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.