Buying property abroad Defend yourself against higher taxOffshore bonds can help educational costs
What worries women
Season's greetings and welcome to the winter edition of our quarterly newsletter.
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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
Having a home in the sun was once a pipe dream for most of us; but cheap flights and rising UK house prices have encouraged thousands of us to take advantage of increased equity in our homes to take the plunge and buy overseas. So what are the potential pitfalls?
Owning a second home overseas, whether for your own use or as an investment – more likely as a combination of the two – can be highly attractive, but it brings with it some downsides.
Not least of these is that you will have all the expenses associated with home ownership doubled! Relying on rental income to cover some or all of the expenses – especially any additional mortgage commitments you may have taken on to help pay for the purchase – is not necessarily a good idea because there is no certainty that the income will actually be forthcoming, at least at the levels expected. Indeed, as has recently been reported in the press, some new developments in Spain have spectacularly failed to generate the “guaranteed” amounts of rent.
This can be particularly relevant if you are buying “off plan” where the property may not be completed for a year or more after you have paid a substantial deposit. You will probably be paying interest immediately, but have no rental income for some time.
There are, however, some important considerations before you get started. Firstly, you will probably be buying in a language – and under laws – other than English. Property ownership is never simple and the rules in overseas territories can differ dramatically. For example in some countries, debts go with the property, rather than the owner. So if there is an outstanding mortgage, you could inherit this along with the home for which you have paid the full price. Potentially an instant negative equity trap.
The rule must be, never to sign anything you do not fully understand and to appoint your own English speaking lawyer to represent your interests.
Secondly, there are frequently tax implications. In some cases there will be both local and national taxes for which you are liable. These can include income tax on rental income and capital gains tax on growth in the value of your home. What is more, you could find yourself liable to the equivalent of inheritance tax when you die, possibly in more than one country, in respect of the same assets (if there is no double taxation relief agreement). Again expert advice should be sought.
Thirdly, the price you agree may not be all that you have to pay. In addition to estate agents fees (which are frequently your responsibility rather than the vendor’s) you may have to pay a local purchase tax and legal expenses. In some countries this can add as much as 10% to the cost of the property.
One additional point worth considering is that if you are borrowing money to fund your purchase, it may be better to do so in the currency of the country concerned, since this could be the currency in which rental income is received (especially if you use a local managing agent). You will also need to consider insurance, especially if you are letting the property, as this must include liability to third parties (and possibly employees such as gardeners and cleaners).
Don’t be put off, this can be a good investment; but it is not one for the unwary. House prices can fall as well as rise, particularly if prices have recently been inflated by high demand, as recently.
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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According to recent government figures, we now pay tax at a rate of £3 billion every day. Revenue from some taxes such as VAT and air passenger tax are rising roughly in line with inflation. But the income generated by stamp duty, capital gains tax and inheritance tax is rising at a much faster rate.
Of course, the business of government must be paid for. So taxes, in the immortal words of the eighteenth century American writer Jeremy Bentham, are inevitable. When, however, we consider that the headline figure does not even include an estimated £60 billion each year collected as council tax and corporation tax, it is clear that the tax burden is virtually out of control.
But what can we do about this?
Well, actually, there is quite a lot that we can do to minimise the impact of tax on our own incomes and savings.
The most obvious defence against tax is, perhaps, to make pension contributions. These not only result in investments that are free of UK taxes (other than the 10% withholding tax on dividends from UK shares - Gordon Brown removed pension funds’ exemption from that many years ago) but also secure tax relief to a very generous level. In fact provided you do not exceed the annual limit (set at £215,000 for 2006/7) you can spend up to your entire earnings for the year on your pension. And your employer can top-up your contributions to the annual limit.
This will immediately save you income tax, but you can also reduce your national insurance contributions by “sacrificing” part of your salary and getting your employer to make a pension contribution instead. (This will appeal to your employer, because he or she will also save the national insurance.)
But it is not just your income that attracts tax. Savings and investments are also liable to tax on the income generated and on capital gains. There is a reasonable threshold, before capital gains tax applies (£8,800 for 2006/7) and investments held for more than three years win some relief, but even after ten years, non-business assets are taxed on 60% of the gain at the same rate as your income.
One way of protecting your assets against income and capital gains tax is to invest in Individual Savings Accounts (ISAs). As with pensions, ISAs cannot recover the tax deducted from UK dividends, but their growth is otherwise free of UK tax and the money can be paid out at any time as a lump sum or income free of all tax. With a pension, only 25% is available free of tax, with the balance being taxed as income.
It is important to note, however, that the charges associated with an ISA can be higher than if investments are held directly.
The most important tax that is rising quickly, for most families is inheritance tax. (Stamp duty is even worse, but there is little that can be done to avoid it.) With house prices in the UK rising faster than the miserly increase in the inheritance tax threshold (set at £285,000 for 2006/7), more and more families are finding that they are caught by this tax which takes 40 pence in every pound, once the threshold is breached.
Yet some fairly simple planning can mitigate the impact of inheritance tax, such as making use of lifetime gifts and potentially exempt transfers (PETs) which are gifts made seven years before the death of the donor. Transferring assets between husband and wife (or civil partners) can also make a massive difference to tax liabilities.
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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Nationwide has recently called upon the government to make ISAs available to the under 18s (under 16s for Cash ISAs) on the basis that the 10 million or so children who are too old to benefit from the new Child Trust Funds (CTFs) will end up effectively paying income tax. This would not, of course, apply with ISAs.
Of course, those not liable to tax can use form R85 to apply for gross payment of interest, but where money is invested by a parent on behalf of their child, it is actually treated as the parent’s income for tax purposes as soon as the income exceeds £100 a year.
While the government cannot accommodate all situations, when introducing a new concept, extending Cash ISAs to the under 16s (but excluding those eligible for CTFs) could be a good idea. This would, however, take time and is unlikely to happen in reality.
What the issue does bring into focus is that education, particularly at university, is becoming very expensive. Young people from all but the wealthiest families can be put off by the prospect of graduating with debts that could easily exceed £22,000 if annual tuition fees of £3,000 and living expenses of £4,400 a year are taken into account. This money has to be paid back, even though repayments do not normally start until the graduate’s income exceeds £15,000 a year.
But building up their own savings, or relying on parental savings is hampered by the 20% tax deducted from most savings accounts.
There is, however, a solution, particularly where grandparents are able to make a lump sum investment on behalf of the grandchild. If this is invested in an offshore bond, then, once the grandchild reaches 18 and requires money to cover his or her university education, an income can be drawn from the fund.
5% of the original investment can be withdrawn each year without the application of tax immediately. Instead it is deferred until the bond is encashed or 100% of the original investment has been withdrawn. However, the student is unlikely to be liable to tax as an individual, since his or her income will probably be below the personal allowance.
If for example, £50,000 is invested by a grandparent in an offshore bond and an income of £5,000 a year is taken, £2,500 will be “repayment of capital” and only £2,500 will be taken as income. Even if holiday earnings generate a further £2,500 a year, total taxable income will be less than the £5,035 personal allowance for tax purposes.
Further to complicate matters (but in a positive way), if no money has been drawn previously, then the 5% not taken during each year that the bond exists can be aggregated with the income later on, so that even less of the “income” is potentially taxable. And gains from offshore bonds are “top sliced” for the assessment of tax in any event. This means that the actual gain is divided by the number of years the investment has been in place and then only the result added to the investor’s income for the purposes of assessing what, if any, tax rate will apply.
There are, of course, other benefits in this way of transferring money down the generations, since the investment will itself not attract inheritance tax, provided the grandparent lives seven years after making the investment for the grandchild.
Clearly, this is not a straightforward issue and 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 survey amongst women in the 40+ age group by Woman & Home shows that 45% are concerned over health generally and 43% are worried over money. When it comes down to detail, more than a third are worried about breast cancer in particular.
What they may not realise is that unless you are prepared to rely on the over-stretched National Health Service, the cost of a mastectomy could easily reach £5,000, including hospital care, or even more if complications arise. Looking at other typical treatments that can affect families, a hysterectomy can cost almost as much and a simple tonsillectomy up to £2,150. A hip replacement, later in life, can cost almost £9,000.
It is not just the cost of treatment that can be a major issue for families, but the disruption that accompanies a major hospital visit that is of concern. So having a facility to at least take care of the financial side can make all the other “stress points” so mush less threatening. Of course, most private hospitals will offer a fixed price service, but this does not allow for complications; nor will it help much that the hospital may allow you to spread payments over a year or so.
The need for private medical insurance has never been as great as it is today. What is more, the cost, while not insignificant can be easily manageable, as there are a wide range of plans available. In fact there are almost too many; which makes it difficult for the average person to navigate their way through the minefield of choice. That is why it is always a good idea to seek professional advice when looking for any form of financial product.
After all, different product providers offer various types of cover, from individual plans to schemes for families and workgroups; from schemes that cover the full cost of treatment, to those offering simply a cash benefit while the individual is in hospital.
There is no rule of thumb as to which is most beneficial; it is a matter of balancing individual requirements and resources. One option to keep costs down is to accept a significant “excess” – that is to pay the first £1,000 of each claim yourself. Alternatively, some schemes have an excess that applies during the year, rather than for each event, so that once total claims exceed the agreed level, all bills are paid.
Other schemes help keep the cost down by covering all consultations by only paying for hospital treatment if the NHS cannot act within (say) 6 weeks.
One of the greatest benefits of private health care is that, provided you use an approved hospital and consultant, payment will be made directly to them, without you having to part with any cash, other than any excess that applies.
There are, of course exclusions and, while these will vary from one insurance company to another, they can often mean that basic dental treatment is not covered, while anything involving a hospital stay might be. There are also sometimes exclusions relating to mental conditions. Again, the importance of consulting a professional adviser is reinforced by the differences between covers.
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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