A few rants...

Inflation figures, NEST, MAS, wealth taxes, there's lots to rant about. .

We've always known that a lot of the stuff governments do makes little sense; politicians are often too busy posturing and looking after own self-interest to make positive long term contributions to society. And even when the intention is good, the execution is all too often flawed. But as far as 'money' is concerned things seem especially bad, or am I just feeling even more cynical than usual? A few rants that spring to mind...

RPI the new CPI?

The Office of National Statistics will consult on whether to change the way RPI is calculated, to bring it more in-line with CPI. There are 3 main differences between the two measures:

• What's included: RPI includes some housing costs that CPI doesn't.


• Who's represented: CPI presents all households whereas RPI excludes the highest earners and pensioners living mostly off benefits.


• The maths: RPI is calculated using arithmetic mean whereas CPI uses geometric mean - different ways to measure an average . Don't worry about the jargon, the bottom line is CPI's method is a bit more relevant because it assumes people change their spending habits in proportion to price changes - i.e. if bread A becomes more expensive than bread B, you might buy more of B and less of A.

The maths part is important as estimates suggest it makes CPI about 0.9% lower than RPI, ignoring the other two differences. And it's really this that the ONS is proposing to change.

From an academic point of view it arguably makes sense. But the wider implications of such a change in practice are massive and make less sense.

The Government will save a fortune on the interest and redemption payments of index-linked gilts (although the contracts on a few index-linked gilt issues may require he Government to redeem them early in this event). And employers with final salary pension schemes may benefit, as the cost of inflation-linking pensions would likely fall.

But those with RPI-linked pensions, investments and savings could stand to lose out, potentially by a lot longer term - such change would be largely detrimental to and unpopular with the public.

NEST

The majority of the population faces a big pension shortfall, i.e. they're not saving enough to enjoy a comfortable retirement. The idea to automatically enrol employees (who don't already have access to a company pension) into a simple low cost scheme is therefore laudable.

However, the Government's attempt at this ('NEST') has a few possible glitches. Perhaps the biggest is that while the annual charge will be a very low 0.3%, there's an additional 1.8% initial charge on contributions - necessary to compensate for civil servants blowing too much cash when setting up NEST. There's no word yet on how long this extra charge will be levied, but it's very unwelcome.

There's also the problem that many of the pension-starved employees NEST is targeting may decide to opt-out, wrongly viewing their compulsory contribution as more of a tax than investment in their future. And employers might try to drive down employee benefits elsewhere to help fund their compulsory contribution - meaning employees won't necessarily be better off.

Nice concept, but in practice I fear NEST may be doomed.

Money Advice Service (MAS)

The population doesn't just face a pension shortfall, there's a big shortfall in money knowledge and education too (if only everyone would visit my site!).

Step forward the Money Advice Service (MAS), the Government's answer to the problem. Trouble is, despite spending tens of millions of pounds on a website, staff and marketing (funded via a compulsory levy on financial services companies), it really isn't very good - just take a look at its website or try calling the MAS helpline with a technical question.

Browse the annual accounts and you'll see senior staff on bloated six figures packages and money being spent left, right and centre - the only thing MAS seems any good at. MAS is obviously immune to the recession hitting the rest of us - annoying to see quangos like this are alive and well.

LibDem talk of a wealth tax

Whether you like the LibDems or not, you'll probably agree they have little chance of getting into power other than via the weaker half of a coalition government. But this doesn't stop Nick Clegg et al. announcing half-baked ideas to more heavily tax the affluent. I'm not against the rich bearing a greater tax burden, but wealth taxes (usually an annual tax on assets above a given threshold) are notoriously difficult to implement, police and run cost effectively. A number of European countries have ditched wealth taxes over the last 15 years for these very reasons. Luckily, unlike the above examples, it's all talk, and that's probably all it ever will be.

Anyway, rants over for now, but I'd love to hear yours, please post below...

Read this article at http://www.candidmoney.com/articles/article260.aspx

Any way to reduce CGT on let property?

Question
My wife and I bought a flat in 1990 for approx £90K which we let until recently when on retirement we moved into it. However the area is not as it was and we would like to choose somewhere else instead.

Today the flat it is valued at about £240K after agents and legal costs. Are we to be taxed on the entire difference of £150K (apart from the standard CGT allowance of around 22K) as the bulk of the 'gain' is due entirely to inflation and so not a gain at all?

This seems most unreasonable and will discourage long term holdings which is counter to the supposed originally announced intention of CGT to catch the get-rich-quick brigade. Also it means the legislation is retrospective and perhaps thereby a worrying precedent. If this large tax charge is in fact the case can it be deferred by rolling it into the bungalow we would like to purchase and thus only be payable on our deaths or further removal?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.

However, if the capital gains tax rate rises in future, perhaps to income tax levels, it would start to look very unfair that inflation is no longer taken into account. But Government's tend to be less focussed on what's fair when they're broke!

Moving onto to your property, you can't roll-over the gain into another property but there's potentially a small amount of good news.

Because the flat is now your main residence you could benefit from private residence relief. This will be proportional based on the period of time throughout ownership it's been your main residence, although you can automatically include the last 3 years provided it's been your main residence at some point.

So if we assume you've owned it for 22 years and it's been your main residence for 3 of those you'll get relief equal to 3/22 of the £150,000 gain, i.e. £20,454 (the calculation should actually be carried out in months).

However, because you let the property you can also qualify for letting relief, which is calculated as the lower of:

- the amount of Private Residence Relief already calculated, or
- £40,000, or
- the amount of any chargeable gain you make because of the letting (calculated as a fraction of the gain - the fraction being the period of letting/divided by the period of ownership).

In your case the private residence relief of £20,454 seems to apply, giving a total of £40,908 relief. This leaves a chargeable gain of £109,092 from which you can deduct available capital gains tax allowances.

Please bear in mind my calculations are for illustration only. You'll need to calculate exact figures yourself or use an accountant to do so.

More details on private residence relief in this HMRC helpsheet.

Read this Q and A at http://www.candidmoney.com/questions/question749.aspx

Equity release on shared ownership property?

Question
Can you get equity release on a shared ownership property where you own 50% and the housing association own 50%?Answer
No, I'm afraid equity release schemes require you to own 100% of the property. If you need to raise cash you may be able to mortgage/re-mortgage your 50% share in the property. However, lenders are far more cautious than they used to be, so even this might be tough unless you have a reasonable amount of equity in the property.

Read this Q and A at http://www.candidmoney.com/questions/question747.aspx

Can I take SSSO/AVC before company pension?

Question
I have just taken voluntary redundancy on 1 September. I have a final salary pension of 27 years and also £22,500 in an AVC scheme with Aviva. I have read about a scheme called State Sptreading Scheme Option (SSSO) and want to know if it could apply to me. My official state pension age is 1 March 2015 so I have 2 1/2 years before I receive my state pension. Do I have to take my company pension in order to get SSSO?Answer
In theory it's possible to take benefits from an Additional Voluntary Contribution (AVC) pension scheme before or after you take benefits from your occupational pension, so this could allow the possibility of using the State Spreading Scheme Option (SSSO) without taking your company pension.

However, it all depends on whether your pension scheme rules allow this (just because HMRC rules do it doesn't automatically mean your pension scheme does), so you'll need to check with your employer's pension scheme administrator.

SSSO allows you to withdraw a temporary income from an occupational pension/AVC (if the scheme allows it) equal to up to 125% of a single person's basic state pension (I believe) until the state pension age, at which point the balance of the fund is used to provide a conventional annuity.

Alternatively, you might just decide to take your tax free cash entitlement from the AVC and buy an annuity now - if your scheme rules allow this.

It's the usual retirement gamble of receiving less income now but for longer or more in future for a shorter overall period of time. There's no right or wrong as such, it depends on how long you think you'll live and prevailing annuity rates.

Read this Q and A at http://www.candidmoney.com/questions/question746.aspx

Capital gains tax on property conversion?

Question
I recently purchased an old pub which I am converting into a residential property and it is now my main (and only) residence.The pub consists of a main building with an attached restaurant to the side of it and my original intention was to the convert the pub into a 5 bedroom house with the restaurant part being a large 'lounge' area, however I decided to apply for planning permission to convert the restaurant part into a three bedroom semi-detached house (which I now have) and my question is this:-

1. Will I be liable for cgt on the restaurant part if I sell it as a 'renovation project' i,e sold the restaraunt as it stands with planning permission?

2. Will I be liable for cgt on the restaurant part if I convert it myself and sell it as a three bedroom house?

Thanks in advance.Answer
They key will be whether HMRC allows you to claim private residence relief on the sale. It's not normally granted if you "acquire a dwelling house and/or spend money on it in order to realise a gain on its disposal".

In other words, if HMRC thinks you bought the pub in order to develop part of it and sell on for a quick profit, it'll likely treat any resulting gains as taxable (possibly as income if it reats you as a developer). Even if you just sell the restaurant area with planning permission, rather than developing yourself, you may still be caught by this rule.

Of course, during the property boom loads of people effectively became property developers by buying homes, living there for a short while (as a main residence) while they did them up then selling at a profit and moving another notch or two up the housing ladder without paying any tax on the gains. Should they have paid tax? It's something of a grey area.

Bottom line, the answer to your question is probably subjective and I'm afraid I don't have enough experience in this area to give a more definite answer. I'd suggest seeking guidance from an accountant or HMRC directly (who can occasionally be helpful when you phone them).

Good luck.

Read this Q and A at http://www.candidmoney.com/questions/question738.aspx

Views on Schroder UK Mid 250 fund?

Question
Appreciate your views on Schroder UK Mid 250 fund.

ThanksAnswer
On the surface, the Schroder UK Mid 250 is a good fund gone bad - it has underperformed the FTSE 250 Index by some margin in 4 of the last 5 years. The last 12 months have offered a ray of hope with the fund finally outperforming the Index, but does this warrant continuing to hold the fund?

There appear to be a few key reasons for the underperformance. Going back several years there was widespread concern that the fund had become too large for mid cap investing - the challenge for manager Andy Brough being he'd have to invest in more companies and/or increase the size of bet on each company - neither necessarily desirable.

The size issue appears to have been compounded by Brough making too many poor sector and stock bets over the last few years. As of the end of August Brough had over half his fund invested in the consumer services and industrial sectors, with Sports Direct his largest holding at just under 6% of the fund. His industrials weighting is broadly on par with the Index, but his consumer services exposure is quite a lot higher - meaning he either expects the economy to pick up or he's very confident in his stock picks.

Either way, remaining in the fund means having confidence in Brough. While once almost a foregone conclusion, poor performance has shaken the faith of many investors. I think there's a fair chance performance versus the Index will bounce back medium term (although I don't expect this to be consistent given market/economic volatility), but on balance I think there's a stronger argument for simply switching into a tracker. Or, at the very least, consider using a different active manager with a stronger, more consistent track record. The Franklin UK Mid Cap Growth (an ex Rensburg fund) run by Paul Spencer springs to mind, as does the Royal London UK Mid Cap Growth fund run by Derek Mitchell.

Read this Q and A at http://www.candidmoney.com/questions/question739.aspx

Which SIPPs for cash?

Question
Which SIPPs allow Interest earning Bank deposits in its Investment Platforms?Answer
Almost all 'low cost' SIPPs restrict customers to a single cash account paying little or no interest. The simple reason being it's very profitable for the SIPP provider to do so (they earn a higher rate on the cash and pocket the margin).

The only exception I've found is the James Hay iSIPP, which offers a range of fairly competitive fixed rate accounts from four banks. The downside is that there's a minimum investment of £50,000 per account.

To access the full range of savings accounts available for pension funds (which is still rather limited and uncompetitive compared to conventional savings accounts) you'll need to use a more expensive higher end SIPP (e.g. AJ Bell Platinum SIPP, Alliance Trust Full SIPP). This will typically cost several hundred pounds both to set up and each year as administration fees, so you'll need to factor in these costs when deciding whether it's worthwhile.

Read this Q and A at http://www.candidmoney.com/questions/question744.aspx

Which adviser for pension transfer?

Question
I am in the process of transferring my personal pension funds onto the Skandia platform. I have the choice of two advisers. One is offering me 0.5% for annual review (but monthly review of underlying funds), while the other is offering 1% for quarterly review (and monthly review of underlying funds). The 1% adviser has the most experience, but the other has an intimate knowledge of my main occupational pension scheme. I may wish to take an annuity, or place the funds in drawdown, in 3 years time. How do I decide which adviser is most appropriate for my needs?

One of the advisers has told me that, if my main occupational pension is greater than 20k, the personal pension should be in a SIPP. Is that right? I have never heard this before.Answer
If you'll likely buy an annuity in 3 years time then your investment choice should really be restricted to cash and maybe relatively safe investments such as cautious fixed interest funds. In this context it's unlikely much investment expertise or monitoring will be required, so the 0.5% adviser may suffice (or consider doing it yourself). And perhaps the bigger question is whether you'll derive sufficient benefit from using Skandia for just 3 years to outweigh the cost of transferring your existing pensions.

If you opt for drawdown instead this will require more comprehensive investment planning and monitoring, as your pension fund could remain invested for many more years and income withdrawals require careful monitoring to ensure your fund doesn't run dry. It may well be the 0.5% adviser has sufficient skill and experience to carry out this task perfectly well. But if you feel the more expensive adviser is more capable then perhaps they will carry out a better job.

I'm not particularly comfortable with advisers trying to charge 1% a year, as this is quite steep and can become a significant sum over time. However, you might feel the advice and service you'll receive justifies the cost - it's a free market after all.

As for the adviser's view that SIPPs should be used for pension pots in excess of £20,000, it's debateable. The advent of low cost SIPPs means it's now financially viable to use a SIPP on pension funds of this size. But whether it's a good idea depends on the extent you'll use and benefit from the increased investment choice. And whenever considering a transfer out of a money purchase occupational pension it's vital to check whether you'll lose any valuable benefits, such as employer contributions and subsidised charges.

Read this Q and A at http://www.candidmoney.com/questions/question745.aspx

Tax on foreign scrip dividends?

Question
I have Royal Dutch Shell shares from I take scrip dividends.

As far as I have been able to find out no income tax is due on the scrip dividend, that is used to purchase new shares. There is a 15% Dutch withholding tax on the conventional dividends.

I called HMRC tro try and check the tax position and they seemed confused...before hanging up.

How are they taxed, is there a catch?Answer
There's no catch as such.

Like most companies, Royal Dutch Shell pays corporation tax on its profits, with dividends paid out of the remaining balance. If you opt for scrip dividends (i.e. extra shares in lieu of a cash payout) there's no 15% Dutch withholding tax, as you mention. Opt for cash dividends and the withholding tax applies.

Whichever route you choose, the dividends are subject to UK income tax as normal. This means basic rate taxpayers will have no further liability (as the corporation tax paid is effectively deemed to be sufficient) and higher rate taxpayers will be subject to 32.5% tax on the 'gross' dividend (generally equal to 25% of the dividend received).

The 15% Dutch withholding tax can be offset against the UK income tax liability, but as basic rate taxpayers don't have any further liability it's only relevant to higher/top rate taxpayers.

So in this case the scrip dividend is more favourable for basic rate taxpayers (as it avoids the 15% withholding tax that can't in practice be reclaimed) while neutral for higher/top rate taxpayers (assuming they reclaim the 15% when opting for conventional dividends).

If you want to read about scrip dividends and capital gains tax see my answer to this previous question.

Read this Q and A at http://www.candidmoney.com/questions/question718.aspx

Index tracking strategy a good one?

Question
I am a great admirer of your website and independent opinions.

In todays volatile markets many people (like myself) are struggling to maintain the value of their investments and provide some sort of investment income/capital growth. Obviously cash deposits now loose money in real terms. There are many theories of how to do this through investments. The problem is sorting out the pressurised sales literature fiction from actual facts. I have narrowed down three areas of interest and would value any opinion on them:-

1. www.saltydoginvester.com. This is a subscription service which provides weekly online updates on performance of unit trusts, all divided up into different segments related to risk which extends backwards historically. There are a lot of figures! They also run their own portfolio which is reviewed and explained weekly and in a monthly newsletter. Their portfolio seems to have been successful in avoiding downward dips, where they have transfered into a money fund. The idea is that you can follow emerging trends by using a platform provider like Hargreaves Lansdown and make sales and purchases at very little cost or effort on line. The basis of the scheme's theory appears to mirror the Jesse Livermore investment rules of momentum trading, which means you only ever buy on a rising market, you do not implement any investments/segmented ideas until the market has confirmed by going up. etc, etc. You have to act decisively once you have spotted a trend!
Although this man Livermore was a legendary and incredibly successful investor over 30 years, his wealth se-sawed up and down and he eventually committed suicide, which is a little worrying.........
The other fly in the ointment is the forthcoming changes in investment commissions and 'trail' commissions.

2. www.monkeywithapin.com This is a website written and hosted by Peter Comley who has a degree in psychology. It is free. It contains an interesting and seemingly academic book 'Monkey with a pin' (which you can dowload and print) This book draws attention to some uncomfortable opinions/conclusions regarding investment managers and how the costs are hidden and the returns magnified by using doubtful stats. and selected time periods. He also draws attention to experiments that suggest that a monkey with a pin can probably outperform star investment managers! 'Buy and hold'' is no longer a good policy due to extreme volatility. He also says that humans are not 'hard wired' to make investment decisions successfully due to their inability to sell at a loss, etc etc.

If the best investment managers are so prone to making mistakes eventually and monkeys can out-perform them, what about tracker funds:-

3. Vanguard Investments and in particular their FTSE Equity Income range, which contain a selection of equity income shares of companies that are yielding a handsome dividend income because they are stolid and huge, like utility companies, etc and also some companies who seemingly yield a good dividend income simply because the market believes they are either boring, non growth or in trouble and have consequently marked their share price down (investing there goes against the Jesse Livermore rules though!)
They have quite a big range of other trackers.
Vanguard Group have commissioned a paper summarising the findings into active investment managers results compared to passive investment which is available on their website.
Of course - need I say - the passive strategy comes out as best and this seems to be confirmed when you compare active fund managers performance and they say that investing is a 'zero sum' game with equal losers and winners. Are these funds real shares or derivatives?
There is a 0.5% purchase fee as well as charges from Hargreaves.Answer
Thanks for a very interesting question.

I've recently written an article including a look at Saltydog Investor here. It's certainly worth a look if you believe in momentum investing and have the time/inclination to make frequent fund switches within your portfolio. But it doesn't particularly suit income seeking investors and you'll probably want to use a fund platform that doesn't charge dealing/switching for funds, else the costs of frequent switching could soon pile up.

The Monkeywithapin website/book makes some valid points. The main conclusion isn't surprising - the majority of active fund managers are simply not very good. I include a random stock pickers (i.e. monkeys) versus active managers comparison on our tracker fund page. And yes, the monkeys tend to fare well.

While the monkeys comparison is a good advert for tracker funds, we mustn't forget tracker funds charges, which pretty much guarantees they'll fail to beat the index (unless their tracking error is consistently positive). So it's important to consider low cost trackers that accurately mirror the chosen index.

It's also important to consider underlying assets when having the tracker versus active manager debate. Some assets just doesn't lend themselves to tracking, for example physical commercial property - there's no practical way to artificially track a portfolio of office blocks and retail parks. It is possible to track indices of property companies (e.g. REITs), but these tend to be more correlated to stock markets losing some of the diversification benefits of property.

Vanguard offers a low cost range of tracker funds (which buy shares, not 'artificial' derivatives), but rather shoots itself in the foot with a £100,000 minimum investment if you want to buy direct. The funds are currently available via four fund platforms, Alliance Trust Savings, Bestinvest, Hargreaves Lansdown and Sippdeal - but each route incurs extra platform fees of some sorts.

In my view (echoed by my portfolio) a mix of trackers and actively managed funds is a sensible approach, using trackers for mainstream assets/markets and active managers for more specialist areas. It still backfires sometimes, but on the whole it works well.

Read this Q and A at http://www.candidmoney.com/questions/question708.aspx

How does Saxo MWM compare?

Question
I wondered what your thoughts on SaxoMWM are? It is fairly new but I have opened an acount. It seems an efficient and relatively cheap way to invest compared to ny Transact account set up through a Financial adviser.

They take 2.2% of what I pay in plus 1% pa. SMWM is much cheaper particularly if you are buying and holding funds an Etf's.Answer
Saxo Modern Wealth Management offers share and fund trading with the option of ISA and SIPP wrappers.

Perhaps the most significant point to note is that Saxo doesn't rebate any fund trail commission, which is very uncompetitive versus those platforms and discount brokers that do, e.g. Alliance Trust Savings, Interactive Investor and Cavendish Online.

There are no dealing charges for funds while shares cost a fairly competitive £9.95 per deal (up to £75,000 trades then the price rises sharply). Corporate bond trades are 0.75% on the first £15,000 then 0.1%, which is high).

There's an annual £35 account charge, which includes an ISA, while the SIPP wrapper is an additional £195 a year.

All in all, it's hard to get excited about Saxo MWM. It's an ok deal if you only want to invest in shares/ETFs, although the likes of SVS Securities and x-o.co.uk offer cheaper dealing without account or ISA wrapper fees (and for very frequent traders Club Finance may prove something of a bargain). If you want to hold funds the lack of trail commission rebates is a big negative that could prove costly over time.

The Transact charges you mention sound high, but they inclued high financial adviser fees. I believe the Transact platform charges 0.2% on purchases (up to £1 million then 0.1%) with some trail commission rebate for larger portfolios. The ISA wrapper is £12 a year and SIPP £80. While not extortionate, the fees could prove a bit steep on larger sums and may become excessive if a financial adviser adds greedy fees on top (believe me, 1% a year is greedy!).

You might find our online dealing, SIPP and ISA discount broker/platform comparisons helpful.

Read this Q and A at http://www.candidmoney.com/questions/question740.aspx

Put shares ininvestment bond?

Question
I am very new to investments though I have been given company stocks every year and they have all appreciated in the US while I am based here in Germany. My financial advisor suggested that I "wrap" the stocks that I have already paid taxes on when they vested into the Skandia Bond to avoid paying further tax when those vested stocks appreciate further. I have no experience and have had 2 poor experiences with financial advisors who bailed out without informing me and not looking after my portfoliio resulting in my making losses. This time round, I am really apprehensive and would appreciate your kind advice.

Answer
Hard to give a complete answer without knowing your tax situation and future plans. I'm assuming you're tax resident in Germany with the intention of returning to the UK at some point?

It sounds as though you've already paid tax somewhere on the shares when they vested from your employer's scheme and now you own the shares directly you're keen to reduce any further future tax liabilities.

If the shares pay little/no dividend income then the key is avoiding tax on future gains. Gains are only taxable when you sell the shares and your liability at that time will depend on the country where you're tax resident. If the UK, you can offset gains against your annual capital gains tax allowance (£10,600 for 2012/13 tax year). In an ideal world you'd strip out gains to maximise use of your allowance each year to reduce the likelihood of a large taxable gain building up over time. I'm afraid I don't know about the tax treatment of gains in Germany.

Your adviser is likely recommending an offshore investment bond. This means there is no tax on gains and income within the bond. However, it's not tax-free. When you eventually sell the bond any overall profit will be taxable. In the UK, this is calculated via a process called 'top-slicing' (see our life investments page for more details), but in simple terms if you're a higher rate taxpayer when you sell the bond you'll pay higher rate tax on all profits made (i.e. gains and income).

If you don't plan on returning to the UK then the tax treatment of the bond will depend on the country where you're tax resident at the time of selling (the tax authorities there may or may not take an interest in the bond - and let's be honest, I suspect some people just don't bother to declare it if outside the UK, although they could be in trouble if found out).

I'm in two minds about your adviser's motivations.

On the one hand, if you're not likely to return to the UK then an offshore bond might provide a convenient tax vehicle for your shares, albeit profits could eventually be taxable (you'll know it's offshore if the company concerned is 'Royal' Skandia).

On the other, investment bonds do tend to pay high sales commissions (which can cause mis-selling) and probably won't be as tax efficient as regular use of your capital gains tax allowance if you plan to return to the UK sooner than later.

If the adviser is recommending an onshore bond I would be very concerned, as both gains and income will be taxed at basic rate within the bond and this would be especially disadvantageous if you're non UK tax resident.

Hope my answer gives you some pointers, feel free to post further information below and I'll try to follow up with more guidance.

Read this Q and A at http://www.candidmoney.com/questions/question741.aspx

Pension contributions with redundancy money?

Question
I have reached 60 years of age and during 2011/12 I retired, received substantial voluntary redundancy plus 3 months PILON. I could pay £80k into a SIPP (£100k gross).

My question is: which of those three (salary, redundancy, PILON) qualify as 'earnings' in 2011/12 qualifying for tax relief on investing into the SIPP?

They all appear to be taxed under PAYE, apart from the first £30k of redundancy. If any of these three does not qualify I would have to scale back my SIPP investment. I have sufficient allowance remaining from the last 4 years x £50k.Answer
Sorry for the slow reply, appreciate the 2011/12 tax year has already passed. However, for reference:

HMRC does not count the first £30,000 of redundancy payments (which are generally tax-free) as earnings. So you'll need to ignore this when calculating your annual earnings.

Pay in lieu of notice (PILON) is treated as earnings (and taxable) provided it's actually a payment in respect of the notice period you would otherwise have worked (i.e. you're being paid for 'gardening leave').

So the pension contribution can be up to your salary plus PILON and any redundancy payment over £30,000.

Just as a note for other readers: HMRC allows you to carry forward unused annual £50,000 pension contribution allowances from the previous three tax years, provided you've fully used your current £50,000 allowance. However, you will only enjoy tax relief up to your earnings in the current tax year if less than the carried forward and current allowance combined.

Read this Q and A at http://www.candidmoney.com/questions/question653.aspx

FundsNetwork SIPP via Cavendish Online ok?

Question
I have a Scottish Widows stakeholder pension (value £170k). To make sure that going forward I benefit from the trail commision I have decided to move the pot of money and all future contributions. The options I am considering are:

1) re-pension i.e. transfer the SW pension to a low cost broker or

2) transfer the entire value to a SIPP. I am planning to do this via Cavendish.

My question is whether I am better off doing 1) or 2)?

I'm financially savvy and already use Hargreaves Lansdown for ISAs and share dealing. I'm not thinking of holding shares or any other assets - just 5 or 6 well established funds in a SIPP. I've already completed the SIPP form (FundsNetwork) and sent ro Cavendish a couple of days ago but am getting cold feet! I would appreciate your opinion.Answer
I think a SIPP is quite sensible on a £170,000 pension fund. Even if you only want to hold half a dozen funds the wider investment choice should more than outweigh any additional fees on a competitive low cost SIPP.

The FundsNetwork SIPP offered by Cavendish Online offers a good choice of funds. The annual £291 FundsNetwork SIPP charge is a bit steep versus competitors, but given the size of your pension fund it's hardly something to lose sleep over.

Possibly of more concern longer term is the level of annual fund commission/platform fee rebates. Cavendish Online rebates all trail commission, typically 0.5% a year, which is very good. However, because they use the FundsNetwork SIPP platform Cavendish has no scope to rebate any of the annual platform fees that Fiidelity receives from fund managers (typically 0.25%). SIPP providers like Alliance Trust Savings and Interactive Investor who run their own platforms do this, which means typical overall rebates tend to be a bit higher than Cavendish (but not always), although they charge dealing fees for funds.

Bottom line, I certainly don't think you've made a mistake. If the pension will be in situ longer term (perhaps 10 years or more) then Alliance Trust Savings or Interactive Investor will likely prove cheaper (depending on your choice of funds), but as this would mean yet another pension transfer I'd be inclined to stay put or now and see how the SIPP market evolves over the next few years (I daresay FundsNetwork will reduce their fees in time) to be more competitive.

Read this Q and A at http://www.candidmoney.com/questions/question668.aspx

Tax position on ETF seeking reporting status?

Question
I hold SPRD ETF USDV and EMDV and I can see from their website that they are seeking "reporting " status.

How do I treat the dividends paid until they become reporting funds? Are they taxable? And what about gains?Answer
Whether or not an offshore fund (including ETFs) has reporting status doesn't affect how dividends are taxed. They're subject to income tax in exactly the same way as UK based funds and shares, i.e. they're deemed to have paid net of basic rate tax meaning higher and top rate taxpayers have an additional liability (unless held within an ISA or pension).

However, reporting status (or lack of) affects how gains are taxed. Gains from funds with reporting status are taxed under the capital gains tax regime, just like UK investments. Gains from funds without reporting status are taxed as income, generally far less attractive.

When a fund is seeking reporting status it's treated as non-reporting. According to the HMRC offshore funds manual the position for investors in your shoes seems to be covered by ‘Regulation 48’.

When a non-reporting fund becomes a reporting fund UK investors may make a ‘deemed disposal’ at the time of conversion. This means you can treat your tax position as if you sold and repurchased the fund on the conversion date. You’ll be liable to income tax on any gains up to the point of conversion, but gains thereafter will be subject to capital gains tax.

You’ll need to detail this via your tax return covering the tax year in which the conversion takes place. There’s no special section on the return for deemed disposals, so you should report the offshore income gain as you would normally and show your calculations in the relevant notes section.

By the same token, if you sell the fund before reporting status is granted then any gains will be subject to income tax.

Read this Q and A at http://www.candidmoney.com/questions/question671.aspx

How safe is Bestinvest SIPP?

Question
BestInvest used to act as discount brokers for the Fidelity SIPP which used the Funds Network Platform and Standard Life acted as the SIPP Administrators. Both are well known and well regarded in the UK.

Best’s new Select SIPP apparently uses the SEI Global Wealth Platform and uses EBS plc, part of Charles Stanley as administrators. SEI appears a very opaque organisation and whereas I can find plenty of information on Fidelity and Funds Network I can find nothing apart from a website which purports to be solely for “investment professionals” for SEI. Neither of these organisations can be described as household names.

Do you have any information on these organisations and how they compare with Fidelity and Standard Life?

Best are offering what appear to be reasonably attractive terms to transfer to their SIPP and, although there are slightly better deals around, Best seem to be offering a reasonable deal if you are actively managing a SIPP based on OIECS, especially as their fund information and manager assessments seem to be accurate and up to date. However, the fact that Best are partnering with unknown names seems to be a reason to be cautious?Answer
Neither SEI nor EBS are as big as Fidelity or Standard Life, but they're well established organisations (44 years and 35 years respectively) - they're just not public facing businesses. I don't think you need be unduly concerned about business risk with either company. You can read details about their history here SEI EBS..

If you feel the Bestinvest SIPP suits your needs I wouldn't hesitate to use it. Yes, it's not the cheapest, but the research is usually decent so you may find this worth the extra cost (versus those SIPP providers who give bigger annual fund rebates).

You might find it helpful reading my answer to this http://www.candidmoney.com/questions/question555.aspx previous questions about the risks associated with using a SIPP ignoring investment performance). Bottom line, you're covered up to £50,000 per provider (via the FSCS) if you lose money through them illegally dipping their fingers into your pension. The other main risk is an underlying bank going bust if you're holding cash within the pension, you're normally covered by the FSCS for up to £85,000 per banking institution.

Read this Q and A at http://www.candidmoney.com/questions/question691.aspx

Take final salary tax-free cash from another pension?

Question
My father is a few years from retirement, he currently has a final salary scheme and a smaller stakeholder pension, when he elects to take benefits is he able to effectively combine the 2 pots , my thinking is if possible it would be better to take his tax free lump sum using all the stakeholder pot and making the balance up from the final salary pot as this would give him the best return and not tie his money up in an annuity.

Is this possible?

Also would there be any complications caused if he moved the stakeholder pension into a SIPP for the 5 years or so he has until retirement?Answer
It's not normally possible to notionally combine pension pots in this way to take most or all of the overall tax-free cash from one of the pensions. The only exception I can think of is if you have an additional voluntary contribution (AVC) pension scheme linked to the main final salary scheme, in which case you may be able to take the tax-free cash from the AVC provided the final salary pension administrator is happy to allow it.

In you father's case it sounds as though his stakeholder pension is separate from his occupational pension scheme (although worth double checking), so this won't be allowed.

Of course, he doesn't have to take tax-free cash from his final salary pension. If he doesn't need the money then foregoing the cash will increase his pension income. Read my answer to this previous question covering the topic.

Provided the stakeholder pension is separate from his occupational pension then transferring into a SIPP shouldn't affect anything. Whether it's worthwhile depends on the extent your father will benefit from the increased investment choice offered by a SIPP relative to any extra cost incurred. Bear in mind if he plans to retire in around 5 year's time he probably won't want to take much risk, if any, with the underlying investments. So keeping the stakeholder pension and investing in cash/fixed interest funds might be most prudent.

Read this Q and A at http://www.candidmoney.com/questions/question652.aspx

Why make a loan from a SIPP?

Question
i understand that a SIPP can make a loan to an individual or business so long as they are not connected.

How does this work in practice? Where is the benefit for the SIPP investor?Answer
Some SIPP schemes (usually the more expensive ones) allow the pension fund to make a commercial loan to third parties. There are HMRC restrictions, primarily that the person or company you loan the money to must be unconnected, e.g. they can't be a family member, business partner or associated business. And the loan must be made on commercial terms, i.e. charge an appropriate rate of interest and wherever possible secured against assets.

The key test is whether a commercial lender such as bank would make the loan and, if so, the rate of interest they'd charge. Also, loans to individuals cannot be used to acquire any type of taxable property, which obviously restricts use.

The only benefit I can think of is the possibility of securing a reasonable investment return from lending the money. But the costs of the SIPP scheme itself and associated legal fees for the loan paperwork will eat into the margin. Plus there's the risk that the borrower will default.

Read this Q and A at http://www.candidmoney.com/questions/question650.aspx

Is existing pension safe from lifetime allowance?

Question
I retired in 1996 and have drawn a final salary pension and also an annuity bought with AVCs since then. Both have annual increments of about 3%. I also qualified for a modest Norwegian State pension in 2008.

Several years ago I was vaguely aware of the changes to the pension rules and the introduction of the Lifetime Allowance but took little notice as I thought that they would not apply to me as I had already retired and had no further occupational pensions not already in payment.

Suddenly the administrators of the scheme have written to me asking for details which they say they are obliged to collect to see if I have exceeded the Lifetime Allowance. My current pension multiplied by 25 would exceed the current Lifetime Allowance and would be far greater than the reduced lifetime Allowance due next year. Am I really at risk of being taxed on the excess?Answer
From what you've said I think you're safe.

The lifetime allowance applies to pension benefits taken after 5 April 2006. The key here is taking benefits, i.e. commencing an income from a final salary pension or buying an annuity/opting for drawdown on a money purchase style pension.

If you've taken benefits from a pension since 6 April 2006 then you would be assessed against the lifetime allowance, including any existing pensions already in payment (although it was possible to protect some pensions by notifying HMRC by April 2009). But if you were already taking benefits from your pension(s) before 6 April 2006 and have no other pensions from which you have taken (or will take) benefits from that date, excluding the state pension, then the lifetime allowance shouldn't affect you.

It might be your pension administrator is on a form filing exercise or has made a mistake. Either way, I'd ask what's triggered them to ask for the information now.

Read this Q and A at http://www.candidmoney.com/questions/question645.aspx

How do I make money from investing?

Question
I don't understand how to manage a Sipp or Stocks and shares ISA.

Am I supposed to crystallise any gains by sellling my chosen funds when they peak, and buy them back when they slump. Or am I just supposed to hold out for the long term and see where they stand then?

What I don't really understand is how they make money.

For example Aberdeen Emerging Markets swings up and down frequently, and sometimes it is 15 per cent up, sometimes 15 per cent down. How does the fund make any money year upon year?

Am I just supposed to hang on till i retire in the hope that they will be at some high percentage, or am I supposed to be dealing them to try to get more for cheaper?Answer
The dream for any investor is to buy at the bottom of the market and sell at the top. Then wait for markets to fall and do it all over again.

But in practice its nigh on impossible to be right all the time - just ask the majority of professional investment managers who fail to beat tracker funds.

So in very simple terms there are two ways to consider investing. One is to try the above (or at least sell at a higher price than you paid) and hope you're right more often than you're wrong. Or you can just invest and trust that over 10-20 years you'll do ok (i.e. markets will do well overall despite a bumpy ride along the way). In practice most of us are probably somewhere between the two.

You're right about the Aberdeen Emerging Markets fund - over the last year it's been very volatile and made little money overall (4.8% at the time of writing). But over the last 3 years its returned 48% in total, rising to 74% over 5 years. So had you invested five years ago and sat tight you'll have made a very tidy profit.

Of course, that's not to say the fund will make as much money over the next 5 years - it might even lose money. The point is, no-one knows, investing is a gamble. The key is to try and keep risk at a level you're comfortable with and, with a bit of common sense, you'll hopefully do a fair bit better than leaving your cash in bank over 10-20 years.

Read this Q and A at http://www.candidmoney.com/questions/question643.aspx

How are foreign dividends taxed?

Question
A most confusing subject with no certain answer.It concerns ETFs that pay Gross dividend and no foreign witholding tax.Is tax payable on this gross dividend or a tax credit is included in the gross dividend and therefore no further liability for basic rate taxpayers?

My understanding from Ishares and HSBC Etf is that tax credit is included and the effective rate is zero,just like other UK companies dividends where 10% tax have already been deducted.

I would appreciate your understanding of any tax implication for a basic rate taxpayer.
If a tax credit is included why do brokers call is Gross and do not provide any explanation on their tax certificate?Answer
Foreign dividends received in the UK are deemed to have a 10% tax credit attached, regardless of whether any foreign withholding tax has been applied (provided your holding is less than 10% of the company's issued share capital) .

Given basic rate taxpayers have a 10% income tax rate on gross dividends then there's no further tax to pay, just like UK dividends.

Logically, this makes sense. Just because a foreign dividend hasn't had withholding tax deducted, it doesn't mean the company concerned didn't pay some form of corporation tax on the profits from which the dividend was paid (just like the UK).

Higher rate taxpayers must pay 32.5% tax on the gross dividend which, after the 10% tax credit is applied, effectively means 25% tax on the dividend received.

When withholding tax is deducted and the UK has a double taxation agreement with the country concerned, you're usually allowed to offset around up to 15% of foreign withholding tax against any UK liability - note: this really only applies to higher/top rate taxpayers as basic rate taxpayers don't have a tax liability.

Read this Q and A at http://www.candidmoney.com/questions/question641.aspx

Which SIPP for funds and shares?

Question
I am 63 years old, retired with a generous company pension. I also have an additional small pension fund in a SIPP with James Hay which is currently in cash. I want to take the 25% lump sum before the end of this tax year and then invest the balance in shares and possibly a high income fund like Neil Woodfords.

James Hay's charges seem very high for my needs and I'm considering switching to Bestinvest. Can you see any downsides in this?

Or can you reccomend any other low cost SIPP providers please. I do not intend to use income drawdown from the smaller pension at the moment I will just leave it (hopefully!) to accumulate.Answer
Afraid my reply is a bit late, but since asking your question I've put together a low cost SIPP comparison you might find helpful.

If you plan to only hold commission paying funds then the Bestinvest SIPP is a reasonable deal for smaller sums thanks to modest trail commission rebates (typically around 0.15%-0.25%). However cash rates are low (a common problem with low cost SIPPs) and a £120 annual SIPP fee will kick in if you hold non-commission paying investments such as shares, although the £7.50 share dealing fee on pension funds above £50,000 is good for active traders.

The James Hay iSIPP charges £180 a year and a £15 share dealing fee, but gives more generous fund rebates than Bestinvest, so it's swings and roundabouts depending on exactly how you invest the pension fund.

Interactive Investor and Alliance Trust Savings generally give the highest annual fund rebates, but charge fund dealing fees on top of their annual SIPP fees. They'll potentially be the best value if you hold more in funds than shares.

If you'll mostly hold shares then SIppdeal is well worth considering. There's no annual SIPP charge, just a £9.95 dealing fee for all investments. Their fund rebates are stingy, but this is less of an issue if you predominantly invest in shares and the lack of annual SIPP fee is helpful for smaller sums.

Read this Q and A at http://www.candidmoney.com/questions/question640.aspx

Must inheritance be paid to UK bank account?

Question
Good morning from a seriously hot Malta.

I am conducting research on behalf of my long time girlfriend Charlie who moved to Malta with her now ex husband 25 years ago followed by her now deceased parents.

The parental legacy has now finally got to the point of fruition with some £450,000 being released from the estate via KPMG in the Isle of Man.

Charlie has decided to invest a chunk of money in the UK with a Spot Factoring Co with a 40 year track record lending short to business with cash flow issues. They offer investors 14% on larger sums, Charlie has spoken to other investors, spoken to the Chairman in the UK etc etc, so all seems ok and this is not really why I am asking you for advice as Charlie is comfortable with the deal.

But

IOM KPMG insist that Charlie has to provide a bank account.The problem is that she only has a Malta based bank account.It seems crazy bringing Sterling into Europe and then transferring back into Sterling with all the fees associated.

I do have a UK bank account registered to my UK property, but am reluctant to transfer that kind of money into my docile UK account. Even if I could I would have to get around the name on the account, it must specifically be sent to a UK account with Charlies name on it. What do you suggest ? maybe the answer is simple but we are anxious not to make any silly mistakes.Answer
I'm afraid I can't be of much help, as I'm as confused as you are re: why KPMG in the Isle of Man is insisting the money is paid into a UK bank account. Provided inheritance tax has been properly accounted for and paid in wherever it's due I can't see why there would be a restriction on where the money can be paid.

I would push this point and ask KPMG exactly why they're insisting the money is paid into a UK bank account and what rules or legislation dictate this. In any case, as your girlfriend is a resident of Malta and not the UK she'll probably find it very difficult to open a UK bank account, something you might want to point out to KPMG. Her best bet might be to open a sterling denominated offshore account and insist the money is paid there - this would at least avoid needless currency conversion.

If you can add any further info below when you get it I'll be happy to provide a follow up answer.

Just a brief warning re: spot factoring investments, they're not regulated by the FSA so no investor protection should things go wrong. 14% is quite a hefty annual return in the current climate so it's obviously not without some risk.

Read this Q and A at http://www.candidmoney.com/questions/question730.aspx

SIPP for expatriates?

Question
I lived in the UK for a couple years about 8 years ago. In my short time there I accumulated a company pension of about 30K GBP. It has not grown at all and I want to put it into a SIPP. Seems like a QROPS will be expensive for a small amount, so I wanted to put it into a SIPP. Are there any SIPP providers that will allow expats to open an account?Answer
Yes. Because you're transferring an existing UK pension most SIPP providers should be happy to accept your business. Although you obviously won't be able to make further contributions unless you again become a UK tax resident.

Off the top of my head both Sippdeal and James Hay accept expatriates in your position, although I'm sure most others do too. You could take a look at our low cost SIPP comparison and try contacting the companies that take your fancy.

Read this Q and A at http://www.candidmoney.com/questions/question638.aspx

A financial adviser rip-off?

Question
Will I be dropping a clanger? Your opinion regarding the fees and charges related to the following pensions would be appreciated. I have today received a couple of pension illustrations from my IFA. I am 57 and self employed.
These involve:

1) A contracted out Aegon pension fund from a previous employment, fund transfer value £12628.00
2) A non-contracted out pension fund with Phoenix, fund transfer value £19605.00.

The proposal is to transfer the fund from Phoenix and merge it with the original Aegon fund in a new Aegon fund.

For the contracted out part of the transfer there are no FA charges and a 1.8% annual fund management charge.

For the non-contracted out part there is a Financial Adviser charge of 5.5% and a 1.8% annual fund management charge.

It states that 'for arranging the plan we will pay your FA commission on the starting level of contribution of £1555.55 immediately and further commissions each year, assuming growth at mid rate this will be £167.22 at year 2 and £151.70 at age 65'

On top of this I am paying my IFA a one off fee of £305.00 for work done which includes finding out my projected state pension entitlement.

3) I am going to start (March 1st) a new pension in a multi manager fund with Aegon paying nett £600.00 per month. The Financial Adviser charge will be 50% a month of the built up fund for 12 months, and an annual fund management charge of 2.5%.

It states that my FA will receive £4725.00 immediately plus annual commission starting at approx £48.00 building to approx £242.00 at age 65.

I have yet to receive the 'cooling off' documents so not committed as yet.

Your impartial opinion would be appreciated, are these charges etc par for the course or am I going to pay over the odds.Answer
Sorry for the very slow reply (rather a big backlog of questions), but yes it does look like you'll be dropping a clanger (I hope you changed you mind!). With charges this high and questionable advice the IFA is trying to take you for a very expensive ride.

It's hard to comment on the pension transfer advice without knowing more detail, but the annual fund charges look high (a stakeholder pension would probably be more suitable - but pay less commission to the IFA which is probably why they didn't recommend this option).

The IFA is effectively trying to pocket over £6,000 of your hard earned cash via sales commission for this advice (which you pay via product charges) and also has the cheek to try and charge a further £305 for a state pension projection you could obtain yourself via one phone call to the State Pension forecast Service on 0191 218 3600 or online here.

The Aegon pension the adviser is recommending is also quite poor and the fund management charge is excessive at 2.5%. As for the adviser receiving half your first year of contributions as commission - this is a throwback to the bad old days when pension mis-selling by snake oil salesmen was rife. I also doubt you'll receive any service in return for the ongoing commissions being paid.

Again, you'll very likely be far better off using a stakeholder pension (where there are no initial charges and annual charges are usually below 1%) or a low cost SIPP if you want a wider investment choice.

This is the type of adviser that gives the industry a bad name - the sooner they move on and stop ripping off the public the better.

Read this Q and A at http://www.candidmoney.com/questions/question637.aspx

Invest in corporate bonds?

Question
I know the bottom of the interest rate cycle is not normally a good time to invest in corporate bonds but in the absence of a sensible interest rate elsewhere and the current uncertainty in the stock market I feel I must consider this.

I assume a collective corporate bond fund would provide less risk than corporate bonds in individual companies, and wondered if they also keep pace with increases in interest rates by purchasing new bonds at higher rates when current ones expire, rather than than solely adjustments in the market price ? I also assume there is no guarantee on what price you will get back with a collective fund whereas with individual corporate bonds you know you will get your original money back if you hold them until maturity.

Would you mind also telling me if there are any investment trust equivalents of corporate bonds funds please.Answer
The key factors that affect the value of fixed interest investments like gilts and corporate bonds are the likelihood you'll receive interest and get your money back at redemption (called 'credit risk'), interest rates and inflation.

As you mention, interest rates matter as when bonds pay higher rates than savings accounts demand is likely to rise, pushing up prices, but if interest rates rise the benefit will be reduced so bond prices could fall. Inflation affects the future value of interest payments and return of capital at redemption (i.e. the money you've loaned the company/government), high inflation means this money will buy less in future reducing the attraction of bonds, hence their price.

Markets don't care so much about current interest and inflation rates, as what will happen in future. So it's all about trying to second guess what will happen over coming months and years.

Fund managers can help by diversifying across a number of bonds, which should reduce risk. But where they can really add (or destroy) value is their ability to take advantage of interest rate and inflationary expectations, as well as trying to snap up undervalued bonds where the market's overly pessimistic about a company's credit risk.

An important point here is something called 'duration' which basically measures a bond's sensitivity to interest rate movements (although the concept more or less holds true for inflation too). Bonds with a high duration are more sensitive to interest rate and inflationary movements, usually because redemption is a long time away and/or interest payments are low. Whereas these factors will have less impact on bonds with a short duration, as there's less time until redemption and/or more money is returned sooner than later via high interest payments.

In simple terms, if you think interest rates/inflation will rise over time then bonds with a short duration might do better. Whereas longer duration bonds may better suit a climate of falling interest rates/inflation.

Of course, in practice it's not this simple (which is why I'm not a bond manager!), but the above are the fundamentals of bond investing.

Do managers add value? Well, as usual, some do but most don't. Buying individual bonds yourself saves fund manager fees and provided the company issuing the bond meets its obligations you can work out exactly what you'll receive until redemption - something you can't do with bond funds.

The managers who tend to add most value are those who have a free reign on where they can invest (typically 'strategic bond' fund managers), although this might increase risk if they get it wrong.

If interest rates rise then new bond issues will likely pay higher rates of interest, but bond managers will have to sell existing bonds (whose price may have fallen) to buy them, so no net gain really.

Investment trusts were historically a tax inefficient home for corporate bonds as interest was hit by a high rate of corporation tax, whereas unit trusts holding more than 60% of the fund in bonds paid no tax on interest. Rule changes in 2009 bought them on a par with unit trusts, but we've yet to see new launches taking advantage of this. However, there are a handful of trusts based in the Channel Islands (historically to avoid the tax disadvantage) including New City High Yield, City Merchants High Yield and Invesco Leveraged High Yield.


Hope the above helps.

Read this Q and A at http://www.candidmoney.com/questions/question636.aspx

UK CGT on sale of French property?

Question
We have recently sold our property in France and paid 19% CGT in France. As we’re not French resident, the amount of CGT paid had to be calculated by a State appointed Fiscal Agent. Will this amount be used to determine our UK CGT liability?Answer
No, because the UK calculation must also include any gain or loss due to currency movements and the deductions you're allowed to make may vary from the French calculation.

When calculating the gain on investments in a foreign currency HMRC requires you to use the exchange rates on the date you purchased the property and date you sold it. Quite straightforward.

However, you can reduce the gain on second homes/investment properties by deducting money you've spent on improving the property and buying/selling expenses - note: general maintenance and repair expenditure is excluded.

In theory you should use the exchange rate for every allowable deduction at the time each expense was incurred. If this is impractical HMRC would probably be comfortable if you instead simply deduct each chunk of money you've transferred over the period of ownership using the exchange rate on the date of each transfer - not forgetting to remove from those transfers amounts that weren't spent on improvements or other allowable deductions.

The French capital gains tax you've paid may be credited against the UK liability, but if the French tax is greater you won't unfortunately get a refund. Don't forget you can both offset your share of the gain against your annual capital gains tax allowance (£10,600 for the 2012/13 tax year) when calculating the UK liability.

Read this Q and A at http://www.candidmoney.com/questions/question731.aspx

Tax on Murray International B shares?

Question
To re-invest dividends efficiently from an investment trust, is it better to hold 'B' shares where the dividend comes in the form of additional shares (as in the Murray International B ORD MYIB), or have the dividends paid(as in the Murray International MYI) and buy additional shares with them? I am a basic rate taxpayer.Answer
Investment Trust 'B' shares remain rare and their taxation depends on the investment trust in question. In the case of Murray International the extra B shares issued in lieu of a dividend are taxed as income so no difference in this respect between receiving a dividend or extra B shares. The only benefit of Murray B shares as I see it is the avoidance of dealing fees if you'd otherwise reinvest the dividend to buy extra shares (i.e. much the same as unit trust accumulation units).

By contrast Investor's Capital Trust B shares distribute income as a return of capital rather than extra shares, which means the payments are subject to capital gains tax when selling shares rather than income tax when the capital is received. This has some potential tax benefit for higher and top rate taxpayers, especially if the eventual gain falls within their annual capital gains tax allowance. Although if they end up paying capital gains tax the 28% rate for higher and top rate taxpayers is less of an incentive than the 18% rate when Investors Capital issued B shares in 2007 (higher rate taxpayers currently have to pay income tax at an effective rate of 25% of the dividend received).

Read this Q and A at http://www.candidmoney.com/questions/question733.aspx

Will commission ban affect SIPP costs?

Question
As I understand it commissions are to end later this year.

I have been looking at your SIPP comparison table and the best value SIPP providers are the ones that rebate the most commission, outweighing sometimes higher annual fees.

Will all this change once commissions are banned and the Sipp providers with no annual fee become the better value?Answer
There'll be change, but unfortunately it's not that simple.

Commissions will be banned for advised sales from 31 December 2012. That means if you buy funds via a financial adviser the fund manager will not be allowed to pay the adviser any sales commission. In theory this should knock about 3% and 0.5% off a fund's initial and annual charges respectively. But in practice the adviser can charge a percentage fee to be taken from the fund, if agreed by their client. So if the adviser takes 3% initial and 0.5% annual 'fees' then the fund cost would effectively remain unchanged.

Commissions will continue to be allowed on non-advised sales, i.e. 'execution-only' deals. So in theory no change to discount brokers. However, the FSA is contemplating a commission ban here too, which I think likely within a year or two.

The other part of the equation is the fees currently paid by fund managers to fund platforms/supermarkets, generally thought to be around 0.25% a year. The FSA wants to ban these payments in favour of platforms charging investors an explicit fee. The change is tentatively planned for 31 December 2013, but not confirmed as yet.

So what we might end up with is funds removing sales commission and platform fees from their charges, giving no initial charges and annual charges of around 0.75%. This is the same as the 'institutional' units already offered by many funds (to larger investors) so this will probably just be extended to retail investors too.

As for SIPPs, Interactive Investor and Alliance Trust Savings have already adopted this kind of charging. As they both operate their own platforms they can rebate both platform fees and trail commissions in return for explicit annual and dealing fees. They're starting to use institutional units for some funds, which avoids the hassle of rebates, and I expect this to extend across the full range of funds they offer over the next year or two.

SIPP providers like Hargreaves Lansdown who keep trail commission and platform fees will be in a quandary if the above changes go through. At the moment they enjoy an annual margin of 0.79% via their Vantage platform (according to their accounting statements) - probably higher for the SIPP as no trail commission rebates. But as their clients mostly pay this via fund charges than direct fees it largely goes unquestioned. If those clients have to pay c0.79% as an explicit fee on top institutional fund pricing they might think twice.

So, to answer your question, I doubt the net cost of the various SIPP providers will change that much. Some have already adopted this new style pricing while others might have to change how they charge but won't become any cheaper unless they cut their margins.

For a more in depth explanation please take a look at my fund charges article.

Read this Q and A at http://www.candidmoney.com/questions/question734.aspx

Which discount broker?

Question
I'm trying to figure out which dicount broker to use for a new ISA and to transfer previous ISAs to. Most comparisons use the example of a small portfolio of £10k and a large one of £100k. I am currently in between. Also I have a couple of other factors to take into account. I wonder if, based on the following requirments, you could advise me on which discount broker to use:

1) My current ISAs are worth ~£40k. They are split fairly evenly between CoFunds, Fundsnetwork, HL and direct with Jupiter. I want to transfer all to a single provider (doesn't matter whether this is as stock or cash as I want to change some of the funds anyway).

2) I want to start a new ISA as a regular (once a month) investor, investing the full ISA allowance of £11,280 this year, and hopefully the same next year onwards also.

3) The monthly investment would likely be split between, say, 5 funds/trusts

4) I want to be able to hold Investment Trusts as well as Unit Trusts.

5) I want to be able to invest in a wide range of funds including smaller name funds like MFM Slater Growth

5) I don't need lots of investment research tools from the provider as there are plenty of other places to get them.

I was going to go with HL but they are not competitive on rebates. I think Alliance Trust might be best, but I am worried about how their dealing charges will impact a regular saver who is investing in 5 funds/trusts each month (don't they even charge a fee to reinvest the rebate they have given you!?!).

I also have a small SIPP currently with HL worth about £12k. I may or may not add to this in the future, would it be best to move this to the same new broker also?

Thanks in advance for your reply.Answer
I'm afraid it's beyond the scope of this to give specific advice (the FSA would probably hunt me down!), but happy to give you some pointers I hope you'll find helpful.

Maybe a good place to start is to take a quick look at each of the main contenders to see how they might meet your needs:

Interactive Investor - full trail commission/platform fee rebates and investment choice, including shares, but £10 dealing charge won't be cost effective for your monthly contributions (£1.50 monthly dealing only available for shares, not funds). £80 annual charge includes 8 trades.

Alliance Trust Savings - full trail commission /platform fee rebates and offers access to shares, but fund choice more limited than most (e.g. Slater Growth not currently available). £1.50 monthly dealing includes funds, which is helpful. £48 annual ISA charge. Fund rebates are paid into a cash account so yes, you'll pay a dealing fee to reinvest. However, I expect Alliance Trust (and platforms in general) to move towards using institutional units (whose annual charge is effectively net of these rebates) over the next year or two, so this issue should subside.

Cavendish Online - full trail commission rebate and no admin or dealing charges. Good, simple deal for funds, especially monthly saving, but no share trading available. Uses the FundsNetwork platform which offers a fairly decent range of funds, including Slater Growth.

Club finance Frequent Trader - full trail commission/platform fee rebates and 50p share dealing, but 0.35% annual fee. Good value if you'll often trade shares else annual fee will take its toll.

Bestinvest and Hargreaves Lansdown offer share dealing and don't charge fund dealing fees, but their ISA trail commission rebates are typically only around one third of those offered by the companies above. Plus there are extra ISA/SIPP charges if you want to hold shares/non-trail commission paying funds.

In summary, there doesn't appear to be a single perfect solution. Alliance Trust looks the cheapest if you want share dealing too, the downside being the £48 annual ISA charge and fund dealing fees - although the £1.50 monthly dealing facility helps. Plus some of the funds you want to buy may be unavailable.

Cavendish Online could work out cheaper for funds on a portfolio of c£50,000, thanks to no ISA charge or dealing fees, despite annual rebates generally being a bit lower than Alliance Trust. However, lack of share dealing probably rules them out for you.

And the others will likely end up more expensive overall.

You could consider using Cavendish Online for funds and Sippdeal for share dealing. Sippdeal doesn't charge an ISA (or SIPP) admin fee and offers monthly dealing for £1.50 (covering FTSE 350 shares plus a selection of investment trusts and ETFs), although their trail commission rebates are low hence not suggesting them for funds. More hassle than using just one platform, but could come out the cheapest route overall.

As for your SIPP, Hargreaves Lansdown doesn't rebate any trail commission, but equally doesn't charge an annual SIPP fee when only holding trail commission paying funds. However, hold shares and you'll pay 0.5% capped at £200 per annum and non-commission paying funds are charged at £1 or £2 each per month..

If you stick to commission paying funds HL will probably end up the cheapest SIPP for a £12,000 pension fund, so little reason to move. But if their other charges kick in then by all means consider another discount broker.

Read this Q and A at http://www.candidmoney.com/questions/question735.aspx

Can wife make sole gift from joint account?

Question
My wife recently wrote a six figure cheque for our son to help him with his business. This is a gift which we see as a potentially exempt transfer incurring no Inheritance Tax on her estate after 7 years. The cheque was written against a joint current account with myself. My health is poor my wife's health is excellent.

Is there any risk that on my demise within 7 years the Revenue would regard half of these monies as being chargeable to Inheritance Tax on my estate?Answer
Provided the money is a gift 'without reservation', i.e. your wife will not ask for interest or the money to be returned, then yes it should be a potentially exempt transfer.

The fact the money was drawn from a joint account shouldn't be a problem provided your wife documents that the gift was solely from her. I suggest she writes a note to this effect and stores it with your Wills (as well as giving your son a copy). Perhaps even send a copy to her tax office for good measure.

One point to bear in mind with potentially exempt transfers is that they're offset against the IHT nil rate band on death before the rest of the estate. So unless the amounts exceed the nil rate band it's unlikely the donor's estate would benefit from the taper relief on potentially exempt transfers should they pass away within seven years of making the gift.

You can read more about this on our inheritance tax page..

Read this Q and A at http://www.candidmoney.com/questions/question736.aspx

Could stop loss sell at a lower price?

Question
if there was a crash in the stock market, is it possible that the sale of my shares triggered by stop loss limits that I have set as a safeguard, could be delayed by the amount of people trying to sell at the same time and the shares could end up being sold at a much lower price?Answer
Yes. A stop loss means the broker will sell your shares if they hit a 'trigger' price that you've specified. However, if the price is falling more quickly than the stockbroker can deal your shares may end up selling below the trigger price, i.e. there's no guarantee of the price you'll get.

The alternative is to use a limit order, which means the broker will only sell if they can get your specified price. However, this risks the shares not being sold at all if the broker is unable to sell at the trigger price - possible in a fast falling market.

Read this Q and A at http://www.candidmoney.com/questions/question727.aspx