Archive: 2017

  1. Let Property Campaign: Guide to making a Disclosure

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    HMRC has recently updated its guidance on the Let Property Campaign.

    The Let Property Campaign is for landlords who owe tax through letting out residential property, in the UK or abroad, to get up to date with their tax affairs in a simple and straightforward way.

    It includes:

    • those that have multiple properties
    • landlords with single rentals
    • specialist landlords with student or workforce rentals
    • holiday lettings
    • renting out a room in your main home for more than the Rent a Room Scheme threshold
    • those who live abroad or intend to live abroad for more than 6 months and rent out a property in the UK as you may still be liable to UK taxes

    Those who are unsure whether they need to disclose unpaid taxes under this campaign can use the Let Property questionnaire to help them decide.

    Full details of the campaign and how to make a disclosure can be found here.

    This is an ideal opportunity for property investors to ensure their tax affairs are up to date and an early disclosure will result in lower penalties and interest being payable. Property investors should also be made aware that if HMRC accepts a disclosure they do not necessarily have to make an upfront payment as HMRC accepts various payment methods and will allow individuals to spread payments.

  2. Save your first working hour and make it automatic

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    Helping clients to make the right choices for regular savings and lump sum investment is one of the key roles of financial planners.  Making the wrong choices can cause serious financial detriment and this consequence, together with relative complexity over the choices and difficulty in “self-serving” the answers, are the three key components underpinning most needs for advice.

    Self-evidently an understanding of the investor’s attitude to risk, fear of loss and time-based financial goals (along with an understanding of all their financial assets) will substantially underpin the choice of investment fund or funds appropriate for the client. As a result of this understanding an appropriate element of risk reduction will be baked into portfolio construction through the development of an asset allocation strategy.

    A desire for tax efficiency will also usually be present, or at least it should be.  After all, reducing “tax outflow” will enable financial goals to be more easily reached. Tax efficiency will also allow a little more investment risk to be taken with the resulting possibility of more return.  Nothing being guaranteed of course – well, not without cost!

    In the quest for tax efficiency for the portfolio selected, pensions and ISAs are the recognised “no-brainers”. Once these are “filled up” though (limits reached) then (leaving aside VCT/EIS for the moment) attention will turn to investment bonds and collectives.  The tax implications dependent on the underlying portfolio can be material.  The changes to dividend taxation, the taxation of interest and capital gains tax all have a role to play – along with charges and how and when they are deducted of course.

    As well as advising on investment portfolio and product wrapper choice, though, it seems that we have a job to do to encourage some people to save a bit more in the first place.  According to new figures from the Office for National Statistics (ONS), UK households have responded to a tight squeeze on incomes from rising inflation, taxes and falling wages by saving less than at any time in at least 50 years.  It seems that only 1.7% of income was left unspent in the first quarter of 2017.  This is the lowest savings ratio since comparable records began in 1963.

    The UK consumer trend since Brexit seems to have been to borrow and spend – a powerful but worrying combination.  Powerful, as it has caused the economy to continue to grow.  But, worrying because, as the savings ratio falls, economists and policymakers are likely to be worried about how much consumer spending can contribute to growth in the months ahead.  Apparently, over the past 54 years the savings ratio has averaged 9.2% of disposable income.  The trend currently, though, is materially declining.  In the first quarter of 2016 the savings ratio was 6.1%, already below the long-term average, and it fell to 3.3% by the fourth quarter of the year.

    The ONS said that the fall was mostly caused by a rise in taxes on incomes and wealth, which led to a fall in household disposable incomes that was not matched by a corresponding drop in spending.

    Part of the rise in taxes was temporary, the ONS said, resulting from high tax payments in early 2017 on dividends paid a year earlier, but it added that not all of the drop was explained by temporary factors.

    They say “the underlying trend is for a continued fall in the savings ratio”.

    It seems that the Bank of England had expected the savings ratio to rise in the first quarter of the year.  In its May inflation report, it thought the drop at the end of 2016 was due to volatile factors and “the headline saving ratio is expected to have risen slightly in the first quarter of 2017”.

    Now it may well be that this “low savings” malaise is less likely to be present in the clients of financial planners with whom the planner has a strong and influential relationship. In which case maybe the planner has a strong role to play in helping the client embed a regular savings habit in their children/grandchildren. To do so can, obviously, have really beneficial effects for individuals’ long-term financial security.  Establishing the right habits early in life is undeniably a good thing – but eternally difficult in this day and age.

    Giving a young individual the gift of financial discipline founded on an acceptance of deferred gratification is one of the greatest things a financial planner can do to enhance intergenerational financial wellbeing for their clients and, ultimately, for themselves by protecting and expanding their client relationships.

    We suggest you pay yourself first, it’s the best financial discipline you can have and to make it easier on yourself, make the saving automatic.  Saving the first hour of your working day.  So if you’re working an 8-hour day save 1 hour or 12.5% of your gross income.

    The best place for most people to save this will be an automatic deduction from your pay into your employers workplace pension, so it’s deducted before you even see it!

    Allow the money to compound and grow overtime, so you will have a happy retirement.

    Happy saving folks!

  3. Half Way Point of 2017 Check In

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    The first half of 2017 is over, where did that time go!  The last 6-months marked the end of another politically turbulent period in the UK. The view across the six months belies the upheaval that took place: the most widely quoted yardstick of the UK stock market, the FTSE 100, nudged up a little under 2.5%. Elsewhere, there were some sharper movement, as the table below shows

     

    30/12/2016

    30/06/2017

    Change in H1 2017

    FTSE 100

     7,142.84

     7,312.72

    2.38%

    FTSE 250

     18,077.27

     19,340.15

    6.99%

    FTSE 350 Higher Yield

     3,753.53

     3,768.50

    0.40%

    FTSE 350 Lower Yield

     3,709.13

     3,953.53

    6.59%

    FTSE All-Share

     3,873.22

     4,002.18

    3.33%

    S&P 500

     2,238.83  2,423.41

    8.24%

    Euro Stoxx 50 (€)

     3,290.52

     3,441.88

    4.60%

    Nikkei 225

     19,114.37  18,909.26

    -1.07%

    Shanghai Composite

     3,103.64  3,222.60

    3.83%

    MSCI Emerg Markets (£)

     1,305.65  1,455.96

    11.51%

    UK Bank base rate

    0.25%

    0.25%

     

    US Fed funds rate

    0.50%-0.75%

    1.00%-1.25%

     

    ECB base rate

    0.00%

    0.00%

     

    2 yr UK Gilt yield

    0.11%

    0.37%

     
    10 yr UK Gilt yield

    1.24%

    1.33%

     
    2 yr US T-bond yield

    1.16%

    1.38%

     
    10 yr US T-bond yield

    2.46%

    2.28%

     

    2 yr German Bund Yield

    -0.79%

    -0.57%

     

    10 yr German Bund Yield

    0.11%

    0.47%

     

    £/$

     1.2357  1.2990

    5.12%

    £/€

     1.1715  1.1389

    -2.78%

    £/¥

     144.1202  145.9505

    1.27%

    Brent Crude ($)

     56.75

     48.99

    -13.67%

    Gold ($)

     1,156.40

     1,242.25

    7.42%

    Iron Ore ($)

     79.65

     63.00

    -20.90%

    Copper ($)

     5,500.00

     5,954.50

    8.26%

    A few points to note from this table are:

    • The US market performed better than the UK, helped by the continued strength in a small number of big cap technology stocks. However, for UK investors on this occasion the dollar worked against them as it fell 4.9% against sterling over the period. The demise of the dollar can be blamed partly on fading expectations that a Trump bump would lead to a rapid rise in US interest rates
    • The FTSE 250, regarded as a better yardstick for UK plc (although still with a significant weighting of overseas revenues), was more resilient. The FTSE 250 breached 20,000 for the first time in May. However, it too succumbed after the election. With the FTSE 250 achieving almost 7% growth in the six months, the result has been that the FTSE All-Share (roughly 80/20 FTSE 100/FTSE 250) outperformed the FTSE 100 by almost 1%.
    • The FTSE 100 has been on a rollercoaster, peaking at 7,377 in mid-January, dropping to 7,099 by the end of the month, then rallying back up to 7,430 by mid-March before diving to 7,114 in mid-April (on the election announcement). Thereafter it rose again to 7,548 in early June on opinion poll optimism, with an inter-day high almost breaching 7,600 before descending in the wake of the voting reality.
    • Against the backdrop of the Eurozone’s continued monetary stimulus, the euro strengthened and continental stock markets posted a positive return. Some of that was down to political clouds clearing in the Netherlands and France as populists failed to gain power.
    • Bond yields headed upwards over the first half, except for 10 year US Treasuries. The Federal Reserve put through two rate rises, with a third likely after summer. In the UK, the June vote of the Monetary Policy Committee suggested that a UK interest rate rise may be nearer than had been expected. Statements from Mark Carney and Andy Haldane, the Bank of England’s chief economist, have spread uncertainty. For now, the notion that there will be no move in the UK until 2019 has been largely abandoned.
    • Commodities had a mixed first half, with gold responding to the dollar’s weakness. The most notable change was in the price of Brent Crude, which sunk back below $50 despite OPEC’s decision to continue production limits.

    A look at these six-month figures is a reminder of just how much day-to-day noise can hide what is – or is not – happening to investment returns.

     

  4. June Interest Rate Decision

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    An increase in interest rates could be nearer than anyone thought!

    Thursday’s meeting of the Monetary Policy Committee (MPC) of the Bank of England was expected to be a non-event. A Reuters poll of economists revealed that not one expected a move in base rates from the 0.25% set in the wake of the Brexit vote last year. They were all proved right, but…

    Of the eight MPC members, three external members voted for a rate increase. It was the first time since 2011 that there had been three votes for a rate rise – and that was when the MPC had nine members. The 3-5 vote was a shock to the market and gave a brief boost to sterling.

    The Bank’s statement noted that “CPI inflation has been pushed above the 2% target by the impact of last year’s sterling depreciation.  It reached 2.9% in May, above the MPC’s expectation.  Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services.  The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.” That concern about over-target inflation seems to have been the reason why the trio voted for a 0.25% rate increase, despite recent evidence that growth is slowing.

    One of those voting for the increase, Kristin Forbes, was attending her last MPC meeting. The election hiatus means that her replacement has not yet been chosen. Neither has a replacement been named for Charlotte Hogg, the deputy governor who resigned in the wake of a grilling from the Treasury Select Committee. In theory Mr Hammond could name two new members in time for 3 August’s MPC meeting, changing the voting mix significantly. Even so, yesterday’s general assumption among commentators that rates would not rise until 2019 is now probably consigned to history. 

    Across the pond, the US Federal Reserve increased its main short term rate by another 0.25% on Wednesday, taking it to a 1.00%-1.25% range. The Fed also set out the first steps to unwinding its bloated $4.2trn balance sheet, the result of its quantitative easing programme. The Bank of England still looks a long way behind…

  5. The Government Incentive To Save

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    My son will be 18 and I want to pass him £4,000 soon in recognition of his achievements?

    It’s impossible to suggest the most suitable investment without understanding a person’s needs in detail. However, I believe the new Lifetime Individual Savings Account (LISA) is worth consideration and there are already a variety of deposit and investment options within ISAs. The LISA was available from 6th April 2017 and is very attractive to anyone under the age of 40. The government will pay a bonus of 25% of the contributions made each tax year and this is available until age 50. Anyone born on or after 7th April 1977 will be able to open a LISA, but note those born in April 1977 had to have opened the LISA on launch day or very soon after. If a LISA starts at age 18 as much as £32,000 in bonuses is available if saving £4,000 each year to age 50. Of course I suspect the rules may change during the lifetime of the ISA, just as the current ISAs and pensions do.

    LISA offers an alternative to a pension and assists people when buying their first home as long as the property value is less than £450,000. The account must be open for at least a year before being able to make a withdrawal for house purchase. At the date of the property purchase the LISA provider will also claim a bonus for the current tax year savings so it will be beneficial to ensure savings are maximised prior to completion of the purchase. There will be a withdrawal penalty for any money taken out of the account before the age of 60 unless it is being used in first time home buying. The government will want the bonus back and a 5% penalty. Consultation is on going on the ability to take loans from the LISA before age 60 too, so you do not lose the bonus. Look out for further announcements before April 2017.

    Young savers will benefit from 2 incentivised savings products: auto enrolment at work (receives employer contributions and government bonus) and LISA (just a government bonus). Both are tax free in life, but auto enrolment schemes cannot be withdrawn from prior to age 55 (just 25% is tax free when you do) whereas a LISA is wholly tax and penalty free from age 60. It would not be surprising to find LISA is offered alongside workplace pension schemes in the future.

    If you have any questions regarding the LISA or any other Financial Planning queries  please contact us.  

  6. IHT Windfall to Follow Rise in Millionaire Numbers

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    Rise in millionaire numbers will mean even more pushed into the UK inheritance tax net.

    According to recent research carried out by financial services company NFU Mutual there could be a rise to almost 500,000 millionaires in the UK this year meaning the growth in wealth will push more people into the inheritance tax net – especially given that the nil-rate band remains frozen at £325,000 until 2021.

    By analysing HMRC’s UK Personal Wealth Statistics, NFU Mutual found the number of millionaires in the UK rose 27 per cent to 409,000 between 2008 and 2013.

    The company has predicted the number of millionaires in the UK could reach 495,000 this year and 585,000 by 2020, based on the rate of previous wealth increases.

    Takeaway:

    It is inevitable that as a result more and more people are likely to need to consider inheritance tax planning. The individuals ought to make use of exemptions as a starting point and that there are other tried and tested schemes such as loan trusts and discounted gift trusts which can be used to provide an inheritance tax reduction with continued access for the settlor and a insured family trust offers flexibility at a fair price.

    If you would like further advice on Inheritance Tax Planning or any other financial matters please call on 01793 771093.

  7. Marriage Tax Allowance – What Is It?

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    As you may be aware the Government has introduced a tax break called the Marriage Tax Allowance.

    The allowance, which came into effect from 6 April 2015, is available to couples who are married or in a civil partnership and enables a transfer of a proportion of their tax free personal allowance between them.

    The transferable amount for 2016/17 is set at £1,100 (10% of the personal allowance) and will change each year as the personal allowance increases.

    To be eligible to claim you must:

    • Be married or in a civil partnership,
    • One of you needs to be a non-taxpayer (which usually means earning less than the personal allowance),
    • The other person needs to be a basic rate (20%) taxpayer, and
    • You must both have been born after 6 April 1935 as there is a different tax allowance for couples where one partner is born before this date.

    HMRC have stated, however, that to date fewer than 1 in 10 eligible couples have applied for the tax break. It is thought that this might be because many people simply aren’t aware of the new allowance or that it can be quite time consuming to claim for the tax break, which is worth £220.

    An application for the Marriage Tax Allowance is a straightforward process and once in place the election will remain until one of you cancels the election or your circumstances change e.g. because of divorce or you become a higher rate taxpayer.

    Where both partners have already filed a self assessment tax return, the claim to transfer can be made when completing their self assessment tax returns.

    Alternatively the non-taxpayer can apply online to transfer their allowance and HMRC will include the additional personal allowance in the partner’s tax code. Where the partner does not have a tax code, i.e. where they are self employed, the additional personal allowance can be included in their self assessment tax return for the year to reduce their tax liability.

    Should you wish to take advantage of this tax break go to https://www.gov.uk/marriage-allowance

  8. Care and the Conservatives – General Election 2017

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    With the General Election looming over us and the election polls ever-shifting, nobody knows which way the scales will tip on 8th June.  However, there have been some interesting topics for discussion raised in the recent weeks. As many will have seen in the recent press, care and the ‘capping’ of care costs is a hot topic for discussion on the Tories manifesto, not without the controversy to ensue, naturally. In this post, we will look at exactly what has been discussed, and what it may mean for us.

    What are the proposals?

    Our PM, Theresa May, has promised that her party will embed an absolute limit on the amount of personal savings that will be protected for individuals in receipt of care services. Theresa’s proposal is set to guarantee that each person in receipt of care will have, in her words, ‘the confidence to pass £100,000 of savings to their children’. The current limit being merely £23,250. As attractive as this sounds, the people were somewhat confused as to what exactly happened to the previously proposed £72,000 cap on care spends. This would have meant that the maximum an individual could have spent on social care in their lifetime was £72,000, had it not been scrapped. 

    Following a dip in the polls, leaving the Tories only single figures over Labour, Theresa announced on Monday that there will again also be a cap on the amount of money an individual will pay for social care, with the intention that they will not end up spending ‘hundreds of thousands’. The figure on this cap remains undecided.

    Another key point to the Tories social care manifesto is that there will be a change to the way that domiciliary care is means-tested. The house will become an assessable asset and the payment calculation for people in receipt of care in their own home will consider this. The people who fall into this category will still receive the aforementioned benefit of retaining £100,000 of savings, and the spend cap. Although this means that more people being cared for in their homes will pay for their care, it is a promise of the PM that they will never be asked to move from their home, should it be over £100,000 and a debt raised against it. The home will, however have to be sold after the death of the owner to release the care debt, much the same as it is now.

    If you have any questions about this or other posts, please get in touch.

  9. The FTSE 100

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    The FTSE 100 – the “Footsie” – is the UK stock market index which garners most of the headlines. It was launched on 31 December 1983 with a base value of 1,000. Today it is about 7,550, which equates to an average annual return (excluding dividends) of 6.2%.  RPI inflation over the same period averaged 3.5% a year.

    Two years after the FTSE 100 was launched, the FTSE 250 came on the scene to cover the 250 UK listed shares below the Footsie’s 100 large cap constituents. The FTSE 250’s base figure was 1,412.60, a number chosen to match the level of the FTSE 100 at the end of 1985. Last week the FTSE 250 broke through the 20,000 level for the first time.

    What looks like a massive outperformance, is not quite so great when subjected to the power of compound interest. The average annual return (again excluding dividends) comes to 8.8% whereas the Footsie over the same period achieved 5.5% (those first two pre-FTSE 250 years were good ones). Inflation from the end of 1985 comes in virtually unchanged at an average of 3.4%.

    The outperformance of the FTSE 250 is not quite as great as it seems because the constituents of the FTSE 100 have generally delivered a higher dividend yield (the FTSE 100 currently yields 3.66% whereas the FTSE 250 offers 2.64%). However, overall there is no denying that the FTSE 250 has trounced its larger counterpart. Look at the long-term graphs and the outperformance turns out to be something of a roller coaster:

    • The two indices performed quite similarly until 2003: on 7 March of that year the FTSE 100 hit a low of around 3,492 while the FTSE fell to 3,890 (11.4% higher).
    • By June 2007, just as the financial crisis was about to hit, the FTSE 250 peaked at 12,197, 81% higher than the FTSE 100’s 6,732.
    • The FTSE 250 took a big dive in 2007/08, bottoming out at 5,492 in November 2008, a decline of 55%. The FTSE 100 took longer to find its low of 3,531 in March 2009, down 48% from its peak. That low coincided with a figure of 5,831 for the FTSE 250, 65% higher than the FTSE 100.
    • Since that 2009 nadir the FTSE 100 has risen by 114%, whereas the FTSE 250 is up 243%.

    Some of the difference in performance is down to the different companies in the two indices. For example, the FTSE 100 has suffered from its exposure to commodities and energy (18.1% against 6.8% currently). A sector breakdown of the industrial sectors of the two indices can be found here. There may also be an effect that, as the top index, the Footsie’s constituents can look like companies that have reached the end of the small/medium company growth stages. 

    Comment

    The graphs can be rather misleading. Unless they are log-scale, a jump from 10,000 to 20,000 looks much more impressive than 3,500 to 7,000, even though both represent a doubling. On a price/earnings ratio basis the FTSE 100 is more expensive (30.04 v 22.46), but that is largely because the figures are historic, capturing the miserable performance of that all-important commodity sector in the last financial year. In terms of five-year volatility, the two indices were identical to the end of April according to FTSE Russell.

    Whether or not you view the FTSE 250 to be in bubble territory, its progress since 2009 is a useful reminder that there has been plenty of scope to outperform the main market index.

    For more information on the FTSE 100 or any other Financial Planning queries please call 01793 771093

  10. Gift Aid Payments and the Abolition of Dividend Tax

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    The abolition of tax credits on dividends from 6 April 2016 has had some potentially serious consequences for donors whose income is largely made up of dividends as well as for charities receiving gift aid.

    This has been referred to as the “gift aid tax trap” and it affects, from 6 April 2016, individuals who make gift aid donations and whose income predominantly comprises of dividend income. Whilst on the one hand this could be interpreted as unintentionally penalising the donors, on the other hand the change appears to be a logical consequence of what, in fact, has been a fiction of the tax credit since the abolition of the advance corporation tax.

    The problem has arisen because of the way that relief on gift aid payments is given.  Basic rate relief on such payments is given at source while the relief at the higher rate or additional rate is based on the grossed up amount of the gifts (grossed up at 20%).  Higher rate and additional rate relief is then given by increasing the basic rate band and the higher rate band of the donor by the grossed up amount of the gift.  The relief is not given against any particular type of income although, obviously, if the result is that the individual is no longer a higher rate taxpayer (by virtue of their basic rate band having been increased by their gift aid donation), then effectively they will pay tax at the basic rate.  Where their income originates predominantly from dividends, the basic dividend rate is only 7.5%.  This assumes the dividend income exceeds the £5,000 annual dividend allowance where it is received tax free.  It should be noted that the dividend allowance is due to reduce to £2,000 from 6 April 2018. 

    It can be seen from the above that there is a mismatch between the tax relief on gift aid being given at 20%  and potentially no tax or tax at only 7.5%  having been paid by the individual donor on their dividend income.  Clearly there will be a problem if most of the individual’s income originates from dividends so that the individual in question has not actually paid enough income tax to cover the 20% tax credit.

    Until 5 April 2016 the tax credits that were attached to dividends could be used to discharge an individual donor’s requirement to account for basic rate tax deducted from gift aid payments, even though the dividend tax credit was only 10%.  Since from 6 April 2016 dividends no longer carry a tax credit, the donors must have paid enough tax to cover the 20% credit that a charity claims under the gift aid.  If the donor has not paid enough tax but signs the gift aid declaration and does not withdraw it, HMRC will ask them to pay the additional tax.

    So, for example, if a taxpayer receives £500,000 in dividends and makes gift aid donations of £320,000 net (grossed up donation of £400,000), the actual tax withheld on the gift aid donation would be £80,000 (ie. 20% of £400,000).

    This means that for 2016/17 the taxpayer must have paid at least £80,000 in tax which clearly would be substantially more than their actual tax liability on their total income of £100,000 (as reduced by the gift aid donation).  

    It would have been possible to carry back any gift aid payments to the previous tax year as long as it was done by 31st January 2017.  If the individual doesn’t want to pay the extra tax, they would need to withdraw any gift aid declaration, which of course would mean that the charity receives so much less. 

    The gift aid declaration forms published in October 2015 by HMRC include a very clear statement and an explanation confirming that the donor needs to pay the same amount or more of tax (UK income tax and/or capital gains tax) as charities will claim on the donor’s gifts in any specific tax year.  It also explains that the donor is responsible for any difference.  Clearly while gift aid is an excellent way of reducing a taxpayer’s tax liability and possibly the tax rate on their other income, this potential “trap” needs to be borne in mind.