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Welcome to the summer edition of our quarterly newsletter.
We hope that you find the following articles of interest. If you have any comments, questions or views, please email us at:info@wealthmatters.co.uk
 The sudden fall affecting so many stock markets during late February were seen by many people as being a threat to the ISA season – after all, why would people want to invest on a falling market? But in reality, this is a question that could be put the other way round.
Nobody likes the idea of losing money, so investing in a falling asset is unlikely to appeal to most people. Yet the wrong time to invest in any asset is actually when it is at the top of its value cycle.
Of course, identifying precisely when this is the case is difficult, and by the time most investors get to hear about a fast rising asset, most of the growth has already occurred. That is why most people prefer to use collective investments such as unit trusts, investment trusts and insurance company bonds. By relying on professional investment managers, we hope that they will be alert to future trends, not reactive to the past.
Using any form of investment requires a commitment to put money in at some stage, so timing is important. Investing when markets are falling looks like “bolting the stable door after the horse has bolted”.
But in fact, this need not be the case, if you can get your timing right. Look at any almost long term graph of most stock markets and you will see that the upwards trend growth is strewn with short term – in some cases not so brief – market reversals. So buying on a falling market simply means that the assets you are buying will be less expensive than the day before – you get more shares or units for the same money. Of course, if the market continues to fall, you will see the value of your investment deteriorate. But over the longer term, it is to be hoped that any losses will be recovered. And not having bought at the top of the previous cycle – however – short means that you stand to benefit a little more, when the recovery moves past the previous peak.
In any event, some experts believe that recent market falls were not systematic – that is representative of an overpriced market – but relate more to the effects of currency market gambling that has left some major players facing large losses, resulting in them liquidating assets in order to cover their position.
What this all means for the “ISA season” is that short term falls in equity markets should by no means be seen as a reason for not investing. Indeed, even if you believe that markets are over-valued and that a correction (a euphemism for a steep and sustained fall in values) is due, equity investments should always be seen as a long term proposition and if you are not willing to hold your shares or unity for at least five years, there are good reasons for staying out of the market altogether.
Deposits may not offer the long term growth potential of shares, but they generally attract lower charges and are certainly less volatile. So while you may not do better than to match inflation by putting it into a savings account, you are unlikely to lose your money, should you need to access it quickly.
What is more interesting is that the Chancellor signalled, last December, that the ISA market is to change (probably in April 2008) so that money initially invested in a cash ISA will then be available for transfer into equities, which is not currently possible. This will make investment strategies far more flexible.
So even of you are not keen to enter the equity market right now, putting the current maximum of £3,000 into a cash ISA could make sense.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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 A recent announcement by HM Revenue and Customs that it is allowing those with overseas assets just a few months to own up, or massive tax penalties will be applied, may have come as something of a shock to those who thought the taxman was just targeting those with offshore bank accounts.
Of itself, ownership of an overseas property does not give rise to potential tax liabilities; it is the fact that it generates an income or capital gain for you that matters. So those keeping a home in the sun for personal / family use only are not affected – provided no money or value is received from friends and family using it. (There are however, other local taxes that will apply and overseas assets are counted for UK inheritance tax.)
The rules are quite simple. If you are a UK resident, you are liable to tax in the UK on your income and capital gains worldwide from whatever source, including bank interest, property rental and income from trade or profession – so it is no use writing a book and having it published in Spain, it will still potentially be taxed in the UK if you live here for more than 90 days a year on average over any four-year period (subject to a maximum of 183 days in one year).
If any money you generate from renting out your overseas home is subject to local taxes, then you will probably benefit from double taxation relief in the UK, to the extent that you have already paid locally. So a basic rate taxpayer with rental income in Spain subject to 24% tax will have nothing further to pay; but a higher rate tax payer would be liable for a further 16%.
The good news is that if you declare to HMRC that you have overseas income before 22 June 2007, they are likely only to charge you the tax due plus 10%; if you leave it any later, or fail to tell them altogether and they find out about it, they will charge a 100% penalty on top of the tax due. After making your declaration to the taxman, you will have up to five months to give them full details.
It is also important to declare any capital gains you make when selling your overseas property, as this counts against your annual allowance in the UK (currently £9,200 per person).
Due to an unprecedented level of inter-state co-operation, it is most unlikely that those with overseas property will escape detection, so honesty is definitely the best policy.
Having said this, owning a home in the sun and even letting it to help cover the costs should not be discounted. At the very least, this can provide a source of cheap holidays for yourself and friends; at best, it might prove a good investment, even after tax.
One important consideration will be how to finance your purchase. If you are re-mortgaging your UK home to release cash to buy a home overseas, you options are limited. If, however, you are intending to borrow against the security of the overseas property, you might wish to consider an overseas mortgage, perhaps in euros, dollars or whatever local currency applies. The reason for this is that your rental income is probably going to be in the local currency (unless you let exclusively in the UK) as will be your main costs such as local taxes, management fees and so on. By having your mortgage in the same currency as the income generated by the asset, you avoid currency fluctuations making your mortgage disproportionately expensive, should exchange rates move against you.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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With the basic rate of tax due to fall to 20p in a years’ time (even if we do lose the 10p rate so will generally be little or no better off) there is not much time for basic rate taxpayers – and those who do not pay tax at all – to maximise the value of their pension contributions.
The basic rate of tax is set to fall to 20% next April, so those paying £200 a month net who currently receive an investment value of £256.41 a month (thanks to grossing up of the basic rate tax relief) will then only benefit from £250 a month going into their pension. This might not sound much of a drop, but over time – and pensions are all about the long term – it will add up.
So putting as much as you can into your pension this year, could be well worth your while, especially when you remember that the growth of your pension fund is free of UK tax (other than the 10% withholding tax on dividends from UK companies, which can no longer be reclaimed).
For most people, pension contributions are paid out of income; which makes sense, because pensions are supposed to replace your income when you retire. But there can be times when you suddenly have access to a large amount of money – perhaps as the result of a large bonus, an inheritance or a win on the National Lottery.
New rules introduced in April 2006 mean that everyone can invest up to their entire income from employment, trade or profession into a pension scheme and receive tax relief on the contribution, up to the total amount of tax they pay. So if you earn £39,000 and are therefore a basic rate taxpayer, and wish to put (say) £25,000 into a pension you could currently receive an investment value of over £32,000.
Next year, the same contribution would be worth £800 less to you.
Non tax-payers can also invest up to £2,808 a year and have an investment worth £3,600 made on their behalf, thanks to the tax relief available at source. Next year, the net contribution will be £2,880 to achieve the same result – which is almost half the amount by which the government has increased the state pension, this year.
For higher rate taxpayers, there is no difference because they receive tax relief at up to 40%. However, their net payment will go up, with the balance of the tax relief coming through there self assessment. Whether HM Revenue and Customs will change people’s tax codes on 6 th April 2008 to reflect the increased “surplus” tax relief on pension contributions (20% instead of 18%), or will wait for the next self assessment forms to come in, has yet to be stated. We would not be surprised if there is a delay in making this change.
In any event, for higher rate taxpayers, making a large payment at any time could make a substantial hole in their tax bill for the year – and provide valuable retirement benefits.
One word of caution – if somewhat early – remember that if you are making pension contributions by direct debit, your net payments will go up on the first contribution date on or after 6 th April 2008.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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 A recent analysis of government data by mform.co.uk shows that the average family mortgage bill has risen by more than 40% form £4,586 in 2001/2 to almost £6,620 in 2005/6 and looks set to hit £7,000 a year this year.
More worryingly for those with large mortgages, who may expect at least one more rise in rates, mortgage costs now account for 13.5% of household expenditure; this figure was just 9% in 2001/2 half as much again.
This puts additional emphasis for the need to review your mortgage arrangements to ensure that you are not paying more than you need to. There are a number of ways you can ensure that you are not caught out paying too much for your mortgage.
- If you are on a fixed or capped rate mortgage, it would be a good idea to check whether you are approaching the end of the guaranteed or capped period. If you are, you could suddenly find that your interest rate zooms up to your lender’s standard variable rate – which is likely to be much higher. If this is the case, you should be talking with your financial adviser to ensure that you are switched to another deal at the right time. In most cases, this should be possible with a minimum of fuss and limited costs. But even if there are charges involved – and many lenders will at least require a fee for closing your current mortgage or switching you to a new deal – this is likely to be better than suddenly having to pay the full rate.
- If you have a mortgage that carried a reduced introductory rate and the offer period is due to expire, you should also be looking at the alternatives. In this case, however, or if you received a cash-back payment on completion of your house purchase, you could well find that there is a penalty for switching your mortgage even after the expiry of the initial period. In this case it is important to seek individual advice about the potential benefits and costs of switching.
- If yours is a variable rate mortgage, then now might be the time to consider a fixed rate deal. Even if interest rates do not rise any further – and some people think that base rate could approach 6% before the end of the year – they are unlikely to fall significantly for some time to come. A capped rate mortgage, where interest rates can fall, bit not rise above the limit set at the start of the deal, could be a better alternative.
If you are using an “Offset” mortgage, the position is rather more complex. Most people using this form of borrowing – where savings are balanced against borrowings before the interest charged is determined every month – are likely to be reasonably sophisticated financially and will have significant amounts on deposit with the lender. The reason for using an “offset” arrangement is that it is highly flexible, you only pay interest on the difference between what you owe and what you have on deposit, and you can repay more or even draw back some of your overpayments at will without any formality. Of course, no interest is earned on your deposits.
However, the amount you pay each month is fixed at outset and then increased and lowered according to changes in the lenders mortgage rate. So if you have a mortgage of £100,000 and savings of £50,000 with the lender, the impact of an increase in interest rates is to hasten the rate at which you repay your capital – and thus to reduce the overall cost to you.
In this specific case (looking at interest only, for simplicity) your repayments might be £479.17 a month, with interest rates at 5.75% and £500 a month at 6%. The difference may not be large, but for the person indicated, they will actually be repaying an extra £125 a year off their mortgage, in addition to the amount already being repaid, simply by virtue of a quarter percent rise in interest rates.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.
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