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FAS

Apr 03
0

Spring Statement – key takeaways for investors

By | Budget

Chancellor Rachel Reeves delivered the Government’s Spring Statement on 26th March. Whilst not a full-blown Budget, pressures on the UK economy from various angles meant that the Statement contained rather more than just an update to Budget forecasts. As expected, no changes to tax legislation were announced; however, there are several key takeaways which investors should consider.

Individual Savings Account (ISA) consultation

Buried in the depths of the Statement, the Government confirmed that they will undertake a review of the current ISA rules. The aim of the review will be to look to “boost the culture of retail investment” and will consider whether the balance between cash and investments is appropriate. This appears to be a clear indication that the Cash ISA is the main target of the consultation, rather than the Stocks and Shares ISA, and therefore the impact on investors could be limited. Savers, however, could see changes to the amount that can be saved within a Cash ISA, although there is no indication as yet as to how the Government could implement any changes to the existing ISA framework. We would expect further clarity as we head towards the Budget in the Autumn.

Increased tax receipts

Amongst the slew of data presented with the Statement, projected tax receipts highlighted the impact of recent changes to tax rules when assets are sold, and on inheritance. The Office for Budget Responsibility (OBR) expect Inheritance Tax (IHT) receipts to have climbed to £8.4bn for the 2024/25 tax year, an increase of 11.6% on the receipts from the previous year. Even more stark is the projection that IHT receipts will reach £14.3bn by 2029/30, a 70% increase over the next five years. The expected increase is due to the inclusion of pensions within the scope of IHT from April 2027, the changes to Agricultural and Business Reliefs, and the ongoing impact of the frozen Nil Rate Band.

Capital Gains Tax (CGT) is also forecast to bring increased funds into the Treasury over the rest of this parliament. The CGT exempt amount (i.e. the net amount of gain that can be made before CGT becomes payable) has been slashed from £12,300 per year to just £3,000 per year in successive Budgets, and the rates of CGT payable by investors increased immediately after the Budget last October. The OBR have forecast that CGT receipts will rise sharply to £19.7bn for the 2025/26 tax year, an increase of 48% on the amount received in the current Tax Year and reach £25.5bn by the end of this parliament in 2029/30.

With more estates being liable to IHT, and investors increasingly unable to avoid CGT, the forecasted figures are a timely reminder of the need to ensure that your financial plans are as tax efficient as possible.

Growth downgraded

The UK economy has effectively stalled over recent months, with GDP data showing very marginal gains. It was, therefore, no surprise that the OBR have downgraded their growth forecast for the UK economy in 2025 from 2% to 1%. Other leading forecasts show a weaker projection, with the Bank of England reducing their growth forecast from 1.5% to 0.75% in February.

Both forecasts may, however, be too optimistic. Households have just been hit with a succession of price hikes, from Council Tax increases to a jump in utility bills. This is likely to continue to supress consumer confidence as households grapple with higher essential expenditure. Businesses have just been impacted by the increase in minimum wage, and hike in employer’s National Insurance. This could lead to rising unemployment, and higher prices, as businesses look to offset the higher costs.

Inflationary pressure

The Chancellor received a welcome piece of news before the Statement was delivered, when the annual rate of inflation, measured by the Consumer Prices Index, fell from 3% to 2.8% in February. This does, however, remain above the Bank of England target rate of 2%.

Most economic forecasters expect inflation to rise again over the rest of this year, as a combination of tax hikes on business and higher energy costs force prices higher. In their latest inflation report, the Bank of England predict that inflation will hit 3.7% by the middle of the year, before falling back gradually.

Amidst an increasingly uncertain outlook for the global economy, we question whether these projections have properly considered the potentially disruptive impact of tariffs imposed by the US administration. On the same day as the Spring Statement, the US announced new tariffs on the import of cars and car parts from overseas, which could directly affect UK exports of luxury vehicles to the US, which is a major buyer of British marques.

Considering the range of factors, the balance of risks may point to inflation moving higher than is currently projected. This could, potentially, limit the scope for further interest rate cuts as 2025 progresses.

What should investors do?

Whilst the Spring Statement did not introduce any changes to tax legislation, it reinforced the weak outlook for the UK economy and underlined the need for investors to consider the tax-efficiency of their financial arrangements.

The ISA allowance remains a valuable tax break and a cornerstone of many financial plans. Naturally, we wait with interest to learn further details on the government review of ISA regulations; however, the indication is that Cash ISAs are more likely to be impacted than Stocks and Shares ISAs.

The projected increased tax receipts from IHT and CGT are a timely reminder of the need to plan ahead to minimise your exposure to either of these taxes. Undertaking estate planning can help reduce the potential IHT liability on your death and leave more of your estate to your loved ones. Similarly, structuring investments with tax-efficiency in mind can help reduce the likelihood of a CGT liability when assets are sold.

Our experienced advisers can carry out an impartial and holistic review of your financial arrangements and suggest changes that promote tax-efficiency and are tailored to your financial goals. Speak to one of the team to start a conversation.

Mar 27
0

The benefits of regular investment

By | Investments

One of the simplest ways of investing for the longer term without committing a lump sum is to regularly invest over a period of time. In fact, many of us do this without thinking, as employer and employee contributions are paid into personal pension plans on a monthly basis via payroll.

Each monthly contribution buys units in an investment fund or strategy, with the quantity of units received from each contribution based on the prevailing price of the selected fund at the time of investment. Since fund prices fluctuate over time, the number of units acquired each month varies accordingly. When markets are performing well, fund prices are generally higher, resulting in fewer units being purchased with each contribution. Conversely, during market downturns, lower fund prices allow investors to buy more units with the same amount of money.

A regular investment approach benefits from a theory known as “Pound Cost Averaging”, which helps smooth out market fluctuations over time. By undertaking regular investment, the purchase price paid will vary from month to month leading to an average entry point over the longer term. This helps smooth out the volatility which is inherent in global equity markets.

Investing regularly can help remove the emotional aspect of the decision on when to invest, which can be particularly helpful during periods when market volatility and risk are elevated. For a long-term investor, the timing of market entry can be less relevant, as investment returns over an extended period are largely dictated by the amount of time an investment is held; however, making the decision to invest in a market downturn can be challenging, particularly for investors who have not experienced such conditions previously.

Regular investment can be a very sensible way of building wealth over the long term. Saving a set amount each month promotes financial discipline and if funds are collected automatically, as is the case with pension contributions, the commitment is made before the funds reach your bank account. The same approach can, however, be used to regularly invest for other financial targets, such as building a sum of money to help children and grandchildren through higher education, or towards a deposit for their first home.

For those without the funds to make a lump sum investment, regular investment into a plan can improve accessibility to investment markets. Most investment plans offer the ability to accept regular savings, which can usually be set up via a direct bank payment each month. Whilst this automates the investment process, it is important to remember that the savings plan can be adapted to reflect changes in circumstances. For example, the amount saved each month could increase as funds allow, or contributions could be temporarily suspended if funds are needed for other financial commitments.

Regular investment with a lump sum

While regular investing is an effective way to build wealth gradually, the same approach can be adopted for those with a lump sum available for investment. Conventional investment wisdom suggests that the longer an investment remains in the market, the greater the potential for growth. A rational investor might, therefore, opt to invest a lump sum immediately to maximize market exposure and potential returns. Historical data supports this strategy, particularly during stable or rising markets.

While investing a lump sum immediately may be beneficial in a rising market, in periods when market volatility is elevated, adopting a regular investment approach may be beneficial. This process is known as “phasing” and divides the lump sum investment into smaller portions which are invested at regular intervals over a set period, such as three, six, or twelve months.

As demonstrated in the example below, an investor with a lump sum of £150,000 to invest could choose to allocate £25,000 per month over six months instead of investing the entire amount upfront. The first payment of £25,000 is made in month one, with the balance of £125,000 being held on cash deposit. Each consecutive month, a further £25,000 is invested until the full investment has been made.

If markets decline during this period (as is the case in the first three months of the example) each investment purchases a greater number of units at lower prices, ultimately enhancing the overall investment position; however, if markets rise steadily, phased investing could lead to fewer units being purchased over time, resulting in a lower return than if the funds are invested immediately. Whilst this would place the investor in a worst position than if the investment was made in one tranche, it would, however, reduce the risk of making the full investment in a single transaction.

Getting the right advice

The decision to phase an investment needs careful consideration of the outlook for investment markets, time horizon for investment, and needs and objectives of the investor. For example, an investor seeking income from an investment may well have to contend with lower natural income in the early stages if an investment is phased, as only a proportion of the investment is committed to the chosen strategy.

Independent financial advice can add significant value in reaching this decision. At FAS, we tailor investment strategies to each client’s unique situation, considering both lump sum and phased approaches where appropriate. If you are looking to establish a regular savings plan, or arranging a lump sum investment, speak to our experienced advisers to discuss the options in more detail.

Mar 20
0

Alternatives to investment property

By | Financial Planning

Buy to Let has remained a popular investment option for many years, as landlords have enjoyed the benefits of a buoyant rental market, and rising property values. Investor appetite may, however, be waning, judging by recent data collated by estate agent Hamptons. Their data suggests the proportion of homes purchased by landlords has fallen to the lowest level since 2009, accounting for just 9.6% of purchasers in January.

It is not only new landlords who appear to be reconsidering property purchases. Those with existing Buy to Let properties are also considering selling, with National Residential Landlords Association research from last Autumn suggesting that 40% of landlords questioned were considering selling one or more properties in the next 12 months.

It is not difficult to see why landlords may be reaching this conclusion. Increased tenant’s rights, and an end to so-called “no fault” evictions, higher mortgage rates and an increased tax burden may all be contributing factors. Further legislative changes, including the recent announcement that all rental properties must meet tighter energy performance ratings, also adds to the uncertainty.

We frequently speak to clients holding rental properties, who are considering reducing their exposure to residential property. This decision needs careful consideration, as undertaking a property disposal is an expensive process, both in terms of fees and timing. The most appropriate way forward will be determined by the overall financial circumstances of the individual in question, with many variables to consider.

Increased liquidity

One of the most compelling reasons to consider an alternative to property investment is the increased liquidity that investments in assets such as equities and bonds can provide. Most regulated investment options provide access within a few working days, whereas raising funds from a property may be a long and expensive process. Other forms of investment, potentially using collective investments holding a blend of equities and fixed interest securities, can easily be realised should funds be needed for any reason.

Tax inefficiency

Profits from property rental income are liable to income tax in the hands of an individual, at their marginal rate of tax. Some allowable expenses can be deducted from rental income, such as insurance, professional costs, property repairs and maintenance. Buy-to-let mortgage interest payments can also be deducted; however, this tax relief has been restricted to 20% since 2020, meaning that higher and additional rate taxpayers have seen the tax they pay increase since the previous relief system was withdrawn.

By way of contrast, investors considering alternatives such as equities and fixed income securities have tax wrappers such as the Individual Savings Account (ISA) available where tax-free income can be generated. Whilst the ISA subscription is restricted to £20,000 per tax year, other options such as Investment Bonds can also provide tax-efficiency, and on equity investments held outside of a tax advantaged wrapper, the rates of tax on dividends are lower than on property income.

Capital Gains Tax (CGT) is another consideration for those selling a property. Successive Budgets have reduced the CGT annual exemption to just £3,000, although joint owners can use both allowances to offset the tax liability. Periods when the property was occupied by the owner can provide Private Residence Relief, and costs in selling the property can also be deducted. Finally, significant improvements made to the property may also be an allowable deduction. CGT is charged at 24% for higher rate taxpayers, whereas basic rate taxpayers pay CGT at 18%. CGT is due within 60 days of completion and therefore those selling property need to calculate the gain quickly to avoid a late payment penalty and/or interest.

Changing legislation

One of the most challenging aspects of property investment is navigating changes in legislation, which threaten to reduce the attractiveness of property investment. Firstly, landlords will need to comply with updated energy efficiency rules, where all rental properties will need to hold an Energy Performance Certificate (EPC) of at least C by 2030. This could force landlords into expensive upgrades to their rental properties, and damage investment returns from affected properties.

The Renters Rights Bill, which is expected to become law during the Summer, may well provide tenants with greater stability, but may lead to higher costs and greater difficulty removing problem tenants. Amongst the measures included in the Bill, so-called “section 21” evictions will be outlawed, meaning landlords will no longer be able to end a tenancy without a valid legal reason. Whilst the new legislation may not have any impact for landlords with good tenants, dealing with issues may become more problematic and costly.

Tailored advice is key

As you can see from the various factors listed above, the decision to sell an investment property is rarely straightforward; however, in our experience, landlords are more readily questioning whether they should consider alternative investment options, a decision which may be underpinned by static or falling house prices in the coming years.

In most instances, an investment strategy designed to produce an attractive level of natural income can compete with net income yields from property investment, particularly when the tax-efficiency that investment wrappers can provide is considered. Taking a diversified approach, and blending investments across different asset classes and sectors, can help reduce risk, and using equities can also produce capital appreciation over time, in addition to the income yield. Not only can a diversified portfolio be more tax-efficient than property investment, such an approach can also prove to be lower maintenance and less hassle.

Our experienced advisers can take a holistic view of your financial circumstances and provide independent and unbiased advice on the options available. We can also look at ways to offset a CGT liability through investments that provide tax relief on investment. Speak to one of the team if you hold investment property and are considering alternative options.

Mar 13
0

Focus on fundamentals

By | Investments

Amidst an avalanche of news flow over recent weeks, investors are trying to understand the implications of events in the White House in respect of the Russian-Ukraine conflict, and imposition of tariffs by the Trump administration. It is, therefore, not surprising that market volatility has increased. At times such as these, we feel it is important to look beyond the noise, and focus on quantifiable, fundamental factors.

Cutting through the noise

Firstly, it is sensible to put the recent market performance in context. It is important to bear in mind that investment markets have enjoyed an extended period of positive returns and relative calm since October 2023. The only significant spike in volatility over the last 18 months was the brief market hiccup when the Yen carry trade began to unwind in August 2024. The graph below shows the CBOE VIX index, which is a measure of volatility in US markets, and often known as the “fear index”. Whilst volatility is elevated, it remains some way below the levels seen in August 2024 and the early part of this year.

The calm incremental returns seen over the last eighteen months represent a long period of market stability, and increased market volatility is expected as we continue through 2025. Volatility is, however, not only an inevitable element of the investment process – it is also healthy. For example, overvalued stocks may be re-rated during periods of volatility, leading to more attractive valuations and greater investment opportunities.

Factors to consider

Investors are weighing up a range of factors that are exerting an influence on market direction currently. Greater uncertainty is apparent, although there are reasons why investors should remain confident about the medium-term outlook.

The imposition of trade tariffs by the White House may represent a bigger threat to global growth than the geopolitical wranglings between US, Ukraine and Russia. There is, however, some question over how long tariffs would be imposed for, which could limit the damage they could inflict. Any trade barrier is unhelpful, and tariffs imposed for an extended period are likely to hamper global growth, which would extend to countries that are indirectly affected. Tariffs are also inflationary, as prices are driven higher, and consumer confidence may also be affected. Likewise, businesses may well curb expansion plans in this environment.

Broad tariffs have so far been imposed on Canada and Mexico, and specific tariffs on commodities such as steel and aluminium have been introduced over recent weeks. There has already been some pullback from the Trump administration, which introduces further uncertainty over the likely damage tariffs could cause and only adds to the volatility.

US corporate earnings remain strong, and we feel this supports a positive medium-term view. Fourth quarter company earnings in the US have largely exceeded expectations, although companies from a range of sectors have warned that the immediate outlook is less positive.

The broadening of the market rally over recent months can also be viewed as a positive signal. Technology stocks were the spearhead for the growth in the US, which widened the performance gap between growth companies and value stocks last year. This gap has now narrowed, with investors turning their focus to other sectors, with financials, energy and consumer staples outperforming, and defence stocks jumping on the likelihood of increased government spending.

Investors showed considerable confidence throughout 2024, although this is likely to be tested in the short term. The market falls before Christmas, and again in January following the announcement of DeepSeek (the Chinese AI competitor), saw investors buy back in, thus reinforcing the positive mood. It remains to be seen whether investors view the current volatility as a buying opportunity; however, it would be foolish to write off the positive trend. In the words of John Maynard Keynes, “markets can stay irrational far longer than you can stay solvent”.

The final positive factor may be delivered by the Federal Reserve. A slowdown in US growth, and weakening outlook, may lead to the Fed cutting US interest rates perhaps more rapidly than many market commentators expect. Falling interest rates later in 2025 could provide an injection of positivity, and support investor confidence.

Remain focused on the long term

In more volatile market conditions, investors would be well advised to review the composition of their portfolio. They should ensure they have adequate diversification across a range of sectors, geographies and asset classes. Even in the most testing of market circumstances, opportunities always present themselves. For example, bond markets have not been immune to weakness, due to concerns over Government debt levels and the jump in inflation; however, good value can be found within short-dated bonds.

Active equity fund managers can allocate their portfolio to sectors that are performing well and seek value where possible. Where passive funds proved hard to beat in some markets last year, the expected conditions lend themselves well to active fund management. This is why we advocate holding a portfolio that holds both passive funds for broad market exposure, and active funds to drive performance.

We also recommend investors remain invested through any period of volatility, as investment returns are delivered from the length of time invested, rather than timing. Trading market conditions introduces significant risks, and the current uncertainty could lead to a rapid repricing of assets. For example, a ceasefire in Ukraine or the decision to remove tariffs could lead to a marked rally.

Keep a sense of perspective

Looking through the noise and rapidly evolving news flow, and focusing on the fundamentals, can help keep a sense of perspective. Strong corporate earnings, pockets of value amidst sectors left behind by the tech rally of 2024, and a supportive Federal Reserve provide us with confidence that markets can continue to perform well over the medium term. It is, however, clear that short-term risks are somewhat elevated, and external factors, such as trade tariffs and the conflict in Ukraine, could derail confidence in the short term.

Given the changing landscape, it would be sensible to ensure that your portfolio remains under review. Our experienced advisers can take an impartial view of an existing investment portfolio and provide suggestions where changes could be made that are tailored to your needs and attitude to risk. Speak to one of the team to arrange a review of your portfolio.

Mar 06
0

Tax year end planning

By | Tax Planning

As we are hurtling towards the end of another tax year, it is important to take the opportunity of reviewing your finances and take appropriate action to make the most of available allowances, exemptions, and tax reliefs, before the deadline on 5th April.

Top-up pension contributions

Making additional pension contributions can help boost your retirement savings and reduce your Income Tax bill. Qualifying personal pension contributions automatically benefit from tax relief at basic rate; however higher-rate and additional-rate taxpayers can also claim additional tax relief through their self-assessment tax return. The maximum you can contribute into a pension in the current tax year, also known as the Annual Allowance, is £60,000 or 100% of your relevant earnings, whichever is lower. This allowance covers all contributions made to pensions in the tax year, including those made into a workplace pension.

Higher earners need to proceed with caution, as those earning over £200,000 may well see their Annual Allowance reduced via a taper. Anyone who has flexibly accessed a pension in the past also needs to take care, as they will be subject to the Money Purchase Annual Allowance, which limits the level of contributions to £10,000. As there could be tax penalties if the level of contribution breaches your available allowance, we recommend you seek advice before making additional pension contributions.

Consider Capital Gains

After being heavily reduced over recent tax years, the annual Capital Gains Tax (CGT) exemption is just £3,000 for individuals, and £1,500 for Trustees in the current tax year.  Despite the much smaller CGT exempt amount available, it would be wise to consider investments that sit outside of a tax efficient wrapper, to see whether it would be sensible to sell assets to make use of the exemption before the end of the tax year, as the exemption cannot be carried forward if not used.

Gains made above the CGT exemption are subject to higher rates of tax following the Budget in October 2024. For investment disposals, basic rate taxpayers are now liable to CGT at a rate of 18% on the excess above the exemption, with higher rate taxpayers paying 24%.

Tax implications should not be the only consideration when deciding whether to sell an investment. Furthermore, if you hold an investment portfolio, choosing which investment to sell can be problematic. Our advisers can consider an existing investment portfolio and provide advice on the best course of action.

Use your ISA allowance

Individual Savings Accounts (ISAs) remain one of the most tax-efficient ways to save and invest, as you do not pay tax on interest or dividends generated from within the ISA, and assets sold within an ISA are not subject to CGT.

As the tax year draws to a close, it is time to assess whether you have fully used your available ISA allowances. For the 2024/25 tax year, the ISA allowance stands at £20,000 per individual. This allowance can be split between a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA (up to a certain limit). In addition, up to £9,000 can be invested in a Junior ISA, which can be held by a child up to the age of eighteen.

It is important to note that ISA allowances must be used in the tax year in question, otherwise they are lost. There is no facility to carry forward or make use of allowances from previous years. It is very much a case of “use it or lose it”.

Planning to reduce an Inheritance Tax liability

One of the simplest methods to reduce a potential Inheritance Tax (IHT) liability is to make gifts, and the end of the tax year is a call to action to consider whether this would be a sensible step to take.

The annual gift exemption is set at £3,000 per person, which means that everyone can gift this amount in the current tax year. Couples can benefit from making joint gifts, effectively doubling the annual gift exemption to £6,000. In addition, if you have not used the gift exemption in the previous tax year, you can carry forward any unused allowance for a single tax year.

Gifts that are greater than the annual gift exemption are also potentially exempt from IHT, if the individual making the gift survives for seven years after making the gift. You could also consider making gifts out of income which is surplus over your normal expenditure. These rules are complex, but used correctly, such gifts can be a powerful way of gifting regular sums, without the seven-year rule applying. We recommend seeking independent advice if you wish to consider making gifts using this method.

Other tax breaks

Those who are married or in a civil partnership could benefit from the marriage allowance. This is only effective if one partner earns below £12,570 per annum, and the other pays tax at basic rate. The non-taxpaying partner could transfer £1,260 of their personal allowance to the taxpaying partner, which would result in an income tax saving of £252. You can also potentially make a backdated claim for the last four tax years, if you were eligible.

It is also worth reviewing your income position in relation to the Child Benefit High Income Charge. This affects those with an adjusted net income which exceeds the earnings threshold, which increased from £50,000 to £60,000 from April 2024. Making pension contributions could be an effective way of reducing your net income to reduce or remove the charge completely.

Seek advice

As we reach the end of another tax year, it would be sensible to consider your financial arrangements to make the most of the available allowances and reliefs, many of which will be lost if not used.

Speak to one of our independent financial planners to carry out an impartial review of your financial position and consider any actions that need to be taken.

Feb 27
0

Maintaining control of children’s investments

By | Financial Planning

We are regularly asked to provide advice to parents and grandparents who wish to invest for their child or grandchild’s future, potentially to help with higher education costs, or towards a deposit for their first home, the cost of which has increased significantly over recent years. Data from Statista shows that the average deposit for first-time buyers in England in the 2022/23 tax year was £53,414. This is more than double the average deposit a first-time buyer needed to find in 2017/18, according to Savills. Even more stark is comparing the data to 1997/98, when the average first-time buyer deposit stood at just £2,200.

With the pressures of modern living, many young people will struggle to save for the average deposit, amidst costs of rent, household bills and living expenses. It is, therefore, often the case that children turn to the “Bank of Mum and Dad” for help, which could well coincide with a time when parents are aiming to clear mortgages of their own or trying to focus on their retirement planning.

Arranging appropriate investments for children can ease the financial burden for families and help provide the necessary funds to help pay for further education, or a house deposit. There are, however, decisions that need to be reached in respect of the structure of the investment plan, and whether to grant the child access to the funds at 18.

Tax-efficiency, but drawbacks

Two of the most popular methods of arranging children’s investments are structured so that the funds automatically belong to the child on their 18th birthday, which may not be a sensible step.

A Junior Individual Savings Account (JISA) allows a maximum investment of £9,000 per annum, and this can be funded by parents or other relatives, which can help with Inheritance Tax (IHT) planning. The JISA benefits from tax free returns and automatically converts to an adult ISA at 18.

A bare trust is another tax efficient way to save for a child’s future. The funds in trust belong to the child but are managed by the trustees (usually parents and grandparents) until they reach the age of 18. All income and gains generated within the trust are assessed on the child, except when the trust is created by a parent. In this case, income that exceeds £100 per tax year is assessed on the parent. It is important to note that this rule does not apply to grandparents.

Maintaining control

A common conversation point with clients are the risks involved when giving control of an investment to a child at the age of 18. Many parents and grandparents have concerns that the child may not make financially responsible decisions at this point in their life. As we mentioned above, the most common uses of investments for children are funding university costs or using the funds towards a deposit on a house; however, funds are unlikely to be needed for either purpose at the age of 18. Student loans cover the cost of tuition fees, and maintenance loans may cover some of the costs of living. The average age of a first-time buyer is 33 years old, and realistically, it is unlikely that anyone turning 18 will have sufficient earnings to support mortgage payments.

The risk is, therefore, that the child could use the funds for other purposes, such as holidays or socialising, and given the lack of control, could lead to disappointment that funds have been used unwisely, or could generate unwanted family friction.

The alternative is to exert control over when the child gains access to the funds. This is often a more palatable option; however, there are drawbacks that need to be considered. Instead of a bare trust structure, where the child owns the investment from the age of 18, a discretionary trust offers far greater flexibility and control. The trustees have complete discretion as to when funds are paid, and to which beneficiary. This is an ideal way of avoiding automatic access at 18, whilst still gifting funds, so that they leave the parent or grandparent’s potential estate. Discretionary trusts do, however, suffer a more punitive tax regime, which starts with the gift into trust and covers both income tax and capital gains tax. Additionally, discretionary trusts also suffer a potential charge to IHT at each ten-year anniversary.

Despite these drawbacks, careful planning can help reduce the tax burden significantly, and investment structures such as investment bonds can also avoid the need for trustees to account to H M Revenue & Customs each year. Segments of the Bond can be assigned to beneficiaries at a time trustees agree is appropriate, which could ease the tax burden further.

An alternative option is for parents and grandparents to set up separate investment accounts for their children, which remain held in the name of the parent or grandparents. Often such accounts carry a designation, to ensure that the investments remain separate to other accounts held. Naturally, such an approach would not be effective for IHT purposes as the investment remains in the name of the parent or grandparent, and the owner remains liable for income tax and capital gains tax; however, with careful selection of tax wrapper, a more tax-efficient approach can be adopted.

Getting the right advice

Parents and grandparents who wish to save for the next generations can explore a range of options, each with positives and drawbacks. Perhaps the best starting point to consider is whether you are content to give automatic access to the funds at 18 years old. In many cases, maintaining greater control is attractive, and with careful planning, the more onerous tax burden can be effectively managed. Our independent advisers have years of experience of advising parents and grandparents in this area. Speak to one of the team to start a conversation.

Feb 20
0

What a restricted adviser may not know

By | Financial Planning

When choosing a financial adviser, one of the primary decisions is whether to use an independent or restricted firm. Whilst the Financial Conduct Authority require firms to set out their service proposition at the outset, many consumers may not be aware of the difference between the two.

Firms offering an independent advice service, need to be able to recommend all types of retail investment and pension products from firms across the market without restriction. This contrasts with a restricted advice service, which may either be restricted by the type of products they offer, the number of providers they choose from, or both.

Both independent and restricted advisers must have achieved the requisite level of qualification, and therefore it is unfair to consider restricted advice as being “poor” advice; however, the constraints under which a restricted adviser needs to work could result in a compromised solution.

Investment selection

One of the key differences between restricted and independent advisers is the range of investment options offered. Restricted advisers generally build their investment proposition from a limited range of “in house” funds. Whilst many of the major restricted advice firms use external managers to manage their investment solutions, the adviser will only be able to choose investments from the pre-selected available panel of funds. This could mean that the investment portfolio designed for the client doesn’t necessarily fit their needs and objectives.

Even more restrictive are the increasingly common mixed asset solutions that many restricted advisers are now regularly recommending. These ready-made portfolios are largely passive in nature, and with limited active fund management, the potential for outperformance is reduced. These mixed asset solutions are undoubtedly more efficient and cost-effective for the restricted advice firm but offer a wholly inflexible and “one size fits all” solution.

In contrast, an independent adviser can select funds without restriction, which can lead to improved performance over the long term. Our analysis shows that a range of popular mixed asset funds (shown in shades of red and orange on the following chart) have largely tracked each other over the long term. The performance of the CDI Progressive Growth portfolio, which is built from our independent investment process and invests in a similar asset blend to the sample group, is shown in blue.

Performance of a range of restricted multi-asset funds (red/orange) compared to performance of CDI Progressive Growth portfolio (blue), over the last 7 years

Source: FE Analytics February 2025

Whole of Market advice

There is a wide range of financial products available on the open market, and new solutions are regularly released by product providers, which are often designed to improve tax-efficiency in response to changes in legislation. Using an independent adviser will mean that an adviser is free from constraint and can select from these products if they fit a client’s needs and objectives; however, a restricted adviser may not even be aware that such products and solutions exist, or if they are aware, they may be unable to recommend the product if it is not within the panel of options permitted through the restricted advice process.

Good examples of the drawbacks of restricted advice can be found when considering Inheritance Tax (IHT) planning, which is clearly an area of concern for many clients. A range of providers have released products designed to mitigate IHT liabilities, including those that seek to qualify for Business Relief. Most stocks listed on the Alternative Investment Market (AIM) will qualify for business relief, and many Discretionary Managed IHT solutions focus on AIM stocks as a way of mitigating an IHT liability. The recent Budget announced that AIM investments will only qualify for half of the available Business Relief from April 2026 and qualifying AIM investments will therefore face a potential IHT tax charge of 20%.

Being able to look across the whole of the market means that an independent adviser can consider asset-backed Business Relief solutions. These investments differ from AIM stocks, as the investment is made in unquoted companies that carry on trades such as renewable energy, storage and logistics, or secure lending. Asset-backed Business Relief investments are designed to produce more predictable returns, without the associated volatility inherent in AIM stocks; however, the returns generated by asset-backed investments may be lower than AIM stocks in strong market conditions. Perhaps the most important difference is that qualifying asset-backed investments will continue to receive 100% IHT relief (i.e. the full 40%) on investments after 6th April 2026, subject to an overall cap of £1m held in Business Relief assets.

Business Relief solutions are only one of a range of different products designed to mitigate a potential IHT liability. There are a variety of different insurance solutions available across the marketplace, which involve the use of protection policies and are often written in trust. A restricted advice proposition may not have the scope to consider all these options.

Making the most of our independent status

We are proud of the independent holistic advice service that we provide to our clients, and our advice process takes full advantage of our independent status, aiming to tailor the most appropriate solution to each and every client circumstance.

Understanding the marketplace is an ongoing process, as new products are released, and existing products are adjusted regularly. Our Investment Committee undertakes regular reviews of available platform services, and we use independent and external research to provide us with an unbiased view of the costs and features offered by each platform. The Committee also uses expert external research and analysis to review Inheritance Tax solutions, Venture Capital Trusts, Enterprise Investment Schemes and many other products.

If you are using a restricted adviser, it may be wise to consider what your restricted adviser isn’t telling you. You may be missing out on potential solutions that could be a better fit for your needs and objectives, which could also mean lower charges and potentially improve investment performance and/or tax-efficiency. Speak to one of our independent advisers to discuss your existing arrangements. We would be pleased to undertake an unbiased and impartial review and explain where improvements could be made.

Feb 06
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Why you need to start retirement planning earlier than you may think

By | Retirement Planning

To anyone in their 30s or 40s, retirement plans may seem like something that can be put off until a later date. Multiple financial pressures such as paying down a mortgage, covering the costs of growing children or funding further education costs often mean that long-term financial planning takes a back seat.

It is often the case that people begin to focus on their retirement plans when they accept that retirement is only a decade or so away; however not taking control of your pension plans earlier may have financial consequences, as regularly reviewing your pension arrangements is crucial to ensuring a secure and comfortable future. With constant changes in pension legislation, stock market volatility and potential changes in your financial circumstances, it is important that your retirement plans remain on track to meet your goals.

Identify savings gaps

Many people underestimate the value of pension assets needed to maintain their desired lifestyle in retirement. The full basic State Pension, whilst increasing to £230 per week from 6th April 2025, can only support a very basic lifestyle, and political parties have openly acknowledged that the so-called “triple lock” is under threat. This could mean that increases to the State Pension could potentially fall behind the cost of living over the next decade or two. It is therefore important to start thinking about the level of income that you would like to aspire to achieve in retirement and consider how your existing plans are placed to reach this goal. This could identify savings gaps that could be filled by increasing pension contributions, which may be easier to afford if made incrementally over a longer period.

Working with an independent financial planner can help review your existing pension contributions and provide advice on the level of additional savings that may be required to meet your goals, and how to make contributions as tax-efficiently as possible.

Investment performance and the need to review

Defined Contribution pension funds are typically invested in a mix of assets such as equities, bonds, and property. Modern workplace pension contracts need to offer a “default” investment option, in which pension investments are held, unless a separate investment strategy is selected. The default investment option usually provides an element of auto-adjustment, known as lifestyling. Whilst this approach can vary from provider to provider, the premise is that in the early years, when you are some distance from your retirement age, the fund will invest largely in equities, with the aim of achieving long-term growth. As you nearer retirement, the mix of assets is automatically adjusted so that the allocation to lower risk assets is increased, with the adjustments eventually reaching a position where 25% of the portfolio is held as cash, with the balance held in a mix of assets, at the chosen retirement date.

For those who do not wish to take control of their pension, this approach is designed to avoid the potential for the value of pension savings to fall heavily just before retirement; however, taking control of your pension investments and making investment decisions, can produce outperformance and lead to a greater pension fund value at retirement. Furthermore, most lifestyle approaches are invested in passive investment funds only, which by their nature, will only ever track their benchmark index. Actively managed funds, invested in the same sector as a passive fund, could potentially outperform significantly, and considering your pension investments earlier in life can give more time for investment decisions to have an impact on your pension fund value, and the income it can generate in retirement.

Building a cohesive strategy

Most people accumulate multiple pension pots from different employers over their careers, and designing a cohesive overall strategy across multiple pensions with different providers can be complicated. Older pension contracts often carry higher ongoing costs than modern pension arrangements, which can impact on performance over time, and many only offer a limited range of fund options from which to create a good performing investment portfolio.

Consolidating older pension arrangements into modern style platform pensions can help bring order to deferred workplace pensions and provide the opportunity to put a cohesive investment strategy, designed to meet your attitude to risk and goals, in place. Undertaking such a consolidation exercise earlier in life provides greater time for the new investment strategy to outperform, and in doing so, can help the value of your pension fund reach a level required to provide a more comfortable retirement.

Working out a financial plan

Starting to consider a retirement plan can be a daunting task; however, working with an adviser can help identify your financial goals and priorities, and consider the level of contributions required to meet your retirement plans. Independent financial advice can also be vital when considering options in respect of existing pension arrangements you hold. Consolidating older style arrangements into a single plan is not right for everyone, as some pensions set up years ago can contain valuable benefits, such as guaranteed annuity rates or protected tax-free cash, which may be lost on transfer. A comprehensive independent review of your pensions can help identify such special features and critically analyse the charging structure and options within your existing arrangements.

Financial advice can also rearrange pension investments into a cohesive strategy, designed to meet your attitude to risk. Modern pension platforms provide access to a very wide range of investment funds from across the marketplace, thus avoiding the restrictions imposed by many workplace pensions. Speak to one of our experienced advisers to discuss your existing pension arrangements, and build a financial plan designed to meet your retirement goals.

Jan 30
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Inheritance Tax – how advice can help reduce your liability

By | 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
0

Why Bond Yields matter

By | 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.