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Investment Bulletin – January 2016

22 Mar

From a momentum perspective, the pessimists were clearly in charge since mid-2015. On the other hand, the sheer size and scope of the setback opens the door to a possible market bounce… a volatile mode the market has been in for recent times. Only time will really tell if this oddly excessive poor start to the New Year was a fluke or the shape of things to come. It’s best to prepare for both possibilities. I’m pleased to say – this is part of our core philosophy.

 

We have been very busy reviewing and reassessing your portfolios, considering the impact of the recently and sometimes violently changing market conditions. The general outcome of our review so far, there are possible changes required and we will speak about this on a one-to-one basis.

 

The results so far indicate, a seriously vulnerable market but I’m pleased to report, we have seen excellent results relative to the general market. We’ve had the panic phase, so is it now time for the panic to subside? I believe there are strong indicators and potentially positive scenarios but as always, only in certain market geographies, sectors and themes.

 

Market Outlook

We believe the key catalysts have been :

 

  • concerns about Chinese exchange rate policy and associated GDP
  • a renewed collapse in oil prices
  • the problems in the Middle East have led to a dire refugee situation
  • the rate hike in the US followed by increased fears of a slow-down in the US economy.
  • the news that Brexit might become a reality after the June Referendum.

 

Macroeconomic and geopolitical factors look certain to play a key part in investor thinking again in 2016, and the outlook is as mixed as it was a year ago. Most western economies are improving slowly, with the US Federal Reserve finally raising its interest rate in December after holding it at an historical low for seven years. European economies also appear more steady, even on the periphery, it appears 2016 will see the continued divergence of central bank monetary policy, with the European Central Bank (ECB) and Japan both continuing their quantitative easing stance.

 

Fixed income was one of the stragglers in 2015, with low yields forcing many investors to seek alternatives, or to move higher up the risk spectrum. The expected divergence in monetary policy between the US and Europe will be a key theme in bond and currency markets.

 

Unless there is some surprise from central banks, it seems clear that the momentum for an even stronger dollar is likely to persist into 2016.

 

An increase in volatility is expected in the months ahead given the shift in the US monetary stance and the increasingly accommodative strategy of the ECB. If there is any sense that the Federal Reserve may be more aggressive than currently priced in, this could possibly lead to higher bond yields and a more negative reaction from credit markets.

 

In Europe, a sharp fall in the euro could trigger a steeper bond curve if inflationary expectations start to build, and this may be temporarily negative for credit spreads.

 

Pseudo-Economics

To paraphrase the late Jude Wanniski – the history of man is a battle between the creation of wealth and the redistribution of wealth. Jude was a Supply-Sider, which means an economist who believes that entrepreneurship and supply (not demand) drives economic growth.

 

Many pseudo-economists have sprung up since the recession voicing opinion rather than understanding, fuelled by a misunderstanding of 2008. They have clearly, used selective excerpts from Economists (such as, Hyman Minsky and the Minsky Cycle), have created an entire theory that the US economy (for example) is in a “crack-up boom.” The boom, according to these “pundits”, has been suggested to be solely caused by the Federal Reserve (Fed), Quantitative Easing (QE) and 0% interest rates, and now that the Fed has tapered and started hiking rates, it’s over and a bust is on its way.

 

These Pseudo-Economists have focused almost solely on money; they’ve forgotten the entrepreneur. We believe quantitative easing did not boost economic growth because banks shovelled that money straight into excess reserves.  We also believe in new technologies – simply, good old entrepreneurship is driving profits and economic output inexorably upward.

 

Volatility in The Markets

Most people think of volatility as a bad thing. It is assumed that higher volatility leads to higher risk of a negative outcome and as it is in our nature to be risk-averse, this tends to take the form of trying to avoid or hedge a loss.

 

Volatility can, however, be an investment opportunity and there are strategies that focus on exploiting bouts of market uncertainty to capture a return premium. Investors need to treat volatility like any asset that has a long-term expected return and a risk profile.

 

Investors should also bear in mind that periods of high volatility are usually short-lived. It is therefore key, to focus on the important developments and ignore the transient ones.

 

Summary

Maintaining a nimble and responsive portfolio is more important than ever. We have chosen to employ a systematic investment approach and diversifying across a number of underlying volatility strategies has the potential to add value to an investor’s portfolio. Particularly in this high-volatility environment, a number of different risk strategies to achieve the desired risk/return outcome to meet investment objectives is considered.

 

We have found the most effective and successful approach to investing, is to focus on the macro-backdrop potentially identifying short-term investment risks and with the potential of tactical advantages. The short-term volatility helps to provide longer term buying opportunities. We see these recent events as a superior opportunity to add value through the service we provide. Our wish is, within your attitude to investment risk, to target potential returns while focusing on capital preservation, where possible.

 

This bulletin provides information, it is not advice. Any opinions are given in good faith and may be subject to change without notice. Opinions and information included within this document does not constitute advice.

(If you require personal advice based on your circumstances, please contact me.)

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Investment Bulletin – October 2015

12 Nov

2015 has been a poor investment period so far, seeing the most significant losses since 2011. The question I’m asking – are we about to see a similar outcome to 2011 with the investment markets rallying and posting significant returns? The answer I have is “maybe” – no one knows but what is clear is the markets have been in the grip of panic, leading in my opinion to being oversold. I believe that this will offer opportunities in certain investment markets for the future.

 

In recent years, the investment markets have been “trading in a range” and this has seen a fall from the top of the range. So, if the markets follow a similar model this could realistically lead to positive returns.

 

It has been our strategy to position your portfolio, within your risk profile, with the focus of relative capital preservation and real total returns. Relative to the market situation, we have performed above expectations and produced pleasing returns.

 

Our portfolios are well diversified and where relevant, we have already made recommendations leading to changes in the asset allocation and some of the fund selections.

 

 

Market Overview

It has been impossible to ignore the recent dramatic sell-off in the Chinese markets and the subsequent falls in other equity markets around the world. Despite the opening up of the Chinese economy its impact on the developed world is fairly limited as regards first round effects, with exports of goods and services to and from China a very small part of GDP (Gross Domestic Product) for all mainstream economies.

 

 

 

I think it is economies that kill markets not the other way around so I believe the current decline is overstated.

 

On a more positive note, lower commodity prices are, of course, producing a significant boost to the western consumer and we are seeing an acceleration in consumer spending across the US, Europe and the UK in 2015. Inflationary pressures are also likely to remain muted for longer and interest rate increases which, until recently, seemed almost a certainty over the coming months could well be pushed back. The US rate increase heavily tipped for December.

 

It is also worth noting that although we have seen sharp falls in equity prices, the moves in bonds have been much less pronounced.

 

Whilst we shouldn’t be complacent, bearing in mind that equity markets can often be a good signal of trouble ahead, I think weakness in China is not sufficient to bring down the global economy. We maintain a modest preference for equity markets but do expect volatility to remain. I am inclined to think the recent drama has been a bit of an over-reaction and is unlikely to have a significant impact in a raw economic sense.

 

 

Summary

We are expecting the prospect of the first interest rate rise since June 2006 and we await the December Federal Reserve meeting. The Fed’s actions in the coming three-to-six months could have wide-reaching implications for the global economy. We expect that if (and based on the Federal Reserve’s commentary and dialog, a rate rise is imminent), this will be closely followed by the Bank of England to raise rates. In both cases, we are expecting small incremental steps based on the strength of the economies. So do not expect large or quickly followed further increases. The expectation is this will not lead to a rise in bank interest rates paid to the consumer, as banks based on recent results and the multitude of fines and legacy problems are not anticipating paying a higher base to account holders.

 

We do expect more volatility but anticipate buoyant equity markets in the near future but with clear risks in several sectors, themes and geographies.

 

Therefore, we reaffirm our focus on valuation discipline and total return strategies, where care and attention is and will always be needed. This focus has allowed us to achieve above average returns in less than average markets over a longer term, always with a clear relative focus on capital preservation, targeted returns and risk profile.

 

This bulletin provides information, it is not advice. Any opinions are given in good faith and may be subject to change without notice. Opinions and information included within this document does not constitute advice.

(If you require personal advice based on your circumstances, please contact me.)

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Pension Freedoms – Is Buy to Let a Stupid Option With My Pension Fund?

22 May

 

 

I have been investigating this due to the discussions in the tabloids but rarely with clients. If I cash in my pension fund, pay the tax and invest the residue in a property – is this a good idea? I have heard that near a university there are student flats available with a guaranteed rental for the first 12 months, etc etc

The details below are for all of those thinking of entering this market….

Image result for buy to let pictures confused

Since the change of Pension Legislation in April 2015, the press has been fully of “spiffy” ideas – why not use your pension to buy a Property and let it out. Much better than one of those silly ‘pension’ things. How can you lose? Property prices always go up??? Hurray for pension freedom! – if I made these statements in my professional life, I’m sure I’d be strung up …. seems madness just focusing on what might go right; what about the risks??? – there I go – typical financial adviser trying to offer a balanced representation – naughty, naughty

Firstly, unless you are going to get involved in timeshare and fractional ownership, we are talking about proper money here. I’d say £200,000 and more.

At that level, we can assume that the client is a higher rate taxpayer, and will probably have other assets.

So let’s run the numbers. Let’s see what this looks like.

If we accept the premise that pensions do and will perform worse than property, and that property can never fall – ‘stupid’ assumptions, but go on – then the simplified figures go something like this

£300,000 pension pot, assuming 6% gross growth, minus 1% fund and platform charges, and 1% adviser charge. A bit high, but OK.

Value of pot in 10 years is a bit under £447,250.

Instead, attracted by the publicity, we take the £300,000 and cash it in. That makes it worth £211,250, using the ‘tax free cash’.

Not great, but we are looking at higher returns. So 4% year on year compound capital growth and 5% income yields – both gross, but 9% total return as a starting point, 50% more than a pension portfolio.

Assuming that the client is a higher rate taxpayer throughout, and that the property is always occupied, and that there are never any capital events required (boilers, roof painting), there are no legal fees, there are no ‘void’ periods, that all tenants pay their rent and look after the property, and the property is sold at the imagined market value, then the net total value returned to the client – including income is… (drum roll) …. just under £399,438. So another £47,812 loss after the original £88,750 tax take.

So I guess the revenue will be supportive of this particular brilliance. Always remember there are other fees to consider, such as, Agents fees (they can be chunky as well), Stamp Duty, Legal Fees,m Contracts, Tenant Vetting, Property Maintenance, Property and Landlord Legislation, costs due to voids and periods of the property being empty, utility costs, tenants non-payments maybe, etc.

As a point of interest, any idea what the gross return needs to be for the Buy To Let to actually break even with the pension? A ‘critical return required?

Its actually nearer 14.5%.

Can you imagine if I tried to take this plan to our compliance for approval?

“I’ve got this great idea! We take a well diversified, flexible and secure portfolio, and cash it in. The client then pays at his highest marginal income tax rate (mainly 40% tax but a bit in the additional rate of 45%) and then invests in a single illiquid asset, which may well require them to add further funds, and take time to manage the asset themselves. There may be court costs involved at some point and we get to pay lots of agents fees and tax. And to match the boring, diversified portfolio, in a low inflation, low risk environment, this single, risky asset only has to grow by at least 14.5% every year to break even!! What a great wheeze!

Excuse me, why are you ringing the FCA……?”

In all the above I have ignored the effects of Inheritance Tax. Promises have been made. They have been before. This time they may be kept. Who knows?

But the BTL is assessable for Inheritance Tax, the pension is not. So if we look at Inheritance Tax, then an additional 40% tax knocks us down by another lump. A real and substantial loss after 10 years.

If your belief is, we all need to give extra coppers to the national pot – then this could be a good option – not only a loss through initial tax payable of £88,750, relative loss in capital value net of Capital Gains Tax of £47,812 but if Inheritance Tax applies then a further £159,775. This could provide £296,337 of tax and relative losses that you could have avoided.

I believe emotionally, some clients will be vulnerable to this suggestion, and clearly some will actually do OK. The numbers are brutal for the majority and I see my role must be to make people aware and protect them from the circling speculators, who are not held responsible for their wild and ill though through counsel.

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Investment Bulletin – September 2014

30 Sep

 

2014 year to date has behaved more or less as expected, trading in a range with the FTSE 100 bouncing from (circa) lows of 6450 to highs of 6850 (data until 15.09.2014).

 

We have made good returns, especially relative to the market – so far in 2014. 2 January 2014 to 15 September 2014, the FTSE 100 Index rose 1.2% in total (and 16 September 2013 to 15 September 2014 rose 2.7%). If we keep this as a consideration of market performance – this explains my opinion.

 

Our forecast of challenging markets has been correct and our approach of diversity is serving us well and I expect positive relative performance for the remainder of the year and beyond. Markets change, the risks and potential outcomes of these markets will change. This will lead to our further discussions around funds selected and asset allocation – I expect that this will lead to some fund selection recommendations and changes.

 

Our portfolios are well diversified, but we are carrying out in-depth risk return analysis and taking into account your outlook to investment risk linked to your investment portfolio(s).

 

Market Outlook

Our plan is for your portfolio to combine growth stock, with income/yield generating assets and defensive assets to help protect the capital value during periods of market decline.

 

Our prediction based on the market so far, and our asset allocation and expectations are on track. The market will remain weak and trade within a range, we will see subdued economic growth globally, but with pockets, countries and some economies slipping into negative figures and possibility returning to recession.

 

I expect the remainder of the year to be beneficial from an investment perspective, leading to high hopes for 2015. So far, there has not been any unexpected fears entering the market and the optimists have not been able to lead a break or up-surge through market barriers. The UK economy continues to exhibit signs of sustained recovery, however, interest rates are now widely tipped to rise – and signs of dissent among Bank of England policymakers have fuelled speculation about the timing and scale of such an increase.

Market Round-Up

Signs of growth within the US economy has supported the idea that one of the world’s largest economies was on the path to recovery. Further ammunition was provided by the US Federal Reserve’s (Fed) statement that it would do whatever it took to be accommodative until economic data showed significant improvements.

 

Asian markets are becoming quite attractive, in part this is due to valuations and associated negative performance, especially in 2013. It seems reasonable to assume that many associated economies have bottomed out (key anticipated markets are possibly India, Indonesia and possibly China).  Outlooks are starting to improve – or so we believe.  In the long run, it is a common belief that these economies have better growth potential than developed economies.

 

When looking at sectors with the best growth potential, this seems to favour technology, small cap, commodities, Europe and healthcare. True, this is assuming that the overall economic global growth story continues, at least as strongly as predicted – now that is a big assumption.   There are vulnerabilities to the scenarios and is a key reason why we combine asset classes and consider both positive and negative associated correlation.

 

On the macro side, economic data remained mixed. Inflation in the eurozone

slowed further, unemployment remained constant. GDP figures showed the German economy shrinking, France’s stagnating and Italy falling back into recession. Yet, fundamentals remain constructive. Lead indicators still point to expansion in the eurozone, albeit at a slower rate. The fiscal drag in Europe has been significantly alleviated and the economic revival in some peripheral countries is still well on track. In Spain, latest total mortgage lending

figures showed a growth of 13.2% year-on-year. Corporate earnings have also improved in Quarter 2 and are set to grow in 2014, helped by a pick-up in global economic activity. Despite the latest headwinds, various economic forecasts still imply a strengthening of activity in the eurozone going into 2015.

 

Your portfolio is being monitored closely and should there be fundamental movements, economic date or expectations away from the planned – I will be in contact and changes where suitable recommended.

This bulletin provides information, it is not advice. Any opinions are given in good faith and may be subject to change without notice. Opinions and information included within this document does not constitute advice.

 (If you require personal advice based on your circumstances, please contact me.)

 

 

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Investment Bulletin January 2014

6 Feb

Market Outlook

This may be the first year since 2007, where the market’s attention is not being dominated by a major tail risk. No double dipping, no fiscal cliff, no life or death moment for the Euro. It seems that the risks are more mid-term as in the problems bubbling away underneath the surface of the Chinese financial sector but this is not generally believed to be an imminent threat.

I agree it is the key medium-term risk to monitor in the global economy but this should not prevent you from being a bit optimistic currently. Instead, the relative normality in the global economy as we begin 2014 means developments in the good old belly of the probability distribution, rather than excitement or doom in the tail, are what matter for the markets.

Okay, fair to say, the markets are well poised for a short-term correction in the first half of this year but I believe we are prepared for this through your portfolio structure, asset allocation and funds selected. Although, as always, “watch this space” as I am constantly reviewing our assumptions, stress testing portfolios and recommending changes as and when suitable.

What Are The Important Questions for 2014?

1.  Will US capital expenditure (capex) pick up from its weak trend so far during the recovery?

The consensus expects US consumption to accelerate in 2014 and capital expenditure to modestly improve.

2.  Will forward guidance stop working?

It makes sense to us that the US Federal Reserve and the Bank of England are cautious by maintaining low policy rates as economies continue to normalise over the course of the year and this is reflected by current policy.

However, the crucial question is – will Janet Yellen and Mark Carney be able to convince markets that the Fed and the Bank of England are themselves not moving towards pre-emptive inflation fighting mode? This is crucial for equity markets.

3.  Which of the so called ‘Fragile Five’ emerging markets (India, Indonesia, South Africa, Turkey and Brazil) will adjust relatively smoothly in 2014 to tighter financial conditions and which won’t?

India is making the best progress so far with the current account deficit falling and its superstar central bank head Raghuram Rajan is following enlightened policy to help the adjustment. In Turkey and South Africa, however, things are looking potentially uglier. All five countries have political elections in 2014, which look likely to act as catalysts.

4.  Where to for the Yen exchange rate?

I expect further Yen depreciation while we are this side of 120 Yen to the US dollar. The rationale being I believe that Yen depreciation and higher inflation are the core components of Abenomics, and still have much more work to do.

Market Round-Up

So it seems fair to say, there seems to be encouraging signs that Europe is now in a recovery phase (maybe), the UK economy is clearly on the mend, the US is seeing possibly a return to productivity; with Asia and Emerging Markets seeing a more contrived situation.

My guess is, we will see periods of expectations running ahead of reality – although the general outcome still potentially looks positive overall but with more volatility and clear periods of panic and decline; and of course the reverse, with signs of underlying growth and optimism.

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So What’s All This About Adviser Charging

29 Apr

Okay, I think it is important to talk about this. From the beginning or 2013, how advisers charge for the services provided has changed; and the service provided has now changed. There is now Independent or Restricted Advisers.

There has been so much focus on what is paid and the general terms are typically, either an hourly rate (average from what I can see around £175 per hour) or where investment advice takes place it’s typically 3% initial (based on the investment amount) and an ongoing servicing fee circa 1.0% (but some institutions will charge more and few less).

business man writing investment concept or investment plan on white board Stock Photo - 13224684

Personally, I believe the big issue is – a fair price is charged for the work done or being done –  what you receive for what you pay. Should Restricted Advice charge the same as Independent Advice? The answer to this is in the detail – so what is the difference?

What is Independent Advice?

The rules set out a new definition for independent advice, which is unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market. This is designed to reflect the idea of genuinely independent advice being free from any restrictions that could affect their ability to recommend whatever is best for the customer. To reflect the range of products that a consumer would expect an independent firm to have knowledge of, and in line with work the European Commission has undertaken.

What is Restricted Advice?

This advice that is not independent and will need to be labelled as restricted advice; for example, advice on a limited range of products or providers.

Where a firm providing restricted advice chooses to limit their product range to certain range of investments or providers, there will be clients for whom this is not suitable. It is not acceptable for a firm to make a recommendation for a product that most closely matches the needs of the consumer, from the restricted range of products they offer when that product is not suitable.

I am an Independent Financial Adviser and have specialised in investments and tax planning with the focus on a high level of service, expertise and support. My view on the argument between the different advice type is simple but then again I am very technically focused targeting tax mitigation and investment returns, profitability and success.

My question to you is should you, as the consumer, pay the same for a Restricted Service as for an Independent Service? 

The first point is be aware of the service being provided – make sure if you are paying for the service being provided and in my opinion that should be a fully comprehensive service. Restricted advice is simply that “Restricted” and Independent is “Independent”. An IFA – Independent needs to take into consideration all available contracts, both packaged and unpackaged, available in the UK Markets – assess, consider, review and recommend from every available structure; whereas a Restricted Adviser will sell you a contract from their permitted range.

Clearly, the time and effort and expertise required under both designations should carry a cost reflective to the service provided. I personally believe that the charge for Restricted Advise should be the less expensive option. It seems that many institutions are not differentiating – I assume they are hoping/expecting the consumer not to notice the difference.

Perhaps also worryingly, a number of institutions and banks have declined to disclose their adviser charges with some saying they would not make their limits public (as reported by Citywire, Investment Adviser, Money Marketing, The Telegraph, Financial Times, amongst others).

Of those who have disclosed mandated adviser charges, there is a typical initial charge of around 3% with ongoing charges ranging up to 3% per annum.

I did think of putting together a list of the institutions and the fees paid but felt that this is not constructive. I believe it is wiser to weigh up the pros and cons of what is being offered and the price you are being asked to pay.

Remember, now you agree to a contractual fee arrangement and as with all contracts the terms are binding both ways. If you are paying for annual reviews, on-going investment advice, portfolio stress-testing and your adviser is remunerated relative to their level of success….make sure you get what you pay for. I know my clients do…and it creates very close and personal relationships where my financial interest and their financial success are aligned i.e. I need my clients to be successful and see positive returns on their investments.

All I suggest is take care and consider your options – what you receive for what you pay.

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Mark Lyttleton Is Taking A Leave of Absence From BlackRoch & Fund Management

1 Jun

Mark Lyttleton is taking a leave of absence for the summer (18 June and end on 17 September 2012). So what does this mean for the funds he manages at BlackRock?

Mark Lyttleton to run absolute return fund for St James's Place

In most cases where personal family issues are given as the reason for the break, one can’t speculate on the issues why. Although, it is more common that if they return to work the vast majority of fund managers that take time out do not return to the role they previously held.

For investors the crucial aspect of this latest twist in the Mark Lyttleton tale is – what to do if their money is in one of his funds?

Since the start of this year, Mark Lyttleton has been removed from managing the BlackRock UK Fund. The reason given at the time so that he could focus on the higher alpha strategies he runs – the BlackRock UK Absolute Alpha and BlackRock UK Dynamic funds.

This makes the timing of his three-month break even more extraordinary.

 

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

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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

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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

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Markets Plummet – An Overview

10 May

We have seen markets plummet since the elections over last weekend, down to lows of 2012 as investors took flight from stocks at risk of being dragged down by troubles in the Eurozone. This sell-off  seems to have been triggered, at least in part, by fears that a planned coalition government in Greece will tear-up the austerity deal underpinning the country’s recent €240billion (£190billion) bail-out.

The FTSE 100 Index saw £26 Billion wiped off its value following a further slide of over 100 points. This is a third day running of major sell-offs across most stock markets following concerns over the future of the Eurozone.

Alexis Tsipras, whose Syriza party came a surprise second in Sunday’s poll, is insisting his country’s bailout deal with the EU and IMF is ‘null and void’.

As well as uncertainty over Greece, fears that Spain will need to bail out its banking sector caused that country’s 10-year bond yield to soar again above the ‘unsustainable’ 6% level. This is perilously close to the 7% interest rate on government borrowing that prompted Greece, Portugal and Ireland to seek bailouts.

Financial analysts said the current market turmoil was likely to continue. It appears unlikely that a Greek coalition would be formed considering the rhetoric from the various party leaders, so uncertainty was likely to reign for a while.

‘The worst case scenario for the EU is if Greece leaves the Eurozone and undertakes a disorderly default. It is difficult to see why the country would do this but then again it only takes one angry politician to change history – Greece is staring into the political and financial abyss. Whilst a less likely scenario, if it did happen it could have huge ramifications for the rest of Europe.

A default for Greece looks likely and a departure from the Euro in the next 18 months is expected – this scenario has in excess of 66% outcome expectation – good chance of happening. Greece would not be allowed to walk away from its debts and financial obligations, if it leaves the euro. The likely scenario would be it would be given a greater period of time to repay its debts. The sanctions against Greece, if it attempted to renege on its debts, does not bear thinking about.

These are grave concerns and the ramifications for the Eurozone, global economic prosperity and stock markets are huge.

Investing is about taking best advantage of the market cycle while avoiding the periods of market panic – I am pleased to say, we hold a defensive strategy across all my clients and so we have avoided the worse of the declines and are well placed to benefit from the market opportunities expected to be created by the current market turmoil.

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

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