Capital gains tax and inflation?

Question
How does the HMRC recommend an individual calculate the profit/loss on an investment when inflation is involved? I have spoken with them last year and they instructed not to include any inflation. So if an investment was bought for £10,000 in 1995 and is, say, £15,000 now, then the result would be that £5,000 uses up part the £10k CGT allowance if the investment was sold now (in tax year 10/11)? Surely not, as I've run through some calculators and it seems that £15k now is about £10k then and there hasn't been a profit/loss ?

Here's another example for sake of clarity which applies to me more directly:

Say, in 1990 about £30k was submitted in to various Equity Funds, and they reached their matury in 2001, 2002 and 2003 and were put in to a Sterling Deposit Fund, but have been in there since 2003. And the current value is maybe about £45k. How would I begin to calculate this? Would I have to track how much each of the funds cost when they were acquired, compare it to how much they were worth when they matured and were put in to the deposit fund? Or is there another, better way, that would mean no CGT is paid because due to inflation, obviously, this wouldn't saturate the current allowance?Answer
Once upon a time you could take inflation into account when calculating capital gains. This was achieved by increasing the purchase price by inflation up to the sale date, a system called 'indexation'.

However, this was abolished in April 1998 in favour of a system called 'taper relief'. Under taper relief the amount of gain subject to tax reduced (by up to 40% for personal assets and 75% for business assets) the longer you held the asset. Assets owned on 31 March 1998 could also benefit from indexation allowance up to that date provided they were sold before 6 April 2008.

Taper relief (and indexation to 31 March 1998) was scrapped from 6 April 2008 and replaced by a flat capital gains tax rate of 18%. So while there was no longer any provision to take account of inflation, the rate was much lower than in the past to compensate.

The introduction of an additional 28% capital gains tax rate from 23 June 2010 (for higher and top rate taxpayers) went somewhat against the spirit of the original move to a low flat rate, but as it's still less than the higher and top rates of tax there's not much room for complaint.

The big issue will be if the rate of capital gains tax rises in future, as without the reinstatement of some sort of inflationary provision it will start to look very unfair. But then I suppose taxes were never meant to be fair...

Read this Q and A at http://www.candidmoney.com/questions/question439.aspx

Junior ISAs worthwhile?

The Government has today announced that Junior Individual Savings Accounts (ISAs) will have an annual contribution limit of £3,000..

Junior ISAs, to be introduced from 1 November 2011, will allow savings and investment to be held tax efficiently by children until they reach 18. Full details are yet to published, but it looks like they'll be pretty similar to conventional ISAs in terms of what can be held and transfers between providers.

Will they be worthwhile?

If you are going to save for your children anyway then probably yes. Chances are savings rates will generally be competitive and it avoids any potential tax issues. Will Junior ISAs encourage more people to save for their children's future? I doubt it, too many of us are failing to save enough for our own futures, let alone our children's.

The only potential downside of Junior ISAs versus some conventional child savings and investments is that the money cannot be touched until the child is 18. Maybe this is a plus as it removes the temptation to spend the money meanwhile, but sometimes flexibility can be useful.

Will they offer tax savings?

Potentially and, if nothing else, they'll certainly make things simpler.

Children enjoy the same personal income tax allowance as adults, currently £6,475 and rising to £7,475 from 6 April as well as the same annual capital gains tax allowance, £10,100 rising to £10,600. So will they pay tax in practice? probably not.

However, it's not that simple. If parents gift money to their children and the resulting annual income exceeds £100 per child per parent then it's taxable as the parent's. not the child's.

And because children are unable to own shares and investment funds before they're 18, it's usual for a parent/grandparent to hold them on the child's behalf in a 'designated account' until they're 18 or gift them into a 'bare trust' for the child.

When investments are held in a designated account they remain owned by the adult until the child reaches 18 (when the adult can pass them over, if they wish), so the adult is liable to tax meanwhile anyway, i.e. not possible to save tax by using the child's allowances.

Investments held in a bare trust are taxable as the child's, as the adult no longer has any rights over the shares, but the £100 rule mentioned above still applies.

So while it's already possible to save tax efficiently for a child, Junior ISAs should make tax matters much simpler.

As with existing ISAs, interest and gains will be tax-free while dividends will effectively be paid net of basic rate tax which cannot be reclaimed. So unlikely to be any tax saving ion the latter.

How much might a child build up by the time they're 18?

Here's a table with a few estimates. I'll also put together a Junior ISA calculator shortly.

Monthly Saving	3% Annual Return	6% Annual Return
£25	£7,138	£9,570
£50	£14,276	£19,140
£100	£28,552	£38,280
£200	£57,104	£76,560
£250	£71,380	£95,703
Assumes monthly saving over 18 and annual returns are after charges.

Read this article at http://www.candidmoney.com/articles/article214.aspx

How to draw an income from my SIPP?

Question
I am 65, retired, non-resident, and have a pension pot uncrystallised of about GBP 265k, from a company pension scheme, presently sitting partly in a SIPP and partly in an insurance company personal pension. I would like to consolidate it into one scheme for ease of management.

Looking at SIPPs, most do not like non-residents, most aim their literature (understandably) at contributors and do not explain the mechanism for cashing out to pay the drawdown, and most have very poor facilities for cash storage.

Does the drawdown have to be monthly, or could it be an annual payment?

An annual payment would be easier to manage (and perhaps obtain an advantage in the timing) if I have to convert investments into cash myself before a payment can be made.

Trying to work out the best and most cost effective provider for me is a bit daunting. Your suggestions would be appreciated, including for any alternative to a SIPP.Answer
Let's start by covering the logistics of drawing an income from your pension - commonly called 'drawdown'.

Once you decide to take an income from your pension your benefits will become 'crystallised'. This means you must take up to 25% of the fund as tax-free cash, if you want to, and won't be able to make any further contributions into the pension (except, perhaps, from other pension funds).

Drawdown rules are changing a little from 6 April 2011, so I've assumed the new rules below as these will obviously apply to you.

To calculate how much income you can take you need to perform a 'GAD' calculation - basically a formula laid down by the Government Actuaries Department that guesstimates how much annuity income your pension could produce. You can then draw income between £0 and 100% of the GAD amount each year. You can read more about the calculation on the HMRC website here.

Then it's simply a case of drawing the income, either monthly, quarterly, annually or ad-hoc within the above limits. The income is normally paid by selling underlying pension investments and, yes, a cash account can facilitate this - although interest rates tend to be appalling. You'll obviously need to keep an eye on your fund to avoid running out of cash and the GAD calculation must be carried out every 3 years until age 75, then every year.

I agree that SIPP providers don't generally accept business from non-residents, but there are a few that will provided the money comes from the transfer of an existing UK pension. Of these, the Sippdeal e-sipp offers a pretty cost effective proposition. There are no charges to transfer in, dealing charges (for funds and shares) are £9.95 per deal and you'll pay a £150+VAT drawdown set up charge plus a further £75+VAT drawdown annual charge. I'd suggest checking how these charges stack up against your existing SIPP.

Withdrawing income annually would probably be more convenient and cheaper too, given the £9.95 dealing charge to sell investments.

As you're non-resident you might also consider transferring into a Qualifying Recognised Overseas Pension Scheme (QROPS). In simple terms these are overseas pensions that HMRC permits your pension to be transferred into. The potential benefit is that income will not be subject to UK tax (although a QROPS must report income to HMRC until you've been non-resident for 5 years) and you might be able to hold investments in your local currency to avoid currency risk. However, bear in mind that the income will likely be taxable wherever you are now resident and the pension fund itself may be taxed too. Plus the costs might be higher than a UK SIPP and there are lots of unscrupulous salesmen peddling QROPS at the moment, will little regard for whether they're actually best advice for their customers. By all means look into QROPS if you don't plan to return to the UK, but tread very carefully.

Or a third option, if you want to keep things simple, is to take the tax-free cash and buy an annuity with remainder of your pension(s). Then sit back and enjoy a hassle free income for life.

Finally, if you do decide to transfer, double check whether you'll incur any penalties from your existing pension providers, if so you'll need to factor these into your decision.

Hope this helps.

Read this Q and A at http://www.candidmoney.com/questions/question433.aspx

Inheritance tax on US shares?

Question
As a UK citizen/resident I have some US stocks held with Charles Schwab, a US broker. They claim that if I die, I am subject to US estate taxeson my account with them. I mentioned to them that I should consider moving these stocks to a UK broker, but they claimed that I would not make any difference as estate taxes are liable on all offshore holders of US assets. However when I talked to my UK broker about holding US assets they denied this saying that it make no difference whether I have US or UK assets. Who is right?Answer
I'm afraid US tax law isn't my forte, but my understanding is as follows:

Estate tax is the US equivalent of inheritance tax and is normally charged on 'alien non-residents' unfortunate enough to die while owning US 'situated' assets worth more than $60,000. On death, the assets above this limit are subject to estate tax at rates of up to 35%.

However, under the 1979 US/UK Estate and Gift Tax Convention it seems that you won't be liable to 'estate tax' in the US on the shares you own there provided you're domiciled in the UK (there was a later double taxation convention in 2001 but this didn't cover estate tax, so the 1979 convention still stands in this respect).

The relevant wording is Article 5 1(a):

"Subject to the provisions of Articles 6 (Immovable Property (Real Property)) and 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services) and the following paragraphs of this Article, if the decedent or transferor was domiciled in one of the Contracting States at the time of the death or transfer, property shall not be taxable in the other State."

The 'following paragraphs' referred to don't seem to affect the position provided you're not a US National and Article 6 basically says that property (e.g. a home, investment property in the US) will be subject to estate tax.

So it doesn't matter whether the US shares are held with a US or UK stockbroker, they should be exempt from US estate tax in your situation.

If your shares are worth more than $60,000 I'd suggest checking with an accountant to be sure, but I'm pretty sure the above is correct.

As an aside, make sure you've completed US form W8-BEN via your stockbroker (if you haven't already) to ensure that the usual 30% US withholding tax on dividends is reduced to 15% (for UK residents).

Read this Q and A at http://www.candidmoney.com/questions/question437.aspx

Will I miss increases by delaying state pension?

Question
I have Deferred my State Pension for 4 years. On the 11th April 2011 inflationary increases will apply to State Pensions.

Would I lose out on these increases if I delayed activating my pension options till later in the year?
Answer
No you won't. When you defer your state pension you receive an extra 0.2% of your weekly state pension for every week deferred, equal to 10.4% a year. When you eventually take your pension this extra entitlement is applied to the prevailing state pension at that time and thereafter.

For example, the basic state pension is currently £97.65. From 11 April 2011 it will rise to £102.15 (by September 2010 RPI: 4.6%), so if you take your pension after that you'll receive £102.15 plus whatever extra percentage entitlement you're owed from, deferring, e.g. if 10.4% you'll receive £102.15 + 10.4% = £112.77. And let's suppose the basic state pension rises to £105 per week the following year then in our example you'd receive £105 + 10.4% = £115.92.

Likewise, if you instead opt to receive a lump sum you won't lose out as you'll receive the unclaimed pension (which will include the higher payments from 11 April) plus interest of 2% above the Bank of England Base Rate.

As an aside, this is the first year that the Government's new state pension 'triple guarantee' will apply. That is, the state pension will rise by the greater of the increase in average earnings, inflation or 2.5%. This year inflation is measured by the Retail Price Index (RPI), but from April 2012 it will be the Consumer Price Index (CPI).

Read this Q and A at http://www.candidmoney.com/questions/question436.aspx

Can equity release affect inheritance tax?

Question
If one takes out an equity release type of mortgage on one's home, where the debt is payable on death, does the amount borrowed count as a debt against one's estate, and thus reduce the total value of the estate prior to an inheritance tax calculation?Answer
Yes it does.

If you take out a 'lifetime' mortgage then the amount borrowed plus interest simply roll-up until you die. On death this debt must be paid from your estate, usually by selling your home, and this is done before calculating your estate's value for inheritance tax purposes.

For example, suppose you have a £300,000 property and take out a lifetime mortgage of £100,000. On death the debt might have grown to £200,000 and the property can be sold for £400,000, leaving your estate with £200,000 after the mortgage has been repaid.

If you take out a home reversion plan (where you effectively sell some of your property below market value but remain there for the rest of life) then that part of the property sold falls outside of your estate.

Either way, the money received from releasing equity obviously remains in your estate unless you spend it or give it away - in the later case 7 years after making the gift.

Read this Q and A at http://www.candidmoney.com/questions/question435.aspx

Non-reporting fund gains taxable in an ISA?

Question
I understand ETFs without distributor/reporting status have tax implications. Gains are treated as income and taxed accordingly. If they are held inside an ISA wrapper, are gains free of income tax?

I understand dividends are classed as income and tax is payable within an ISA. So I suspect capital gains treated as income is also liable to income tax. Very confusing!Answer
Thanks for raising this point, which is confusing!

Thankfully gains from a non-distributor or non-reporting fund are tax-free when held within an ISA or pension. This is because although any gains are treated as income, they're not dividends.

Dividends are not taxed within an ISA/pension, but they're not truly tax-free either because they're paid out of taxed company profits. The net result is that basic rate taxpayers don't save any tax on dividends within ISAs or pensions, but higher rate taxpayers avoid paying an extra 25% tax on the dividend received.

Read this Q and A at http://www.candidmoney.com/questions/question434.aspx

Can inflation bond pay without deducting tax?

Question
You rate the BM Savings 5 Year Inflation Rate Bond (2) highly except that it is taxable. Can a non tax payer get the return without paying tax, either by completing an R85 or getting a refund via a tax return?Answer
Yes, non-taxpayers can enjoy gross returns as the interest is treated just like a conventional savings account. As you highlight, non-taxpayers can receive interest without deduction of tax by completing form R85, or reclaim any interest deducted via their tax return or using the HMRC R40 tax repayment form.

I rate the bond highly for its type, but as mentioned in the review there's not a clear cut case for linking savings returns to inflation over the next 5 years - a good fixed rate account might generate higher returns if inflation falls back.

Read this Q and A at http://www.candidmoney.com/questions/question432.aspx

Take final salary pension tax-free cash?

Question
I'm about to take my (final salary) pension and will soon be asked to decide how much of the 25% I wish to take as cash free cash, and how much of it to put back in the pot to improve my index linked monthly pension. With the extremely low annuity figures I can see, what other factors should I be considering in the decision to take the lump sum instead?Answer
It generally makes sense to take the maximum 25% tax-free cash entitlement from personal and money purchase pensions for the simple reason it's tax-free. It might be possible to generate a more tax-efficient income from the money compared to taking additional taxable pension income.

However, as you're in a final salary pension the decision is not quite so straightforward, as any tax-free cash taken will reduce your valuable inflation-linked pension income. I'd start by finding out the 'commutation rate' of your pension scheme - that is the amount of tax-free cash you'll receive for each £1 of pension you give up. For example, if the commutation rate is 12 then taking £12 of tax-free cash will reduce your annual pension by £1. The higher the rate the better.

You can then make a simple comparison of whether the tax-free cash could buy a comparable inflation-linked income (via an annuity) that more than offsets the sacrificed pension income. If it doesn't then taking extra pension in favour of tax-free cash is probably worthwhile (it's worth checking whether taking tax-free cash affects any spouse pension on your death).

But it'd also be sensible to factor in tax. For example, if your spouse is a non-taxpayer would you be better off taking tax-free cash and holding savings/investments or an annuity in their name to make the most of their personal income tax allowance? (versus you receiving taxable pension income). Or would it be advantageous to put the cash into ISAs ensuring a tax-free income?

Also bear in mind that if you take the tax-free cash to invest then this adds risk, whereas your final salary pension provides certainty that you'll receive an inflation-linked income.

I suppose the final thing to think about (albeit grim) is how long you expect to live. The longer you live the better value pension income (or an annuity) is. If your life expectancy is short then this would likely swing things in favour of taking tax-free cash now and, of course, vice-versa.

Best wishes for a happy retirement whatever you decide.

Read this Q and A at http://www.candidmoney.com/questions/question430.aspx

Where to transfer self-select ISA?

Question
I own a self select Isa of several years value approx £89,000. It is with a stockbroker which I know makes charges on transfers out. Are there any ISA provders that will pay all or some of these fees to get the business? Obviously I only want to move to one that has competetive dealing fees etc. I am aware of iDealing. The holdings are equities and investment trusts.Answer
I've had a quick look around the cheaper stockbrokers and I'm afraid the answer is no, I can't find any paying a bonus to get your business.

I guess it's a simple equation, if they offer very competitive fees there's not enough fat on the bone to throw at poaching customers from other brokers.

iDealing pays £10 per stock, capped at £150 per type of account (e.g. ISA or SIPP) and £400 overall. Let's suppose you have 10 stocks in your ISA, you'll receive £100 of credits (to offset against charges) in return for transferring your ISA to them.

iDealing charges a £9.90 dealing fee per trade, which is not bad, but also a £5 quarterly fee for the ISA wrapper, i.e. £20 a year. This could obviously erode the initial credits within a few years.

Personally I'd more be more inclined go for a broker who doesn't charge for the ISA wrapper and offers rock bottom dealing fees, especially if you're likely to trade fairly frequently (obviously the potential saving will need to outweigh transfer penalties from your exising broker). The cheapest I've found so far is x-o.co.uk, which charges £5.95 per deal and no ISA wrapper charge. I've reviewed them here.

Read this Q and A at http://www.candidmoney.com/questions/question428.aspx

MetLife guaranteed products any good?

Question
What is your view on met life guaranteed products? How does it work and who provides the guarantee?Answer
MetLife's guaranteed products work by investing your money in one of three index-tracking funds (which, to varying degrees, split your money between stock markets and fixed interest) and then applying capital guarantees to those funds every one or two and a half years. The idea is they protect you from losing money and help 'lock-in' gains as you go along.

To explain this more clearly let's take a look at MetLife's guaranteed pension plan - The Retirement Portfolio. This is a personal pension that offers access to the above guaranteed funds, both pre-retirement and during retirement when you're drawing an income - this is referred to as the 'Secure Capital' option. You can also opt for a 'Secure Income' option during retirement which guarantees a minimum level of income while leaving your money invested.

So, suppose you're 50 now and plan to retire at 65. You could transfer your pension(s) into MetLife's Retirement Portfolio and choose one of the Secure Capital funds. This means your pension fund will grow based on performance of the chosen fund and you can elect to lock-in any growth each year (capped at 10%) or every two and half years (uncapped) to give a new minimum fund value guarantee. At each 'lock-in' date, your guarantee will be the greater of the previous guarantee and current fund value - and the guarantee itself applies when you reach retirement after 15 years at age 65..

For example, you invest £100,000 and opt for the annual lock-in. After a year the fund has risen 15% in value, so your minimum guarantee rises to £110,000 (because it's capped at 10%) and the fund is worth £115,000. The fund the falls gradually over the next few years to £90,000 (so guarantee remains £110,000) until rising again to 110,000 in year 7. Over the next year the fund rises by 5% to £115,500 and your guarantee rises to the same level...and so on until year 14 when your fund is valued £150,000 and the guarantee is £140,000. The market crashes in the final year and your fund falls to £120,00 - but you'll have a £140,000 pension fund at retirement thanks to the guarantee.

The secure income option promises a fixed minimum rate of income (dependent on your age) for life while allowing you to leave the money invested under the secure capital option. In the above example the income rate for a 65 year old is 4.25%, so you'll receive 4.25% of £140,000, £5,950 a year. The income is deducted from your fund, but is based on the 'Secure Income Base, which is the greater of your initial investment at retirement (£140,000 in this example) and the fund value at every 'lock-in' review. So, if you fund falls you'll just receive based on the guaranteed £140,000, but if it rises you'll receive 4.25% of the new guaranteed amount.

If you die under the secure income option, the death benefit is the greater of your fund value or initial investment less income taken.

This all sounds pretty good, so what's the catch? In a word - charges.

The problem with investment protection is that it costs. And the cost could end up outweighing any benefit.

In the above example, you'd pay an annual pension charge of between 0.5% and 0.7% (depending on amount invested). You'll also pay between 0.5% and 1.95% a year for the secure capital index funds (the shorter the period guaranteed, the higher the cost). And on top of this there'll be fees or commissions for financial advice. So, if you want protection over 10 years on the conservative index fund (I can't really see the point in buying protection for longer periods) on a £140,000 pension pot you'll pay a 0.7% annual pension fee, fund charges of 1.95% and probably IFA commission of 0.5% - total annual charges of 3.15%. This is a colossal amount and if we assume 6% annual returns before charges they'll wipe out over half your investment growth.

You might beg to differ, but I just don't see the point of paying such high fees for protection. You could get similar funds (without protection) within a stakeholder pension or low cost SIPP for well under 1% a year.

The secure income option in retirement could, in theory, make more sense if you'd like to draw income from your pension rather than buy an annuity. The MetLife route should prevent you from running out of cash to pay a lifetime income.

But compare the 4.25% for a 65 year single life income to current level annuity rates of around 5.5% and you're around 1.25% a year worse off. Yes, your pension fund could grow, in which case so could your income, but I think the chances of this are fairly slim after income and charges are deducted.

Under the secure income option protected fund charges reduce to between 0.55% - 1.55% (depending on fund chosen) but add in the annual pension charge and adviser commission and you'll still probably be paying over 2% a year in charges while being invested in fairly cautious funds.

The guarantee is provided by MetLife as far as I can see, so if they fail the guarantee fails. In the event of default you should be covered by the Financial Services Compensation Scheme for 90% of what you're owed with no upper limit.

In summary, I don't particularly like these types of product. I guess they have their place and some people may well be quite happy to pay for the peace of mind that protection can bring. But the cost of protection is so high on periods of around 10-15 years I'd rather take a bit of sensible risk and pocket the savings.

Read this Q and A at http://www.candidmoney.com/questions/question427.aspx

Budget 2011 - a reflection

Will the Government's chosen path to lead us out of the financial abyss work?.

The Budget re-confirms that the Government is banking on private sector growth to more than compensate for public sector cuts and pull us all out of trouble. It's a massive gamble (see my explanation why here).

If it works the annual spending deficit could be culled by 2015/16, but if it fails we could find ourselves in an increasingly deeper hole. This year's growth forecast has already been reduced from 2.1% to 1.7% and the projected 2.5% next year and 2.9% in both 2013 and 2014 looks optimistic.

The extra £1,000 personal allowance will save basic rate taxpayers £200 annual income tax, but shrinking the basic rate tax band will leave higher rate taxpayers a little worse off. And the planned 1% rise in NICs will kick in from April , ouch. Not to mention frozen child benefit and reduced child tax credits for families on incomes above £25,000 (more details here), the middle classes could certainly start to feel the pinch next tax year.

Rising energy and food prices have led to high inflation, which means especially big tax hikes on cigarettes and alcohol, as duty is rising at 2% above inflation. Fuel duty is being cut by 1p and the 1p 'escalator' has been ditched in favour of a 'stabiliser' policy that will reinstate the 1p extra annual increase only if the oil price falls below $75 a barrel. But while a nice gesture, given current oil prices it'll make bugger all difference to most households who are reluctantly spending an increasing proportion of their income of fuel.

While many households will probably find themselves worse off overall following these changes (with high fuel and food prices rubbing salty into their wounds), businesses have more reason to be cheerful. Reductions in corporation tax and planning red tape coupled with new enterprise zones and proposed changes to EIS/VCT rules, designed to encourage more private investment, will hopefully give business a boost and attract more multi-national companies to our shores (even if you do end up with a factory being built down the road from you). And the doubling of entrepreneur's lifetime relief to £10 million (i.e. 10% CGT) might stimulate more business start-ups.

All in all I don't think it was a bad Budget. The Government's chosen path is a big gamble, but I'm not sure they have any other realistic options. Trying to spend their way out of a gargantuan deficit would be an even greater risk. But when tax rises kick-in in April or earlier and public spending cuts really start to hurt I fear the relied upon private sector growth won't happen quickly enough to stave off the threat of recession. I really hope I'm wrong.

Read this article at http://www.candidmoney.com/articles/article213.aspx

Switch my ISA when non-resident?

Question
I'm non-resident and understand that I can't open new cash or equity ISAs. My question is can I switch money from one of my existing funds (opened before I became non-resident) into a new fund to try and get a better a return?Answer
While you can't add new ISA money as a non-resident, it is possible to switch or transfer your existing ISAs.

Switching between funds with your existing ISA provider(s) should be no problem at all, you just need to tell them what changes to make, either in writing or online (if they offer this facility).

But transferring your ISAs between providers could prove more challenging. It is allowed, but most ISA providers won't let non-UK residents open an ISA account, which you'll need to do if you want to make the transfer. When I looked into this previously the only ISA provider I could find that allows this is HSBC - see my previous answer for more details.

Good luck!

Read this Q and A at http://www.candidmoney.com/questions/question426.aspx

Should I buy C shares?

Question
I have set up a direct debit with JP Morgan to buy shares in the JP Morgan Global Emerging Income Trust (JEMI). They are now starting a C shares issue. What are these and should I change my direct debit to buy these instead?Answer
When investment trusts want to attract more money under management, they need to issue more shares. But unlike unit trusts, they can't simply create extra units/shares on demand, it needs to be via a formal share issue - with 'C' shares the usual route to doing so.

C shares are a short term home for new subscriptions. Once money is raised and invested, then the C shares are converted into ordinary shares in the main investment trust. Why go to all this bother? It makes life much simpler - the shares can be offered at a fixed price then converted at the prevailing price later on, plus it avoids affecting the performance of the existing investment trust by suddenly injecting a whopping amount of cash and existing investors partly having to foot the bill for stamp duty and dealing charges on new investments purchased.

JP Morgan Global Emerging Income Trust (JEMI) C shares are scheduled to be offered at 100p each on 13 April, with the conversion rate into ordinary shares calculated on 3 May and actual conversion taking place on 17 May. The trust is aiming to raise £200 million.

When buying C shares there'll be an initial charge of 1.62%, so every 100p invested will buy 98.38p worth of shares. The minimum investment is £1,000.

The potential advantage of buying C shares is avoiding the current premium to net asset value of around 4% on JEMI shares. In English this means the shares currently cost about 4% more than the value of the underlying investments, largely because it's a popular trust with more buyers than sellers - hence the extra share issue.

When the JEMI C shares are converted into ordinary shares, they will buy those shares at net asset value, not the prevailing share price, hence avoiding any premium there might be at that time.

Should you buy C shares instead? It's not feasible to do so with a monthly direct debit as this is a one-off issue with a £1,000 minimum investment. If you were investing a lump sum then it is arguably worthwhile in order to avoid paying a premium for the existing shares, but given the initial charge on C shares and relatively small premium on existing shares we're not talking about a big difference. In any case, the existing premium to net asset value may well decline by the time the C shares are converted, so ultimately I'd expect there to be very little in it.

Read this Q and A at http://www.candidmoney.com/questions/question425.aspx

Budget 2011 - how will it affect business?

How will the Budget affect businesses across the country?.

The Chancellor wants to boost private sector business. And, let's face it, he needs to given the Government's massive gamble that private sector growth will outweigh public sector spending cuts.

Today's Budget contains a mix of tax and bureaucracy cuts intended to help existing business (large and small) and attract multi-national companies to set up shop in Britain. Let's take a look at the key announcements:

Corporation Tax

The main corporation tax rate, already due to fall from 28% to 27% from 6 April 2011, will be cut by a further 1% to 26%. It will then fall by a further 1% a year until 2014 as previously announced, which means a very globally competitive rate of 23%. The banks won't however benefit from this, with bank levy increases offsetting the tax cut.

Small businesses with profits below £300,000 will see their tax rate fall from 21% to 209% from 6 April 2011.

National Insurance

As previously announced, employer NICs will rise by 1% from 6 April 2011, although the earnings threshold will rise to avoid a rise on staff earning below £20,000 a year. So employer Class 1 NICs will rise from 12.8% on weekly earnings above £110 to 13.8% on earnings above £136.

VAT

The threshold for VAT registration will rise from £70,000 to £73,000 from 6 April 2011.

Enterprise Zones

The Government will set up 21 Enterprise Zones in troubled areas and offer businesses located in these areas 100% relief from business rates (effectively council tax for companies) for 5 years.

Business Rates

The small business rate relief holiday, announced last year, will be extended for a further year from 1 October 2011. Good news for those small businesses exempt from business rates under the current holiday.

R&D Spending

Companies spending money on research and development can currently enjoy 175% tax credits, i.e. for every £100 spent on qualifying R&D they can deduct £175 from taxable income. This will increase to £200 from 6 April 2011 and £225 the following year.

Planning Permission

Planning rules will be relaxed to promote more business growth. Developers will no longer require permission to convert empty commercial buildings into housing and sustainable projects will be assumed to be approved (with the exception of green belt land). Local councils will also be allowed to auction off public sector land with pre-approved planning permission.

While the sentiment to grow business is admirable, expect a major backlash from those who end up having factories and housing estates pop up on their doorstep. Mind you, probably not a bad time to buy a deserted warehouse or office building on the cheap...

Entrepreneur's Relief

Those qualifying for this relief (which means only 10% tax on gains) will see their lifetime allowance double to £10 million. This should hopefully encourage more entrepreneurs to set up small businesses and create jobs.

REITs

Real Estate Investment Trusts are a type of fund that allow tax efficient investment in property. The Government proposes to relax rules by 2012 to make it easier to set up and run a REIT. Again, the intention is obviously to boost property development and investment.

Red Tape

The Chancellor wants to attack the myriad of petty rules and regulations that strangle small businesses. A key proposal is that all start-ups and companies employing fewer than 10 staff will be exempt from all new regulations from 1 April for 3 years.

Read this article at http://www.candidmoney.com/articles/article212.aspx

Budget 2011 - how will it affect individuals?

How will today's Budget affect you?.

The Chancellor claims his Budget sets out to stimulate growth - something Britain badly needs right now (more on the this in another article to follow). He also claims it's fair for families, although I doubt many families will be jumping for joy following today's announcements.

Yes, basic rate taxpayers will save about £200 of income tax thanks to a higher personal allowance, but rising National Insurance brings bad news for higher earners and most families will lose out from the frozen child benefit and falling child tax credits previously announced. And with most excise duties rising by a high level of inflation, drowning your sorrows with cigarettes and alcohol could cost you quite a lot more.

Let's take a look at the main changes affecting individuals (changes affecting business to follow).

Income Tax

As previously announced, the personal allowance will increase by £1,000 to £7,475 from 6 April 2011. This means basic rate taxpayers should be around £200 a year better off, but the threshold for higher rate tax will fall from £37,401 to £35,001 above the personal allowance.

Annual Income	Income Tax 2010/11	Income Tax 2011/12	Change
£25,000	£3,705	£3,505	£+200
£50,000	£9,930	£10,010	-£80
Change in income tax bill from 6 April 2011.

The personal allowance will increase by £630 for those under 65 to £8,105 from 6 April 2012.

The 50% tax rate introduced last April is intended to be temporary, although no news for how long. And the Chancellor would like to merge income tax with national insurance to simplify the tax system, although this will probably take 'years'.

National Insurance

As previously announced, Class 1 & 4 NICs will increase by 1% from 6 April 2011, although the level of income at which these start will increase to protect those earning below £20,000.

Class 1 employee contributions will rise from 11% (on weekly earnings between £110-£844) to 12% (£139-£817) and from 1% (over £844) to 2% (over £817).

Class 4 self-employed contributions will rise from 8% (on annual profits between £5,715-£43,875) to 9% (£7,225-£42,475) and from 1% (above £43,875) to 2% (above £42,475).

Annual Income	NI 2010/11	NI 2011/12	Change
£25,000	£2,121	£2,133	-£12
£50,000	£4,260	£4,381	-£121
Change in employee Class 4 NIC from 6 April 2011.

VAT

No change to the rate, but from 1 November 2011 the limit for VAT-free imports from outside the EU will fall from £18 to £15 - which might have a small impact on some of the Jersey/Guernsey based internet shopping sites.

Capital Gains Tax

Rates will remain unchanged at 18% and 28% while the annual allowance will increase to £10,600.

Inheritance tax

No change to the rate or nil rate band, but from 6 April 2012 the rate will fall from 40% to 36% where 10% or more of a net estate is left to charity.

Fuel

The planned 4p per litre rise in fuel duty this April will be postponed until January 2012 and the 2012 inflation increase will be delayed from April 2012 to August 2012. And duty will also fall by 1p per litre from 6pm tonight.

The 'escalator' tax that adds an extra 1p to fuel duty inflationary increases will, from tomorrow, be scrapped in favour of a fuel price 'stabiliser'. This means the extra 1p will not be applied if the oil price is above $75 a barrel. While the extra tax charged on profits from oil and gas production will rise from 20% to 32%, reverting to 20% should the oil price fall back below $75 per barrel.

Alcohol

Alcohol duty rates will increase by 2% above inflation (a 7.2% rise) on 28 March 2011. From October 2011 there'll be extra duty on high strength beers and reduced duty on low alcohol beers.

	Beer (pint)	Wine (bottle)	Champagne (bottle)	Spirits (bottle)
Typical Change	+3p	+12p	+15p	+45p
Typical increase in price from 28 March 2011.

Cigarettes

From 6pm tonight tobacco duty will rise by 2% above inflation, but the way it's charged will be biased more toward the duty per cigarette than on the sale price - hitting low cost cigarettes more heavily.

	£4 per pack	£5 per pack	£6 per pack
Change	+42p	+35p	+27p
Increase in price per pack of 20 cigarettes from 6pm 23 March 2011.

Vehicle Duty

To increase by inflation for vehicles in VED band D an above, adding between £5 and £25 to the cost of an annual tax disc.

Air Passenger Duty

The planned inflationary increase this April will be deferred until April 2012. It will however apply to private jets for the first time. The Government would like to move to a per plane tax instead, but has been advised it's not currently legal...

Company car fuel benefit charge

If you receive a company car and free fuel you'll pay some tax on the fuel benefit. The £18,000 multiplier figure currently used to calculate this will increase to £18,800 from 6 April 2011. What difference will it make? Probably an extra £45 of tax per year for basic rate taxpayers and £90 for higher rate based on a typical 2 litre diesel car.

HMRC Mileage allowance

If you use your own car for business you can claim reimbursement from your employer, at a rate of 40p per mile for the first 10,000 miles and 25p per mile thereafter, without hat being a taxable benefit. And if reimbursed for less than this you claim the residual mileage allowance against your tax bill. The 40p rate will increase to 45p per mile from 6 April 2011 - the first increase since 2002.

Child benefit

Will continue to remain frozen at £20.30 per week for the eldest child and £13.40 for each other child until April 2014.

Child tax credit

As per previous announcements, child tax credits will start to increase from 6 April 2011 for families with incomes of around £25,000 or less, but fall for everyone else - see full details in my previous article. http://www.candidmoney.com/articles/article123.aspx

EIS/VCT

vThe rate of income tax relief given on the Enterprise Investment Scheme (EIS) will rise from 20% to 30% from 6 April 2011. While the amount that can be invested will double from £500,000 to £1 million from 6 April 2012.

EISs and Venture Capital trusts (VCTs) will also benefit from being able to invest in larger companies (changing from maximum of 50 employees and less than £7m of gross assets before investment to 250 employees and £15m of gross assets) and make bigger investments per company (changing to £10 million) from 6 April 2012.

Entrepreneurs Relief

The lifetime limit on gains that qualify for 'entrepreneurs' relief will double to £10 million from 6 April 2011. Capital gains tax is charged at just 10% on such gains.

Non-domicile taxation

From April 2012 the tax treatment of non-domiciled individuals tax resident in the UK. It looks like the current £30,000 annual 'remittance' charge will be dropped if such individuals are bringing foreign income or gains into the UK to invest in businesses, while the £30,000 charge could increase to £50,000 for those who've been UK resident for 12 years or more.

Potholes

Local councils will receive £100 million towards pothole repairs - hurray!! Perhaps my local council will finally reimburse me for the burst tyre I suffered from a crater in one of their roads...

Read this article at http://www.candidmoney.com/articles/article211.aspx

How are dividends taxed?

Question
When the dividend a Company is paying is confirmed in the press in percentage terms, is this what you receive before or after tax?Answer
Dividend percentage yields are shown net of basic rate tax.

The workings are as follows. When companies pay dividends it's out of taxed (or shortly to be taxed) profits. To reflect this they come with an attached 10% tax credit.

The basic income tax rate on dividends is 10%, rising to 32.5% for higher rate taxpayers and 42.5% for top rate taxpayers, all charged on the 'gross' dividend - i.e. the dividend received plus the tax credit. The tax credit can then be offset against the tax owed to give the net tax liability.

Much easier to explain via an example:

Company X pays a 90p dividend which, on a share price of 2000p gives a 4.5% yield. The 'gross' dividend is 90/0.9 = 100p and the 10% tax credit is 10p (100p x 10%).

A basic rate taxpayer must pay 10% tax on the 100p gross dividend, equal to 10p. But the attached tax credit of 10p cancels this out, so no further tax to pay.

A higher rate taxpayer must pay 32.5% on the 100p dividend, equal to 32.5p. The attached tax credit reduces this to 22.5p. A simpler way to calculate the higher rate liability is to multiply the dividend received by 25%, i.e. 90p x 25% = 22.5p.

And top rate taxpayers must pay 42.5%, equal to 42.5p. The attached tax credit reduces this to 32.5p, in other words 36.1% of the dividend received (90p x 36.1% = 32.5%).

The 10% tax credit can never be reclaimed, not even by non-taxpayers or in ISAs and pensions, so it's not possible to enjoy truly 'tax-free' dividends. The advantage of ISAs and pensions is that higher and top rate taxpayers don't have to pay the further tax outlined above.

Read this Q and A at http://www.candidmoney.com/questions/question424.aspx

Question
Is there a simple, straightforward way of working out your tax code?Answer
It's not too difficult. Most tax codes are a number followed by a letter, worked out as follows:

Number - When multiplied by 10 the number gives the amount of income you can earn in a year before paying income tax, i.e. your available personal allowance. Unless you have a K code in which case it's the amount that must be added to your taxable income to take account of untaxed income you've received.

Letter – the letter tells HMRC what allowance, if any, you're eligible for.

Special Codes – if you have two or more sources of income you might have a two letter code, usually in relation to a second job or pension. This tells HMRC that your allowances have been applied to your main job or pension (for which you'll have a normal code).

Letter/Special Code	What it means
L	You're eligible for the basic personal allowance.
P	You're aged 65 to 74 and eligible for the full personal allowance.
Y	You're aged 75 or over and eligible for the full personal allowance.
T	There's other items HMRC needs to review in your tax code.
K	Your untaxed income on which tax is due is greater than your allowances.
BR	All your income is taxed at the basic rate of tax (most commonly used for a second job or pension).
D0	All your income is taxed at the higher rate of tax (most commonly used for a second job or pension).
NT	No tax is to be taken from your income or pension.

Putting all this together:

1. Add up your tax allowances (for most people it's simply your personal allowance e.g. £6,475).

2. Add up any untaxed income and taxable employment benefits (let's assume £1,275).

3. Deduct the total in (2) from (1) (e.g. 6475 – 1275 = 5200).

4. Divide the balance in (3) by 10 and add the letter that suits your situation (e.g. 520L).

Read this Q and A at http://www.candidmoney.com/questions/question423.aspx

Santander Flexible Cash ISA review

Santander's Flexible Cash ISA (Issue 3) pays an attention grabbing 3.3% annual interest, or 3.5% to some existing Santander customers via the 'Loyalty' version. Is it too good to be true?

Well, yes and no.

The interest rate for the first year is very generous. Santander promises to pay 2.8% (3% for the loyalty version) above the Bank of England Base Rate, so you'll benefit from any interest rate rises. And the rate is guaranteed not to fall below 3.3% (3.5% loyalty version) during that time. But once the year is up the rate will plunge to a normal variable rate, currently 0.5% - awful.

You can invest between £1 and £5,100, but Santander won't let you transfer in an existing cash ISA. Withdrawals can be made online, by phone or via a branch or cash machine. Interest is calculated daily and paid annually on 1 March.

To qualify for the 'Loyalty' version you need to have a current account (and pay in at least £1,000 a month), mortgage or investment with Santander.

In summary, this a great deal provided you transfer elsewhere after a year. If you don't, as Santander is obviously hoping, you'll likely end up earning very little interest thereafter - in which case I'd steer clear. So whether this cash ISA is worthwhile depends on how efficient you are monitoring/transferring your savings.

Read the full review at http://www.candidmoney.com/candidreviews/review56.aspx

Can I phase retirement using stakeholder pensions?

Question
Are Stakeholder Pensions less flexible than their more expensive predecessors?

In the 1980's I remember the old Section 226 "flexible" personal pension plans. Some companies had them with premiums as low as £10 per month, so people could, if they wanted, "phase" in their retirement in small segments by having ,for example, a range of plans set with different retirement ages: eg from ages 60 to 65. The downside was that a lot of these plans were "tiddlers" producing very small benefits and had high charges.

When they were replaced by the newer Stakeholder Plans the charges were reduced and these new plans also became very good at taking transfers in . So all the "pension flotsam and jetsam" from the transitory nature of many peoples employments could be brought together by " transfers in" in to one "ocean going" pension arrangement. They could "suck in " rebates from National Insurance, funds from otherwise non viable occupational schemes , personal pensions with exotic but unsuitable funds or funds that become more expensive when you leave . So the "tiddlers" become ocean going "bloaters" that are almost too valuable to put in the net for conversion because of their abilities to "gobble up " the pensions bits and pieces of the future.This is particularly the case now as the Government wants us all the work longer so there is a need to maintain some capacity for future transfers in.

By now the "fish" has grown a bit: If this slightly bigger "fish" is brought back to port to early all that ability to "suck in" the bits and pieces from the employments of the future is lost . But these bigger pension "creatures" do not like being cut up into segments either so they cannot be treated like the "tiddlers" as per above. If one mentions segments to a financial services industry helper one is likely to ger a slightly "non plussed" response together with a denial of their present availability. So what to do with these Stakeholder plans? New options for drawdown are available. If I select this "non annuity" drawdown route and start drawing down will the residual fund still have the ability to accept transfers in? Will the new drawdown rules help or would a SIPP be more flexible in this regard for transferring in and drawing down at the same time?Answer
Stakeholder pensions are cheap and flexible in so far as you can stop/start contributions and transfer to another pension without penalty. The downside, as you point out, is that stakeholder pensions don't currently offer an income drawdown option (called an 'unsecured' pension) and I doubt they ever will - it'd probably be unprofitable for pension providers to do so given their low margin on stakeholder.

If you want more control over taking your pension benefits gradually then an alternative to drawdown is 'phased' retirement, whereby a pension is segmented into 1,000 policies and you can take each policy (i.e. withdraw 25% tax free cash and buy annuity with remainder) at a different time. Again, stakeholders don't offer this option as the providers probably take the view it's more hassle than it's worth.

But even if you require such flexibility in the future, stakeholder pensions can still be worthwhile meanwhile. When the time comes to drawdown or commence a phased retirement simply transfer the stakeholder pension (with no penalty) into another personal pension offering the required drawdown or phased facility. This avoids paying potentially higher charges up until retirement.

Once you start taking benefits from an unsecured pension you'll need to take the tax-free cash (if selected) and won't be able to make any further contributions. However, it is possible to transfer pensions already in drawdown from one provider to another, so it should be viable to consolidate more than one unsecured pension in this way.

Read this Q and A at http://www.candidmoney.com/questions/question422.aspx

Can dividends protect against inflation?

Question
I wanted to create some additional income and my stockbroker advised me that good quality high yielding shares would be better than corporate bonds because of the effect of inflation. Would you agree with this?Answer
If we consider income in isolation then your stockbroker is generally right. Income from corporate bonds is fixed, whereas dividends tend to rise over time, making them a potentially better hedge against rising inflation.

However, it's not that simple as the (capital) value of both corporate bonds and shares can vary.

The price of corporate bonds tends to fall if inflation and/or interest rates rise (as it makes a fixed income them less attractive) and vice-versa. Shares can fluctuate quite markedly in price depending on the prospects of the companies concerned and general stock market sentiment.

So while income from shares might be the better long term hedge against inflation, this may be little consolation if stock markets dive shorter term and lose you money overall. Of course, stock markets might also rise, no-one knows, the main thing is to be comfortable with the potential volatility.

So I'd be inclined to favour decent dividend shares over 5-10+ years, but shorter term I fear high volatility might make the shares route rather risky.

Read this Q and A at http://www.candidmoney.com/questions/question421.aspx

Can I hold ETFs in fund supermarkets?

Question
This is a question about Exchange Traded Funds. It must be 8 or so years since a Canadian relative visited us and told me his portfolio had been made up entirely of ETFs. He had worked in the Canadian public services and had got a good payout when he retired early and ETFs were the vehicle he had chosen. I remember thinking back then that the Americans are usually 10 years or so ahead of us and that this would probably be an area I would need to look into a some point in the future. He appeared to be totally at ease with being 100% passively invested and this, in itself, was a bit of a revelation. Why was he so confident with them? " Why haven't I thought of this before?" I thought. There was definitely different market forces at work "over there": at some stage, I thought, it was likely to be more like the norm "over here" as well.

But "over here" in 2011 the main supermarket providers still appear to give prominence to collective funds like unit trusts. For some reason other collective investments, like ETFs and investment trusts, still appear as being positioned more on the "back burner" or specialist, if they are positioned at all. Is there any supermarket that overcomes this well and gives these financial instruments equal or top billing? Or are they going to be consigned to the "specialist " desk forever?

One difficulty is that it is difficult to switch out of providers that do not offer them (to those that do ) without incurring costs. Are there any ways round this? If I wanted to put the whole of next year's ISA allowance into to ETFs by way of a switch out, would it be worth it and what would be the best supermarket to use? Or is non supermarket vehicle the best option? Are our fund supermarkets too "conservative" (with a small "c"? )Answer
The simple reason that some fund supermarkets/platforms don't offer access to exchange traded funds (ETFs) is that ETFs are traded on stock markets - and not all fund supermarkets offer a stock market trading facility. When investment trusts are not available, it's normally for the same reason.

I think it's more a case some fund supermarkets not wanting the hassle/expense/complexity of offering a share trading facility than any concern on their part customers will end up taking too much risk. And, being cynical, it's probably less profitable for them versus unit trusts. Unit trust providers typically pay fund supermarkets around 0.25% a year to feature on their platform, ETF providers don't have sufficient fat on the bone to pay such charges.

However, there are several fund supermarkets/platforms that do offer share trading, hence they'll allow you mix ETFs with funds within an ISA. Take a look at our Guide to Fund Supermarkets and look for those supermarkets with a tick in the 'shares' column.

The cheapest option if you want to combine funds and shares (inc ETFs) on the same platform is Alliance Trust Savings. The dealing charge is a flat £12.50 (also applies to funds) and there's a £25 annual ISA fee although this does include two free trades.

You could get a cheaper deal if you don't mind using one platform for funds and another for shares. For example, online stockbroker x-o.co.uk doesn't charge for an ISA wrapper and charges just £5.95 per share trade.

I agree switching investments between fund supermarkets can be a pain and potentially incur charges, so using an online stockbroker for ETF/investment trust purchases independently from your fund holdings can make sense.

ETFs are a welcome introduction to our shores, but always remember that they're only as good as the index they track. If your chosen index falls you'll still lose money. The positive points of ETF investing are the range of different indices available for tracking and generally low charges. However, you can usually get as cheap a deal (if not cheaper) on mainstream indices via conventional unit trust tracker funds, so don't always assume ETFs are cheaper.

As for next year's ISA, I'd start by thinking about the type of investment that would best suit your portfolio. Once you've made this decision then consider whether a tracker is a good way to get this exposure and, if so, whether an ETF is preferable to a unit trust tracker. You might find our trackers page helpful.

Read this Q and A at http://www.candidmoney.com/questions/question418.aspx

Japan disaster - impact on investments

To what extent should you be concerned about the disaster in Japan affecting your investments?.

Losing money on investments hurts, but it pales into insignificance compared to the loss of life and suffering resulting from the earthquake in Japan.

Nevertheless, it's natural to be concerned about the impact these troubled times might have on your investments, so let's try and cover what's going on and the issues to consider.

What's happened so far?

• Friday 11 March - A severe earthquake hits Japan , pushing the Japanese stockmarket (Nikkei 225 Index) down around 2% the same day.


• Monday 12 March - Nikkei falls a further 6% as markets react to the full extent of the disaster.


• Tuesday 13 March - Concerns over radiation leaks from the Fukushima nuclear power plant push the Nikkei down a further 10%.


• Wednesday - 14 March - Nikkei rises over 5% as the Japanese Government continues to pump money into markets, radiation concerns recede slightly and some investors buy stocks in the hope of grabbing a bargain.

How has this affected other markets?

Most global stockmarkets have fallen - probably due to concerns that the problems in Japan will hit demand for imports (hitting foreign exporters) and some investors withdrawing cash from stockmarkets and diving for safety.

Soft commodities have also fallen over concerns on the extent Japanese demand for food will fall short term (Japan imports around 60% of what it eats) - grain prices are down 5-10%.

The oil price has fallen slightly while gold and government bonds (e.g. US Treasuries and UK Gilts) have risen a percent or two thanks to rising demand from safe haven investors.

What next?

The biggest question mark - and likely driver of market volatility - is the extent of radiation leaks from the Fukushima nuclear power plant. In a worst case scenario severe leaks could have a catastrophic impact, both environmentally and on markets. On a more positive note, if the situation doesn't deteriorate then markets might move up a little as they breathe a sigh of relief.

Either way, Japan faces major problems. It's a big exporter and the earthquake will inevitably hit production, hence profits shorter term. The cost of rebuilding damaged areas is likely to largely fall on the Japanese Government, which already has the highest debt to GDP ratio in the world at 200% (UK is c60%). It has managed to afford such high levels of debt by successfully selling bonds domestically (cheap borrowing). Whether there'll be domestic appetite for further bond issues remains to be seen. And, of course, all this comes at a time when the Japanese economy is already fragile.

Stockmarkets elsewhere will probably calm down if the nuclear situation doesn't deteriorate. Falling short term exports to Japan will hurt some companies (China and the US are the two largest exporters into Japan), but this shouldn't make a significant difference to markets. And in time some economies, especially Far Eastern, may end up benefitting from supplying materials, goods and services as Japan rebuilds damaged areas.

Commodities prices will probably calm down, or at least react more to news from other parts of the world (e.g. Middle Eastern turmoil and climate).

If, in the aftermath, negative sentiment towards nuclear power grows then it's arguable the price of oil and gas could rise if fossil fuel power stations are built in favour of nuclear. However, fossil fuels have their own issues and detractors so I think it's too early to make such calls. And, let's face it, despite disasters in the past the use of nuclear power continues to grow - in my view it's is here to stay.

Conclusion

Very short term investment prospects hinge more or less solely on the extent that radiation leaks at Fukushima either subside or worsen. Beyond that I think the outlook for the Japanese economy is very grim. Markets elsewhere should eventually calm down , but expect more unpredictable turbulence for another week or two yet.

Read this article at http://www.candidmoney.com/articles/article209.aspx

Can I get money back from a suspended fund?

Question
Mis sold an offshore property bond by our financial advisers.

The FOS found in our favour and we were paid out what we thought we had lost at that time. We were then waiting for the fund to pay out the remainder of our redemption – which we were led to believe would be paid back shortly. The directors of the fund then suspended it, and 4 years down the line they are still holding our redemption payment “until further notice”. We are now seriously out of pocket (100,000's). The IFA has gone bust and our Insurance company who provide the wrapper for the fund is of no help.

Is there anything we can do to get our money back? We used our mortgage and a loan to finance the investment – advised by our FA. Answer
I'm sorry to hear about your predicament, sounds like you received shockingly bad advice.

Unfortunately I don't think there's a simple solution to this problem. The Financial Ombudsmen Service (FOS) obviously based the compensation awward on you being able to withdraw the remainder of the fund shortly afterwards. As this hasn't been possible you could revisit FOS to seek this balance, but even if they were to award it you (there's no guarantee they will) the IFA can't pay you the compensation as they've gone bust. The Financial Services Compensation Scheme (FSCS) could step in at this point (as the adviser would be declared 'in default'), but payouts are capped at £50,000 per person per firm - hence unlikely to cover the full amount outstanding.

Unless the fund managers are guilty of any dishonest (rather than dumb) dealings then I'm afraid there's probably no action you can take against them. I assume the fund remains suspended because they can't find a buyer for their property investments. if you can find out more about these underlying investments it might help you gauge the likelihood of if/when you're likely to get any money back.

The insurer is probably just providing an investment bond 'wrapper' rather than having any connection with the investment fund, so I can understand why they won't want to get involved, annoying though that might seem.

Given the sum invoved it might be worth your while taking legal advice from a specialist in this area, but I fear they won't be able to tell you any more than I've been able to.

Good luck and sorry I can't give a more positive answer.

Read this Q and A at http://www.candidmoney.com/questions/question416.aspx

Flat £140 state pension update?

Lots of news coverage this week about the proposed flat weekly state pension. But does it tell us anything new?.

The Government has made a bit more noise this week about its desire to introduce a flat state pension. But has it told us any more than we already knew? (which wasn't much - see my previous article) - not really.

We're still no clearer on:

• How much a flat state pension would be, although £140 is the 'target' figure still being bandied about.


• What will happen to those who've built up extra state pension entitlement via SERPS, S2P or buying extra years (to me it seems inevitable they'll lose out to some extent).


• Whether the changes will apply to everyone or only those retiring after the new system is introduced - although rumours suggest the latter.


• How the pension will be funded. The Government can't afford to spend more so any extra expenditure will need to clawed back from elsewhere.


• When a flat pension will be introduced.

In theory this information, or at least firm proposals, will be contained in a government 'Green Paper', but again no official word on when this will be published - although rumours suggest it'll be by the summer.

The only new bits of information to emerge this week are that the new system would be contribution/credit based and that the Treasury seems to agree with the principal of a flat state pension - whoopee do.

Contributions and credits suggest that we'll have to make NI contributions to qualify for a flat state pension (probably 30 years, as currently required for a full basic state pension) and that mothers will enjoy credits towards when not working to look after children under 12.

There's also the issue that the Government might not be able to push through the plans (when they're eventually agreed) before the next election, which is due by June 2015. If it fails to get the core elements of this new system in place and get re-elected then a new government could scrap the whole idea - especially as Labour introduced the current means-tested system.

For now, we'll just have to carry on watching this (very blank) space...

Read this article at http://www.candidmoney.com/articles/article206.aspx

Best way to give money to grandchildren?

Question
My in-laws have inherited some funds - probably £150K - they are proposing to invest it for three children (aged 11,12 and 13) to pay their university fees and other costs - estimated at £15K pa each for 3 years the first one staring in 5 years time. So there would be a withdrawal of £15K in five years time, £30K the following year, £45K the year after, etc

They have been advised to use a St James's Place Investment Bond - not sure of the details of which funds - set-up as a trust.

I wondered what you view on this approach is as I have particular concerns around:

Is this the most tax efficient approach - as the investment fund has to pay 20% income tax on income and gains

The level of charges - reading the guide they will withdraw > 5% of the fund pa after year 5 so will incur partial withdraw charges not specified

Investment is short term so will tax and charges make it a poor investment

Unable to get a feel of the investment returns on the various funds - only can locate today's bid/offer prices

Look forward to hearing from you.Answer
There are a few issues here to consider:

• Are your in-laws concerned about inheritance tax (IHT) when they pass away? Depending on their age, health and wealth this may or not be an issue.

• Assuming IHT is an issue then gifting the money will remove it from their taxable estate provided they live for a further 7 years. But it means waving goodbye to the money for their own use, so they need to feel comfortable they can afford to.

• Even if IHT isn't an issue, do they want to set something in stone to ensure the children will have a right to the money from age 18 and ensure equality? If so, then a trust can help achieve this.

• What sort of investment return would be required to provide the intended £15,000 per year per child from age 18 to 21?

• What types of investment could potentially deliver this return and how much risk would be involved? And are your in-laws comfortable taking this risk?

• What the most tax efficient and cost effective way to buy and hold these investments?

• Who's going to monitor/look after the investments over the next 10 years until the youngest child receives their last income payment?

I won't cover all the above in too much depth, else I'll end up writing another website and send you to sleep! But in broad terms:

If IHT is an issue and they can afford to give away the money then using some sort of trust will almost certainly make sense - I doubt they'll want the children to receive all the money in full now. For example, a discretionary trust will allow them to give the money away now but retain some control as to how it's invested, when the children receive money and how much they get. Your in-laws would be called the 'settlors' (the ones gifting the money) and might also act as 'trustees' (along, perhaps with others, e.g. you) whose job it is to ensure the money is invested and managed in line with the settlor's wishes.

If there's no IHT issue, then they need to decide whether to give the money away now anyway (via a trust as above) or keep it themselves with a view to passing money across to the children in future. The latter is simpler, but less robust in terms of the children definitely getting the money.

I'll cover tax in a moment, but let's look at what sort of investment return would be required to ensure £150,000 invested now can pay an income of £15,000 per year per child for three years between age 18 and 21. Ignoring charges and tax, an average annual return of 2.9% would just about suffice. Tax and charges could perhaps add a further 2-3% to the required return depending on which investments are used and how they're held.

In any case, this sort of return is certainly feasible without taking excessive risk. The simplest option would be to use a 5 year fixed rate savings account paying around 4.5%+ then do the same again on maturity (assuming interest rates are around the same, or higher, at that time) - minimal risk and no need to pay a financial adviser.

The downside with cash is that although safe, returns are unexciting and your in-laws might generate higher returns by investing. But this means risk - the children could end up with rather more or less than intended depending on how the investments perform. This is impossible to predict, so the best you can do when investing is use common sense and pick a spread of sensible investments to reduce risk.

If your in-laws hold the savings/investments themselves then they'll be liable to income tax on interest/dividends and capital gains tax on gains. Whether this is a problem depends on their tax band and whether they already use their capital gains tax allowance. They could use their joint ISA allowances to gradually remove the money from the taxman's claws.

If savings/investments are instead within a discretionary trust then dividends will be taxed at 42.5% and interest at 50% (on income above £1,000 a year). The income tax can be reclaimed in the hands of the children (assuming they're non-taxpayers) when eventually distributed (income tax paid by the trust before then can be rolled forward via a 'tax pool' meaning it could still be reclaimed by the children in future - see http://www.candidmoney.com/questions/question323.aspx my answer to this earlier question for more details and an example). So this route could be tax efficient (provided gifts are below the nil rate band, currently £325,000, else it'll be classed as a 'lifetime transfer' and extra tax will apply).

Discretionary trusts do get an annual capital gains tax allowance, but it's currently £5,050 - half the amount given to individuals. Gains in excess of this are taxed at 28%.

I'm not a great fan of investment bonds, but they can work quite well within discretionary trusts, especially when held offshore (no tax is automatically deducted within offshore investment bonds, it's 20% onshore). Up to 5% of the original investment can be distributed each year without being subject to income tax, and unused 5%s can be rolled forward to use in a later year. When the bond is eventually surrendered (probably when the youngest child has received their final payment) a big tax liability could arise in the trust, but this could be avoided by 'assigning' the bond to the children before surrender - if the children are non-taxpayers there may be little/no income tax to pay.

So, yes, using an investment bond could make sense in this context, but using an offshore variety would be most tax efficient. But beware that investment bonds tend to pay high sales commissions, probably £6,000+ on a £150,000 investment. I would favour a fee-based independent financial adviser in this instance, as St James Place advisers are tied to their own range of products. I wouldn't expect to pay fees of more than £2,000 for this work if pursuing the investment bond/trust route.

Read this Q and A at http://www.candidmoney.com/questions/question410.aspx

Can I avoid CGT on a second home?

Question
Is it possible (and legal) to move out of ones main and current residence and live in a property that one owns and currently lets out, to live there for 6 months to mitigate any capital gains tax liability on the rented out property when it comes to be sold?

Answer
Potentially. The tax allowance that relates to this is 'Private Residence Relief', which is the one used by MPs to 'flip' second homes and avoid paying capital gains tax on profits made. While some MPs got into hot water over 'flipping', it was their own moral code of conduct that they generally broke, not the law.

Private residence relief means you don't have to pay capital gains tax on profits made from selling your home provided that it's been your only home or main residence, and you've only used it as your home, for the whole time you've owned it.

Now this might not sound very promising re: second homes, but there's a couple of very helpful provisions in the private residence relief rules.

Firstly, if you own more than one home you can nominate one as your 'main residence' by writing to your tax office. This must be made within two years of changing the number of properties you own, otherwise HMRC will instead decide which is your main residence based on facts, which could make things more difficult. So, if you buy another property always tell HMRC which will be your main residence within two years, even if it'll continue to be your existing home for the time being.

While this is good news, in that you can switch your main residence very easily (provided you've complied with the two year rule), it doesn't get around the problem that the second property probably hasn't been your man residence throughout the time you've owned it.

This is where the second provision - the one famously used by some MPs - comes in. The final 3 years that you own a property will be treated as if you lived there, even if you didn't, as long as the property has been your only or main home at some time during the period that you owned it.

Putting all this together, the following is perfectly legal:

You've lived in your family home for a number of years and decide to buy a second home, which you rent out. You tell HMRC within two years of buying it that your family home will continue to be your main residence. You decide to sell the second home within three years of buying and switch it to your main residence a week before the sale completes. After the sale you switch your main residence back to your family home.

Any profits from the sale of the second home will be tax-free thanks to private residence relief.

Of course, life won't always be this simple. You might own the second home for a lot longer than three years, in which case relief will be given in proportion to the total time you used it as your main residence. For example, you own a second home for 10 years, but only used it as your main residence during the first year you bought it. Relief is based on these 12 months plus the 36 months (last three years of ownership) out of the 120 months of ownership, so you'll get relief on 48/120 of the gain.

You can read more about private residence relief in this HMRC help sheet.

Read this Q and A at http://www.candidmoney.com/questions/question408.aspx

How can I invest in shares?

Question
I have some money I want to invest and wondered how do I find a broker?

My husband has invested in shares for years but he uses Nat West share buying service and I'm not a Nat West client. I went to my own bank Llloyds and asked to buy a share isa but they said they wouldn't let me because I am not retired and they say it is too risky since I am living off my savings but I feel if I should want to go down that route they should let me, however the bank advisor refused to do it.Answer
It really depends on what sort of service you want.

If you're happy choosing shares yourself and just want a stockbroker to buy them for you, then your cheapest route will be an 'execution only' online stockbroker. With a bit of shopping around you can buy and sell shares for around £10 or less per deal with no charge for an ISA 'wrapper'. Take a look at my answer to earlier question for some examples.

If you want advice on which shares to buy then you'll need to use an advisory stockbroker, examples include Charles Stanley and Redmayne Bentley. You'll probably find there's a minimum investment level of around £50,000 and expect dealing fees to potentially run into hundreds of pounds with an annual charge on top. Whether or not an advisory stockbroker's advice is any good you'll have to judge yourself - as I've never used one.

As an alternative, you might consider using an investment fund, such as a unit trust. This could potentially reduce risk by spreading your money across a number of shares, perhaps 50 or more.

Choosing a decent fund is a challenge in itself, although if you stick to a low cost tracker fund (e.g. which tries to mirror the FTSE All Share Index) you probably won't go too far wrong longer term. Fidelity and HSBC both have examples which charge less than 0.3% a year. Or, if you require an income then maybe consider a UK equity income fund.

Whichever route you decide to pursue, please do think carefully about the risks of stockmarklet investing before taking the plunge. The markets seem especially volatile these days and I don't think it's out of the question they could fall by 10% or more if we slide back into recession (which, of course, may or may not happen).

If you can tie up the cash for 10 years or more then I think there's a good chance you'll earn more money via some sensible stockmarket investments than a savings account. And with any luck you'll make a decent return sooner than this. But you can't rule out losses and if losing money will give you sleepless nights or cause a big financial problem I'd be inclined to steer clear and stick to a high interest savings account.

Also, I'd avoid bank financial advisers. They're seldom independent or good value for money.

Read this Q and A at http://www.candidmoney.com/questions/question407.aspx

Difference between multi-manager and funds of funds?

Question
Is there any real difference between a "fund of funds" and a "multi-manager fund"?
Answer
Multi-manager tends to be used when referring to both funds of funds and manager of manager funds, which can cause some confusion.

In a fund of funds the manager invests your money into a spread of other funds, for example you might buy a fund that in turn holds 20 funds. The advantage of this approach is that it's easy to get very wide investment exposure - some funds invest in a range of different assets (e.g. global stockmarkets, bonds, property and commodities) and are marketed as one-stop portfolios.

The disadvantage of funds of funds is primarily cost. You'll pay the fund of funds manager an annual management fee of around 1.5% and the underlying funds will have annual charges too (although they're usually charged at institutional levels, around 0.75%), so total annual charges could easily exceed 2%. And, as usual, the skill of the fund manager is important too. Pick a bad fund of funds manager and you might as well have chosen funds yourself.

Most funds of funds can invest in funds from any investment groups (called 'unfettered'), although some are restricted to the company's own funds (called 'fettered'). Always check this before investing - unfettered is potentially better, albeit more expensive.

In a manager of manager fund an overall manager will delegate parts of the fund to specific investment managers rather than buy other funds. For example, they might choose one manager to handle the UK stockmarket and another the US etc. The chosen managers, who may well work for other investment companies, will normally purchase shares (or bonds etc as appropriate) rather than funds and run that part of the overall fund as if it was their own.

This approach should be cheaper than funds of funds and usually costs the same as conventional funds, because you're paying just one annual management fee (the manager of managers pays the underlying managers out of this).

Manager of manager funds can work well provided the overall manager delegates to top notch managers. But in practice this isn't always the case and switching underlying managers is a far slower process (for example, they might have an annual contract) compared to funds of funds (where the manager can sell a fund almost instantly).

I'm not sure one approach is better than the other, they both have their pros and cons. But funds of funds tend to be better suited to investing in a wide range of assets within a single fund.

Read this Q and A at http://www.candidmoney.com/questions/question406.aspx

How do I sell a US share certificate?

Question
I hold 60 shares in Harsco Corporation Common Stock a USA Based company.

I was given these shares when I worked for there UK branch in Newport (HECKETTS LLANWERN) and would like to sell them from the UK. Could you advise if this can be done and what cost would apply? Also could you direct me to a company that could help sell these shares?Answer
At the time of writing the shares were trading at around $34 on the New York Stock Exchange, valuing your holding in the region of $2,000, or £1,250.

As you received the shares via Harsco when you worked for them I'd start by checking whether there's a scheme in place allowing (ex) employees to sell. Harsco shares are administered in the US by Mellon Investor Services, you can call them on 001 800 850 3508 (sorry, they don't publish an email address).

If there's no scheme in place then you'll need to check whether you hold the shares via a certificate (the US jargon for this is 'customer name') or via a stockbroker nominee account (US jargon is 'street name').

If already held via a stockbroker then you simply need to contact that stockbroker to arrange the sale.

If, as is more likely, you hold the certificate then you'll need to find a UK stockbroker willing to sell this for you. Unfortunately, this is easier said than done as these days stockbrokers offering a US trading facility only seem to do so via nominee accounts (that is, an account where the stockbroker technically owns the shares in a single account and gives you the right to your holding) - the only firm I know of that should be able to sell your certificate is Redmayne Bentley. They're not the cheapest, expect to pay at least £50 in charges, but should make selling straightforward.

If you've lost your certificate then you need to contact Mellon Investment Services to obtain a replacement.

An alternative is to try and transfer your certificate into a stockbrokers nominee account then sell (I believe TD Waterhouse will allow this). You might save a bit of money but this route is more hassle and will take longer to sell.

Good luck.

Read this Q and A at http://www.candidmoney.com/questions/question405.aspx

Is ISA bundling bad?

Question
This ISA question is about stocks and shares ISAs with particular reference to funds.

Should I like "amalgamation" of the separate Tax Years into one ISA or not? This amalgamation is done by both some fund managers and some fund supermarkets/discount brokers and sometimes they can both do it to the same investments to magify the effects.

I am not sure what the technical term for this "amalgamation" is but what I mean here is the practice of some funds managers (or fund supermarkets) to put all the funds from the different ISA Tax Years into one big ISA. In such a way as the boungaries between the different Tax Years and the boundaries between differerent categories of investment (eg PEPs and ISAs) are lost forever. Is this a bad thing or a welcome simplification for most people?

I first came across it several years ago with a Perpetual PEP savings plan that I had in place at the time. As it was a plan that I kept for several years it involved many different Tax Years. Later I transferred it to a discount broker/supermarket who had the same practise. All the investments from the different years were rolled into one big Tax Year investment with this plan. At the time I took the view that this was a "bad thing" but would proceed with the transfer anyway. I made a mental note that, for me, the discount broker might be best kept for "non ISA" business only in future. By this time I had noted that other fund supermarkets kept the investments in the different Tax Years separate albeit under one overiding account and, perhaps irrationally, I preferred this.

Then, much later, I tried to work out why I had taken the view that it was a "bad thing". I was "hard put" to come up with anything other than a suspicion it was cost saving which offfered no benefit to the customer. But, after thinking about it, I did think of at least one more solid reason why I did not like it and it has to do with my own "forgetfulness": when looking at my investments for 2003/4 I came across my ISA looking rather "bigger" than it should have been and I wondered whether I had exceeded my annual ISA allowance (ie made a mistake) with the discount broker by accidentally transferring funds into the ISA that were non ISA.

I decided to investigate further. I had forgotten that I had used this ISA Tax Year to transfer in PEPS from these earlier PEP investments with Perpetual which then "topped up" my ISA investment for this year: so it made it "look and feel " a bit "illegal " when it was , in fact , not so. These PEP transfers in were , at the time , allowable ,as transfers in , but the broker's system did not keep the various Tax Years and the PEP investments separate and so it had the effect of making this ISA look like I as busting the ISA limits for that year when in fact I was not . I had merely forgotten the "history" of this ISA investment as the years had gone by , until I retrieved my documentation and looked at it again in detail. The fact that they both had the same "amalgamation" strategy had also magnified the effect and the "history" of these investments had been lost.

Am I right or is a more balaced view needed?Answer
In the days of Personal Equity Plans (PEPs) it was only possible to transfer an entire holding from one PEP manager to another. And given fund supermarkets didn't exist it made sense to use a different PEP (fund) manager each year to ensure diversity. So transferring PEPs by tax years was both practical and the norm.

The introduction of ISAs allowed partial transfers, that is you didn't need to transfer your entire holding with one ISA manager to another. This allowed greater flexibility but started to become messy if you split an ISA from a single tax year between several ISA managers.
And the proliferation of fund supermarklets and platforms means it's really not practical to identify ISA holdings by tax year any more. I think the technical term for this is 'bundling', i.e. your ISA holdings from various tax years are bundled into one account and viewed as such.

I agree doing so probably saves ISA providers some money, but it also simplifies things for customers. If I own units in a fund that relate to several different tax years, I would much rather see just one entry for that fund on my valuation than multiple entries reflecting the different tax years.

I suppose there is a downside if you like tracking your ISA investments by year, but I think it's a small price to pay for the convenience and flexibility of managing your ISA portfolio on a single platform. But I think it is sensible to keep track of all your investments and subsequent switches/transfer, either on paper or on computer, e.g. using a spreadsheet.

Read this Q and A at http://www.candidmoney.com/questions/question404.aspx