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The child benefit tax charge, introduced on 7 January, affects over one million families

A family with 2 children could soon see their annual spendable income drop by up to £1,752 p.a. in 2013/14, while those with 3 children could lose £2,449 pa. With prices rising faster than incomes, it is imperative for many families to know how they will be affected, and what options are available to help improve their situation.

What are the implications of the tax charge?
Benefit payments will continue to be paid in full to the claimant, but if the household’s highest earner’s personal taxable income exceeds £50,000 per tax year then the amount will be clawed back by way of a tax charge. Once taxable income exceeds £60,000 in a tax year, the charge will be 100 per cent of the benefit claimed i.e. the value of the benefit is wiped out. For incomes between £50,000 and £60,000, the tax charge is 1 per cent for every £100 income exceeds the £50,000 threshold. Overall, these people will benefit, as the tax charge will always be less than the benefit claimed.

For the 2012/13 tax year, the tax charge will never exceed 25 per cent of the yearly benefit claimed as the tax charge will only have been operational for one quarter of the current tax year. As such, the tax will be limited to £438 where benefit is being claimed for 2 children, or £612 for 3 children. Around 500,000 people will need to complete a tax return for the first time. The tax charge will be collected under self assessment; therefore, for those submitting online, the first return will need to be in by 31 January 2014. It is important to note that failure to do so could result in fines and late payment penalties.

What action can be taken?
This will very much depend on an individual’s personal circumstances and priorities. Making an individual pension contribution to reduce income to below £50,000 would wipe out the child benefit tax charge altogether, while higher rate tax relief would also be available on the contribution if it all falls in the higher rate band. Any contribution reducing income to a level between £50,000 and £60,000 will still result in a surplus of child benefit over the tax charge, and a tax return would still need to be completed.

A pension contribution by salary sacrifice is an alternative way of reducing taxable income. With the employer’s agreement, an employee can reduce their contractual income in return for an equivalent employer payment to their pension. The employee will also save NI at 2 per cent for payments over the upper earnings limit – if the employer agrees to pass their 13.8 per cent NI saving on to the pension then the contribution itself can be increased. Another alterative is to simply continue claiming the benefit and paying the tax, which is a more likely consideration for those families where the higher earner has adjusted net income between £50,000 and £60,000, when the benefit will still exceed the tax charge.

The important tenets of his investment philosophy and mythology

Warren Buffett is considered by many as the most successful investor of the 20th century and named “one of the most influential people in the world” by Time magazine in 2012. In this article we look at Buffett’s investment mythology and analyse some of the most important tenets of his investment philosophy.

Finding low-priced value
While evaluating the relationship between a stock’s level of excellence and its price, Buffett asks himself several questions to find low-priced value:

Has the company consistently performed well? 
He looks at a company’s return on equity (ROE) and determines whether or not they have consistently performed successfully, compared with others in the same industry. However, looking at the ROE of a company over the last year alone isn’t enough. To get a better perspective of historic performance, investors should view the ROE from the past 5-10 years.

Has the company avoided excess debt? 
Buffett also considers the debt/equity ratio of a company, as he would prefer to see minimal amounts of debt, meaning that earnings growth is being generated from shareholders’ equity and not from borrowed money. A high level of debt compared to equity will result in volatile earnings and large interest expenses.

Are profit margins high? Are they increasing? 
Not only does the profitability of a company depend on a good profit margin but also their margins consistently increasing. A high profit margin means that the company is not only executing its business well, but increasing margins means management has been efficient and successful at controlling expenses. Investors should look back at least five years to get a clear indication of a company’s historical margins.

How long has the company been public? 
One of Buffett’s criteria is longevity: value investing means looking at companies that have stood the test of time but are currently undervalued. He will usually consider companies that have been around for at least 10 years, meaning that he would not consider most of the technology companies that have had their initial public offerings (IPOs) in the past decade. Historical performance is also crucial – determining if a company can perform as well going forward as it has done in the past is tricky, but Buffett is very good at it.

Do the company’s products rely on a commodity? 
He will usually steer clear from investing in companies whose products are indistinguishable from those of their competitors; if they don’t offer anything different than another firm within the same industry, Buffett sees little that sets them apart. He uses the term ‘economic moat’ as a way of describing any characteristic that is hard to replicate; the wider the moat, the harder it is for a competitor to gain market share.

Is the stock selling at a 25 per cent discount to
its real value? 
The most difficult part of value investing is determining whether a company is undervalued, and is Buffett’s most important skill. Investors must analyse a number of business fundamentals, including earnings, revenues and assets, to determine a company’s intrinsic value, which is usually higher than its liquidation value.
Buffett will then compare it to its current market capitalisation. If his measurement of intrinsic value is at least 25 per cent, he sees the company as one that has value – the key to this depends on his unmatched skill in accurately determining this intrinsic value.

The proof is in the pudding
As you can see from the above examples, Buffett’s investing style reflects a practical, down-to-earth attitude. This value-investing style is not without its critics, but nobody can question the success it has brought. The thing to remember is that the most difficult thing for any value investor is in accurately determining a company’s intrinsic value.

Information is based on our current understanding of taxation legislation and regulations. Levels and bases of and reliefs from taxation are subject to legislative change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.

Uncertain election results rekindle euro-crisis fears

The prospect of a long period of political uncertainty following elections in Italy, the euro zone’s third-largest economy, has shattered months of uneasy calm in European financial markets and demonstrated that the currency union remains prey to shocks.

Italy’s protest vote against the Eurocrats has wrenched market attention away from the hunt for yield and back onto political risk. The social disaffection caused by youth unemployment has been strikingly reflected by the surge of the Five Star movement.

Italian economic fundamentals are fragile and the recession still deep. At best, the political impasse in Italy will push back the market’s expectation of a recovery there. At worst, the contraction could deepen as consumer and business confidence cowers under an extended period of political uncertainty.

Austerity-first solution
The elections have also emphasised that the most powerful opposition to the euro-zone crisis managers’ austerity-first solution to the bloc’s financial crisis could come from the ballot box. Three polls last year—a referendum in Ireland on new fiscal rules and elections in the Netherlands and Greece—went in favour of the euro’s political masters, in Greece’s case only just. However, in Italy, the euro zone seems to have run out of luck in a vote interpreted as a rejection both of the country’s traditional political class and of the austerity many Italians see as being imposed on them by Brussels and Berlin.

Financial-market tranquillity
The return of growth in Southern Europe is officially projected to be reached in the next 12-18 months, but may have been further postponed due to recent uncertainty. But there was no sign of any rethink: euro-zone governments and the European Commission have urged Italy to stick to the path of economic overhauls and budget stringency. The election has challenged the optimism beginning to emerge among politicians that the crisis was over, which had been encouraged by the financial-market tranquillity following the promise from European Central Bank President Mario Draghi in July to “do whatever it takes” to save the euro.

A grand coalition
We can now expect weeks of hiatus in the Italian political system as political leaders discuss whether they can form a grand coalition that can govern the country seems a certainty. Nothing formal can happen until March 15, at the earliest, when Parliament is formally convened. By May 15, President Giorgio Napolitano’s mandate will expire and a new president must be elected. An early decision to call new elections seems unlikely: to do so in an apparent effort to get the “right result” for the EU risks a further backlash among voters.

Fiscal discipline
The political will to preserve Eurozone stability has been proven in Greece. A new government in Italy, when it is eventually formed, is more likely to be unstable and ineffective than unorthodox and radical. Fiscal discipline is likely to be broadly preserved even if serious structural reforms are now off the agenda. Hence, the negative market reaction to events in Italy may provide an opportunity to buy into the periphery, albeit at significantly higher yields. It will be important to keep an eye on the rating agencies, who could well jangle nerves with another downgrade if policy uncertainty in Italy persists.

The UK has lost its AAA credit rating for the first time since the 1970s

The credit rating agency Moody’s, at the end of February, downgraded the UK’s sovereign debt rating from AAA to AA1, relegating the UK to the second tier for the first time since 1978. The announcement made headline news, but it was far from unexpected and the possibility of a downgrade had been predicted; the coalition government is taking longer than expected to reduce the UK’s sizable deficit and all three leading credit rating agencies – Fitch, Moody’s and Standard & Poor’s – had already placed the UK on a “negative” outlook during 2012, stoking expectations of a downgrade.

Government’s capacity to repay its debts
Credit ratings provide an indication of a government’s capacity to repay its debts, but any concerns about the downgrade leading to a rise in the borrowing costs for the UK appear overplayed, at least if the recent experiences of the US and France are any indication: the US lost its AAA status in August 2011 while France was downgraded in November 2012. The borrowing costs of both nations have declined since their respective downgrades while their main stockmarket indices have risen significantly.

Fiscal consolidation programme
The implications of the UK’s downgrade are likely to prove more political than economic. Moody’s announcement highlighted the challenges that “subdued medium-term growth prospects pose to the government’s fiscal consolidation programme” and the coalition government continues to face substantial challenges in its attempts to reduce the UK’s debt levels. Politicians have placed considerable value on the UK’s top credit rating – indeed, in the Conservative Party’s manifesto of spring 2010, George Osborne pledged to “safeguard Britain’s credit rating”. As such, the news of the downgrade puts more pressure on the Chancellor of the Exchequer than on the economy itself.

Catalyst for fresh trouble
Taking everything into consideration, a drop in the UK’s credit rating is not likely to make much difference to the fundamental performance or health of the country’s economy. Although Moody’s decision highlights the challenges that the government face, the downgrade itself is likely to represent a symptom of the existing problems rather than a catalyst for fresh trouble.

Promising growth prospects
The decline in the value of sterling is likely to continue, as investors move their money into currencies used by countries with more promising growth prospects. A weaker pound would certainly help exporters, but it also makes imports more expensive. The price of petrol has already risen over the past month, and further increases like this are likely to put more pressure on household incomes and company profits, as well as on economic growth as a whole. A lower credit rating could also make it more expensive for the UK to borrow money.

Longer to resolve than expected
In a similar way to borrowing from a High Street bank, if you are in a well-paid job and are living within your means, you will have to pay a lower interest rate on a loan than someone who the bank thinks is overstretched and maybe not able to keep up with repayments. At present, the UK needs to borrow more than £100bn a year from investors, both at home and around the world. It seems that the UK’s economic problems, in line with many other countries, will take longer to resolve than expected.

Measures introduced through the Care and Support Bill come into effect in April 2017

Bills for long-term care in old age are to be capped at £75,000 in England. The recent announcement for changes to social care is thought to be part-funded by a freeze on the inheritance tax ‘nil rate band’ threshold.

Chancellor George Osborne announced during the Autumn Statement 2012 that inheritance tax rates would rise from £325,000 (£650,000 for married couples and registered civil partners) to £329,000 (£658,000 for couples) in 2015/16. This will now be delayed until 2018/19. As a result of this three-year extension, more people could be subject to an inheritance tax bill. Inheritance tax is charged at 40 per cent and is payable when the value of an estate exceeds the available nil rate band threshold.

Disappointment at the level of the cap
Jeremy Hunt, the Health Secretary, told the Commons in February that the ‘historic’ long-term care reforms would save thousands of people from having to sell their family home to pay for care. Some campaigners voiced their disappointment at the level of the cap, which was more than double the £35,000 recommended by the independent Dilnot Commission in 2011.

Means-tested government support
Alongside the cap, Mr Hunt announced a rise – from £23,250 to £123,000 – in the asset threshold beneath which people will receive means-tested government support for care bills. He also announced a lower cap on costs for people who develop care needs before retirement age, as well as free care for those who have needs when they turn 18.

Andrew Dilnot, whose report recommended a cap of between £25,000 and £50,000, said he was disappointed by the government’s proposal of a higher level, but did not think it would undermine his system.

The proposed £75,000 cap from 2017 equated to £61,000 at 2011 prices, he pointed out.
The measures will be introduced through
the Care and Support Bill and come into effect in April 2017.

Have you fully used your 2012/13 ISA allowance?

In times like these, every penny counts. Interest rates are at historic lows and rising inflation can erode our buying power. But one way to mitigate these effects is to shield savings from tax by investing through an Individual Savings Account (ISA).

A flexible ‘wrapper’

An ISA is not itself an investment – it’s a flexible ‘wrapper’ under which a wide range of investments can be made, and the proceeds are free of capital gains or income tax. You can choose from two types of ISA – Stocks & Shares ISAs (shares, bonds or funds based on shares or bonds) and Cash ISAs. Stocks & Shares ISAs are also known as Equity ISAs.

Your questions answered
The 5 April ISA deadline is fast approaching and, if you don’t invest by then, you will lose your 2012/13 tax year ISA allowance forever.

Here are answers to some of the most common questions we get asked about ISAs.

Q. What is an ISA?
A. ISAs began on 6 April 1999. With an ISA you are entitled to keep all that you receive from that investment and not pay any tax on it. You can save up to
£11,280 in the current 2012/13 tax year. A tax year runs from 6 April to 5 April in the following year. The ISA scheme provides different ways of saving to meet people’s different needs. You can plan for the short term or put your money away for much longer.

Q. What are the different types of ISA?
A. There are two types of ISA: Cash ISAs and Stocks & Shares ISAs. In each tax year you can put money, up to certain limits, into one of each. Cash ISAs may be suitable for short-term savings, so that you can get at your money easily.

Stocks & Shares ISAs may be appropriate if you can afford to leave your money untouched for longer than, say, five years.

Q. Can I have an ISA?
A. You have to be aged 16 or over to open a Cash ISA, or 18 or over to open a Stocks & Shares ISA. You also have to be resident and ordinarily resident in the UK for tax purposes, or a Crown employee, such as a diplomat or a member of the armed forces, who is working overseas and paid by the government. The spouse, or civil partner, of one of these people can also open an ISA. You cannot hold an ISA jointly with, or on behalf of, anyone else.

Q. How many ISAs can I have?
A. There is a limit to the number of ISA accounts you can subscribe to each tax year. You can only put money into one Cash ISA and one Stocks & Shares ISA.
But, in different years, you could choose to save with different managers. There are no limits on the number of different ISAs you can hold over time.

Q. How much can I put into ISAs?
A. In the tax year 2012/13, which ends on 5 April 2013, you can put in up to £11,280 into ISAs. Subject to this overall limit, you can put up to £5,640 into a Cash ISA and the remainder of the £11,280 into a Stocks & Shares ISA with either the same or another provider.

So, for example, you could put:

£5,640 into a Cash ISA and £5,640 into a Stocks & Shares ISA; or
£3,000 into a Cash ISA and £8,280 into a Stocks & Shares ISA; or
nothing into a Cash ISA and £11,280 into a Stocks & Shares ISA

Q. What are the tax benefits of an ISA?
A. You pay no tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses. UK dividend income has been taxed at source at the rate of 10 per cent and this cannot be reclaimed by anyone. You pay no tax on capital gains arising on your ISA investments (losses on ISA investments cannot be allowed for Capital Gains Tax purposes against capital gains outside your ISA). You can take your money out at any time without losing tax relief. You do not have to declare income and capital gains from ISA savings and investments or even tell your tax office that you have an ISA.

Q. Can I put money into an ISA for my child?
A. Junior ISAs are a popular way for family and friends to build up tax-efficient savings and investments to help with the cost of university, provide a deposit for a house or simply give children a start in life. Any child resident in the UK qualifies who wasn’t eligible for a Child Trust Fund (CTF):

Children born on or after 3 January 2011
Children (aged under 18) born on or before 31 August 2002
Children born on or between 1 September 2002 and 2 January 2011 who didn’t qualify for a Child Trust Fund. Most children born between these dates did qualify for a CTF

The current maximum allowance per child per tax year is £3,600 and this will increase to £3,720 for the 2013/14 tax year. The account is held in the child’s name and a parent or guardian can open and manage the child’s account. Once a parent or guardian opens the account for their child, anyone, friend or family, is able to make a contribution up to the annual limit. No withdrawals are permitted until the child reaches the age of 18, at which point their account is automatically converted into an ‘adult’ ISA giving them full access to their investments and savings.

Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

A renaissance period for investment trusts

Investment trusts have had to exist in the shadow of unit trusts for the past few decades. But in rising markets investment trusts generally outperform other funds and can deliver more stable, growing income streams.

Superior performance records
Investment trusts are in a renaissance period and are coming up on the radar of more people, far more than five to ten years ago. There is a lot more attention on the superior performance records of these trusts versus their equivalent open-ended funds.

Investment trusts can play a useful role in your investment line-up. They were born in 1868, are closed-end products listed on the London Stock Exchange and unlike their more popular rival, unit trusts, they have a fixed number of shares in circulation.

Broader economic market
You can buy these shares when the trust is first launched in the offer period or you can trade them on the stock market. Although a trust’s share price generally moves in line with the value of its investments, the price can be affected by a range of factors, such as demand from investors and the situation in the broader economic market.

Buying or selling shares when the price is below the value of the trust’s assets is called trading at a ‘discount’, while the opposite scenario of the shares being higher than the asset value means you’re trading them at a ‘premium’.

Increase your returns
In contrast to other types of fund, investment trusts can borrow money to boost investment. This is known as ‘gearing’. Although gearing can increase your returns when markets are on the up, it can exacerbate your losses if markets are falling. The more gearing the trust has, the more likely your gains, or losses, will be magnified. Gearing is one of the ways in which investment trusts have managed to beat their unit trust peers.

Aside from higher returns over the long term, investment trusts can provide a more stable, growing income. Whereas unit trusts tend to invest in equities or bonds, investment trusts have the ability to tap harder-to-access areas such as private equity.

Shopping and finding a bargain
The opportunity to buy a trust at discount is like shopping and finding a bargain you know is worth more than the price. But if you’re concerned about the price fluctuating or the discount widening even further, trusts tend to have ‘control mechanisms’ in place.

Historically, most investment trusts have traded at a discount and often traded at high discounts. Now, many have a discount control mechanism where the board can buy back the shares, which is a good thing, to ensure there are not discounts of 40-50 per cent.

Trading at a premium
On the flipside, if a trust is trading at a premium, it does not mean it’s worth writing off. You need to look at your time horizon. It’s less of an issue if you’re invested for ten years with a quality manager.

Investment trusts have tended to have lower charges, which can help to boost your gains over the long term. A major benefit of investment trusts is that they are usually cheaper than open-ended funds, and this should help to increase their popularity.

Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

Retiring baby boomers are setting out a new model for later life

The UK is witnessing the march of a new type of retiree as the first post-war ‘baby boomers’ pass the old Default Retirement Age of 65. According to Aviva’s latest Real Retirement Report, more than one in three (39 per cent) over-55s are continuing to receive a wage and nearly half are intent on using their extra earnings to travel more when they finish full-time work.

Data from the latest census in 2011 showed there were 754,800 people aged 64 in England and Wales, and almost 6.5 million people are turning 65 over the next decade compared with 5.2 million in the previous decade. The spike is due to the post-war birth rate soaring when the armed forces returned from the Second World War, with the new-born generation dubbed the ‘baby boomers’.

Pushing back the boundaries
Allied with improved health care, more people are remaining active as they approach retirement age, and the report shows how they are pushing back the boundaries at work and in their leisure time.  23 per cent of 65- to 74-year-olds were still wage earners in December 2012, compared with 18 per cent when the report first launched almost three years ago in February 2010.

Fuelling the rise of income and savings
With 55 per cent of 55- to 64-year-olds also still in employment, compared with 41 per cent in February 2010, this trend looks set to continue as more baby boomers pass the age of 65. It has already fuelled the rise of income and savings among over-55s during the last three years. The typical over-55 now has an income of £1,444 each month along with £14,544 in savings (December 2012), compared with a monthly income of £1,239 and savings of £11,590 in February 2010.

Enjoying the fruits of your labour
Despite 80 per cent being concerned by rising living costs over the next six months (December 2012), the UK’s over-55s are determined to enjoy the benefits of extending their working lives. Nearly half (44 per cent) plan to use their extra time in retirement to travel more, while 42 per cent are focused on spending more time in their gardens.

Socialising is high on the agenda for many over-55s in retirement, with 37 per cent planning to invest extra time in their families and 33 per cent keen to socialise more with friends.

The most common motivation
They also have philanthropic intent: two-thirds (66 per cent) of over-55s would be interested in carrying out charity work or volunteering once they have retired. The most common motivation is to give something back to the community
(49 per cent) and to stay active by getting out of the house (48 per cent).

A new model for later life
It’s clear that the first baby boomers are setting out a new model for later life, and getting the most out of their improved physical health and the freedom to continue working for longer. Many people find that staying active in a job helps to keep them young at heart – with the bonus being that it boosts their earning and savings potential in the process.

The key to making the most of this opportunity is for people to start planning for their 60s and beyond well in advance. In this way, rather than accepting the old retirement stereotypes, you can have the freedom of choice about whether you continue to work or not, rather than feeling forced to carry on out of the demand to meet financial commitments.

New rules mean women could increase their pension income by over 20 per cent

The new 20 per cent uplift in capped income withdrawals will come into force on 26 March this year, and people could start to see the benefit of this uplift from the start of their new income year following that date.

New gender neutral rules
An income year is driven by the date a person first started taking income withdrawals from their pension. While people do not need to take any action for this uplift to take effect, women could see their income rise by over 20 per cent as a result of the new gender neutral rules, but they need to take steps to achieve this.

Changes to the maximum capped income calculation as a result of gender neutrality commenced on 21 December 2012. The factors that determine the amount of income withdrawals that men and women are permitted to take from their pension each year is now identical, which means the position for women has improved significantly.

Extremely beneficial for women
To benefit from the new gender neutral rates, an income recalculation point is needed for women. It could be extremely beneficial for women to take this action, especially if more income is needed to live on.

The 20 per cent uplift in pension income will happen automatically, However, women can now benefit from enhanced gender neutral terms, so if applicable to you, it is important you find out whether triggering a recalculation could increase your income even further.

Some pension schemes have the flexibility to recalculate the income annually, making it easy for women to take advantage of this enhancement. For those who are in a scheme that does not offer annual reviews, you could still trigger a recalculation by transferring new money into your capped income fund, but you should always seek professional financial advice to ensure this is the best option.

Tax planning checklist 2012/13 for you,
your family and your business

Make sure you take advantage of the wide range of year-end tax planning opportunities available this year. Here is our checklist of the main top ten areas to consider for you, your family and your business.

For myself AND my family I have…

Made the most of my 2012/13 Individual Savings Account (ISA) allowance

Taken advantage of increased pension contributions to reduce taxable income

Ensured that I have a tax-efficient gifting strategy

Used my annual capital gains tax exempt amount

Reviewed my estate planning and my Will

For my business I have…

Extracted profit from my business at the lowest tax cost

Made sure my staff remuneration packages are tax-efficient

Carefully considered the timing of asset purchases and sales

Recorded any appropriate constructive obligations in respect of employment awards

Planned the purchase of business equipment to take full advantage of capital allowances

Are you satisfied you are paying the minimum tax necessary? 

As everyone’s circumstances are different, we would be delighted to review yours with you so we can help you make the maximum tax savings. To discuss how we could help ensure that you are not paying any more tax than you absolutely need to, please contact us for further information.