Brightsides.uk

Tag: personal-finance

  • Interview with Quilter Financial Planner

    Jagdeep Singh and I had a hugely rewarding chat about their service offering, comprises matching clients with appropriate investment portfolios based on their investment objectives and risk tolerance.

    The first stage of the process is an internally generated questionnaire, assessing how clients feel about risk and looking at their expectations and cash-flow requirements. Are they looking for income, in which case they are chasing dividend yields, or are they seeking value-add to trading stocks commensurate with their long-term growth expectations?

    Establishing the risk-reward ratio

    When assigning clients baskets of investments, the financial planner has to interrogate the overhead of an actively managed fund – transaction fees and management costs, for example. Potential investors have to ask themselves, “What’s the potential growth of that fund, and will be be appropriate for me?”

    Singh stresses that swaps and futures, and other instruments used to hedge against the risk of certain bank holdings on their balance-sheet, are “not financial instruments recommended to retail investors,” that are largely deployed to lock in a more favourable borrowing rate on credit products with counterparties (interest rate swaps or IRS); or trade on growth expectations for commodities and foreign exchange (forex).

    In the context of portfolio allocation, “crudely, up to 60% of the invested sum is in equities, and 40% in bonds. It depends if there’s lifestyling applied – the fund, which reduces the exposure of the portfolio in the 10-15 years pre-retirement, will invert the ratio meaning 40% is applied to equities and 60% to bonds.

    The trade-off is that bonds demonstrate less volatility, but also less growth in their tradable value.”

    This re-allocation of portfolio apportionment is termed the ‘Glidepath to Retirement’.

    Duration of Capital Investment

    When questioned about lock-in clauses, Singh says that a minimum investment period of 5 years should be treated as standard, that clients should not expect to withdraw their capital before the end of that period and that they should not invest more of their income than they can afford, which is why in advance they establish overhead cost of living and allocate a capital buffer to forestall emergency costs and/or financial hardship situations.

    Of course, the option still exists of taking your pension fund as one lump sum. Apparently pre-Budget when the Labour Party came in, a lot of people applied to take the cash for fear the Labour Party would revoke the tax-free cash option – which it did not do. But Singh points out that a bank savings account deposit can still be liable for income tax – “Better to stay invested so you can capitalise on growth, where there’s no need to take the money.”

    Different Buckets

    In terms of the service offering, the ‘Model’ portfolio is analysed on a quarterly basis, whereas those with tailored portfolios will predicate return on historic performance of funds contained within it and these are analysed at the year end. You can tender individually to buy into specific funds, and both options have an opt-in for ESG ratings to be incorporated – “We do both scenarios in ESG.”

    When considering apportionment to actively managed funds, obviously they consider the price to equity (P:E) ratio, past performance and management fees. Also factor in the F:E ratio, representing the quality of that fund compared to its peers – what growth level it returns vs the benchmark.

    Core factors determining apportionment are a consistent track record and a favourable comparison with historic volatility – what is the correlation with overall market volatility and does the manager generate a positive gain through trading volatility? How are its holdings marked to market? These so-called beta measures are applied when considering including a fund in one of the investment portfolio options.

    For an initial consultation if you are considering a long-term investment as part of your plan for retirement, contact

    Jagdeep.singh@quilterfa.com

    07342 412630

    or make application via the online portal where you can search for his individual investment advisor profile.

  • “What is the VAT charge on teeth whitening?”

    This would be an excellent example of direct allocation vs indirect allocation of input tax where the operator makes some taxable supplies, but additionally exempt supplies and the input tax allowance for charge-backs is apportioned according to the ratio of taxable supplies over turnover.

    Many dentists offer standard-rated cosmetic procedures (e.g. teeth whitening, veneers for purely aesthetic reasons, dermal fillers), as well as exempt services (routine check-ups, fillings, restorative work, and dentures designed to protect, maintain, or restore health). As a partially exempt trader, VAT filing returns need to correctly attribute allocations of cost vs output on billable services, and they may qualify to recover some of their input tax although their primary service offering is exempt for VAT purposes.

    Let’s look at the Legislative Requirements

    The standard method described in this scenario could be applied to dentistry where there are aspects of public and private practice, where a proportion of indirectly allocated (residual) revenue comprising taxable supplies can be reclaimed on the input tax on the dentistry practice.

    Additionally, there are special methods where different outputs are used as proxies for standard-rated supplies which apply in situations where, for example, high value transactions are undertaken which consume inputs to an extent significantly greater than transactions of a lower value; or where payment receipts on costs recorded in the cashbook lag the invoice due date distorting the level of output tax logged at the tax point of the invoice. Alternative apportionment methods might utilise output values and/or number of transactions to determine the taxable threshold on residual allocation of taxable vs exempt supplies. Other proxy values might comprise cost allocations, to determine which business divisions are predominantly taxable or exempt; or management accounts, to drill down into admin overheads on managing concurrent business divisions.

    All charge-backs claimable on residual or unallocated input tax allocations are subject to the de minimis threshold, which is set at £625 per month and where the value of exempt supplies is no more than 50% of the value of all supplies. A regular ‘historic test’ must be conducted where the monthly value of supplies is subjected to the de minimis requirement backdated twelve months i.e. over the last tax year, and an annual adjustment must be made based on use of taxable supplies and how it has changed in the context of cost allocations.

    Partly exempt businesses can seek approval of a special method, during:

    1. Your ‘registration period’, the period ranging from the date you were first registered for VAT to the day before the start of your first tax year (normally 31 March, 30 April or 31 May depending on the periods covered in your VAT Returns.
    2. Your first tax year (normally the first period of 12 months commencing on 1 April, 1 May or 1 June following the end of your registration period), provided you did not incur input tax relating to exempt supplies during your registration period.
    3. Any tax year, provided you did not incur input tax relating to exempt supplies in your previous tax years.

    Once this period has expired, you must revert to using the normal “standard” method calculation based on the values of your supplies, and may still recover input tax using the standard method, or seek approval for a special method if you prefer. 

    Where the standard method does not produce a fair and reasonable deduction of input tax, you may be subject to a standard method override where the use or intended use of taxable supplies differs substantially from the deduction made using the standard method to these supplies. A difference is classed as substantial if it exceeds £50,000 annually and/or exceeds 50% of the residual tax incurred and £25,000 per year if the group undertakings are not part of the same VAT group.

    The override does not apply:

    1.  If you carried out your annual adjustment on the basis of use.
    2. To any input tax you were required to attribute on the basis of use.

    To apply the override you need to compute the difference between the input tax deductible under the standard method and that deductible according to use. Any costs which are not incurred in the same relationship between values of supplies may be addressed separately from the principal calculation.

  • Capital Gains Tax Exemptions. Learn how to avoid CGT on qualifying investments and settlements

    All assets are regarded as chargeable assets except for those which are specially exempted from CGT. The main exemptions are as follows: 

    1. A taxpayer’s private residence 
    1. Motor cars, including vintage and veteran cars (although not personalised numberplates) 
    1. Items of tangible, removable property (referred to as “chattels” which are disposed of for £6,000 or less. 
    1. Chattels with a predictable useful life of 50 years or less, unless used as business and eligible for capital allowances (Chapt 19) 
    1. Gilt-edged securities and qualifying corporate bonds (Chapt 20) 
    1. National Savings Certificates and Premium Bonds 
    1. Foreign currency (if acquired for private use) 
    1. Winnings from pools, lotteries, bettings etc 
    1. Decoration for valour (unless purchased by acquirer) 
    1. Damages on compensation received for personal or professional injury and compensation for mis-sold personal pension schemes 
    1. Life insurance policies (unless purchased by a third-party) 
    1. Shares in a Venture Capital Trust (Chapt.6) 
    1. Investments held either in an Individual Savings Account (ISA) or a Child Trust Fund (Chapt.60 

    2012-13, the max capital allowance of an ISA was capped at £11,280. Notes interest and dividends arising from ISAs are exempt from income tax. Capital gains (and losses) arising from ISAs are exempt from CGT. 

    Notes 2 types of ISA: 

    1. Cash ISA is deposited with a bank or building society and is held in a savings account. 
    1. Money investment in a stocks & shares ISA is used by the ISA provider to acquire stocks & shares on the saver’s behalf. 

    Venture Capital Trusts 

    A Venture Capital Trust (VCT) is a company which is approved as such by HMTC. The main conditions which must be satisfied before IMRC approval can be obtained are as follows: 

    1. The company’s ordinary shares must be listed on an EU stock exchange 
    1. Its income must be derived wholly or mainly from shares and securities and no more than 15% of this income may be retained by the company 
    1. At least 70% of its total investments must consist of “qualifying holdings” and at least 70% of these holdings must consist of “eligible shares”. Broadly, shares or securities owned by a VCT rank as qualifying holdings if they were newly issued to the VCT and are shares or securities of a company which would be a qualifying company for the purposes of the EIS (Enterprise Investment Scheme). Eligible shares exclude redeemable shares. 
    1. No holding in any one company (other than in another VCT) can represent more than 15% of a VCT’s investment. At least 10% of a VCT’s investment in a company must be held in the form of eligible shares. 

    Income tax relief is available to taxpayers who subscribe for newly-issued shares of a VCT. This takes the form of a tax reduction equal to 30% of the amount invested, subject to an investment limit of £200,000 per tax year. This reduction takes priority over the tax reductions relating to certain payments by the taxpayer (see Chapt.4) and the tax reduction relating to the MCA (see Chapt.3) To qualify for income tax relief, the taxpayer must hold the shares for a minimum holding period of at least 5 years. 

    Dividends on the first £200,000 of VCT shares acquired in each tax year are exempt from income tax and any capital gain or loss arising from the disposal of these shares is exempt from capital gains tax, regardless of whether or not the shares have been held for the minimum holding period. 

    Enterprise Investment Scheme (EIS) 

    *Dividends on the scheme are subject to income tax in the usual way* 

    a) Income tax relief is available to taxpayers who subscribe to newly issued ordinary shares in “qualifying cos”. Features include: 

    – less than 250 employees 

    – permanent establishment in UK and have gross assets not exceeding £15mn immediately before the share issuance, and not exceeding £16mn immediately after it. 

    – the co. Must have raised no more than £5mn under the EIS and other venture capital schemes in the previous 12 months. 

    b) A taxpayer’s EIS investments of up to £1mn in tax each year are subject to tax relief. 

    c) Relief takes the form of a reduction in the amount of tax due to the taxpayer’s chargeable income equal to 30% of the amount invested in qualifying cos during the year. This reduction takes priority over the tax reductions relating to certain payments (Chapt.4) and MCA (Chapt.3) 

    d) The taxpayer must not be connected to the co. At any time during the two years prior to the date of the investment and the three years following the date. Broadly speaking, an individual is connected with a company for this purpose if he or she is an employee of the co, or, together with associates, owns more than 30% of the co’s ordinary shares. 

    1. Any capital gain arising on the eventual disposal of the shares is exempt from CGT but any loss arising on the disposal is eligible for relief, and the loss may be relieved: 
    1. As a capital loss, in the usual way or 
    1. Against the taxpayer’s total income for the year in which the loss is incurred after the prev. Year (see Chapter 12) 

    When calculating the allowable loss, the shares are deemed to have been acquired for their issuance price, less the tax reduction obtained when shares were purchased. 

    The taxpayer must retain the shares for a minimum holding period of at least 3 years or both the income tax and capital gains tax reliefs are lost. 

    Seed Enterprise Investment Schemes 

    The money raised by the new share issue must be spent within 3 years of the share issue. You must spend the money on either: 

    a qualifying trade 

    preparing to carry out a qualifying trade 

    research and development that’s expected to lead to a qualifying trade — such as a project to make an advance in science or technology 

    You cannot use the investment to buy shares, unless the shares are in a qualifying 90% subsidiary that uses the money for a qualifying business activity. 

    1. Subject to certain conditions tax relief is available to investors who subscribe to ordinary shares in a co. which is carrying on a new business, although not one which started more than two years before the share issue.  
    1. The co. Concerned must be an unlisted trading company with a permanent establishment in the UK, have fewer than 250 employees and its assets less than £200,000 before the SEIS investment is made. Also, the amount of all SEIS investment received by the company must not exceed £150,000 (correct as of last published edition of Alan Melville’s ‘Taxation’ 2012-13. 
    1. During the period from the co’s incorporation until the third aniversary of the share issuance, the investor must not own more than 30% or more of the co’s share capital, or be an employee of the company other than the director. 
    1. Tax relief takes the form of an income tax reduction equal to 50% of the amount invested up to a limit of £100,000 p.a. 

    *As with the main EIS, any SEIS investments made during a tax year may be carried back and treated as if made in the previous years. 

    Income from Trusts and Settlements 

    A trust or settlement is an arrangement whereby property is held by persons known as trustees, for the benefit of persons known as beneficiaries. This fall into two main categories: 

    1. If one or more persons are entitled to receive all the income which is generated by the trust property, then those persons are “life tenants” and the trust is a “trust with an interest in possession”. 
    1. If there is no life tenant and all the trustees have the discretion to distribute as much or as little of the trust income to the beneficiaries as they see fit, the trust is referred to as a “discretionary fund”. 

    Trusts with Vulnerable Benificiary 

    This special tax regime ensures that the tax liability of this type of trust is reduced to the amount of tax that would have been payable if the trust income and gains had accrued directly to the beneficiary concerned. 

    A “vulnerable beneficiary” may be either a disabled person or (in certain circumstances) a minor. Trustees who wish to claim the special tax treatment available under this regime must make an appropriate election to HM Revenue and Customs. Once made, such an election is irrevocable.