Financial Planning

As we head into the festive season, the focus of many at this busy time of year will be on buying gifts for loved ones. It may also be a good time for grandparents to think about the benefits of making gifts to help set grandchildren up for adult life, and help with future expenses they may face, such as education and university costs, or funds towards a deposit on their first home.

Gifts made to grandchildren under the age of 18 will need to be held in Trust for them, and perhaps the simplest form of Trust arrangement, a Bare Trust, is ideal for this purpose. The Trust is a separate legal entity, and Trustees will need to be appointed to administer the money. The Trustees could be the donor of the gift, the child’s parents, or other responsible individuals.

The Bare Trust continues until the beneficiary reaches 18, although it is important to note that at this point the beneficiary has the right to request that the assets are transferred to them. Some parents and grandparents may see this as less than ideal, as 18 is quite a young age to receive a substantial capital sum. That being said, if the purpose of the gift is to help pay for further educational expenses, funds will be handed over at the time that they are needed.

In addition, Bare Trusts can allow Trustees to advance funds to a child earlier than age 18, however funds must be used for the child’s benefit, such as education costs.

Bare Trusts can be tax-efficient

Bare Trusts can often be a tax-efficient way of gifting funds to the next generation, as income or capital gains arising on assets held in the Trust are taxable on the beneficiary, i.e., the grandchild. As they are unlikely to have any other taxable income at that age, if the amount of Trust income generated is below the child’s personal allowance (which is £12,570 in the current Tax Year) then no income tax will be due. Similarly, capital gains on investments realised are also taxable on the minor beneficiary, and therefore if the gains fall within the Capital Gains Tax (CGT) allowance, there will be no CGT to pay.

It is important to note that these exemptions do not apply when a parent makes a gift for their minor child, as the parental settlement rules may mean income remains taxable upon the parent.

Gifting to reduce an Inheritance Tax liability

Gifts into a Bare Trust are treated in the same way as any other gift and are therefore subject to the same tax rules as any other transfer by way of gift. Each individual has an annual gift allowance of £3,000 and if the allowance from the previous Tax Year has not been used, then this can be carried forward. A couple could therefore potentially make a total gift of £12,000 without any immediate Inheritance Tax (IHT) considerations. Any amount above this would be a Potentially Exempt Transfer and the donor of the gift would need to survive seven years from the date of the gift for this to fully escape their Estate for IHT purposes.

Making use of the annual gift exemption, or making larger gifts, can be a useful method of reducing a potential IHT liability, although the decisions around IHT planning in general are often more complex and require careful consideration. Holistic financial planning can help those in later life consider their potential IHT liability and look at a range of options that can reduce the amount of tax that would be payable by their Estate.

Deciding on an investment strategy

Whilst it is possible for money to remain as cash within a Bare Trust, for example held in a deposit account, most Trustees will opt to look to some form of other investment, such as Equities (Company Shares), Bonds and other assets, such as Property or Infrastructure, to try and achieve better returns than those that can be generated from deposit accounts. Trustees need to make sensible decisions in respect of how funds are invested, and as the responsibility rests with the them, many Trustees opt to receive independent investment advice to devise an appropriate investment strategy.

In addition to the initial investment decisions, Trustees have a duty to review the investments to ensure that they remain suitable. Other than reviewing investment performance, Trustees need to consider whether an investment strategy should be altered as a child moves closer to age 18, in particular if funds will be used at this time.

Bare Trusts need to be registered

A further responsibility that Trustees need to undertake is to register the Trust with the Trust Registration Service. This service is managed by H M Revenue and Customs and is the government’s way of keeping a record of Trusts in the UK.

The Service records the beneficial ownership of assets held in trust, together with the Trustees’ details. When first established, only Trusts that suffer tax on a regular basis had to register, but now Bare Trusts fall within the category of Trust that need to comply with the registration process.

Trustees can register using the Government online portal, and Trustees do need to be aware that they must register a Trust within 90 days of the Trust being established. Failure to register can lead to financial penalties, and whilst HMRC are likely to take a more lenient approach initially, persistent offenders are likely to face fines.

FAS can provide holistic and independent advice to grandparents looking to set up a Trust, including the most appropriate Trust to consider, together with advice on a suitable investment strategy. Speak to one of our experienced advisers for further details here.

Married couples can benefit from tax breaks that can reduce Income Tax, Capital Gains Tax and Inheritance Tax, together with other applications that can affect both personal and business finances. Although some of the rules can be complex, they are worth reviewing to see whether a married couple can benefit.

Transferring an Income Tax allowance

Before we look at the current rules, it is worth considering the historic context of the Married Couples Tax Allowance. Prior to 1990, the income of a married couple was added together for tax purposes and treated as if it was the income of the husband. The 1990 Budget introduced the concept of personal taxation, with each individual being taxed on their own income. However, married couples continued to receive a benefit in the form of the Married Couples Allowance, until it was abolished in the 2000 Budget for all married couples, except where one spouse was born before 6^th April 1935. This allowance remains available to those couples who meet this criteria and in the current Tax Year can reduce the amount of tax paid by up to £941.50 a year. If the eligible couple were married before 5^th December 2005, the tax reduction is received by the married man.

Not to be confused with the Married Couples Allowance, the Marriage Allowance was introduced in the 2015 Budget. This allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner, and in the current Tax Year can provide a tax reduction of up to £252 a year.  To benefit, one spouse must have an income below the Personal Allowance, which is £12,570 in the current Tax Year, and can therefore transfer just over 10% of their unused Personal Allowance to their spouse. The higher earning spouse needs to be a basic rate taxpayer, that is to say, he or she receives income between £12,571 and £50,270 a year.

Going about claiming the allowance is straightforward, either via the Gov.UK website or by contacting HMRC, and you can backdate your claim to include any tax year since 5^th April 2018 that you were eligible for Marriage Allowance.

Using combined allowances for Capital Gains

Capital Gains Tax (CGT) reform was one of the main features of the recent Budget Statement, delivered by Chancellor Jeremy Hunt. From next Tax Year, the annual CGT allowance will halve and then halve again in the following Tax Year, meaning that gains on asset disposals in future years are more likely to be liable to CGT.

As individuals each receive a CGT allowance, married couples can potentially reduce the amount of CGT payable on disposal, as transfers of assets between spouses are not deemed to generate an immediate tax liability. This allows part of an asset which is held in one spouse’s name to be transferred to the other spouse, so that both CGT allowances can be used.

Common applications of this rule are in the transfer of shares between spouses so that each spouse sells down part of the holding to use both CGT allowances, or the transfer of the percentage of a property prior to sale.

Transferable Nil Rate Band for IHT

Married couples also benefit from the ability to transfer any unused Nil Rate Band on death of a spouse. The Inheritance Tax (IHT) allowance for each individual is £325,000 and this allowance will remain frozen until at least 2028. However, transfer of assets between spouses on death are exempt, and any unused IHT allowance can also be transferred to the surviving spouse. If the first to die leaves all assets to their surviving spouse, their estate will benefit from a double allowance of £650,000 on the second to die.

This ability to transfer allowances also extends to the Residence Nil Rate Band, which is available on Estates where a residential property is bequeathed to a direct lineal descendent. The Residence Nil Rate Band is currently £175,000 and, as with the Nil Rate Band, if unused on the first death, the surviving spouse can receive the unused allowance, providing a further £350,000 allowance.

Contrast this to the position where a couple are not married. Any assets that exceed the Nil Rate Band (or Residence Nil Rate Band) are likely to be subject to IHT at 40%.

Keeping the ISA allowance

When a spouse or civil partner dies, the surviving spouse can inherit any Individual Savings Allowance (ISA) held at the date of death. This can be a valuable benefit if couples have made sensible financial planning decisions and used ISA allowances to hold Stocks and Shares or Cash during their lifetime. The rules provide a fresh allowance equal to the value of the ISA at date of death – or when the ISA is closed – and the new allowance is in addition to any allowance the surviving spouse has in the current Tax Year.

For couples who have built up substantial investment portfolios using the ISA allowances, the Inherited ISA rules are valuable, as the transfer of investments on death could otherwise leave the survivor in the position where future dividends or interest could be liable to tax.

The value of financial planning

Married couples can benefit from modest tax breaks under UK tax legislation, although the rules can be complex and through careful planning, there are other benefits that can be obtained by positioning assets in the most tax advantaged manner.  This is where holistic financial planning can add significant value, considering all aspects of a couple’s circumstances, personal and business assets, to position these to their best advantage. Speak to one of our experienced financial planners who will take a holistic view of your finances.

If you are interested in discussing the above further, please speak to one of our experienced advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Over the last three weeks, the terms “Gilt” and “Yield” have seemingly been ever-present in news bulletins. Following the announcement of the Government Growth Plan on 23^rd September, Gilts have come under pressure, which in turn forced the Bank of England into a temporary position whereby they purchased Gilts, in a move designed to stabilise the market. Let’s go back to basics and look at the importance of Gilts to the wider economy.

What is a Gilt

A Gilt is a loan note issued by the UK Government, who use the money raised by the sale of Gilts to fund public spending. Gilts are issued by HM Treasury and listed on the London Stock Exchange. The term “Gilt” or “Gilt-edged security” is derived from the fact that the British Government has never failed to make interest or capital repayments on Gilts as they fall due. The first Gilt was issued in 1694, to help finance the war against France, and raised a total of £1.2m. By way of contrast, the size of the Gilt market in 2021 topped £2 trillion.

The UK Government is not unique in raising funds in this manner. Most Governments issue loan notes in one form or another. The US issues Treasury Bonds, Germany issues Bunds, and other major nations, such as France, Italy, Canada and Australia also finance public spending in this manner.

Conventional and Index Linked

There are two different types of Gilts listed on the London Stock Exchange. Conventional Gilts comprise around 75% of the Gilt market, and all have two common elements. Firstly, they pay a “coupon” or fixed interest payment, each six months. Secondly, the Gilt has a redemption date, upon which the principal of the Gilt is repaid. This is typically a fixed price of £100.

The remaining 25% of the Gilt market is made up of Index Linked Gilts. These have a redemption date, in the same manner as Conventional Gilts; however, the coupon payments, and the principal value at redemption, are adjusted in line with the Retail Price Index (RPI). This means that the redemption value, and the interest payments, keep in line with inflation.

Common Factors

Whilst Gilts have a redemption date, the fact that Gilts are traded securities will mean that the price will fluctuate over time. Gilt market sentiment is often dictated by prevailing interest rates, and as we have seen over recent weeks, how the market views Government economic policy.

As interest rates rise, this increases the attractiveness of overnight money on deposit, and therefore makes a Gilt look less attractive. The opposite is true, as Gilts generally look more attractive when interest rates are falling. Furthermore, in the situation when interest rates are rising, any new Gilts that are issued will need to offer a higher coupon to attract buyers. This tends to lower demand for existing Gilts which may well offer lower coupons.

The time remaining until a Gilt reaches the stated redemption date will also influence Gilt prices. When a Gilt heads closer to its maturity date, the value of the Gilt will move towards the Gilt’s initial face value.

Finally, inflation can impact on whether Gilts are in demand. Higher inflation, as we have seen over recent months, will reduce the purchasing power of a Gilt’s face value and coupon payments.

How yields are calculated

Gilt yields are often quoted by market participants, rather than Gilt prices, as the yield offers  a reflection of the cost of borrowing. The running Gilt yield is calculated by dividing the annual coupon by the current price. For example, if a 5% Gilt is currently priced at £90, the yield is 5.55%. Adding the redemption price into the equation can give an indication of the total return a Gilt holder will achieve if the Gilt is held to redemption. Take the same example of the 5% Gilt, currently priced at £90. Assuming this redeems at £100, then the buyer would also benefit from a £10 capital uplift per Gilt held, to redemption.

Implications for other Bond markets

It is important to note that movements in Gilt markets affect the attractiveness of Corporate Bonds. This is due to the fact that Corporate Bonds tend to trade using a “spread” over the corresponding Gilt, which indicates a risk premium that the holder of the Bond is willing to accept for holding a Bond issued by a company, rather than a Gilt issued by the Government.

Why Gilt Yields matter – mortgage rates and public finances

As market confidence in Government economic policy has ebbed since the Growth Plan was announced, Gilt yields have generally been rising. The Bank of England programme to purchase Gilts stabilised the market a little, although concerns remain over the prospects for Gilts in the short term.

Yields are of importance to the mortgage market, as they affect so-called “swap” rates, which financial institutions pay to other institutions, to acquire funding for future lending. In simple terms, swap rates are a best guess as to where interest rates will be in the future, and tend to move in tandem with Gilt yields.

As Gilt yields rise, any additional Government borrowing will need to offer higher coupons, to ensure there are sufficient buyers for the Gilt issued. Furthermore, as Gilts reach maturity, the Government needs to roll over the borrowing into new Gilts, which again are likely to be at higher interest rates. This increases the interest bill paid by the Government and places further pressure on public finances. For this reason, the Government will want to ensure Gilt yields are brought back under control as quickly as possible.

Likewise, those with a fixed rate mortgage that is due to mature will be well advised to keep a close eye on Gilt yields as an indication of the direction of travel for mortgage rates in the near term.

Where next for Gilts?

Whilst some details of the change in Government policy have already been announced, market participants will still look to the 31^st October for full details of the Budget review. The market is likely to be quick to jump on any perceived weakness in Government messaging, following the replacement of Kwasi Kwarteng with Jeremy Hunt as Chancellor. Shortly after the 31^st October statement, both the US Federal Reserve and Bank of England will announce interest rate decisions on 2^nd and 3^rd November respectively. This will, therefore, be a period when further volatility in the Gilt market is likely. At FAS, we will, of course, continue to monitor events closely.

If you would like to discuss the above further, then contact one of our experienced advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

The UK Housing Market has seemingly defied gravity over recent years, shrugging off the economic effects of Brexit and the Covid-19 pandemic. For those who have suggested previously that prices may have peaked, there have been a number of false dawns. However, recent market data, together with the higher costs of living and the impact of mortgage rate hikes, may well combine to finally curb house price inflation.

The latest Halifax House Price data, released on 7^th October, showed that house prices decreased marginally in September, with a -0.1% month on month fall. Whilst not newsworthy on its’ own, perhaps of more interest was the news that the annualised rate of growth has now fallen in three successive months. Nationwide, who also publish monthly house price data, reported flat prices on the month and a further fall in the annualised rate.

Cost pressures

We are not surprised to see price growth slow, as the higher costs facing households begin to bite. Despite Government support which has capped the unit rates for Gas and Electricity domestic supplies for the next two years, household bills have still risen substantially from where they were earlier in the year. Food price inflation has also impacted on household budgets, and whilst petrol prices at the pump have fallen over recent weeks, they remain elevated from a year ago.

Whilst household outgoings have increased due to the cost of living, and caused some pain to household finances, the recent turmoil in the mortgage market is likely to have a bigger impact over coming months. Fixed mortgage rates have been climbing sharply since the UK mini-budget announcement on 23^rd September, the result of which has seen the yields on Government Bonds (Gilts) rise sharply, as markets reacted negatively to the announcements. This led to Bank of England intervention to stabilise the Gilt market by temporarily buying Bonds. Given the uncertainty, mortgage lenders raced to pull fixed rate mortgage deals at record pace, with new deals being released at sharply higher rates, as the cost of securing funding has now increased.

Mortgage hikes

To put this in context, prior to the Chancellor’s speech, the average two-year fixed rate mortgage was priced at 4.74%, but has now risen to more than 6% at the time of writing, the highest level since 2008. In stark contrast, the average two-year fixed rate mortgage was just 2.34% at the end of 2021. In monetary terms, taking out a £200,000 repayment mortgage over 25 years in December 2021, at the average two-year fixed rate of 2.34%, would have resulted in monthly mortgage payments of £881 per month fixed for the first two years. The same repayment mortgage taken out with two-year fixed rates at 6%, would result in an increase in monthly payment to £1,289 per month for the first two years.

For those borrowers on fixed rate deals that are shortly coming to an end, the new rates on offer are likely to come as a shock. The higher rates will also affect first time buyers, who will find affordability stretched further. The effect on the mortgage market is highly likely to negate the Stamp Duty changes announced in the Mini-Budget, which increased the residential nil-rate band from £125,000 to £250,000 for all purchasers, and from £300,000 to £425,000 for first-time buyers. Without the turmoil in the mortgage market, the permanent reductions in Stamp Duty may well have continued to support prices.

The wider impact

With homeowners being hit from all sides, a sharp slowdown in the housing market is now highly likely. This may well have wider economic consequences, as perceived strength in the housing market is closely linked to consumer confidence. As homeowners see house prices rise, they generally feel better off and more confident to spend. The reverse is also true, and for some who are over-leveraged, some homeowners risk holding a larger mortgage than the value of their home.

Housing transactions may also slow, which will affect many sectors of the economy. Each Property transaction completed will provide business for Removals and Storage firms, Solicitors, Surveyors, Estate Agents, together with spending and renovations undertaken by new householders. This may also have a knock-on effect on unemployment. The Home Builders Federation suggest that over 11,500 jobs are supported by housing transactions alone.

Reasons to be positive?

For those remaining positive about house prices in the longer term, supply side constraints remain. The Office for National Statistics (ONS) forecast the number of households in the UK will increase by 1.6m over the next 10 years, whilst the current rate of house construction in the UK is running at levels that falls short of the amount of new homes that will be needed.

It has also been suggested that landlords who are not keen on selling up may well be looking to increase rents, which in turn could lead to renters looking to purchase, in particular if prices fall by an appreciable amount.

Where does this leave Property investors?

Buy-to-let landlords have enjoyed the benefits of rampant growth in house prices, together with rental income, over recent years. However, those who are leveraged with Buy-to-Let mortgages may begin to see a squeeze on rental margins, which landlords may not be able to pass on to tenants.

From a financial planning perspective, residential property assets remain a valid part of any sensible diversified investment approach. With house prices likely to come under pressure, the risk of holding residential property as an investment has increased. This is further justification for landlords to look closely at the returns they are achieving on their property investments, and consider whether they need to adjust their overall strategy.

If you would like to discuss the above further, then contact one of our experienced advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

We would all like to think that we are able to manage our affairs successfully, and will continue to be able to do so in the future. However, an increasing number of people are affected by illnesses such as Alzheimer’s or Dementia, which can mean that individuals are no longer able to make decisions for themselves.

According to Alzheimer’s Research UK, almost 950,000 people in the UK are living with Dementia,  with this number projected to rise to 1.6 million people by 2040. A person’s risk of developing Dementia is 1 in 14 over the age of 65; however, this illness sadly affects younger people too, with over 42,000 people under the age of 65 being diagnosed with Dementia.

These very sad statistics underline how important it is to consider what would happen if you lost capacity to manage your affairs. Setting up a Lasting Power of Attorney (LPA) is straightforward and can make sure your loved ones can make the important decisions about your health and your financial wealth on your behalf, should you become incapacitated through ill health or accident.

What is an LPA?

An LPA is a legal document that lets you appoint someone you trust to make decisions on your behalf, should you become unable to make those decisions for yourself in the future. There are two different types of LPA, one covering Property & Affairs (e.g. property, investments and assets) and Health & Welfare (which covers health care and medical treatment).

You can choose to set up one or both types of LPA, and you can nominate the same person or elect to have different attorneys for each. Preparing an LPA doesn’t mean that you instantly lose control of the decisions that affect you. For the Property & Affairs LPA, you can be specific about when the attorney can take control when preparing the LPA, and in respect of the Health & Welfare LPA, this can only be used once capacity to make decisions has been lost.

All LPAs must be registered at the Office of the Public Guardian, which is the government body responsible for the registration of LPAs before they can be used.

Who to appoint as your attorney

Choosing the right attorney or attorneys is an important decision to reach. You can nominate anyone to be your attorney, provided they are 18 years old or older, and are not bankrupt.

The person, or people, you choose needs to be someone that you trust to make decisions for you, and will be able to act responsibly and in your best interests.

The risk of not preparing an LPA

If you lose mental capacity and don’t have an LPA arranged, this can leave loved ones with significant worry, and could potentially have ramifications for the individual’s personal finances.

If an LPA has not been prepared, and mental capacity is lost, an application will need to be made to the Court of Protection, for an individual to become your appointed ‘deputy’. This deputy will then make financial decisions on your behalf. The Court has the final say as to who is appointed, and this may not align with your wishes.

The process of making a Court application is long-winded, with applications taking many months to be heard and then approved. This could lead to significant issues for ongoing financial transactions, such as investment management, or the purchase or sale of a property. Directors and Business owners are at particular risk, as loss of capacity could lead to the situation where no individual is authorised to run the business.

Furthermore, using a Solicitor to support a Court Deputyship application can lead to expensive costs, that could be avoided by preparing an LPA in advance.

LPAs and Investment Advice

When an individual loses capacity, attorneys will often seek independent financial advice in respect of assets held by the donor of the power. For example, we are often asked to provide investment advice to attorneys where the donor has moved into long term care, and their property has been sold, leaving a cash sum upon which investment advice is needed.

It is important to recognise that an attorney appointed by an LPA is generally not permitted to delegate responsibility to another individual, without express permission by the Court of Protection. This has an impact when an individual holds investments that are managed under an existing Discretionary Management agreement, and then loses capacity to manage their affairs.

This can be overcome by inserting specific wording in the LPA document when it is prepared, which provides express permission to delegate investment management decisions to an existing or new discretionary investment manager. The view of the Court has, however, changed over the course of the last year, and it appears the Court is taking a more practical view when these situations arise.

Don’t leave it too late

Given the sad prevalence of cognitive decline in the population, we can’t stress enough the importance of preparing an LPA document. Most people appreciate the importance of making a Will to deal with affairs and assets on death, but perhaps don’t place the same emphasis on preparing an LPA. Failing to take this step can lead to unnecessary stress for loved ones, and potentially leave the individual exposed to significant risks in respect of investments, property or business assets. We strongly recommend that all individuals consider preparing an LPA, either in conjunction with a review of their existing Will, or separately.

How we can help attorneys

Whilst the focus is often placed on the importance of ensuring an LPA is in place, attorneys appointed under an LPA can often find themselves thrown in at the deep end when trying to manage the finances of the donor. At FAS, we have considerable experience in assisting attorneys to understand assets held by the donor of the power, and can provide independent advice on existing investments, or how best to invest cash funds held by the donor. Give one of our experienced Advisers a call if you require assistance.

If you would like to discuss the above further, then contact one of our experienced advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Simply announced as a “fiscal event”, the series of announcements made on Friday may well have more impact than many full-blown Budgets have had over recent years. Aimed at delivering growth, the Chancellor reversed a number of policy decisions and announced some surprise measures in the statement, too.

Additional Rate scrapped

Perhaps the most eye-catching of the announcements was the removal of the 45% Additional Rate Income Tax band. This rate is currently payable on income earned over £150,000. From 6^th April 2023, the maximum rate of Tax payable on income will be 40%.

We await clarification in respect of the impact this could have on Trusts. Currently, Discretionary Trusts pay tax equivalent to the additional rate (45% on Trust income over the first £1,000 of income, and 39.35% on dividends) and it is not, at this stage, clear whether Trusts will realign with the new highest rate of Income and Dividend Tax. Further information is likely to be revealed when the Finance Bill is published.

With the removal of the Additional Rate Band, the Personal Savings Allowance of £500 will also become available to those whose income is currently within the Additional Rate Band. Under the current rules, anyone with income over £150,000 does not benefit from the Personal Savings Allowance, which covers the first £500 of savings income.

Income Tax cut brought forward

Previously announced as a policy measure due to come into force in 2024, Kwarteng has brought forward the 1p cut in the basic rate of Income Tax by 12 months, to take effect from 6^th April 2023. The basic rate of tax will fall from 20% to 19%, and this will apply to earned and savings income. The current rate of relief of 20% will be maintained for Gift Aid charity donations until April 2027.

Reverse over Social Care

Previously announced by former Chancellor Rishi Sunak, the Government have reversed the planned policy decisions designed to raise funds to help provide for the social care budget. The 1.25% National Insurance hike for Employees and Employers will be scrapped from November 2022, and the Dividend Tax rate hike, which was implemented in April 2022, will also be reversed from next April.

For Basic Rate taxpayers, Dividend Tax will revert to 7.5% from the current 8.75%, with Higher Rate Taxpayers paying 32.5% once again, rather than the current 33.75%. Coupled with the removal of the Additional Rate Tax Band, the maximum rate of Dividend Tax payable from 6^th April 2023 will be 32.5%, which could present opportunities for business owners to draw more from their business in a tax efficient manner from this date.

The reduction in Dividend Tax rate will also benefit those with large investment portfolios held outside of tax-efficient wrappers, such as an Individual Savings Account (ISA).

Pension changes

There were no major announcements in respect of Pensions. With the reduction in the Basic Rate, and removal of the Additional Rate, from 6^th April 2023, the maximum rate of Income Tax relief on pension contributions will fall to 19% for Basic Rate Tax payers, and a maximum of 40% for Higher Rate taxpayers.

Despite the Basic Rate Income Tax reduction coming into effect in April 2023, the Growth Plan suggests that pension schemes that arrange contributions on the relief at source method (i.e. personal pensions) will still be able to claim Basic Rate relief at 20% until April 2024.

This presents an opportunity to gain an additional 1p of Basic Rate relief on contributions in the 2023/24 Tax Year.

Venture Capital Trusts secured

A feature of European Union state aid rules was that a “sunset” clause on Venture Capital Trusts (VCTs) was due to come into force in 2025. This could have meant that new investments in VCTs may not have qualified for relief from 2025. However, in a move designed to boost UK entrepreneurship, this deadline has now been removed, which secures the future of Venture Capital Trusts.

In addition, Kwarteng announced an extension of the Seed Enterprise Investment Scheme (SEIS) limits, with companies being able to raise £250,000 of SEIS investment, rather than the current £150,000 investment.

The support of VCTs and other tax-efficient investments is welcome, as this has proven to be beneficial for small business looking to raise funding for expansion, together with offering attractive tax breaks for investors.

Stamp Duty Land Tax

As part of measures designed to help the housing market, the Stamp Duty Land Tax (SDLT) threshold for residential properties has been doubled from £125,000 to £250,000. This will mean that no SDLT will be payable on properties up to £250,000. For first-time buyers, the relief has been extended, with the first £425,000 – instead of the current £300,000 – being exempt from SDLT. This relief is available on properties up to £625,000 in value.

These changes may well support the lower end of the housing market; however, there has been no change to the rates applying for higher value properties. The 3% levy on additional properties purchased will also continue unchanged.

Corporation Tax changes axed

The intended increase in Corporation Tax, scheduled for 6^th April 2023, has been axed. The rate of Corporation Tax would have increased to 25% from next April; however, it will now remain at 19%, and presents an opportunity for business owners to rethink plans to draw profits over the current and next Tax Years.

In Summary

The announcements were certainly eye-catching and we wait to see whether the new legislation will have the desired impact on growth. The initial market reaction has been fairly clear, given the slump in the Pound against the Dollar immediately after the measures were announced.

From a financial planning perspective, these new rules present interesting opportunities for business owners, those with share portfolios and individuals saving through a pension, to review their current arrangements.

If you feel a comprehensive review of your financial planning objectives and plans would be beneficial, then speak to one of our experienced advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

The Bank of England’s Monetary Policy Committee announcement of a 0.50% base rate hike last week would have been sufficient to cause headline news on its own, given that the increase was the largest single rate rise announced by the Bank for 27 years. However, it was the accompanying gloomy statement by Andrew Bailey, the Bank of England Governor, forecasting a prolonged downturn in the UK economy over the coming 15 months, that drew most attention.

Fifteen months of recession?

Mr Bailey warned that the UK would move into recession in the fourth quarter of 2022. Recessionary conditions represent a significant and prolonged downturn in economic activity, and is often defined by two successive quarters where Gross Domestic Product (GDP) falls. Mr Bailey’s comments that the Bank now forecast a contracting economy for the latter part of this year and for the whole of 2023 raised eyebrows amongst commentators and respected economists. Former Monetary Policy Committee member Professor David Blanchflower commented that Mr Bailey had been guilty of “loose talk” and the day of the announcement was “… as bad a day for the British economy as I can remember”.

The statement by the Bank, which accompanied the 0.50% base rate hike, cited sharply rising inflation over coming months as the reason behind the rate increase. The Bank now expects Consumer Price Inflation (CPI) to reach in excess of 13% later this year, largely due to the increase in wholesale gas costs. This would represent a further increase of 3.6% over the current CPI print.

We take an objective view of macro-economic conditions, and generally feel that central bankers perform a reasonable job, given the intense focus that markets place on every announcement or comment that is made. In this instance, however, we can’t agree with the Bank’s comments in respect of the UK economy, and would go as far as branding the pessimistic long-range forecast as being irresponsible.

Interest rate policy

Firstly, let’s consider the reason behind the rate increase announced by the Bank. Inflationary pressure is largely being caused by external forces that are beyond the control of the Bank of England. Energy and Fuel costs are all increasing as a result of the conflict in Ukraine, which has driven the price of wholesale gas to more than double since the start of the year. Sanctions on Russia, combined with threats to slow or even halt gas supply through pipelines, has led to a scramble to secure gas supplies, pushing prices higher. Crude oil prices have similarly seen a spike during the course of 2022, although prices have fallen back by 25% since the start of June. Food prices have been driven by a combination of increased costs of shipping and transportation, and increased costs and limited supplies of goods such as Sunflower Oil and Wheat.

Despite this Core CPI – which ignores energy, food, alcohol and tobacco prices – has actually fallen back from 6.2% in April to 5.8% in June. Core CPI tends to be a useful measure of domestically generated cost pressure, and perhaps should give the Bank more comfort that wage increases and prices for goods and services are not out of control.

We would argue that the strength of our currency is an area that should command more focus in decision making. Sterling has been weak against the Dollar, falling by more than 10% this year, which stokes inflation, as the cost of imported items priced in Dollars increase as Sterling weakens. Given the immediate reaction on currency exchanges to Mr Bailey’s comments, which saw Sterling weaken in the face of the 0.50% base rate increase (which would normally be seen as positive for the currency) we feel Sterling may remain under pressure for some time to come.

Growth will slow, but perhaps not stall

The dramatic drop in GDP expectations announced by the Bank is another area we feel demands further scrutiny. The Bank’s central forecast is for growth to be negative for the final quarter of 2022 and remain in negative territory for the whole of 2023, with a net contraction of 2.1% over this period. When divided by the five quarters of recession suggested by the Bank, this would represent a contraction of 0.4% per quarter, which is considerably more pessimistic than the OECD (Organisation for Economic Co-operation and Development) which suggested in June that UK growth would be flat during 2023, and the International Monetary Fund (IMF) which, in April, forecast 1.2% growth in 2023.

UK GDP increased by 0.8% in Q1 of 2022, and the preliminary reading for Q2, to be announced next week, is expected to continue to show the UK economy expanded, albeit by a lower rate of growth. April showed a decline of 0.2%, but May saw GDP increase by 0.5%. Given the reported rate of growth, compared to the grim projections by the Bank, growth is either going to slow dramatically, or (as we would suspect) the Bank is being overly negative in their forecasting.

As you can perhaps deduce from our analysis, we don’t agree with the Bank forecasts or the message that the Bank appear to be conveying. We find it hard to believe that Mr Bailey’s predecessors, Mark Carney or Mervyn King, would have made such predictions. It is clear that inflation will persist, although we expect the pressure to ease as we move into 2023. We also appreciate that growth is likely to slow as we move towards the end of the year, although we feel more positive that any recession in the UK will be more short-lived than the Bank suggests.

If you would like to discuss the above with one of our experienced advisers, please get in touch here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Life assurance is a crucial area of financial planning, particularly where there is a need to provide protection for young and growing families or where others are financially dependent on the life assured. It is, however, all too often ignored by individuals when they assess their financial priorities. According to research undertaken by Canada Life last year, 63% of those questioned have never thought about, or do not have, an active life insurance policy in place.

Lump sum cover

The most common form of life assurance is a term assurance policy, whereby the death of the life assured triggers a lump sum payment to beneficiaries. Often the policy will be established as a decreasing term assurance policy, which is designed to cover a repayment mortgage. These policies are set up so that the amount of cover falls over time broadly in line with the outstanding mortgage balance.

Whilst holding life cover over an outstanding mortgage balance is obviously sound financial planning, a lump sum payment would do little to provide additional funds on an ongoing basis to cover day-to-day living costs and other expenditure for family members left behind. This is where a different type of life insurance – family income benefit – can be very useful.

Providing a regular income

The main feature of family income benefit is that the policy is structured to pay a monthly tax-free income to beneficiaries for the remainder of the policy term, rather than paying out a lump sum. It is designed to replace earnings or income that would have been generated, in the event that the policyholder dies, thus allowing surviving family members to maintain their standard of living. The policy is structured at the outset over a specific term, and in the event of a claim being made on the policy, the payments will be made for the remainder of the term. For example, if a policy was established for a 20 year term, and the policyholder died in the 9^th year, the monthly benefit payments would continue to be paid for the 11 years remaining on the policy term.

Benefits paid by a family income benefit policy can either be paid on a level basis (i.e. the monthly premium and benefit payments are fixed at the same amount for the life of the policy) or indexed, where the level of benefits, and monthly premium, are inflation linked. This can protect the real value of the cover provided, and the cost of living increases we have seen over recent months are a timely reminder of the importance of protecting future payments against rising inflation. Many family income benefit policies also pay out on diagnosis of a terminal illness, and some policies allow the monthly payments to be commuted to a lump sum payment, if the surviving family feel this would be more helpful in their circumstances.

Cost-effective cover

Many people consider affordability as being one of the main barriers to holding adequate life insurance. Indeed, research carried out by Canada Life in 2019 confirmed that 27% of respondents felt the cost of the premiums was the main reason for not taking out cover. Family income benefit is often more cost effective than lump sum term assurance, as the total amount paid out by the policy depends on when the policyholder dies. If they die in the early years of the policy, the total payout will be more than if they die nearer the end of the term of the policy. Because the total amount paid decreases over time, it’s cheaper than an equivalent single lump sum life insurance policy which runs for the same period.

Specific situations where cover can assist

As we have established, the most common use of a family income benefit policy will be to provide families with cost-effective cover to enable the surviving family to maintain their standard of living in the event of death. Typically, policies would be put in place to provide a term of insurance until the youngest child leaves higher education.

In addition, however, there are many scenarios where family income benefit could be a very sensible solution for specific protection needs. One such situation is to cover divorce maintenance payments, which would potentially cease in the event of the death of a divorced parent. By taking out a family income benefit policy, the benefits could continue to provide the maintenance payments, thus enabling the ongoing standard of living the children enjoy to be maintained.

In a similar vein, family income benefit can be useful to cover education costs, in particular if a child is privately educated. By taking out a policy that covers the ongoing educational costs, this could mean a child being able to stay in private education or could potentially even provide ongoing funding through university.

Another scenario where family income benefit could be helpful is to cover the cost of care. Many individuals are full-time carers for loved ones, and in the event of death of the carer, this could leave the individual being cared for facing the need to pay the cost of finding alternative care. By taking out family income benefit, the monthly payments for providing ongoing care could be covered.

Seek our advice

Whilst many individuals hold adequate cover to pay off outstanding mortgages and other liabilities, the ongoing costs of living are often ignored. Family income benefit can be a cost-effective way to provide a regular income in the event of death and help maintain a family’s standard of living. If you would like more information on this type of policy, then speak to one of our advisers at FAS, who can take an independent look across the whole of the protection market, and provide advice on the most appropriate solution.

If you would like to discuss the above with one of our experienced financial planners, please get in touch here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Buying your first home has never been easy, and the increase in house prices over recent years has made the task even harder for first time buyers. As a result, prospective house buyers are turning to parents, grandparents and other relatives for help. Indeed, it is a scenario we come across regularly; and, by and large, parents are keen to give their children a helping hand to provide a deposit to enable them to buy their first home, or trade up to a larger property.

The UK’s 10^th largest lender

If the Bank of Mum and Dad was a business in its own right, it would be the UK’s 10^th largest lender measured by total loans issued, according to research carried out by Legal & General in 2019. This research, undertaken in conjunction with the Centre for Economics and Business Research (CEBR) also showed that 23% of all housing transactions undertaken in that year involved parental or family assistance, with 65% of buyers questioned saying that they would not be able to proceed with the purchase without the financial assistance. Legal & General’s research also showed the average gift made for this purpose was £25,800 for buyers in London.

By providing a gift by way of deposit, parents can enable their children to increase the amount they can borrow on a mortgage, helping them to buy a home which would be impossible without the financial assistance. Alternatively, the gift could mean that the child borrows less on their mortgage, leading to lower monthly repayments and potentially access to lower mortgage interest rates.

Beware the pitfalls

Despite the good intentions that parents often have to help their children, they would be well advised to consider the pitfalls before gifting funds to their children to enable them to buy a home.

Any gift – be it by way of a deposit for a house or for another purpose – could have inheritance tax consequences. Each individual can make gifts of £3,000 per tax year and therefore a married couple could gift £6,000 of capital (plus £3,000 each from the previous tax year if not used) without any inheritance tax concerns. As shown by the research above, this is less than 50% of the average financial assistance provided by parents. Any amount gifted above the gift exemption is treated as a potentially exempt transfer (PET). No inheritance tax is due immediately; however, the person making the gift needs to live seven years from the date the gift is made for the gift to fully escape inheritance tax.

If a parent makes a gift to a child who is buying with an unmarried partner, the consequences of relationship breakdown could mean that the funds are unprotected if the property is subsequently sold. It is an important scenario to consider, and this can be avoided if the solicitor dealing with the purchase prepares a suitable Declaration of Trust, which stipulates that the amount of the gift is paid back to their child from the proceeds of sale.

Be careful with co-ownership

Some parents decide that rather than making a gift of a deposit, they would prefer to buy the property with their children. Whilst this allows parents to enjoy an equity participation in the property, the tax consequences need to be considered further. Firstly, assuming the parents already own a home, the purchase would be seen as being a second home, and therefore be liable to the additional rate of stamp duty (3% of the purchase price).

Secondly, the share of the property owned by the parents would not benefit from Principal Private Residence Relief, and if a gain is made on sale of the property in the future, the proceeds on the share owned by the parents would potentially be liable to Capital Gains Tax, at a rate of 18% or 28% (depending on their overall tax position).

Lastly, if a mortgage is being arranged for the purchase, the parent would be jointly responsible to meet the mortgage payments if the child was unable to make the repayments.

Looking after your interests

Whilst there are plenty of valid reasons for the Bank of Mum and Dad to remain open for business, parents need to carefully consider their own financial needs in later life before gifting funds to help offspring onto the housing ladder. The same research undertaken by Legal & General showed that 17% of parents passing money to their children via the Bank of Mum and Dad are materially worse off financially as a result.

Giving away capital when retirement is looming can diminish the amount of savings or investments, but also reduce the level of income that could be generated by the gifted capital. The gifted funds are also no longer available to cover any unexpected expenditure, and children will often not be in a financial position to return the favour if the parents require funds.

Parents would also be well advised to consider the effect of unequal gifts made to children. If one child receives a helping hand onto the property ladder, friction within the family could be caused, in particular if the parent is not in a financial position to equalise the gift to children at the same time. It may well be sensible to consider recording the gift in your Will, and making provision so that all are treated in an equitable fashion over time.

Engage with financial and legal advice

Many parents are happy to open the doors of the Bank of Mum and Dad, and do the best they can for their children. There are, however, a number of financial and legal considerations that need careful thought. A good solicitor should be able to provide the necessary advice to protect the gift in the event of relationship breakdown, and any changes that may be appropriate to your Will.

At FAS, we can provide assistance to parents who wish to use their funds to help their children. We can advise on which assets are gifted, and the potential financial impact of any actions taken on their financial security. Speak to one of our experienced advisers for assistance.

If you would like to discuss the above with one of our experienced financial planners, please get in touch here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

The so-called “cost of living crisis” is never out of the news at the moment, with the hike in energy prices, petrol, and food costs causing concern for many. Headline UK Consumer Price inflation rates have now exceeded 6% per annum, and with expectations that annual inflation could reach double digits by the autumn, many are considering how to give their income a welcome boost.

Feeling the squeeze

One group in particular who are likely to feel the effect of the price hikes more than others are retired individuals, where income levels are not keeping up with the general rising prices. The reference point that sets the annual increase in State Pension is the rate of inflation at the September preceding the end of the tax year, and as a result, the State Pension has only increased by 3.1% this year, lagging behind the current rate of inflation by some margin.

Retired individuals who hold savings on cash deposit have had to live with low interest rates for more than a decade, so in some respects conditions at the moment represent the status quo. However, the big difference this year to previous years is the fact that the gap between savings rates and inflation has widened, and this trend is only likely to strengthen during the remainder of the year.

The quest for better rates

A simple option for those who are receiving a disappointing rate of interest on their savings is to look to move funds to an account paying a better rate. The Bank of England have increased base interest rates on three occasions since December last year, and in an attempt to tackle the persistent higher rates of inflation, are likely to increase rates further during the remainder of this year. Our current expectations is that the Bank of England will hike rates a further three times before the end of the year, although the continued uncertainty over the price hikes and growth could see the Bank take a more aggressive stance if necessary.

That being said, the pursuit of improved cash interest rates remains an exercise in frustration, despite the likelihood of cash interest rates offered by banks and building societies improving during the course of year. As much as cash savings rates improve, the prevailing rate of inflation is likely to have risen further, maintaining and even increasing the difference between the cost of living and savings rates.

Look to alternative options

So what can investors do to generate much needed income and also aim to add some growth into the mix to offset the rising prices?

By considering alternative assets to cash, such as fixed interest securities and equities, more attractive levels of income can be generated. Naturally, moving away from cash deposits introduces investment risk, which is not present when holding cash (although as we have shown above, cash is not risk-free, as inflation risk can be significant). Investment risk can be mitigated in a number of different ways. By holding a diversified portfolio, with allocations to different assets that look to balance out assets that have potential for greater returns, with those that offer more predictable returns. In addition, stock specific risk can be avoided by investing in pooled funds (such as Unit Trusts or Open Ended Investment Companies) that spread the investment across a wide range of different individual positions.

Let’s take a look at those alternative asset classes in more detail. Corporate bonds, government bonds, and other fixed interest securities are loans, where the investor lends capital to the issuing company or government. In exchange, the bond provides a regular income for a fixed period of time, with a set return of capital offered when the bond redeems. These investments tend to be more predictable than equities (company shares) but they do still carry risks. These risks include default risk, where the issuer of the bond is financially unable to repay the capital or interest. This risk can be minimised by careful selection of who to lend your money to.

Dividend income generated from equities (company shares) are regular distributions of capital to shareholders. The ability of a company to pay dividends relies on the company having sufficient capital to make the distribution, and are not fixed. Dividend yields came under significant pressure during the early stages of the pandemic, but more recently, dividend yields have improved. Unlike fixed interest securities, equities tend to be more volatile in terms of their capital value, which shows greater fluctuations over time. That being said, equities have greater potential to provide capital returns, and once again, with careful management, the risks can be managed through diversification into assets held in different sectors of the economy and geographic locations.

It’s all in the blend

By blending these assets classes, together with other assets that complement the overall strategy (such as infrastructure or property) cash savings could be better employed to generate more attractive levels of income and over the longer term, aim to provide some capital appreciation. Holding these assets in an individual savings account (ISA) can enable a tax-free income to be generated and this is often a sensible way of generating additional income, particularly for those who rely on fixed incomes, such as in retirement.

Moving away from cash and into investments such as fixed interest securities and equities can be a big step and this is where expert financial planning advice can add significant value. The advisers at FAS can provide impartial advice on the options open to you and construct a discretionary managed or advisory portfolio designed to meet your income needs.

If you are looking to make cash worker hard for you, then please get in touch with our experienced financial planners here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.