ISSUE 1 n SPRING 2010
Image right fees Is the coming of a new tax regime on the horizon?
50 per cent tax rate
Mitigating the impact of the forthcoming rate increase
Tax facts What you need to know Investment solutions Achieving the most efficient mix of risk and return Retirement planning Transferring pensions
Investing in a new decade What opportunities could the future hold?
Pro Sport Wealth Management LLP Investment House, Bolton Road, Bradshaw, Bolton. BL2 3EU Tel: 01204 602909 Fax: 01204 306600 Email: email@example.com Web: www.prosportwealth.co.uk
INSIDE THIS ISSUE
issue Investing in a new decade What opportunities could the future hold?
03 Investing in a new decade
Inheritance Tax Planning
Your questions answered
Achieving the most efficient mix of risk and return
Image right fees Is the coming of a new tax regime on the horizon?
Protecting key personnel
Managing the risk that could ultimately threaten your company’s profits
Financial reasons to make a will Putting it off could mean that your spouse receives less
Investing at a time of low interest rates
Investment opportunities when interest rates are low
Tax facts What you need to know
50 per cent tax rate Mitigating the impact of the forthcoming rate increase
What opportunities could the future hold?
Looking ahead to this new decade, what areas could be seen as opportunities for investors?
Emerging markets It is estimated that the world’s population is set to increase by 50 per cent in the next 40 years, mostly from emerging markets, which include the ‘BRIC’ countries of Brazil, Russia, India and China. While the proportion of people of retirement age will increase in Western economies, India should enjoy a demographic boost as a large group of the populace enters the most economically active part of their lives. Although investing in a single country is a high-risk strategy, diversification that includes holdings within the BRIC countries and other areas such as Mexico, Hong Kong, South Korea, South Africa and Thailand could become an increasing attraction to many investors.
Healthcare An increase in an ageing population, particularly in Western economies and Japan, will be seen as positive for the healthcare sector over the next ten years. Investors may be attracted by the potential for higher returns driven by a need to spend significantly more money by governments and the private sector in the area of geriatrics.
Agriculture It is forecast that, by the middle of this century, there will be an additional 2.5 billion people in the world to feed, leading to an increase in land and food prices. With China’s shift to urbanisation and the emergence of a powerful middle class in the developing world, investors may be attracted to investment in soft commodities such as cocoa, sugar, corn and wheat. China’s evolutionary demographic shift, when combined with the acute water shortages that China and others may suffer during this decade, could make for a highly rewarding investment opportunity.
Energy Global urbanisation will also feed through to growing demand for construction and infrastructure and these projects should drive demand for energy. The demand for uranium is also set to continue this decade as a result of a global resurgence of interest in nuclear power. This is positive news for investors, with the UK and other countries planning an aggressive expansion programme for nuclear energy as it is seen as one of the cleanest forms of producing energy during this decade.
Technology A greater exposure to the semi-conductor, software, media and internet, communications and computing industries means that investors are also likely to be attracted to these areas this decade.
Currency Although currency is the most actively traded asset class in the world, it still remains one that is largely ignored by retail investors. Will this decade see a change in investor sentiment?
Ethical Climate change and water shortages could also drive future investment returns for investors, turning their attention to themes that include water, energy, agriculture and forestry. n
These are specialised investments and may not be suitable for everyone. They should only be considered as part of a balanced portfolio and professional financial advice should be sought prior to investing. These could be highrisk investments. If you would like to discuss how we could help you with your investment requirements, please contact us for further information.
planning Transferring pensions There are a number of different reasons why you may wish to consider transferring your pension schemes, whether this is the result of a change of employment, poor investment performance, high charges and issues over the security of the pension scheme, or a need to improve flexibility. You might well have several different types of pension. The gold standard is the final-salary scheme, which pays a pension based on your salary when you leave your job and on years of service. Your past employer might try to encourage you to move your pension away by boosting your fund with an ‘enhanced’ transfer value and even a cash lump sum. However, this still may not compensate for the benefits you are giving up, and you may need an exceptionally high rate of investment return on the funds you are given to match what you would get if you stayed in the final-salary scheme.
Alternatively, you may have a money purchase occupational scheme or a personal pension. These pensions rely on contributions and investment growth to build up a fund. If appropriate to your particular situation, it may make sense to bring these pensions under one roof to benefit from lower charges, make fund monitoring easier and aim to improve fund performance. Transferring your pension will not guarantee greater benefits in retirement. n
Effective retirement planning requires an expert knowledge of the detail of pension legislation and an ability clearly to understand your individual long-term objectives and expectations. We offer both. For more information about the services we offer, please contact us.
Inside this issue
Welcome to the first edition of our wealth management magazine. Independent Financial Advisor Ltd was formed in 2006 with aspirations of providing financial planning advice which covers all aspects of wealth, both in creation and retention. We have created a network of Chartered businesses with Chartered Financial Planners working within these businesses, providing clients with access to the highest qualifications in the profession. Over the last couple of years the downturn in the markets has highlighted the lack of service clients receive from larger institutions and has provided IFA Group with a rare window of opportunity to reshape the Financial Services Sector. We fully understand that our clients require the best service; therefore we strive to fully understand their needs and build long-standing relationships built on mutual respect. We are a modern business at the forefront of our industry with the latest systems and technology and we maintain core traditional values of honesty, integrity and trust. We have recently opened our new office in Southampton to cover the South of England, IFA (South) LLP headed up by Malcolm Lay. Malcolm brings with him 20 years of experience specialising in the group pensions market, working previously at Director level within a national benefit consultants practice and within one of the big five accountants. Along with this we have also added a specialist division within the business to accommodate the growth in specialist advice to professional sports people. Pro Sport Wealth Management LLP is managed by Gareth Griffiths who has 14 years experience of playing football at professional level and 4 years as an IFA. Gareth is a well respected figure within the PFA and is a trustee of the PFA’s accident, benevolent and education fund. I hope you enjoy this first issue of our magazine and find it informative. If you require further information on any of the subjects covered or on any other matter, please do not hesitate to contact us. Phillip Rose APFS Chartered Financial Planner
Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements. They should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.
Inheritance Tax Planning Your questions answered You don’t have to be seriously wealthy for your estate to be subject to Inheritance Tax (IHT) after you die. Currently, IHT is levied on everything you leave over £325,000 (2009/10). Inheritance tax planning is a complex subject and it’s important to obtain professional advice if you have any concerns about your particular requirements, as this could save you thousands of pounds of potential lost tax. You might consider taking advice on IHT planning to: n Keep your assets within your family n P rotect your Nil Rate Band if you were to die and your partner re-marry n P rotect assets passed to children or grandchildren from the risk of them becoming bankrupt or divorced n P rotect your assets from the need to fund long-term care in later life n R educe an IHT liability n A void an IHT liability These are some of the typical questions that we are asked by our clients: Q: Should I write a will? A: The simple answer is ‘yes’. It’s easy to put off making a will. But if you die without one, your assets may be distributed according to the law rather than your wishes. This could mean that your spouse or partner receives less, or that the money goes to family members who may not need it.
These are some of the financial reasons for making a will: n if you aren’t married or in a civil partnership (whether or not it’s a same sex relationship), your partner will not inherit automatically. With a will, you can make sure your partner is provided for n if you’re divorced or if your civil partnership has been dissolved, you can decide whether to leave anything to an ex-partner who’s living with someone else n you can make sure you don’t pay more IHT than necessary Q: How can I minimise the value of my estate for IHT purposes? A: You cannot be taxed on money that was never yours. It is sensible to ensure that as much as possible is outside your estate. Check that all current or new life insurance plans are written under an appropriate trust. Your existing life policies could be transferred into such a trust. If your employer pays a death benefit, complete a nomination form and make sure any money goes directly to the person you choose and not into your estate. It is also worth thinking about legacies you receive. Someone who benefits from a legacy could divert that gift to another person. You can apply for a ‘deed of variation’ within two years of the death of the giver.
Q: What are the effects of getting married? A: Anything you pass on to a spouse (the same concession applies to same-sex couples who register under civil partnership laws) is free of IHT. However, legacies between unmarried couples are not tax-free. This may become a significant issue when a couple jointly own their home, which could lead to some people having to pay an IHT bill just to continue living in their home. Q: Can I gift my home to my children? A: For many families, their homes are their biggest asset. The government has clamped down on schemes to get around the ‘gifts with reservation’ rules. These allowed people to give away homes, but still live in them. Now, income tax can be charged for living rent-free in a home you once owned. But there are still ways to reduce IHT. Most couples who own a home together are joint tenants. This means that if one person dies, the other automatically becomes the outright owner of the property. The alternative is to register as ‘tenants in common’, each owning half the property absolutely. This means that on death, your share may be left to someone else to keep down the size of your estate. Q: Are there any investments that will enable me to reduce an IHT liability? A: Some investments are given favourable treatment for IHT purposes, including shares in unquoted businesses, woodlands, farms and farmland. Many shares on the Alternative
Investment Market (AIM) also qualify for relief. Investing in AIM shares is one way of reducing an IHT liability on an estate. Qualifying AIM shares offer more IHT relief than some other assets and qualify as ‘business property investments’. If property is held as AIM shares in certain trading companies for a period of at least two years, it becomes eligible for Inheritance Tax Business Property Relief at 100 per cent and will fall out of the estate for IHT purposes. This relief is a relief by value, the shares being treated as having no value for IHT purposes. Not all AIM companies are eligible for Business Property Relief. Please note that AIM shares may be more volatile than shares listed on the main market, the London Stock Exchange. There may also be a more limited market for AIM shares, which are generally higher risk investments in smaller company shares. Q: Should I consider trusts to minimise an IHT liability? A: When writing a will, there are several kinds of trusts that can be used to help minimise an IHT liability. On 22 March 2006, the government changed some of the rules regarding trusts and introduced some transitional rules for trusts set up before this date. This is a very complex area of IHT planning and professional advice should always be obtained. Q: Could I use a life insurance policy to pay for a future IHT bill? A: A whole-of-life insurance written under an appropriate trust could be used to provide a lump sum on death that falls outside your estate. On death, the proceeds of the policy would be used to settle the IHT liability. The premiums are treated for tax purposes as a gift from regular income. The advantage is that you retain your wealth through your lifetime and so have the funds if, for example, you need to go into long-term care. Q: In which other ways can I reduce the value of my estate? A: Giving away money will reduce your estate, but will not cut the tax liability immediately. You have to survive for seven years for most gifts to escape the IHT net. However, within that last seven years, the HM Revenue & Customs (HMRC) allow gifts of up to £3,000 each tax year. Unlimited gifts up to £250 per person per tax year are exempt, as are payments of up to £5,000 for wedding gifts. The most powerful concession is that regular gifts made from normal income can be exempt from IHT. You must show you have been giving regularly and are not materially reducing your standard of living or running down savings. This concession allows parents or grandparents to help children without fear of IHT tax problems in the future. n
Timely decisions on how jointly owned assets are held, the mitigation of IHT tax, the preparation of a will and the creation of trusts can all help ensure your dependents are left financially secure. If you would like to discuss your particular situation, please contact us. Don’t leave it until it’s too late.
Investment solutions Achieving the most efficient mix of risk and return Do you currently have the most suitable method of holding and structuring your investments to achieve an efficient mix of risk and return that is specific to your particular objectives? And are you fully utilising the income, capital gains and inheritance tax advantages of these investments, particularly as the taxation regime governing them may be subject to change in the future? We have provided a selection of tax-efficient solutions you may wish to discuss with us. The over-50s were able to shelter more of their money from the taxman on 6 October last year when Individual Savings Account (ISA) limits rose by £3,000 to £10,200, or £20,400 for a couple. Everyone aged 18 and over will be given the new limit from 6 April 2010. Venture Capital Trusts (VCTs) enable individuals to invest in unquoted and AIMlisted firms, and give tax-free capital gains as well as income (usually taxed at 32.5 per cent for 40 per cent taxpayers). They also attract initial tax relief at 30 per cent, which is an income tax relief that is given as a tax reducer, as long as they are held for five years. The maximum investment is £200,000 a year. This type of investment does come with a high degree of risk. Enterprise Investment Schemes (EISs) invest in firms typically involved in a particular sector or project, and give income tax relief of 20 per cent on up to £500,000 a year, if held for three years. Gains are tax-free, but not income, and investments fall outside your estate for inheritance tax purposes after two years. This type of investment does come with a high degree of risk. EISs also allow you to defer Capital Gains Tax (CGT) incurred in the previous
three years or the subsequent 12 months, which is attractive if you paid at the old rate of 40 per cent (in force until 6 April 2008). While you still have to pay CGT on EIS shares bought with tax-deferred funds, you could save 22 per cent on past gains. Onshore investment bonds are taxed internally at the 20 per cent basic rate. However, up to 5 per cent a year of the original investment (a minimum of £5,000, but no maximum) can be withdrawn for 20 years without any immediate tax liability. And you can ‘roll up’, taking 3 per cent income in one year and 7 per cent the next. If you become a basic rate or non-taxpayer when the bond matures, there is no further tax to pay. Gifting income-producing assets to your spouse, where he or she is a lower rate or non-taxpayer, could save high earners a considerable sum. Say you had a portfolio of investment properties worth £500,000, which produced an income of 5 per cent or £25,000 a year. If you were a high earner and held the investments in your own name, you would be liable for tax on the income of £12,500 from the 2010/11 tax year. However, if you gifted the assets to a spouse who had no other income, the first £6,475 would be tax-free and the remainder taxed at 20 per cent, so just £3,705, which equates to a £8,795 tax saving. This example is based on the original owner having total taxable income above £150,000 (hence the liability on the £25,000 rental income would be 50 per cent rather than 40 per cent). n
If you would like to arrange a review to discuss how we could help you save and invest more taxefficiently, please contact us.
The onus is now on clubs to prove that image rights are of real value and are exploited as such.
Image right fees Is the coming of a new tax regime on the horizon? The future relationship between the tax authorities and Premier League clubs is set to intensify even further following recent reports that they are unlikely to reach an agreement on a collective deal over image rights. This topic which goes back more than a decade has intensified in recent years as public finances have come under more pressure. The Premier League’s finance director Javed Khan has conducted discussions between representatives from the top 20 clubs, the objective to explore whether they could agree a structure of payments to satisfy demands from HM Revenue & Customs (HMRC) over claims for up to £60m in unpaid taxes and devise a workable ongoing solution. Rugby Union has already agreed with HMRC officials to an arrangement whereby the professional game will pay a percentage of their image right fees directly to the tax authorities. However, due to the complexities involved in the professional football game it is believed that a similar deal is unlikely to be workable within football. Within Manchester United’s recent £504m bond issue prospectus, it states the Revenue’s view is that “image rights may be a form of remuneration and, as such, should be taxed as income”. HMRC is looking at players that receive separate payments in order to license their individual image rights, which would typically 06
be free of PAYE and national insurance and is often channelled through an offshore company. Today most Premier League contracts will have an image rights clause. Experienced agents say that the concept was invented for good reason, and remained legitimate, but conceded it had been exploited by some clubs and players. This has become a standard part of contract negotiations, with many players claiming that the club will benefit from their image in some way - whether their name appears on replica shirts or other merchandise the club markets. The clubs argue that the payments are wholly legitimate licensing payments. But HMRC suspects that in some cases image rights contracts have simply become a standard top-up to an employment contract. With Spain, Italy and France all having more advantageous tax regimes for overseas players particularly since the announcement of the new 50 per cent tax rate commencing 6 April 2010, many UK clubs are looking at different ways to maximise their appeal. A spokesman for HMRC said it could not comment on individual cases but added: “The government remains committed to ensuring that everyone pays their fair share of tax and that the minority who seek not to do so should not succeed.” It said the onus was on any business to clear any transactions over which there was any “uncertainty” with HMRC.
Rather than going after individual contracts, in 2006 the Revenue decided to take a more structured approach. It discovered that many image rights deals were based on games played or goals scored, clearly linking them with the players’ employment contracts. Investigators examine correspondence between players, agents, clubs and accountants in order to try to prove the link. HMRC set up a specific unit to investigate and negotiate settlements with clubs. The onus is now on clubs to prove that image rights are of real value and are exploited as such. That could leave smaller Premier League clubs more exposed than those at the top end. At least half of Premier League clubs are now thought to be under investigation. A Premier League spokesman confirmed that it was continuing to try to broker a deal. “Discussions are ongoing with HMRC to try to reach a mutually acceptable position. Both sides agree that it is acceptable for the assignment of a proportion of income to image rights however, the question is how best to decide what is a reasonable level across a multitude of varying contracts and levels of player.” There is a precedent that a club can acquire the image rights of a player through an image rights contract for the purpose of exploiting that image. But it’s got to be for commercial reasons and you’ve got to look at each specific one to make sure it’s commercial and the club has tried to exploit it. n
Key person insurance is cover that pays out for loss in the event of either death or disability of the important individuals within a business and is designed to protect or compensate the business.
Protecting key personnel Managing the risk that could ultimately threaten your company’s profits A vital part of any business is the people who work there. But what if something happened to one of the key personnel in your business, for example, if an important member of staff died unexpectedly or became unable to work due to a serious illness. This could have a considerable impact on the core operations, sales and profit of your business. Key person insurance is cover that pays out for loss in the event of either death or disability of the important individuals within a business and is designed to protect or compensate the business.
Is your business at risk? Small and medium-sized businesses could be particularly at risk. However, there is a solution – insurance that would replace the lost profits caused by the loss of a key person. Typically, the liability of any such insurance is the estimated cost of the loss, for example, in business or revenue lost, and/or the replacement of that individual.
Key personnel to consider n T he people who create the business and steer it in the right direction n T he people without whom your business would lose sales and profits n Directors, partners and shareholders n Integral managers, or key IT development specialists or development operators
Types of cover There are various types of insurance policy that can be used for this purpose. There might
be a short-term need for cover, for example, during an important project. In this situation a term assurance policy may be the most appropriate solution. However, if the key person is likely to remain with the business for an indefinite period of time, whole-of-life assurance may be more appropriate.
Partnerships Companies and sole traders can affect policies on employees. But partnerships in England and Wales are not a separate legal entity, so where the key person cover is for an individual partner, the policy can either be taken out jointly by all the partners, in which case it becomes a partnership asset or, alternatively, the key partner could take out a policy and place it in an appropriate trust for the other partners.
Insuring a key person The required level of insurance taken out has to be justifiable. Factors to be taken into account when estimating the required level of cover will include the profits that will be lost if the services of the key individual are no longer available, the expected cost of recruiting and training a new person and the length of time before that replacement is likely to be fully established. In the event that a loan may be called in on the death of the key person, the amount of the loan and the effect this would have on the profitability of the business will also need to be assessed.
To calculate the sum insured, it is generally acceptable to use the individual’s earnings, including bonuses and company perks, multiplied by a factor of five to ten times earnings. Alternatively, a multiple of profits may be used, which would not typically exceed two years’ gross profits or five times annual net profit, divided by the number of key people being insured.
Tax implications The tax implications of this type of insurance vary. Often, the premiums for key person insurance will be allowed as a business expense for corporation tax purposes, but certain conditions will need to be met. Where the policy proceeds are taxable, the tax payable will be linked to the type of underlying policy. Payments under a key person term assurance policy will be treated as a trading receipt and subject to corporation tax. Bearing in mind that the policy has been taken out to replace lost profits and those profits would have been liable to tax, this approach makes sense. However, the payout from a whole-of-life policy is treated differently, as it is considered a capital item. As these policies are deemed ‘nonqualifying’ for life assurance purposes, they will be taxed as the company’s income. n
If you would like to arrange a review of your current corporate requirements and discuss the options available to you, please contact us.
Financial reasons to make a will Putting it off could mean that your spouse receives less
It’s easy to put off making a will. But if you die without one, your assets may be distributed according to the law rather than your wishes. This could mean that your spouse receives less, or that the money goes to family members who may not need it. There are lots of good financial reasons for making a will: n y ou can decide how your assets are shared out - if you don’t make a will, the law says who gets what n if you aren’t married or in a civil partnership (whether or not it’s a same sex relationship) your partner will not inherit automatically, so you can make sure your partner is provided for n if you’re divorced or if your civil partnership has been dissolved you can decide whether to leave anything to an ex-partner who is living with someone else n y ou can make sure you don’t pay more Inheritance Tax than necessary If you and your spouse or civil partner own your home as ‘joint tenants,’ then the surviving spouse or civil partner automatically inherits all of the property. If you are ‘tenants in common’ you each own a proportion (normally half) of the property and can pass that half on as you want. A solicitor will be able to help you should you want to change the way you own your property. Planning to give your home away to your children while you’re still alive. You also need to bear in mind, if you are planning to give your home away to your children while you’re still alive, that: n g ifts to your children, unlike gifts to your spouse or civil partner, aren’t exempt from Inheritance Tax unless you live for seven years after making them n if you keep living in your home without paying a full market rent (which your children pay tax on) it’s not an ‘outright gift’ but a ‘gift with reservation,’ so it’s still treated as part of your estate, and so liable for Inheritance Tax n following a change of rules on April 6, 2005, you may be liable to pay an Income Tax charge on the ‘benefit’ you get from having free or low cost use of property you formerly owned (or provided the funds to purchase) n o nce you have given your home away, your children own it and it becomes part of their assets. So if they are bankrupted or divorced, your home may have to be sold
to pay creditors or to fund part of a divorce settlement n if your children sell your home, and it is not their main home, they will have to pay Capital Gains Tax on any increase in its value If you don’t have a will there are rules for deciding who inherits your assets, depending on your personal circumstances. The following rules are for deaths on or after July 1, 2009 in England and Wales; the law differs if you die intestate (without a will) in Scotland or Northern Ireland. The rates that applied before that date are shown in brackets.
If you’re married or in a civil partnership and there are no children The husband, wife or civil partner won’t automatically get everything, although they will receive: n personal items, such as household articles and cars, but nothing used for business purposes n £400,000 (£200,000) free of tax – or the whole estate if it was less than £400,000 (£200,000) n half of the rest of the estate The other half of the rest of the estate will be shared by the following: n surviving parents n if there are no surviving parents, any brothers and sisters (who shared the same two parents as the deceased) will get a share (or their children if they died while the deceased was still alive) n if the deceased has none of the above, the husband, wife or registered civil partner will get everything
If you’re married or in a civil partnership and there were children Your husband, wife or civil partner won’t automatically get everything, although they will receive: n personal items, such as household articles and cars, but nothing used for business purposes n £250,000 (£125,000) free of tax, or the whole of the estate if it was less than £250,000 (£125,000) n a life interest in half of the rest of the estate (on his or her death this will pass to the children) The rest of the estate will be shared by the children.
If you are partners but aren’t married or in a civil partnership If you aren’t married or registered civil partners, you won’t automatically get a share
of your partner’s estate if they die without making a will. If they haven’t provided for you in some other way, your only option is to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975.
If there is no surviving spouse/civil partner The estate is distributed as follows: n t o surviving children in equal shares (or to their children if they died while the deceased was still alive) n if there are no children, to parents (equally, if both alive) n if there are no surviving parents, to brothers and sisters (who shared the same two parents as the deceased), or to their children if they died while the deceased was still alive n if there are no brothers or sisters then to half brothers or sisters (or to their children if they died while the deceased was still alive) n if none of the above then to grandparents (equally if more than one) n if there are no grandparents to aunts and uncles (or their children if they died while the deceased was still alive) n if none of the above, then to half uncles or aunts (or their children if they died while the deceased was still alive) n to the Crown if there are none of the above It’ll take longer to sort out your affairs if you don’t have a will. This could mean extra distress for your relatives and dependants until they can draw money from your estate. If you feel that you have not received reasonable financial provision from the estate, you may be able to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975, applicable in England and Wales. To make a claim you must have a particular type of relationship with the deceased, such as child, spouse, civil partner, dependant or cohabitee. Bear in mind that if you were living with the deceased as a partner but weren’t married or in a civil partnership, you’ll need to show that you’ve been ‘maintained either wholly or partly by the deceased.’ This can be difficult to prove if you’ve both contributed to your life together. You need to make a claim within six months of the date of the Grant of Letters of Administration. n
Investing at a time of low interest rates Investment opportunities when interest rates are low If you are an income-seeking saver in search of good returns from your savings in this low interest rate environment, we can provide you with the professional advice you need to enable you to consider all the options available. In addition, we can help you determine what levels of income you may need and work with you to review this as your requirements change. Another major consideration is your attitude towards risk for return and availability. This will help to determine which asset classes you are comfortable investing in. Cash, especially in the current climate, is an important element for any income investor. One option you may wish to discuss with us is cash funds, dubbed ‘money market’ portfolios. These use the pooled savings of many investors to benefit from higher rates not available to individuals. They can invest in the most liquid, high-quality cash deposits and ‘near-cash’ instruments such as bonds. But, unlike a normal deposit account, the value of a cash fund can fall as well as rise, although in theory, at least, it should not experience volatile swings. Bonds are a form of debt, an ‘IOU’ issued by either governments or firms looking to raise capital. As an investor, when you purchase a bond you are essentially lending the money to the government or company for a set period of time, which varies according to the issuer. In return you will receive interest, typically paid twice a year, and when the bond reaches
maturity you usually get back your initial investment. But you don’t have to keep a bond until maturity. You can, if you wish, sell it on. Much of the government’s debt, including the additional money being used to aid the economy and refinance the banks, is in the form of bonds it issues. Gilts are bonds issued by the British government. The advantage of gilts is that the government is unlikely to fail to pay interest or repay its debt, so they are generally the safest investments. Government bonds pay a known and regular income (called the coupon) and a lump sum at maturity (called the par). They typically perform well as the economy slows and inflation falls. Corporate bonds operate under the same principle as gilts, in other words companies issue debt (bonds) to fund their activities. High-quality, well-established companies that generate lots of cash are the safest corporate bond issuers and their bonds are known as ‘investment grade’. High-yield bonds are issued by companies that are judged more likely to default. To attract investors, higher interest is offered. These are known as ‘sub-investment grade’ bonds. The risks related to investing in bonds can be reduced if you invest through a bond fund. The fund manager selects a range of bonds, so you are less reliant on the performance of one company or government. The ‘distribution yield’ gives a simple indication of what returns are likely to be over the next 12 months. The ‘underlying yield’ gives an indication of returns after expenses if all bonds in the fund are held to maturity.
An alternative route to generating income is by investing in stocks that pay a dividend. If a firm is making good profits it can decide to share this with investors rather than reinvest it in the business, so essentially dividends are the investors’ share of company profits. Share prices of companies that regularly pay dividends tend to be less volatile than other companies, but remember that company shares can fall in value. In addition, dividends can be cut if a company finds itself in need of extra cash. Another way to invest in equities for the purpose of obtaining a better income is via an equity income fund. The fund manager running the portfolio selects a wide range of equities, so you are less reliant on the performance of any one particular company, and will try to select companies that pay regular dividends. n
There are many different ways to generate more income. We can help you make informed decisions about the investment choices that are right for you. Any number of changing circumstances could cause your income to diminish, some inevitable and some unpredictable – new taxes and legislation, volatile markets, inflation and changes in your personal life. To discuss structuring your income requirements in a way that minimises the impact of these changes, please contact us.
Tax facts What you need to know Check your PAYE code You should check that you are on the correct code. Don’t just assume that if tax is being deducted at source it must be right. If you have been paying too much tax, you can claim back the excess for up to six previous years. If you have been paying too little, the Revenue can claim it back.
Make full use of your personal allowances We all have a personal allowance, currently £6,475 (under 65) a year, which is the amount you are allowed to earn before you start paying tax. If appropriate, couples should consider maximising their personal allowances by channelling savings and investments towards the person who pays the least amount of tax.
Consider carrying out a salary sacrifice Salary sacrifice means giving up the right to part of your salary in exchange for a benefit, such as an employer pension contribution. Both you and your employer will save money on National Insurance and the employer also saves on Corporation Tax.
Make the most of tax relief at your highest marginal rate on pension contributions You should make the most of tax relief at your highest marginal rate on pension contributions. This tax break is particularly valuable if you are a higher rate taxpayer and so potentially receive relief at 40 per cent (2009/10) on your pension contributions that fall within the higher rate band.
Bring forward dividend payouts to this tax year If you are a high earner and work for a family company or have your own company, you may wish to consider bringing forward income distribution from future years to this tax year. If you pay yourself a dividend this
year, and assuming you are a higher rate taxpayer, you would currently be paying an effective rate of 25 per cent on dividends. But from the next tax year you would, as a top rate taxpayer, be paying an effective rate of 36.1 per cent on your dividends.
Make sure you receive your age allowance if you are over 65 Make sure you receive your age allowance if you are over 65. This allowance is currently worth £3,015 on top of the normal personal allowance for those aged 65 to 74 and £3,165 for those over 75, taking their total personal allowance to £9,490 and £9,640 respectively. Those entitled to it should make sure they claim it, as it is sometimes not included automatically in an individual’s tax coding.
Bring forward income Shareholders in their own businesses who take money as dividends will be taxed at 32.5 per cent until 5 April, rising to 42.5 per cent the following day. On £10,000-worth of dividends, you could save £1,000 in tax by bringing the payment forward. Bear in mind, though, that you would also have to pay the tax via your selfassessment form a year earlier.
Share incentive schemes High earners could ask their employer to set up a share incentive scheme ahead of the changes so that, instead of taking cash bonuses, they would receive shares in the firm. This converts income taxed at up to 40 per cent today (or 50 per cent from 6 April 2010) into gains taxed at the flat rate of Capital Gains Tax (CGT) of 18 per cent.
Defer tax relief Consider deferring claims for tax relief until the 2009/10 tax year has ended on 5 April, boosting potential tax relief to 50 per cent from 40 per cent.
Review family trusts It may be worth drawing income arising in a family trust. This is taxed at 20 per cent on
up to £1,000 and 40 per cent thereafter, rising to 50 per cent from 6 April 2010. However, this will depend on the type of income, as dividends would be taxed at either 10 per cent (if within the £1,000 band) or 32.5 per cent (42.5 per cent from 6 April 2010). Even trusts with a small amount of income will be subject to tax at 50 per cent. Alternatively, beneficiaries could draw the income if their other earnings are below £150,000 – beneficiaries of a discretionary trust have no entitlement to income. The trustees could choose to distribute the income but it would have to come with a 40 per cent (50 per cent from 6 April 2010) tax credit. The increase in tax rate will only affect ‘non-Income In Procession’ trusts which pay RAT (‘Rate Applicable to Trusts’).
Crystallise pension benefits People in their early fifties who want to retire early or release tax-free cash from their pensions may wish to consider doing so before 5 April, when the minimum retirement age goes up from 50 to 55. However, there are many instances where it is not advisable to take the cash. For example, if your pension has a guaranteed annuity rate, you may be better off using your entire fund to buy an annuity. If you are in a final-salary scheme you could choose to take extra tax-free cash and a reduced pension, although take care as the income you would give up is guaranteed, is inflation-proofed and has a widow’s or widower’s benefit. However, in other cases it may be worth crystallising benefits. Equally, it may be worthwhile if you want to free up cash to make gifts for Inheritance Tax planning or make other tax-efficient investments. n
This article does not constitute advice and you should seek professional financial advice with regards to the most appropriate ways of structuring your affairs to maximise tax efficiency. For further information or to discuss your requirements, please contact us and we’ll provide you with a complete financial wealth check. 11
50 per cent tax rate Mitigating the impact of the forthcoming rate increase An increase in the top rate of personal income tax for all income above £150,000 was announced in the 2009 Budget. The new 50 per cent rate will come into force from 6 April 2010. This is a significant increase (and an increase in the original figure announced in the Pre-Budget Report in November 2008, which stated that the rate would be 45 per cent as of April 2011) and also represents a structural change to the tax planning landscape. The 50 per cent income tax rate (42.5 per cent on dividends) requires a structural change to tax planning to ensure that robust, practical and sensible planning is put in place, sooner rather than later, to ensure maximum tax-efficiency. The new rate, and other changes announced in the 2009 Budget, mean that it is paramount that employees and investors carefully consider their tax position to explore what planning can be effectively put in place now to help mitigate or defer the upcoming increased income tax liabilities. There is a range of sensible and effective options that will mitigate the impact of the forthcoming rate increase. Planning now rather than later is, as ever, the best approach and planning for both employment and investment income is essential. A bespoke approach will typically provide the best solution, since planning should always be appropriate to your particular tax and personal profile. Key factors
will include your long-term residence plans, your various sources of income and your anticipated expenditure. Tax planning should be perfectly integrated with your commercial objectives, so your succession planning and business strategies will be relevant. In addition, the gradual withdrawal of the personal allowance for those with incomes of £100,000 or more, and the restriction of higher rate tax relief for pension contributions for those with incomes of more than £150,000 (from April 2011) will increase the tax burden on higher income earners, giving a marginal rate of tax for some of 60 per cent. The transitional provisions on pension relief have immediate effect, particularly for those who usually pay significant annual contributions, such as senior executives and partners in professional partnerships. Now is an appropriate time to review strategies to ensure they are consistent with your personal objectives. One approach could be to maximise income so that it is subject to the current top rate of 40 per cent (32.5 per cent for dividends). Bonus payments, realisation of gains on unapproved share schemes, dividend payments or remittances of income, for those not domiciled in the UK, might be brought forward so that the income falls to be taxed before 6 April 2010.
Where a company is planning to purchase its own shares, with the shareholders taxed on the proceeds as income rather than gains, the value to shareholders would be increased by completing the exercise before the change in tax rates. Of course, the timing cost of any action that accelerates the date for the payment of tax should be borne in mind. For the self-employed and those in partnership, strategies to maximise profits taxable at 40 per cent rather than 50 per cent, for example, by changing the accounting date, could be considered. Given the current differential of 32 per cent between the income tax and capital gains tax rates, from 6 April 2010 onwards capital returns will have a significant tax advantage over income returns. Various investment vehicles for trading, property holding or wider investment activities alongside tax-efficient profit extraction techniques could be considered. Changing an investment structure could also be explored at a time when asset values are relatively low, so that any future returns deliver your longer-term objectives. How investments are held across the family should be reviewed to ensure holdings are efficient. Another approach could be to plan to minimise exposure to the 50 per cent rate before it arrives. Strategies that allow income to accumulate in tax-efficient ways should be considered. n
This article does not constitute advice and you should seek professional financial advice. If you would like to discuss how we could help you with your financial planning requirements, please contact us for further information.
Pro Sport Wealth Management LLP, Investment House, Bolton Road, Bradshaw, Bolton. BL2 3EU Tel: 01204 602909 Fax: 01204 306600 Email: firstname.lastname@example.org Web: www.prosportwealth.co.uk Pro Sport Wealth Management LLP is an Appointed Representative of Independent Financial Advisor Limited which is Authorised and Regulated by the Financial Services Authority
Published on Apr 1, 2010