Category: blackstar

ISA inheritability makes ‘allowance’ for your spouse

Details have begun to emerge on how the new inheritable ISA rules will operate. And the good news is that it will be achieved by an increased ISA allowance for the surviving spouse rather than the actual ISA assets themselves. This means clients won’t have to revisit their wills.

How the rules will work.

If an ISA holder dies after 3 December, their spouse or civil partner will be allowed to invest an amount equivalent to the deceased’s ISA into their own ISA via an additional allowance. This is in addition to their normal annual ISA limit for the tax year and will be claimable from 6 April 2015. This means the surviving spouse can continue to enjoy tax free investment returns on savings equal to the deceased ISA fund. But it doesn’t have to be the same assets which came from the deceased’s ISA which are paid into their spouses new or existing ISA. The surviving spouse can make contributions up to their increased allowance from any assets.

What it means for estate planning

By not linking the transferability to the actual ISA assets, it provides greater flexibility and doesn’t have an adverse impact on estate planning that your client may have already put in place. For example, had it been the ISA itself which had to pass to the spouse to benefit from the continued tax privileged status, it could have meant many thousands of ISA holders having to amend their existing Wills. Where the spouse was not the intended beneficiary under the Will or where assets would have been held on trust for the spouse – a common scenario – the spouse would miss out on the tax savings on offer. Instead it’s the allowance which is inherited, not the asset. This means that, even in the scenarios described above, the spouse can benefit by paying her own assets into her ISA and claiming the higher allowance. And the deceased’s assets can be distributed in accordance with their wishes, as set out in their Will.

The tax implications

The tax benefits of an ISA are well documented. Funds remain free of income tax and capital gains when held within the ISA wrapper. And it’s the continuity of this tax free growth for the surviving spouse where the new benefit lies. It’s an opportunity to keep savings in a tax free environment. But the new rules don’t provide any additional inheritance tax benefits. The rules just entitle the survivor to an increased ISA allowance for a limited period after death. The actual ISA assets will be distributed in line with the terms of the Will (or the intestacy rules) and remain within the estate for IHT. Where they pass to the spouse or civil partner, they’ll be covered by the spousal exemption. Even then, ultimately the combined ISA funds may be subject to 40% IHT on the second death.

With ISA rules and pension rules getting ever closer, it may be worth some clients even considering whether to take up their increased ISA allowance if the same amount could be paid into their SIPP. This would achieve the same tax free investment returns as the ISA and the same access for client’s over 55. But the benefit would be that the SIPP will be free of IHT and potentially tax free in the hands of the beneficiaries if death is before 75.

What’s next?

The new allowance will be available from 6 April 2015 for deaths on or after 3 December. Draft legislation is expected before the end of the year and the final position will become clear after a short period of consultation. The new inherited allowance will complement the new pension death rules – a welcome addition to the whole new world of tax planning opportunities for advisers and their clients from next April.

Regulators tell Solicitors to only refer to Independent Financial Advisers

New guidance has been issued by the Solicitors’ Regulation Authority (SRA) stating that Solicitors must not refer clients to tied or multi-tied advisers; i.e. advisers who are not truly independent.

The SRA has stated that it is aware that some law firms have been approached by multi-tied and tied advisers seeking to enter into restrictive arrangements to provide financial services to the law firms’ clients. It reiterated that firms must always act in the best interests of their clients. This means that they must refer clients to independent financial advisers for investment advice.’

According to Sifa (the body representing independent financial advisers who specialising in working with law firms), there is confusion among solicitors about the status of financial advisers and this has resulted in widespread breached of the Solicitors’ Code of Conduct. Sifa said it had received numerous calls from IFAs reporting instances of solicitors referring clients to St James’ Place.

This was a subject alluded to in an earlier Blog entitled Confusion on Sources of Financial Advice I have also commented here in more detail about the differences between Independent and Tied Advice.

So, if you are a Solicitor or indeed anyone seeking financial planning advice make sure that you ask the adviser whether they are genuinely independent. Solicitors can be sanctioned for failing to do so and individuals are likely to suffer from a restricted choice and, in all probability, high charges

Asset Allocation: What’s it all about?

The basic premise behind asset allocation is that it is generally accepted as being the most significant factor behind the performance of investment portfolios. At its highest level this is literally the split between growth (equities) and non growth assets (cash and fixed interest). There are other factors including market timing, stock selection, momentum, value tilts, smaller company tilts etc. which have varying degrees of significance. Significance is used in this case to mean statistically meaningful or measurable.

The rationale for investing in anything other than risk free (e.g. cash/Treasury Bills) is to make extra returns. Therefore the more that you add to risky assets the more you should reasonably expect to make above risk free over time. A very basic asset allocation model could therefore be to simply have a split between a UK FT All Share Index Tracker and say Cash/Bonds. The more you add to the Tracker the more risk you take but the greater the returns you expect.

You could also add a Value and/or Smaller Companies tilt if you believe the evidence provided by French and Fama that, in return for additional risk (above just investing in the market as a whole), these two factors have demonstrated a tendency to generate additional returns (in excess of the market as a whole).

A decision that you will need to make is whether to take some fund manager risk. Obviously the reason why you would do this is because you believe that there is empirical evidence to indicate that you should make some extra profits in return for the extra risk and cost to which these expose you. Most readers will already be familiar with my views on this. For now I will simply quote from the FSA Occasional Paper on the Price of Retail Investing page 47 ‘That is, it appears to be the case that, on average, resources devoted to actively managing a fund do not create any off-setting improvement in fund performance’.

We are all familiar with the term diversification but do we really understand what this means? It does not just mean splitting a portfolio between different fund manager’s offerings so as to avoid having too many ‘eggs in one basket’. Rather, it is the method by which you blend asset classes which behave differently to each other in order to reduce the risk profile of the portfolio as a whole. It can be demonstrated that if you take a number of asset classes with given risk levels (typically measured using the standard deviation) that the risk profile of the portfolio composed of them will frequently be less. So it is useful, when constructing a portfolio, to ensure it contains a range of asset classes which behave differently i.e. they are uncorrelated.

Asset classes which tend to be fairly uncorrelated with equities include property and commodity futures. Both of these can be accessed via collective investments such as OEICS and Unit Trusts as well as Exchange Traded Funds.

Interestingly, alternative investments such as hedge funds appear to potentially have the potential to substantially worsen potential portfolio returns and make their risk profile increase rather than reduce overall. This is before you take into account the relative lack of information about what they actually do or the very high charges levied by them.

You will also need to decide on the extent to which you bias the portfolio (if at all) in favour of the UK market. In general if you are dealing with UK based investors you may want to increase the weighting to UK equities beyond their actual weighting as a function of the value of world markets as a whole. If you are dealing with expats, either non Brits or maybe Brits who are likely to retire abroad you have to ask yourself whether a portfolio with an overweight UK allocation would be appropriate.
There is no hard and fast rule about exactly what splits you should adopt. In general it is better to have any asset allocation strategy than none. Once you have adopted your asset allocation strategies you need to periodically rebalance the allocations to ensure that the risk profile of the portfolio is maintained. There is evidence that many private investors loose substantial sums by chopping and changing and following the market when they would have been better off simply adopting a long term buy and hold strategy.

A good source of information on asset allocation as well as many other aspects of investment is IndexInvestor.com and in particular this article.. I would also very much endorse Tim Hale’s book which you can find here. I have also found this presentation given by Tim on Asset Allocation which you may find useful.

One final point on this. You will always find conflicting views on the most effective methods of investment and many of these will be given by extremely credible people. All I can say is that you have to look where the weight of the arguments lie and then take a view.