AIDAN BAILEY of The Fry Group reviews diversification to determine if it remains a compelling proposition in today’s investment climate.

Diversification has always been touted as a primary means of reducing investment risk, by spreading money across a range of asset classes – such as shares, bonds, cash and property. In that way, if one asset class struggles another may rise to compensate. But what happens when every asset rises or falls in tandem? During the 2008 financial crisis, the UK stock market lost almost half its value, UK property dropped 20 percent, returns on cash collapsed and corporate bonds plunged 25 percent. Likewise in 2009, these same assets experienced a strong recovery together. 

AIDAN BAILEY of The Fry Group reveals how domicile of origin and other factors impact your UK Inheritance tax responsibilities. 

As a British expatriate, the key to deciding if you’re liable for UK Inheritance tax (IHT) is based on the concept of domicile. If you’re domiciled in England, Wales, Scotland or Northern Ireland, taxable estate includes global assets. But if you’re domiciled elsewhere, taxable estate is limited to UK assets only.
     Assessing your domicile requires a detailed examination of your background. At birth you acquire a domicile of origin from your father. But if your father is deceased at the time of your birth, or if you were born out of wedlock, your domicile of origin is determined by your mother. Upon adulthood, you can establish a domicile of choice in another country by demonstrating you’ve severed all connections with your “homeland” and have established permanent ties elsewhere. If you move to another country, your domicile of choice will remain as is until you establish a fresh domicile of choice. 
     If you’ve emigrated from the UK you remain domiciled in the UK for three tax years after departure. A foreigner entering the UK is only domiciled after being a UK resident for tax purposes for more than 16 tax years out of 20 years. Despite frequent references to the “17 out of 20” rule, it’s unsafe to act on the 17th year. If married couples have different domiciles the usual inter-spouse or registered civil partner transfer rules are also affected. So be careful when transferring assets from a UK-domiciled spouse or registered civil partner, to a foreign-domiciled spouse or registered civil partner and vice-versa.

Tax Burden
A potential charge to tax arises when you “gift” assets during your lifetime or upon death. While you’re not required to pay IHT on the first £325 000, any excess will be taxed at 40 percent. Attitudes to IHT vary. Some people feel it’s important to retain all assets, while others don’t see the point in saving Income Tax and Capital Gains Tax during their lifetime, if it results in assets being subjected to 40 percent IHT when they die. If you fall under the latter category you can take measures to reduce or eliminate IHT altogether. As a homeowner, you could be caught in the IHT net by default – even before taking into account the value of your investment. For an unmarried individual with valuable property or substantial investments, the burden is obviously considerable.
     The Fry Group has developed a user-friendly guide using flowcharts to help you minimise or eliminate IHT. By answering a series of questions, you’ll be directed towards an IHT planning solution best fitting your needs. Email info@thefrygroupsg.com to request a copy of the chart today.

Aidan BaileyBA (Hons) CertPFS AWP^CM 
General Manager Singapore, International Division

UK pension plans are not a one-size-fits-all model as AIDAN BAILEY of The Fry Group reveals, outlining the many schemes available.

If you’ve worked in the UK but have retired to another country, under UK law your UK pension remains liable for income tax. However, this can easily be avoided by taking action. The current trend is to transfer pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS) – designed to give you complete control over your finances while avoiding UK tax. While considered a powerful tool, a QROPS is generally more expensive than other UK-based equivalents. So it’s always wise to conduct a full review of your pension benefits and consider all available options.

Pension options
Double Taxation Agreements (DTAs) Most DTAs require your pension to be taxed only in your country of residence – beneficial if tax rates in your resident country are lower than the UK. While a DTA doesn’t exist between the UK and all countries, it’s available in many countries within and around Asia, so it pays to check if your country of choice complies. 
Foreign Service Relief Your pension can be exempted from UK tax if a substantial portion or better yet, the entire amount was earned through overseas employment. Complete a simple application to Her Majesties Revenue and Customs (HMRC) and your pension could be paid out in gross.
Qualifying Recognised Overseas Pension Scheme (QROPS) If both DTA and Foreign Service Relief are not applicable for you, choose a QROPS. This overseas self-invested personal pension plan enables UK-registered pensions to be transferred to overseas jurisdictions upon approval from HMRC. As long as your funds are from a UK-registered pension and you’re a non-UK resident, Income Tax will not be deducted from any ongoing pension payments.

AIDAN BAILEY analyses UK interest rate predictions and predicts the class of funds to select for consistent returns.

With the recent talk of double-dip recessions, Japan-style deflation and the high possibility of further quantitative easing – such as money printing – the general consensus is the UK base rate, currently standing at 0.5 percent, will remain low a bit longer. But there are conflicting reports. While Ernst & Young ITEM Club reports low levels could last until 2014, research conducted by a Policy Exchange think tank suggests the possibility of base rates at eight percent and inflation at 10 percent within the next two years. 
     Personally, I think that’s very unlikely as the economy is still weak but the theory is after a brief double dip recession in early 2011, recovery will gain traction and together with the Government’s current measures, stave off a recession. £200bn of Quantative Easing will lead to an explosion in money supply, resulting in inflation. The Consumer Prices Index (CPI) – an inflation measure the Bank is responsible for maintaining at approximately two percent – could also increase to six percent. So to keep a lid on inflation, interest rates may indeed need to rise to eight percent. 
     Such differences in opinions are becoming increasingly common. Unless you strongly agree with either view, I’d highly recommend “absolute return” funds. Traditional equity funds are similar to Formula 1 cars – they perform best on a smooth and straight road, but falter on uneven ground. An absolute return fund is akin to a rally car – flexible and skillful enough to perform well both on tarmac and off-road. So no matter what type of road you find yourself on, an absolute return fund promises you a smooth and safe ride.
     The below image illustrates a relatively consistent return is possible, by maintaining a diversified spread of assets and holding only those you believe will be profitable – no matter what comes your way.

Aidan BaileyBA (Hons) CertPFS AWP^CM 
General Manager Singapore, International Division 

Considering investing in a block of land? Australian property tax and expatriate tax expert STEVE DOUGLAS outlines the tax claims you can still enjoy.

Q. I’m looking at buying land, rather than a house, in Australia. What can I claim tax-wise?

A. All Australian properties are taxable assets. But you’re only able to claim expenses against income tax if a property produces an income. If land remains vacant you can’t claim any costs and won’t need to lodge an annual income tax return – unless you have other Australian income. But if it generates an income – such as rental on farmlands – the land is treated as a normal property. As such, costs including rates, interest and upkeep can be claimed against any income generated. A deficit can then offset other Australian income – including rental on another property – and any unused amounts can also be carried forward for future benefit. So it’s definitely beneficial if the property you buy can generate an income.   
     If it doesn’t, you won’t receive an annual income tax deduction. But you’ll still enjoy a tax benefit, as all holding costs can be used to offset any future capital gains tax, when you sell. Always keep a record of any associated costs, such as annual rates, land tax, loan interest, general maintenance, upkeep expenses and architect or planning fees. When you sell, these expenses will be deducted from the sale price, ensuring you only pay Capital Gains Tax on the net gains made. And provided you owned the property for more than 12 months, you’ll also be entitled to a 50 percent Tax Free Allowance from this reduced amount.
    Always keep relevant receipts for the entire duration of ownership to prove your deduction at the time of sale. It’s also wise to keep an annual register of expenses and make any further loans against an income-producing property, rather than vacant land. If you own both types of property, any debt reduction is best served against the loan taken out to acquire land rather than a rental property.
     Don’t be afraid to build a house. The cost of increased borrowing will still be less than the cost of the land alone, because potential rental income will be able to cover the additional expense – improving your overall tax position.

AIDAN BAILEY shows you the right path for making sound financial planning decisions.

During these uncertain financial times your planning can be tested to the limits and it can be tempting to jump from one "good idea" to another. But without careful planning, such "day" trading can be a recipe for disaster. Here are some key steps to consider in helping you stay on the straight and narrow.
Information Before you make plans for your financial future, ensure you understand where you’re starting from – check your income, assets, retirement objectives, life assurance and pension plans, UK or otherwise. It’s difficult to map a plan without knowing where you’re starting from.
Time horizons Give each of your assets a time period to achieve set objectives and consider specific future dates to assess and make further plans.
Risk tolerance When you’re planning a financial strategy, always carefully consider the degree of risk you’re willing to take. This doesn’t mean because you have a high capacity to accept risk you should adopt a high risk portfolio. Understand your limits.
Asset allocation Work together with a licensed and qualified adviser to determine a mix of assets to best suit your needs. Studies have shown the decision of asset allocation is the most important when it comes to determining investment returns.
Fund selection Once you’ve chosen your asset allocation, you’ll require a blend of suitable funds to meet your needs. Again, it’s best to seek advice from a licensed and qualified adviser at this stage.
Tax planning Although the tax "tail" should not wag the investment "dog", it’s important to protect your assets from unnecessary tax. Identify the most tax-efficient manner for your investments – such as approved pension, ISA, bonds, trusts and other structures. 
Review your financial affairs on a regular basis to ensure your chosen asset allocation continues to be suitable, funds are performing in line with expectations and advantages are made of any changes to tax legislation. Changes can then be made if necessary, although you shouldn’t lose heart if your strategy is not immediately successful. Markets rarely move in straight lines and by selling out of a fund which has dropped in value over the short term, you could miss out on a recovery. If your asset allocation fits your circumstances, objectives and risk profile, always sit tight on it – unless something fundamental, such as your objectives, has changed.
 

Aidan BaileyBA (Hons) CertPFS AWP^CM 
General Manager Singapore, International Division    

Aidan Bailey of THE FRY GROUP explains implications of the UK’s new Emergency Budget.

Here’s what you should know about the UK’s new Coalition Government Emergency Budget, designed to reduce the country’s current deficit, balancing the £86bn gap between tax revenue and state spending.

Income Tax: Personal Allowance From April 2011, the basic personal allowance for those less then 65 years will be raised to £7,475. Reductions to the basic rate band will be announced later this year.

Capital Gains Tax (CGT): Rates and Entrepreneurs’ Relief CGT is now 18 percent for basic rate taxpayers and 28 percent for higher rate taxpayers, replacing the previous all-gain rate of 18 percent. A further 40 or 50 percent increase may happen in 2011. Expatriates remain exempt, for now.

Furnished Holiday Letting New FHL taxation documentation includes the following:

·         Applicable to European properties

·         Increase to number of days property is available and let out

·         Revised loss relief

State Pensions are re-linked with earnings. State pensions will increase yearly in tandem with earnings, inflation, or by 2.5 percent – whichever is greater.

Taxation of non-domiciled individuals will be reviewed, “to ensure non-domiciled individuals make a fair contribution to reducing the deficit, in return for greater certainty and stability for those bringing skills and investment to the UK,” says the Chancellor.

Corporation Tax (CT) Rates From 1 April 2011, companies with profits above £1.5M will incur a new CT rate of 27 percent. Those with profits below £300,000 will be taxed 20 percent.

VAT will increase to 20 percent from 4 January 2011. This will not affect zero-rated, exempt or reduced-rate supplies such as children’s clothing and books, education, health and domestic fuel and power.

Bank Levy will be based on banks’ balance sheets. Set at 0.07 percent, with a lower initial rate of 0.04 percent from 1 January 2011.

            According to the coalition’s plans, structural deficit will be balanced by 2015 and government borrowing will be reduced to 1.1 percent of the Gross Domestic Product by 2015/16. Although these ambitious targets translate to severe cuts in some public service sectors – health, schools and defence are not affected – general feedback has been positive.

Reactions

Ratings agency Moody applauds these plans, has confirmed the UK’s AAA status and declared the budget a "key step towards reversing the significant deterioration in the Government’s financial position that occurred over the past two years”.

• The yield on 10-year gilts fell two points to 3.43 percent, indicating renewed confidence in public finances.
• A more austere approach to fiscal policy will ensure monetary policy remains loose for some time. UK interest rates are likely to remain at record low levels over the foreseeable future.

Aidan Bailey BA (Hons) CertPFS AWP^CM 

General Manager Singapore, International Division

Aidan Bailey of THE FRY GROUP paints the current financial picture for the UK and international markets.

Some weeks ago Newsweek ran the headline “The End of the Euro”, which, in my opinion, should be taken with a pinch of salt. In August 1980, TIME magazine’s headline read “The End of The Equity Cult”, when in reality the Dow Jones Industrial Average in the US was at 1,000 and just about to commence the greatest rise in its 200-year history!
          It’s still very early to predict anything about the new Tory-Lib Dem pact, although they have started on the right foot following the demise of Gordon Brown’s Labour government, whose stance on the economy was considered by many as being too fragile to risk making cuts and has been referred to in some quarters, “as illogical as continuing to feed an alcoholic more alcohol, for fear of the trauma of detoxification.”
          Presently, the main worry is the proposed goal of a £6 billion spending cut, which may not be sufficient when a figure at least 10 times more is needed. However, managing the economy is tricky business. Too little action and financial markets might lose confidence, too much and a “double dip” recession may occur.
          According to some, the UK economy should be relatively easy to turn around by redirecting to the productive sector the circa 5 percent GDP currently pumped into the public sector. In reality this means laying off 500,000 to 750,000 workers and increasing general efficiency. Such a major culture change is not easy and can’t be accomplished overnight.  

          Member of the Bank of England’s Monetary Policy Committee, Adam Posen takes a more somber note, stating that although Britain and the US are unlikely to face repeated recessions, their plight is scarier than Japan’s. In Posen’s view, Britain faces an uncomfortable trio of obstacles, none of which plagued Japan in the 1980s or 1990s.

·         Unlike Japan, Britain has to sell a large proportion of its debt to overseas investors, who are more likely to exit the market if they become nervous with Britain’s fiscal prospects.

·         The UK faces the challenge of having to boost a troubled manufacturing sector if it’s to recover sufficiently. That said, a devalued Sterling is an advantage in that regard.

·         The banking system’s continued troubles would undermine companies’ abilities to raise funds. Businesses already appear to be hoarding savings – something which happened in Japan.

            According to RBS Credit Strategist Andrew Roberts, the world could be heading for the Great Depression II. Albert Edwards of Societe Generale expects some years of deflation, followed by hyperinflation as countries monetise their deficits. We certainly seem to remain in a period of uncertainty.

Aidan Bailey BA (Hons) CertPFS AWP^CM 

General Manager Singapore, International Division

Aidan Bailey of THE FRY GROUP cautions UK savers on what to look out for as inflation rates spike and interest rates remain low.

In April 2010, the UK’s Consumer Price Inflation (CPI) rose from 3 percent to 3.4 percent. This, according to the Office for National Statistics (ONS), was the result of a relatively strong dollar, higher refining costs, the increasing price of oil and food and the rising price of imported goods due to a weakened Pound Sterling. The continuing rise in Value Added Tax (VAT) ­– 17.5 percent as of January – and flat gas bills, which plummeted this time last year, have also contributed. Other rising costs include clothing prices and airfares – which increased by 11.3 percent in 2009.

          These figures are bad news for UK savers, as the real value of your savings will diminish rapidly if you can’t find accounts paying rates to match the inflation increase. For expatriates, finding a bank account offering more than 3 percent is a challenge and the hurdle is even higher for UK tax payers. The inflation rate has now exceeded the Bank of England’s set target of 2 percent and is at its highest level since January 2010. According to financial website Moneynet, savers paying basic rate tax need to find an account paying over 4.25 percent to ensure their savings keep pace with inflation. Higher rate taxpayers would need to find an account paying 5.67 percent to match CPI figures.

          So why aren’t interest rates rising? Despite the sharp rise in prices, analysts expect the rate of inflation to take a back seat as weak economic growth and high unemployment dampen rising prices. This theory is further underscored by the governor of the Bank of England, Mervyn King, who has implied inflation will shrink towards 2 percent in the coming months. Analysts expect the Bank of England to keep interest rates low, in order to stimulate growth. "We would not expect the Bank of England to be swayed by short-term movements in commodity prices, so today’s figures should not have much bearing on interest rates. We still expect rates to remain on hold for the remainder of this year," said Hetal Mehta, Senior Economic Adviser to the Ernst & Young ITEM Club. 
          UK interest rates have been at a record low of 0.5 percent for 13 consecutive months. Policy helped bring the UK economy out of recession in the last quarter of 2009 – when it grew by 0.4 percent.  But if prices continue to rise sharply, the Bank’s Monetary Policy Committee (MPC) may have to raise rates. And if the CPI inflation rate remains above 3 percent, Mr King will have to write yet another letter of explanation to the Chancellor.

Aidan Bailey BA (Hons) CertPFS AWP^CM 
General Manager Singapore, International Division

AIDAN BAILEY reveals what happens to your retirement pension upon divorce.

For many people, their largest asset – other than their home – is often their retirement pension. And during divorce, a commonly-raised question is, “what happens to my pension?”

          It’s compulsory to take pension entitlements into consideration in divorce settlements. The three key options available are offsetting pension benefits, pension attachment orders and pension sharing orders. The method used can be negotiated through your solicitors, or if contentious left to a Court to decide – and Courts normally prefer pension sharing or offsetting.

Offsetting pension benefits Pension rights are taken into consideration and equalised through transferring other financial assets of the marriage. For example, one spouse might retain their pension fund while the other keeps the family home. This method makes for a clean break with each party retaining their existing pension benefits.

Pension attachment orders Formerly known as earmarking orders, this method does not allow for a clean break. Attachment orders do not transfer ownership of any of the pension to an ex-spouse, so the member still has full control – subject to what the trustees will allow – over how the pension is run. In addition, benefits are taxed at the marginal rate of the member who retains the liability for the income tax on the whole pension – even the part of the pension earmarked for the ex-spouse.

Other drawbacks are:

·         Benefits remain with the member. The ex-spouse has no control over the timing of benefits or investment risk.

·         Income benefits cease on the member’s death – although a lump sum death benefit may be earmarked.

·         Benefits cease on the ex-spouse’s death or remarriage.

·         If the member retires early the member and the ex-spouse receive a reduced pension.

Pension sharing orders (PSO) With a PSO, the court awards a slice of the pension benefits known as a pension credit to the ex-spouse. This is based upon a percentage share of the Cash Equivalent Transfer Value (CETV). A corresponding pension debit reduces the value of the former spouse’s benefit.
          Where the existing scheme is a personal pension scheme, the CETV is always transferred to a scheme chosen by the ex-spouse – usually another personal pension. In cases where the pension is split, the pension share does not have to be 50/50. And if the parties are unable to agree, the split will be set by the court. In practice, the split of the pension value is likely to be unequal, due to the different life expectancies of males and females.

Aidan Bailey BA (Hons) CertPFS AWP^CM 
General Manager Singapore, International Division