January 2025

Jan 30

Inheritance Tax – how advice can help reduce your liability

By FAS | Inheritance Tax

Inheritance Tax (IHT) mitigation is a common feature of many long-term financial plans, and a topic where our advisers often provide independent advice. It is perhaps unsurprising, given the increase in the number of estates now liable to IHT. HMRC recently announced that IHT receipts for the 2023-4 tax year had increased to £7.5bn, and with the changes to Agricultural and Business Relief and Pension Death Benefits announced in the 2024 Budget, this figure is likely to grow significantly.

Tailored advice is crucial

IHT is, in some respects, a voluntary tax, as actions taken through your lifetime can help reduce, or even eliminate, the amount of tax payable by your beneficiaries. Effective IHT planning does, however, require very careful planning to maximise the tax efficiency of any actions taken, and ensure that planning strategies do not have unintended consequences. It is important to note that IHT planning is an area where “one size does not fit all”. There are a range of options open to reduce your potential IHT liability; however, the most appropriate option or options for each individual’s circumstances is entirely dependent on the value and composition of financial assets, family situation and other factors such as your attitude to risk and health.

Considerations when gifting

Perhaps the simplest way to reduce the value of your potential estate is to gift assets to family members. Gifting is straightforward, and as the saying goes, giving with a “warm hand” can mean that the donor of the gift can see the positive impact of the gift made. With the pressures on family finances, and difficulties younger family members can encounter purchasing their first property or paying for further education, intergenerational lifetime gifting is becoming more commonplace. There are, however, important considerations when gifting, particularly when assessing your own need for funds in the future. If you needed long-term care, for example, you may regret gifting funds if this means you are unable to access the level or quality of care that you need in later life.

When making gifts, it is important to consider the type of gift you intend to make and to ensure that the gift is as tax-efficient as possible. Lump sum gifts above the annual exemption each year are deemed “potentially exempt transfers” where you need to live seven years from the point the gift is made to avoid a potential IHT charge on the gift. Gifts out of surplus income can avoid the seven-year clock; however, such gifts need to be made from income that is truly surplus over your expenditure, and gifts of surplus income need to be made regularly.

Gifting assets directly to family members may not be desirable. Often younger family members are below the age of 18, and gifting could also create issues for adult children who themselves may have an IHT problem. Gifting assets into trust may be a solution in such circumstances. Trusts can be powerful tools to protect family wealth; however, the tax regime applicable to trusts can be punitive, although the impact can be lessened by structuring trust investments sensibly to reduce both the tax burden and administration.

Keep control of your assets

Many people wish to retain greater control over their assets when considering IHT planning. Assets that qualify for Business Relief are an option that may be an appropriate way to reduce a potential IHT liability. Qualifying investments are likely to be outside of your estate for IHT purposes once they have been held for two years, although this assumes the investment is held until date of death and remains qualifying. The primary benefit of Business Relief solutions is that the investment remains in your name, and can be sold and accessed if the funds are needed for another purpose, for example long-term care or private surgery.

Another option to mitigate an IHT liability is to consider insurance options. A Whole of Life insurance plan, appropriately arranged, could provide funds that your executors can use to pay part or all the IHT due. This type of planning does, however, have drawbacks, as premiums can become more expensive in later life and need to be paid throughout your lifetime. It is also inflexible, as it cannot adapt to future changes in legislation or circumstances. Insurance can also be used to cover lump sum gifts made during your lifetime. Such policies cover the IHT payable on any lifetime gifts, and as the amount that needs to be covered tapers after three years, premiums are more affordable.

The role independent advice can play

IHT planning is an area that needs to be reviewed from time to time, to make sure that the measures put in place remain effective. Changes in circumstances, or an increase in the value of assets held, could mean that further planning is necessary. Even those who have undertaken IHT planning in the past may well need to revisit their plans in light of the changes to Agricultural and Business Relief from April 2026, and Pension death benefits from April 2027, either to arrange further mitigation, or amend existing arrangements as necessary.

Another key aspect to consider is the need for IHT planning to fit within a wider, comprehensive financial plan. There are often competing priorities in later life, such as income production, preservation of capital, tax efficiency and risk management. This is where working with an independent and holistic financial planning firm can help create a financial plan that takes into account your individual circumstances, and prepares a tailored strategy which aims to reduce your potential IHT liability, whilst taking other important financial planning considerations into account. Our experienced advisers can assess the potential liability to IHT, and provide holistic advice on the available options. Speak to one of the team to start a conversation.

Jan 23

Why Bond Yields matter

By FAS | Investments

You may well have noticed the intense media coverage of the rise in UK Government bond yields since the start of the year, which have led to Chancellor of the Exchequer Rachel Reeves coming under increased pressure. Bond markets saw weakness through the final quarter of 2024, which intensified over the first few trading days of this year, over concerns that the Government will need to borrow more money to fund their spending plans. This is not the first time, nor will it be the last, that bond market conditions move from being an investment story to headline news. Just over two years ago, bond market turmoil led to the resignation of Liz Truss in the wake of the infamous Kwasi Kwarteng budget, and in 1976, Harold Wilson’s Government was forced to borrow money from the International Monetary Fund due to the spiralling cost of debt.

How is it that bond markets can exert so much influence? The reason is that Government bond yields are a critical indicator, and have implications for the outlook for risk assets, the wider economy and personal finance.

Bond yields in focus

When Governments look to borrow money, they often do so by issuing bonds, which are known in the UK as gilts. Each gilt offers a fixed rate of interest for the life of the issue and have a redemption date, at which point the Government will buy back the gilt for a fixed price.

Take the example of a gilt issued today, with a redemption date in 10 years’ time. The gilt carries an interest rate of 5% per annum. At the point of issue, the gilt is priced at 100p and it will be repurchased in 10 years at 100p. At launch, the yield on the gilt (which is calculated by dividing the interest by the bond price) is 5%. The Government therefore knows the amount of interest payable on the debt, and investors can easily determine their rate of return if they hold the bond to redemption.

Gilts and other bonds are, however, traded securities, and bond prices will fluctuate over time, with factors such as the underlying base interest rate, the economic outlook and global conditions influencing the direction of bond prices. Low confidence in the economic outlook can lead to investors selling gilts, leading to a fall in price. Any such fall in price increases the yield. Using the example above, if the gilt price fell from 100p to 95p, the yield on the bond would increase from 5% to 5.26%.

Such a move would not impact the level of interest paid by the Government on this particular bond; however, the yield sets the market expectation at which future bonds would need to be priced. Gilts regularly redeem and indeed, gilt issuance is likely to rise to help finance the Government’s spending plans. As a result, the interest costs paid on Government borrowing would rise over time, as new issues need to offer a higher rate of interest to match market expectations.

Bond yields have wider implications

When investing in fixed interest securities, such as gilts and other bonds, the yield is clearly critically important, as it represents the return that you can achieve from holding the bond to maturity. Gilt and other major Government bond yields also set a benchmark return that you could achieve without taking significant investment risk. This has a direct impact on other investment markets, such as equities, as a higher yield makes bonds more attractive to investors relative to equities, and can lead to investors moving out of riskier assets and buying bonds instead.

Central banks also keep a close eye on Government bond yields, as the yield on key benchmark loan durations provides a temperature check on the health of the economy. Sharp increases in bond yields, as experienced in the UK and US recently, could lead to central banks raising overnight interest rates.

Pressure in bond markets not only affects investors but also impacts on other areas of personal finance. Pension annuity rates are calculated with reference to gilt yields, and rising yields can have a positive impact on annuity rates. The opposite is, of course, true, as witnessed by the very poor annuity rates offered when interest rates stood at close to zero during the Covid period.

The rates offered on fixed-rate mortgages are also sensitive to movements in gilt yields, as interest rate expectations are used to calculate rates offered by mortgage lenders. Many individuals will see cheap fixed-rate deals taken out over the last five years coming to an end in 2025, and a spike in yields could heap further pressure on borrowers whose current deal is ending. In turn, this could impact mortgage affordability and dampen demand in the housing market.

Any further constraint on the public purse can also have a knock-on effect on personal finances. If Government borrowing costs become more expensive, this may lead to cuts to expenditure on public services or could force the Government to raise taxes further.

Where next for bond yields?

The increase in yields seen over the last few months is largely a reflection of changes in interest rate expectations. Inflation has been nudging higher, moving further away from the Bank of England target rate of 2%. Investors are also nervous about the prospect of trade tariffs being imposed by the incoming Trump administration.

Given these factors, bond markets are likely to remain volatile in the short term. Whilst the spotlight has rightly been placed on the pressures on UK gilts, bond yields have also risen in the US and Europe, which lead to investment opportunities within fixed income investments. This may well be an ideal time to consider the allocations you hold in fixed income within your investment portfolio. Speak to one of our experienced team if you would like to discuss how your investments are positioned.

Jan 16

Avoid becoming the victim of an investment scam

By FAS | Investments

We have previously reported on the alarming rise in financial fraud, which accounts for 4 in every 10 offences carried out against individuals in the UK. Sadly, more people are falling victim to ever more sophisticated methods used by fraudsters, who are using new technology to their advantage.

A recent report undertaken by Barclays indicates that one in five consumers have fallen victim to a scam over the last year, and one in three people know of someone who has been scammed. Further evidence of the rise in fraud is that the Financial Ombudsman Service reported that they received over 8,700 complaints relating to fraud in the first quarter of 2024, an increase of 42% on the same period in 2023, and double the number of complaints seen in the first quarter of 2022.

These grim reports are a timely reminder of the need to remain vigilant against fraud. Victims may not only face financial consequences – becoming a victim of financial fraud can also lead to considerable emotional harm.

Financial fraud can take many forms, with the most common being cases where consumers are tricked into handing over bank details to fraudsters, after being alerted that they are due to receive a fictitious refund from an organisation or business, or owe a fine or have tax to pay. Other frauds and scams, including those relating to investments and pensions, have also become more commonplace over recent years.

What can you do to protect yourself?

There are some common-sense steps you can take to help defend yourself against financial scammers. Firstly, always remain vigilant if you receive any unsolicited communication from your bank, H M Revenue and Customs or any other company you deal with.

You should also be cautious when receiving an unexpected phone call. If you’ve been called by someone claiming to be from your bank, end the call and then phone the official bank number from a different phone. This is important, as scammers can keep the line open if you call back from the same phone. You should never disclose passwords, PIN numbers or bank details over the telephone.

Text messages or emails received from a bank or other service provider should be treated with suspicion, especially if the text message asks you to click on an email link. This could direct you to the scammer’s website, where your personal details can be collected. If in doubt, always log on to a legitimate website directly, rather than clicking a link in an email.

It is not only communications from companies and organisations that need to be treated with care. An increasingly common scam is where a scammer contacts an individual via text message, pretending to be the child of the victim, asking for funds to be sent to the child for a fictitious reason.

You should always be wary of cold callers trying to sell you an investment product or service. Don’t allow yourself to feel rushed into making a financial decision, and always take time to think about whether to take up an offer. This will give you time to seek independent advice before reaching a decision.

Unrealistic investment returns

Scam cases involving investments and pensions continue to rise, and fraudsters are using more convincing ways to make offers look and sound more plausible to unsuspecting consumers. A good rule of thumb is that you should always reject any unsolicited contact offering you the opportunity to make an investment. The contact could come via a telephone call (often from organised set-ups known as “boiler rooms”) or an email, and may offer the opportunity to purchase an investment that can provide unrealistic returns that sound too good to be true. The fraudulent offer may also try and hurry you into making an urgent decision, on the pretext that failure to act quickly would mean missing out.

Protect your pension

Pension scams usually take the form of cold calls, offering investment opportunities in high-risk investments, such as overseas property, forestry or other similar unregulated investments. Many of these offers will suggest that the individual needs to transfer their pension to the scammer to access the unregulated investments, and this is often accompanied by high pressure selling tactics.

Another potential scam is a call offering the ability for an individual to access or unlock their pension before the age of 55. This can only legitimately be undertaken in a very limited set of circumstances and treat anyone contacting you to offer such services as being highly suspicious.

Know who you are dealing with

Consumers can help protect themselves from investment fraud by checking who they are dealing with. The Financial Conduct Authority (FCA) Financial Services Register lists details of firms and individuals who are authorised to provide investment and pension advice.

The FCA also provide a list of “cloned” firms on their website, where you can check whether a fake firm has been previously reported for setting up a fraudulent operation that uses the name, address or other details of a legitimate firm.

Don’t add to the statistics

Given the worrying increase in financial fraud, everyone needs to be vigilant to the risk of falling victim to a scam or fraud. Consumers should always treat any unsolicited contact from a financial services provider, a utility company or other organisation with a degree of caution. Trust your instincts, and if something feels suspicious, then report it to Action Fraud, the UK’s national reporting centre for fraud and cybercrime.

Jan 09

Five themes for 2025

By FAS | Financial Planning

Many investors will look back at 2024 and be satisfied with returns from investment markets. Whilst pockets of positivity remain, 2025 may well be a year when investors are likely to face more testing conditions than the calm waters seen last year. We look at five themes that could shape market direction over the next twelve months.

Broadening of US market performance

2024 was a year when technology stocks dominated investor attention. And rightly so, given the consistently strong earnings updates throughout the year, amidst increased focus on the potential for Artificial Intelligence (AI) to boost earnings growth over the medium and longer term. Given the demanding valuations of leading tech names, investors may increasingly look to other sectors of the US economy, where valuations are less expensive. Given the sheer size of the largest tech stocks, any extended period of weakness will have a direct impact on index values, and 2025 may well be a year when taking a selective approach to asset allocation will yield outperformance.

Another variable is the impact of an incoming President Trump. Expected cuts to corporate tax rates may well help support investor sentiment, and relaxed regulation could help provide a boost to banks and financials. The Oil and Gas sector could also see renewed interest, given the anticipated policy decisions.

Tariffs – words or action?

One of the biggest unknowns as we enter 2025, is the extent to which Trump will follow through on threats to impose tariffs on the US’ trading partners. Trump has stated that tariffs will apply to imported goods from China, Canada and Mexico from day one of his second term in office. Trump imposed tariffs during his first term in office, in an attempt to boost jobs and industry, and clearly favours extending import duties; however, the extent to which Trump’s threats are followed through is open to question.

Increased costs could stoke US inflation and could damage the growth potential for major export nations who trade with the US. Trading partners are unlikely to take the imposition of tariffs lying down and could retaliate, leading to a global trade war.

UK economy to enter recession?

Whilst it is too early to speculate on whether the UK will enter a technical recession in 2025, the warning signals are flashing red. UK GDP growth was negative for both September and October, with August being the only month showing positive month-on-month growth over the second half of 2024.

Recruitment firms have seen a drop in job vacancies, with companies from a range of sectors suggesting that the increase in Employer National Insurance and minimum wage from April will add further pressure. Household finances remain under similar pressure and consumer spending remains weak, with early reports of sluggish retail sales over the key pre-Christmas period.

Japan to push forward

2024 was a key year for the Japanese economy, which finally appears to have shrugged off the spectre of deflation. Equity markets responded well to the normalised conditions, with the Nikkei 225 breaching levels not seen since the 1980s. Despite the strong performance over the last year, Japan continues to be an interesting investment opportunity. Compared to other global markets, such as the US, valuations are undemanding, and further normalisation of monetary policy, and increased wages, may boost domestic consumer spending.

Despite the positive outlook, investors need to be mindful that Japanese equities may be volatile. August 2024 saw a sharp fall and rebound in the Nikkei 225, largely due to the Japanese Yen being used as a funding currency for investment overseas, and decisions taken by the Bank of Japan could see the “carry trade” unwind.

Interest rates to nudge lower

2025 should see global central banks continue to cut base interest rates, in response to moderating inflation data. The Federal Reserve, Bank of England and European Central Bank announced a series of rate cuts during the second half of 2024, and whilst further cuts are likely during 2025, central banks will be keeping a close eye on key economic data before committing to further cuts. Inflation figures will, perhaps, be the most important factor that central banks consider, and the Bank of England will be closely watching the jump in inflation seen in October and November, which saw the Consumer Prices Index (CPI) move away from the 2% target.

The US Federal Reserve have a similar conundrum. Inflation dropped consistently in 2024 to reach 2.4% in September, before rebounding in October and November. Whilst the Fed cut US interest rates at their December meeting, Chairman Jerome Powell warned that the Fed would tread cautiously before implementing further monetary easing.

Bond markets may well remain nervous, despite the direction of interest rates. Government Bond yields in the UK and US rose during the fourth quarter, largely due to concerns over the state of government finances. UK Gilt yields have climbed to levels not seen since 2023, on the back of the October Budget, and US Treasury Bond yields have also risen following the US election result.

Time to review portfolio strategy?

2025 may not be the comfortable ride that last year proved to be for many investors. There are, however, always opportunities for outperformance. Given the expected conditions, investors would be wise to review investment strategies to ensure that their portfolio is invested appropriately. Seeking independent advice can help analyse your existing investment approach and provide recommendations to adjust strategies. Our team of experienced Advisers are on hand to provide impartial advice. Speak to one of the team to discuss how your portfolio is positioned as we enter 2025.