Tax on money from a foreign relative?

Question
I have received £50,000 from a relative who lives abroad. Is any UK tax due?Answer
Assuming it's a gift then there's no UK tax due. Just bear in mind that any subsequent interest or gains you might earn from saving/investing the money would be liable to tax as usual.

If the money had instead resulted from a joint investment you'd made (e.g. a holiday home) then you'd normally be liable to UK capital gains tax on your share of the profits.

Read this Q and A at http://www.candidmoney.com/questions/question488.aspx

Why bed and ISA?

Question
Why does such and unusual and (on the face of it "odd") term like "Bed and Isa" exist at all?. I remember the term "Bed and Breakfast" used to exist in relation to investments but have forgotten exactlt what it referred to. Somebody somewhere must have decided that the old "pun" should be kept going in a new form that no longer made any sense to the man in the street.

Why was this so and why does "Bed and ISA "have to be distinguished from a mere and "common or garden " switch : it implies there is a difference? Are there any Government inspired differences or insistences? I remember these being referred to but cannot remember what they were exactly.Answer
In investment terms, 'bed and breakfast' refers to the practice of selling an investment (e.g. shares or units in a fund) one day and buying back the same investment the following day - the reason being to realise capital gains that can be offset against an individual's annual capital gains tax allowance (currently £10.600).

However, Gordon Brown (then Chancellor) scuppered this practice in 1998 by introducing a rule that investors would have to wait for 30 days before buying back the investment to effectively realise gains. Otherwise, the original purchase price of the investment is deemed to be the price at which you subsequently buy it back (the original purchase will subsequently apply when you sell the investment and don't repurchase within 30 days).

This leaves three practical options if you want to optimise your use of the annual capital gains allowance by stripping out gains from your portfolio each year (I refer to shares below, but it could equally apply to other investments subject to capital gains tax)..

1. Sell shares and wait at least 30 days before repurchasing the same shares.

2. Sell shares and re-invest the proceeds (straight away) in other shares.

3. Sell shares and buy them back (straight away) within an ISA.

Re-purchasing shares within an ISA is not caught by the 30 day rule because an ISA is technically treated as a different investment, even though you might buy back the same shares you've just sold.

The reason for referring to 'bed and ISA' is to distinguish this from 'bed and breakfast', because the process does still allow you to realise gains when selling shares and repurchasing them within 30 days (plus everyone in financial services seems to like jargon!).

Read this Q and A at http://www.candidmoney.com/questions/question486.aspx

Should I use a foreign currency broker?

Question
My sister has had an offer accepted on a house in Austria. She has to put down 20, 000 Euro as a deposit but will obviously have to convert this from Sterling.

Apparently when you are transferring such large amounts of money the best way to do it, and to get the best rates, is to use foreign exchange dealers. The only problem is she is not sure they are regulated and have mixed customer service reviews.

Can you offer any advice on the best way to proceed safely?

Answer
Despite the potential benefits of good exchange rates and low charges, using foreign exchange brokers remain a dilemma due to concerns over the safety of your money. Especially in light of the high profile collapse of Crown Currency.

I would only consider using exchange brokers that are authorised and regulated by the Financial Services Authority (FSA). Some companies are just 'registered' with the FSA (e.g. Crown Currency was), but I'd give these a miss as they don't have to jump through many hoops to do so - becoming authorised is more hassle hence companies who do this are arguably more serious businesses. See my answer to this earlier question for more details.

However, even authorised and regulated currency brokers are not totally safe, as any losses might not covered by the Financial Services Compensation Scheme (FSCS).

Is there much risk? In theory, no. An authorised and regulated currency broker must hold your money in a segregated client bank account - i.e. they can't touch the money for their own use. Provided the broker follows FSA rules then your money is safe while they hold it (unless the bank goes bust, in which case you should be covered up to £85,000, but double check this with the broker).

However, in order to physically exchange your money into another currency the broker must pass your money to a third party (called a 'counterparty'), at which point it's no longer held in the 'safe' segregated account and you could lose your money if either the broker or counterparty goes bust at that point. The counterparty will usually be a large bank so the chances of a problem are minimal, but always check which counterparty will be used and make your own judgement of how safe they'll be.

Once the counterparty returns the foreign currency to the broker it's once again held in the segregated account before being sent to the final destination bank account you've specified.

Provided you stick to a well established FSA authorised and regulated foreign exchange broker I think the chances of anything going wrong are very slim. You might get more peace of mind using a bank, but the rates and charges will probably look grim by comparison.

Hope your sister enjoys the new house.

Read this Q and A at http://www.candidmoney.com/questions/question485.aspx

What type of fixed interest should I buy?

Question
My bank have suggested that I top up my various accounts to £50,000 to avoid a £12.95 per month fee. To do this I need to move £30,000 from other savings accounts and new funds. However the Banks interest rates are ... awful!

I do have £15,000 in shares in a bank trading account which counts towards the £50k limit and I would be prepared to move other directly held equities held in my name t o the trading account to qualify circa £10/15,000. To obtain a realistic return on the £30k and stoop the monthly charge I am considering investing £5,000 x 2 into Fixed Rate Gilts, £5000 x 2 into Index Linked Gilts and £5000 x 2 Pibs. OR 3 x £10k if secure and lower charges. I would welcome your imput re: the selection of suitable funds.

For my research I have looked at RBS Inflation Linked 3.9% min 2022 and RBS Royal 5.1%, + Nationwide 6.875% . Fot the time being I would probably invest the income into shares in my wifes name over the next 5 years or spend if required.

Since I will shortly be 65 and my assessable income will by design be close to the Age Allowance Clawback threshold the Fixed Interset securities should probably be in my wife's name and she is aged 61 and basic rate tax payer. I will be 65 in August with a State Pension Disability Living Allowance (Higher rate) plus Mobility. Other assets are £475K SIPPS/PPPS, £75k ISAS, Shares//ITs/Units £ 35k Deposits, £40k and 3 interests in Properites £550k totalling circa £1.2m allocated roughly 66.67% self and 33.3% spouse.Answer
If my bank wanted to charge me £12.95 per month I'd tell them where to go and take my business elsewhere!

However, assuming you have reason to stay with them then check that their dealing charges aren't excessive (above £15 to trade online is very dear these days), else a few trades could start offsetting the monthly charge for some while.

Depending on redemption date, gilts are currently yielding around 2-4% gross until redemption (i.e. taking into account any capital gain/loss you make if buying now and holding until redeemed). This isn't very exciting. There might be scope for shorter term gains if inflation subsides (gilts don't like inflation), but then rising interest rates could push prices down. Over 5 years I think a fixed rate savings account paying about 5% p.a. arguably looks better value.

Index-linked gilts are currently yielding about 0.5% to redemption (i.e. the return ignoring inflation). The breakeven rate of inflation required for 2016 index-linked gilts to match returns from similar conventional gilts is about 2.9% - put simply if you think average annual inflation (RPI) will be higher than this then buy index-linked gilts, else conventional will give a higher overall return.

PIBs are yielding rather more (to redemption, or 'call') at around 7-10%, but there's a simple reason for this - they're viewed as being more risky. Plus, they can sometimes be difficult to trade which might be a pain when you come to sell. I think current prices are fair given the risks, but I wouldn't take too big a bet as we may not have seen the last of the financial turmoil that can push down PIB prices. To read more about PIBs see my answer to this earlier question.

The RBS Inflation Linked traded bonds aren't very generous - they pay the greater of inflation (RPI) and 3.9% each year and you run the risk that RBS might go bust (remember, this is a bond, hence bit covered by the FSCS). One of the 'less risky' PIBs yielding about 7% seems a better deal to me - after all, will inflation average over 7% a year (required for the RBS product to provide a higher return)? I doubt it.

Well done on splitting investments with your wife to optimise your tax position, you'd be surprised how many couples don't. As your income will be close to the age allowance limit, keep making use of ISAs as ISA income doesn't count towards this.

In summary, I would give serious thought to a fixed rate 5 year account with another bank/building society as rates of around 5% look attractive, especially if held via a cash ISA. Corporate bonds and PIBs generally look more fairly priced than gilts right now, but there's a reason gilts appear expensive - investors are nervous and buying gilts for safety. If companies and building societies do struggle over the next few years bond/PIB prices could suffer. If you can stomach stock market ups and downs then one of the more cautious equity income funds (e.g. Invesco Perpetual, Newton or Schroders) might prove worthwhile as their dividends remain quite attractive with yields (net of basic rate tax) of around 4-6%. You could also consider strategic bond style funds for fixed interest exposure (where managers move money between safer and riskier bonds based on their view of markets to try and deliver a decent return), but there's no guarantee of success and annual management charges can especially take their toll during flat/negative markets.

Good luck whatever you end up deciding.

Read this Q and A at http://www.candidmoney.com/questions/question484.aspx

Is it best to try and time markets?

Question
Some time ago I wrote asking whether you had any figures for what happens when an investor misses the worst N market days in (say) a five or ten year period. (I was curious to know how such figures would compare with those frequently given for missing the best N days.)

You were unable to find figures, but I am now in a position to tell you a little about what they might be.

According to the Morgan Stanley Countries Index (MSCI), an average investor holding global emerging markets funds for the whole of the ten years up to April received an annual return of 15%.

The average investor who missed the best 10 (or 20) days received 8.5% (or less than 5%).

The average investor who contrived to miss the worst 10 (or 20) days received 22% (or just under 28%).

Source: Ian Cowie, Daily Telegraph May 21.

You may not be sure what this proves. I’m not sure either. However, the figures relating to the best N days are often trotted out as somehow establishing that one should always, always be ‘in the market’. The above figures for the worst N days suggest that on the contrary the odds may not be stacked against one if one misses the odd day or several. Perhaps what the figures really show is their worthlessness, whether for best or worst days.

On that sad conclusion, I hope I haven't wasted your time.Answer
Thank you very much for the figures, they make interesting reading.

I suppose the rationale behind figures showing reduced returns if you missed the best N days is that it highlights the risk of missing big upturns (due to not being invested) when trying to time markets (i.e. attempting to buy at the bottom). But you're right, in trying to time markets you might also miss very bad days and end up better off than had you stayed invested.

On balance the odds might be in favour of remaining invested throughout because it's easier to stay put (and not miss the best N days) than to actively try and avoid the worst days.

Nevertheless, as you conclude, I wouldn't get too caught up on worrying whether you'll end up better or worse off by trying to time investments versus taking an invest and hold approach. Unless an investor is exceptionally insightful or lucky they'll probably get it wrong about as often as they get it right!

If anyone has more thoughts/views on this please post below.

Read this Q and A at http://www.candidmoney.com/questions/question481.aspx

Is my part-time final salary pension fair?

Question
I am lucky enough to have a final salary pension but it does not pay out until I am 65 which is in about 12 months time. For the past 3 years I have worked on a part time basis for my emloyer and it was agreed that all part time days would count as service toward the pension a long with any additional days that I agreed to work when the company had need of me. This was in writing and I paid pension contributions on the part time and additional days .

I have now left work and my pension details have been crystallised. The company now advises that not all the additional days will count toward pension service - only mutiples of 8 which they equate to a months service. They claim that "all days count" toward the pension but only multiples of 8 will result in a service credit! Whilst the sums involved are minimal this really seems sharp practice. I do not believe the service of full time staff is based on mutiples of 8 ! There are 7 days where I paid contributions but no service credit is to be given - at the very least I believe a refund of the contributions would be reasonable but the company is silent on this question. Who is being unreasonable?

The trustees oversee a pension fund which pays out to both Directors and Staff. Directors are allowed to retire at 60 years staff must wait until they reach 65 years. Whilst Directors pay in more by reason of higher salaries is it fair that they can take pensions 5 years earlier from the same fund that I have paid into - it seems that I am potentially subsidising their pension! Am I muddled?

Thank you in anticipation of your reply
Answer
The usual practice for calculating a final salary pension for someone moving from full-time to part-time work is to pro-rata the salary up to the full-time rate and pro-rata the period of service into full years of service.

For example, suppose you belong to a 60ths pension scheme and worked 5 days a week at £30,000 a year, then reducing to 2 days a week for 3 years with a pro rata salary reduction. Your part-time pension entitlement would be 1/60th x 2/5 x 3 x £30,000 = £600 annual pension. The 2/5 part of the calculation takes account of working 2 days a week (out of 5) which, over 3 years, gives the equivalent of 1.2 full years of service at full annual pay of £30,000. Multiply this by 1/60th to get the actual pension.

It sounds as though your employer is doing things a bit differently, although the net result is likely to be pretty much the same. Using 8 days to equate to a month's service suggests your employer is assuming a 2 day working week (with 4 weeks in a month) then applying this to your actual salary rather than pro-rating to an annual salary (as per the above example).

Only counting multiples of 8 working days is a bit stingy, I suppose they do this to make the administration simpler. But it does seem unfair that this approach can ignore up to 7 days of service which, as you mention, contradicts your employer's claim that 'all days count'. I would ask to the company's pension administrator for an explanation and how they reconcile this to their claim - and check whether the part-time pension calculation is detailed in the pension paperwork you were given when moving from full to part-time. If you feel you don't get a satisfactory answer then by all means complain.

It's not uncommon for directors to enjoy more favourable pension benefits than other members of staff. And yes, they probably will get relatively greater benefits from a final salary scheme by virtue of having a higher salary and potentially a more favourable accrual rate (i.e. they can build up their years of service more quickly).

That's just the way it is, but it's the company and not you that's subsidising them. I suppose the burden of lots of fat-cat director pensions doesn't do much to help final salary pension scheme deficits, but unless the scheme is in danger of going bust then it's not really your problem.

Read this Q and A at http://www.candidmoney.com/questions/question480.aspx

How do fund yields relate to interest rates?

Question
I notice that virtually all ITs and OEICs pay a yield of between 0 to 5%, which is better than most savings accounts at the moment.

What happened back in the days when savings accounts paid 10 to 15% interest - did the ITs and OEICs still pay up to 5% more than savings accounts?

So what do you expect to happen this time around, to the average Income producing OEIC or IT, when the bank rate goes up from it's current low?Answer
Yield refers to the income paid by an investment divided by its price. To answer your question, it really depends on the type of investments held in the fund. As most funds invest in either stock market shares or corporate bonds, let's look at both of these.

Share income comes from the dividends that companies pay and is always quoted net of basic rate tax (for UK companies/funds). These tend to rise over time (unless the company has financial problems), but the yield will also depend on the share price. For example, suppose a company pays a 3p annual dividend and its share price is 100p, the yield is 3%. Let's assume it raises the dividend to 4p the following year - if the share price is still 100p the yield will be 4%, a share price of £133 would keep the yield at 3% while a share price of 150p would see the yield fall to 2.67%.

Yields of around 3% have generally been the norm for UK shares over the years, with dividends tending to keep pace with share price rises. When markets crash yields might rise above this, as dividends tend not to fall as much as share prices, while yields might fall a little during periods of soaring share prices.

Of course, some companies pay no dividends at all (i.e. zero yield) while others pay higher than average, but the above generally holds true. So, when interest rates were above 10% back in the mid to late eighties dividend yields would have looked low by comparison.

However, the bigger slice of long term stock market investment returns normally comes from rising share prices, so yield is only one part of the equation. For example, a stock market fund might yield 5%, but you'll still lose money if its price falls by more than 5% over the year.

Also, just because stock market yields tend to stay fairly level it doesn't mean you won't benefit from holding dividend shares long term. For example, suppose you buy a share at 100p with a dividend of 3p. 10 years later the dividend has risen to 6p and the share price is 200p. The yield is still 3% (6p/200p), but your original 100p investment is producing 6p annual income, an equivalent yield of 6%.

Corporate bond yields are more influenced by interest rate movements.

A corporate bond is an IOU issued by companies on which they promise to pay a fixed rate of interest before repaying the loan on a fixed date in future. For example, a company might issue a bond promising to pay 5p annual interest for 20 years per 100p borrowed - a yield of 5%. If savings account interest is less than 5% and you think the company is safe (i.e. they'll repay your interest and loan) then you might buy it. But suppose you can earn 10% in a savings account, no-one would bother buying the bond. So the bond's price would fall to make the yield competitive - in this example probably to 50p or less to give a yield of at least 10% (5p/50p).

So corporate bond yields will tend to mirror interest rates, but if you already own the bond then a rising yield means the bond's price is falling - potentially losing you money if you decide to sell.

In summary, I wouldn't expect higher interest rates to make much difference to stock market dividend yields but they would probably push up corporate bond yields.

Read this Q and A at http://www.candidmoney.com/questions/question479.aspx