With this week’s announcement of higher inflation figures for the UK and unemployment figures steadying for the fist time in 18 months it is a crucial time to review your whole financial situation, in particular your debt/savings ratios. 

As a general rule we would always advise people to have a good handle on the cost of their debt, both mortgage and credit cards/unsecured. This would include the interest costs, the amount of outstanding balance and repayment plans. This needs to be viewed alongside savings with one eye on interest rates and the other on the taxation burden on the savings.

Questions to ask your self are:

1. Do I have an emergency cash fund?
2. Is it held in a cash ISA to maximise its growth potential?
3. Can I pay off any debt?
4. While interest rates are low is it worth paying down monthly on my mortgage? Or do I get more interest to save it?
5. Am I making use of tax efficient government products?
6. Is there merit in considering an offset mortgage the next time I remortgage?
7. (If married) are we maximising tax efficiency between the two of us?

Sometimes the worry of financial insecurity can leave us feeling a bit like a rabbit blinded in the headlights. If only that rabbit had someone with sunglasses on to say, “Look its OK, just move off to the side here I have something to show you...” Effortless but invaluable. We can often be too close to our own financial burdens to look at them objectively. There is no substitute for a clear plan.

Do not leave the tap running on your money or your hard earned efforts will slip down the plughole. Set time aside and make a plan. Get someone who can look at it objectively to help. There is no better time than today and you will wonder why you did not do it earlier.

It is that easy.

Last week I spoke to a large group of financial services professionals on the benefits of using social media for business.

This is the video we put together to show the old and new approach.

Although we are now into a new calendar year, the tax year does not end for nearly another three months.

The next tax year sees some significant tax changes, perhaps the most important one being that anyone with income in excess of £150,000 will pay income tax at 50% on the excess. The question most often asked is “can anything be done to reduce the amount of tax I am paying?” The simple answer is that there are lots of things that taxpayers can do.

If you are the owner-manager of a business you may want to look at accelerating income, either by way of bonus or dividend, so that it falls to be assessed in the current tax year rather than next. This would obviously also accelerate the date on which the income tax is paid, however at least this tax will be at the current higher rate (40% for bonuses and 25% for dividends) rather than the new 50% rate (36.1% for dividends) which comes into force from 6th April. In many cases the company may not have the cash-flow ability to pay the bonus or dividend, in which case the bonus or dividend can be lent back to the company and withdrawn as and when the company can afford it.

Shareholders could also look at gifting some of their shares to their spouse if the spouse’s income is likely to be significantly less than £150,000 so as to ensure that both spouses make full use of their £150,000 taxed at 40%. HMRC will no doubt look at such transfers carefully and there may be other implications of making the transfer and therefore shareholders should seek professional advice before making any such transfer.

For the self-employed, where any income is taxed as it arises, it is obviously not possible to manage the amount assessable to income tax in the same way as it is in a company. However the self-employed can still look at making sure that they utilise all allowances fully and if family members work within the business, ensuring that they are paid a commercial salary for their work.
There is also the possibility of undertaking more esoteric planning which would seek to shelter all of the tax payable on the income.

For example taxpayers could look at making investments into structures whereby the profit realised is taxed as capital rather than income. By doing this the taxpayer has the advantage of their annual capital gains tax allowance which is currently £10,100 and thereafter paying tax at 18% on any profit realised. There is now a structure available which enables clients to simply transfer their current investments into the structure and withdraw the profit as capital rather than income as described.

Company owner-managers could also look at the way in which they extract their income from the company. By structuring their income through an unregulated pension scheme they are able to access the fund tax-free whilst still being able claim relief for the payment in the company. Such planning has been around for about 18 months and is becoming increasingly popular as we move towards the 2010/11 tax year. It is therefore inevitable that HMRC will look to amend the tax legislation shortly (possibly as soon as the Budget due in March) and therefore any company looking to make use of this opportunity would be advised to move quickly.
Self-employed individuals, or employees not able to structure their income using the above structure, could look at undertaking planning which reduces their personal income tax on their income. There are a number of ways in which this can be achieved depending on the taxpayer’s circumstances.

The above is just a quick run-through of a few tax-saving ideas. They are all completely legal and are based on ideas developed by leading tax barristers.

It’s a little disappointing that the main news arising from the G20 finance ministers’ meeting at St Andrew’s is the story of Gordon Brown’s calls for a tax on the activity of the capital markets. Mr Brown had suggested the tax but almost immediately US Treasury secretary, Timothy Geithner, dismissed the notion as unworkable. Needless to say the City was none too impressed either. The bottom line is that this so called Tobin tax would only work if it were applied worldwide. To do otherwise would simply drive business to a low or non-tax financial centre. Anyway the prime minister senses the opposition and has somewhat back tracked suggesting he merely wanted to open the tax-on-banks debate.

Foreign exchange markets open the week with the Dollar lower across the board. It has lost about two cents against both the Euro and Sterling. The pound has picked up the lions share of those exiting the Greenback and starts the day at over 1.12 versus the single currency.

The start of the week is a little light on economic data so, barring unscheduled news, we don’t expect much price movement today.

Commentary kindly supplied by Anglo Irish Bank

The story in markets last week was all about the weakness of Sterling. The pound fell to a five month low against the Euro, confounding many who had expected Sterling to appreciate against the single currency by the end of the summer.

Significant falls against the US Dollar were also recorded, but certainly the movements against the Euro are what are making the headlines. This can be attributed mainly to remarks made by the Bank of England governor Mervyn King.

Mr King in an interview stated that the fall in Sterling was “helpful” in rebalancing the UK focus on exports. His view was that as the weaker pound would facilitate exports, it would also discourage imports, and, as such help rebalance the UK trade deficit whilst providing stimulus to the UK manufacturing sector.

It is difficult to argue with his logic in that respect, and upon hearing this foreign exchange markets took it to be a green light signal to sell the pound. After all if the Central Bank Governor is supportive of a weaker currency, then whilst not policy, it could almost be construed as a desire.

In any event Sterling fell sharply and remains weak on the opening this morning. We have a varied selection of economic data out this week so it will be interesting to see if the trend continues. Euro sellers should be happier anyway.

EXCLUDED PROPERTY TRUSTS

5 Meaning of estate
(1)For the purposes of this Act a person’s estate is the aggregate of all the property to which he is beneficially entitled, except that...
(b) the estate of a person immediately before his death does not include excluded property.

The exemption from Inheritance Tax afforded by s5(1)(b) IHTA as quoted above is obviously an extremely attractive and valuable one.

 For a period in the early part of this decade planning was widely used whereby the taxpayer would acquire an interest in an Excluded Property Trust and the value of that interest would immediately fall outside the charge to Inheritance Tax.  The planning was particularly popular in so-called “deathbed” scenarios where the taxpayer had a limited life expectancy such that more conventional Inheritance Tax planning ideas were not considered viable.

Whilst HMRC would not necessarily agree with the analysis that simply acquiring an interest in an Excluded Property Trust resulted in a decrease in the chargeable estate of the purchaser, they were sufficiently concerned by the wide use of the planning to change the legislation in Finance Act 2006. The changes were contained at subsections (3B) and (3C) of section 48 IHTA 1984 and the relevant subsections of section 48 now state:

48 Excluded property
(1)A reversionary interest is excluded property unless—
(a)it has at any time been acquired (whether by the person entitled to it or by a person previously entitled to it) for a consideration in money or money’s worth, or
(b)it is one to which either the settlor or his spouse is or has been beneficially entitled, or
(c)it is the interest expectant on the determination of a lease treated as a settlement by virtue of section 43(3) above...

 (3)Where property comprised in a settlement is situated outside the United Kingdom—
(a)the property (but not a reversionary interest in the property) is excluded property unless the settlor was domiciled in the United Kingdom at the time the settlement was made, and
(b)section 6(1) above applies to a reversionary interest in the property but does not otherwise apply in relation to the property.
but this subsection is subject to subsection (3B) below...

(3B) Property is not excluded property by virtue of subsection (3) or (3A) above if— (a) a person is, or has been, beneficially entitled to an interest in possession in the property at any time, (b) the person is, or was, at that time an individual domiciled in the United Kingdom, and (c) the entitlement arose directly or indirectly as a result of a disposition made on or after 5th December 2005 for a consideration in money or money’s worth. (3C) For the purposes of subsection (3B) above— (a) it is immaterial whether the consideration was given by the person or by anyone else, and (b) the cases in which an entitlement arose indirectly as a result of a disposition include any case where the entitlement arose under a will or the law relating to intestacy.

The result of the changes introduced by subsections (3B) and (3C) meant that the planning idea of simply acquiring an interest in an Excluded Property Trust would no longer result in that interest being treated as Excluded Property for calculating their chargeable estate. Therefore it appeared that this planning idea was no longer possible.
However, that does not mean that Excluded Property Trust planning is no longer viable. It is still possible for a taxpayer to become the holder of an interest in an Excluded Property Trust and for this interest to still qualify as Excluded Property.
By becoming the holder of an interest in an Excluded Property Trust but not falling foul of subsections (3B) and (3C) it is still possible to reduce the value of a person’s chargeable estate.

Example
The taxpayer (a widow) has a chargeable estate, after taking into account the Nil Rate Band and any other reliefs, of £2million made up of her main home and investments. If she were to re-arrange her estate such that £2million were held via an interest in an Excluded Property Trust and the value of the estate were matched by an equal debt owed to the Excluded Property Trust, the taxpayer’s Inheritance Tax Position would be as follows:

TOTAL CHARGEABLE ESTATE

£2,000,000

LESS: DEBT OWED TO EXCLUDED PROPERTY TRUST
    £(2,000,000)

   
ESTATE CHARGEABLE TO IHT

£0

In most cases the taxpayer’s chargeable estate will be made up of assets that the client cannot dispose of in order to obtain the interest in the Excluded Property Trust, however it is still possible to undertake the planning via the use of short-term borrowings.

Market Round-Up

UK

- The UK market continued to advance, ending the month of August 7.1% higher as the
trend of better than expected data continued.
- Rising UK business confidence, rising US consumer confidence and further encouraging
US housing data were among factors helping to lift the mood, although an air of
caution remained due to the size of the rally since March.
- The top gainer in the FTSE 100 for the week was RBS, rising 18.9%. Talks to sell their
Asian assets to Standard Chartered and speculation they may be looking at buying back
shares from the UK Government were key drivers.
- Although miners were hit by profit taking mid-week, Kazakmhys was the stand out
winner in the sector after reporting better than expected earnings in the first half of the
year. The stock was up 8%.
- BAE was the biggest faller in the FTSE 100, down 6.44% following the loss of a US
defence contract.

US

- US equities rose to a new high for the year in last Thursday’s trading, driven by strength
in the oil price, which lifted oil stocks, and by news that GDP shrank less than previously
anticipated in the second quarter, at an annualised rate of -1.0%. Analysts had expected
a decline of 1.5%.
- The Case-Shiller Index of house prices in 20 metropolitan cities rose 1.4% over June
versus expectations of just 0.2%. In addition, sales of newly built single family homes
rose for a fourth straight month in July, whilst the overall inventory of unsold homes fell
to a sixteen year low.
- The Conference Board’s Index of Consumer Sentiment rebounded in August to a
reading of 54.1, having fallen to 47.3 in July.
- The Dow and S&P declined on Friday, though the Nasdaq managed to gain 0.5% after
Dell beat Q2 earnings expectation, and Intel upped guidance on Q3 revenue due to
improved demand for its microprocessors and chipsets.

Fixed Interest

- The week began with the yield on two year gilts hitting an all time low of 0.822% after a
broad rise in bond prices due to weaker shares and renewed market jitters that the Bank
of England may cut the interest it pays on deposits.
- Gilts then struggled after upbeat US home sales gave investors cause for optimism.
Further downward downward pressure came when it came to light that the BoE paid
below market price in its latest reverse auction.
- Later in the week mixed data gave investors no clear direction. In the UK, figures on
business investment for the second quarter showed the sharpest quarterly fall since 1985
and led to concerns of a downward revision to Q2 GDP data. August retail sales figures
from the CBI showed an unexpected slight worsening, but firms were more optimistic
about the coming month than any time since July 2008. Housing data from the
Nationwide Building Society showed the biggest monthly price rise in two and a half
years.

Europe

- European equity indices booked another positive week, hitting 10 month highs.
Investors were buoyed by continued strong corporate results, both at home and
overseas, and optimism about the outlook for the global economy. The FTSE Europe
ex UK index rose 2.0%.
- A raft of upbeat economic data including better than anticipated industrial new orders in Europe, Germany’s IFO index of business climate which was upwardly revised, and
housing numbers in the US all pointed to a better outlook for the global economy and
helped boost risk appetite.
- Nokia’s announcement that they are to enter the highly competitive business of making laptops was taken well. Shares climbed 10.6% over the week.
- Nataxis shares soared almost 18% following news that its majority owner, statebacked BPCE, is to guarantee around J35 billion worth of toxic debt at the French
investment bank.
- Banco Santander announced that they are to buy-back up to J16.5 billion of assetbacked securities (commercial & residential).

Japan/Pacific Basin

- Japanese equities ended the week up 2.89% and also hit a 10 month high in the
process. Positive economic data released in the US improved investor sentiment on
hopes for a global economic recovery. The S&P/Case-Shiller home price index and
consumer confidence in August topped forecasts. Exporters climbed on the back the
news. Energy linked shares advanced as oil prices steadied around $74 a barrel.
- The Hang Seng closed down 0.50%. Investors took profits after recent strong
performance, however, they continued to worry over the government’s fine-tuning of
fiscal and monetary policy. Disappointing results from blue chips CNOOC and Esprit
fuelled concerns ahead of a flurry of results from other companies in the coming days.
- Indian shares finished the week 4.47% higher. Sales of previously owned US homes in
July, which recorded their fastest pace in nearly two years, and upbeat comments from
Ben Bernanke boosted stocks. Index heavyweight Tata Motors advanced after a Credit
Suisse upgrade and outsourcer Wipro climbed higher on a weaker Rupee.

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I have taken this from Standard Life's press release that has just been issued:

The Cutting Edge - Finance Act 2009 receives Royal Assent
The Finance Act 2009 has now received Royal Assent. The Act includes the pension and tax changes announced in this year's Budget dealing with pension contributions made between Budget day and 5 April 2011 by high income individuals. While the changes only have an immediate impact on a small fraction of the UK population the shockwaves, which resonate from removing the principle that people get tax relief on pension contributions at their highest marginal rate, should not be underestimated.
Following some sustained lobbying by the industry there was a relatively late change to the rules, introducing some further leeway for those high income individuals who have a history of paying irregular contributions. Full details of the revised rules and how they impact upon people is detailed below.
While the Finance Act is now law it is likely that some further changes will be introduced in two specific areas through forthcoming regulations. The first is around transfers. As things stand, high income individuals who move their pension provision to a new provider may fall foul of the new special annual allowance tax charge even if they don't increase contributions.
This Finance Act contains the rules covering the position between Budget day and 5 April 2011 - so that part is largely done and dusted. The Government suggests the rules for 2011 onwards will be included in a Finance Bill early in 2010. It's therefore likely that these measures will be law before any General Election. The Conservatives have said they are unlikely to repeal any legislation if they win the election, so it seems likely we will have to cope with these rules whichever Government is in power in future.

If you are wondering how this is likely to affect you, feel free to contact me.

I am critically aware that this is an extremely sensitive subject matter but one that needs to be discussed.

On Radio 5 Live this morning the headline news was that 115 Romanians were forced to flee their homes and take refuge in a local church in my home town of Belfast. As you will all know we are not strangers to trouble in Belfast but it appears more and more to be targeted towards immigrants.

The next news story featured was unemployment… Britain's unemployment expected to reach a 12-year high of 2.27m.

Are racist attacks on immigrants a symptom of unemployment?

Did the BNP win 2 MEP seats because of the MP expenses scandal?

Food for thought this morning.