Yellowtail Blog

The changes to inheritance tax rules announced last October in the pre budget speech allowed the transfer of unused allowances between spouses and civil partners following the first death. Yet many people with existing nil rate band discretionary trusts might have considered the change to be largely irrelevant, but it would be a mistake to ignore the potential effects of this change.

Under the new rules, if the first spouse who dies now with a nil rate band of £312,000 gifts this into a nil rate band trust as a result of their will, and then a few years later the surviving spouse dies when the nil rate band has increased to say £400,000, then the total amount of money that is exempt from 40% inheritance tax is £712,000.

Under the new rules however, if the first spouse simply passed their assets to the surviving spouse, then on the second death, the estate has the benefit of two nil rate bands, but at the then current rate. Under the same scenario of using a £400,000 nil rate band, this would equate to a total of £800,000 that would avoid inheritance tax at 40%.

Of course, if the asset was placed in the nil rate band trust and it grew at a greater rate than the rise in the nil rate threshold then it might still offer a better solution. Yet in my experience, nil rate band trusts are for couples who really cannot afford to physically give the money away, and tend to want a very low risk investment within the trust, it is after all there to provide additional income for the surviving spouse. In this regard I would suggest that the nil rate band trust is no longer needed in a number of instances. The legislative changes have brought about a similar end result, and removed the need for an additional layer of complexity that a trust brings.

Going back to my earlier post on measuring economic output per person or capita, Bill Mitchell on his website obviously thought that ranking Olympic achievements on a per capita basis was going to be fairer than the overall picture presented by the conventional medal table.

As he says, “I consider [the per capita ranking] to be more meaningful than the official rankings which just reflect world power derived from economic might.”

Bill has an interesting taken on the data, but be warned he uses the unique-to-the-US ranking style, tallying the total number of medals, rather than the number of gold medals ranking used by the rest of the world.  Coincidentally Team USA are ranked first in the world on a US ranking only, not in golds won.   

The report today that the UK economy is grinding to a halt, based on the release of Gross Domestic Product (GDP) figures by the Office for National Statistics, reminded me of an interesting article in the Economist about GDP.

According to the author the conventional view is that America’s economy has been more buoyant than Japan’s in the last few years.  The rate of growth in GDP backs this up, with annual real growth in GDP of 2.9% versus Japan’s 2.1%. 

There’s more to the story than the headline figures though, and the article argues “the single best gauge of economic performance is not growth in GDP, but GDP per person…a rough guide to average living standard.”

Looking at GDP growth per capita as it’s known between 2003 and 2007, Japan has actually done better than America because Japan’s population has been shrinking. 

With countries where politicians take credit for booming economies such as Australia, figures look less flattering through the lens of GDP per capita because population has grown rapidly at the same time.  In the 5 years to 2007 the Japanese and Australian economies have expanded at the same rate.

If we agree that GDP per person is a better measure maybe we should apply the same thinking to the Olympics – gold medals per capita anyone?

Want to live rent free in London?  I read an interesting comment in the property section of London Lite yesterday.  Yes, I know I shouldn’t be reading that rag, but it’s difficult holding my investment management textbook open on a crowded tube!

The Director of a property search company was talking about a few lucky clients who are now living rent free after selling their property.  She went on to say that her clients have, “put their money in the bank at six percent interest, and that pays their rent, so some of them are effectively living rent free.” 

I know what she is thinking – my wife and I have had the same discussion.  If you can live on the interest, you still have the capital left, so in effect you are living for free, right?  Wrong. 

Unfortunately it doesn’t work that way.  When you lend your money to a bank they will pay interest, this partially compensates you for delaying the purchase of something else with your money (new Porsche anyone?).

Go back to 1975 and we find inflation touching 25% a year.  Suppose at the start of 1975 you had £10,000 on deposit after selling your house.  With that money you could have bought 4 Porsche 911s.  But the bank is offering you 25% interest so against your better judgment you put the Porsche brochure in the sock drawer and use the interest to pay your rent.  You decide to live “rent free.”

At the end of the year, you’ve received £2,500 interest which you’ve given to the landlord.  But every time you look in the sock drawer the Porsche brochure grabs your attention and after a year you decide to dip into your savings to buy that Porsche you’ve always wanted – you saved for a year right? 

Unfortunately for you Porsche workers demanded more money, the price of oil and steel increased and Porsche were forced to raise their prices - now your £10,000 only buys 3 Porsches and a tank of petrol…oh and your landlord has decided to put up the rent, the price of his Porsche has also gone up.

Inflation isn’t as extreme today, but the same principle applies.  You can save your capital and spend your interest to live “rent free,” but the longer you do this the less you will be able to buy with your remaining capital.  And even if you save the interest the value of your money is eroded, as over the longer term the interest you earn after tax is less that you need to beat inflation.

If you are currently renting and can’t rent for free you should be praying for property prices to drop by more than your rent.  But that’s another story… 

“Really, if you’re hanging on to your policy you want a degree of predictability… [t]hose who do not feel they have this may want to move on.”

Dennis is quoted in an article in the FT on with-profit policies.   

While the Aviva payouts announced this week are good news for some with-profits investors, those with money in other life offices may be feeling less fortunate.

Stock markets remain volatile and the Financial Services Authority is paying closer attention to the financial strength of life assurers and banks, in the wake of the Equitable Life and Northern Rock scandals.

Financial advisers say policyholders would be wise to do the same.

You can read more of the article, which explains some of the related jargon on the FT website.

Sometime back in April I was invited to a music recital in one of the churches in Little Venice, I remember it being quite cold for the time of the year and wondering how on earth the performers were going to cope with the chilliness of the church. In particular the female performers looked as though they would freeze wearing only their sleeveless ballgowns.

The audience were generally wrapped up well, and we had been fortified with a glass or two of red wine to help take the chill off - very thoughtful. And so the evening commenced with an eclectic mix of violin and piano pieces, including a world premier of a recent composition by a contemporary Japanese composer.

Finally after an hour or so the music ended and the real purpose of the evening unfolded - sponsorship of the forthcoming (sixth) Little Venice Music Festival in September. I suppose I had an inkling there would be a call for financial help, after all until quite recently Virginia and I had been neighbours (Virginia is one of the key organisors of the concert), so I knew they were always looking for some financial assistance.

So after an enjoyable evening we were being asked to dig deep into our pockets. The amount of money needed wasn’t a huge amount, but their appeals were largely falling on deaf ears, and so we stepped in as the principle sponsor to support the event.

Looking back I’m not entirely sure why, it must have been the wine! Besides I don’t even live in Little Venice these days. However, music is something to be enjoyed and there is little enough community spirit and involvement - or so were told. The Little Venice Music Festival seems to tick so many boxes - and surplus proceeds would go to the nearby St Mary’s Hospital - it seemed harder not to help!

Of course, being the principle sponsor does come with some priviledges, including a number of tickets to each performance. We will be offered these to our clients as soon as we have the final details. In the meantime, anyone wanting to learn more about this year’s festival should visit the Little Venice Music Festival website.

Dennis Hall gives financial advice to a twenty something buy-to-let investor in The Times.

Sara Turner owns “a two bedroom house…has a devoted boyfriend and recently landed her dream job in travel journalism after an ‘amazing’ year touring India.”

Unfortunately it doesn’t look as if Sara’s finances could cope with any stress, such as periods where her property was not generating any rental income.

You can read the complete article including Dennis’ advice on the money section of The Times website.

Dennis Hall comments on asset allocation and the correlation between asset classes, noting the recent convergence in returns between property and equity.

Asset allocation becomes even trickier when the issue of which asset classes are non-correlated is considered. Over the past year, as the credit crunch has taken hold, some asset classes that are usually thought to be non-correlated - property and equities, for example - have in fact fallen at the same time.

Dennis Hall, a financial adviser at Yellowtail, suggests that the recent convergence may be because property has been treated more as an equity, with people investing in it for capital growth rather than for its long-term rising rental yield.

You can read the entire article on the FT website.

Dennis Hall comments in an article for the Financial Times in their Weekend Money Supplement.

Discussing multi-asset funds - basically funds that invest in all the main asset classes including equities, bonds, property and cash - Dennis states that financial advisers are likely to recommend these funds to clients because it “takes the burden of asset allocation off their shoulders.”

You can read the rest of the article on the Financial Times website.

We asked…and our clients and partners answered. Kicking-off our seminar programme with a breakfast seminar in November, we wanted to know what the issues affecting you currently are, and plan our first session around your responses.

We asked which of these topics would be most relevant (and the votes are in):

1. How to retire early (31% of the votes)
2. Providing an inheritance for future generations (16%)
3 How to invest in times of trouble (53%)

We had a really good response to our survey with a lot of alternative suggestions as well. All the responses and suggestions will be used to shape our programme going forward.

For our blog readers out there– we’d also be interested in your comments. What topic would be top of your list?

Answers on a post card (or easier still, using the comments form below).