Welcome to our Spring Newsletter. We are finally getting to see the sun, now that spring is upon us. Let’s just hope that the future is as bright with all that is happening at the moment in the financial markets and in the economy as a whole. What with changes in the budget under fire (particularly the removal of the 10% income tax band), rising inflation, the bank of England lending £50bn to high street banks in an effort to ease liquidity fears, a slump in bank mortgage approvals, falling house prices and split decisions on base rate cuts - it all seems a bit gloomy. The introduction of a flat rate in capital gains tax (CGT) to 18% has proved to be a contentious issue and again, like the changes in income tax is largely beneficial for higher rat tax payers, yet often detrimental to basic and lower rate tax payers. This years budget was mostly non-eventful, all in all it seems, it was not really thought through properly, especially regarding the CGT issue. If you are unsure as to how you are affected by the changes in the budget, please give us a call.
However, there is some good news – Wealth Matters have launched their new website recently (www.wealth-matters.co.uk) which is meant to be more informative and interactive to allow our clients and prospective clients to understand the financial planning process. There are case studies on the site, as well as documents to download. There are useful calculators and a log in section for Transact members.
We are delighted to inform you that Wealth Matters won an FT Adviser ‘Mystery Shopper Enquiry competition’ in January this year, thanks to the knowledge and service of our in house mortgage adviser, Deborah Caulfield. The subject of the telephone call was buy-to-let mortgages.
The three articles contained in this newsletter are topical subjects. One is about saving for your children, another is on investing in emerging markets and finally there is the issue of tax within a family run business. We hope that you enjoy them. Please contact us should you have any questions relating to these topics or on any other matter of finance, and we can point you in the right direction.
All investments are about the long term; so the earlier you start the better and this is particularly true of planning to help your children. Begin when they are very young and they have the opportunity to become independent more quickly, later on.
If you start early enough, you can keep the costs down to a manageable level; and bearing in mind the expenses that most new parents face, this has to be a good thing.
There are a number of forms of investment that can be used, including Child Trust Funds (CTFs), equity based investments and, perhaps surprisingly, pensions.
Child Trust Funds are available to children born on or after 1 September 2002, who will receive a £250 government voucher to start their account. The account, which belongs to the child and can't be touched until they turn 18, offers tax free growth on the money and ensures that they will have some money to start adult life.
What makes CTFs so valuable is that parents, grandparents and others can boost the CTF by up to £1,200 each year; so with the additional £250 the government will add at age seven, each child could have a pot at 18 worth more than £22,000, even before investment growth.
CTFs can be invested in cash or equity funds, offering families the choice between a high-level of security and potentially lower growth, or less security but, especially over 18 years, the chance of greater returns. According to HM Revenue and Customs, money in equity based accounts has grown more than a similar amount left in a savings account over every 18-year period in the last 40 years.
CTFs offer families the ability to switch from one provider to another and to change product provider, if they wish. The income generated does not impact on the family’s entitlement to Tax Credits.
It is also possible to set up other forms of investment for children, including bank accounts and collective share-based investments. However, equity based investments are subject to a 10% withholding tax on UK dividends (this applies within CTFs too) and interest from bank accounts is taxed at source unless form R85 is completed on behalf of the child. Any investment income in excess of £100 a year resulting from parental gifts will attract tax on the parent.
Importantly, CTFs do not create this potential tax liability.
One issue that might concern many parents is that giving any child of 18 a large sum of money could lead to them simply going off and buying a high powered motorcycle or car; with potentially dangerous consequences. There is little that can be done to prevent this and tax law on trusts makes it difficult to adopt any alternative strategy without careful planning. However, taking steps to give children a financial education – and ensuring that they understand early on that this money is intended to help them get through university, or otherwise establish themselves in life could have much wider benefits that avoiding the obvious pitfalls of combining young adults and too much money.
With an eye to the very long term, parents can set up pension schemes for their children by gifting them up to £2,808 (from 2007/8, rising to £2,880 from April 2008) which, if invested in a pension scheme will be topped up to £3,600 a year by the government. Benefits will be available to the child from age 55 in the form of a (currently) tax free lump sum of up to 25% of the total accumulated fund, plus an income for life.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact your financial adviser.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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This is simply not true, although new markets tend to do comparatively better than established ones simply because of the positive inflow of cash. In practice, emerging markets such as China, Brazil and India may look attractive, but carry with them substantial risks.
Looking at our own past, it is all too easy to draw comparisons with the “South Sea Bubble” of the early eighteenth century. In that case speculators “talked up” stock in a highly risky venture which had dubious (to say the least) prospects based on the anticipation of access to South American Gold, which never materialised, partly because Spain was blocking access to the ports concerned. The result was that investors lost substantial amounts of money and never really had the prospect of getting their investment back, let alone turning a profit.
The point is that investment performance is largely driven by sentiment and the availability of capital seeking a home; the underlying fundamentals are often so very different. Long term investment outcomes depend on economic stability, sound markets and good management.
This means that investing needs to take account not of how markets have been moving in the past, but how they are likely to move in the future, comparative to the current position, based on the likelihood of sustainable growth.
It may thus be seen that China and India, given political and social stability, could be expected to provide long term growth based on a low cost base and massive internal demand, which means that they are only partly dependent on exports. By comparison, Japan, which has a well established free market economy and a secure political base has high internal costs and is dependent on exports to keep it afloat.
Does this mean you should invest heavily in the former while ignoring the latter? In all probability the answer is “no”. This is because nobody can predict what will happen in future; political and economic circumstances can change quickly; a world recession could hit China and India just as much as the UK.
What this should tell us is that putting all your eggs in one basket is unsafe and that it is important to have a diverse asset distribution strategy. It also tells us that few individual investors will have sufficient knowledge to make decisions on their own and that collective investments are likely to be most suitable for most people. The costs are higher than direct investments, but the risk far less onerous.
Investment diversity means that you do not have to rely on picking the winner (like China last year) and risk it falling at the last fence (like Ireland last year). You may miss out on the biggest potential wins, but you will also avoid the largest potential losses. On average, you can expect to do better by selecting a varied investment strategy.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact your financial adviser.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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For some years, HR Revenue and Customs (HMRC) have been attempting to charge a family company tax on earnings which it claims are attributable to one partner, but paid to the other in order to minimise tax by keeping the principal’s income below the higher rate tax threshold.
Last year, HMRC finally lost its case in the House of Lords, so it has had no alternative but to change the law – thus frustrating the will of the courts – so that it can look beyond actual remuneration to determine who contributes what towards a business and thus what they should be paid.
HMRC argues that it is unfair that some people can reduce their tax liability by shifting income between them; others might argue that with a massive and growing tax burden, everyone should do what they can to reduce their own bill! Certainly, businesses now face the prospect of Tax Inspectors asking how much work, and of what nature, people do in family companies, so that they can effectively tax what they see as the ‘main earner’, even if money is actually paid to a ‘supporter’.
For companies constructed with equal shareholdings between husband and wife, this has further ramifications, because dividends will be included in the calculation. This is likely to mean that, whereas previously dividends could be paid in order to minimise national insurance costs, this may no longer be practical; or at least not without incurring additional income tax liabilities on one partner.
One solution will undoubtedly be to consider making increased pension contributions in respect of the ‘main earner’. Not only are these fully allowable as a business expense, but they also do not attract national insurance on behalf of employer or employee. It may be difficult to do so in respect of the ‘supporter’ – at least beyond a fairly basic level – because the Tax Inspector can disallow pension contributions where it feels the total remuneration package is above what may be considered a market rate for the work done.
However, the benefit of making pension contributions in respect of the ‘main earner’ is that not only will this help build up future retirement benefits but, for a person aged 50 or more (rising to 55 in April 2010) it is now possible to take 25% of the money invested as a tax free lump sum, leaving the rest to roll up or produce a taxable income, as required.
It is important, however, that the tax free cash taken cannot be seen as being ‘recycled’ into further pension contributions as this will result in a substantial penalty. HMRC has already stated that money taken as tax free cash cannot be used as a pension contribution or to replace ‘other’ income which is then used to increase pension contributions.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact your financial adviser.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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