have to give ourselves those wins.

    By keeping your debts separate, when you pay each one of them off, you get a win; a ‘Yes, I did it!’ If you consolidate your debts, that win comes so much further down the line. Psychologically, that’s much harder for your journey to debt-free.

    That’s why I believe it’s better to keep your credit cards and loans separate. Mindset plays a huge part in getting out of debt, and those wins are crucial.

    Snowball your way out of debt

    Once you’ve got a spreadsheet detailing all your debts, arrange them into order from smallest balance first to largest balance last – NOT in order of interest rate. For each account, pay off the minimum amount every month, to make sure you’re protecting your credit rating and not getting any extra fees added.

    To attack your debt, you pay your snowball – the surplus money you have left over each month – onto the smallest balance first. The idea is to rapidly and aggressively do whatever it takes to pay that smallest debt off, to get a win and feel good about the process and your progress. You’ll be so much more motivated to clear off your next debt this way.

    Once that first debt is gone you take your snowball, plus the minimum payment you were paying on the first debt, and pay it all towards your second-smallest debt. Repeat this process over and over until they’re all gone.

    My Snowball spreadsheet on my site is set up to help you do this automatically.

    Earning more

    You have two choices to pay down your debt as quickly as possible: bring more money in, or cut down on what’s going out. Unfortunately, there’s no magic spell!  Some ideas to increase your income include:

    • If you’re on a modest income or have children, use the website to see if you are entitled to any benefits.
    • When it comes to your job, if you’re not on a fixed pay scale then there may be ways to increase your earnings; can you do any overtime? Can you add more value to your company, increasing its turnover and with it your salary? Can you ask your boss outright what would need to happen in order for you to get a raise?
    • Alternatively, look outside your usual role, for example by freelancing or selling your skills online. Technology has made it possible for anyone to earn money from home and compete with much bigger businesses.
    • Sell unwanted items. This is the best time of year for you to clear out all the things in your house you haven’t used for 12 months, as Christmas bargain hunting begins! Thanks to sites such as eBay and Facebook, it’s never been easier to make money from unwanted items.

    Spending less

    I have a Bank Accounts System that works brilliantly for any level of finances. It automates your money as much as possible, taking emotion out of everyday financial decisions and giving you control over your spending. Here’s how it works:

    1. Set up two bank accounts, one for bills and another for personal spending.
    2. Automate ALL your regular payments using standing orders and direct debits and have these come out of your bills account – which is also where you have your income paid. Go through each payment and ask yourself three things: do I need this, do I want this, can I get a similar experience for less elsewhere? You might be surprised at how much you can save, from TV packages to utilities to refilling water bottles and having coffee at home instead of out.  My expenditure spreadsheet at gives you ideas for all your expenditure items.
    3. Put some WAM into your life! WAM is your weekly WalkAbout Money, and it pays for all your variable spending and fun: wine, coffee, haircuts, car fuel and so on. Work out how much you want (or have) to spend in a month after your outgoings, divide it by four, and you’ll get your weekly WAM.
    4. Set up a weekly payment for this amount from your bills account to your WAM spending account. Set it for a Wednesday, because then you don’t have too long to wait after the weekend, which is when most of us spend our cash, until you will be paid again – it’s all in the psychology and it’s automated!
    5. Your WAM is your weekly allowance; it’s finite. DON’T dip into your bills account for more if it runs out, it’s not too long to wait for the next Wednesday to come around!

    This system gives you boundaries that stop you overstretching: if you can’t afford something, save a little of your WAM each week until you can. The bank accounts system works for everyone from those on low income through to very high-net worth individuals, and it will work for you too.

    Warren Shute is the author of bestselling personal finance book The Money Plan, available on Amazon, and was named the UK’s Financial Professional of the Year.


  5. Bank of Mum and Dad at risk or not?

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    Over recent years the so-called Bank of Mum and Dad has been an increasingly popular way to help first time buyers get onto the property ladder. However, an article claiming that, “The Bank of Mum and Dad risks going out of business” appeared in the Financial Times last week. On the other hand, a report produced by Legal and General (L&G) suggests that what has become known as the Bank of Mum and Dad (aka Bomad) is still very active.

    So, is Bomad at risk or not?

    Given the low interest rates at present, whilst mortgage repayments may be affordable, average property price is still too high. And for many, they don’t have the necessary funds available to pay the deposit – which is why Bomad has played a very active part.

    In their report L&G say that some 50,000 UK property transactions this year will be enabled by parents digging into their pension pots. A further 23,000 will be supported by annuity income and another 44,000 will be supported by parents releasing equity from their own home.

    According to L&G around one in five of the over 55s who help their children on to the property ladder are doing so by accepting a lower standard of living for themselves and one in ten say they feel financially less secure as a result of doing so.

    Whether or not the Bank of Mum and Dad is truly a risk is yet to be seen. However, there are a number of different ways in which parents can help their children (or even grandchildren) to get on to the property ladder, although for some parents giving away money too early can result in them not having adequate resources for themselves in the future. It is therefore vital that they fully consider their own requirements first before taking any action.

    Any of the following options could be considered depending on the parents precise circumstances:

    1. A gift –parents could make an outright gift to their child and provided they survive seven years from the date of making the gift it will be exempt from inheritance tax. This option will be more suited to those who have adequate funds available for their own needs and wish to mitigate inheritance tax in the process.
    2. Use exemptions –even if parents can’t make a large gift they could jointly use their annual exemptions (up to £6,000 each, so £12,000 in total if unused in the last tax year) to help with property purchase/stamp duty costs/moving costs etc..
    • A loan– a payment could be made via a loan. In this case it is advisable to sign a loan agreement which sets out the terms of the loan and makes it clear that the payment is not intended to be a gift because this will avoid any misunderstanding in the future. And, as a loan is repayable this will be most suited to parents who are unable to make a gift as they may require access in the future.
    1. A Trust –the parents could consider setting up a trust for their child, although in this case it is important to consider any capital gains tax issues which may arise on a subsequent sale and also stamp duty land tax issues if the parents already own a property.

    While this provides a summary of a few options which are available, like with any planning advice will be key.

  6. The Markets so far in 2018

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    The third quarter of 2018 is over. Returns have been mixed, with the USA the standout performer.

    For markets it has been an interesting nine months, with a fair slice of performance – good and bad – down to what has been happening in the USA, but what else would one expect with it being about 52% of the world market cap. The country has experienced three hikes in interest rates (with another still earmarked for December). On this side of the Atlantic, the Brexit process has rumbled on with no clear end yet in sight, while the Eurozone ended September with a renewed round of jitters about the financial profligacy of Italy’s populist government.

    For all the noise, many markets are little changed across the first nine months of 2018, a fact illustrated by the graph of the Footsie for the year to date:


    Looking more broadly, the nine-month out turns are shown below:



    YTD Change

    FTSE 100




    FTSE 250




    FTSE 350 Higher Yield




    FTSE 350 Lower Yield




    FTSE All-Share




    S&P 500




    Euro Stoxx 50 (€)




    Nikkei 225




    MSCI Em Markets (£)




    MSCI ACWI (£)




    2-yr UK Gilt yield



    10-yr UK Gilt yield



    20yr US T-bond yield



    10-yr US T-bond yield



    2-yr German Bund yield



    10-yr German Bund yield















    UK Bank base rate



    US Fed funds rate



    ECB base rate



    A few points to note from this table are:

    • The FTSE 100 has been on a rollercoaster ending up slightly short of where it started the year. Add in dividends – the yield on the FTSE 100 is now 4.01% – and the market produced a small positive total return.
    • The FTSE 250, regarded as a better yardstick for UK plc (although still with a weighting of overseas revenues of around 50%), has performed much the same as its FTSE 100 multinational counterpart. The problems of the retail sector have continued, along with Brexit uncertainties.
    • The US market performed strongly, helped by tax cuts and rising revenues. Rising interest rates and the vagaries of Donald Trump economic ‘policies’ seem to have passed the market by, witness the longest ever bull run for the S&P 500 recorded recently.
    • The Eurozone economies showed signs of losing momentum, with politics casting a cloud in Italy.
    • Emerging markets were the worst performers hit, as earlier in the year, by the rising US dollar and interest rates, with the most obvious victims once again Turkey and Argentina.
    • Bond yields have headed upwards over 2018 in the UK and US but remained flat in the Eurozone (excluding Italy). A fourth US rate rise is expected in December, with the next UK increase possible in February unless the inflation numbers improve and/or Brexit talks break down. The yield on 10-year US Treasury Bonds appears to be settling above 3% and is still close enough to the 2.7% 2-year bond number to keep some pundits watching for an inversion of the yield curve, followed by a recession.