Month: November 2017

The Chancellor’s Autumn Budget 2017

The Rt Hon Philip Hammond MP

Following a turbulent few months across The Palace of Westminster, with a call for more spending and a more aggressive approach to growing the economy, the Chancellor’s budget was largely seen as a business as usual approach, albeit within the ever-present shadow of Brexit.

So now that Philip Hammond has had his day in Parliament, let’s see what kind of impact it’s going to have on yours.

Well firstly, there were no significant announcements regarding tax or pension changes. Nor was there anything that set the markets alight, or sent them into free-fall. In fact this market apathy was manifested in the non-movement of the FTSE 100, Benchmark 10 year Government bond or guilt and with the pound largely static during the Chancellors hour-long delivery.

What the Budget might mean for you

INCOME TAX

Your personal income tax allowance is set to rise to £11,850 for the fiscal year 2018-19 throughout the UK apart from Scotland. As Scotland will set its own personal tax threshold, should it choose to, in the Scottish budget due on 14 December.

The higher rate of income tax in the UK will rise to £46,350 for the fiscal year of 2018-19. Again with the exception of Scotland, who may address this in their impending budget.

STAMP DUTY

First time buys will not have to pay Stamp Duty on properties up to a value of £300,000, which would also see those buying properties up to £500,000 paying no stamp duty on the first £300,000. A move that should benefit 95% of first time buyers

PENSIONS

The pensions lifetime allowance will rise in line with the consumer price index to £1.03Million. One highlight for pensions is that there will be no changes in the pensions funding limits, with the annual allowance remaining at £40,000 and not tapered until adjusted income exceeds £150,000.

ISA’s

The Junior ISA limit is set to rise to £4,260. Whilst the overall ISA limit will stay at £20,000 of which £4,000 can be paid into a LISA (for those eligible).

CAPITAL GAINS TAX

There will be a £400 increase in the capital gains tax allowance, seeing the threshold rise to £11,700.

INHERITANCE TAX

The nil band rate for inheritance tax will remain at £325,000 until April 2021, with the residence nil rate band increasing from £100,000 to £125,000. Which means that, in the future, couples can leave assets up to £900,000 to future generations free of inheritance tax liability.

TRUST

Although no specific details were announced, there is a planned consultation, to be published in 2018, which will consider the simplification and fairness of trust taxation.

STOCKS

The UK Stock Market was largely indifferent to the Chancellors speech. In fact, when he stood up to speak the FTSE100 was trading at 7,448 and when he sat down an hour later, it was largely unchanged.

The real movement in the market came about through the changes in Stamp Duty. With large house builders witnessing their shares drop between 1% and 3%. Possibly reflecting some disappointment in the detail of the chancellors £44 Billion Housing Package, along with the lack of an extension to the popular Help to Buy scheme, compounded with an investigation into the speed at which permitted land banks see the building of new homes taking place.

In true Stock Market traditions, where the tide goes out for one group, in it comes for another.
With the increase in the Stamp Duty it is widely believed that we will see a reinvigoration of the housing market, as well as the driving up of house prices. All this leads to higher profits for Estate Agents and, as a consequence of that, national chains saw an increase in the value of their share price.

CURRENCY MARKETS

The downgrade in the UK’s GDP growth forecast for the next three to four years, along with the rest of the budget, went through without any real reaction from the currency markets. With Sterling ending the budget in much the same place as it started against the Euro and Dollar.

2017 BUDGET SUMMARY

All in all, the Chancellor delivered a steady budget, without any radical changes to the landscape. As always, if you have any questions regarding a specific area of the budget, or your own personal circumstances, then please don’t hesitate to get in touch, where we will be happy to help you in any way.

Making sense of Capital Gains Tax and your Property 2017 – 2018

Capital Gains Tax (CGT) is a complex area to dip into, so here I’ve tried to give a brief
explanation for the normal situations that many of us face, broken down into the following
sections:

When you don’t have to pay Capital Gains Tax
When you are eligible to pay Capital Gains Tax
How much you will have to pay?
What if you have a second residential property?
Letting relief and Capital Gains Tax
Capital Gains Tax on inherited homes
Capital Gains Tax on gifted homes
Capital Gains Tax Liabilities for UK Non-Residents
Capital Gains Tax on investments
Claiming Entrepreneurs’ Relief against Capital Gains Tax

As always, our advice is to seek clarification on any issues from your Financial Adviser.

When you don’t have to pay Capital Gains Tax.

If you are selling your own home (main place of residence) then the good news is, that it’s
very unlikely that you will need to pay CGT as you will benefit from 'Private Residence Relief'.
If however you are selling a home that you currently rent out, or you are selling a second
home, then CGT may become applicable. That said, there are a number of ways you may be
able to reduce your CGT bill through letting relief or by nominating which of your homes you
wish to be viewed as tax-free.

When you are eligible to pay Capital Gains Tax.

Although not an exclusive list, below are the most common scenarios that activate CGT on a
property sale:

• It is not your main place of residence
• You have developed your home. For example you may have converted part of it into flats
• You have sold part of your garden, where your total plot, including the area you are selling,
is more than half a hectare (1.2 acres)
• You exclusively make use of part of your home for business
• You let out all or part of your home. This doesn’t include having a lodger. To count someone
as a lodger you need to be living in the property too, or they are classed as a tenant
• You moved out of your property 18 months ago
• You bought the property for the purpose of renovating it and selling it on

How much you will have to pay?

The CGT rates for 2017 – 2018 state that when you sell a property, you are allowed to keep a
proportion of the profits tax-free. This is called your Capital Gains Tax Allowance.
In the 2017 – 2018 tax year, you can make a profit of £11,300 before you have to pay CGT.

With basic rate taxpayers paying 18% CGT on property sales over this profit allowance.
Whilst higher-rate and additional-rate taxpayers will have to pay 28%.

What if you have a second residential property?

As long as you haven’t bought your second home with the sole intention of selling it in order
to make a profit, and you use it, then you can nominate which of your two homes will be tax-
free. Just make sure you make the nomination before the two-year deadline from the time you
acquire your new home.

It’s worth noting that the property you nominate doesn’t have to be the one where you live
most of the time. So it makes sense to pick the one you expect to make the largest gain on
when you come to sell.

Civil partners and married couples can only nominate one main home between them, but
unmarried couples can each nominate different homes.

Letting relief and Capital Gains Tax.

Providing the property has been your main home at some point, and you have let out either
all or a part of your home, then you can claim tax relief in the form of Private Residence Relief
for the time it was your main residence, along with the last 18 months of ownership. You can
even claim if you weren't living in the property during those 18 months.

You may also be able to further reduce your capital gains tax bill by claiming Letting Relief.
However, you can't claim Private Residence Relief and Letting Relief for the same period.
The amount of letting relief you can claim will be the lowest of these three:

• £40,000
• The total you receive from the letting proportion of the home
• The total Private Residence Relief you get

Capital Gains Tax on inherited homes.

When someone leaves you their home in their will, you inherit the property at the market
value at the time of their death.

As there is no CGT payable on death, the value of the home is included in the estate and
inheritance tax may be payable instead.

If you sell the property without nominating it as your own home, you won’t be able to claim
Private Residence Relief, so there will be CGT to pay if the value has increase between the
date of death and the date of the sale.

Capital Gains Tax on gifted homes.

If the property is gifted to you during the owner’s lifetime (while they are still living there), this
is termed as a ‘gift with reservation’ and essentially means it still counts for inheritance tax
when the gift giver passes away.

So there will be CGT to pay when you sell the home if the value has increase between the
date of the gift and the date of the sale.

Capital Gains Tax Liabilities for UK Non-Residents.

Unfortunately, being an expat or non-resident in the UK no longer avoids CGT duties. Since
April 2015 British expats and non-residents are required to report the sale or disposal of
properties to HMRC. With the CGT being payable on gains made after 5 April 2015.

Please be aware that you must inform HMRC within 30 days after the ownership transfer
date, even if there is zero tax to pay.

Capital Gains Tax on investments.

Making regular investments is often seen as the smartest way to get into the stock market.
However it can present some challenges if you decide to partially sell your investments. If you
are completely liquidating your portfolio, then the CGT is straightforward – being the total
amount paid into the fund deducted from the proceeds of the final sale gives you the size of
your capital gain. With anything exceeding the £11,100 CGT limit becoming liable at your tax
rate.

It’s when you only liquidate part of your investments that things can become complicated. As
a rule of thumb, if you have bought units at a variety of prices over a period of time, then you
will need to work out the average price per share. You can then calculate your investment
against your gain. Again your financial adviser can help you with this.

Liquidating funds often allows investors to ‘Bed and ISA’. Where investments that are held
outside an ISA are sold and then the same investments are bought back within an ISA
avoiding CGT in the future.

Claiming Entrepreneurs’ Relief against Capital Gains Tax.

Business owners who are selling all or part of their business can claim Entrepreneurs’ Relief
(ER) on the sale and reduce their tax liability to 10% on all qualifying gains.

The main qualifications for ER, are if you dispose of any of the following:

• All or part of your business, including the business’s assets, once it has been closed
– either as a sole trader or business partner
• Shares or securities in a company where you have at least 5% of shares and voting
rights
• Shares you got through an Enterprise Management Incentive (EMI) scheme after 5
April 2013
• Assets you lent to your business or personal company
Once again, this is not an exclusive list and further information can be found here

If you have any questions regarding Capital Gains Tax

As always, if you are in any doubts as to your current situation, or potential CGT obligations,
then you should consult a financial adviser. You are welcome to contact us where we
will be happy to help answer any questions you may have.

The Rate Rise is here – but what does it mean?

Well we all new it was coming, but what now? What does the first interest rate rise for more than a decade mean for you?

Despite the fact that it’s a small increase from 0.25% to 0.5% it will have an immediate impact on UK households and businesses. On one hand it means higher costs for those with mortgages and other borrowings but on the other it’s better news for all those with savings.

Is it misery for Mortgages?

Mortgage rates will inevitably rise following the increase in base rate. The main group affected in the short term are those on a standard variable rate (currently average 4.6%), along with those who are on tracker mortgages, where rates are likely to raise this side of Christmas.
Although the scale of the rise is unlikely to push many people into hardship, as a 0.25% rise on a 25 year mortgage of £200,000 at a standard variable rate of 4.5 per cent means an extra payment of about £300 a year.

Is a Fixed-rate fantastic?

With The Bank of England announcing that further rate rises can be expected, brokers are anticipating a rush on fixed-rate deals of five years and over. Although over the last few months there have been a lot of fixed-rate product withdrawals and rate increases, as the banks anticipate the rush to a fixed-rate product.

Is it the right time to Remortgage?

Anyone looking to remortgage or move to a fixed rate can still access the historically low rates available in the market, with two year fixed-rate deals available at 1.09% or fixed for five years at 1.68% for those with a 40% deposit.
It is generally thought that borrowers should be encouraged by the comment accompanying the announcement by The Bank of England “The expectation at the moment is that the speed of future increase in rates is going to be relatively slower than we thought.”

Is it super for Savers?

For those living with near non-existent returns over the last few years, it would seem like welcome news. Although that depends upon whether the banks choose to pass this increase onto their customers. A move looking increasingly unlikely, as the link between base rate and savings rate appears to have been severed sometime ago. Following the announcement, the Nationwide says the “majority” of its savers will benefit from a rise, while Newcastle Building Society and Yorkshire Building Society pledged to pass on the full rate rise to all savers. So it’s not a clear rate rise for every saver in the UK. One to watch carefully!

Is it perfect for Pensions?

With annuity rates closely linked to movements in interest rates, according to experts, the rate rise is likely to be fed through resulting in higher income for pensioners.
Richard Eagling of Moneyfacts suggests “The interest rate rise is good news for those on the verge of retirement who may be looking to secure an income through an annuity, as it is likely to boost gilt yields, which underpin annuity rates.”

Is it time up for Transfer Offers?

The rise in the interest rate is more than likely to end the record high transfer offers currently available to members of defined benefit pension schemes. Head of Royal London, Sir Steve Webb says “The one group who may be concerned by today’s news are those planning to take a transfer from a final salary pension. Transfer values are likely to track down as interest rates rise. Anyone considering a transfer may wish to take impartial advice on the pros and cons of a transfer as a matter of urgency, as transfer values are unlikely to remain at today’s very high levels.”
So if you’ve been considering your potential transfer value now is the time to look at what the opportunity might be, before the rate rise causes an end to the current offers, that can be 30 or 40 times projected pension income.

Is it interesting for Investments?

The markets have already priced in the rate rise decision, so it is predicted that there will be little impact on stock prices in the short-term. With political uncertainties like Brexit still having an affect on company’s ability to make investment decisions.

Is the Rise repeatable?

It’s because the Bank of England is forecasting inflation falling below 3%, that many believe that further rate rises in 2018 are unlikely. On-going increases risk slowing or halting an already weak economy, currently experiencing the uncertainty of Brexit. So the feeling is that this rate rise is probably going to be an isolated incident, until Brexit is behind us and the economy is more stable.

Record High Transfer Values

Final Salary Pensions, Hurry Whilst Shocks Last!

Well here’s something that doesn’t happen that often. The turmoil in the financial markets is actually presenting an interesting opportunity – and even Brexit may have had a hand in generating this particular happy shock!

I’m talking about Final Salary Pension Schemes here. In a world of future uncertainties and undetermined risk, a final salary pension can be seen as something to hold onto at all cost. But just consider the following for a second. They are often inflexible and are not usually targeted to accurately meet individual members’ needs. Which can cause members to transfer out to access things like greater flexibility under the new freedoms to pensions introduced last year. Or they might want to access a cash lump sum, to reduce debt or to ensure their families benefit more greatly from the fund in the event of their death.

Recently we’ve seen more and more people transferring values, by which I mean the capital value of the benefits promised by a scheme (sometimes called the CETV or Cash Equivalent Transfer Value) at unusually high rates. By high rates, I’m mean as much as 40 times the annual pension income!

So why are values so high and will it last?

The conventional wisdom here is that values have been driven up significantly by recent reductions in the returns one can achieve with government bonds, brought about by the result of the Brexit vote, combined with The Bank of England’s attempt to prop up the economy. Which is great for anyone looking to take advantage of the CETV on their final salary pension. But like all good things, it is likely that it will be coming to an end soon, because when the bonds return to their normal range, we can expect to see transfer values to reduce too.

So if you’ve been thinking, it might be time to start doing!

Right now there is an unusual opportunity to extract some significant value from your pension. However the situation is predicted to return to normality soon, so now is the time to act.

Working out your transfer value

It’s important to understand that there are a variety of factors that different pension schemes use to calculate transfer values. These usually revolve around your age now and what your age will be when you are entitled to start drawing the benefit. They may also include the specifics of the escalation of benefits before and after retirement as well as any benefits your spouse or dependents are entitled to.

As a rule of thumb, the closer you are to your retirement, the higher the CETV multiple will be. Oddly, the further away you are, with more time for the assets to grow, the lower the present value is. The state of your schemes funding and security of your benefits will also have an impact on final figures, as will the scheme being underfunded in any way.

The best way to know exactly what your potential opportunity might be, is to request a CETV quotation from your pension provider.

You can look before you leap

The main advantage with a defined benefits scheme is the guaranteed income. As you lose these guarantees when you transfer, your future pension income will depend upon the returns you earn on the invested assets. That’s why, once you’ve received your CETV quotation, it’s vital to calculate the exact rate of return you need to ensure you would exceed the income you were set to receive on your final salary scheme. But right now, the high rate of the current CETV multiples mean that these required return rates can be as low as just one percentage point above inflation to make the move a sound choice.

You should also consider that when you transfer out of a final salary scheme, the investment risk moves from the pension provider over to you. So you must consider your attitude toward risk. This will be influenced by factors such as your financial situation, other assets and income sources you might have that you could fall back on if you need to, should returns be weaker than predicted.

Apart from the questions of risk and return, there maybe other things to consider. Your existing plan may have other non-financial benefits attached to it, which you may not wish to give up.

Having said all that, final salary schemes are well known for their restrictions and inflexibility. So transferring out may open up some new ways to access your pension pot and therefore open some new options for your retirement and inheritance tax planning too.

So what does everyone else do?

Generally we find that individuals with more wealth and other assets beside just their pensions, who are looking for greater flexibility and control over their retirement savings; or are planning to pass a substantial portion of their wealth to their children are more likely to opt to transfer out of a final salary scheme.

Whilst those with more limited assets, who prefer the security of the guaranteed income, tend keep to their final salary scheme.
Like everything in financial services, it’s your individual circumstances and aspirations along with where you are in terms of your timeline that will help determine what’s right for you.

One thing’s almost certain – this opportunity won’t last

If you are considering requesting a CETV quotation, I’d do it sooner rather than later. As the current high transfer values have been caused by the short-term market developments I covered earlier – and the situation is unlikely to last much longer. As when we see the increase in bond rates, we will most likely see the decrease in the multiples you can currently secure with your CETV.

If you would like some help deciding what’s best for you, then call us now for a free initial consultation. We would be delighted to go through your individual circumstances with you and help you decide on the best option for you.

For more information of our pension transfer advisory process, you can visit our sections on UK Pension Transfers and Expat Pension Transfers.