Monthly Archives: April 2013

IHT – The Voluntary Tax

Ever since 1694 the UK government has considered death as a sensible time to put its hand in our pockets by taxing the estate left behind.

By the time the modern system was introduced in 1894, the number of duties and taxes had multiplied to 5: a legacy duty, a succession duty, a probate duty, the accounts duty (an anti-avoidance tax on gifts) and a Temporary Estate duty. Since that time the basic principles of a progressive tax triggered by death have been unchanged, but successive Chancellors have continued to take steps to reduce avoidance by taxing gifts and tinkered with the tax status of various business assets.

One constant feature for well over a hundred years is the activity of tax advisers, and even many of the ways which they recommend to keep your hard-earned wealth away from the Chancellor.

The most obvious way of avoiding the burden is to leave the country and generally tax havens will neither tax your capital nor your income, but the process of leaving is fraught with potential pitfalls and tax authorities have no love of those who try to escape their clutches in this way! The next most obvious way is to give away what you can children and charities are often mentioned in this context (sometimes even by people other than children or those who work for charities) and as long as you stay alive long enough or do it in affordable dollops (out of ordinary income) you can give away everything you own. The problem is that you will then be dependent on children or charities yourself as a result. Past generosity does not guarantee future good treatment. Ask King Lear. The same effect can, of course, be achieved in terms of tax minimisation by spending the money on fast cars, fast living and slow horses and you will still end up dependent on children and charity. If you manage to spend it all you do not need a will, but for most people drawing up a will and considering what their spouse and other dependants will inherit is the first and extremely important step.  Even if you plan to leave the country or give it all away you should have a will as the grim reaper may call before you have done this.

A somewhat more pedestrian approach to planning is to establish trusts to own various assets, and again this approach has been employed for generations. Unfortunately the Chancellor now takes a large share regularly and the net effect of much of the tax planning of recent decades has just been to give him a clearly defined pool of assets in which to fish. But trusts may even now have a place in planning, particularly for the care of the mentally or physically disabled. Just remember, the one certainty is that you will pay fees for putting trusts together, for running them and possibly then even more for taking them apart one day.

Today’s real bargains from the Chancellor are to be found in some very generous reliefs for business assets of various descriptions. So, added to the traditional home of farms and forests are various enterprises of which one chancellor or another has approved. Any serious business (but not financial, investment or property) attracts relief if it is in a private company. In addition a portfolio of stocks listed on the Alternative Investment Market (AIM) counts as a business asset with 100% relief. Portfolios of AIM shares can be constructed easily and as long as they are put together 2 years prior to death are 100% exempt.

For as long as it lasts it seems likely that putting substantial assets to work in a company which qualifies for Business Property Relief could be a sensible course and anyone whose estate is likely to be counted in millions should consider whether a trading company would be a good way to conduct their affairs.

With Corporation Tax at 20% the tax filter on profits is no longer as confiscatory as it became when the imputation tax system was abandoned. Anyone with a possibility of channelling assets into an enterprise of this sort should definitely consider how to do so and possibly give away a share of the company to heirs at the same time. The business should carry out a trade but trades such as development of property (not just holding it), insurance (via Lloyd’s) and trading in almost any non-financial goods will qualify. The principals do not themselves have to be active in the trade and quite often there are agents who are expert in a field who will carry out the business on their behalf.

There are lots of schemes designed specifically to avoid IHT, many involving bonds, often offshore, trusts and insurance. The main consideration with these is that they are an obvious target for the Chancellor. A secondary consideration is that whenever tax saving comes into the design of an investment product there are expenses. Clearly, as Chief Executive of a financial services firm, I like to see lots of fees going to advisers but in some cases the certainty of a high level of fees should be given rather more weight and the uncertain future gain rather less weight in the decision process.

My conclusion, after years of considering all sorts of alternatives for all sorts of clients, is that it is wise to consider giving away what you can easily afford at an early stage, and only when you have done this should you think about other ways of minimising taxes. The traditional period for gifts to become wholly exempt is 7 years but among other ideas for taxing gifts the possibility of taxing accumulated lifetime gifts in the hands of the recipient has waxed and waned so even if you knew exactly when you had an appointment with your Maker it is probably better to make any gifts at the earliest possible date. But keep enough for a nursing home in your declining years; you and your heirs will both feel better if you can look after yourself. If you have an income which exceeds your expenditure then giving away the surplus is simple and lies outside the lifetime gifts regime.

As far as elaborate schemes are concerned I observe that many either do not work or come at such an expense that one might question their efficiency. Exile may be effective but having seen many of those who move to sunnier climes return because they did not want to die abroad, missed grandchildren or wanted to have the NHS around them it might be as well to be absolutely certain that you really want to leave permanently before going too far down this route. The outstanding bargains in the tax saving arena are the business property reliefs and it is certainly worth considering how to maximise both the range of different ways you can achieve such classification for your assets and also how you can maximise the amounts in such ventures. Even AIM portfolios today can give a diversification and an asset base which was unavailable when the relief first came in because of the breadth and number of companies now listed on AIM.

Finally there are two very important points which are as true now as they were when the first estate duties were designed (the Romans certainly had them, but they probably go back at least to Hammurabi). The first is that it is a very easy tax to collect because death is difficult for the most avid tax avoider to hide. Secondly, it is the most painless tax to collect because the victims are not in a position to object, or really care too much. So death duties will not go away.

DO NOT            

GIVE AWAY TOO MUCH

BUY TOO COMPLEX BONDS & SCHEMES

CREATE ARTIFICAL BUSINESS

OR BUY LEISURE FARMS

OR WALKERS’ WOODS

(ALL MAY BE DISQUALIFIED)

USE PRETEND CHARITIES

TAKE EXCESSIVE AIM POSITIONS

FAIL TO KEEP YOUR WILL UPDATED

IGNORE THE FACT YOU ARE MORTAL

OMIT TO BUY LIFE COVER IF YOU NEED IT

 DO

GIVE AWAY ASSETS

(PARTICULARLY FIXED ONES)

MAXIMISE BUSINESS ASSETS

GIVE TO CHARITY

CONSIDER AIM PORTFOLIOS

USE FORESTS OR FARMS

(HOPEFULLY PROFIT MAKING)

MAXIMISE SPOUSE RELIEF

GO ABROAD

(BUT ONLY IF YOU ARE SURE)

USE TRUSTS ONLY IF ADVISED TO

http://www.nwbrown.co.uk/

How employers can attract the best job seekers

Under current conditions there are always lots of applicants, but for employers recruitment is a costly process and the important thing is to get it right first time, says Tracy Beadnell of NW Brown.

What our clients often find is that an attractive benefits package tends to bring in a better class of candidate as only those who are interested in the long term and stable employment place a great priority on pensions, continued income in sickness, life insurance and the other benefits found in a good package. The result of offering these is often disproportionate to the cost if it means better employees who stay with you longer.  Today everyone tends to be focused on pensions because of the current reforms. Job seekers will often find a big difference in flexibility, contribution rates, and clarity of offering depending on how well structured and explained the new schemes are. Explaining the new rules to both employers and employees takes up much of Tracy’s time, but doing this helps both the potential employer become more attractive and the employee to appreciate the value of the benefits package.

If you would like to discuss employee benefits, please contact Tracy Beadnell, Corporate Financial Adviser at NW Brown & Company Ltd on 01603 692755 or at tracy.beadnell@nwbrown.co.uk

Featured Client – WindmillArt

A unique gallery space for the region’s artists

WindmillArt is a private, not for profit, commission free, art exhibition gallery and event venue in the grounds of Windmill House in Linton, South Cambridge.

It was created in the first instance by a commercial property investment client of NW Brown to provide a vehicle for the exhibition and sale of his Brazilian wife’s beautiful custom designed, handmade jewellery (www.terezavotre.co.uk). They gathered some other talented local artists, cleaned up the large brick tower windmill in their garden and the first exhibition was held in 2005.

Two or three exhibitions a year since then has seen the 1836 brick tower windmill evolve as WindmillArt is now also used for birthday parties, business meetings, photographic shoots and the like. In June http://www.behindburlesque.co.uk have hired the venue for a two day celebration of burlesque with a photographic exhibition, two nights of live cabaret all followed by a Sunday photo-shoot with the performers for photographers wanting to capture this popular genre. Information, dates and tickets are available from their website.

Equipped with a plug and play sound & light disco system the building also converts to a night club as well as up to three photo studios, which along with the 7 acres of grounds is frequently used for photo-shoots as well as seminars & practical workshops on photographic theory and techniques.

http://www.windmillart.co.uk continues, with the help of NW Brown, to be a thriving local art exhibition gallery as well as a flexible and inexpensive venue for a wide variety of private or commercial uses.

Should you have an idea to use it then please make contact via conrad@windmillart.co.uk or call 07931 372110.

http://www.windmillart.co.uk/

http://www.nwbrown.co.uk/

An insight into the Collectives Managed Service

As a provider of financial services a large part of our work is concerned with advising clients on where to invest their savings. We are a “whole of market” adviser and provide advice across the entire spectrum of financial products, ensuring that our clients receive truly independent advice that is tailored to their circumstances.

When appropriate to do so, we will recommend investment in the stock market and this may be through the medium of unit trusts and investment trusts, which are known as collective investments. Collectives are simply portfolios of investments, managed and administered by professional investment managers for the benefit of their investors, although with some important differences.

Perhaps the most significant of these differences is the ability to borrow money for investment. This is known as “gearing” and is only available to investment trusts, due to their legal status as a company. An example of this is the pair of European funds run by Alex Darwal of Jupiter Asset Management Ltd. These comprise an investment trust and a unit trust. Although there are some differences in the underlying portfolios, the principle is that the return on the investment trust will be increased by the extent to which its portfolio is geared. At the time of writing the portfolio has gearing of 10% so the rise in value of the investment trust’s portfolio will be 10% greater than that of the unit trust in a rising market. However, if the manager misjudges and gears up in a market that subsequently falls, the fall in value of the portfolio will be proportionately greater. Historically, gearing has been beneficial and investment trusts have outperformed unit trusts over the longer term (5-10 years).

Private clients can invest through our Collectives Managed Service (CMS) or our Managed Portfolio Service (MPS), both of which are managed on a discretionary basis and available in ISAs and SIPPS as well as directly held portfolios. The main reason why one service might be chosen over another is likely to be the amount of money the client has available for investment, although other factors would also have a bearing and the overall decision would be based on a detailed analysis of the individual circumstances of the client.

Our Corporate Benefits business also makes use of collectives, typically recommending managed or lifestyle funds where a company pension scheme is provided by insurance companies such as Aviva or Standard Life, or portfolios of individual funds from a range of management groups where the scheme member has more specific requirements.

At NW Brown we have considerable expertise in collectives and offer a suitably comprehensive range of advice and management services to ensure that all of our clients are catered for.

http://www.nwbrown.co.uk/collectives-management/

NW Brown lends its support

Romsey Mill is a local charity creating opportunities with young people, children and families in Cambridgeshire.

The charity, which started in 1980, works with around 3500 people each year, including young mothers and fathers, young people on the margins of society who may be involved in offending and those struggling to engage fully with education. They also work with families with pre-school children and young people with an autistic spectrum condition who have few social opportunities.

Their work is long term, encouraging participants to develop their skills and to enable their progress towards training, work and positive involvement in the community. With a string of inspiring success stories they are always looking for further help and support, whether from volunteers or sponsorship. NW Brown looks forward to supporting this very worthwhile charity in the future.

For further information please go to www.romseymill.org

http://www.nwbrown.co.uk/

NW Brown News and Events

NW Brown is delighted to be involved in the local communities of Cambridgeshire,
Norfolk and surrounding counties by supporting cultural events and the arts as well as local sports such as the Norfolk 20/20 cricket, North Walsham Rugby Club and the Cambridge Real Tennis Club. This is our first year as a main sponsor of the Norfolk & Norwich Festival in May which we are looking forward to immensely. We are sponsoring 5 concerts in the Assembly Rooms in May.

We also hold regular networking events in both Cambridge and Norwich, with industry based speakers, which are specifically designed to be of interest to a wide range of clients and include a diverse range of subjects such as property, embracing technology with Apple, antiques & wine appreciation and ladies pamper charity evenings. The events provide an ideal opportunity for our clients to learn more about a subject that interests them as well as get to know us better.

We continue to make our premises available for suitable charity dinners and
to other organisations for meetings. The Board Room in Cambridge has seen half a dozen such dinners over the last 12 months and the beautifully restored Pavilion in Norwich is increasingly well used.

In May we are looking forward to an evening in the fast lane at Aston Martin in Harston near Cambridge.

If you would like to know more or would like an invitation to any of our events please visit http://www.nwbrown.co.uk/events/ or contact our events co-ordinator, Nicole, on 01603 692747.

What do we use collectives for? In one word… diversification.

In this one word is implicit a theory which is perhaps best summarised as “do not put all your eggs in one basket” but in practice is rather more than this.

At its most extreme this theory says that if you take a large number of extremely risky positions and get paid a lot to take each individual one, the chance of them all going wrong is very small. We use investment trusts and unit trusts (known as “collectives”) to gain exposure to areas such as smaller companies (Aberforth Smaller Companies Trust), emerging economies (Templeton Emerging Markets Trust) and international index linked bonds (Standard Life Global Index Linked Bond Fund). In each case we are investing in an asset class to which we have no ability to gain access without taking specific risks on individual stocks. We therefore choose talented managers who specialise in a particular market or asset class and back their judgement by investing in the collectives they manage.

We also use collectives where the size of a portfolio makes it difficult to achieve diversification of risk without incurring a disproportionate level of expense due to the resultant small unit sizes. Here we will use large UK and international general trusts (such as Alliance Trust and British Empire Securities & General) as the core of a portfolio and include other funds for specialist areas such as fixed income, smaller companies or merging economies. There are also occasions where we use collectives opportunistically, for instance by investing in the zero coupon preference shares of investment trusts (such as F&C Private Equity), where we combine attractive tax treatment with secure asset backing. In some cases we could achieve the same effect with directly held investments but as well as greater risk it would almost certainly be more expensive for the client, particularly if there were cash flows in or out of the portfolio that required the investment structure to be adjusted.

Overall, collectives allow investors to benefit from diversification of risk, either for smaller portfolios where it is sensible to diversify, or for larger portfolios where some exposure to specialist areas might be appropriate. In this role they have a place in almost every investor’s portfolio. There are some areas, however, where the asset class itself can be so risky that even with the benefit of spreading that risk through a collective vehicle, it is still something we would deem too speculative for even the most adventurous of our clients. Examples of specialised asset classes that have come to the market in recent years include property in Vietnam, timber in Uruguay and special situations in China. Some of these have come to grief in such a spectacular fashion that the investor might just as well have picked a potentially more volatile directly held share, or even put their money on a horse. You will read elsewhere in our blog about the ways in which we manage portfolios of collectives and the care we take to ensure that we align our clients’ appetite for risk with the investments we buy.

www.nwbrown.co.uk/collectives-management/