Newsletter – May 2018

When it comes to getting a mortgage, if you opt to do it yourself you can expect to spend a lot of time trawling websites comparing best buys and traipsing round various different lenders. All this takes time and it can be hard to know if you’ve made the right choice.

That’s why these days over 70% of buyers are choosing to work with a mortgage adviser to help ensure they get the most appropriate deal. Mortgage advisers undergo in-depth training and know the mortgage market inside out.

They can carry out all the research for you, and know the major lenders well. They may also have access to special mortgage deals only available via intermediaries. They know from experience which lenders are likely to favour lending to people in your circumstances, and will make sure you include all the relevant information when you make your application.

Mortgage applications made via an adviser can often go through quicker, principally because we know the criteria used by each lender, and are on hand to supply answers to any queries that might be raised. They know what specific information lenders expect to see in order to agree a loan, and will ensure it’s included.

Not just any mortgage 

They will spend time with you working out what’s the right type of mortgage for you, given your financial situation. They will also provide useful information on things like how much deposit you’ll need to get a good mortgage deal, how to choose a conveyancer or solicitor, and the different types of property survey available. So, if you’re looking for a mortgage and would like some help, do get in touch.

Your home or property may be repossessed if you do not keep up repayments on your mortgage. 

Couples could now save an extra £20,000 of inheritance tax (IHT), as the residence nil rate band (RNRB) increased in April 2018.   

The RNRB was increased at start of the new tax year and it is due to increase by £25,000 in each of the next two years, reaching £175,000 in 2020/21. It will be indexed to the Consumer Price Index after that.

The RNRB was introduced to give married couples and civil partners an eventual total IHT exemption of £1 million. This new band was introduced rather than increasing the existing nil rate band, which has been at £325,000 since 2009.

Whilst the increase is good news, the RNRB creates a lot of complexity for the taxpayer. A good example is that the £125,000 band is reduced by £1 for each £2 of estate over £2 million. So, in 2018/19 your RNRB is lost completely if your estate exceeds £2.25 million.

However, the estate value is calculated at death, so if gifts are made only days before death to reduce the estate below the £2 million threshold, the RNRB is not lost – a potential tax saving of up to £50,000 at present. A surviving spouse or civil partner can also double that saving by inheriting any unused RNRB from their partner.

Complexities such as this mean that, between April and December 2017, just over 3,000 estates claimed the RNRB, compared to 24,000 that paid IHT, according to data obtained via a Freedom of Information request.

If you have not reviewed your estate planning in the light of the RNRB, it makes sense to do so. The RNRB can encourage deathbed gifts, as outlined above. In some instances, it can also mean couples should revise their wills to avoid leaving everything to the survivor on first death.

The value of tax reliefs depends on your individual circumstances. 

Tax laws can change. 

The Financial Conduct Authority does not regulate tax advice.

UK inflation is falling faster than expected, as the March figure for the Consumer Price Index (CPI) was 2.5%.

This March figure, published in mid-April, surprised forecasters, who had predicted annual inflation would remain at 2.7%, as in February. That February figure was itself a surprise, as the forecasts had predicted 2.8%.

The drop for March may be the result of one-off factors, so it should be treated with caution. One issue is the way individual categories can distort the final figure. In March, alcoholic drinks and tobacco saw the sharpest drop price – from 5.8% to 3.5%. These both saw two sets of tax increases in 2017, because of the double Budgets, whereas in 2018, the Chancellor moved to a Spring Statement and did not change any taxes. It was the classic one-off.

The unexpected drop prompted debate about whether the Bank of England would raise the base rate on 10 May. However, there is still a large gap between what can be earned on short term deposits and inflation, whether or not the base rate rises.

Despite inflation falling, you are steadily losing purchasing power if you are holding more cash than you need on deposit – even before the tax impacts are considered. The onus is still on investors to invest to protect the real value of their capital. ν

The value of your investment can go down as well as up and you may not get back the full amount you invested. 

Past performance is not a reliable indicator of future performance. 

The Dow Jones industrial Average – the Dow – is a well-known part of the investment market, often quoted by news sources. But what does it mean, and is it useful when making investment decisions?  

The Dow was created in 1896, and is arguably still used today mainly thanks to history or habit.

• There are several issues with the Dow, such as:
• The index only tracks 30 shares.
• It has a large absolute value – around 25,000 – which means movements sound bigger than they are. ‘Dow falls 500 points’ has more impact than, ‘Dow falls 2%’, even if the two measures are identical.
• A committee chooses which shares the Dow tracks – where most main indices choose their constituents by market capitalisation – so it has some surprising absences, such as Alphabet (Google’s holding company) and Facebook.
• Almost uniquely, the Dow is weighted by share price rather than company stock market value, which has some strange effects. Because a high share price means a larger weighting, Boeing (with a share price around $320) has nearly double the weight of Apple (with a share price around $170), even though Apple is the largest US company and over four times the size of Boeing.

When China recently announced proposed tariffs on imported aircraft aimed at Boeing, this had a disproportionate effect on the Dow, as Boeing shares (over 9% of the Index) fell.

Investment professionals prefer the S&P 500 Index, which is capitalisation-weighted and, as the name suggests, covers the top 500 companies in the US. The largest funds tracking the US market follow the S&P 500, not the Dow.

Despite its flaws, the Dow’s prominence is a reminder that the daily noise of markets is not always what it seems, and underlines why expert advice is essential when choosing and monitoring your investments.

The value of your investment can go down as well as up and you may not get back the full amount you invested. 

Past performance is not a reliable indicator of future performance. 

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. 

HMRC is starting the tax year with their annual reminder to submit your tax return.    

HMRC’s reminder might seem early, but its statistics show that 750,000 people (6.5%) missed the deadline for 2016/17, potentially facing an immediate £100 penalty, even if they had no outstanding tax to pay. Anyone with a 2016/17 return still outstanding could also be clocking up additional penalties of up to £10 per day.

HMRC cancelled more than a third of all the penalties initially levied in 2014 and 2015 according to statistics obtained under a Freedom of Information Request. However, it is best not to incur the fine in the first instance, even if you have what HMRC calls a ‘reasonable excuse’.

You have until the end of October 2018 to submit a paper tax return and 31 January 2019 if you file your return online. According to HMRC, 9.92 million out of 11.43 million tax returns for 2016/17 were filed online by 31 January 2018, while 0.77 million were made on paper.

You can make your tax return easier, whether or not you take professional advice, by reviewing how you hold your investments:

• Beware holding multiple interest-earning accounts with only small deposits. HMRC has started pre-populating some returns with deposit interest data, but the process does not cover joint accounts. Keeping your savings in a single account can make more sense and, if you want to chase interest rates, makes switching providers easier. But remember, only £85,000 per account is protected by the Financial Services Compensation Scheme.
• Consider using investment structures which do not need to be reported. ISAs are the obvious example, but there are several others.
• If you still hold certificates for shares or funds, consider transferring the holdings to a nominee account. You will then receive one consolidated tax voucher instead of multiple vouchers.

For more information on any of the above, please contact us. There is no deadline, but the sooner you act, the easier next year’s tax return will be.

The value of your investment can go down as well as up and you may not get back the full amount you invested. 

Past performance is not a reliable indicator of future performance. 

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. 

The value of tax reliefs depends on your individual circumstances. 

Tax laws can change. 

The Financial Conduct Authority does not regulate tax advice.

The income threshold at which student loan repayments begin rose on 6 April 2018.   

English and Welsh students who started their courses after 31 August 2012 can now earn £25,000 a year – up from £21,000 – before they have to start repaying their student loans. The increase could provide a saving of £360 a year, with repayment rates at 9%.

Although the change was heralded as good news, that is not the whole story:

• Automatic enrolment pension contributions nearly tripled at the same time. For those earning £29,000 or more, this increase more than wipes out the savings from the repayment threshold increase.
• Interest rates for student loans have not changed. Before graduation, interest remains at RPI + 3% (currently 6.1%, and 6.3% from September 2018). After graduation interest is charged at RPI for those earning up to £25,000, rising on a sliding scale up to RPI + 3% for those earning £45,000 or more.
• As with any loan, lower repayment levels mean a longer payment period. Although student loans are capped at 30 years, after which the debt is written off.
• The Institute for Fiscal Studies estimates that the higher threshold will cost the taxpayer £2.3 billion a year, and that the government will end up writing off about 45% of total student debt.

A basic rate taxpaying graduate who is auto-enrolled in a workplace pension scheme faces an effective marginal ‘tax’ rate of 43.4% – more than higher rate tax – for every £1 earned above £25,000:

• 20% Income tax
• 12% National insurance
• 2.4% Auto-enrolment pension contribution (net)
• 9% Student loan repayment
• TOTAL 43.4%

Once the higher rate tax threshold is reached, the effective marginal rate becomes 51%. The savings from lower national insurance contributions, and earnings over the auto-enrolment threshold, are more than lost on extra income tax.

If you have children or grandchildren going to university, these figures are a reminder that it could be wise to start planning university funding. However, it is perhaps better to think of graduation funding, as it may not make sense to pay off the student loan early.

Tax laws can change. 

The Financial Conduct Authority does not regulate tax advice.

Often referred to as ‘the sandwich generation’, many 40 to 60 year olds can find themselves providing financial assistance not only to their children, but also to their mums and dads.

With increased life expectancy, many older people can expect to live well into their 80s and 90s, but may require assistance with daily living or need to go into residential care. At the other end of the scale, families are having children later and it has become a wellpublicised phenomenon that these children are often still, to some extent, financially dependent on their parents into their 20s or even 30s.

Financially, saving for retirement and supporting other family members is placing a significant burden on the sandwich generation, and in many cases severely reducing their capacity to save or invest for their own futures.

How to plan for your needs 

Adopting a collaborative approach to financial planning can help ensure that parents are able to prepare for their future whilst looking after the needs of other family members. Openly discussing wealth matters as a family can help establish priorities, clarify goals and ensure that plans are put in place to support each generation as their needs dictate.

Almost a quarter of over-50s in a recent survey¹ admitted that they sacrificed saving for their retirement to provide financial support to other family members, while 12% admitted they had stopped saving completely.

Whatever age they are, everyone should make provision for their later years. Even small sums saved regularly will go some way towards providing a pension income. Getting good advice will help you work out how much you will have available to live on in retirement, and how you can improve your pension outlook.

¹ Aviva, Real Retirement Report, 2017