Investing in a Business

Solomons-financial-advisor-wimbledon-blogger

Investing in a Business

One of the ways that Government attempts to create jobs is to encourage and stimulate small businesses, start-ups or recently started businesses. The Prime Minister wants these to scale up, not simply start up. So as a regular investor (which in my world we call a retail investor) there are various ways that you are incentivized to be part of this wealth creation.

Tax effective incentives

Venture Capital Trusts, Enterprise Investment Schemes, Small Enterprise Investment Schemes are all such investment structures designed to encourage you (with tax incentives) to invest into new businesses. Generally, though not always the case, these would be businesses looking for money, to which traditional banks don’t, can’t or won’t lend. Since the credit crunch, despite the Government pouring billions into the system, most lending to small businesses has not increased. Indeed any chart on the topic would suggest that Banks are positively less than helpful.

A Different Approach

As we approach the end of the tax year, various specialist companies will produce offers for these tax efficient investments. The rules for them are fairly complex, primarily because they (the rules) seem to get changed each year. It would certainly be true to say that the degree of investment risk is generally much higher than say investing into most normal investment funds that track an index. As with most things, there are good and not so good and some downright awful. Despite being 3 or 5 year investments, in reality they are long-term investments, where the positive rewards may take some years to bear fruit, and as with almost every business, extracting money from them requires a carefully considered exit strategy and ideally several potential buyers.

The company you keep

In the latest Trainspotting film, (T2, which is a return to Edinburgh and the characters from 20 years ago) two of the characters (Renton and Simon) decide to have a proper go at running a “business”. Despite being “creative thinkers” and possessing “the gift of the gab” rather more is required to run a successful business. Sadly, their skill set and personal focus do not lend themselves to a successful outcome. Some investors could be forgiven for thinking that the degree of risk being taken is similar to that of investing into non-mainstream investments. However the only thing in common is the capability of the management of the business. Good managers can turn a bad business around, but equally a good business can be ruined by bad management. We all know that there are some very unsavory characters in business, some even cross-over into politics. Trainspotting has a particularly nasty character. As is always the case, people are key. In this form of investing, it is certainly the case that a good business plan requires a good management team to implement it.

Choose wisely

So (and here is where you imagine Ewan McGregor reading this) if you think that you might want to choose to invest in small businesses, choose to create jobs, choose wealth creation, choose something a bit different, choose a dose of tax relief, perhaps you should be thinking about choosing to invest into an EIS, SEIS or VCT. As with T2 it won’t be everyone’s cup of tea, (or drug of choice). Generally, you’ll need a minimum of £25,000 to invest. This is for those that do want to choose some of the companies that will make a mark on the next 20 years. Those that are comfortable with the risk. Those that are choosing to invest for the long-term and have a clear idea of what they are getting into. Then investing in businesses can provide a rewarding experience. But choose wisely. Here is the trailer for T2: Trainspotting.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Investing in a BusinessDominic2023-12-01T12:18:49+00:00

The Future of Pensions

I am currently at my annual conference in Wales – the Chartered Institute for Securities and Investments (CISI) with whom the IFP – Institute of Financial Planning merged last year. Yesterday we covered a number of valuable topics, but the talk that resonated most with me was from former Pensions Minister MP Steve Webb, who talked about the future of pensions – amongst other things.

I had to admit that my BS radar is usually on hyperdrive when listening to any politician these days, which is probably a sad reflection on me, however I was very impressed by what he had to say, albeit he did not paint a terribly pleasant picture of the future. Of course, only time will tell if his predictions come about and in fairness, he was quick to remind us of the problems with predicting the future, particularly in a climate where since the last general election all of the major political parties have changed their leaders and the country has voted to leave the EU.

Book cover of Yes Minister - A Very Courageous Decision

Play it again Sam…(or Phil)

Webb was clear that changing pensions is pretty difficult and appears to be a low priority to either the Government of Civil Service. He gave an insight into the slow turning wheels of Whitehall, sounding much like an episode from Yes Minister. Given all the change that we have had (State Pension, Auto Enrolment, Pension Freedoms, Annual Allowance Taper, Lifetime Allowance…) he suspects and urges a period of quiet inaction from the Chancellor, Philip Hammond. This is particularly pertinent to those concerned about the loss or reductions of tax relief on pension contributions or changes to the tax free cash entitlement. He made the case that the public and financial planners could not plan ahead in confidence if the rules are changed every year, yet warned at Chancellors are easily tempted by ideas to collect more tax, however short-sighted.

Whilst on the subject of tax he made it clear that the Treasury are naturally inclined to taxing now rather than in the years ahead, so there is a very real pressure to take the view that tax relief reductions in the short-term outweigh the advantages of taxed incomes in the future, so by inference, a system of loss of tax relief and no taxation of pension income is a genuine prospect. He argued that this was evidenced by the Treasury’s love for ISAs and obvious contempt for pensions with the Lifetime Allowance reductions (and associated tax penalties) and the new tapered annual allowance. Personally he would scrap the LTA but retain a cap on annual pension contributions (which I certainly agree with). He did point out that of course putting trust in future Chancellors to honour a commitment not to tax pension income in the future required a high degree of faith, which deliberately provoked some mirth from the audience.

Turning to Brexit, he simply outlined his view that interest rates are likely to be very low for a long time, which would place pressure on people to look for better returns than the puny sums they achieve from their savings. He argued that this would likely lead to yet more scams as people fall for yet more illusory promises of high returns. He also warned of the impact on final salary pension schemes which, because of the assets that they hold and the way calculations are performed, would have larger deficits in their pensions (due to low interest rates) probably leading to some, or perhaps a majority of companies trimming their dividend payments.. which in turn makes the task of achieving investment income harder still.

He seemed to have little regard for our regulator of whom he said was “not fit for purpose” and thought the new LISA was perhaps the most badly constructed investment idea for years. If you follow me on social media, you will know my thoughts on this already.

So, whilst Steve Webb found a receptive audience, I was left with the sinking feeling that there was little hope for common sense to return to the Treasury… but who knows… we all get to find out in a few weeks time for the Autumn Statement.

Dominic Thomas
Solomons IFA

The Future of PensionsDominic2023-12-01T12:19:06+00:00

Pension Tax Relief Changes?

It would appear that further changes for pensions are likely. Pension tax relief has been “under review” which I always take to mean a report into the impact of a decision has been already made. At present whatever your rate of tax you receive as relief for any pension payment that you make.

As outlined within this blog before, in practice this costs HMRC a lot of money and is essentially a gift back to anyone that appears to be deemed as “rich” which as far as I can tell from Government and Opposition policy is anyone earning something between £50,000 and £1million as anyone with an income above £1m seems to largely avoid paying any tax her in the UK.

The expectation is that relief will be 33% so that a neat little explanation of tax relief can be spun by the media – 2 for 1… that is £2 from you £1 from the Government. Personally I fail to see how this is sensible as it’s an extra 13% for most people and a reduction of only 7%-12% for higher and additional rate taxpayers. It would be more sensible to have a standard rate of 25% which then at least correlates to the 25% tax free cash lump sum. 3 for 1 is just as simple to spin.

Constant Changes to Pensions

This comes on the back of other pension reforms

Pension freedom – abolition of any requirement to buy an annuity, retaining your pension as an investment portfolio.
Reduction in the Lifetime Allowance (£1m from 6th April 2016)
Online application for Lifetime Allowance Protection
Reduction in the Annual Allowance to £40,000
Annual Allowance tapering for those with income of £150,000+ from 6th April 2016 reducing the annual allowance to a maximum of £10,000.
Auto Enrolment or Workplace pensions
Changes to what constitutes a “year” input years are reverting to tax years.
Flat rate State Pension
Changes to the State Pension Age
Legislation to give HMRC the ability to take money from your bank account

Some of these changes are welcome, some are not, and many seem to be altered each tax year, making planning for the future somewhat awkward to say the very least.

Dominic Thomas
Solomons IFA

Pension Tax Relief Changes?Dominic2023-12-01T12:19:34+00:00

Taxing Reforms for Pensions

Taxing reforms for pensions

There has been considerable “chatter” about the prospect of pensions being reformed even further. In particular, the tax of pensions is very much up for debate, making the prospect of tax reforms for pensions a genuine possibility.

In brief the Chancellor has already made huge changes to the pension system, enabling a pension to be taken as a lump sum or as income without any requirement to buy an annuity. In addition, a pension can now be easily passed on to beneficiaries of your estate, rather than ceasing when you do.

Tax Overpayments

The new freedoms have already and will continue to mean that some people don’t do their sums properly and end up paying too much tax – unnecessarily, which of course is a good thing if you run HM Treasury… every little helps and all that.

In very simple terms, most people will currently find that whatever the size of their pension pot, they can take 25% of it as tax-free cash (these days “we” call it a pension commencement lump sum – or PCLS). The rest is taxed as income.

Reforming tax relief

At the moment, anyone that pays into a pension gets tax relief – either at 20%, 40% or even 45% depending on your rate of tax. Everyone gets 20% (from age 0 to 75). So an investment of £1000 actually costs £800 if you are a nil rate or basic rate taxpayer. If you pay more than 20% tax, you get to claim the balance back via your tax returns.

The Chancellor is reviewing this, because it costs the country a lot of money. The main problem being that employers make most of pension contributions each year and do so in part because it is treated as a deductible cost. If this were considerably altered, then most employers are likely to reduce or even stop (bar the minimum requirements of auto enrolment) their contributions. This would result in smaller pensions in retirement…

So he could simply reduce tax relief to a lower amount, in essence he has done this already for anyone earning over £150,00, who have their annual allowance restricted to just £10,000 (less than an ISA) if they earn over £250,000.

Tax relief provided in 2013/14 amounted to £34.3bn, whereas the tax on pensions generated £13.1bn a “cost” to the UK of £21.2bn. Most of which (2/3rds) is reclaimed by higher rate taxpayers… those paying 40% or more.

Shrinking the Pot

He has also reduced the amount that can be held in a pension (the Lifetime Allowance) which is set to reduce again from £1.25m to £1m next April. Anything above this will be subject to an excess tax charge of 55% as things stand at present. That’s what I call easy money for the Treasury and there isn’t that much that you can do about it, other than applying for protection where relevant.

Changing the Sweetener

Another option would be to make pensions tax-free in retirement instead of taxable. Whilst this sounds all well and good, the reality is that who would honestly trust any future Government not to change the rules later, when they realise that they need the income to be taxed.

Simplicity Seems Dead

I am of the opinion that pensions are going to change, how much and when, we simply do not know. However the Government wants to be seen not to help the “rich” which seems to include people paying 40% tax and everyone paying 45% tax. It would include anyone in the State Sector that has built up a long career – doctors, teachers, police, civil servants – all of whom seem to be the current “cat to kick”. It certainly includes anyone that has pension funds worth £1m or more. Though I would argue that £1m in a pension pot isn’t that huge (yes I know its relative) but in practice that provides at £40,000 a year income… not enough to pay higher rate tax. The worst case to my mind would be to create a “before and after” system – which we have had before, which only makes life more complicated.

If I were Chancellor?

People need an incentive to save for the long-term. I would abolish the Lifetime Allowance making all current and previous protections irrelevant. I would restrict tax relief to a % of salary, perhaps providing it directly as a 5% tax cut, say 20% tax becoming 15% if payments are made to a pension. That way HM Treasury collect taxes, people are incentivized to save and earn. I would scrap rules that enable people to pay into pensions for children, which is essentially something that only the wealthy can do, so that pensions are only for those aged 18. However I would continue to tax pension income as income…

Sadly, for younger generations the prospects of good pensions looks fragile… of course there is the prospect of the solution as outlined in Logan’s Run….. there’s just one catch..

Dominic Thomas
Solomons IFA

Taxing Reforms for PensionsDominic2023-12-01T12:20:08+00:00

Pensions: Lifetime Allowance and Mad Max

You have probably heard of Mad Max – its latest incarnation is currently in UK cinemas. You may have heard about the Lifetime Allowance – which has been part of the pension vocabulary since 2006 or “A-Day”. Suffice to say that I believe that the Lifetime Allowance is rather mad.

In the event that you are a politician and reading this, may I ask why you think pensions are important? To my mind, pensions should be encouraged. The end result of a pension should be that people living in the UK are able to provide for themselves above the State Pension, so support their lifestyle. This has several obvious benefits – creating financially independent adults, not requiring State support. Having income means that income tax can be levied and collected to help pay for our society. Let’s also not forget that income is there for using (spending) which enables trade to occur and wealth to be created and so on.

A World of Plenty?

It would seem that politicians generally think not having a rising burden on the State is a good thing. Indeed encouraging pensions with tax relief is the “sweetener” or “bait”. Much like the film Mad Max, we probably don’t want to create a society reliant upon the occassional benevolence of the prevailing “Lord”. Surely we would like a society where all prosper? OK we know the UK has limited resources, so adjust the tax relief, but don’t make it hard or even pointless to save. Even the current regime isn’t tempting enough for millions of people that don’t or cannot save for their future.

Scarcity

At present pension contributions are restricted, which seems fair enough, but the amount that the pension pot grows to is also restricted by the Lifetime Allowance. This is currently £1.25million, which sounds like a reasonable sum, but in practice isn’t as much as you’d like to think, given that it has to last for the remainder of your life. The Lifetime Allowance has already reduced over the years from £1.8m and if the Chancellor does what he suggested he would in the last Budget, it is likely to shrink to £1.0m next April. In other words £250,000 of the Lifetime Allowance will be lost – or more accurately invoke a tax penalty of £137,500.

Mad Max and Excess Tax

If the Lifetime Allowance is exceeded, there is a tax charge of 55% on the excess. OK there are some ways that you can protect your higher pre-legislation allowance, but these are designed by bureacrats and “problematic” to say the least. Essentially this excess tax charge punishes those that save or get good investment results…. let’s not forget that the income from pensions is subject to income tax anyway. So I fail to understand why we don’t simply abolish the Lifetime Allowance and all the protections that have surrounded it. Your pension fund should be just that – a pot that you can actually use with confidence.

Mad Max – Fury Road is currently in UK cinemas, starring Charlize Theron, Tom Hardy and Nicholas Hoult. The Chancellor, George Osborne has his next Budget on 8th July 2015…

Dominic Thomas

Pensions: Lifetime Allowance and Mad MaxDominic2023-12-01T12:40:10+00:00

Planning for the Tax Year End?

The tax year end is rapidly approaching and you don’t have long to use up various allowances that expire on 5th April 2015, so it really is time to take action now should you wish to do so. Despite the media and politicians doing their best to confuse everyone about tax, tax avoidance is actually perfectly legal and something that is encouraged. By way of example….

NS&I Premium Bonds & Children’s Bonds
ISAs – Annual Allowance
Pensions – Annual Allowance, Lifetime Allowance, Carry Forward Allowance
Capital Gains Tax Allowance
Personal Allowance
Nil Rate Band Allowance (inheritance tax planning)
Giving Allowance (£3,000 per person)
Enterprise Investment Schemes, Venture Capital Trusts, Small Enterprise Investment Schemes
Business Property Relief

There are lots of ways to reduce tax, married couples have even more options. Tax evasion is illegal not tax avoidance. It is certainly true that some schemes are deliberately aimed to test the law on this, but nothing that any of our clients use or would even want to use. Hopefully by now you will have received the lates copy of Talking Money, let me know if you haven’t – we have run out of stock, but you can see an online copy here.

Dominic Thomas

Planning for the Tax Year End?Dominic2023-12-01T12:39:58+00:00

Tax Year 2012-13 Ending

The 2012/13 tax year is nearly at an end. Time is running out. HMRC essentially operate a world of “use it or lose it”. For most people this means ensuring that you have maximised your pension allowances (£50,000 is the maximum permitted in the tax year, subject to a plethora of qualifying rules – aren’t we all thankful for pension “simplification”). These days pretty much the only advantage of a “pension” is the tax relief – which is applied at your highest rate of tax. Thereafter, have you used your ISA allowance, all £11,280 of it? capital gains tax allowances? and a heap of others for those with more sophisticated planning.

Most people give money to charity, so do remember that this attracts tax relief in a similar way to pensions. Also you are able to use your annual giving allowance of £3,000 per person (the giver) moving money from within your estate to those that you want to benefit, a very basic form of inheritance tax planning – it can certainly become much more complex based upon the size of the IHT problem that you expect.

There are other forms of allowances, but please treat these with caution and remember the adage “fools rush in where angels fear to tread”. I was on the train on Saturday evening, coming back from a very good performance of “The Judas Kiss” when the couple next to me started discussing their financial planning rather loudly ( I really wasn’t trying to listen). The subject of their conversations was about VCTs (Venture Capital Trusts) and the tax relief available. They had clearly not attended the same meeting as one was describing how the VCT worked to the other. Their “adviser” had not charged for his “advice” (not permitted nowadays) and I was rather concerned about their understanding of the risk involved and the lack of compensation coverage if or when things go wrong. The FSA would suggest that only around 3% of all investors are likely to find this sort of investment suitable (3% of investors, not 3% of the population). Of course some VCTs can be a great solution, others require you to be more of an expert than a Dragon in the Den. Please be aware that there will always be someone willing to discuss a “guaranteed winner” to an unsuspecting person. When it comes to investing, there is no such thing as a guarantee, despite what it may say on the tin. Be warned – and sadly I have to say that the information on the MAS website fails to adequately convey the degree of risk with a VCT. You can lose all of your money. It is not called venture capital for nothing!

We will be closed for Easter (Good Friday is this Friday!). We re-open on Tuesday 2nd April and I can assure you that despite every good effort, attempting to make a tax-year end payment by Friday 5th April will create some significant stress if you leave it late.

Dominic

Tax Year 2012-13 EndingDominic2023-12-01T12:23:29+00:00

Tax Reclaim

For those of you that are higher rate taxpayers, remember that you need to reclaim your higher rate tax relief via your tax return. HMRC do not provide you with an indefinite amount of time to get this sorted. In practice anyone with higher rate relief claims must reclaim the 2008/09 year by 5th April 2013. So make sure you do! In general, you only have 4 years to make a claim.

Tax ReclaimDominic2023-12-01T12:23:29+00:00

Pension tax relief cut – rumours and gossip

Rumours: Pension Tax Relief Cut

The pensions industry is always awash with rumour. Today, we returned to the tried and tested rumour of higher rate tax relief being scrapped or reduced on pension contributions. This obviously would mean that the Government will save tax by not providing the relief (quick example – £10,000 investment = £8,000 cost to basic rate taxpayer, £2,000 paid by the HMRC automatically. Higher rate taxpayers reclaim another 20% (£2,000 in this instance) via self-assessment tax returns). So of course there is an obvious “saving”. However this is the social politics of envy and nothing more. Pension contributions have already been restricted to £50,000 per tax year and the Lifetime Allowance has been reduced to £1.5m. Today’s gossip (and that is all it is) suggests that Mr Osborne will be tempted to cut the annual allowance from £50,000 to £40,000 or even £30,000. Alternatively he may simply ban higher rate tax relief.

Coincidence?

I’m known for being fairly suspicious of my “industry” and given that there will be a ban on commission at the end of the year, I cannot help but think that hurrying higher rate taxpayers to make large lump sum payments into pensions, earning some advisers a large commission, may not be a timing coincidence.

Pensions have little going for them

Pensions have very little going for them other than tax relief. Automatic Enrolment (AE) has begun for large firms and will eventually mean that everyone is pretty much forced to save into a pension. It seems very odd that we know that Britain does not save enough, yet we constantly elect politicians that lack the courage or wisdom to do anything about our longer-term problems, which I believe will make the cuts, spending reviews and credit crunch look like a time of bounty unless people start taking their own finances seriously.

Taxing our way to the death

Yesterday I attended an excellent talk entitled “Debt, austerity and growth – where’s the money?” and the analogy was made that attempting to increase taxes whilst stimulating growth doesn’t work. The Winston Churchill quote was cited:

“We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”. Sir Winston Churchill (1874-1965)

As I have said before a fair tax is a single rate of tax that everyone pays. It should not be tiered, it should not differ depending on income or the source of income. Fairness is the same treatment. Unfortunately our politicians and most of the media and public seem to confuse this with wealth reallocation.

Pension tax relief cut – rumours and gossipDominic2023-12-01T12:23:08+00:00

Lawyers Expect A Close Shave With HMRC

2011: The Lincoln Lawyer – Furman

It may be many years since the UK launched a proper taskforce, but HMRC is effectively going out all guns blazing in its campaign for collecting owed taxes. At the moment they are focusing on Lawyers . It basically works like this, HMRC know roughly how many clients each practice has, therefore it can look at average revenues and spot those that look a little bit low on their declared income. Previously HMRC has attacked Doctors, Dentists, Tutors and Coaches, however Lawyers are the first “high risk” group being attacked by the taskforce.

Other “high risk” groups include the hair and beauty trade in the North East, thought to owe around £3.5m in tax. Restaurants in the South East and Solent are also under review (£2.5m), the Scottish motor trade (£3m) and the grocery and retail trade (£7m). There are now over 30 HMRC Taskforces in operation, all launched since May 2011.

There are various ways to legitimately reduce your income tax. The most obvious being to make pension contributions, which attract tax relief at your highest rate of tax. Charitable Giving is also a way of reducing tax burdens and of course means that your money goes to a source that you are concerned about. If you are need assistance do get in touch, otherwise perhaps some of the no win, no fee cases may be concluding earlier.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting

Lawyers Expect A Close Shave With HMRCDominic2023-12-01T12:22:53+00:00

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