A Greek tradegy

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Until recently I must confess my only interest in Greece was food and mythology, oh and a nod to Stelios for bringing us cheap flights.

But my mind has turned from moussaka to money more recently as it transpires that the Greek Government has a gaping hole in its finances and hasn’t been completely honest about just how big the hole is.

The problems facing Greece are not that different to here, just more extreme. The Greek Government ran a sloppy ship during the good times and hasn’t tightened its belt sufficiently during these bad times.

After spending around 50 billion more euros than it has, the Greek Government needs to borrow heavily to plug the gap, but markets are understandably reticent to lend the money through buying government bonds as they’re worried they won’t get their money back, i.e. the bonds are viewed as ‘junk’. This pushes up the interest rates Greece must offer to attract investors, which in turn increases its annual interest bill – a downward spiral - a bit like being trapped on a high interest credit card with too little income to pay it off.

You’d expect demand for Greece’s currency, the euro, to weaken given these difficulties. But it’s not that simple, as the other 15 eurozone countries that share the same currency won’t want to see the euro suffer as a result of events in Greece – especially those with more economic clout such as Germany.

Consensus is that they’ll put their hands in their pockets to offer Greece some sort of rescue package, probably demanding a say in how Greece runs its financial affairs in return.

Nevertheless, the euro will undoubtedly take a hit, especially shorter term. And eurozone woes could continue given Portugal, Spain and Ireland are also in financial dire straits.

Why should UK investors care? Well apart from global stockmarkets catching a cold from the initial bad news, the outlook for eurozone stockmarkets has further weakened – bad news if you own an investment fund in the area.

And although a weaker euro is good news if you’re taking your summer holiday in Europe, it reduces the value of euro based investments when converted back into pounds.

What this Greek tragedy highlights more than anything is that Western economies still have a long way to go before they emerge from the global downturn with their finances intact. The inevitable tax rises and spending cuts, necessary to start balancing the books, have yet to bite. And when they do, it will hurt...a lot.

When I was growing up I always assumed I’d probably live to see the balance of economic power start to shift firmly from West to East. I just didn’t think it would so visibly be happening by the time I hit 40.

I really hope both the eurozone and the UK can emerge from this storm sooner than later, but I’ve a feeling things will never quite be the same again.

Read this article at http://www.candidmoney.com/articles/article60.aspx

They shoot horses don't they?

Back in the Nineties, With Profits bonds were as popular as Ford Sierras. But while Ford had the grace to retire the Sierra before it fell, insurers seem determined to run With Profits into the ground..

The personal finance columns must be pretty tricky for the journalists, because there really is not much around that is new. Most of us want to put something away to spend later, we'd like it to keep pace with inflation, and if we can do a bit better than that we are generally quite satisfied. Those of us who have passed the age of 40 know that we all spend the first half of our lives worrying about dying young, and the second half worrying in case we live too long.

Anyway, With Profit Bonds have been back in the headlines. A few years ago, a lot of us were sold these beauties. The sellers used to say that they were as safe as Building Society deposits, but with the chance of capital gain. All this was founded on the apparently stellar returns on many 25 endowments that matured in the late 1980s and early 1990s.

Needless to say, With Profit Bonds have delivered poor returns over the past ten years, when the stock market has gone nowhere. So the general wisdom to check the policy to see if you can get out at a five or ten year anniversary without penalty makes eminent sense.

But believe it or not, the With Profit Bond can still be found. It is actually a single premium life assurance policy, with a sum assured of £1 more than the premium. Don’t ask me why it is like it is, because we’d be here all day.

Your money goes into a 'fund' although the way the fund actually works differs quite a lot from one office to another. The actuaries who run the fund can change the asset allocation without telling you. So your bond might start with 75% in equities but wind up with 30% in no time at all. You are stuck with the fund managers, even if their performance turns out to be ghastly. The charges are very far from clear. You will benefit from an annual bonus declaration, but the only certain way to do so is to die. When you want your money back you may find that the provider applies a Market Value Reduction to the nominal value of your Bond. You will pay your share of the income and capital gains tax paid by the fund.

That is, by the way, a trick financial planning question: how can you make certain that your client will be liable for capital gains tax? The answer is to sell him or her an investment bond.

On the face of it, given that Equitable Life did for With Profits what John Prescott did for ministerial dignity, it may be a surprise that you can still actually buy what amounts to a pig in an actuarial poke. Why have these things not simply disappeared? After all, there are simpler and more transparent ways to allocate assets, and retain control of the costs and direction of the individual investments.

There are three reasons. One: we consumers are gullible, we like being reassured, and ‘With Profits’ is a quite wonderful name. Would you like it with profits, or without, sir? Two: sales people can earn twice the commission payable on a portfolio of Unit Trusts. Three: Life companies are surrounded. There is nothing they can do that no-one else can do, except of course With Profits. And there are no charges that they can obfuscate, except of course for With Profits. Which is why a few people have made a lot of money hovering up old With Profits funds.

Once upon a time financial services was a three player game in which the product makers and the product sellers ganged up on the product buyers. Regulation was supposed to change all that. It hasn’t. The very existence of the With Profit Bond proves the point. If it were a horse...

Read this article at http://www.candidmoney.com/articles/article59.aspx

Use cheap mortgage to invest?

Question
I have an agreed mortgage of upto £70,000 at 0.75% above the BoE base rate (1.25%).

Should I borrow the max and buy a Buy to let or invest it at a higher rate than I would be paying? Or not do anything with it?Answer
It depends on how much risk you want to take and whether the attractive rate (0.75% above base rate) is for the life of the mortgage or just an initial offer period.

Let’s start with the lowest risk option, take the money and put it in a savings account. If you’re ok with 90 days notice you could currently earn 3.24% gross via an Investec High 5 account, equal to 2.59% for basic rate taxpayers and 1.94% if you pay higher rate.

Assuming you put the whole £70,000 in this account (in practice you’d probably want to limit it to £50,000 – the amount covered by the financial services compensation scheme) and choose the monthly interest option (to pay the mortgage on an interest-only basis) then at current interest rates you’d make a theoretical annual ‘profit’ of £1,393 if a non-taxpayer, £938 if a basic rate taxpayer and £483 if a higher rate taxpayer.

Sounds good, but you’ll need to factor in any costs relating to the mortgage, especially redemption charges in case you want to bail out - if interest rates rise there’s a risk the savings could start to lag the mortgage, especially if the mortgage rate is introductory rather than for the life of the mortgage.

No-one knows what will happen to interest rates over the next few years. My guess is that they’ll remain low, but I wouldn’t place a big bet on that.

If you can pay off the mortgage at any time without a prohibitive penalty and the figures work for you, then the savings route might appeal. You could even opt for a four or five year fixed rate savings account, where gross annual rates of 5% or more are on offer, but this could leave you stuck if rates rise.

A buy to let property is a lot more risky and inflexible, but could work out favourably longer term. Residential property yields currently seem to be around 5% a year, before costs and tax. However, you’ll need to factor in both purchase and ongoing costs (such as management fees, ongoing repairs and maintenance, as well as empty periods) - try using our Property Rental Yield Calculator to get a clearer idea of what profit, if any, you might make.

In the past many buy to let investors have been happy to break even re: mortgage costs on the basis they’ll profit from rising property prices. I wouldn’t be keen to run this strategy in the current climate, unless you think you can add value through development or plan to run the mortgage for the full term so you eventually own the property.
As for other types of investing, I’d be very nervous taking a punt with borrowed money. Invest in emerging markets and/or commodities over the next 20 years and I think you’ll do very well, but it’ll probably give you some very sleepless nights along the way.

Ultimately I think you need to gauge the possible profit then decide whether the potential hassle and/or risks are worth it. Our risk/return attitudes all vary, so there’s no right or wrong answer, other than feeling comfortable with whatever you decide.

Read this Q and A at http://www.candidmoney.com/questions/question133.aspx

AiM shares not allowed in ISAs?

Question
Why is it that HMRC does not allow ISA investors to hold AIM-listed shares in their portfolios if such investors are willing to accept the limitations of AIM shares? After all, one may include corporate bonds and even hedge funds in this vehicle.Answer
Sadly the decision seems to be based more on a technicality than common sense. After all, you can hold shares listed on the US NASDAQ exchange within an individual savings account (ISA) – and NASDAQ and AiM both tend to have similar types of companies (small) listed on their exchanges.

The reason HMRC does not recognise AiM as a stockmarket is that AiM shares and securities are not admitted to the 'official list' maintained by the UK Listing Authority (UKLA), which happens to be the Financial Services Authority (FSA).

As far as I can see this is the only reason AiM shares cannot be held within in an ISA, I don't think HMRC has gone out of its way to preclude them.

If a share is listed on both AiM and a stock exchange recognised by HMRC then it may be held within an ISA, but such companies are obviously few and far between.

As an aside, AiM shares (with some exceptions) do qualify for business property relief. This means that provided you hold qualifying AiM shares for at least two years they normally fall outside of your estate for inheritance tax purposes.

Read this Q and A at http://www.candidmoney.com/questions/question136.aspx

Tax when newly self-employed?

Question
I am new to business and i hoping to start out my own wedding and corporate event photography business in the next couple of months.

I have been in full time employment for a year and this venture would be done in my future spare time (I do not intend to quit my job), but I am confused over the regulations for the AIA (annual investment allowance) and VAT, hopefully you can put me straight. Here's how i see it after my limited research:

To start up my business i would need to but some equipment (cameras, lenses, computer etc..). I have calculated these costs to be £8000 (Including VAT). I will register for VAT (as i will hopefully have some corporate customers), and so would look to claim back 17.5 % of this intial outlay. Balance remaining £6816.

Now on to AIA...as I understand it I would be entitled to claim back 100% of the cost of the new equipment (provided its 100% for business use) against my income tax. So...say i make £1000 in the first year (not much but a start), then presumably VAT (flat rate for photographers is 8.5% i believe, and income tax is taken off this value (20%?). My full time employment gets me 25,000 a year, so £1000 - £85 - £200 = £725 NET (also minus NICs).

Because of my inital outlay on expenses (£8000), can i claim for a tax rebate of the £200 from my self employed income and the full amount of tax from this and last year of my full time income (approx £3250 per year)? This would pay off the inital outlay by the end of my first trading year.

I have no idea if this is correct, and it is probably a rambling incoherent babble, but as i said i am a newbie and would appreciate the help. Cheers in advanceAnswer
You're on the right lines...but some of your maths is a bit optimistic!

It's simplest if we consider separately the three taxes that you could face as a sole trader: income tax, national insurance (NI) and value added tax (VAT).

Income tax
Income tax will be due on all your business profits, i.e. earnings from the business less any expenses 'wholly and exclusively' incurred in carrying out that business. This might include expenses such as travel to venues, stationary and telephone calls. If you use some items for both personal and business use, e.g. home/mobile phone and internet, you can charge the proportion used for your business.

Assets such as cameras and computers are normally deducted from revenue (when calculating profits) over several years via 'capital allowances' but you're right, under the Annual Investment Allowance they can be fully deducted in the year of purchase up to £50,000 (excluding cars).

Be careful though if you intend to use capital items for personal use too. If so, then you'll only be able to claim the proportion (of time) they're used to carry out your business, e.g. if you use the camera equipment a quarter of the time for your own pleasure then you would claim £6,000 and not £8,000 against your business revenue.

The business profits, or losses, would then be entered on a self-assessment tax return, along with your employed income to work out how much income tax you need to pay or reclaim.

VAT
You must register for VAT if your self-employed turnover exceeds £68,000 (2009/10 tax year), below this it's optional. If you register then you must add VAT, currently 17.5%, to all your sales but you can offset VAT paid on allowable business expenses.

The benefit is that you can re-claim VAT on business purchases and corporate customers won't mind as they can probably re-claim the VAT you must add to your invoices. However, wedding customers will likely be private, so becoming VAT registered could make you 17.5% more expensive in their eyes than non-VAT registered competitors. Registering for VAT also means more paperwork as you must submit a VAT return each quarter.

If the VAT you pay on business expenses exceeds the VAT you receive from sales you can reclaim the balance via your VAT return. As with income tax, any non-business use must be apportioned, i.e. reflected in the VAT you reclaim on expenses.

If you register for the flat rate VAT scheme you can't reclaim any expenses – you just pay a fixed VAT rate on revenue (including the VAT you've charged) – although you can reclaim VAT paid on capital items costing £2,000 or more (including VAT) which aren't intended to be sold or rented out. The £2,000 minimum can comprise several items provided they're bought at the same time from the same supplier via a single payment.

Flat rate VAT does make life simpler and worth considering if you decide to register for VAT and don't expect to have lots of smaller expenses below £2,000.

The current rate for a photographer is 10%, although you get a 1% discount during your first year.

National Insurance
A self-employed person normally pays class 2 and class 4 contributions. Class 2 is a fixed weekly amount of £2.40 for earnings over £5,075 and class 4 is a percentage of your profits (8% between £5,715 - £43,875 and 1% thereafter). If your earnings are low in the first year, you might avoid both.

Putting all this together, where would it leave you if you spent £8,000 (including VAT) on capital equipment (100% used for business) and generated £1,000 (including VAT) of revenue in your first year? (We'll ignore other possible expenses for now).

Well, you wouldn't have to worry about NI, except for making sure you've registered for a class 2 'small earnings exemption'.

You would owe £149 of VAT on your invoices, but could reclaim £1,191 on the capital expenses, netting you a VAT refund of £1,042 under the standard scheme.

Under the flat rate VAT scheme the net refund would be £90 – £1,191 = £1,101, assuming all the capital equipment qualifies via the £2,000 rule. If none qualifies you'd owe £90.

Income tax would normally be due on your profits, which exclude VAT under the standard VAT scheme. In this example you'd make a loss of £851 - £6,809, i.e. £5,958, which you should be able to offset against tax you've already paid on your employed earnings. Assuming basic rate tax of 20% you could claim a £1,191 income tax refund.

Under the flat rate VAT scheme your loss would be calculated as £910 - £8,000 = £7,090 (note: expenses shown inclusive of VAT), meaning you could reclaim £1,418 of income tax.

Hope this all makes sense and good luck if you go ahead with the venture.

Finally, a general warning: bear in mind that HMRC expects self-employed individuals to be running a serious ongoing business. If they suspect someone is using a business as a ruse to save tax on equipment for personal use they might take a closer look...

Read this Q and A at http://www.candidmoney.com/questions/question131.aspx

Electron cards vanishing?

Question
Thank you for your recent response re: student accounts. Following on from that I am looking for a student account that also provides an Electron credit card. I have read a couple of articles that the Electron card is being withdrawn from use. I would be most interested to hear your thoughts on this.Answer
Visa Electron cards are similar to Visa debit cards in that money is taken from your bank account – there’s no credit. But, unlike debit cards, Electron cards always check your account balance to make sure you can pay for a transaction before authorising it. Purchases that would push your bank account overdrawn are declined.

This is why you can’t use Visa Electron cards to pay via offline terminals (e.g. on trains and planes), the seller can’t carry out a real time check to ensure you have sufficient funds for the purchase.

The reason sellers, especially budget airlines, like Electron cards is that the ‘interchange’ fees charged by card providers tend to be lower than credit and debit cards. If you spend £100 in a store, the shop owner might have to pay £2-3 in card fees if you pay by credit card but less than 50p if you pay by debit card and lower still if you use a Visa Electron card.

Nevertheless, many UK banks have been withdrawing Electron cards in favour of debit cards on the basis they’re similar enough and more widely accepted - a pain if you like low cost flights!

Because you can’t use an Electron card when overdrawn it’s rare for student accounts with an overdraft facility to offer Electron cards – I can’t find one (if anyone does know of one please let me know).

However, if you really want one you could try opening a basic bank account (with no overdraft facility) that offers Electron cards, e.g. the Halifax Easycash account. This could be held alongside your student account.

Read this Q and A at http://www.candidmoney.com/questions/question130.aspx

Holiday protected by credit card?

Question
Is it right that if I pay the deposit for a holiday with a Visa credit card, but the balance by other means, I still have payment protection for the whole amount for the holiday should the provider go bust?Answer
In general, yes, but it’s not always straightforward.

When you pay for a single item costing between £100 and £30,000 using a credit card then you’re protected under section 75 of the 1974 Consumer Credit Act – which says the credit card company is equally liable with the retailer, even if only part of the purchase price was made on your card.

So you could, for example, pay a £50 deposit for a £500 holiday on your credit card and the rest in cash and you’ll still be covered for the full £500 via your credit card provider.

However, if you book a flight or package holiday through a travel agent who simply sells you a ticket/package from an airline or tour operator directly, you won’t normally be protected by section 75. This is because the travel agent is deemed to have only supplied you with the tickets and not the flight or package itself – silly, but that’s the way it is.

If the travel agent builds a package for you then you should be protected by section 75, although whether travel/accommodation/car hire are classed as single items re: the £100 minimum depends on whether they’re billed separately or as a single ‘package’ price.

It’s worth remembering that provided you book a holiday through an Association of British Travel Agents (ABTA) member then you should be covered by their protection scheme in any case. If you’re on holiday and the tour operator or airline goes bust the agent will ensure your holiday continues as originally planned and get you home afterwards.

Also, flights protected by Air Travel Organisers’ Licensing (ATOL) cover you against airlines going bust. While most tour operator flights are ATOL protected, scheduled flights booked directly with an airline, and often travel agents, aren’t.

Back to section 75, the cost of a single item excludes any credit card fees, delivery and other similar charges. And where low cost airline flights are purchased on a one-way basis, each flight will be treated as a separate item whereas a return flight is one item.

Finally, remember section 75 only applies to credit cards. Debit cards, cheques and card cheques are not covered.

Bottom line, it’s usually worth paying holiday deposits by credit card if it appears you’ll be protected by section 75. Also check whether your holiday/flight is ABTA and/or ATOL protected. Nevertheless, it’s sensible to buy travel insurance in any case, but shop around for a good deal - the policies sold by travel agencies are often overpriced.

Read this Q and A at http://www.candidmoney.com/questions/question134.aspx