Office Of Tax Simplification IHT Review – Some Interesting Insights

There were a few interesting insights to be gleaned from the OTS Inheritance Tax Review, in addition to the much-covered suggestions for changes to the IHT regime.

First is the seemingly profound under-use of the ‘gifts from regular income exemption’. We have often made the point that this is the most underutilised and misunderstood IHT exemption and figures from the OTS seem to confirm this point.

In the 15/16 tax year, there were only 579 claims in total for the gifts from income exemption with well over half of these claims being for less than £25,000.

As such, it could be argued that there is a huge missed opportunity out there for additional IHT savings, without the hassle of the 7-year rule. Of course, the OTS has made some suggestions to abolish the gifts from income exemption, but for now it lives on and it might be wise to make hay while the sun shines.

Another notable point raised in the review is the fact that of the estates that paid IHT in the 15/16 year, only 20% had any form of lifetime gifting within the 7-year cycle.

Now of course in some cases, this would simply have been unaffordable, however surely there are a host of missed opportunities for IHT savings in the 80% of estates which had engaged in no gifting at all.

2016 – A Year in Review

As 2016 draws to a close, I always take the opportunity to review what has happened in both my business and personal life, but also to consider what has happened in the wider world around me. In this latter category, 2016 has been eventful to say the least.

The year started typically enough, we had an oil price scare and fears over growth in China, however none of that is unexpected across the course of a typical year ‘in the markets’.

What came as more of a surprise, was the Brexit vote in June. I don’t think I will ever forget that morning, turning on the TV to see that what no one thought could happen, had happened. That day was also memorable for me on the basis that I was stuck in London that night searching for a hotel at short notice because of issues with the trains (another item that has made headlines far too often in 2016).

What I found even more surprising however, was how the markets reacted with relative calm to the events unfolding. Yes, there was a few days of volatility (which is only to be expected after any major event like Brexit, especially when no one really expected it), however the markets soon recovered and went on to set record highs in many places.

As if Brexit wasn’t enough, we then had the unexpected election of Donald Trump. Again, the markets seemed to react positively and many market have continued to set new highs in December.

The million dollar question is ‘what happens next?’. I think if 2016 has shown us anything, it is that no one really knows. ‘The markets’ had predicted doom and gloom of epic proportions if Brexit OR Trump happened, let alone both of them, yet 2016 has been one of the more positive years for some time now.

My other often cited bug bear of 2016 has been the increasing intensity of panic inducing headlines in the media for increasingly small events. ‘Billions wiped off the UK stock market’ was a recent news headline, on a day when the FTSE 100 fell by less than 0.5%!

While 0.5% of the FTSE does happen to total billions of pounds, a rise or fall of 0.5% each day is so commonplace on the FTSE 100, that this is not really news at all. As such, my advice remains to take what you read, watch and listen to with at least a small pinch of salt.

As 2016 draws to a close, I also reflect on how lucky I am to do the work I love each and every day. I would like to take this opportunity to thank all of our clients, contacts, professional connections and suppliers for working with us in 2016 and beyond. I would like to wish you all seasons greetings and a happy and prosperous 2017, whatever the year has to offer us!

Woodford Joins the Team

In the recent meeting of the Buckingham Gate Investment Committee, we deliberated long and hard about adding the Woodford Equity Income fund to the Buckingham Gate Portfolios.

While Neil Woodford’s experience and performance in this sector is almost undeniable, the reason we had pause for thought is that the track record of the fund is only 18 months. We usually like a fund to have a 3 year track record before we would consider adding it to the portfolios.

In this case however, we have made an exception to this rule for what we feel are a number of very good reasons:

  1. The performance of the fund during it’s 18 month history is outstanding by almost every measure. We have considered no less than 12 different fund performance metrics and the Woodford fund tops the tables in all of them. The case for including the fund was compelling based on these factors alone.
  2. While Woodford Investment Management is a new venture, Neil Woodford has been managing a UK Equity Income fund with a very similar mandate for more than 20 years at Invesco Perpetual with similar success. If we combine Neil Woodford’s track record across the two funds, it makes for some very impressive viewing.
  3. Given the ‘brand name’ of Neil Woodford, he has been very successful in gathering new monies to invest in his fund, with the Woodford Equity Income Fund having over £8bn of funds under management at the time of writing. As such, the fund does not have the same characteristics as many other ‘start up’ funds. In fact, the fund is considerably larger than many other more established players.

With all of the above taken into account, we have decided to include the fund within our portfolios.

When we combine Neil Woodford’s experience in the UK Equity Income space, with that of Nick Train (Lindsell Train UK Equity Fund) in the UK Equity growth sector, we are left with a duo of the most experienced and successful managers in the UK equity sector.

It is important to remember that past performance is no guide to the future, however we do feel that there is significant value to be added by experienced managers in the UK equity space. This is in an unusual contrast with the US equity sector, where there are very few, if any, ‘active’ managers who consistently add value.

For this reason we continue to adopt our hybrid approach to fund selection, choosing more expensive active managers where we feel they can add value, and using low cost ‘tracker’ funds where they may not.

Our 2014 Investment Action Plan – Part 3 – Rebalance Investments

While the media painted a somewhat gloomy picture of the economy in 2013, on the whole, financial markets had a bumper year. Given the significant differences in performance across market sectors, it is likely that many portfolios will now be out of line with the intended asset allocation.

A priority for 2014 should be to ensure that portfolios are re-balanced back into line with the intended asset allocation and that a thorough review is conducted to ensure that the investments are still suitable for your needs and objectives.

Our 7 Step Investment Action Plan – Part 1 – Diversification

2013 was quite a year in investment terms – many clients will have portfolios in need of some serious spring cleaning in 2014. We have put together a 7 step action plan for 2014 – part one is below. Stay tuned for more over the next week or two.

The old saying goes, “don’t put all your eggs in one basket” and it has long been the case that when considering an investment portfolio, diversification across different asset classes is of the upmost importance in order to manage risk and return.

While diversification across asset classes is as important now as it always has been, given the increasing speed of change in both the political and regulatory environment, it makes sense to diversify across product types as well.

For example, pension plans offer highly generous tax reliefs to investors as well as tax efficient fund growth, however they also have restrictions in terms of the amount that you can save and the age at which you can gain access to the funds.

Pensions are especially prone to legislative change and recently seem to have become a politically easy target for the government to extract further taxation from more wealthy savers. As such, while a pension plan will form the bedrock of most retirement plans, it makes sense to include some other “product types” to lessen the impact of an adverse change in pension planning rules. An increase in the minimum pension age (from 55 to 60) for example would throw many retirement plans off course. Holding a suitable range of other “product wrappers” such as ISA’s and investment bonds will mitigate this risk.

The tax treatment of product types is also prone to change. There has been talk in the media of government plans to reduce the level of tax relief available or further limit the total allowable lifetime savings within a pension plan. Conversely, there is pressure to increase the amount of tax-advantaged savings allowed in an ISA each year to encourage the public to save and invest.

Given that the time horizon for some investments is 30 years or more, it seems almost inevitable that some form of taxation or legislative change will impact on the plan before it completes. It is vital to review your plans on a regular basis to ensure that they remain suitable for your circumstances over time.

Buckingham Gate’s 2014 Financial Planning Thoughts

With the new year now underway, I thought it time to share our early thoughts on some of the key financial planning issues clients are likely to face in 2014.

 1. Re-balance investments

Given the fantastic market performance of 2013 both in the UK and abroad it is likely that many portfolios will now be out of balance when compared to the intended asset allocation. If left unchecked this can cause a large increase in the risk and volatility within a portfolio and could lead to larger than expected losses in future years. As such now would be a prudent time to review your financial planning goals for the years ahead and rebalance investment portfolios accordingly.

2. Plan ahead for pension legislation changes on 6th April

The 6th April 2014 sees the introduction of a reduced lifetime and annual allowance for pensions. The annual allowance is a limit on the amount of tax advantaged pension contributions an individual can make in a single “pension input period”. The lifetime allowance limits the total amount of pension savings you can accumulate in your lifetime. Any excess over these allowances can lead to large tax charges, which in some cases can be as high as 55%. This is a high priority area, which should be looked at well in advance of the deadline of 6th April. Clients who are members of a final salary or public sector pension scheme could be particularly vulnerable in this area.

3. Make considered use of tax allowances – Now!

Many people make use of their various tax allowances right at the last minute, especially ISA payments. In some cases this means that there is not sufficient time to complete the significant research required to make a suitable recommendation for investment and we are unable to assist. Furthermore, by leaving the use of these allowances to the very end of the tax year you are effectively losing out on a whole years worth of tax advantaged fund growth. Now is the time to start planning for the end of the tax year on 5th April and it would also be a great time to start planning for the 2014/15 tax year as well.

Some diligent individuals who have made full use of their ISA allowance since it’s introduction now have in excess of £1m sheltered away in a tax efficient home with no income or capital gains tax liability. For most this would make a most welcome addition to any retirement planning or investment goals.

4. If you are an employer – Start preparing for auto enrolment

While the new auto enrolment rules have already taken effect for the largest of employers, 2014 is the year where this new legislation will really start to impact on owner-managed business. Each employer will have an auto-enrolment staging date, this is the date on which a particular business will be required to comply with the new legislation. At an absolute minimum we would recommend that employers start preparing 6 months before their staging date preferably a year or more. If you would like an initial assessment of your auto-enrolment staging date and liabilities as an employer, please do get in touch.

5. Make the most of the low interest rate environment – While you still can!

While the low bank of England base rate is likely to persist for some months yet, the markets are starting to price in a rise in the benchmark interest rate within the next 18 months or so. This will begin to have an impact on the rate at which lenders can secure funds and In turn, this will start to filter down to mortgage rates. Clearly each individual will have different circumstances but in general those clients who have variable rate mortgages or borrowing may want to consider locking into the historically low rates currently available.  While no-one can say for sure exactly when a rate rise will occur, we can say with some certainty that the base rate will have to increase at some point from its current low.

6. Make a thorough financial plan

We all have different financial goals and objectives, however many of us are unsure as to exactly how or when those objectives will be achieved. Whether you aspire to retire early or fund a new business venture, by creating a comprehensive cash-flow model we are able to predict how close your existing provisions are to meeting your personal needs. As well as looking at the “ideal” scenario a cash flow plan will also enable you to consider your financial position in a number of “what if” scenarios such as the illness of a family member. This exercise is often eye opening and can show how well prepared (or not) you are for the financial challenges which life could throw at you.

By making time to sit down with a Chartered Financial Planner, you will be able to start 2014 with a suitable plan in place to ensure that you meet those all important financial objectives.

Buckingham Gate Review of 2013

With the new year only days away I thought it timely to share our review of 2013. While some people would group 2013 in with the volatile years that went before it, the underlying theme of 2013 was recovery.

While the UK has officially been out of recession for some time now, 2013 would for most have felt like the year the recovery really bedded in. The forecasts for the UK economy look promising going into next year and lets hope that worst of the current “downturn” is truly behind us.

As far as the markets are concerned 2013 was a fantastic year. The FTSE 100 opened on 2nd January at 6027 and is sitting as I write (30th December) at 6,740 for a gain of c11.9%. The US market faired even better with an opening figure of 13,412 and a close on 26th December of 16,479, which is a gain of c22.8%. For some reason the media painted a rather more gloomy picture of western economies but the numbers never lie with both the UK and US enjoying a good year for market growth.

The start of 2013 also saw the introduction of the FSA’s “Retail Distribution Review”. This was the biggest legislative change in the financial planning profession for some time with the ban on product based commission coinciding with the need for a higher level 4 standard of qualifications in order to provide professional investment advice. At Buckingham Gate this caused us less concern then most due to our fixed fee charging structure and commitment to an even higher level 6 qualification and Chartered Financial Planner status.

Also in January, the government announced the move to a single tier state pension, which will be around £144 per week in todays terms. While some people will be worse off under the new rules I feel that this is a good move for state pension provision in the UK. The flat rate pension removes all of the ambiguity and uncertainty from the previous system of a basic state pension along with many over complicated top up plans. What this means is that people can clearly see what level of provision the state will provide and, as such, make suitable private plans on top of this.

Also in the pensions arena was the introduction of auto-enrolment for the largest UK employers. This new legislation means that most people not currently contributing to a workplace pension will be automatically enrolled into a plan with contributions taken directly from salary. 2014 will see this legislation apply to smaller employers and Buckingham Gate has an exiting proposition lined up to provide professional advice and assistance to those employers. Look out for more details in early 2014!

Property prices also resumed their seemingly never-ending upward climb in 2013. Already there is talk of a further housing bubble and this will be watched closely by policy makers in the new year. With house price growth already predicted to average around 8% in 2014 they could have their work cut out.

We have a number of financial planning issues already on the radar for 2014 and will provide our thoughts on some of these in the first of our new year planning posts early in January.

In the mean time the whole team at Buckingham Gate would like to wish our clients a happy and prosperous new year!