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My PFS - Technical news - 12/09/17

Personal Finance Society news update from 30th August to 12th September 2017.

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Taxation and Trusts

Investment planning


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The Chancellor, Phillip Hammond, has announced that the first 2017 Autumn Budget will take place on Wednesday 22 November.

As a reminder, there will only be one fiscal event each year, held in the Autumn.

From 2018, there will be a Spring Statement, responding to the forecast from the Office for Budget Responsibility, but no major fiscal event.

Finance bill (no.2) 2017 published

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The Finance Bill (No.2) 2017 was published on Friday 8 September.

After a long enough wait the government has published the second Finance Bill of 2017. This Bill resurrects most of the tax clauses that were announced in the March Budget but were left out of Finance Act 2017 in the run up to the General Election.

Many of the provisions - including the deemed domicile reforms for non-doms and the extension of IHT to UK residential property held by non-doms indirectly through overseas structures - will take effect retrospectively starting on 6 April 2017.

The Bill, which was introduced to the House of Commons as Finance Bill 2017-2019, is expected to be enacted later this year as Finance (No.2) Act 2017.

Confirmation that the non-dom reforms will go ahead as planned will bring a welcome end to the uncertainty ofthe past few months and affected clients will now be able to take steps to minimise the effect of the reforms and take advantage of the transitional opportunities available.

Other provisions resurrected by the Bill include the reduction of the dividend allowance to £2,000 from 6 April 2018 and new rules that allow taxpayers to apply to HMRC to recalculate disproportionate chargeable event gains arising on part surrenders of life assurance policies.

Are lasting powers of attorney good or bad for you?

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Denzil Lush, recently retired senior judge at the England and Wales Court of Protection (CoP), caused a considerable furore when he told BBC listeners last month that he would never grant anyone a lasting power of attorney (LPA) over his financial affairs, because of the serious risk of abuse.

While there has not been any specific research into this matter Mr Lush suggests that probably in one in eight cases there is abuse.  If correct, this would mean one in eight of nearly 2.5million powers of attorney that have been issued, or about 300,000 cases, result in abuse.

From time to time we do read about cases of abuse, most recently about a gentleman who appointed his neighbour as an attorney only for the attorney to steal most of the donor's assets, although this case at least ended up with the criminal going to jail.

The charity, Action Against Elder Abuse, says that in one year alone its helpline received reports of theft from elderly people that totalled £42 million. In the majority of cases the money had been taken by family members who felt they were entitled to 'take their inheritance early'. This would also support Mr Lush's comments against LPAs.

With all this publicity, and given that financial advisers are often involved in recommending that their clients execute a power of attorney, how should an adviser respond to concerns raised by clients?

In England the way in which powers of attorney were granted changed, from October 2007, as a result of the Mental Capacity Act 2005. The 'new' LPAs were intended to give greater protection to vulnerable individuals, following concerns that the 'old' Enduring Powers of Attorney were open to abuse of power by the attorney. 

The initial process for the LPAs was then criticised as being too onerous and too expensive and, over the years, it has been simplified and made cheaper. With the online process also simplified, there is an argument that the law has now made it easier for those who wish to abuse LPAs. It has been suggested that some of the changes are the main cause for concern. In particular, when LPAs came in, at least one person had to be notified when an LPA was made. This is no longer a requirement. So you could have a parent with a son and daughter who wishes to appoint, say, the son to be their attorney, but with no obligation to notify the daughter. Unsurprisingly, this could cause friction if not worse. This could be rectified by reinstating the requirement to notify a close relative.

There is also nothing in the present law that requires an attorney to appreciate their responsibilities and to account for their actions. Unlike with the CoP-appointed deputies, attorneys do not have to provide annual accounts, a full list of assets or a surety bond.

Given the evidence of more frequent financial abuse by attorneys it has been suggested that it should be made compulsory for an attorney to prepare annual accounts and to submit these to the Office of the Public Guardian for checking. However, until changes are made, the problems are likely to persist.

The above is all based on English law, as different rules apply inScotlandand inNorthern Ireland.

The subject of powers of attorney, as well as Wills, is often a good starting point for discussing clients' estate planning. 

As for Mr Lush's comments, well,having adjudicated in 6,000 power of attorney cases, he is no doubt an authority. However, by definition, all the cases he has dealt with were the problem ones. The vast majority of LPAs work well, although this is not a reason for complacency.

It should really go without saying that placing financial and health affairs in the trust of a particular individual should be carefully thought through but perhaps the abuse cases indicate that some LPAs are being set up without taking sufficient care and prior advice.

At Technical Connection our view remains that, despite the risk for abuse, an LPA, if arranged and administered diligently and correctly, is still a powerful and effective tool to ensure peace of mind, and as such something that should be encouraged.

The key seems to be in the right choice of individual to be appointed as the attorney.  That does not have to be a family member or friend. Many individuals will appoint a professional attorney to act for them precisely because they do not feel that their family or friends will be able to make the impartial decisions in their best interests that are required. On the other hand, many people will not entrust their affairs to anybody other than a family member. One of the areas in which an adviser should be able to assist is encouraging their clients to openly discuss their plans for making an LPA with all their close family members. This is because there is evidence that frequently the problems arise where a person appoints one of their children as an attorney while their other children are kept in the dark.

It is also important to stress that proper advice is taken by both the donor and the prospective attorney. An involvement of a professional, whether a solicitor or a financial adviser, together with ensuring that the whole family is involved in deciding who should be the attorney, should help reduce the risk of trouble, let alone any abuse.

Advisers face uncertainty on pre-paid funeral plans

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Over recent years it has become increasingly common for clients to take out a pre-paid funeral plan as not only is it an easy way to get a funeral arranged it also  protects family members from rising costs and uncertainty about any specific final wishes.

But what happens if the provider firm defaults?

The Financial Services Compensation Scheme (FSCS) has confirmed it will not cover failed firms. While some providers will be signed up to a set of industry standards which would protect client money, other funeral plan providers will not have done this, leaving clients high and dry in the event the firm goes out of business.

It is a requirement of the Funeral Planning Authority (FPA), which is an industry organisation, that registered firms keep client money protected in an independent trust fund or through a whole of life insurance policy.

It is also possible for funeral plan providers to be regulated by the Financial Conduct Authority (FCA).  However, many use exemptions. Regardless of this, even a plan bought by an individual from a regulated funeral provider would not be covered by the FSCS. This is because products are not categorised as a 'designated investment' under the FSCS's compensation rules. 

So what should advisers be looking for when arranging a funeral plan for clients?

Funeral plan providers rely on insurance companies and investment trusts to meet their obligations to consumers. In some instances where a whole of life policy provider, or a provider of a product held within a trust, goes bust, the FSCS may be able to pay out to the funeral plan provider or the trustees. 

The funeral plan provider or trustees of the investment fund would then decide what to do with that compensation, and the FSCS is not responsible for that decision.

While this is not an ideal outcome at least it provides some clarity in that no funeral plan customers have recourse to the FSCS if the provider defaults. It is therefore advisable for advisers who have arranged pre-paid funeral plans for clients to check what protections are offered by their providers. 

Autumn budget 2017 - what can we expect?

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Last November, the then relatively new Chancellor, Philip Hammond, announced he would be switching to Autumn Budgets, starting after the Spring Budget in 2017.  This was a reversion to an idea introduced in the early 1990s, but abandoned when Gordon Brown replaced Ken Clarke at the Treasury in 1997.

Following last year's announcement, the Treasury published a "7 things you need to know" press release explaining how the Autumn Budget timetable would work. This said "From winter 2017, Finance Bills will be introduced following the Budget. The aim will be to reach Royal Assent in the spring, before the start of the following tax year." It also promised that "Legislation Day", when most tax policy consultation summaries and draft Finance Bill legislation is published, would move from December to the summer, starting in 2018.

What the Treasury did not say was that there will effectively be no Legislation Day for the Autumn Budget 2017 because there is not sufficient time. However, the Treasury has "opened the Budget representations portal earlier than usual to allow more time for HM Treasury to note and consider representations". The deadline for submitting representation for the Autumn Budget 2017 is 22 September, according to Treasury guidance.

Before considering what might be in the Autumn Budget, some background points need to be considered:

  • Traditionally, the first Budget after an election is when the unpalatable medicine, ie tax increases, is dispensed. According to the Institute for Fiscal Studies, prior to the 2015 election, each of the previous five post-election Budgets saw net tax rises of more than £5bn in today's terms. The Summer Budget after the 2015 election topped this, aiming to raise the Treasury's inflow by more than £9bn. However, over a third extra of this revenue disappeared in the following Autumn Statement., when George Osborne was forced to climb down on reforms to tax credits.
  • Philip Hammond has already lost planned income from of his own Budget climb down on NIC Class 4 contributions - a measure which never even reached the first Finance Bill. In the grand scheme of things, the loss is small beer - about £2bn spread over four years from 2018/19. He is on record as saying he will need to replace the missing revenue, but any recoup will be lost on the noise of overall numbers.
  • On the expenditure side, Mr Hammond must find the extra £0.5bn a year over the next two years that was pledged to Northern Ireland as part of the DUP's "confidence and supply" deal following the general election. 
  • The DUP's support means that in theory the Government has a majority in the House of Commons for Finance Bill legislation. In practice, as the Class 4 row showed, theory can be overturned if enough Conservative backbenchers are unhappy - and they are hardly an overjoyed team post-election and mid-Brexit.
  • The latest government borrowing figures appear to give the Chancellor as much as about £10bn wriggle room. However, he will face the problem which prompted Gordon Brown to drop Autumn Budgets: the fiscal picture at the start of the new tax year can be very different from that the previous autumn.

What might appear in the Autumn Budget? At present, there are few clues. The 'normal' Budget process in which the previous (Autumn) Statement gives a clear steer of future Budget contents does not exist on this occasion. The Budget 2017 Red Book mentioned a variety of future consultations, some targeting an Autumn Budget announcement. In the aftermath of the election little has emerged, as a look at the Treasury's list of consultations reveals.  

The Brexit legislative programme will mean that Mr Hammond is unlikely to risk any controversial proposals that could upset backbenchers, such as major revisions to pension tax relief or other tax increases. The absence of consultations also points to few changes. Mr Hammond will face the further headwind of MPs weary of Finance Bill work alongside the European Union Withdrawal Bill 2017-2019.

The result could be a dull, steady-as-she-goes Budget, with little of interest beyond the standard tweaking of tax bands and allowances. The Conservatives' election manifesto promised a personal allowance of £12,500 and a higher rate threshold of £50,000 by 2020 (ie 2020/21). That implies increases of £1,000 and £5,000 spread over the next three tax years.

One of the reasons given by the Treasury for the Autumn Budget timetable was that it would "help Parliament to scrutinise tax changes before the tax year where most take effect". It may be that this time around there will be few changes for the Finance Bill weary parliamentarians to study.


FTSE 100 review

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FTSE Russell, the providers of the FTSE 100 and related UK indices, has just announced the results of its quarterly review.  This is based on market values on 29 August and will take effect from Monday 18 September.

As far as the FTSE 100 is concerned, there are two exits and two entries:

Going out…

Provident Financial, most famous as a doorstep lender, was widely forecast for demotion. In August, a second profit warning and dividend suspension prompted a near two thirds fall in its share price. While some hedge funds had been shorting the company for a while, other investors - notably Neil Woodford - remained supporters after the first profits warning.

Royal Mail joined the FTSE 100 shortly after its 2013 privatisation at 330p a share. Its share price surged up to 615p early in the following year, but since then the company has gradually fallen out of favour. Declining letter volumes and a battle over the future of its defined benefit pension scheme (which could yet lead to a strike) have seen the share price drop to below 400p.

Coming in… 

NMC Health will not be a familiar name to many outside the investment community. It is an Abu Dhabi-based group which operates private hospitals and other medical businesses in the UAE and, to a lesser extent, in Spain. The company was floated on the London Stock Exchange in 2012 and has a market capitalisation of £5,400m. However, only 40% of the shares are freely floated, which could create problems for Footsie tracker funds looking to rebalance in September.

Berkeley Group Holdings, the London-oriented housebuilder, was ejected from the FTSE 100 a year ago. Back then investors were frightened that the Brexit vote would hit the residential property market and the housebuilder sector was sold off. A year later that fear has proved unfounded and the sector has more than recovered its pre-referendum level - hence the return of Berkeley Group to the Footsie.

These latest constituent changes are a reminder of several factors, including the volatility of individual share prices, even amongst Footsie constituents; and the fact that a Footsie company may have virtually nothing to do with the UK beyond its listing...

Individual savings accounts - 2016/17 official statistics

The latest HMRC data on ISA holdings and contributions show stocks and shares ISAs gaining ground over their cash counterparts.

At the end of August HMRC published their latest statistics for Individual Savings Accounts (ISAs). The figures are to the end of the 2016/17 tax year and relate both to value and subscriptions by type of plan.

The more interesting points to emerge from the numbers are:

  • Years of ultra-low interest rates and the arrival of the personal savings allowance appear to be taking their toll on the popularity of cash ISAs. In 2016/17 there were 8.48m accounts subscribed to, nearly 1.638m (16%) fewer than in 2015/16. In 2008/09, over 12.2m cash ISA accounts received subscriptions. The amount invested also dropped between 2015/16 and 2016/17 - from £58.694bn to £39.191bn. The peak cash ISA subscription total was £60.951bn in 2014/15.
  • In contrast to cash ISAs, stocks and shares ISAs gained marginally in popularity with 2.589m accounts subscribed to, up 50,000 on 2015/16. This is still almost a quarter down on the 2010/11 peak of 3.387m.The total amount subscribed rose between 2015/16 and 2016/17, from £21.129bn to £22.325bn, a new record.
  • JISAs continued to gain in popularity, with 794,000 subscriptions in 2016/17 (up from 738,000 the previous year), although investment at £858m was down £63m on 2015/16. 71% of JISA accounts and 61% of JISA subscriptions were in the cash component. The total value of JISAs as at April 2017 was £3.39bn of which £1.96bn (58%) was in cash.
  • Cash ISA holdings at April 2017 amounted to £270.233bn, up £1.259bn from 2016 and an indication that around £40bn was withdrawn (or transferred) from cash ISAs in the year, given the £39bn subscription level in 2016/17.
  • The total amount held in stocks and shares ISAs as at April 2017 was £314.993bn, an increase of £51.645bn over the corresponding 2016 figure.
  • The introduction of AIM and similar shares as permissible holdings in ISAs from 5 August 2013 is now showing through with total investment of £9.242bn - more than is held in corporate bond funds. The statistics merely show 'EEA shares', but the footnote points to them being 'company shares which are traded on any market of a recognised stock exchange in the EEA', words which mirror the AIM-enabling regulations.
  • Innovative Finance ISAs barely registered in 2016/17 - there were 2,000 accounts opened (with HMRC rounding to '000s) and £17m invested (rounding to £m).

The fading of cash ISAs is long overdue. There is much less competition in the market than there once was - witness the fact that non-ISA interest rates are often better than or very near to ISA rates, even allowing for basic rate tax (which most basic rate taxpayers will not pay because of the personal savings allowance).

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