Topic: Family financial planning

Inheritance Tax rule changes


This week, I thought I would outline how effective estate planning can help safeguard your wealth for future generations.

If you want to have control over what happens to your assets after your death, effective estate planning is essential.  After a lifetime of hard work, you want to make sure you protect as much of your wealth as possible and pass it on to the right people. However, this does not happen automatically. If you do not plan for what happens to your assets when you die, more of your estate than necessary could be subject to Inheritance Tax.

The rules around Inheritance Tax changed from 6 April this year. The introduction of an additional nil-rate band is good news for married couples looking to pass the family home down to their children or grandchildren, but not every estate can claim it.

Bereaved families

 This tax year, more than 30,000 bereaved families will be required to pay tax on their inheritance[1] according to the Office for Budget Responsibility,. So, it pays to think about Inheritance Tax planning while you can and work out how much potentially could be taken out of your estate – before it becomes your family’s problem to deal with.

A recent Inheritance Tax survey conducted by Canada Life [2]  shows that Britons over the age of 45 are either ignoring estate planning solutions or they have forgotten about the benefits these can provide.   Only 27% of those surveyed have taken financial advice on Inheritance Tax planning, despite all of them having a potential Tax liability.

Leaving an estate

Every individual in the UK, regardless of marital status, is entitled to

Sometimes Spending Brings a Bigger Return Than Saving


I thought it was about time we included a Sketch from our friend Carl Richards which appeared in the New York Times in his regular Sketch Guy column.

2017 06 20

Many of our clients have got used to us telling them to spend money but many of them find this hard.

Life experiences give you an incalculable return on investment every single time so why is it hard to spend money on them.

The reason is often that experiences tend to feel like an extravagant expenditure of money, time and energy but I will keep telling you that you only have one shot at life and your goal is not to leave a small fortune to HMRC!

A very adventurous Carl and his wife illustrates this well with a tale of how he and his wife had the chance to

Turn Down the Noise


The Investment and Financial Services industry is noisy and is especially so in the middle of an election. Every day, thousands of articles, blogs, broadcasts, podcasts and webcasts are published, shouting for your attention and trying to make investment sexy.

It’s easy to fall into the trap of thinking that if you do not listen to the noise carefully and sift out the best ideas, i.e. the one’s that could help you find the highest returns—then you will not achieve your financial goals. Actually, we find the opposite to be true; trying to keep up with the latest investment fads can be detrimental to your long-term performance rather than beneficial to it. The noise can drown out the signal.

So what is the alternative?

We believe that it starts with having a strong evidence based investment philosophy that, over a long period of time, will prove to be rewarding for our clients. Our philosophy is based around some of the most enduring ideas in finance, these are ideas that help us achieve your financial goals by harnessing the power of capital markets in a systematic way. At the core, these fundamental concepts have remained the same for decades, but as research evolves into how markets work, our understanding improves and we develop our approach accordingly.

Added to this, we use investment managers that really take care over the details of implementation of the ideas. They understand that investment returns are precious and easy to lose in day-to-day management. They know it does not make sense to pay 5% in fees and costs to go after a 4% return.

This combination of a robust, enduring philosophy and a steady, disciplined application has helped us provide our clients with a way to turn down the noise.


The kids are alright?


Further to my blog at the end of March “You can’t Take it with you”, I wanted to share with you some experiences and observations around gifting to children.

In many cases people delay making decisions about gifting to their children and other family members which is often due to fears such as: –

  • They may squander the gift – This may indeed be the case, but if they are set to inherit the money eventually, gifting it to them whilst you are still around allows you to guide them.  However, if this is a concern then the money can be gifted into a Trust. This would entail additional cost, added complexity and possibly a feeling of distrust and therefore if you are considering this option, you should be open with the family; at least about why. Another option is to gift an asset such as a property or a house deposit, which is difficult to squander and from our experience, property ownership makes children more responsible.   Another somewhat extreme but effective measure is to make it known that if the gift is used unwisely, they may be disinherited.
  • Too much too young– I love getting song titles from the Specials into my blogs! Some people are concerned that giving money too soon could remove that individuals work ethic and desire to create their own wealth. This can be tricky and the choice will be determined by the child’s personality and the values they have had instilled upon them. Again, a trust may be a possible solution.


  • Future Outlaws – As we all know; divorce courts start from a 50/50 split of assets. If you are concerned

It pays to live …


… or more accurately, it now costs more to die if you live in England and Wales as Probate fees are set to rise in May 2017.

The Ministry of Justice (MoJ) has announced that it plans to go ahead with a revision of probate fees despite a consultation in which only 63 out of 829 respondents agreed with changing from a flat probate fee to a proportionate fee based on the value of the estate. In addition only 13 out of 831 respondents agreed with the revised proportionate scales.

Should I stay for good in this final salary pension scheme?


The overwhelming majority of people who have been fortunate enough to be a member of a defined benefit (also known as ‘final salary’) occupational pension scheme should stay in it. There is certainly much to be said for a guaranteed, inflation-linked income for life

However, for some individuals leaving the scheme might be the right option. One example of this is wealthier clients, who may be more concerned about passing on an inheritance and the amount of income tax they pay on an income they may not need, rather than the prospect of running out of money.  For such people the high level of transfer values currently available will be good news and Carpenter Rees have been advising several clients on this matter.

There are many factors that are driving up transfer values but the first, falling interest rates from UK government bonds – gilts – is having the greatest impact.

Falling gilt yields – The economic uncertainty produced by the vote to leave the EU has seen investors moving into safe havens; gilts have been a major beneficiary of this trend. The increased demand has pushed prices high and as a result reduced gilt yields to historic lows. With the lower expected future returns from gilts, pension schemes have had to assume higher current values to provide the guaranteed future benefits – which in turn have resulted in higher pension transfer values.

Lower expected investment returns – We currently live in an economy with low inflation and low interest rates meaning we should expect lower investment returns. In addition, defined benefit final salary based pension schemes are paying out more of their funds in retirement benefits to pensioners as many schemes are closed to new younger members. As a result, Trustees, are expected to take less investment risk by reducing the proportion of their funds in equities and switching to gilts and fixed interest stocks to match the liabilities of the pensions they are paying out.

Improved life expectancy – Life expectancy at older ages in England has risen to its highest ever level. This is a generally welcome development, but it can be a headache for pension schemes that must now expect to pay pensions for longer and this is again reflected in higher transfer values.

It does not however follow that higher transfer values mean that more people should transfer. Many will be comfortable with the guarantees in place and the fact they do not have to take on the investment risk.  But for those with enough wealth to be confident about their own future financial security and would like to be in control of the level of income and therefore the tax they pay, a transfer of benefits from a final salary would be worth considering.

The decision to transfer will be based around numerous factors including the level of risk a client would wish to take, the income levels required and whether they would view their pension fund as a valuable asset to pass on to future generations outside of the estate. I know that I have mentioned our financial modelling software many times, however, this tool is invaluable in helping our clients understand whether a transfer would be of benefit to them; this is crucial as once the transfer is complete, the decision is irreversible.

If you would like to talk to us about your defined benefit pension plan, or in deed any other pension plan, please do get in touch.   We look forward to hearing from you hear.


Warren Buffett says low-cost funds founder is my hero


I know I go on about the cost of active investment management, but I am sure you will agree that Warren Buffett has more clout than me.

In his latest annual letter to his investors he referred to Jack Bogle the founder of Vanguard, which transformed investing forever with the index fund, as a hero for protecting millions of investors from the high cost of active investment.

Warren Buffett has estimated that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade.

Buffett stated: “If a statue is ever erected to honour the person who has done the most for American Investors, the hands down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.”

Buffett saved his most brutal attack for the hedge fund industry, stating that a number of smart people are involved in running hedge funds, but to a great extent their efforts are self-neutralising and their IQ will not overcome the costs they impose on investors. He then went on to say the problem, simply, is that the majority of managers who attempt to over-perform will fail. The probability is also very high that the person soliciting your funds will not be the exception who does well.

He advised investors of all spectrums to make more use of index funds and went on to say: “The bottom line: when trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

Bearing in mind that investment management fees are generally higher in the UK than the US, UK investors are likely to be even better off long-term by following Warren Buffett’s advice. This is why we advocate the use of low-cost funds by using the likes of Vanguard and Dimensional, so that you, as our client, retain more of the investment performance than you would if you invested in actively managed funds.


2016/17 Year End Planning


The 2016/17 year end for tax planning purposes is now only a matter of months away with the deadline approaching on 5 April. Effective tax planning is about knowing the personal and business taxes you are liable to pay and acting to legally minimise them. It is also about maximising your net income and creating opportunities to invest and save tax-efficiently for the current and future needs of your business, your family and yourself.

While there is no doubt that the tax system is complex, you should not let complexity deter you from a simple goal: keeping your taxes as low as possible. We have provided some of the key areas you need to consider if applicable to your particular situation.

Personal Allowance

Ensure each spouse uses their full Personal Allowance for Income Tax purposes where possible. Annual income of less than currently £11,000 is not liable to tax. Spouses and registered civil partners should consider the possible transfer of income-producing assets to ensure that Personal Allowances are not wasted.

Personal Allowance for high earners

Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £122,000 or above.

Spouse remuneration

If a self-employed person or family company employs a spouse to assist in the running of the business, the spouse could be remunerated fairly to utilise the tax-free Personal Allowance. It is possible to set the earnings at a level whereby no tax or National Insurance Contributions will be due but entitlement to State Retirement Pension and other benefits is protected.

Minor children and teenagers 

Minor children are entitled to Personal Allowances. There are restrictions on the amount of income that a child can derive from a parent, but gifts from other relatives can be considered. Junior Individual Savings Accounts (JISAs) can be funded by parents. Teenaged children can be employed in family businesses providing legal restrictions and national minimum wage issues are taken into account.

Individuals with no taxable income

Pension contributions of up to £3,600 gross per year can be made by individuals with no taxable income. The net contribution after tax relief contributed at source by the UK Government would be just £2,880.

Tax-relievable pension contributions

The Annual Allowance for making tax-relievable pension contributions is £40,000, so consideration should be made to utilising the full Annual Allowance for 2016/17 by 5 April 2017. It is also possible to carry forward unused Annual Allowances from the previous three tax years, so it may be possible to receive tax relief in the current tax year on contributions well in excess of £40,000 with a little planning.

Tax-relievable pension for high earners

For high earners, the Annual Allowance definition is more complicated, but those with an annual ‘adjusted income’ of more than £150,000 will be reduced to as little as £10,000 for 2016/17.

Pension Lifetime Allowance

The pension Lifetime Allowance – the total amount of UK pension savings each individual is allowed to build up in their lifetime – is currently £1m. If you exceed the Lifetime Allowance, you could be facing a 55% tax bill. The ‘flexible drawdown’ pension rules now in place from 6 April 2015 onwards allow individuals the opportunity to plan their affairs to manage the level of the money they take from their pension pot to both minimise annual Income Tax liabilities and keep within the Lifetime Allowance. A review of what you could draw down as income from your pension funds before 6 April 2017 could prove worthwhile.

Tax-favourable investments

If appropriate to your particular situation, the use of tax-favourable investments such as Individual Savings Accounts (ISAs), Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCT) should be reviewed. Up to £15,240 per person (so up to £30,480 for a married couple) can be invested in an ISA for the 2016/17 year.

Timing of income

Taxable incomes may fluctuate from year to year as a result of one-off payments or changes in circumstances. Consideration should be given to the benefits of accelerating or deferring the taxation point of investment income and employment bonuses, and also to the timing of the payment of dividends paid out by family-owned companies.

Company dividends

From 6 April 2016, company dividends are still treated as the top slice of income but will no longer be grossed up, and will be taxed at 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band. However, the first £5,000 of dividends will be tax-free to the recipient, no matter which tax band you fall in.

Capital Gains Tax

It’s important to consider utilising your tax-free Capital Gains Tax Annual Exemption, currently £11,100. Each spouse or registered civil partner is entitled to the exemption each year, so gifts between spouses prior to sales of assets may be tax-effective. It may be worth crystallising capital losses where gains in excess of the Annual Exemption have been made. The deferral of sales until after 5 April may see tax paid at lower rates and provide significant cash flow benefits in terms of when tax needs to be paid.

Inheritance Tax

The use of and the carrying forward of the £3,000 annual exemption should be reviewed, together with other possible exemptions such as those for small gifts of up to £250 per individual, regular gifts out of normal annual income and tax-free gifts in consideration of marriage, which can range between £1,000 and £5,000 depending on the relationship with the person getting married.

Review your Will

A review is due if there has been: a birth or a death; a marriage or a divorce; a move abroad; a significant change in the value of your estate; a new business or the disposal of a previous business; a retirement; or a relevant change in tax law. We can help you to work through changes to keep your estate plan up to date.

Want to explore the options available to you?

We all have to pay our taxes, but within the legal framework there are numerous ways of saving tax and making sure you do not pay more than is absolutely necessary. If you would like to explore the options available to you in preparation for the 2016/17 year end, please contact us sooner rather than later.


Tax efficient saving – right place, right time and right order


Tax-incentivised, tax-free, or potentially tax-free are some of the savings choices on offer. Failing to make the most of these will mean you may pay unnecessary tax on income and savings. However, saving into the right tax wrappers at the right time, and crucially in the right order, can limit the tax paid.

The introduction of new tax-free allowances means that there is now greater scope to save and pay little or no tax on those savings. The new £5,000 dividend allowance and £1,000 personal savings allowance bring the total tax free allowances available in 2016/17 to £33,100.

Tax-incentivised savings such as pensions, and tax-free wrappers such as ISAs, are clearly preferable to savings which are potentially taxable. Consequently, when deciding where to save these should always be the first choice.

But pensions and ISAs come with a savings cap. The tax relief on pensions funding is controlled by earnings, the annual allowance and lifetime allowance. There is also a maximum subscription limit of £15,240 (rising to £20,000 from 2017/18) on ISA saving.

Once these pots have been maximised it may still be possible to achieve similar tax efficient returns on other investments with a little bit of careful management of allowances of course.

Unit trusts and OEICs The new dividend allowance creates an opportunity for virtually tax-free saving by building up a collective portfolio where income tax and capital gains tax can be ‘managed out’ by using the respective allowances.

This can be achieved by keeping dividend income to below £5,000 a year, and realising capital gains annually from the portfolio within the annual CGT exemption (£11,100 for 2016/17).

The portfolio value at which no tax will be due will, of course, depend on investment returns, but they could look something like this if allowances are fully used:

Portfolio size Dividend Yield Tax free income Cap. growth rate Tax free growth
£200,000 2.5% £5,000 5.5% £11,100
£400,000 1.25% £5,000 2.75% £11,100
£500,000 1% £5,000 2.22% £11,100

The order of saving For those who use their tax incentives and allowances efficiently, the order in which they are most likely to fill their savings pots is:

  1. Pensions The combination of tax relief on contributions, no tax on income/gains within the pension fund and 25 per cent tax-free cash make pensions difficult to beat as a means of long-term saving.
  2. ISAs Similarly, investments within an ISA do not suffer tax on income and gains. In addition, the ISA can be accessed at any time without giving rise to a tax charge.
  3. Unit trust/OEICs Building up a portfolio so that dividends and gains can be kept within the available allowances can create a fund which is potentially tax free.
  4. Offshore Bonds Income and gains within an offshore bond enjoy gross roll up and are tax-deferred rather than tax free. But there is the potential for them to be tax free if gains can be taken when clients’ or their intended beneficiaries are non-taxpayers.

The tax saved helps to optimise returns and this, combined with reducing the management charges for investment, means that you keep more of what you’ve saved to spend or pass on to your families.


Making Tough Decisions in an Uncertain World


Donald Rumsfeld, the former US defence secretary, certainly added to the lexicon of the concept of uncertainty with his infamous ‘known-knowns; known-unknowns; and unknown-unknowns’[i] interview, when describing the link between Al Qaeda and the Saddam regime in Iraq. While it confused many, it does provide us with a useful framework for understanding the uncertainty that we all face as we seek to put in place sensible plans for our finances, not least how to invest our liquid assets.

We face a number of critical decisions on our life journeys from young, family and career-orientated adults, through the inflection point of leaving the workforce and hopefully onto a happy, healthy, long and financially secure retirement. These include decisions such as: when to retire? How much is enough? How much can we spend? What should we invest in? Can we afford to gift the children some capital at this point?

The challenge we face is that these decisions are made against the backdrop of great uncertainty – in our lives, the capital markets and the rapidly changing world we live in. However, we must make those decisions if we are to give ourselves the best opportunity to achieve the things we aspire to do, with the wealth that we have. These sorts of decisions would be easy if we knew that we were going to die at the age of 99 and could obtain a return, year-in year-out, of say, 4 per cent above the rate of inflation!

But that is not the real world – our lives and the markets contain much more uncertainty than that. Perhaps the most valuable contribution that a good, unconflicted advisor can play now, and in the years ahead, is facilitating you to feel empowered to make the best decisions that you can in the face of this uncertainty. Let us take a look at this with a little help from Donald Rumsfeld, the former US defence secretary.

What are the ‘known-knowns’?

If we look at the ‘known-knowns’ we can come up with a list that acts as both a starting point and platform for making decisions. It includes:

  • How much wealth you have today, where it is and who owns it
  • Your current income and expenditure
  • Your current rates of income tax and potential inheritance tax liability
  • Your vision of what you want your money to achieve for you (financial security, help for the children, philanthropic works)
  • The principal options for investing it, which are simply being either to lend it to someone (bonds) or to become an owner of companies (equities)
  • The returns that have been exhibited on an historical basis for investing in bonds and equities of different kinds
  • The fact these returns do not come in straight lines
  • Some basic principals of investing that we know to work effectively.

What are the known-unknowns

Now we step into perhaps less comfortable territory, not least because we are faced with thinking about our own mortality:

  • We know we are going to die, but we do not know when, either in our own case or in the case of our partners or other family members
  • We know that life takes many turns and that the future that we envisage for ourselves may well not to be the one that we experience. As the old adage reminds us ‘Life is what happens to you when you are busy making plans’
  • We know that investment returns do not come in straight lines, but we do not have much of a clue as to what the returns on investment will be this year, next year or indeed over the lifetime for which we will be investing. We can make some sensible estimates, but these are by no means guaranteed
  • We know that there are some really smart investment professionals out there who could manage our money for us. The unknown is that we have no reliable means of identifying, with any certainty, who they are today
  • We know we could do with some help, but do not necessarily know who to turn to or who we can trust.


What are the unknown-unknowns

Well if we knew what they were, they would be ‘known-unknowns’. In the financial world, these potential events have become known as ‘Black Swans’. The phrase was coined by Nassim Nicholas Taleb in his insightful book Fooled by Randomness[ii], which makes the point that just because most swans are white, it does not means that black swans do not exist. He describes a Black Swan event as “being beyond the realms of regular expectations; carrying extreme impact; and which is prone to us concocting spurious explanations as to why it happened and how it could have been predicted.”  Interestingly, he also views it as being the inverse – i.e. the non-occurrence of events that seem highly likely. What could these be?

  • A computer virus that wipes clean all electronic records of stock ownership?
  • A nuclear explosion at Fort Knox’s gold reserves (as was nearly experienced in James Bond’s Gold Finger).
  • That all financial assets deliver negative returns in the years ahead.
  • Others? Your guess is as good as ours.

How we incorporate these events into our thinking is taxing, but we must try and do what we can to ensure that we incorporate robustness and flexibility into our planning

Is there any help? (the quick answer is yes)

It is all very well working out our own Rumsfeldian list, but how does that help us to manage the uncertainty? The short answer is that it helps us to identify where the risks lie as we try and plan and to put in place sensible strategies to mitigate the unknowns that we face. It also illustrates the need to run a range of scenarios, in some instances, so that we can form some insight into what the various possible outcomes may be, where we draw our red lines, and what choices we face in these circumstances. This is where a professional financial planner adds considerable value.

Carpenter Rees exists to help its clients make these decisions with clarity and confidence in the face of the uncertainty of life and markets.

Insightful, structured, and yet flexible financial planning process, combined with a robust investment process, are the essential ingredients for maximising the chances of enjoying a financial outcome. This is turn provides a lifestyle, that is not only acceptable, but hoped for – ‘Yes you can still go to South Africa to play golf, again, this year.’

A sound process that helps to frame the problems that we face correctly helps us to make better decisions as a consequence.

The essential blend of financial planning and robust investment process

 Making Tough Decisions in an Uncertain World

Sound financial planning is, somewhat surprisingly, one of the best-kept secrets in the world of private finance. Akin to the preparation of a balance sheet, profit and loss statement and forward-looking management accounts, which allow companies to manage their assets, liabilities and cash flow into the future, financial planning does the same at an individual level.

Life-time cash flow modelling tools can help to gauge quantum and direction of decisions, and assist with scenario planning as needed. However, numerical precision needs to be avoided as it sets a false sense of certainty in an uncertain world.

Discussing the issues with an advisor, running a range of scenarios and gaining a sense of the likelihood of achieving the outcome you wish for (and the risks to it), helps most clients to feel much clearer and more comfortable about their wealth, their future and the decisions they may face along the way.

A good financial planning process helps to identify the three components that define how much investment risk a client needs to take: the first component is how much risk can they tolerate, which is a psychological trait; the second is defining their financial capacity for losses, which is a function of their wealth and future lifestyle needs; and the third is the financial risk that they need to take to achieve their goals. Discussing how to align these three components is one of the most important financial conversations that anyone will ever have. Only once this is agreed, can a sensible and suitable investment portfolio be structured.

In investing there are no absolute right or wrong answers, only better and worse solutions. Better solutions are founded in process that encompasses insight into the problem (what should we invest in), are focused on reducing uncertainty (with as little risk as possible) and a robust and consistent decision making process (should we go right or left at this decision point?) As Albert Einstein stated “Make it as simple as possible but no simpler”, which has been our mantra as we have built and implemented our evidence-based approach to investing. In essence, it encapsulates the following core principles:

  • Capitalism works and we should use it to do the heavy lifting as we try to generate returns from our portfolio as either owners (equities) or lenders (bonds). Finding the right balance between the two is key
  • Markets work pretty well – they are a zero-sum game before costs. The evidence tells us that few professionals ‘win’ over the sorts of time frame we are interested in and they are well-nigh impossible to identify in advance. Using ‘passive’ funds that seek to deliver the return of the markets make sense
  • The mix of assets we choose to hold dominates the return journey that we will experience – it is what we focus on
  • We seek to take risks carefully that deliver adequate rewards over time
  • We diversify all portfolios broadly; at the security, geography and asset class levels
  • We keep an eagle eye on costs of all kinds to ensure that you receive as much of the return on offer from the markets as possible
  • We rebalance this mix of risks regularly, back to the level of risk that is most appropriate for your circumstances

Whilst many would argue over Donald Rumsfeld’s political contribution, his framework for thinking about the great uncertainty that exists in our world, our lives and the capital markets is a useful one. In the face of this uncertainty, we need to use the ‘known-knowns’ as our starting point and the ‘known-unknowns’ as a basis for analysis and scenario planning to get a tighter handle on the possible range of future outcomes. The ‘unknown-unknowns’ are a reminder of the limitations of our knowledge and our need for flexibility and resilience. Sound financial planning and robust investment process are two key elements for managing this uncertainty.

We hope that you have enjoyed this paper. Please do not hesitate to call if you have any questions or comments on it.