Financial supplement 2016-17

the barrister

Personal Finance & Wealth Management Supplement

Personal finance & wealth management supplement the barrister 2016

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Supplement 2016

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Personal finance & wealth management supplement the barrister 2016

Contents: 04

A place for everything

By Carolyn Gowen

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I Adviser – Are we facing a robot-revolution?

By Steve Murray

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Protecting your wealth from the tax man

By Charles Calkin Do I need a financial planner?

By Tom Glanville

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A partnership for life - Six difficult questions to ask a prospective wealth manager

By Andy Steel

Stamp duty changes – Second homes and investment properties: winners and losers

By David Percival

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Collectables: How to profit from anniversaries

By Daniel Wade

Is it true that HRMC can help investors pay less tax whilst keeping Britain great?

By Elizabeth Orbell

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Four Topical Tax Changes

By Charlie Thompson Busting the most common pension funding myths!

By Dave Downie

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Searching for growth…and finding it - Global thematic opportunities for the long term

By Guy Monson Personal wealth management for barristers: A new approach

By Charlotte Ransom

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Defending your wealth – how to protect your assets in volatile markets

By James Horniman

As pension allowances narrow, interest in VCTs and EIS is set to grow

By Jason Hollands

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Personal finance & wealth management supplement the barrister 2016

A place for everything

By Carolyn Gowen, Chartered Wealth Manager and Certified Financial Planner at City-based wealth management firm, Bloomsbury Much is written about ensuring that you have the correct asset allocation within your investment portfolio and investors should of course know the asset allocation strategy they are following (and why) and the implications of that on their investment returns. Less, however, is written on the subject of asset location and the role which that should play.

and HMRC processes it and pays the rebate.

It should however be noted that there are additional options available when selecting funds which pay interest income, which serve to make the ongoing scheme administration less complex: •

Some custody platforms (through which the underlying SIPP investments are held) offer a gross investment account, which will permit eligible account holders such as pension schemes to invest in gross-paying funds.

•

Many funds offer gross share classes for eligible investors and whilst many of these are based offshore (often in Dublin), some will be UK-based.

Interest income in pension funds We are all aware that investments within a pension wrapper benefit from a number of tax breaks, the main ones being: • •

no capital gains tax on realised gains and no income tax on income, unless the pension scheme is deemed to be conducting a trade.

There are a number of options available to those investing in pensions, depending on the type of pension wrapper in which they invest. For example, an employer-sponsored money purchase pension scheme, or a personal pension plan with an insurance company, will normally only offer a selection of investment funds chosen by the scheme provider. A self-invested personal pension (SIPP), on the other hand, will provide a much wider choice of investment funds, along with individual shares, bonds and commercial property.

When looking at which investments to hold within a SIPP, one important consideration is how the underlying investment pays out income.

In the case of a dividend payment, it is not possible to reclaim any UK income tax; therefore there is nothing for the UK pension scheme to reclaim, nor is there any tax liability on the income received.

In the case of a bond fund, where the income paid is classified as interest, if this is a UK listed fund it will generally have its income paid after the deduction of 20% income tax. On receipt of this, the pension scheme administrator will reclaim the 20% income tax deducted.

The tax deducted at source will then be rebated to the pension scheme, although of course there is a delay before the scheme administrator completes and submits the return

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Investing via either of these two options will mean the pension scheme administrator no longer has to reclaim the income tax via the pension scheme return while the investor benefits from having the gross income reinvested immediately when each payment is received.

All change However, in HMRC’s “Budget 2016: overview of tax legislation and rates (OOTLAR)” which can be found at www. gov.uk https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/513073/OOTLAR_complete_for_ publication.pdf,

paragraph 2.11 states that ‘legislation will be introduced in Finance Bill 2017 to remove the requirement to deduct income tax at source from interest distributions from openended investment companies, authorised unit trusts and investment trust companies and from interest on peer to peer loans. These changes will have effect from 6th April 2017.’

If the legislation is introduced as outlined, and depending upon the ‘small print’, it seems likely that from 6th April 2017, it will be possible for any UK fund not to have to deduct income tax from interest payments, unless it chooses

Personal finance & wealth management supplement the barrister 2016

to continue to do so. This will make it easier for pension funds to invest in funds which do not deduct income tax at source from interest distributions.

Asset location considerations prior to vesting benefits In the past, it was not uncommon for a large proportion of the growth element (i.e. equity-based investments) of a portfolio to be held in the pension scheme due to the capital gains tax-free environment provided by the pension wrapper. Since the introduction of the Lifetime Allowance (LTA) however, and particularly as we have seen the value of the LTA repeatedly reduced year on year, we find ourselves more often trying to dampen down growth within our clients’ pension wrappers to minimise their tax liability when benefits are taken.

Therefore, when we are considering asset location for our

clients, it is not unusual for us to be allocating the bulk of the defensive element (i.e. the fixed interest investments) of the portfolio to the pension wrapper. Given that capital gains tax (CGT) is a) not paid by many people and b) still one of the lowest tax rates payable for basic rate taxpayers for investment funds, holding growth assets in a taxable environment does not necessarily mean a higher tax bill.

With the introduction of the ÂŁ5,000 dividend allowance the ability to hold growth assets tax-efficiently even within a taxable wrapper has increased significantly.

Added to which, of course growth assets can also be held tax free within an ISA.

Asset location considerations when pensions are vested Tax is tax, regardless of whether it is income tax, CGT or inheritance tax (IHT). Once you move into the decumulation

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phase, it is important to give consideration to a) how you access sufficient cashflow to meet expenditure requirements in the most tax efficient manner and b) how you arrange asset location for this phase.

Many investors will have their investment portfolio split over several different tax wrappers. It is important to ensure, as far as possible, that the right asset classes are held in the most appropriate tax wrapper to optimise the tax efficiency of any withdrawals.

First, it is important to remember that it is possible for an individual to receive withdrawals in income and capital of up to £33,100 in 2016/17 without suffering any personal taxation if the withdrawals are made in the optimum manner, for example: Earned/pension income Dividend income Savings income Realised capital gains

£11,000 £ 5,000 £ 6,000 £11,100

Carolyn Gowen is a Chartered Wealth Manager and Certified Financial Planner at award-winning City-based wealth management firm Bloomsbury. She has been advising successful individuals and their families on wealth management strategies for over 25 years.

Carolyn can be contacted by Email truewealth@ bloomsburywealth.co.uk or Phone: 020 7965 4480 If you would like to learn more about Bloomsbury visit our website www. bloomsburywealth.co.uk

Total £33,100

Where additional inflows are required care needs to be taken as to from where capital is drawn down, taking into account the tax payable both now and in the future.

With the changes to pensions legislation which came into effect on 6th April, meaning that pensions can now be seen as an extremely tax-efficient inter-generational planning wrapper, it can often be argued that withdrawals from the pension wrapper should be avoided as much as possible, due to the benign tax environment for vested funds which have not yet been drawn and the IHT benefits available from leaving those funds within the pension wrapper. It might also be appropriate to switch from a ‘defensive heavy’ asset allocation within the pension wrapper to a ‘growth heavy’ allocation, if maximising long-term growth opportunities for your heirs is a primary consideration.

There is no absolute ‘right’ or ‘wrong’ answer that will apply to everyone. However, there are a number of factors which need to be considered when looking at the provision of income when being drawn down from pensions, ISAs and taxable accounts and these factors will ultimately serve to determine the optimum asset location. Working with a good financial planner will help you to define your expenditure needs via a lifetime cashflow, and then determine the optimum method of meeting those requirements, taking into account not only your personal tax situation today, but also future potential tax liabilities, whilst balancing the need for financial security for you and any desire you might have to maximise what you leave to the next generation.

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Personal finance & wealth management supplement the barrister 2016

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I Adviser – Are we facing a robot-revolution?

By Steve Murray – CEO, 1825, part of the Standard Life Group

Conjuring images of a dystopian future more at home in a sci-fi film, I am of course shamelessly sensationalising a topic currently facing both our industries. If you were to go on headlines alone then you would be forgiven for believing that Asimov’s version of the future is both imminent and inevitable, at least where the financial advice and legal professions are concerned.

Having launched a new financial planning business last year, innovation and advances in digital and technology are always on my radar. We’re trying to set 1825 up in way that will enable us to welcome the opportunities that new technology can bring. But sometimes things are framed incorrectly, and opportunities can be positioned as threats.

In which case we’re facing the same ‘challenge’ as you: how to take opportunities from the perceived threat of a robot takeover?

And specifically how technological innovation can help us provide even better support to clients and stakeholders.

What impact has things like Artificial Intelligence (AI) have had on our professions? Earlier this year Baker Hostetler, one of the largest law firms in America, hired ROSS – the world’s first artificially intelligent attorney. But forget the notion of shiny chrome humanoid, ROSS is more like a (very) intelligent search engine.

The ROSS application works by allowing lawyers to ask questions in natural language, like they would to a colleague.

Because it’s built upon a cognitive computing system, ROSS is able to sift through over a billion text documents a second and return the exact passage the user needs. It also learns as it goes and gets smarter and more useful over time.

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To me, this sort of innovation is very exciting. In this example, technology is being used to do the time-consuming, burdensome task of research which frees up time to focus on the work where that adds the most value – evaluating the research, drafting documents and developing arguments.

That doesn’t mean that the legal profession won’t notice a shift though. Research carried out by Deloitte estimates that technology has already contributed to the loss of more than 31,000 jobs in the legal sector. However the report also believes that there has been an overall increase of approximately 80,000 legal jobs – most of which are better paid and more highly skill. So instead of replacing us, AI enables us to reach positions that might have been beyond our reach without it.

But this is far from a ground-breaking development. In principle it’s been happening for hundreds of years. For example, it’s estimated that between 1700 and 1870 Britain’s total agricultural output almost tripled due to advances in technology. Fast forward to today and the vast majority of those agricultural jobs have been taken over by machines. I can only speak for myself, but I’m pretty pleased that the Combine Harvester has taken my place toiling in the field.

And although the technology we’re talking about now has come a long way from farmyard mechanics, the ‘threat’ is essentially the same. The industrial revolution of the 1800s saw groups of men destroying the machines that they feared would steal their livelihood, when in reality the advances lead to a better quality of life.

As we’ve seen throughout history, and now with ROSS, we’re giving robots the jobs that we don’t want to waste time on,

Personal finance & wealth management supplement the barrister 2016

rather than them taking the roles we value. But if Artificial Intelligence can get to the stage where it can give elements of basic advice to clients, it would be no bad thing.

We’re starting to see this already in the financial planning sector through a myriad of online tools which help give people an insight into their financial future. I see this is a very good thing. In our industry price is often a barrier that stops people seeking help with their finances. If digital tools and AI can help us better support our clients and potentially enable more people to access advice that has to be a positive thing.

But of course it’s not as simple as “build the technology and they will come”. When pensions freedoms arrived in April 2015 our whole industry expected increased levels of demand. To manage the increase, Standard Life built an online tool to enable people to access their pension money themselves. We saw some people go all the way through the process and then stop and pick up the phone just before they pressed the final button. They didn’t stop because the tool was complicated or because they didn’t know what to do – they knew exactly what they were doing and how to do it. They stopped because they wanted reassurance from an expert, and that’s something a machine couldn’t give.

Our ability to connect with others on a human level, to show empathy, offer comfort and have a relationship is still a huge asset. And thankfully that’s often what clients value most.

For financial planners the most important part of the job is the client relationship, creating trust and loyalty and giving people peace of mind.

We recently held a focus group with some 1825 clients and that aspect really shone through. I think ‘empathy’ was one of the most interesting points, with a client explaining that

he initially looked for someone who would understand what he was going through. His financial planner is a similar age and right from when the relationship started he knew that he was dealing with someone in the same long-haul that he was, who has an understanding of what it’s like to be making life decisions in your 40s and knows about being a parent. That’s something no robot will ever be able to truly emulate.

Our clients’ value having someone on their side and the feeling that someone is looking after them, at least as much as they value the pure return on investment. Of course that’s important as well, but that’s an area where technology can help us do a better job, analysing funds and data just as ROSS can do legal research.

There are arguments however that as people become more used to digital tools and AI that they will become less reliant on human relationships. But I don’t think it’s as simple as that. A study of 1,000 Millennials revealed that the majority (85%) of this age group prefer to communicate with friends, family and colleagues in person rather than by phone or email. This is the generation whom we would traditionally expect to favour digital options, but it seems that as the world becomes less reliant on human interaction, it’s exactly what we crave.

So I won’t worry about robots replacing us anytime soon.

As long as we concentrate on our clients and focus on being human – in the war against the machines, that’s our USP.

‘1825’ is a trading name used by Pearson Jones plc, which is part of the Standard Life group

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Protecting your wealth from the tax man

By Charles Calkin, Head of Financial Planning at James Hambro & Co a pension. Tax relief is available on private pension contributions up to 100% of your annual earnings. You can take 25% of your pension pot tax-free as a lump sum (or in small lump sums over time if you wish) from age 55. You pay income tax on the rest as you draw it at your marginal rate – which, if you manage your income smartly, might be at no more than 20%.

You can pay up to £40,000 in this tax year into your pension as long as you do not earn over £150,000 (in which case you are subject to another taper – your annual allowance falls by £1 for every £2 of adjusted income above £150,000 until it hits £10,000, when that tapering finally stops). This is another argument for carefully managing income.

3 Use carry forward Once you have used this year’s allowance, you can take up unused allowances from the previous three tax years – a potential extra £130,000 gross – though there are complexities. For instance, you need to have sufficient earned income in this year to offset the contribution against.

Many investors are extremely sensitive to market volatility, panicking when markets tumble temporarily. Yet they give little thought to tax planning, leaving them exposed to significant and often unnecessary erosion of capital – now and in the future.

You are taxed on your income after pension contributions, so someone earning £270,000 who has not made pension contributions in the previous three years could potentially invest £170,000 into their pension and be taxed on just £100,000 of income.

History tells us markets recover over time, but there are fewer opportunities to recover assets lost to tax.

4 Watch the pensions roof

Fortunately, the Chancellor recognises tax is not just vital for funding public services but is also a useful tool for shaping human behaviour in support of public policy. As a result, several opportunities have been created to reduce tax legitimately – for instance, to encourage saving for retirement. It means you can make a significant difference to your tax bill without using complex schemes that are open to retrospective legal challenges.

These 10 tips should help.

1 Try to avoid the taper trap Most of us have a personal allowance – up to £11,000 this tax year. Any earnings up to this amount are free of income tax. However, your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000 and disappears altogether by £122,000.

What this means is that the marginal rate of tax for those earning between £100,000 and £122,000 is a winceinducing 60%.

Many barristers have fluctuating incomes. Those with the ability to manage the timing of invoicing and payments and at risk of falling into this “taper trap” may want to bring forward or delay earnings to reduce the impact.

2 Consider pension contributions One way of avoiding the taper trap is to contribute into

Be careful that you are not breaching or threatening to breach the lifetime allowance for pensions, which has been reduced to £1 million this year. You will usually pay extra tax on income or cash from pensions that exceed this allowance.

It is worth checking the value of all your current and historic pension schemes to ensure you are not nearing the limit.

If you are, it is possible to apply for fixed protection to help reduce or mitigate the lifetime allowance tax charges.

5 Use your ISA allowance For many high earners the tax benefits of pensions make them an obvious first step when it comes to saving for retirement. Do not forget ISAs. You can save up to £15,240 into an ISA this tax year. You will obviously have already paid tax on these earnings, but any growth henceforth will be free of income tax and capital gains tax (and do not have to be declared on your tax return). An allowance for accumulated funds is also available to any spouse on the first death. Any assets not in an ISA wrapper already and which can be in one should be moved over, even if this takes a few years.

6 Consider EIS and VCTs – but with caution Enterprise Investment Schemes and Venture Capital Trusts are an example of the Chancellor using tax to shape investor behaviour. By offering generous reliefs he encourages the wealthy to invest in newer, risky but potentially highgrowth businesses. Good for the businesses, perhaps, but

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many investors have enjoyed the upfront initial tax benefits of these schemes only to regret the decision later. Invest carefully and remember that it is seldom wise to let the tax tail wag the investment dog.

7 Make the most of your spouse’s allowances Where possible, couples should make the most of their various tax allowances. You and your spouse both have a personal allowance, personal savings allowance, annual dividend allowance, ISA allowance and a basic rate tax band. You both have an exempt band for capital gains tax too.

It is often also worth considering setting up a spouse’s pension. Even if your spouse is not earning income, you may be able to invest £2,880 in their name and enjoy basic rate tax relief taking it to £3,600.

By sharing assets between each other judiciously it is often possible for couples to use both sets of tax-free allowances and avoid any higher-rate tax bills – now and in retirement.

It is useful to know that transferring shares between spouses is not seen as a disposal for CGT purposes.

8 Draw income intelligently If in retirement you draw on your various savings pots smartly – drawing incomes jointly to exploit the full range of allowances and from a combination of ISAs and pensions – you can significantly reduce your household income tax bills.

Be aware that accrued pension funds can be left taxefficiently in the event of death before they are drawn too, as they are free of inheritance tax. This may mean drawing more heavily on ISA income in the early years of retirement.

9 Review your will and power of attorney A proverb from 1546 says: “But who is wurs shod than the shoemakers wyfe, With shops full of newe shapen shoes all hir lyfe?” It is probably not surprising that members of the legal profession can be among the poorest at making wills and powers of attorney.

The consequences of dying intestate may be serious – it creates additional problems for your family at a difficult time and can mean your money and assets being shared in a way of which you would not approve.

Make sure you have a will; consider powers of attorney; ensure nominations and expressions of wishes are up to date and reviewed regularly for your pension, and if you have young children think about identifying guardians for them. Make sure funds are in the right hands at the right time, settling benefits in trust if necessary.

10 Take advice Defendants who choose to represent themselves might still be acquitted, but undermine their chances substantially by not employing expert representation. The same applies to financial planning. Do not hesitate to take professional advice around your financial planning and investment needs.

It could significantly increase your chances of meeting your financial objectives in retirement and beyond.

The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Tax benefits may vary as a result of statutory changes and their value will depend on individual circumstances. James Hambro & Company is an appointed representative of James Hambro & Partners LLP, which is authorised and regulated by the Financial Conduct Authority

Do I need a financial planner?

By Tom Glanville, Chartered Financial Planner, Director, Shipman Financial Planning Ltd It does seem that everything is more complicated these days. This seems to be especially so when looking at the area of advice. This is in part due to regulation, with far more emphasis on who can give advice in what areas. Gone are the days of the friendly bank manager giving broad general advice to generations of a family. Now there seem, on occasions, to be teams of advisers to cover each different area of advice required. Call me old fashioned but whilst specialism is an excellent trait to have there is the need for someone to look at the overall picture and keep the end objective in view. Step forward a good financial planner.

If we consider a fairly typical situation we can see how this may

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or may not work. Charles has worked for the family firm for many years rising to the role of managing director, but he is ready to step back and let his son William take over in that role. Whilst there are many things which need to be sorted out, Charles’ first concern is how he is to live in retirement as his salary will stop. He had always intended drawing on the pension funds he had built up over the years, but he has other options: a large share portfolio, a couple of family trust funds, the potential for dividends from the shares in the family firm to even staying on as a consultant. He needs an income of £100,000 a year to do what he wants to do for the next few years.

Depending on the amounts of money held in the relative pots mentioned above, the problem is not if he can raise the £100,000 a year income but almost having too much choice of where to take it from. As mentioned he had always expected to draw on his pensions when the time came to step down from the firm, but he has heard that this may not now be as logical as he had always thought.

It is quite likely that his investment portfolio, the Trust funds, and the funds within his pension will be managed by a wealth manager or private banker. His accountant can advise him on the tax position on taking dividends from his company shares. His lawyer can advise him on the implications of using the family trusts to fund his requirements but this becomes more complex if the funds are in an offshore bond, which there may be very good reasons to retain. So having had all this advice from very qualified people, where does he take his income? Sometimes it is up to the financial planner to try to join the pieces together to come up with a plan.

‘Coming up with a plan’, is I guess, what a financial planner does; often putting together the advice from other professionals which has been given in specialist areas. In some ways therefore we are general practitioners, or some may say “jack of all trades, master of none” However, in the ever increasing drive to specialise the general practitioner is becoming a rarity. Whilst not referring to medical GPs in the traditional sense of course, I am told by many of my medical clients, that in hospital, one of the major problems faced by patients with complex medical conditions is getting the interaction between the different specialists consultants correct. Indeed, one of my clients’ daughters has been in hospital for a while now unfortunately and has at times been under up to 10 different specialists, all doing their best for her, but all in their own world.

A historical easy comparison from the financial planning side would be business people being advised by their accountant to pay themselves by dividends rather than salary, as it is more tax efficient. Unfortunately that has meant personal pension contributions are very limited.

In some case this could be overcome by making company pension contributions but this is not always possible.

Hence the client getting excellent advice from two different professionals to do two different things.

One area where I have provided a good deal of advice is with regard to Trust investments. Whilst the day to day management of the funds should be left to wealth managers, there is a danger in going straight to them. As mentioned

previously, there may well on occasions be very good reasons for the money to be placed in an offshore bond and then managed by the wealth manager and it is far better at the outset to find that out, rather than face some awkward questions later. The recent case of Daniel v Tee 2016 EWHC 1538 Ch again showed that whilst actions can be undertaken with the best intentions, outside influences can result in awkward questions, and often in Court.

Most trustees are aware of the requirement to take “Proper Advice” under the various Trustee Acts. Whilst this is clarified in a way by saying a suitably FSA (now FCA) qualified individual, it is not very specific. I think the easy comparison is to look at who the trustees would consult if they were looking to buy a property to provide rental income. It is unlikely they would use the same person to provide advice on what property to buy, and to provide letting agency services. Equally when looking at stockmarket investments, the trustees should take advice from a financial planner, and the wealth manager manages the money dayto-day. Many wealth managers prefer a financial planner to be involved, as this will cover their requirements regarding suitability, and some reduce their fees accordingly for this, as it then allows them to concentrate on just managing the money.

Like many professions, financial planners do not have a monopoly on financial knowledge and much of the information I supply could be researched on the internet by the clients. There are a couple of main reasons why clients will still pay for advice. For some, it is that they live such busy lives the last thing they wish to do is spend time researching what they should be doing with regard to their finances. For others, whilst they may well possess good knowledge, they wish to have the reassurance that someone else is working alongside them. On occasions, if one is looking after one’s own financial affairs, one can be too close to spot the obvious. I recently discovered one of my clients, who is the managing director of a successful company, had received a pay rise which put his pay well above £100,000. He did not realise that he would lose all his personal allowance as a result. He therefore suffered mixed emotions when I told him, but was far happier to discover that making additional pension contributions he would benefit from the equivalent of 60% tax relief. The equivalent saving for something in his company he would undoubtedly have picked up, but missed it for his own finances.

It is a much over used phrase but it is all about “adding value”. If someone knows they need £500,000 of life cover over a 10 year period there is an argument that I could add little value. However, their beneficiaries may think slightly differently when faced with the inheritance tax bill of £200,000 after pay out on death, as the policy had not been put in trust!

Tom Glanville TEP CFPTM FPFS Chartered MCSI Chartered Financial Planner Director, Shipman Financial Planning Ltd tom@shipmanfp.co.uk tel: 01392 278 491 www.shipmanfp.co.uk

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A partnership for life - Six difficult questions to ask a prospective wealth manager

By Andy Steel, CEO, James Hambro & Partners Good wealth managers can genuinely make the difference between a retirement spent in frugality or abundance, your cash just lasting out or you leaving money behind for children, grandchildren or other loved ones.

They can enhance your quality of life in other ways too, offering reliable administration, ensuring you know where your investments stand at any point and by being a dependable ally alongside you through some of the more difficult points of life.

This is a partnership that will hopefully last for decades and even generations so it is important to get it right.

While we are keen to nominate ourselves for this important role, we also recognise that many people may want to test the market. The following six questions should help any cross-examination and help ensure you make the right judgement.

confident of their offering that they will allow you to leave whenever you like, with no exit fees.

Be wary, therefore, of lobster-pot investments, where you are lured into an investment management service only to find yourself trapped for several years by a system of tapering exit fees – 6% in the first year, 5% in the second and so on. We have had people come to us one year into such deals, wanting to move but imprisoned by the prohibitive £50k exit fees on their £1m investments.

Wealth managers can also enchain you by investing your assets within fund vehicles that can only be held by clients of that firm. In leaving you cannot transfer the assets in-specie across to your new manager and so you have to sell them and may end up crystallising significant CGT charges in the process.

2. Are there buried charges?

1. What does it cost to divorce?

Divorce can be expensive, but that should not be the case with your wealth manager. A good manager will be so

As anyone knows, good advice costs. But we all also know that just because a service is expensive does not necessarily mean that it is good.

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The key here is to understand costs. A manager’s fees can sound very competitive on the surface, but the headline figure may mask a number of hidden charges that soon rack up. Most managers will bill an annual management charge (AMC), which covers the legitimate costs of managing the portfolio appropriately and meeting your reporting needs.

On top of this will be the costs associated with third-party funds. There are also likely to be trading costs, usually quite modest.

Many will, however, also add in other costs, like performance fees, charges for the safe custody of assets and the collection of interest and dividends, as well as commission charges on trading. If the manager uses their own funds, check out the costs – sometimes these can be surprisingly high and could be a way to ramp up fees unobtrusively.

3. How is my money managed?

Some managers adopt a passive approach to investment.

What this means is that they populate your portfolio with low-cost exchange traded funds (ETFs) or trackers that simply track a number of global market indices. A good FTSE 100 tracker, for example, should mirror the performance of the FTSE 100’s component parts – the 100 biggest UK-listed companies. Actually, it is likely to underperform the index marginally because of the costs.

Others advocate active management, where fund managers can be selective – picking only what they believe to be the companies with the most promising prospects, strongest balance sheets and best management. The costs of research and trading mean that active management is often more expensive but the best active managers can usually outperform broad market indices and justify their extra expense over the long term.

We see a place for trackers – we use them, for instance, in markets where it is very difficult for active managers to outperform the broad indices. In the main, however, we tend to use a blend of active funds run by managers we consider to be the best around the world. We combine this strategy with investments in a number of individual “best ideas” stocks, chosen by our own expert team. (This ability to invest directly also enables us to tailor portfolios more carefully to a client’s bespoke needs – for instance, in investing ethically.)

4. Is performance independently assessed?

It is important to understand that past performance is no guarantee of future performance, but few investors make a decision without at least looking at performance history. Some managers can mask poor performance or boost average performance by publishing figures drawn from an unrepresentative sample. Ask detailed questions about any data presented and look for wealth managers whose performance is independently assessed by a credible organisation.

5. Who is looking after my money?

It is important to understand the role of the person with whom you are building your relationship. We are committed to ensuring clients work directly with the manager and the small team actually managing their money, rather than employing relationship managers. We believe this direct relationship helps ensure your wealth is being being run to best suit your needs. Markets can be very volatile and it can be nerve-wracking when the headlines scream of billions wiped from stock markets. It can be comforting to be able to pick up the phone and speak to someone you have got to know well who is on the coal face managing your money and able to give an expert overview.

Of course, you also want that person to stay. A big feature of the industry in the past couple of years has been a wave of consolidation and mergers as firms seek to build scale. This has led to a lot of upheaval – people moving on, changes to the business culture and processes, centralisation of investment management and, more importantly, of client relationship management.

Staff turnover is inevitable in any organisation, but check if it is high. We believe our partnership structure is more likely to deliver continuity and stability of relationships and proposition, helping us attract and retain good staff – and good clients!

6. How bespoke is the service?

In recent years we have seen a lot of wealth managers telling clients that if they have below a certain level of assets they have to go into one of their off-the-shelf funds or model portfolios. Here their money is basically run the same as that of all other clients with a similar attitude to risk and reward.

These structures can actually make sense for many people but make sure it is your needs that are being met, not those of the wealth manager.

Trust your instincts Hopefully by the time you have explored all these questions and issues with a prospective wealth manager you will have a strong sense of whether you can trust them and whether there is a good fit between you. If you already have a wealth manager and this piece has flagged up issues that have been causing you to feel uncomfortable about the relationship do not fall for the myth that changing wealth manager is complex and time-consuming. It need not be. In fact, a good wealth manager should ensure it is not.

The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is no guarantee of future performance. James Hambro & Partners LLP is authorised and regulated by the Financial Conduct Authority.

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Stamp duty changes – Second homes and investment properties: winners and losers

By David Percival, commercial property solicitor and specialist in real estate and construction at Excello Law

In the Spending Review and Autumn Statement of 2015, the then Chancellor George Osborne announced a 5-point plan for housing. This Article is intended to illustrate how the changes work in practice, as well as identifying some areas where the effects of the tax increase might be mitigated.

The Government’s stated intention was to refocus support for housing towards low-cost home ownership, particularly for first time buyers. The 5-point plan proposed higher rates of Stamp Duty Land Tax on purchases of additional residential properties. The higher rates proposed, and then introduced in the budget, are 3 percentage points above the current SDLT rates for the purchase of second homes, holiday homes, buy-to-let properties and any residence other than a place for the buyer to live in.

The promotion of owner-occupation is gained, therefore, by penalising people who buy property that they are not going to live in. Stamp Duty is an easily collected tax and increasing rates, by and large, means increasing revenue.

The Government had suggested, in the Autumn Statement, that it did not wish to put off “large scale” investors, meaning companies with a largish portfolio of homes for rent. The suggested number of ownership of residential units above which the owner would qualify as a large scale investor was 15. The Government Statement recognised that such organisations “contribute to an overall increase in housing supply”. It therefore came as a considerable surprise in the budget that the Chancellor decided that the 3% surcharge on SDLT rates would apply to the purchase of any residential property in England and Wales by companies, as well as the purchase of second homes by individuals.

A couple of examples might illustrate just how expensive, from the Stamp Duty point of view, the acquisition of residential investment properties or second homes is likely to prove: A property company buys a flat as an investment for £250,000. If the acquisition was completed prior to 31st March 2016, the duty payable would have been £2,500. If completed after 1st April 2016, the duty payable is £10,000 (unless Contracts were exchanged prior to 25th November 2015).

A house with planning permission for conversion to a number of flats is on the market for £750,000. The marginal rate of tax payable by a property investor acquiring that property for conversion will be 8%. The Stamp Duty payable will be £50,000.

There are also changes designed to prevent people who already own or have an interest in a residence in England and Wales from purchasing another one and avoiding the duty increase. For instance, if either one of a married couple of civil partnership acquires a residential property where the other already owns a residential property, they may pay the higher rates when purchasing another

residential property. Beware, therefore, the MP whose spouse alone owns a home in the constituency and who then seeks to acquire in his/her own name a flat in London.

It will also apply to individuals who set up a limited company to purchase, say, a holiday home or a residential flat as an investment. The company will pay the SDLT surcharge.

There are other tax changes, falling outside of the Stamp Duty Land Tax regime, but which nevertheless cause more headaches for the “Buy to Let” industry. These are, in brief, an inability to set off all interest paid on borrowings against rental income for tax purposes, with the percentage of qualifying interest being reduced even further in future; and an inability to claim relatively higher rates of depreciation on furniture, fixtures and fittings.

So far, all bad news for what might be described as the residential property investment industry and all good news for the treasury. However, that industry is large and powerful and is likely to seek ways to do what it can to mitigate the impact of the tax increases. There are almost certainly going to be “grey areas” around the changes before they bed in fully.

There are some instances where the duty increase will not apply. Firstly, residential property acquired for less than £40,000 is still free from duty as there is no obligation to submit an SDLT return on an acquisition at that price. So the builder who buys dilapidated homes to do up and let out or sell, can still avoid the increase (albeit the property will have to be in pretty bad nick).

People who, or whose spouse or civil partner, do not already own a home in England and Wales, who buy a home whether to live in or as an investment, are not affected by the Stamp Duty changes.

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Housing Associations and Charities who buy residential property can also claim relief. The Government still refers to them in the Autumn budget statement as “registered social landlords” whereas they are now strictly Registered Providers, but never mind. In the example above of the large house being sold for £750,000 with planning permission for conversion to flats, the commercial developer pays stamp duty of £50,000 and the Housing Association nil.

There are also Stamp Duty reliefs for the purchasers of multiple dwellings. An investment company buying a dilapidated block of 6 flats for refurbishment for, say, £600,000 qualifies for relief. The average price for those flats is taken to calculate the duty rate, subject to a minimum of 1%, so the duty in that case, was, until 31st March, 1% of the total price, or £6,000. The new rules will make that 3% of the total price (or of the average price of each flat multiplied by 6) being £18,000. However, the buyer can elect to pay tax at the rate applicable to commercial property for the purchase of 6 or more dwellings. That is generally at a lower rate, and in this case would be £7,500. So the buyer in that case would be best advised to opt to pay SDLT at the commercial rate, rather than the residential rate, and thus achieve a legitimate Stamp Duty saving.

There is a relief where a property is residential in character when acquired but is acquired specifically for the purpose of converting it to a commercial use. It may be anticipated that the disparity between commercial residential rates will lead to attempts to elect to treat property as commercial rather than residential in character.

Trusts and loans may also come to the fore. For instance, under the new rules if a parent who owns residential property acquires property jointly with their children in order to help them on to the property ladder, then notwithstanding that the child is going to live in the house, the Stamp Duty surcharge is payable. Better, from the Stamp Duty perspective to provide a loan and, with any prior mortgagee’s consent, take a charge over the property to secure that loan.

Say elderly parents live in rented accommodation or do not own residential property in England and Wales. Say the family wish to acquire a holiday home – best to acquire in the name of the parents who will not have to pay the SDLT surcharge. It may be that subsequently the parents can enter into a Deed of Trust whereby they hold the property on trust themselves as well as other named beneficiaries, or issue a charge over the property to secure any loans made by other family members.

It remains to be seen whether the Government’s stated objective of freeing up property for first time buyers, in particular, is going to be successful. It is conceivable that one of the by-products of the policy will be to reduce the price of residential property generally because of the larger amount of tax on acquisition that many people will have to pay. It may make some investors drop out of the market.

It may well be that prices, particularly in London, remain too high for first time buyers. It may have an effect on regeneration schemes, both big and small: for instance, the purchase by a builder of a terraced house for refurbishment and letting at a price of £100,000 now carries with it an additional cost for the acquirer of £3,000. The gap in the market that this may cause might not be filled by Registered Providers or charities, nor by first time buyers who will not be able to afford both a deposit and the cost of refurbishment. It is conceivable that instead of making more people the owners of the homes they live in, there will be more homes lying empty.

In summary, these are significant changes, implemented with political and economic objectives to rebalance the housing market. Expect more to follow. Although their commercial impact remains to be seen, in legal terms, the wide scope of changes and their far-reaching impact seem likely to provide more work for specialist barristers over the next few years.

David Percival is a commercial property solicitor and specialist in real estate and construction at Excello Law

Searching for growth…and finding it - Global thematic opportunities for the long term

By Guy Monson, Chief Investment Officer, Sarasin & Partners For the moment at least, markets have chosen to view Brexit as much as a cause for cautious optimism at the generous and timely liquidity provided by central banks as a reason for despair over yet another impediment to a wider global recovery. Whichever is ultimately right, world bond markets are still giving investors the same message, namely that genuine economic growth is going to be fiendishly hard to find in a world where ‘secular stagnation’ (as economist Larry Summers describes it) is increasingly the norm.

In response to this, we continue our search for long-term, repeatable growth opportunities that are largely independent of the immediate political and economic agenda. We have loosely grouped their findings into four long-term trends that draw on fundamental changes in technology, consumer behaviour and demographics, and are often supported by mandated changes to government policy. We look below at

the winners and losers from these trends, and the likely impact on client portfolios.

Cloud computing There has been a nascent quantum leap in modern computing. Cloud computing refers to the centralisation of computing power in huge data centres, which brings a near 80% fall in costs compared to the traditional in-house hardware model. Initially, this has been as much a negative as a positive for global technology stocks.

What we will be buying are the leading infrastructure players (led by Amazon’s cloud giant, Amazon Web Services), alongside network hubs and the infrastructure of the internet, which is under increasing pressure as speed and volume across the net continue to climb.

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The automotive revolution The global automotive industry is on the cusp of a period of unprecedented change. We believe emergent vehicle automation technologies are one of the most attractive areas for investors. Safety oriented vehicle automation (collision avoidance, automatic braking) has growing regulatory support and ready consumer acceptance. Barriers to entry are high, with auto companies understandably conservative about whose systems they deploy. We see a clear roadmap to fully autonomous vehicles ten years or so from now.

The rising technological content in autos creates opportunities for specialist industrial, software, battery and semiconductor makers. According to comments from semiconductor manufacturer Infineon Technologies on a recent analyst trip, a plug-in hybrid contains $704 worth of semiconductors versus just $338 in a car with a conventional drive train. The new Mercedes E-Class contains more lines of code than a Boeing 747.

However, electric vehicles remain costly and a true inflection point is probably still several years away (especially considering cheap oil prices). Both battery prices and charging times need to fall. Energy storage is key. When all three of these conundrums are solved, we will see a complete transition where energy can be stored efficiently and affordably in order to power grid backup, cars, and industrial processes.

What we will be buying are leading vehicle automation companies, alongside selected lithium and battery producers.

What we won’t be buying are traditional auto stocks without advanced EV plans.

What we won’t be buying are pure hardware stocks, and many of the large standalone software providers (cloud operators have moved ‘up the stack’ and started to offer their own database and enterprise solutions).

Retail disruption OPEC (Organisation of the Petroleum Exporting Countries) revenues fell by $438 billion last year as oil prices declined giving a windfall spending gains to global consumers. This comes on top of lower food and commodity prices, and new lows for mortgage rates, which have all combined to lift real incomes in the US and Europe, although the UK’s benefit has been hobbled by sterling’s ‘Brexit’ collapse last month.

While global consumers will save a portion of the gains to pay down their debt, the rest will likely be spent. But shopping habits are changing dramatically. Ecommerce’s growth continues unabated. Within this, Amazon’s extraordinary market share has been achieved by combining price leadership with unrivalled range and superb customer service metrics. In China, Alibaba’s Taobao and T-Mall dominate online retail with an estimated 50-60% share of the market. Indeed, in many parts of China, ecommerce has leapfrogged the creation of formalised bricks and mortar retail. The superiority of the ecommerce model begs the question of whether China will ever build hypermarkets, and by extension whether many of the supermarkets of the West are in fact stranded assets from a pre-digital age.

What we will be buying are dominant business models like Alibaba or Amazon (although we will be alert to valuation) and low cost retail models like Costco, Primark and TJX (owner of TK Maxx) that we believe remain relevant in the ecommerce world.

What we won’t be buying are traditional high street retailers and their global equivalents, many of which we think will struggle to survive.

Deleveraging Higher capital requirements mandated by regulators have undermined the economics of large parts of the traditional banking businesses. Banks now need to have not only enough capital to run their activities, but also to provide a level of safety that would protect governments from participating in additional bailouts. To achieve this, bank balance sheets have been shrunk, risky loan books restructured and investment banking activities reduced. The latter in particular require a vast inventory of assets (such as bonds or commodities) at just the point when the automation of trading continues to compress ‘sell side’ margins.

The result is a drive towards a simplified banking model, which is more capital intensive and more intensively regulated. Neither of these are notionally positive outcomes for the equity investor. But, there are positives for the investor that should not be overlooked. Greater capital cushions mean today’s banks are far less risky than in the past, and while their business is duller, it is more reliable.

Banks tend to profit from higher interest rates. While that is clearly not a tailwind at present, banks can provide a useful, good value hedge in portfolios against markets that have become addicted to low or zero rates. What we will be buying includes simple, cheaply valued but strongly capitalised US bank franchises and carefully selected, dividend rich European names. We will also be adding to the beneficiaries of financial technology including with a particular focus on electronic payments.

What we won’t be buying are poorly capitalised banks with little hope of dividend flows or oversized investment banking franchises.

Guy Monson, Chief Investment Officer Sarasin & Partners LLP 100 St. Paul’s Churchyard, London EC4M 8BU 020 7038 700

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Collectables: How to profit from anniversaries

By Daniel Wade, Paul Fraser Collectibles Want to make money from collecting? It pays to think ahead. Far ahead.

Major anniversaries often increase values for rare, desirable memorabilia. We’ve seen it recently with the Titanic centenary in 2012 and the 50th anniversary of John F Kennedy’s assassination in 2013.

Why so? Because the media attention drives new collectors to the sector, and compels lapsed collectors to collect once more. And with increased demand, prices can only go one way.

The trick is to buy your memorabilia before anyone else is thinking about the anniversary, then sell at the height of the excitement. And buy the best you can afford – the scarcest, most in-demand pieces appreciate far more than cheaper items.

Here are four anniversaries to consider: 2019: 50 years since Apollo 11 Buzz Aldrin may tell you otherwise, but when it comes to collectable astronauts, there’s only one man in town: Neil Armstrong.

Neil Armstrong stopped signing autographs in 1994 Armstrong’s signature is worth far more than Aldrin’s (images courtesy of Paul Fraser Collectibles )

Signed photos of the first man on the Moon sell for around £5,000. The second man down the ladder? Just £300.

That’s supply and demand at work. Demand for Armstrong’s autograph is high because collectors want to own the “first” of things, not the second. And Armstrong’s signature is far rarer than Aldrin’s. Tired of seeing autographs he gave appearing for sale, Armstrong stopped signing in 1994. Aldrin continues to sign anything and everything (for a small fee).

But how about something flown aboard the Apollo 11 mission? American flags, bits of spacecraft, even toothbrushes have sold. To hold an item that has been into space can make your head swim. To know it accompanied Armstrong, Aldrin and Collins on their historic mission is mind blowing. Small US flags (the crew took several) sell for around £15,000.

At the top end, pages from the mission-flown checklist the Apollo 11 crew used sell for £30,000 and up.

Where are the spacesuits Armstrong and Aldrin wore on the Moon’s surface? They’re set to go on display at the Smithsonian in Washington, DC in 2019 – to mark the 50th anniversary. £ Where to buy: Bonhams or Nate D Sanders

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2027: 100 years since Charles Lindbergh flew across the Atlantic When Charles Lindbergh touched down in Paris in 1927, he had achieved something many thought impossible.

Something several others had died trying.

He was the first person to fly solo non-stop across the Atlantic. That’s despite his plane, the Spirit of St Louis, having no front windows, and Lindbergh forced to navigate with a map on his knees.

150,000 people greeted him in Paris after his 33 hour flight.

They tore the plane’s canvas to shreds.

Lindbergh’s flight changed aviation overnight. He opened people’s eyes. During the rest of 1927, applications for pilot’s licences tripled. The number of licenced planes quadrupled.

Airline passengers grew by 3,000% in the next two years.

And only 34 years later. Man would go into space.

That’s the reason Paul Fraser Collectibles sold parts from the Spirit of St Louis for £150,000, and why a letter Lindbergh wrote shortly after arriving in Paris made $75,000 in 2002.

You can pick up Lindbergh signatures for around £1,500, while a Lindbergh-signed piece of fabric from his historic plane is £75,000. £ Where to buy? Paul Fraser Collectibles or Heritage

Auctions

Lindbergh-signed cloth from the Spirit of St Louis – selling for £75,000 at Paul Fraser Collectibles (images courtesy of Paul Fraser Collectibles )

Spitfire images courtesy of Bonhams

2030: 50 years since John Lennon’s death The Beatles have no parallel on the music memorabilia scene. And John Lennon is the most collectable of the four.

You can argue about whether Paul had more song writing talent. Lennon had the greater mystique. It’s a mystique that endures. And his early death at the hands of Mark Chapman ensured his artefacts are rare.

It all adds up to huge money for Lennon memorabilia. The Gibson acoustic guitar on which Lennon wrote many of the band’s early hits, including Please Please Me, sold for $2.4 million in 2015 – a record for a Beatles guitar. Lennon’s original lyrics to A Day in the Life sold for $1.2 million in 2010.

A rare signed copy of Lennon and Ono’s Unfinished Music No. 2 (image courtesy of Paul Fraser Collectibles )

Even the most unusual pieces sell well.

Lennon’s tooth, which he gave to his housekeeper, auctioned for £19,000.

Lennon’s autograph is a more affordable option. A signed autograph album page is yours for around £7,000, in top condition.

Want to gauge the true value of John Lennon? His childhood home sold for £480,000 in 2013 to a US Beatles fan. Prices of comparable houses on the same street? £150,000. £ Where to buy? Tracks or Liverpool Beatles Auction

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2030: 50 years since John Lennon’s death Demand for first world war medals, weapons and letters home has soared during the ongoing centenary commemorations.

Expect to see something similar for militaria from the second world war come 2039. By then, the importance of these artefacts will have grown significantly, because those who fought in the conflict will no longer be with us to tell their story. Even today, only 5% of second world war combatants are alive.

Artefacts from the most famous events of the conflict are the most valuable.

Think Dunkirk, the Dambuster raid and D-Day. A bombsight used by the Dambusters sold for £41,500 in 2015.

1939-1945 War Medal – awarded to all British combatants – can be yours for just £15, although unlike first world war medals – they are unnamed. Prices get serious for Victoria Crosses – each medal a reminder of that man’s valour.

Just 181 Victoria Crosses were awarded in the second world war. Australian private Edward Kenna’s made £678,000 in 2011.

WWII British Army rifles sell for around £400 and are common, so their investment-potential is limited. A better option are US Army M1 helmets. These iconic helmets are growing in popularity – thanks no doubt to films such as Saving Private Ryan. You can get one for around £250. Examples still bearing unit insignia are worth more.

Original “Keep calm and carry on” posters sell for up to £20,000 (image courtesy of Bonhams)

Wartime posters are surging in popularity. Those rare examples in top condition are especially sought after as most show significant wear. Expect to pay around £20,000 for a museumgrade “Keep calm and carry on” poster, produced by Britain’s Ministry of Information in the early months of the war.

In the market for a Spitfire? They do occasionally appear for sale. £2 million should get you one. £ Where to buy? Dix Noonan Webb or Chiswick Auctions

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Is it true that HRMC can help investors pay less tax whilst keeping Britain great?

By Elizabeth Orbell, Head of Client Services, Rockpool Investments Entrepreneurial spirit lies at the heart of what makes Britain great. This is the spirit which fuels thousands of small to medium sized privately owned but profitable companies that are a vital source of wealth creation and employment in this country. Many of these companies will at some point need access to finance to help them continue to thrive and grow.

Limited finance can, at best, dampen growth and, at worst, put these businesses at risk.

However, with bank funding more limited and banks maintaining a highly cautious approach to lending, access to finance for small to medium sized businesses is hard to come by and often not accessible via the normal bank finance.

So is there a way of ensuring that this spirit is kept alive and flourishing?

Well it seems there is and that it is the private investor who can actually make the difference for these companies whilst also benefitting from the rewards that private companies can potentially bring to their overall investment portfolio.

These are the same investors who are probably feeling frustrated by the low yield of their current investment portfolio. They may also have become victims of their own success and now find that saving for their retirement through the traditional pension route is very limited.

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So how can the needs of these small to medium sized businesses be brought together with the needs of the individual investor?

The answer lies with HMRC who here act as a force for good. HMRC’s long established Enterprise Investment Scheme is designed to encourage private investors to invest in companies which require finance for growth. The tax reliefs are generous – 30% income tax relief, capital gains deferral, loss relief, capital gains free at exit and exemption from inheritance tax after 2 years.

And for entrepreneurs EIS offers an efficient and successful way of raising finance – 71% of companies receiving EIS funds have grown employee numbers post investment.

Entrepreneurs who need access to finance, and investors who are looking for better returns than traditional assets whilst also paying less tax. Both exist and one provides the solution to the others’ problem – hopefully to the benefit of all. So are there any barriers in the way to prevent this happening and what are the potential pitfalls?

Firstly, let’s cover off the most obvious point that there are risks involved. Shares in private companies are illiquid and can’t be sold when an investor chooses. Small companies can fail and investors can lose their money. Shares must be held for at least three years to qualify for the EIS tax reliefs but in reality small companies often need longer than three years in order to let their growth plans come to fruition.

However, if investors are prepared to take the long view, then there are significant benefits to be gained. But just

to add another note of caution the success of an investor’s private company investment portfolio is very dependent on finding the right companies and having the right structure and terms in place for investors. Herein, lies another of the key barriers to investing in private companies. How can investors find the companies which are poised for growth to invest in and how do investors get the best value when putting their cash at risk?

Until relatively recently the answer would have been for investors to either spend the time searching out private companies themselves and doing their own due diligence to ensure that the company is in good health and then negotiating their own terms. In this scenario investors would inevitably end up putting all their eggs in the one basket as this is a highly time consuming exercise. In reality, most investors don’t have the time or the knowledge to do this. The other alternative would have been to invest via a fund. This meant putting money into a blind pool. Whilst easy to access, in reality this route involves a protracted timescale for deployment. The investor is can be ill informed, there is no control and a lack of visibility.

However, the good news is that there is now another route for investors to access private companies which combines the best of both of these routes. This is effectively where a team of professional investment managers do the hard work finding the private companies that are suitable for investment. They do this by having casting as wide a net as possible through contacts to hear about as many companies as possible who are looking for growth capital to reach the next stage of their development. Experience, time and resources within are then required to sort through these

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and identify the few companies that will really be able to take advantage of the injection of capital and flourish with investment. When the potential stars of the future are spotted, high levels of due diligence are undertaken. This is where this direct investment model differs from the more highly publicized trend of crowdfunding. The minimum investment amount may be less on a crowdfunding site but so is the information and due diligence process undertaken.

What really matters and helps the success of a private company investment portfolio is to find an investment firm which will work closely with the management teams of the companies to ensure that their future business plans are robust and where the professionals are prepared to stand in the shoes of the investor and ensure that they negotiate the best terms.

Having access to professional investment managers who specialise in private company investment is undoubtedly a more feasible route for high net worth and sophisticated investors, than for these investors to attempt to find the companies themselves. It also offers far more engagement than investment via a fund. In the aftermath of the financial crisis and in a digital age with information at our finger tips, it is transparency and control which many investors are looking for. A number of organisations have picked up on this and are delivering a more investor friendly experience which is in essence very simple.

So this is how it works: the investment managers undertake due diligence on companies requiring up to £5m of funding which will qualify under the rules of the Enterprise Investment Scheme. The finance package is structured to ensure that the risk to the investor is mitigated as far as possible – of course strongly supported by the EIS tax reliefs available. Investors confirm their investment and investment is made directly subscribe for shares in the companies. HMRC’s EIS Certificates are sent to individual investors to claim their income tax reliefs and capital gains deferral. The shares are then held for a minimum of three years and are capital gains free on exit.

And, of course along the way, the funds injected into this small to medium sized company sector is keeping the entrepreneurial spirit alive and, yes it’ true that HMRC can help investors pay less tax in a Britain which continues to be Great.

Elizabeth Orbell Head of Client Services eorbell@rockpool.uk.com 0207 015 2150 www.rockpool.uk.com

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Four Topical Tax Changes

By Charlie Thompson, assistant tax manager at Muras Baker Jones There are a number of wide ranging pieces of tax legislation that have recently come into force, with more taking effect soon. Here is a selection of four with the most significant impact.

1.

2.

3.

4.

Stamp Duty Land Tax on second homes Interest income tax changes Dividend tax increases Mortgage interest restriction for Buy to Let Landlords

1. Stamp Duty Land Tax on second homes Significant changes have been announced to Stamp Duty Land Tax (“SDLT”) and apply from 1 April 2016. Broadly speaking, anyone purchasing a second (or subsequent) residential property from 1 April will pay an additional 3% SDLT over and above the normal rates unless they are replacing their main home.

The changes will affect limited companies, trusts, buy to let landlords purchasing rental property, people purchasing second homes or holiday homes (including Furnished Holiday Lets) and, in certain circumstances, people moving house.

The higher rates apply to individuals where they own more then one home, anywhere in the world. Where the purchaser is married or in a civil partnership, then the higher rates will apply if their spouse also owns a residence.

The only exemption is where the new property is purchased to replace an existing main residence which has been sold within the last 3 years. If the current residence has not yet been sold, then the additional SDLT must be paid and then reclaimed if the current residence is sold within 3 years. This is a significant cashflow impact.

The higher rates and standard rates are shown below:

Band

Existing residential SDLT rates

£0 - £125k £125k - £250k £250k - £925k £925k - £1.5m £1.5m +

0% 2% 5% 10% 12%

New additional property SDLT rates 3% 5% 8% 13% 15%

Where the second property is worth £40,000 or less, a special 0% rate of SDLT will be applied. When applying the new rules it is important to note that the date of exchange of contracts is not the usual tax point for SDLT, it is the date of completion.

As the Finance Bill was originally drafted, where an annexe is purchased with a main residence and the apportioned price for the annexe exceeds £40,000 then the higher rates of SDLT will apply to the whole transaction. The Finance Bill has now been amended so that annexes within the same grounds, or within the same building, of the main property and where the annexe makes up no more than one third of the total price then the higher rates do not apply. The annexe must be capable of being used as a separate dwelling, with its own access and facilities.

Where a residential property is purchased by a limited company to be rented to unconnected individuals, then the higher rates of SDLT will automatically apply.

Where 6 or more residential properties are purchased in the same transaction then it may be possible to reduce the rate of SDLT, as Multiple Dwellings Relief may apply. This is a complex calculation where the purchases are averaged.

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Please note that SDLT only applies to England and Wales.

Scotland has slightly different rules for the Land and Buildings Transaction Tax.

2. Dividend tax increases

3. Interest income tax changes Following on from the dividend tax changes, using a combination of reliefs in the right circumstances, it is possible for a director-shareholder to utilise their personal allowance and basic rate band and draw £43,000 of income while paying only £1,575 of tax.

Prior to 6 April 2016, dividends were paid with a 10% notional tax credit which covered the basic rate of income tax, so that lower earners had no further tax liability.

This meant that, assuming there was no other income, an individual could receive up to £38,146 in dividends without paying any income tax.

From 6 April 2016 UK taxpayers are entitled to both a ‘Personal Savings Allowance’ (“PSA”) and a ‘Savings Rate Band’. Despite the different names, both of these apply a 0% tax rate to interest income within certain limits.

From 6 April 2016, the way dividends are taxed changed significantly, a new allowance was introduced, the notional tax credit was removed and new tax rates apply.

The PSA is £1,000 for basic rate (20%) taxpayers, £500 for higher rate (40%) taxpayers and Nil for additional rate (45%) taxpayers. This broadly means £1,000 or £500 of interest income is tax free for a basic or higher rate tax payer respectively.

A £5,000 dividend allowance which means that regardless of other income, an individual can receive this amount in dividends tax-free. It does however, count as a part of the income falling within a tax band. For example if an individual received £29,000 in other income after normal allowances, a £5,000 dividend would be tax-free but anything over this would have breached the basic rate tax band and would therefore be taxed at the higher rate.

The savings band is an additional allowance of up to £5,000 to set against interest income although its availability depends on the make up of an individual’s taxable income.

The amount of savings band available to utilise is the excess of up to £5,000 over the personal allowance where it is not used up by non-savings income (e.g. salary, trading profits, rental income etc.).

An important point to make is that under the new system, if dividend income exceeds the dividend allowance then an individual will need to register for self-assessment as no tax is deducted at source on dividends.

Both of these reliefs enable interest to be drawn from a company income tax free. In order for a company to pay interest to an individual however the individual must have lent the company money or have undrawn dividends or salary in a loan account for example.

Tax Band

2015/16

2015/16

Basic Rate

0%

7.5%

Higher Rate

25%

32.5%

Additional Rate

30.56%

38.1%

Any interest must of course be charged at a commercial rate in order to be deductible for corporation tax and there is a certain amount of additional administration required by the company in accounting for this.

*First £5,000 is tax-free

4. Mortgage interest restriction for Buy to Let Landlords

The new effective rates are shown in the table, after taking account of the 10% notional credit in 15/16. There is now tax to pay at the basic rate and also the tax to pay at higher rates has increased.

Last year significant changes were announced to tax relief for finance costs in respect of residential rental property starting from April 2017. This only affects property owned by individuals, trusts and unincorporated businesses.

Currently, interest costs are fully deductible where the mortgage has been used to purchase a residential rental property. By April 2020, relief will be given as a deduction from the tax liability at 20% of the finance cost.

A minority of individuals will be better off from the change, where a high salary and small dividend is received. The dividend allowance may cover a small dividend, where higher rate income tax would have applied previously.

A small company with a director who normally pays a small salary with a large dividend will need to look in more depth at the most tax-efficient route of distributing their profits.

There a common misconception that basic rate (20%) tax payers, i.e. taxpayers with income under £42,700 in the 2016/17 tax year, are not affected, however, care must be taken as the changes can push a basic rate tax payer into higher rate, especially with a highly geared property portfolio.

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Band

Existing residential SDLT rates

£0 - £125k £125k - £250k £250k - £925k £925k - £1.5m £1.5m +

0% 2% 5% 10% 12%

New additional property SDLT rates 3% 5% 8% 13% 15%

For example: A Higher (40%) rate payer with annual rental income after other expenses of £15,000 and mortgage interest costs of £5,000 each year will have taxable rental income in 2016/17 of £10,000 and a tax liability of £4,000.

In 2020/21, the taxable rental income will be £15,000 with a higher rate tax liability of £6,000. There will be a deduction from the liability of £800 (£4,000 at 20%), leaving a net liability of £5,200 – an increase of 30%.

The effects of these changes can be mitigated in a number of ways, for example you may wish to consider: 1.

2.

3.

4.

Transferring ownership to a lower earning spouse; Owning rental properties through a limited company; Investing in commercial property or Furnished Holiday Lets, which are not affected by these changes; Paying off some or all of the mortgage.

Some of these new rules are contained in the 2016 Finance Bill which is still subject to amendment and could change prior to becoming law. All the above items come with pitfalls and criteria so please take professional advice before implementing any of them.

*Please note this article is intended as a summary at the time of writing in August 2016 of a number of complex issues.

Professional advice should be sought on these issues.

Charlie Thompson is an Assistant Tax Manager at Muras Baker Jones Limited, an independent firm of Chartered accountants based in Wolverhampton. He can be contacted on 01902 393000 or Charlie.thompson@muras.co.uk

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Busting the most common pension funding myths!

By Dave Downie, Technical Manager at Standard Life Pensions may still be the best place for savings even you have reached your lifetime allowance (LTA). And yet hitting the allowance appears to be a watershed for many.

Some stop funding their pension without a thought. But such drastic steps should only be taken if there is a better financial alternative.* But for many rapidly approaching the £1 million – should they ‘limit’ themselves or make ‘allowance’ for more funding?

Let’s look at the current tax rules and see if we can bust some common myths that may be contributing to the perception that continued funding above the LTA is always ‘bad’. Of course these rules could change in the future and each person’s tax treatment depends on their circumstances, so I’m talking in general terms.

An allowance not a limit The key word is ‘allowance’. It is not a ‘limit’ to funding as

some may think.

There’s nothing to prevent you from continuing to pay in – you still have an annual allowance available (£40,000 if not reduced by the tapering for high earners), allowing you to make contributions and get tax relief at your highest marginal rates. The LTA is not a barrier to pension saving or the growth on the investment. It’s the point where you have to assess the likely tax treatment of continued funding before deciding on where to save in the future. In this way it is no different to any other allowance such as the personal income tax allowance, annual capital gains tax allowance or the new dividend allowance – once breached, tax will be applied.

What’s the alternative?

For the self-employed, it is a straight choice of the best place to carry on saving for retirement. And the continued funding of your pension, even if some or all of your contributions and investment growth results in an LTA tax charge, may result in a better net return over other investment alternatives.

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Remember that pension contributions attract tax relief at your highest marginal rate, so that could be 40% or 45%.

And a pension income is only part of the tax story. Funds within a pension also benefit from the fact that: •

Investments held within the fund do not suffer further tax on income or gains; and on death, they can be passed on free of IHT to provide lump sums or pension income for any named beneficiaries. It may be that you do not need to rely on your pension savings in retirement, and there would be no point in taking money out and potentially exposing it to IHT at

*Contributions made by anyone with enhanced or fixed protection would result in forfeiture. Careful attention is required to weigh up the pros and cons before restarting any funding.

•

40% on top of the other tax charges already discussed.

And if you die before age 75, then after any LTA charge has been dealt with, the income or lump sum would be tax free for your beneficiaries – so potentially only a 25% charge and only on the excess over the LTA.

Most other investment alternatives will not benefit from tax relief and their investment returns may be subject to income tax and/or capital gains tax. And these alternatives are likely to form part of your estate on death and inheritance tax could be due.

So it is important you balance what you might get back after tax on other investments against what it might be worth in your pension even after you have paid the LTA charge.

No immediate charge when funds hit £1m When your fund hits the £1m LTA … nothing happens.

There’s no immediate penalty. You just have a fund greater than the amount the allowance protects. The tax charge is only incurred when benefits are crystallised (ie when you take your pension benefits), such as when the fund is designated for drawdown.

However, benefits do not have to be taken all at once. By phasing retirement and only crystallising the required funds needed each year, the timing of the LTA charge can be managed, at least up to the age of 75 (at which point uncrystallised funds will be tested along with any investment growth on crystallised funds). A charge will only be incurred during your lifetime when the cumulated value of funds taken exceeds the LTA. The penalty for exceeding the LTA The charge is often expressed as 55%, but that is only payable if the whole of the chargeable amount is taken as a lump sum. If you move it to your drawdown pot only 25% will be deducted (remember there is no tax free cash element). This would be beneficial if the income tax rate applying to income withdrawals is less than 40%, which will be the case for many people in retirement who are able to control the level of their taxable income from effective management of tax allowances.

LTA test on death If there are still uncrystallised funds on death before age 75, these will be tested against the LTA. Funds not covered by the LTA will suffer an LTA charge, but this will only be at 25% where the death benefits have been designated to provide an income. And this will be the only tax charge because your beneficiaries will be able to draw their income

tax free.

If there are any crystallised funds remaining on death before 75, these will not be subject to a 2nd LTA test. So if you die before age 75 your beneficiaries will be able to inherit the pot without any further lifetime allowance charges. And again the income they take will be tax free – so the only charge incurred would be 25% on funds in excess of LTA when it was originally put into drawdown.

If you die after age 75 then the beneficiaries would pay income tax at their own rates on amounts drawn. So depending on their other income, this could potentially be only subject to basic rate tax, or even covered by their own personal allowance.

A reduced annual allowance for high earners Some high earners may see the amount they can pay in to their pension reduced this year.

The standard pension annual allowance (AA) of £40,000 is reduced by £1 for every £2 of ‘income’ over £150,000 in a tax year, until the allowance drops to £10k. So someone with income of £210,000 will see their AA cut by £30,000 (that is, £60,000 ‘excess’ income divided by 2).

However, it is possible to pay more than your annual allowance if you have not made full use of your allowances in previous years. Pension carry-forward allows unused allowances from the previous three tax years to be used in the current year.

Not only may this allow you to pay more than the standard £40,000 allowance this tax year, but it could also prevent your annual allowance from being cut if you earn more than £150,000. That’s because there’s an additional test which would see the full £40,000 allowance retained if total income less your own personal contributions are less than £110,000 for the tax year.

Example, Christine is self-employed and has total profits of £200,000 for the tax year. This would typically see her annual allowance reduced from £40,000 to £15,000 for this year.

In recent years she has paid £25,000 each year to her pension. It leaves her with unused allowance of; • • •

2013/14 - £25,000* 2014/15 - £15,000 2015/16 - £15,000

* Annual allowance was £50k in 2013/14 This means Christine can pay £40,000 for the current year plus £55,000 carry-forward of unused allowances. A contribution of £95,000 would reduce her income to below the £110,000 threshold and the allowance is not tapered. So by paying more into her pension she has retained her full allowance.

Summary Ultimately, having a fund approaching the lifetime allowance doesn’t mean that pension saving has to cease.

A considered approach can show that there may still be reasons to continue funding depending on your circumstances. And remember from April 2018 the LTA will become inflation linked so it won’t remain £1M forever.

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Defending your wealth – how to protect your assets in volatile markets

By James Horniman, Portfolio Manager, James Hambro & Partners

Few in the investment world have matched legendary investor Warren Buffett for his ability to turn a phrase as well as a profit. When it comes to seeking to earn a decent return on your capital, Buffett’s cautionary words serve us all: “The first rule of investment is not to lose money. The second rule is not to forget the first.”

The Sage of Omaha’s advice seems particularly apt – yet increasingly challenging – today. The shock EU referendum result in June led to trillions of dollars being wiped from global stock markets in just a few days. Longer term, its effects will reverberate through the UK economy for many months – and probably years – against a backdrop of an already highly uncertain worldwide economic environment.

Even without Brexit, risks fairly abounded for investors looking for somewhere to put their money to give it a chance to grow in real terms without exposing it to potential for high volatility or permanent losses.

Equities are usually a key port of call for such investors, but a near-record-breaking bull run in stock markets stretching back to 2009 means some feel valuations are stretched.

Amid such concerns, volatility is high and markets are prone to sell off quickly, as they did post-Brexit, before recovering to a degree.

Similarly, government and corporate debt, those other mainstays of investment portfolios, present investors with scant opportunity for meaningful income or growth. Many supposedly lower-risk bonds are delivering little reward.

The situation is so bad that there is said to be some $10trn currently invested in government securities paying negative interest rates. Income payments at the high-yield end of the corporate market are more attractive, but these come with substantially more risk of capital loss.

There are other asset classes to consider beyond equities and bonds, including cash, property and ‘alternatives’ – an extremely broad term that can encompass the relatively straightforward, such as gold, through to absolute-returnstyle funds or extremely esoteric investment assets and strategies.

Cash offers a short-term safe haven, which is not to be undervalued in today’s markets. However, with interest rates often below inflation, hoarding your assets in cash accounts is arguably just a guaranteed way to lose money in real terms.

Property can mean a whole host of things – from buy-to-let (which is under growing pressure from the Chancellor) to commercial property funds. Property tends to be cyclical and

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closely linked to the economy. Areas of the market look very vulnerable to a correction post-Brexit.

Absolute return funds are meant to deliver positive returns in all market conditions – for instance, by shorting assets (in other words, betting on them going down in value). It has to be said that few have delivered on their promises, so they need to be selected wisely.

Gold cannot earn you income, unlike equities, but it is seen as another safe haven and tends to be priced in US dollars, so it can be a currency play too (particularly if you think sterling is going to plummet in the months ahead).

Across many of these other asset classes investors find themselves with the asymmetrical risk presented by some equities and areas of fixed income – lots of potential for downside in exchange for only a relatively small amount of upside.

So what should they do? There are no silver bullets, but good wealth managers should have strategies, techniques and tactics for navigating these tricky waters. Make no mistake, investing in today’s markets is difficult; but skilful asset allocation and investment selection, backed by a sound investment view and in-depth research, can help protect and grow your wealth while reducing the volatility that tends to be part and parcel of investing in the post-financial-crisis – and now post-Brexit ¬– world.

Usually this means building portfolios that include all or most of the asset classes we have discussed – diversification helps reduce the risk. In simple terms, don’t put all your eggs in one basket.

It also means actively managing your assets. The old “buy and hold” and “time in the markets, not timing the markets” axioms still hold value – DIY investors often lose money by over-trading, panic selling on the dips, buying when assets have recovered and it is too late. On the other hand, a skilled active manager, while not betting all assets on an outcome, can shift the emphasis of the portfolio to reduce risk and exploit opportunity.

The actions we took in the run-up to the EU referendum in June provide a good example of this tactical asset management in practice. Ahead of the vote we increased cash balances within portfolios and lowered overall equity weightings, focusing on equities less sensitive to wider economic and political influences. Within the UK we shifted the focus more heavily on to stocks with an international, non-UK-domestic bias. We increased US treasuries holdings to protect against a weaker sterling and built up investments in absolute return funds. We also bought gold and reduced property exposure.

others are fearful.”

It does not feel time to be greedy, but those who shared our fearfulness a few months ago will now have some capacity to exploit opportunities when they arise during anxious times ahead.

What to look for in a wealth manager Track record – ask to see their performance track record against benchmark stock indices such as the FTSE 100, as well industry peers. Don’t just look at returns – look at volatility and periods of loss compared to other wealth managers and stock markets. Even if overall performance looks good, periods of loss or high volatility may mean a wealth manager is unsuitable for investors for whom wealth preservation is paramount.

Process – good wealth managers should have a disciplined and well-documented investment process. Ask about how performance was achieved and the investment thesis that led to decisions being made. What is the underlying investment philosophy and how is that articulated and executed through the investment process?

Resources and capability. – large and/or well-resourced research departments do not necessarily mean a wealth manager will deliver on performance, but it is important to know where a wealth management firm gets its investment information and how it seeks to interpret this information.

Compatibility – investment performance is what ultimately matters in wealth management, but the relationship and service side should not be overlooked. Ideally, you want to feel like you will get along with your wealth manager. They should also provide you with a good service in terms of regular communication, portfolio reviews, being available to talk to you and providing you with portfolio information and performance updates.

Transparency on charges – charges can be a big drag on net performance, and it is important to understand what you are paying for. Remember, headline charges may not cover everything.

Other good managers probably took similar steps. Actions such as these help protect capital in declining markets and downturns and therefore meet Mr Buffett’s two golden rules of investing.

As for the future, another Buffett piece of advice comes to mind: “Be fearful when others are greedy. Be greedy when

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The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.

Past performance is no guarantee of future performance. James Hambro & Partners LLP is authorised and regulated by the Financial Conduct Authority.

As pension allowances narrow, interest in VCTs and EIS is set to grow

By Jason Hollands, Managing Director, Tilney Bestinvest There’s an old saying that nothing is certain in life except for death and taxes. In respect of the latter ever greater numbers of the public have found themselves subject to the higher rates of income tax in recent years while the “additional rate” of tax introduced by Labour, currently at 45%, Labour looks set to remain a fixture for the foreseeable future.

Contributing to a pension has typically been the first port of call for those seeking to reduce a hefty income tax liability, as pension contributions have long attracted income tax relief at the investor’s marginal rate. Yet pension rules and reliefs have undergone significant tinkering over the last two parliaments and so this well-trodden path to reducing the burden of income tax has become progressively more restricted. Under George Osborne’s tenure as Chancellor there have been aggressive cuts to both the annual pensions allowance and the lifetime allowance – the amount an investor can accrue in their pensions over and above which a punitive 55% tax is applied when benefits are crystallised.

For those who have traditionally focused on pensions as their primary route to reducing their income tax liability, this tax year has seen a further tightening of the noose. The lifetime allowance has been slashed to £1 million from £1.25 million, while a new tapering regime has been put in place to seriously limit access to pension tax relief for those earning over £150,000 pa (inclusive of any company contributions). Under the new regime, those impacted will see a £1 reduction in their pension allowance for every £2 of income

earned above £150,000, with a maximum reduction of £30,000.

Anyone with an income of £210,000 or more will therefore see their annual pension allowance this year tumble from £40,000 to £10,000 irrespective of the value of their existing pensions.

As a result of these raids on pension allowances, many professionals are simply going to have to look beyond pensions for tax efficient investment opportunities. Individual Savings Accounts (ISA) are an important part of the mix but while ISA returns are tax-free and offer greater accessibility than pensions, contributions do not provide tax relief. Although the ISA allowance is set to be hiked to £20,000 in April 2017 from the current £15,240 allowance, this nudge up in the allowance won’t plug the gap for those who’ve just seen their annual pension allowance cut by up to £30,000.

Against this backdrop we expect to

see greater interest in more niche tax efficient investments schemes such Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS). These are long-established Government initiated schemes to encourage investment into small, unquoted UK companies, as well as those issuing shares on AIM, the London Stock Exchange’s lighter-touch market for growth-companies. As the UK Government sees such enterprises as key to the future of the UK economy, it provides attractive tax incentives through these schemes to encourage investment in them.

VCTs and EIS have grown in popularity after previous rounds of reductions to the pension lifetime and annual allowances and so there is every reason to expect interest to grow further this tax year. According to a recent survey commissioned by Albion Ventures among financial advisers, more than half (54%) expect to see levels of client

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demand for VCTs rising over the next year as a result of the pension limit restrictions, up from under a third (32%) in 2015.

VCTs and EIS invest in similar types of businesses but their structures and tax reliefs differ. In simple terms, a VCT is an investment company, listed on the London Stock Exchange – like an investment trust – which invests in a portfolio of small, unquoted UK companies, selected by a management team. Mature VCTs typically hold between 30 and 60 such companies, providing diversification. An EIS however, is a direct shareholding in an individual company, and therefore should be regarded as much higher risk.

Subscriptions to new share issues of both VCTs and EIS companies provide investors with a 30% income tax credit, though to keep this relief the shares must be held for at least five years in the case of a VCT or three in an EIS. While in theory the shorter minimum holding period might make EIS sounds more appealing than VCTs, the reality is that as these companies are unquoted, the point at which an investor can exit their investment will typically be when the business is acquired and is not in the investor’s control. In practice the holding period is likely to be much longer than three years –when considering an EIS company, look at how the company expects to provide an exit and the indicative timescale. VCTs in contrast offer greater flexibility as their shares are listed on the stock market, providing an eventual route to exit for shareholders wanting to sell their shares.

Investment into VCTs on which tax relief can be claimed is capped at £200,000 per person this year and £1 million for EIS. Capital gains on both VCT and EIS shares are free from tax but an important feature of VCTs is that they can also pay tax-free dividends, including special dividends arising from gains the VCT makes when it sells a holding in a company.

When yields on many traditional asset classes such as bonds and listed company dividends are very low, the tax-free yields available on VCTs are another factor that will likely underpin interest in VCTs this tax year.

Although EIS don’t provide investors with the dividend potential of VCTs, they do have other features that may make them more appealing to certain investors. Firstly, investors with a capital gains tax liability can defer this through reinvesting the gain into EIS companies, with the gain recrystallizing when the EIS shares are sold. With careful planning the gain could be repeatedly deferred through further reinvestment, potentially until the investor passes away when the liability is eliminated altogether.

Another feature of EIS, that does not apply to VCTs, is that after being held for two years EIS shares become 100% eligible for Business Property Relief, meaning they no longer form part of the investors estate for inheritance tax

purposes.

Within the VCT universe there are a wide range of strategies on offer. Broad categories include Generalist VCTs i.e. those which invest in unquoted companies across a range of sectors, VCTs which focus predominantly on companies quoted or about to be listed on the AIM market and Limited Life VCTs, which will aim to wind up and return cash to investors within a certain time horizon. While all VCTs should be regarded as higher risk investments, some have a greater focus on capital preservation, especially Limited Life VCTs, for example by making asset backed investments.

Asset backed investments typically involve the VCT seeking a first charge over an asset owned by a businesses, such as a freehold property, as a condition of their investment. This provides a form of security if the investment turns sour.

While demand for these schemes is likely to be high this year, supply will be limited because of the strict criteria around the types of businesses that can accept VCT or EIS funding. Various tests are applied for a business to be eligible for such financing, including rules on the number of employees and gross assets they may have; and restrictions on the age of the business to ensure this tax assisted financing is used to support earlier phase businesses. A number of types of activity are specifically excluded from these schemes such as care homes, farms, forestry, energy generation and trading in securities or property. VCTs are careful not to raise more funds than they are confident they can deploy into new investments, as they must be at least 70% invested in qualifying investments within three years of launch. After two buoyant years of fund raising and some VCTs already having cash available to make new investments, we expect some VCTs will only seek more modest amounts of new cash from investors this tax year, with the strongest offer potentially reaching their fund raising targets quite rapidly.

While VCTs and EIS undoubtedly offer attractive features for tax efficient financial planning and the potential for accessing fast growth companies, it is important to remember that there is no such thing as a free lunch. The tax incentives are there for a reason: the illiquid nature of these types of investments makes them inherently high risk. These schemes are therefore not going to be suitable for everyone and should not be considered as a straight replacement to a core investment such as a pension. But for some investors, they can have a valuable part to play in an overall long term investment strategy which should be primarily anchored around mainstream investments such as ISAs, funds and listed companies.

Email: Jason.Hollands@tilneybestinvest.co.uk Office Number: 020 7189 9999 Website: www.tilneybestinvest.co.uk

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