Financial Planning

Firms have until 31^st July 2023 to fully implement the Consumer Duty requirements for new and existing products and services. The Financial Conduct Authority (FCA) introduced the new requirements last year and undoubtedly these are significant pieces of regulation that aim to improve how firms serve their clients.

In recent years, the FCA has considered several provider services and products unfit for purpose because they fail to provide fair value, ongoing support or exploit customer loyalty. To combat this, the FCA’s Consumer Duty aims to create a significant shift in culture and behaviour to ensure all firms offer a higher standard of care for its clients.

Underpinning principles

The underpinning principles of the new regulations set out how the FCA expects firms to act. In essence, a firm must act to deliver good outcomes for retail clients by acting in good faith and supporting them in pursuit of their financial objectives. The FCA wants to see these new principles applied to products and services, price and value, consumer understanding and consumer support. When designing a product or service, providers should also avoid negative barriers and anything that could impact on a consumer experience such as exit penalties or unreasonable terms that may make it difficult for a client to move to an alternative provider in the future.

FAS Consumer Duty analysis

Whilst it may be labour intensive and somewhat consuming at times, we welcome any regulatory change that raises the bar within our industry, which has come a long way over the past 20+ years. Far too often, we still hear and read about poor consumer experiences where clients have perhaps been “sold” a dubious product or service, have been charged an extortionate fee or are continuing to pay for a service they do not receive.

At FAS, good client outcomes are at the core of our everyday operations, and we are confident that the depth of what we do here is way above the industry standard. So, we hope it will come as no surprise to you that having undertaken a fair assessment of the services we provide in line with the new Consumer Duty regulations, incorporating the Concepts Discretionary Managed Portfolio Service, it has been comfortably demonstrated that FAS does indeed provide fair value and good outcomes for its clients. Furthermore, we will be reviewing the services we provide each year to ensure that this continues.

As part of our Due Diligence, we will also be monitoring the platforms and product providers we recommend to our clients to make sure they too meet all the new Consumer Duty requirements for clients.

Independent v Restricted

As many of you will know, there are two types of financial adviser, an independent adviser and a restricted adviser. At FAS, we choose to be completely independent so that we can research and recommend financial products spanning the whole of the market. In doing so, our advice is unbiased and unrestricted which contrasts with a restricted firm where advisers are limited to certain products from certain providers. In some cases, restricted advisers can only recommend products from a single company, which in our opinion is not providing a comprehensive service to clients or good value.

We are very proud of our independence, and the ability to recommend the most appropriate product or service from across the marketplace helps us to achieve our aim of providing the best advice to clients. By being independent, we can also aim to provide good value for money, by being able to access potentially more cost-effective options from across the industry.

Client awareness of restrictions?

Consumer Duty throws a shadow over a restricted advice service, and we wonder how such firms are faring with this regulatory review. Consumer Duty requires firms to demonstrate that they are providing good outcomes for clients, and value for money. There is a greater emphasis on the need for clients to understand the precise nature of the service they are receiving so we would be interested to know what percentage of restricted advice clients truly understand the restrictions they are faced with and the impact these can have.

By not being able to select funds from across the marketplace, this can dampen investment returns from the chosen investment funds, as a single fund house or manager is unlikely to be “best of breed” in all areas of the market. We have undertaken own our analysis and research of fund performance of the in-house funds offered by firms offering a one-stop shop and discovered that in many cases fund performance over the long term can be disappointing. Also, despite the restricted nature of the advice, clients opting for a restricted service may not receive good value for money, as fund solutions and management fees may be higher than those charged by firms that are independent.

We believe Consumer Duty gives independent firms such as FAS a distinct advantage and as our day-to-day operations focus on providing a responsive, independent advice service, we feel confident that our business easily meets the requirements of the new regulations.

If you have any questions regarding our internal review or any other matter relating to your financial arrangements, please do get in touch here.

When we consider what the future may look like, many would place financial security high on their list of priorities. Once financial objectives have been set, it takes forward thinking and planning to achieve those goals. Whilst it is possible to create a plan yourself, using a financial planner can provide expert advice and reassurance, help identify areas that you may not have considered and save time too. In this article, we look at some of the key ways that financial planning can help achieve investment goals.

Setting the objectives

When people first engage with a financial planner, one of the key areas to agree upon are the financial objectives that need to be considered. Identifying a priority order is an important step to take, to obtain a clear view of the most important areas to tackle first. Objectives can change over time, and at different stages of our lives, our priorities will evolve. For example, a young family looking to purchase their first home may well be focused on obtaining a mortgage or protecting their family in the event of death or ill-health. Whilst long-term saving and pension planning would naturally be desirable at this time too, affordability may well dictate that these areas take a lower priority for the time being. Other life events that can lead to a significant shift in financial priorities are reaching retirement age, getting married or facing divorce.

Identifying opportunities

Financial planning is a personal process. Everyone has a different set of circumstances, goals and attitude to risk, and it is therefore not possible to create a financial planning template that best suits every possible situation. Engaging with a qualified financial planner can introduce solutions and opportunities that may not immediately be apparent. These solutions and ideas can vary from ways at which income tax liabilities can be reduced, to investment advice to reduce risk and diversify an existing investment portfolio. Taking a holistic view can also identify gaps in a financial plan, such as the need to arrange additional protection, to establishing a plan to fund school fees or university costs in the future.

Regular review and planning

None of us know what the future holds and even the best laid plans may need to adapt to a change in circumstances. Advice is perishable, and a particular course of action may need to be altered as circumstances change. This is why reviewing your finances on a regular basis is so important, as it provides the opportunity to consider whether you’re on track to meet your goals, and understand how existing plans and arrangements may need to adapt.

Holding a formal financial review at least once a year can also be the ideal time to look at annual planning opportunities, such as using the Individual Savings Account (ISA) allowance, making additional pension contributions, or selling assets to use your Capital Gains Tax allowance. It can also make sure that your finances are not affected by any changes in legislation that have occurred since the previous review.

Reassurance in difficult market conditions

Investment is a long-term process and markets will go through bouts of volatility from time to time. Behavioural finance studies show that investors can make rash decisions to sell investments when market conditions are difficult, which may not be the correct course of action to take. It is at this point that the true value of financial planning advice can be found. Speaking to an adviser can provide reassurance and a calm voice through market turmoil, helping you focus on the longer term and taking an impartial view of your overall financial position. A good adviser can also suggest changes to asset allocation if appropriate and highlight opportunities.

Saving time

Whilst some people are happy to create and manage their own financial plans, many would prefer to work with a financial planner to help achieve their investment goals. Life is busy and it can be difficult to find the time to properly review and consider existing financial arrangements. Engaging a financial planner can lighten the burden and provide peace of mind that a professional is keeping abreast of financial markets and reviewing the investment plan.

The value of advice

Holistic financial planning can add significant value in terms of guidance, planning and reassurance. Over the longer term, it could also boost returns. A study carried out by Vanguard in 2020 found that working with an adviser can help increase investment returns over time, through added value achieved by behavioural coaching, rebalancing of portfolios and use of annual tax exemptions. Vanguard estimate that these factors could potentially add around 3% per annum in additional returns. Naturally, there are some caveats, in that investment market performance can vary from year to year, and the monetary benefit of using an adviser will vary accordingly. The study is, however, an interesting attempt to quantify the benefits of engaging with a financial planner.

Engage the right adviser

Using a financial adviser to create a plan, and undertake regular reviews, can provide many benefits, from tax planning to guidance and reassurance. Using a Chartered firm brings further comfort that the advisers are highly qualified, and the business will aim to deliver the highest standards of professionalism.

Contact us here to start a conversation with one of our experienced financial planners.

Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice.

The diagnosis of any serious illness can be physically and emotionally draining for families, however, being diagnosed with dementia can be particularly challenging. As cognitive decline tends to be a progressive illness, the burden on finances over time can be significant and losing the ability to make decisions can lead to difficulties in managing money on a day-to-day basis. Any financial risk can be reduced by thinking ahead, as forward planning can keep your affairs in order and help family members organise your finances effectively, if you are unfortunate enough to lose capacity and the ability to make decisions for yourself.

Sobering statistics

Sadly, dementia cases are rising rapidly. According to figures commissioned by the Alzheimer’s Society, there were 900,000 people living with dementia in the UK in 2019. This figure is expected to almost double to 1.6 million by 2040. Looking at global figures, it is estimated that 139 million people around the World will be living with dementia by 2050.

Whilst often considered to be an illness developed by older individuals, 42,000 people under the age of 65 in the UK are living with dementia. Early-onset dementia can pose particular risk for family finances since those developing the illness may still be working and need to consider how to cover mortgage costs and pay for the upkeep of dependent children.

Make a Lasting Power of Attorney

It is important to consider what would happen to your affairs, if you suffered from cognitive decline, and were unable to make decisions that impact your finances or well-being. This is particularly important when an individual holds investments, property or other assets that cannot be managed easily.

Given the stark figures for dementia cases, it is important that individuals take responsibility and get their affairs in order by creating a Lasting Power of Attorney (LPA). This is a legal tool that lets you appoint someone (an attorney) you trust to make decisions for you if you are unable to make those decisions yourself.

There are two different types of LPA. The first covers your Property and Affairs and the second covers your Health and Welfare. In both instances, the attorney steps into the shoes of the individual granting the power and has the same legal status. For example, an attorney can undertake relatively simple tasks such as paying a bill or collecting benefits, as well as dealing with more complex decisions, such as selling a property or managing investments.

An attorney is duty-bound to always act in your best interests and consider your wishes in any decisions they make on your behalf. For this reason, most people will appoint a family member as their attorney, as this is someone who knows you well and you trust to make the right decisions for you.

Once the LPA has been created, it needs to be registered with the Office of the Public Guardian (OPG). In the case of the Property and Affairs LPA, this can be used as soon as it has been registered; however, the Health and Welfare LPA can only be used once you are unable to make decisions yourself.

It is not too late

Whilst forward planning can provide reassurance that your affairs are in order, many people do not make a LPA in advance of the diagnosis of dementia. It is important to note that a diagnosis does not prevent an individual from making a LPA, but it is advisable to get the documents prepared as soon as possible. A medical assessment by a qualified professional is likely to be required to ascertain whether the individual has the mental capacity to make an informed decision to be able to create the LPA.

The consequences of not taking action

If an individual loses capacity, and no LPA has been prepared, then typically an application is made to the Court of Protection, who will appoint a deputy to manage your affairs on behalf of the Court. Whilst a deputy has similar powers to an attorney, the deputy is appointed by the Court, and not by you. This appointment may, therefore, not concur with your wishes. Furthermore, the process of appointing a deputy is costly and long-winded and this could lead to considerable delays in being able to make financial arrangements, such as paying for care costs.

In addition, a deputy is placed under greater control and supervision by the Court, and needs to prepare an annual set of accounts, covering decisions and financial transactions taken. A deputy may also need to arrange a “security bond”, which is an insurance policy that protects the assets of the patient.

Keep your Will up to date!

In addition to preparing a LPA, everyone should make a Will. This sets out an individual’s wishes on death and helps make life a little easier for family members at a time of great stress and sadness. As with the LPA, the diagnosis of dementia would not prevent an individual from making a Will; however, it may well be advisable, or even necessary, to obtain expert medical evidence that an individual has the capacity to make the Will.

How FAS can help attorneys

At FAS our advice is that all individuals should consider making a LPA. It is sensible planning which can avoid significant cost, delay, and worry for loved ones. You can either prepare LPA documents through the Government web service or contact a Solicitor who can provide advice and prepare the documents and application for you.

We are very familiar with providing advice to attorneys, where planning decisions such as covering the cost of ongoing care, or managing existing investments are needed. Our financial planning team have extensive experience in dealing with dementia cases. If you have any queries or concerns, please do give us a call.

If you would like to discuss the above in more detail please contact one of our experienced advisers here.

Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice.

The start of each tax year brings a new set of tax allowances and is traditionally a time when investors take stock of their existing arrangements and look for planning opportunities. The series of measures announced in the Budgets in November and last month herald some significant changes that will now come into effect, with a number of potential planning opportunities to consider.

Pensions overhaul

A range of new pension legislation comes into effect from 6^th April, and provides significant opportunities for individuals looking to accumulate their pension pots, anyone whose pensions are close to the Lifetime Allowance, or indeed those who have already begun drawing a pension flexibly.

The pension Annual Allowance, which is the maximum that an investor can contribute to a pension each tax year, has increased from £40,000 to £60,000. It is important to remember that any contributions made are always capped by the level of relevant earnings (salary or self-employed income). The new allowance of £60,000 provides much greater scope for individuals to make a higher level of contribution, and in particular, provides a valuable opportunity for Directors to arrange substantial Employer Pension contributions.

Anyone who has flexibly accessed a pension in the past, has seen the limit for further pension contributions limited to just £4,000 each year, as they are subject to the Money Purchase Annual Allowance. This allowance has been increased to £10,000 from 6^th April 2023, and provides scope for those returning to work after taking retirement to make a more meaningful level of pension contribution.

The biggest single change in the March Budget was the announcement that the Lifetime Allowance for pension savings is to be scrapped. In the 2023/24 tax year, this allowance remains in place; however, the tax charge for breaching the Lifetime Allowance has been reduced to 0%. The level of Tax Free Cash available when taking a pension hasn’t been increased, but the removal of the punitive tax charge for breaching the Lifetime Allowance provides new opportunities for those wishing to pay more into their pensions, or for anyone with pension savings above the allowance, to draw more out of their pension. As ever, planning around these areas can be complex, so we recommend speaking to one of our experienced independent financial planners for advice.

Investment tax changes

Anyone who holds investments outside of an Individual Savings Account (ISA) should look to consider how tax efficient their portfolio is, as changes to the taxation of dividends may lead to more individuals paying tax on their dividends. The Dividend Allowance, which covered the first £2,000 of dividends in the 2022/23 tax year has been halved to just £1,000 for 2023/24 and a further halving of the allowance will follow in the 2024/25 tax year.

Consider the position of an individual who holds £30,000 in investments (either directly held stocks or Unit Trusts) outside of an ISA, that generate a dividend yield of 4%. In past tax years, the Dividend Allowance would have easily covered this income, thus avoiding any tax liability. With the smaller allowance now in place, this would mean that £200 of the dividend income would be subject to tax at 8.75% for a basic rate taxpayer, or 33.75% or 39.35% for a higher or additional rate taxpayer respectively.

By placing the investments inside an ISA, dividends would be tax free; however, investors need to be even more careful to consider the Capital Gains Tax (CGT) consequences of any actions taken, as the CGT allowance has more than halved from £12,300 to just £6,000 in the new tax year.

The start of a new tax year is also an ideal time to consider the existing investment strategy, and if you hold investments that have not been reviewed for some time, now would be the ideal opportunity to overhaul an existing portfolio.

Tax tune-up

Whilst the amount we can earn in a tax year before paying Income Tax hasn’t changed, more people may well find themselves subject to Income Tax on their earned income, or from pension sources, from the start of the new tax year. Pensioners in particular need to pay attention to the impact of the 10.1% increase to the State Pension coming into effect, on the amount of Income Tax they could pay on other income, such as private pension or investment income.

Other tax traps exist, including the lowering of the starting point where Additional rate Income Tax is paid. The reduction from £150,000 to £125,140 will mean that higher earners will end up paying an additional 5% Income Tax on income between £125,140 and £150,000. Coupled with the taper on the Personal Allowance (which isn’t new, but is nonetheless painful) this is the ideal time for higher earners to take stock of their financial position and consider planning opportunities to reduce their tax bill.

Take a holistic view

We have outlined just a handful of the most important changes that come into effect from 6^th April, but there are more that should be considered, depending on your particular circumstances. This is where holistic financial planning can provide significant value, in assessing the bigger picture and taking into account your personal circumstances to look for ways to improve tax-efficiency and streamline investment strategies. A conversation with one of our experienced independent planners could well help identify changes that take full advantage of the new opportunities.

To discuss the above in more detail please 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 have commented on the prospects for house prices on a number of occasions over the last year, and highlighted the immediate headwinds that are likely to face the housing market. Recent data published by Nationwide has supported this view, as their House Price Index has now fallen by 3.2% from the peak in August 2022 to January 2023, and further weakness is likely over coming months. A recent report commissioned by Schroders on housing affordability has underlined how stretched current property valuations are and suggests that house prices could correct further in the near term.

High earnings multiples

The Schroders report analysed the average UK house price as a multiple of average UK earnings, and at nine times earnings, the last time UK house prices were this expensive relative to earnings was over 150 years ago. Apart from a blip during the 2008-9 Great Financial Crisis, the last 20 years has seen home ownership becoming steadily less affordable.

There are a number of reasons why affordability has been steadily falling. For many years, demand for housing has outstripped supply, and according to data from the Office for National Statistics (ONS) the UK population increased by 3.4m between 2011 and 2021, but only 1.9m new dwellings were built.

Wages have also lagged behind the pace of house price increases. Between 2012 and 2022, prices across the UK registered an average increase of 5.3% per annum (according to Rightmove), compared to average wages, which increased by an average of 2.7% per annum over the same period (Source ONS). More recently, however, wage inflation has picked up, with average earnings increasing by 6.4% over the three months to November 2022, compared to the same period in 2021.

Mortgage pressures starting to ease

Borrowers have become conditioned to low interest rates since 2008, and as a result, covering mortgage interest payments has not been a major concern for many holding a mortgage. Over the last 15 months, the UK Base Rate has increased sharply, increasing from 0.15% to 4%, which means that those borrowers on a variable or tracker rate will have experienced a series of hikes in their payments.

Fixed mortgage rates also increased during the first half of 2022, but the very sharp acceleration in fixed mortgage rates last October has added to the pressures on the housing market. As a result of the ill-fated mini budget, announced by former Chancellor Kwasi Kwarteng just six months ago, Gilt yields increased rapidly, which in turn pushed up the cost of securing long-term debt for mortgage lenders. As is often the case, however, the market reaction has turned out to be an over-reaction; at one point, the market rate was implying that the Bank of England Base Rate would hit 6% by the middle of this year. This is looking increasingly unlikely, and indeed, the Bank of England may actually be close to reaching the end of the rate hiking cycle, with Base Rates sitting at 4%.

Given the downward adjustment in base rate expectations, it is possible that the effect on the housing market will be lower. There are, however, a large number of mortgage holders, whose fixed rate mortgage deal is coming to an end during 2023. These individuals are highly likely to see a jump in their mortgage payments, although as fixed rates have fallen back from their peak, the effect is now likely to be less than was feared only 3 months ago.

Deposit concerns

For many first-time buyers, gathering a deposit still remains the biggest hurdle to home ownership. We have previously covered how the “Bank of Mum and Dad” is the UK’s 10^th largest lender measured by total loans issued, and our previous article highlighted some of the potential issues that can arise by gifting funds for a deposit.

With house price affordability so stretched, parents and grandparents may well be tempted to provide larger gifts to help family onto the housing ladder. However, parents and grandparents need to consider their own financial position carefully before making a gifted deposit.  For example, giving away capital sums when retired, or close to retirement, can not only diminish the amount of savings or investments held, but also reduce the level of income that could be generated by any capital that is gifted. In addition, this could mean that funds are also no longer available to cover any unexpected expenditure that faces the parent or grandparent, and children will often not be in a financial position to return the favour if the parents require funds.

Solving the affordability conundrum

House price affordability can only improve by an increase in house construction (thereby easing the supply issues) an increase in earnings, or a fall in prices. In reality, it may well be a combination of all three factors that eventually improve house price affordability. However, we feel this may take many years to correct, and in the meantime, house price affordability is likely to remain stretched.

For anyone looking to gift a deposit to help ease the affordability conundrum, we can provide advice on the implications of gifting capital. We also highly recommend parents and grandparents seek independent legal advice before taking any action to help a family member with a deposit.

If you would like to discuss the above in more detail, please speak to one of our 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 circumstance.

Taking financial advice can make a real difference in helping you achieve your aspirations, at all stages of life. As a Chartered, independent advice practice, we view our independence as being a vital component of the service we offer to clients, and we are proud of this status. Of equal importance is our ability to take a holistic approach to financial planning, whereby we consider your wider financial planning concerns and focus on your financial goals. In this article, we will explain why we value our independent status, and how taking a holistic view can help us tailor the advice that we give.

Restricted vs Independent Advice

Financial Advisers and Planners fall into one of two camps, ‘Restricted ‘and ‘Independent’. Being ‘Restricted’ means an Adviser can only recommend products from a limited selection or product range. For example, this could be an Adviser in a bank or other product provider, who can only consider and recommend products and services from that company. It could also mean an Adviser who can only advise on a limited number of areas of financial planning or is unable to review existing arrangements that you may have in place.

This contrasts with an ‘independent’ Adviser, such as FAS. As independent Advisers, we can consider products from a wide range of companies across the market and will give unbiased and unrestricted advice.

In practice, being independent means that we can take a totally impartial view when it comes to selecting a solution or product and can take into account all relevant criteria – such as cost, features and ease of administration – so that we can recommend products that provide the most appropriate fit to a particular set of circumstances.

Using a Restricted Financial Adviser doesn’t necessarily mean you run the risk of receiving poor advice. All Financial Advisers must have a similar minimum level of qualifications and meet the same standards. Using a Restricted Adviser, however, does mean that the choices available to you may be limited, and the advice they give you may not be the best available, or meet your needs.

Taking a holistic approach

At FAS, we always take a holistic approach to financial planning with our clients. This means we really take the time to understand all aspects of the complex picture that makes up a client’s financial circumstances. Of course, as part of the initial assessment, we will need to understand the current arrangements a client holds, such as existing pension plans or investment accounts, life assurance and other protection arrangements. This analysis is crucial to understand how appropriate the current plans are and whether they can be improved. However, a holistic planning approach goes much deeper, to look at how these arrangements fit into the “bigger picture” that makes up an individual’s current financial position and their aims for the future.

Holistic planning also aims to help clients define their financial goals and objectives, so that the advice we then give is tailored to help achieve that goal. Often clients have several objectives and goals, and using a holistic approach can help clients place those targets in a priority order.

Of course, life doesn’t always go according to plan, and circumstances change from time to time. For example, a client could lose their job, receive an inheritance, face divorce, be diagnosed with an unexpected illness, or welcome a new addition to the family, any of which could force a shift in those priorities. By reviewing a holistic plan regularly, we can look to adapt existing arrangements to meet the challenges or opportunities presented by the change in circumstances.

One particular area that benefits from taking this approach is when we meet a client who is considering their retirement options. For example, we help clients to identify the level of retirement income with which they will feel comfortable, by considering all aspects of a client’s position. This can help focus a client on the affordability of the kind of retirement that they wish to achieve, and also potentially help them come to a conclusion on other planning decisions, such as whether early retirement is a sensible decision.

This approach often identifies areas that need close attention that the client hasn’t given any thought to. These can be as varied as looking at the implications for Inheritance Tax if the client were to die, to looking at financial planning to help children and grandchildren or considering alternative ways of generating an income in a tax efficient manner.

Getting the most out of financial planning

We feel that choosing a Financial Adviser that takes a holistic approach can help tailor the advice and solutions to an individual’s precise requirements, and take into account important aspects that are relevant that could be overlooked by traditional financial advice. We also are firm believers in the benefits that true independence can bring to the advice proposition.

If you would like to obtain holistic advice, speak to one of our experienced Advisers to discuss your requirements, 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.

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.