Legal Entity Identifiers (LEI’s) – Do you need one?

If you hold any form of investment, whether it be stocks, company shares, investment bonds, etc., you may well have heard of a Legal Entity Identifier (LEI) – but what is it, what does it do, and more importantly … do you need one?

In January 2018, the UK will become subject to new legislation brought about by the Markets in Financial Instruments Directive II (MiFID II) regulations.  MiFID first came into force in the UK in November 2007 when its aim was to increase competition and consumer protection in the financial services sector across the European Economic Area (EEA).  However, lessons learned from the ‘financial crisis’ along with the desire to strengthen consumer protection have led to the updating of the regulations.

Transaction Reporting & Unique identifiers

Perhaps one of the biggest changes to be brought about by MiFID II relates to the transaction reporting rules, which are designed to ensure that Investment Firms report post-trade information to the Financial Conduct Authority (FCA) to help them to detect and deter market abuse. In addition to this, from the 3rd January 2018, Investment firms must also ensure that prior to trading in any ‘reportable financial instrument’ they hold an appropriate unique identifier.  For individual’s this will be their N.I. number, and for a Legal entity, this will be a Legal Entity Identifier (LEI).

Legal What is a Legal Entity Identifier (LEI)?

Legal Entity Identifier’s (LEI’s) are unique alphanumeric 20-character codes that are used to

Pack up your troubles in your old kit bag and smile, smile, smile…

This week I thought I would share with you a blog written by Tim Hale of Albion Strategic Consulting.  Tim is engaged by Carpenter Rees as a consultant and has helped design and develop the investment strategies we put in place for our clients. Tim is well known  for his investment knowledge and is author of the book Smarter Investing. 

Modern life provides us – some would say swamps us – with so much news, information and punditry, which focuses on the here-and-now, that it is easy to be overwhelmed with the feeling of doom and gloom. The list of things to concern us is long and worrisome; Donald Trump leading the free world, a nuclear-armed North Korea; an increasingly fractious Brexit process and looming cliff-edge, to name a few.

The natural extension of this is to worry about what the impact of all this uncertainty will have on your portfolio and in turn, on your future wealth and expenditure goals. The first mistake is to believe that the world is falling apart around our ears.  It most certainly is not.  The second mistake is to think that the portfolio needs to be repositioned to mitigate these events. There are six key reasons why portfolio tinkering is unlikely to be a sensible course of action.

Reason 1: today’s ‘unprecedented’ turmoil is no different to how it’s always been

Today’s worries dominate our thinking; but can you remember what you were worrying about a year ago, or two years ago? Probably not. It has ever been thus.  Take a look at the chart below. The overwhelming take-away is to acknowledge the relentless upward trajectory of purchasing power for those patient enough, and disciplined enough, to stay the course.

Figure 1: The relentless growth of purchasing power, despite World events

Source: Albion Strategic Consulting[1]

Reason 2: bad news sells – so don’t ignore the underreported good news

We are all aware that bad news sells. For example, the Office for Budget Responsibility (OBR) delivered a ‘gloomy’ forecast for growth of ‘only’ 1.4% for 2018.  Yet, the UK economy is still growing; remember too that this slow down comes after a period of growth that has outstripped much of the developed world – particularly the rest of the EU – for the past few years.  It is not all bad news.

Reason 3: the danger of conflation of ‘what ifs’

The human mind likes stories and in themselves these stories may lead to what appear to be rational outcomes on which some action, or another, could or should be taken. What we often fail to realise is that the seemingly logical outcome is highly unlikely; we have failed to multiply the probabilities of each sequential outcome together.  Think hard about the stories you read and hear.

Reason 4: the futility of futurology

Futurology is the financial markets’ version of astrology. There is a huge industry out there from the IMF and the UK’s Office for Budget Responsibility (OBR) to investment banks, academics and BBC reporters all peddling their own view of the future.  These futurologists have one thing in common; they are nearly always wrong in their predictions, and are rarely held to account for their poor forecasts. Take forecasts with a pinch of salt.

Reason 5: the framing of data

As we all know, data is used to score points in support of the data-user’s viewpoint. Be aware that simple statements of fact can be both very influential and misleading.

Reason 6: the news is already in market prices

It is normal to be worried about the potential impact of what is going on in the world and how this will affect markets. The reality is that you are not alone; in fact, all active investors have some view on how Trump, Brexit, Merkel’s problems in Germany, or the Federal Reserve in the US – to name a few – will impact bond and equity prices.  These global, diversified view-points are already reflected in the equilibrium price of securities, agreed freely between buyers and sellers.

Your portfolio is already structured to manage uncertainty

Today’s concerns such as Brexit, Sterling’s weakness, potential tax rises in the event of a Labour government, and Donald Trump in general, are endlessly recycled through the 24/7 media soundbite process, alarming some who are invested in the markets. Well-structured investment portfolios seek to ensure that any market conditions can be weathered in the future, whatever drives these storms.  Your highly diversified portfolio, balancing global equity assets with high-quality shorter-dated bonds, is well positioned to do so.  Try not to worry.  Start by watching the news less.

If you are feeling concerned, please feel free to get in touch to talk further.

 

Other notes and risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1]     Global balanced portfolio: 36% MSCI World Index (net div.), 26% Dimensional Global Targeted Value Index, 40% Citi World Government Bond Index 1-5 Years (hedged to GBP) – no costs deducted, for illustrative purposes only. Data source: Morningstar Direct © All rights reserved, Dimensional Fund Advisers.

Your Wealth – Your Legacy

In my recent blog ‘to gift or not to gift’ I talked about how too much money can leave you with a difficult quandary regarding gifting. But what is too much money, and have you even considered your Legacy or Inheritance Tax?

Data from the Office of National Statistics shows that IHT receipts increased by 22.9% in the first quarter of this tax year. The figures show that since March, more than £2billion has been taken from people’s estates in IHT.

According to new research[1], almost half of UK Adults (47%) say they have never discussed Inheritance matters.  Talking about estate planning can of course be an extremely emotional subject as people generally don’t like talking about death or money. However, research shows that around one in ten people would like to talk about it but haven’t found the right time, whilst some people just don’t know where to start.

Amongst the most common reasons given for not discussing Inheritance are; not old enough so it’s not a priority, don’t like talking about it, and avoiding it because it’s a morbid subject.

However, whilst approximately a third of people say they don’t feel comfortable talking about their legacy, there are some life events that may prompt people to talk to loved ones, such as a health scare, a near death experience and getting older. Research suggests that after their partner or spouse, people feel most comfortable talking to their mum or a financial adviser in the first instance.

So just what can you pass on?

When someone dies, the value of their estate becomes liable for IHT. Everyone is entitled to pass on assets up to the value of £325,000 IHT-free. This is called the ‘nil-rate band’. It hasn’t changed since 2009 and will remain frozen until 2021.  Any excess above £325,000 is taxed at 40%.

Residence nil-rate band

The new £100,000 residence nil-rate band was introduced in April 2017. It will increase in steps to £175,000 in April 2020 so married couples or registered civil partners with children will be able to pass on up to £1 million IHT free, as this is in addition to the ‘nil rate band’.  However, the residence nil rate band is only available when passing on the family home, or the value from the sale of it, to a direct descendant, so it is important to consider structuring your estate to make the most of these allowances.

5 Conversational topics to have with your loved ones

  1. The importance of an up to date will – When you are making a will, this is a good time to talk to your family about your wishes. Research found that just four in ten over 55’s have an up to date and valid will.
  2. Take advantage of the gift allowance – gifting small sums or money regularly throughout the year can be a great way to financially help loved ones, as well as reduce your IHT liability. See my previous blog http://carpenter-rees.co.uk/blog/gift-not-gift/ for further information on gifting.
  3. Let life events help you start a conversation – It’s not only negative events that can prompt a discussion about inheritance matters. Positive events such as the birth of a child or a marriage can also make people evaluate their plans. Use these opportunities as a way of talking to relatives about how you would like to pass on your wealth.
  4. Talk about later life care – Social care is a much talked about topic, and many people are worried about how they will pay for care when they get older. As a result, people are starting to plan for this earlier, and this provides an ideal opportunity to also talk about your estate planning.
  5. Talk about family heirlooms – If you find it hard to approach the subject of estate planning with your family, then a good place to start could be talking about family heirlooms. People love to hear stories about other relatives even if they never had the chance to meet them and this can be a great opportunity to start a conversation about estate planning.

For more information, please see the November / December edition of our smartmoney magazine, http://carpenter-rees.co.uk/resources.html

Planning for what will happen after your death can make the lives of your loved ones much easier. To discuss putting in place an estate plan to reduce or mitigate Inheritance Tax, please contact us – don’t leave it to chance.

 

[1] Brewin Dolphin

Autumn Budget 2017

Chancellor of the Exchequer, Philip Hammond, delivered his second Budget to Parliament on 22 November 2017. 

In every Budget there are winners and losers and Autumn Budget 2017 was no different. In his keynote speech given to MPs in the Commons, Mr Hammond signalled that he will allocate funds to ‘invest to secure a bright future for Britain’, saying the Budget is about much more than Brexit.

Under pressure to deliver a bold and positive vision of the UK’s future, Mr Hammond started the speech with an upbeat introduction to the economy, defying the expectations of more negative forecasts and promising to face challenges head on, seeking out opportunities. He laid out his plans for tax, housing and travel, but his ability to manoeuvre was limited by figures that showed large downgrades to the UK’s future path of GDP and productivity growth. 

The Chancellor resisted the temptation of making major changes to the pension system to raise cash. The only notable change was that the lifetime allowance for pension savings is set to increase in line with the Consumer Prices Index (CPI), rising to £1,030,000 for the tax year 2018/19. To encourage people to save adequately for their futures, he also announced that the annual allowance, a limit on the amount that can be contributed to your pension each year while still receiving tax relief, will remain at £40,000.

Personal taxes were largely left unchanged, though personal allowances and the higher tax threshold will be increased from April next year. The now annual obligatory freeze of fuel duties was delivered, but new levies on diesel cars were announced.

Click here  to read our guide to the Autumn budget 2017

Want to discuss the impact of Autumn Budget 2017 on your personal or business situation?

Overall, this was not the bold, game-changing Budget that many in the Chancellor’s own party were demanding. If you would like review what action you may need to take to keep your personal and business plans on track, or if you have any further questions, please contact us.

 

 

How to Financial Plan for owners of a growing business

For many entrepreneurs, making a profit is an achievement and growing that profit year on year is the ultimate goal. However, this leads to the new set of considerations and planning needs.

Questions such as;

  1. What do we do with excess capital?
  2. How do I extract money from the business tax efficiently
  3. How do I retain my quality staff and continue to attract more?

Carpenter Rees have always practised the principles of de-risking business owner’s personal finances. Having separate assets that are not linked to the business can give peace of mind and the ability to direct all their energies into growing the business. Taking money out of the business in a tax efficient manner, and using this capital to strategically build a portfolio of Investments independent from the business can help to achieve this goal.

At the growth stage of the company’s development, it is important that the company has a proactive accountant who will provide advice on profit extraction strategies. This includes maximising the tax benefits available by mixing remuneration by way of salary and dividends, the availability and scope of the level of pension contributions that can be paid and the private benefits that can be paid by the company (although some of these may incur a tax charge).

Pension schemes which were set up when the company first started making profits can now be funded to a greater

Your financial adviser will now take you through the safety procedures

Whilst listening to the safety procedures on a recent flight with friends on our annual Barons golf trip (Incidentally, I won the Barons trophy for the second year running!) it reminded me of the importance of planning clients investments.

Fasten your seat belts

As we hover around market highs for world equity markets and the 10-year anniversary of the crisis at Northern Rock, the media is again stoking up concerns about current market levels. We have had several conversations on this subject recently with clients.

The truth is that at some point the markets will fall. So, if the markets do fall what do you do?

Adopt the brace position

If you have planned your investments correctly, absolutely nothing is the answer. This may not be your natural reaction as you may feel an urge to take control; but what do you do? Do you sell?  if you do decide to sell, what do you sell, when do you sell and where do you invest the proceeds?   You then need to decide when to go back into the market. Getting these decisions right is practically impossible and even the so-called experts can make the wrong calls.

There is no doubt it can be scary, and at such times there is no comfort in reading the newspapers or listening to the news.

The emergency lights will direct you to your closet exit

So, what do you do? Well you stick to the plan that we have worked on with you, which will have built in the possibility of market falls; the scale of which is dependent upon the risk you wish to take with your investments.

When we design your plan, we ensure that you have a level of cash that you feel comfortable to hold and in addition, we ensure that you have cash within your portfolio to cover normally 12 month’s requirements. There will also be a certain amount of short term fixed interest stock within your portfolio, the level of which is again dependent upon the level of risk you wish to take. Most of our clients have 30% or more in these safer investments, so it is important to remember that if the stock market fell by 30% and you have 60% of your investment portfolio invested in equities, then your portfolio value will reduce by around 18%.

Sit back and enjoy the flight

These lower risk investments enable you to leave your long-term portfolio untouched when markets fall enabling you to sit back relax and wait for your portfolio to recover and fall comfortable in the knowledge that you need not stress about making the right calls.

To Gift or not to Gift.

Having more money than you need can sometimes leave you with a difficult quandary – should you gift it or not?  This is a question I have been asked numerous times over the past few months.

In a previous blog, http://carpenter-rees.co.uk/blog/the-kids-are-alright/ I talked about this and the fact that people often delayed making gifts due to fears such as giving the kids too much to young, treating the family fairly, or whether they might squander your hard-earned money (and believe me when you grew up in the 60’s in a culture of ‘watching the pennies’, the thought of someone else being reckless with ‘your’ money is certainly not an easy thought).

On the flip side of the coin, delaying making gifts can mean that you could die with ‘too much’ and therefore potentially incur IHT liabilities on your estate. Whilst there are thresholds to ensure that some of the value of your estate is excluded, anything above these thresholds is taxed at 40%. Not only could this result in a significant reduction in the inheritance you leave behind, but the tax due must be paid by the end of the sixth month after an individual has died …. not always an easy task and particularly where a proportion of wealth is tied up in property.

So, if making the decision to gift isn’t difficult enough, as with many things in life, once you’ve made that decision the next steps are not straightforward either; and I’m not just talking about deciding who to gift to, how much, what they will do with it, what happens in the event of a future marriage breakdown, have you left yourself with enough funds, etc. etc. … I’m talking about the HMRC rules which govern Gifts.

HMRC rules

There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.

There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently.

Other gifts count towards the value of your estate.

What counts as a gift

A gift can be:

  • anything that has a value, such as money, property, possessions
  • a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift

Exempted gifts

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can carry any unused annual exemption forward to the next year – but only for one year.

Each tax year, you can also give away:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • normal gifts out of your income, for example Christmas or birthday presents – but, you must be able to maintain your standard of living after making the gift
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • gifts to charities and political parties

You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

Small gifts up to £250

You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.

The 7-year rule

Any gifts made in excess of the exemptions count as part of your estate for 7 years.  Therefore, death within this period may result in inheritance tax to pay.  To make this fairer, HMRC introduced a sliding scale known as ‘taper relief’, which sets out the amount of tax due.  Gifts given in the 3 years before you die would be charged at 40%, whilst gifts made 3 to 7 years before your death would be charged as follows: –

Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

 

Gifts are not counted towards the value of your estate after 7 complete years have passed from the date of the gift.

Conclusion

As with all financial decisions, gifting is something which requires careful thought. Of course, gifting is not the only option.  Another option is to spend more money, or save less.  Often clients can be so preoccupied with accumulating wealth and ensuring that they can fund the lifestyle that they require, that they forget to consider the impact of ‘too much’ money.  In my previous blog  http://carpenter-rees.co.uk/blog/sometimes-spending-brings-a-bigger-return-than-saving/, I talked about how spending money and particularly on ‘life experiences’ can be hugely rewarding.  These are all things that we discuss when going through a client’s financial plan.

As I’ve said previously, there is no perfect solution and one of our roles as financial planners is to help clients think through major life decisions. Our experience in dealing with many families and family businesses stands us in good stead. Carpenter Rees will help make sure that the decision you reach is sensible, balanced and meets your personal values & preferences, family circumstances and concerns over inheritance tax.  Involving family and helping educate them in financial matters is an area where our involvement makes a difference.

Reasons to be cheerful

If you are like me, you will often listen to the news or read the papers and think the world is going to the dogs! The depressing headlines appear to be endless, but if you look beyond the media, there are a lot of things that are going right.

The world faces many challenges – but then it always will. The legacy of the financial crisis is still with us, the UK’s exit from the EU is likely to be a constant source of speculation for a considerable period, terrorist attacks continue to cause carnage, and we cannot ignore the entertainment that the US President is providing!

So, it’s no wonder that its’ easy to forget the good things, but they are worth keeping in mind when you are overwhelmed by the grim headlines.

Here are several reasons to be cheerful: –

  1. Over the last 25 years, 2 billion people globally have moved out of extreme poverty according to the latest UN Human Development Report.
  2. Over that same period, mortality rates among children under the age of 5 have fallen by 53% from 91 deaths per 1000 to 43 deaths per 1000.
  3. The UK economy continues to grow and will continue to do so.
  4. According to the Office for National Statistics (ONS), happiness levels in Britain have climbed to their highest rate since 2011 (when they first started measuring it)! Okay, so the Government measuring happiness levels is a little concerning, but apparently, we are a happier nation.
  5. We have the highest level of employment in the UK since records began in 1971.
  6. Renewable energy sources are now accounting for 23% of global electricity generation and are expected to rise to 26% by 2020.
  7. We live in a world of rapid innovation and one report estimates the digital economy accounts for 22.5% of global economic output and this will continue to grow.
  8. Mortgage repayments continue to be cheap and despite the likelihood of an increase in interest rates are likely to remain so for some time due to fierce competition amongst lenders.
  9. It is unlikely that we will have an election next year, but as we love nothing more than entertaining the world with a good old British comedy farce, maybe we shouldn’t bet against it!
  10. Early form would suggest that the premier league is likely to be won by a side from Manchester; but one half of the city will clearly be disappointed at the season end.
  11. Christmas is on its way!

The world is far from perfect and it faces many challenges, but just as it is important to be realistic and aware of the downsides, we must also recognise the advances we are making. Where there is reason for caution, there is always reason for hope.

Keep the good things in mind when you feel overwhelmed by the bad – there will always be reasons to be cheerful …. In the words of Monty Python ‘Always look on the bright side of life’!

Lifetime Allowance – Clearing up some of the Myths

During many of our annual planning meetings with clients, we often cover the effects of the pension lifetime allowance, as this now impacts upon more and more people. The pension lifetime allowance is the maximum value you can build up in all pensions without incurring an additional tax charge.

The current level of the Lifetime allowance is £1m and this is scheduled to increase in line with CPI (a measure of inflation) from April 2018. It is estimated that 4% of retirees will exceed this allowance – as there are 11.5 million people approaching retirement age this means 460,000 could be subject to the tax charge by the time they come to draw their pension benefits.

Government figures suggest that tax revenues of £126 million were collected from individuals whose pension pots exceeded the lifetime allowance in 2015/16 and this represented an increase of 62% on the previous year. Importantly, the standard Lifetime Allowance was £1.25m at that time!

It is an allowance not a limit

We prefer our clients not to view the lifetime allowance as a limit but more a point at which the tax treatment changes, so it is no different to other allowances such as the personal income tax allowance or annual capital gains tax allowance.

When your pension fund value is more than £1m you may have to pay tax on the excess slice of your money. It is important to note that you only pay the tax when you start to take pension savings over the £1 million allowance. It is not something you automatically pay when your pension savings reach that figure.

So how much is the tax?

There is a myth around the tax being 55% in all cases; but this is only the case if you take the excess over the lifetime allowance as a lump sum. If you draw the excess as your savings over the allowance as income the tax charge is 25% this being a tax charge on top of the income tax you pay on your pension. So, if you are a 40% tax payer you would pay total tax of 55% on this excess income. This is because for every £1,000 of excess, a £250 lifetime allowance charge is deducted, leaving £750. After 40% income tax that leaves £450, resulting in the same figure as the 55% charge. This is therefore the same rate of tax so it the comes down to bird in the hand or in the bush if you have a choice.

Those in a final salary scheme who have breached the allowance will have no choice other than to pay the 25% lifetime allowance tax charge, and income tax on their pension payments.

It is important that you get advice as to how you are best to take this excess income and using your tax allowances can help to reduce the total tax you pay.

Work out if you are likely to reach the figure

It is important to get to know about all your pensions so you can keep track of what you have. We, as your financial adviser, will review your pensions annually and are able to project whether you are likely to breach the limit.

If you reach the figure are you better off saving elsewhere?

This very much depends on circumstances and we have covered this in a previous blog.

A further check is made at 75.

We also spend some time looking at this when putting together financial models for our clients as there are instances where the lifetime allowance must be paid on any remaining funds. This is once again where a good financial planner will work with you to ensure this is minimised / planned for.

In short, it pays to talk and discuss this issue with your financial adviser who can assist in ensuring your pension fits in with your goals and lifestyle aspirations but trying to ensure taxation is minimised.

The Pension Scheme Saviour for the Family Business….

We have a great deal of experience in dealing with family businesses a lot of which comes because we administer the ultimate family business pension vehicle, the Small Self- Administered Pension Scheme (SSAS).

These schemes are the made to measure Family Business Pension! The family are trustees as well as members and have the facility to use the funds in the scheme to invest into the family business by way of a loan to the company (now referred to as Pension Led Funding but we still call it ‘Loan back’) or using the funds to purchase commercial property for the business. The key here is that the family has control over the investment strategy, the membership (family members only) and the level of contributions (within limits set out by HMRC).

We have been involved in a couple of recent interesting cases involving the use of the Family Business Pension:

The first was for a family business looking to reduce their debt to the bank but at the same time secure the assets owned by the family business for the current and future generations. The solution was for the company to sell its main site to the Family Business Pension, whose members are the generation currently running the business; the proceeds received by the company were then used to reduce the bank borrowing. The asset remains in the control of the family as trustees of the scheme and the company has achieved its goal at the same time.

The second involved the pension fund helping the family business buy a competing business out of Administration. A collection of 4 Family Business Pensions, from within the group of companies acquiring the business, purchased the business property as part of this transaction – thereby improving the scale of the business group and preserving over 100 jobs.

In our dealing with Family Business Pension Schemes we often get involved in interesting projects such as those outlined above. It is not always about the money it is often about where to have the assets (i.e. in the Company or the Pension) or sometimes it is simply about where there is access to funds and all too often in the latter case, the Pension can be the ideal solution. 

I am probably preaching to the converted in many cases but please feel free to pass the word on to other family businesses that could benefit from a bespoke, made to measure pension scheme or who simply have a scheme, but are not receiving any proactive advice on what they can do.