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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.

HMRC Focusing On Tackling Tax Avoidance by the Wealthy

17 Jan

HMRC Letter 480

It’s official, HM Revenue & Customs is doubling its team tackling potential tax avoidance of wealthy individuals. The number of inspectors has increased to over 200 inspectors.

The Affluent Compliance Team is to begin recruitment of 100 additional inspectors. The focus of the unit has expanded from those with annual incomes from £150,000 and accumulated wealth of £2.5 Million to £20 Million; to include those with wealth above £1 Million.

HMRC has reported that the unit had received additional tax receipts of £75 Million (by the end of December 2013). This is expected to rise to a target of £586 Million by the end of 2015.

Exchequer Secretary David Gauke says: “The team has made a great start by bringing in £75m in additional tax that would otherwise have been lost to the country…… Dodging tax is immoral, illegal and unaffordable and the minority who cheat are increasingly finding that, thanks to the work of the Affluent Team, they have made a big mistake.”

Director of the Affluent Team Roger Atkinson says: “Good quality intelligence is central to catching the cheats and so we are expanding our Affluent Intelligence Unit fourfold. This is very good news for all honest taxpayers.”

Launch of Waverley Court Consulting Ltd – Website www.waverleycc.co.uk

18 Dec

I am pleased to announce the launch of my website – http://www.waverleycc.co.uk

After much work, reviews, re-writing and editing my website is now live. Let me know your thoughts on the content, design and presentation. Personally, I am most pleased with the Testimonials sections – every one who kindly provided their comments presented their views of our relationship.

The Launch Of My Corporate Website

11 Dec

We are almost there !!!

I expect within a few days my website will be up and available.

The official corporate Financial Services site for Welshmoneywiz is Waverley Court Consulting Ltd.

Autumn Budget Statement

10 Dec

You have to give George Osborne his dues…we all knew there were failings in the assumptions from the Summer Budget. He didn’t duck the bullet. Rather than just guidelines and review of the Summer Budget (normally what seems to be the Autumn Budget), it was more an introduction to the Spring Budget 2013, giving details of  some of the fiscal changes ahead.

A benefit of knowing about tax policy to be introduced from a future date is, it gives us a chance to plan now.

Registered Pension Schemes

George Osborne made proposals to cut back on the tax advantages of registered pensions.

The bad news :-

 Annual allowance to be reduced from £50,000 to £40,000 from tax year 2014/15.
 Lifetime allowance to be reduced from £1.5m to £1.25m from 2014/15

The good news :-

 Allowances to remain unchanged for 2012/13 and 2013/14 (at up to £50,000)

 Carry Forward remains unchanged for tax years 2010/11, 2011/12, 2012/13 and 2013/14 (at up to £50,000)

 Fixed protection available – enabling benefits to be taken up to the greater of the standard lifetime allowance and £1.5m without any lifetime allowance charge

1.  Election by 5 April 2014

2.  Protection lost where further accrual/contributions on or after

      6 April 2014

 Personalised protection option – a possible additional transitional protection

1.  Provides a lifetime allowance of the greater of the standard lifetime

     allowance and £1.5 million, but without the need to cease

     accrual/contributions on or after 6 April 2014.

2. Available to individuals with pension benefits with a value of at least

     £1.25 million on 5 April 2014.

 Maximum capped drawdown income to be increased from 100% to 120% of the relevant annuity rate determined from the GAD tables – date to be confirmed.

Planning Opportunities

The reduction in the annual allowance was expected and was only to £40,000 (it could have been worse). The reduction doesn’t apply until tax year 2014/15. Carry Forward of unused annual allowance of up to £50,000 for each of tax years 2010/11, 2011/12, 2012/13 and 2013/14, is available.

It gives a high earners the chance to maximise contributions before the reduction in the allowance bites. Also, for very high earners, if action is taken before the end of this tax year, they may be able to secure the 50% tax relief.

The changes to the lifetime allowance will mean that any one likely to be affected by the reduction and looking to retire in the near future will need to consider all means to reduce/avoid any lifetime allowance charge. This includes :-

  • Electing for fixed protection and/or, if available, personalised protection.
  • Considering drawing some or all of their benefits in 2012/13 or 2013/14 when these will be set against the current £1.5 million lifetime allowance.
  • Consider how benefits are taken.

Income Tax

So, it seems fair to say, there is actually only a very small change in the potential tax bill payable. Personal allowance has increased and the basic rate band has shrunk. The unlucky few are worse off but in most cases the situation seems to either be neutral or possibly a slight improvement.

The personal allowance is to increase by £1,335 to £9,440 in 2013/14 – an improvement in the terms announced in the Summer Budget.

In 2013/14, the basic rate tax limit will reduce from £34,370 to £32,010. This is offset by the increased personal allowance.

The result of these changes is that all taxpayers who are fully entitled to a personal allowance (where net income is less than £100,000) will be better off. At the lower end, the extra increase in the personal allowance will lift a quarter of a million people out of tax altogether.

From 6 April 2013, additional rate income tax will reduce from 50% to 45%. This rate applies for those who have taxable income of more than £150,000. For those affected, there is an incentive to make investments before 6 April 2013 and defer the resultant income until after that time.

In terms of planning for married couples/registered civil partners, this will mean that:

 There is scope to shelter income from tax if a higher/additional rate taxpayer is prepared to transfer income-generating investments (including possibly shares in a private limited company) into a non-taxpaying spouse’s name

 There is an incentive for lower rate taxpayers to make increased contributions to registered pension plans with a view to ensuring that any resulting pension income falls within the personal allowance.

Age Allowance

As the personal allowance increases, the age allowance is gradually being phased out. The amounts of age allowance are frozen at £10,500 for those born between 6 April 1938 and 5 April 1948 and £10,660 for those born before 6 April 1938.

For those who satisfy the age conditions, the age allowance is still currently worth more than the personal allowance. However, the allowance is cut back by £1 for each £2 of income that exceeds the income limit. The income limit will increase from £25,400 to £26,100 in 2013/14.

For those who are caught in this income trap, you should take appropriate planning i.e. reinvesting income-producing investments into tax-free investments (ISAs, VCTs, EISs, SEISs) or possibly tax-deferred investments (single premium bonds) or by implementing independent taxation strategies.

Business Tax

The Government will reduce the main rate of corporation tax by an additional 1% in April 2014 to 21% in April 2014.

The small profits rate of corporation tax for companies with profits of less than £300,000 will remain at 20%.

The capital allowance known as the Annual Investment Allowance will increase from £25,000 to £250,000 for qualifying investments in plant and machinery for two years from 1 January 2013. This is designed to encourage and incentivise business investment in plant and machinery, particularly among SMEs.

A simpler income tax scheme for small unincorporated businesses will be introduced for the tax year 2013/14 to allow:

Eligible self-employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. Businesses with receipts of up to £77,000 will be eligible and will be able to use the cash basis until receipts reach £154,000. They will generally not have to distinguish between revenue and capital expenditure.

All unincorporated businesses will be able choose to deduct certain expenses on a flat rate basis.

Tax Avoidance and Evasion

As expected the Government unveiled a bundle of measures aimed at countering tax avoidance and tax evasion.

Areas of particular interest are:-

•  The introduction of the General Anti-Abuse Rule. This will provide a significant new deterrent to people establishing abusive avoidance schemes and strengthen HMRC’s means of tackling them. Guidance and draft legislation will be published later in December 2012;

•  Increasing the resources of HMRC with a view to:

•  Dealing more effectively with avoidance schemes

•  Expanding HMRC’s Affluent Unit to deal more effectively with taxpayers with a net worth of more than £1 million

•  Increasing specialist resources to tackle offshore evasion and avoidance of inheritance tax using offshore trusts, bank accounts and other entities, and

•  Improving technology to help counter tax avoidance/evasion

•  Closing down with immediate effect for loopholes associated with tax avoidance schemes.

•  Conducting a review of offshore employment intermediaries being used to avoid tax and NICs. An update on this work will be provided in the Budget 2013.

•  From 6 April 2013 the Government will cap all previously unlimited personal income tax reliefs at the greater of £50,000 and 25 per cent of an individual’s income. Charitable reliefs will be exempt from this cap as will tax-relievable investments that are already subject to a cap.

Inheritance Tax

The inheritance Nil Rate Threshold is to increase, although by only 1% in 2015/2016 to £329,000. Currently, the Nil Rate Threshold is £325,000 and has been frozen since 2009 until 2015. This means, from 6 April 2015, if the first of a married couple to die does not use any of his/her nil rate band, then the survivor will have a total nil rate band (including the transferable nil rate band) of £658,000.

We await the outcome of the consultation on the taxation of discretionary trusts which is due to be released in December. Hopefully this will incorporate some simplification to the current complex system.

Capital Gains Tax (CGT)

The CGT Annual Exemption (£10,600 in 2012/2013) will increase to £11,000 in 2014/2015 and £11,100 in 2015/2016. We do not know what it will be in 2013/14.

Gains that exceed the annual exempt amount in a tax year will continue to be subject to CGT at 18% and/or 28% depending on the taxpayer’s level of taxable income.

Trustees pay a flat rate of 28% on gains that exceed their annual exemption.

Individual Savings Account

The current maximum investment in an ISA is £11,280 in a tax year (maximum of £5,640 in cash). With effect from the tax year 2013/2014, the maximum will increase to £11,520 (with the cash content not to exceed £5,760). Use of the allowance should always be maximised as any unused allowance cannot be carried forward.

The Junior Isa and Child Trust Fund maximum annual contribution limit will move from £3,600 to £3,720 from 6 April 2013.

The Government will consult on expanding the list of Qualifying Investments for stocks and shares ISAs to include shares traded on small and medium enterprises (SMEs) equity markets such as the Alternative Investment Market and comparable markets. This could lead to ISAs becoming even more appealing as a tax shelter.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)

The rule changes, mostly approved months ago, revolved mainly around opening up more companies for investment from VCTs and EIS, and increasing how much can be invested.

The size of companies that the schemes can invest in has been increased from £7 million to £15 million and the number of employees from 50 to 250.

The limit on the amount an individual can invest in an EIS has increased from £500,000 to £1 million, while the amount an EIS or VCT can invest in an individual company has increased to £5 million.

Ian Sayers, director general of the Association of Investment Companies (AIC), commented, ‘The proposed rule changes allow VCTs to invest in a wider range of companies which is a welcome boost to the sector and businesses desperately seeking finance.

‘The Chancellor’s removal of the £1million limit on VCT investment in a single company will ensure more efficient support to smaller businesses in the UK.’

However, the Budget also finalised plans to subject VCTs and EIS to further scrutiny in relation to the investments that they make.

The government will introduce a ‘disqualifying purpose test’, designed to exclude VCTs or EIS that do not invest in qualifying companies and are set up solely for the purpose of giving investors tax relief.

Although the schemes escaped any changes to their individual tax benefits, the Budget introduced a cap on tax relief, in an effort to prevent high income taxpayers getting away with very low tax rates.

The new rules will set a cap of 25% of income on anyone seeking tax relief of over £50,000 but, while the proposals are not particularly clear, it appears EIS and VCTs will be exempt.

Paul Latham, managing director of Octopus Investments, explained, ‘The good news is that the government’s new cap only applies to tax reliefs which are currently classed as “unlimited”. This means that tax-efficient investments, such as EIS and VCTs, are unaffected by this legislation.’

 

ECJ Judgement and the effect on Discounted Gift Trusts

26 Nov

This article summaries the judgement provided by the Court of Justice of the European Union (ECJ) regarding gender discrimination in relation to insurance premiums and its effect on Discounted Gift Trusts (DGT).

The Decision

On 1 March 2011 the ECJ issued a judgement that stated that the insurance services sector will no longer be able to offer gender specific premiums or benefits from 21 December 2012.

How does this impact Pensions, Annuities and Insurance?

This ruling is expected to affect these areas of financial services and following the 21 December 2012, we will see how this will be embedded into our existing legal framework and processes.

How does this impact DGT valuations?

When calculating the open market value of an income stream to arrive at a discount, HMRC guidance provides the use of certain gender specific mortality tables. HMRC have indicated they will review their guidance to take account of the judgement. However, it is likely that any change would not happen until late 2012. For DGTs declared before any change to the HMRC guidance on valuations, this judgement should have no impact, as the basis of the discount calculated will be relevant as at the date the trust is declared not the date of death of the settlor(s).
 
It should be remembered that the discount is just one factor in deciding whether a DGT is a suitable arrangement as part of your Inheritance Tax planning strategy.

The Rationale for the Judgement


Directive 2004/113/EC prohibits all discrimination based on gender in the access to and supply of goods and services. 

This means that from 21 December 2007 the Directive prohibited the use of gender in the calculation of insurance premiums and benefits. However, the Directive allowed exemptions to Member States regarding the use of gender specific premiums and benefits so long as the Member State ensured that the underlying actuarial and statistical data of which the calculations are based are reliable, regularly updated and available to the public.

The judgement considered if the intention of this exemption was to allow gender specific premiums and benefits to continue indefinitely. The Court concluded this was not the case and that gender specific premiums and benefits works against the achievement of the objective of equal treatment between men and women and therefore it was appropriate to bring this practice to an end.

Concluding that gender specific premiums and benefits would be regarded as invalid with effect from 21 December 2012.

 

Personalised Portfolio Bond – Be Aware Of The Issues

18 Oct

Investment Bonds have formed part of many investment strategies and the tax wrapper purchased by many – care is needed. In recent years there has been an explosion in the number of off-shore bonds and based on assets owned or the contract terms these may be defined as a Personalised Portfolio Bond (PPB), which is taxed differently.

Beware – for a UK resident – taxed in the UK individuals the tax is payable each year based on yearly deemed gain and the cumulative gains – so not just the yearly actual gains – assessed and taxed at your personal rate of income tax.

Personal Portfolio Bond Legislation
The PPB legislation is an anti-avoidance measure which imposes a yearly deemed gain on life assurance and capital redemption policies where the property that determines the benefits is able to be selected by the policyholder.

The deemed gain is subject to income tax where the policyholder is UK tax resident. The legislation can be found in Income Tax, Trading and other Income Act (ITTOIA) 2005 Sections 515 to 526. The PPB legislation applies for policy years ending on or after 6 April 2000 and the tax year 2000-2001 is the first for which a PPB gain can arise.

Personal Portfolio Bond Tax Charge
Where a policy is regarded as a PPB then the PPB legislation imposes a tax charge on an artificial deemed gain on the policy for policyholders who are UK resident individuals, UK resident settlors or UK resident trustees (where the settlor is not UK resident or has died).

The tax charge based on the PPB deemed gain is payable yearly for UK resident policyholders. The PPB deemed gain is calculated at the end of each policy year while the policy is in force. It does not apply on surrender, death or maturity, but previous amounts are taken into consideration as shown in the example below.

How is it Calculated and Applied?
The PPB deemed gain is not based on actual gains. The PPB deemed gain assumes a gain of 15% of the premium and the cumulative gains for each year the policy has been in force. The tax charge on the PPB deemed gain will be the highest rate of tax paid by the investor. Top slicing relief is not available.

What Policy Assets Are Permitted Under the Personal Portfolio Bond Rules?

  • property appropriated by the insurer to an internal linked fund
  • units in an authorised unit trust
  • shares in an approved investment trust
  • shares in an open-ended investment company
  • cash*
  • life policy, life annuity or capital redemption policy, unless excluded (see below1)
  • an interest in non-UK collective investment schemes (not closed-ended funds)
  • Cash includes sums in bank or building society accounts, but not cash that is acquired in order to realise a gain on its disposal.

A life policy, life annuity or capital redemption policy is ‘excluded’ if:

  • the policy or contract is itself a personal portfolio bond; or
  • the value of any benefits under the policy or contract is determinable

directly or indirectly by reference to a personal portfolio bond;

or

  • a personal portfolio bond is property related to the policy or contract.

Some examples of policy assets which are not permitted under the PPB rules :-

  • Any stocks and shares not listed on a recognised stock exchange,
  • Loan Notes linked to the value of an index or a security which are not themselves collective investment schemes,
  • Private company shares,
  • Non UK closed ended funds,
  • Cash held with the intention of currency speculation.

Returning to the UK with a Personal Portfolio Bond
The test of whether a policy is a PPB is an ongoing test. If a policy was originally a PPB but its terms were varied so that it ceased to be a PPB then the PPB tax charge will not arise.

The yearly PPB deemed gain only arises if a policy or contract is a PPB on the last day of the related policy year.

The following options are available:

  1. Do nothing. In which case the tax charge for a PPB deemed gain will apply.
  2. Request the product provider to endorse the policy and therefore restricting the assets to permissible assets only.

Will there be any changes to the assets that are allowed?
Since the PPB rules have been in force, the only changes to the investments have been an extension to the list of assets which are not permitted assets. Once the policy is endorsed, should any assets at a future date cease to be permitted they will have to be disposed of at the first reasonable opportunity.

Cash Holdings – must not be for the purpose of currency speculation. Any cash held in the policy which arises as a result of buying and selling investments (essentially a transaction account), and which is in the currency of the policy is permitted. In addition a bank or building society deposit account in the currency of the policy is permitted as well as a number of others.

Closed Ended Funds
With closed-ended funds, only shares in UK FSA authorised investment trusts are permitted. The Financial Services and Markets Act 2000 states that closed-ended vehicles are not collective investment schemes. Therefore non-UK closed-ended funds cannot fall within the permitted assets. Shares in a non-UK company may not be classed as an OEIC under the Financial Services and Markets Act 2000 and therefore may not be permitted assets. Clarification should be sought on each asset.

It is essential that policyholders inform their fund adviser of their decision regarding endorsing their policy, and restricting what assets they can invest in. It is the policyholders responsibility, along with the fund adviser to monitor your investment selection. The product provider/insurance company are not responsible for this, nor are they obliged to pass on to the policyholder or fund adviser information relating to your selected funds.

What happens if a fund adviser accidentally acquires non permitted assets for a client’s policy?
This is a risk, which is why it is important that a fund adviser knows about the restrictions. It would clearly be an action which would breach the terms of the endorsed policy and that breach must be remedied. It is probable that it would be necessary to discuss the matter in full with HM Revenue & Customs.

Points to consider if assets need to be sold
If assets have to be disposed of to allow a policy to be endorsed, policyholders need to consider the cost of the PPB tax charge against the current market value of the assets and possible future growth.

Consideration also needs to be given to assets with restricted dealing days, ensuring there is sufficient time for receipt of the endorsement request and time to sell the assets and endorse the policy before expiry of
the time limit.

What happens if a policy is not endorsed before the time limit expires?
The tax charge for the PPB deemed gain will apply. The charge is assessed on the day before the policy anniversary each year. The charge will cease to apply for the policy year ending after the policy has been endorsed.

Action checklist

  1. The policyholder should discuss their options with their financial adviser or fund adviser.
  2. Decide whether or not to endorse the policies to avoid the tax charge or continue with it unchanged.