Archive | May, 2012

China’s Economic Growth Forecast Is Cut

23 May

 The World Bank has cut its economic growth forecast for China to 8.2% (from 8.4%).

The World Bank has urged China to adopt an easier fiscal policy to boost consumption rather than state investment to lift activity. This strategy would require China to lean on fiscal policy instead, to fuel growth. The fear being, a slowing China will drag growth in emerging East Asia to two-year lows this year and also warned Europe’s debt crisis could inflict bigger damage if it worsens.

The view is if governments and central banks act in time to stabilize activity, economies should recover next year. The suggestion is to further loosen monetary and fiscal policies to foster activity, but accepted the ability to maneuver is constrained by inflation risks which could spike assuming growth rebounds.

The European Union accounts for one-third of global import demand in China, and a recession in the Eurozone will take its toll on both China and East Asia. This has a severe likelihood that Asia could suffer from years of sluggish demand in export markets with the United States and Europe. China is expected to be the first to suffer from an export slump before passing the effects on to others in Asia.

My contact details :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

Market Caution Before EU Summit

23 May

Shares either retreated slightly or became more subdued yesterday on concerns over Wednesday’s meeting as hopes for fresh measures to tackle the Eurozone debt has seemed to fade.

 

 

There are renewed fears Greece would leave the euro bloc dampening appetite for riskier assets. Personally, this would be financial suicide for Greece and the words from the former Greek PM Lucas Papademos support this belief, although anything is possible.

Lucas Papademos told CNBC ” there are no preparations underway in Greece for possibly exiting the Euro”.

EU leaders are expected to discuss regional bonds jointly underwritten by all Eurozone member states. New French President Francois Hollande supports the proposal but German Chancellor Angela Merkel is opposed to it.

On the other side of the world, the Bank of Japan concluded a two-day policy meeting announcing it has no plans to introduce any further easing policies or programs. This is as expected by the markets.

 My contact details are :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

Relief Rally or the Start of Something More?

22 May

Yesterday saw stocks rebound from last weeks losses – the debate is whether it’s just a quick relief rally or the start of a new move higher?

In order to break that gravitational pull, we’ll need evidence suggesting the worries are at least containable and that the market and growth contractions realistically are expected to reverse – yes, I mean sustainable growth. I am looking for signs the rally is sustainable.

Personally, depending on information and data in the next few days, we have the potential to see a rally at least short-term. The question I want answered currently is, “Is all the recent bad news and woes already priced into the market?” Although, on the time horizon, there are other factors that could start worrying stocks – the so-called “fiscal cliff,” combination of budget cuts and tax hikes for next year, issues around China’s growth story, etc.

The worries over the Eurozone hangs over the market and any further negative headlines could easily derail the market’s rally if this recent positive market move is the start of a rally. The European leaders summit Wednesday could well be a good barometer to this risk.

The G8, over the weekend, helped give markets a bounce after leaders embraced Greece, saying they want it to stay in the Eurozone and they would also seek ways to motivate ways to create and stain global growth. China also helped, with Premier Wen Jiabao staing that China will focus on boosting growth.

Some believe that with the efforts taking place, we may have seen the bottom of the recent correction on Friday, but it is not clear-cut. The opposite opinion on the situation provided by some analysts is, “we’re not there yet” and believe “we‘re going to be in more of a ‘sell in May and go away’ trend”. Here, the belief is the summer is going to flatten out, then we come back in the fall. If this is the case we easily could have another month of the current market trends.

My contact details are :- tel  029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

The Markets and What’s Next?

21 May

The markets have seen a sell-off in the recent past and I expect this to continue untill some stability returns to the market and this is unlikely until the Greek Elections in June and a government is formed, at the earliest assuming no additional market controvecies.

It is clear that the problems in the Eurozone will keep a chokehold on financial markets in the weeks ahead. Investors and the markets are currently assessing Greece’s commitment to the austerity measures and the Eurozone as a whole – we await other headlines on the debt crisis.

G8 Meeting over the Weekend

 

G8 strongly supported keeping Greece in the Eurozone. No decisive decisions were made but confirmed they would do what was necessary to battle financial turmoil while revitalizing their economies. They stressed the need for strategies to encourage growth.

Greece’s failure to form a ruling coalition after its May 6 election has now led it to a second election in June. Polls show the radical left party is in the lead, and that party rejects austerity measures agreed to as part of the Greek bailout.

 

Reports This Week

  • Monday & Tuesday – Atlanta Fed President Dennis Lockhart speaks in Tokyo on monetary policy
  • Tuesday – US Treasury auctions $32 billion in 2-year notes
  • Wednesday – US Treasury auctions $32 billion in 5-year notes
  • Thursday – New York Fed President William Dudley at Council on Foreign Relations & US Treasury auctions $29 billion in 7-year notes
  • Friday – Consumer Sentiment Report

My contact details are :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

Pros and Cons of Offshore/International Bonds

16 May
Most reasons to consider offshore/international bonds include:-
  • Simplicity
  • Price
  • Access
  • Risk profile
  • Fund choice
  • Currency
  • Future aspirations and objectives
  • Tax

The actual reasons are specific to the client/investor and care is needed as there are many alternative investment structures, which maybe more beneficial and suitable.

Taxation of the offshore bond

Single premium investment bonds are taxed under the chargeable event legislation, which means gains are assessed to income tax, rather than capital gains tax (CGT).

As the bond is invested with an offshore insurer it does not suffer any income tax or CGT within the fund except for any unreclaimable withholding tax which may have been applied.

Any gains, dividends, rent or interest are taxed at 0% within the fund.

Taxation of the bondholder

For individuals any chargeable event gains will be chargeable to tax at their appropriate rate (typically, your highest marginal rate including the gain created by the encashment :- 10%, 20%, 40% or 50%.* Trustees will pay tax at 50%.

Taxpayers can use their personal allowance and their highest marginal rate of between 10% and 50% tax bands when calculating overall tax liability. For trustees, the first £1,000 worth of chargeable event gains (assuming no other income) is taxed at 20%.

For highly personalised bonds it’s important to remember that for UK resident policyholders there is a deemed charge of 15% of the premium and the cumulative gains per annum.

Advantages of the offshore bond wrapper

  • Bonds are non-income producing assets so there are no annual tax returns for individuals or trustees (also true of onshore bonds where charges are typically lower).
  • Funds can be switched within the bond without giving rise to a CGT or income tax liability on the investor and with no tax reporting requirements (also true of onshore bonds where charges are typically lower).
  • Switches in and out of funds are not subject to the CGT 30 day rule so will not give rise to a taxable event (also true of onshore bonds where charges are typically lower).
  • Income received gross within the bond wrapper will only suffer income tax on future disposal (basic rate tax is deemed and payable under an onshore bond wrapper).
  • Tax liability is reduced proportionally for time spent as non-UK resident (this excludes normal holidays and is applicable to typically time living abroad).
  • The bond can be assigned by way of gift without giving rise to an income tax charge, although there might be inheritance tax (IHT) considerations (also true of on-shore bonds where charges are typically lower).
  • 5% tax deferred allowances on each premium paid can be taken each year for 20 years without incurring an immediate tax liability (also true of on-shore bonds where charges are typically lower).
  • For the purposes of age allowance, withdrawals within the 5% tax deferred allowance are not treated as income (also true of on-shore bonds where charges are typically lower).
  • Realised chargeable gains may benefit from slice relief which can reduce or remove any higher rate liability (also true of on-shore bonds where charges are typically lower).
  • Top-ups will benefit from top-slicing from inception (individuals only) – (also true of on-shore bonds where charges are typically lower).
  • Multiple lives assured on a whole of life contract can be used at outset to avoid a chargeable event on death of the policyholder, or where there is more than one policyholder, on the death of the last of them to die (also true of on-shore bonds where charges are typically lower). Alternatively, a redemption contract where no lives assured are required can be used (typically not available with an onshore bond).
  • Can be gifted into trust and assigned out of trust without giving rise to an income tax or CGT charge (also true of on-shore bonds where charges are typically lower).
  • Single premium investment bonds are not normally included where means testing is applied by a local authority for residential care (also true of on-shore bonds where charges are typically lower) but care is needed and further advice before assuming to be true.
  • Wide investment parameters (also true of on-shore bonds where charges are typically lower).
  • Ability to appoint third-party custodians and discretionary managers (also true of some onshore bonds where charges are typically lower).

Disadvantages of the offshore bond wrapper

  • On encashment, chargeable event gains can suffer tax up to 50%*.
  • As withdrawals from a bond are assessable to income tax, it’s not possible to use personal or trustee Capital Gains Tax (CGT) allowance to reduce gains.
  • Base cost of the investment is not devalued on death for income tax purposes (chargeable event gains are assessable against original investment and any subsequent additional premium paid).
  • Death of last of the lives assured on whole of life contracts will create a chargeable event (even if bondholders are still alive).
  • Chargeable event gains reduce any available age allowance based on the total gain, not sliced gain applicable where total income exceeds £22,900.
  • May not be suitable where ‘income’ interest exists inside a trust.
  • Investment losses cannot be offset elsewhere.
  • On death of the last of the lives assured, income tax and IHT may be due.

* Finance Act 2009 increased this to 50% for trusts and for individuals with income in excess of £150,000 from April 2010.

 
This article is based on interpretation of the law and HM Revenue & Customs practice as at July 2010. I believe this interpretation is correct, but cannot guarantee it. Tax relief and tax treatment of investment funds may change in the future.

This article provides a high level summary of the potential advantages and disadvantages of offshore bonds held by a UK-resident investor (excluding companies). I cannot accept any responsibility for action taken based on this or related articles, as this is solely for information purposes and is not advice nor recommendation.

My contact details are :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

VAT to be charged on Discretionary Management?

14 May

So,  with the European Court of Justice (ECJ) declaring discretionary services should be subject to VAT. Many will be effected by this, if it becomes legislation. Those effected with be anyone receiving discretionary management services, such as, through a Stock Broker, Discretionary Fund Manager, etc.

This announcement was in response to a question by the German high courts about Deutsche Bank’s VAT treatment of its discretionary services. The ECJ recommended all elements of Deutsche’s discretionary services – including initial charges – should be subject to VAT, backing a clarification by HMRC earlier this year.

HMRC has stressed that the statement from the ECJ is currently “just an opinion” and not a final decision. The final decision is expected to be made in Germany in the near future.

If this is the final outcome, there may be legal implications for the UK afterwards; and in this instance, the ECJ statement was “in-line” with the European Union’s taxation rules. On 29 February 2012, the HMRC issued guidance on fees and VAT preventing discretionary fund managers from NOT paying VAT in this manner. This is due to come into force in 2013 alongside the FSA’s RDR overhaul of financial advice.

Stock Broking and Discretionary Fund Management companies offer only a single packaged proposal and as such this is settled case-law that i.e. where a transaction comprises a bundle of elements, regard must be had to all the circumstances in order to determine whether there are two or more distinct supplies or one single supply.

Moreover, in certain circumstances, several formally distinct services which could be supplied separately must be considered to be a single transaction when they are not independent.

The advocate general concluded that the portfolio management services of the kind at issue “form a single supply for VAT purposes” and as such, these services do not fall within the exemption provided for on the common system of value added tax.

My contact details are :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

Taxation of Collectives within an Offshore Bond

14 May
Taxation of the collective investment when held as an asset of an offshore bond – income

Any income received (dividends or interest) within the offshore bond wrapper from the collective is deemed to be received gross. Withholding taxes may apply which may not be reclaimed.

The 10% notional tax credit issued alongside any UK dividend income cannot be reclaimed by the offshore bond provider or investor.

The income will remain in the fund, untaxed, until encashment from the bond by the investor.

Taxation of the collective investment when held as an asset of an offshore bond – capital gains

The collective would suffer no ongoing capital gains tax within the offshore bond.

Realised gains would be subject to tax when the investor encashes the bond.

Investment losses cannot be carried forward although any deficiency loss created on encashment may be available to offset any higher rate income tax suffered by the investor.

Switches made within the bond will not generate a tax charge.

Principally, where a collective is held within an offshore bond, the policyholder is only liable to tax when they encash the bond.

Encashment of the bond by the policyholder

On encashment, assuming a chargeable gain has been made, a chargeable event would occur and the investor would be liable to income tax on this gain at their HIGHEST MARGINAL RATE.* However, personal allowances and the 10% tax band** would be available where earned income levels were sufficiently low. A basic rate taxpayer would be liable to tax at 20%.

* Finance Act 2009 increased this to 50% for trusts and for individuals with income in excess of £150,000 from April 2010.
** Bond gains are deemed to be savings income.

This article is based on interpretation of the law and HM Revenue & Customs practice as at March 2010. I believe this interpretation to be correct, but cannot guarantee it and the Tax Relief and tax treatment of investment funds may change in the future.

 I do not accept any liability for any action taken or refrained from being taken on the basis of the information contained in this or any related article. With all tax planning, it must be reviewed on each person’s personal circumstabces and the information provided in this article is for information purposes and is not advice nor recommendation.
 
My contact details are :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan