Welcome to the new year but to be frank not much has changed over the last twelve months; the same issues, frustrations and key themes continue to frame the world of financial services and planning.
The Woodford saga continues with three national firms of solicitors now putting together class actions against Hargreaves Lansdown for their part in the debacle. Meanwhile it has come to light that Neil Woodford salted away a £9m dividend before the collapse which throws a spotlight on the level of investment management fees and the supervisory skills of the regulator.
Broadly most are in favour of where the FCA is going in ensuring appropriate client outcomes but it continues to fail in preventing scandals; the Woodford clients are gated and watching their fund values drop, while the 11,600 investors in the London Capital and Finance (LCF) bond collapse were dealt a hammer blow as the Financial Services Compensation Scheme (FSCS) ruled it was ‘unlikely’ to pay compensation based on misleading advice. Meanwhile, financial planning firms are expected to see their Financial Services Compensation Scheme (FSCS) levy rise to £213m for the 2020/21 financial year, as a rising number of claims against SIPP providers will have an impact on IFAs’ bills.
Finally, pension legislation is in urgent need of revamping and yet the very recent attempt to sort the problem has been met with an underwhelming reaction. The suggestion to raise the threshold at which the annual allowance taper kicks in from £110,000 to £150,000. Under current rules, anyone with a threshold income of above £110,000 and an ‘adjusted’ income of above £150,000 has their annual allowance reduced. I am stopping there as it is too complicated to explain and doesn’t solve the problem!
Enough of the rant, onto the articles and our positive views on how we can assist and enhance your financial planning to meet your goals and objectives. As usual if you want to pick up with us, just drop a line to the author.
Choosing Executors carefully
Being made an executor for someone’s estate in a Will can be highly daunting. People sometimes overlook the responsibilities and role that this title carries and often do not take the time to consider who may be suitable.
The executor(s) named in a Will have to ensure the deceased’s estate is wound up properly and all the wishes stated in the Will are carried out.
There are many legal responsibilities associated with being an executor that many people don’t realise, these include:
– Registering the death
– Arranging the funeral
– Valuing the estate
– Paying any inheritance tax
– Applying for probate
– Sorting the deceased’s estate finance
– Placing a deceased’s estate notice
– Distributing the estate
– Keeping estate accounts
Some of the list above will need to be done immediately when someone dies whereas others can take up to nine months before they are finalised.
Things to do immediately when someone dies
It goes without saying that registering the death is an immediate action to be taken by the executors. If the deceased prior to the death lived in England, Wales or Northern Ireland then the death must be registered within 5 days, alternatively it is 8 days for Scotland.
This is done usually by appointment only at the nearest registry office where the person died. In order to register the death the executor will need either a medical certificate from the GP or hospital doctor or permission from the coroner that they can register the death.
Once this is complete they will be given a death certificate and at which point the funeral can be arranged. It must be noted that the funeral is the responsibility of the executor and they are liable to pay the costs, although the deceased’s estate will normally cover the costs. The executor must also be aware of any instructions or funeral plans made by the deceased usually located in the Will.
Inheritance Tax – What the executor of the Will needs to be aware of
Before the court will grant probate, Inheritance tax must first be dealt with via HMRC. The executor must assess the assets, complete any relevant IHT forms and pay any IHT where due. This can take some time to complete depending on the nature, size and complexity of the estate.
Applying for a Grant of Probate
Once any IHT has been paid the executor can then apply for the grant of probate online via Gov.uk or by post.
Placing the deceased’s estate notice
This is an important role of an executor which they are often unaware of. Before any distributions are able to take place to the beneficiaries it is important that the executors protect themselves by placing a deceased’s notice in The Gazette and in at least one local newspaper. This enables any potential creditors to the estate to be made aware and give them time to come forward. As an executor they are personally liable and as such must ensure all debts on the estate have been paid before they distribute it to the beneficiaries.
Administering the estate and keeping accounts as an executor of a Will
Finally, an executor can distribute the estate. They will need to call in assets such as bank accounts to an executors account or client account if solicitors are acting for them. They will then need to consider and discuss with the beneficiaries how they would like to receive the assets of the estate that they have been left through the Will. If a trust arises the executors will also need to consider what to do with the assets and consider their potential future role as trustees.
In order to demonstrate that the executors have administered the estate properly the executors should keep full records and prepare final set of accounts for the estate.
Executors are carrying out a loved one’s final wishes and as such it can be a daunting role during an extremely tough and emotional time in their life. The responsibilities of an executor are extensive and carry personal liability, therefore it is important that executors are considered carefully and the role has been discussed with then before they are appointed to make sure they are happy to act.
Cash Management Services
Cash Management services, as detailed in our previous edition of Marginal Gain are a service that is seeing a large uptake of clients wanting to take advantage of the enhanced interest rates that are on offer to them.
At Carnelian we are able to access a bank of different savings accounts that can be offered to clients through specialist software that we can use in order to compare a range of different products. These products range from instant access accounts all the way up to those accounts with a five-year fixed rate. Each of these that we’re able to compare will be able to offer a higher level of interest than those on offer from the usual high street banks.
Below is a table showing the benefits of utilising our Cash Management service for individual who may have a lot of cash sitting in their savings accounts. As we can see from the example, they currently have £310,000 spread across six different savings accounts. These accounts are achieving relatively low levels of return of around 1.04% to the highest of 1.21%, thus not making it a viable option to many investors as a place to grow their capital, with a return of £3,620.50 and an effective rate of interest of 1.17%.
This table also shows the proposed savings accounts that we are able to find for our clients that wish to use the service. In this example, they are consolidated down to just the four accounts, three with a one-year fixed rate of interest and one with a 120-day notice period. As you are able to see, the level of return is substantially higher than the return that a client would see if they remained in their current savings accounts, with an increase over a year of £1,493 and an effective rate of interest of 1.65% compared to the previous 1.17%. These proposed accounts also take advantage of the Financial Services Compensation Scheme (FSCS) protection of £85,000 per account, meaning the savings are protected should the provider holding the money get in trouble!
Lastly, this example illustrates the charges that we would take in order to facilitate the use of the Cash Management service, and at 0.1% of the balance this still allows a client a far larger return on their capital than they would be seeing if they remained using their current savings accounts.
Effective Cash Management can therefore allow clients to grow their capital at a far higher rate than the usual savings accounts on offer and largely in a risk-free way. It is therefore a far more viable option for investors to grow their cash than was previously possible with the low interest rates.
If you have any queries regarding the above, then please do not hesitate to get in touch with us so we can assist with any questions that you may have.
Buy to Let Investors choosing Limited Company structure
Government hostility towards buy-to-let investors has driven a massive change in the structure of property portfolios. Purchasing through a limited company is now the preferred route for all landlords regardless of portfolio size or type of property.
The data, published by Foundation Home Loans, showed 62 per cent of landlords with one to 10 properties would purchase via a limited company, almost equal to the 65 per cent of those with 11 or more properties who said the same thing.
Previously landlords with larger portfolios were more likely to purchase properties through a limited company while those with smaller properties typically took out a buy-to-let mortgage in their individual name.
Overall almost two thirds of the 888 landlords polled in September planned to make their next purchase within a limited company vehicle — up from 55 per cent of those asked in June.
The buy-to-let market grew rapidly after the financial crisis. This was driven by several factors such as falling equity markets, quantitative easing driving up asset prices, and cheap credit. Recently however, the market has taken a beating as a number of tax and regulatory changes have hit landlords’ pockets.
How the rules changed
In April 2016 an additional 3 per cent stamp duty surcharge was closely followed by the abolition of mortgage interest tax relief for landlords.
Landlords then took a further hit when a shake up of rules by the Prudential Regulation Authority meant buy-to-let borrowers were now subject to more stringent affordability testing.
The changes to mortgage relief have been phased into the system since April 2017, but by April 2020 landlords will be unable to deduct any of their mortgage expenses from taxable rental income.
Instead, they will receive a tax-credit based on 20 per cent (the current basic tax rate) of their mortgage interest payments.
Following the changes, landlords who were higher or additional-rate taxpayers would now only get refunds at the 20 per cent rate, rather than top rate of paid tax.
On top of this, landlords could also be forced into a higher tax bracket because they would need to declare the income that was used to pay the mortgage on their tax return.
Based on a property yielding £950 in rent and a £600 mortgage per month, the landlord’s income could drop by 57 per cent after the rule changes.
Why Limited Companies?
Due to the tax shake up, limited company status is more attractive to landlords as changes would not affect them and they can offset mortgage interest against profits which are subject to corporation tax instead of income tax rates, which is cheaper.
Interest coverage ratios on limited company applications are also lower than for most individual landlord applications.
Impact on the BTL Market
Brokers have reported that, in addition to the increasing use of limited companies, landlords are taking other steps to improve the profitability of their properties.
For example, many are taking action to control their costs by taking advantage of low mortgage rates. Average mortgage rates have also been slashed over the past few years as lenders battle in a “race to the bottom” which has seen two-year fixed rates for buy-to-let properties fall below 1.3 per cent.
There is some evidence that landlords have started opting for higher yielding properties moving from standard flats and houses to more high-yielding houses of multiple occupancy or multi-unit blocks, as well as in locations around the country not previously considered.
However, other research by Accumulate Capital found 37 per cent of landlords were planning to sell one or more of their properties, with 61 per cent of them blaming increasing regulations and taxes.
Some predict that the buy-to-let market would shrink in size leaving only ‘professional landlords’ able to make viable returns. However, there’s little to suggest that landlords are offloading property in significant numbers. There is some evidence that buy-to-let enquiries from new and smaller landlords had plummeted, but the larger portfolios are still transacting.
Investment Prospects for 2020
The UK has been tipped as the region set to produce the best stock market return throughout 2020 by investment trust managers.
The Association of Investment Companies polled its member managers in November and found a third (33 per cent) thought the country had the best prospects over the coming year.
This was ahead of Asia Pacific ex Japan (19 per cent) and Europe and the US, which received 10 per cent of the votes each.
UK equities have had a tough time over the past few years as Brexit uncertainty has stifled optimism and decision-making in the market, but managers believed the UK had strong prospects over a five-year view. 2020 could be the catalyst for a dynamic start to the period as the new Government start with a fiscal stimulus, investment in infrastructure and changes to pension legislation to remove the arbitrary caps on pension funding.
Nearly a quarter (24 per cent) of those polled thought it was the most promising region over the next five years, just behind emerging markets which bagged 29 per cent of those surveyed. The US was the third most popular choice with 19 per cent of the votes.
For 2020, fund managers were most optimistic about interest rates remaining relatively low (24 per cent) followed by improving global growth (14 per cent).
Even with Brexit and General Election uncertainty, managers were bullish about Real Estate Investment Trusts. REITs were the joint most popular sector — alongside Software and Computer Services — as both secured 14 per cent of the votes for the sectors likely to perform best next year.
Annabel Brodie-Smith, communications director at the AIC, said: “Despite 2019 being a year of Brexit and political uncertainty, it’s promising that investment company managers are most optimistic about the prospects for the UK next year.
As always, an exposure to the UK as part of a balanced and managed portfolio is essential to deliver investment returns and to provide investment diversification and to manage risk.