Newsletter January 2012

Update – what’s happening over there and in the Isle of Man

EIS and VCT

In the UK the Chancellor’s Autumn Statement contained few surprises, the main exception being changes in the rules affecting Enterprise Investment Schemes (‘EIS’) and their collective investment variant, the Venture Capital Trust (‘VCT’).

EIS were introduced in 1994 and VCTs in 1995, both with the intention of encouraging investment in small companies by offering tax concessions. EIS invest in single companies which satisfy certain criteria and VCTs in portfolios of qualifying businesses. Up to £500,000 can be invested annually via EIS, and £200,000 via VCTs; and both schemes offer up-front income tax relief of 30%. In addition, EIS provide exemption from capital gains tax if held for at least three years, and VCTs for five years.

The first change announced in the Chancellor’s statement is that the investment limit for EIS is to be increased to £1 million p.a.. The second is that restrictions on the size of companies in which the schemes can invest are being relaxed to include companies with assets up to £15 million and up to 250 employees.

The major surprise in the Autumn statement is that a new ‘Seed EIS’ (‘SEIS’) is to be introduced to encourage investment in start-up businesses. A major accountancy firm described as “astonishing” the fact that SEIS will provide 50% income tax relief in the tax year 2012/13 on investments up to £100,000 even if investors’ own tax rate is lower than 50%. In addition, if the investment is made from gains made from the sale of other assets in the same tax year, these gains will be exempt from capital gains tax.

As a result, every £1 invested in SEIS will cost the investor only 50p. In fact, the total relief will amount to 78% if gains are reinvested and account is taken of the 28% saving in CGT.

However, the benefits of SEIS could be outweighed by the very high risk of investing in start-ups, and the difficulty in conducting due diligence suggests that it is unlikely that SEIS will be available as a retail product. Investment is likely to be confined to entrepreneurs’ friends and families.

Pensions and tax

It had been suggested that the UK Chancellor might withdraw some of the tax benefits of pension saving, notably the availability of tax-free cash (usually 25% of the value of the fund) and higher rate tax relief on contributions. In the event these fears proved unfounded, but they serve as a reminder to higher rate taxpayers to take advantage of the current concessions while they last.

There were, however, other developments on the pensions front.
The State pension age is to be increased from 66 to 67 from 2026, eight years sooner than originally planned. This may cause some people to consider working longer or saving more, but one benefit is that retirees who have not yet accrued their maximum benefit entitlement will have a chance to top-up their National Insurance contributions. We understand this will also apply in the Isle of Man.

In the UK firms with fewer than 50 employees which do not have a comparable staff pension scheme in place will be required to introduce NEST (the National Employment Savings Trust) and the operative date had been set at April 2014. However, recognising the financial burden that compulsory contributions will place on such firms, the Government has announced that the operative date is to be deferred until May 2015. Larger employers are already instructing financial advisers to provide staff briefings and advice.

We see IOM government giving consideration to NEST or similar at some point in the next few years as pressure continues to be applied to Manx budgets and people are expected to save more for their own retirements rather than falling back on the state.

On the tax front, the annual UK capital gains tax allowance has been frozen at its present level of £10,600 for 2012/13. Finally and as an aside, we see the IOM review on the taxation of investments being a way by which the tax office may be able to apply capital gains tax in all but name. Watch this space.

Junior ISAs

In the UK, Junior ISAs have been available since November 2011, when they replaced Child Trust Funds. Family and friends can contribute up to £3,600 a year into either cash or stock and shares accounts, and from April 2013 the annual investment limit will increase in line with the consumer price index.

Accounts can be established for any UK resident under the age of 18, but no withdrawals can be made before the child’s 18th birthday, except in the case of terminal illness or death. When the age of 18 is reached, the Junior ISA will be converted automatically into an adult ISA.

Any method of encouraging children and young people to save, and being introduced to the concept of credit being the last rather than first resort, is to be welcomed. The lack of such options being available locally is something we hope government will consider.

Deferring annuity purchase

The income available to purchasers of retirement annuities has fallen by around 20% over the past three years and now stands at historically low levels. Consequently, many retirees are asking whether it would make sense to delay annuity purchase until rates might improve

There is a good chance that the yield on gilt-edged securities, which are the main influence on annuity rates, will rise from current levels in the foreseeable future. It is also a given that annuity rates will rise with increasing age, as also will the likelihood of declining health qualifying the annuitant for the improved rates available from an enhanced or impaired life annuities.

However, it’s not a one-way bet. Every year’s deferral is a year’s annuity income lost. And with every passing year, the period between payments starting and the reaper coming to call gets shorter.

The answer is likely to be different for each individual, but a good way for investors with larger pension pots to hedge their bets would be to phase annuity purchases over a number of years.

January 2012

No responsibility can be accepted for the accuracy of the information in this newsletter and no action should be taken in reliance on it without advice. Please remember that past performance is not necessarily a guide to future returns.
The value of units and the income from them may fall, as well as rise. Investors may not get back the amount originally invested.

What to do if you missed the Isle of Man Tax deadline

As we are all aware, 6^th October was the date by which an individual’s personal tax return must be filed with the Income Tax Division (“ITD”) for the year preceding 5^th April 2011. Sharon Sutton, a Chartered Financial Adviser at Thornton Associates, talks to Barry Hennedy, a Chartered Tax Adviser at Taxmann Limited, on the importance of this date in the tax calendar.

What happens if the tax return is not filed by the due date?

There are a number of important points here. Firstly, you may be liable to a penalty of £100. Secondly, you should still file the return as soon as possible after the deadline because the closer you get to 31^st October the greater the risk you will receive a default assessment.

What happens if I receive a default assessment?

A default assessment is an assessment raised by ITD which is an estimate of your liability. It is important to realise that this does not excuse you from the requirement to complete and file the income tax return. Also, you should pay what you believe to be your true liability because interest may arise if it proves to be higher than the default assessment.

What if I think my liability is less than the default assessment?

You should still pay what you believe to be your liability and you can request ITD to postpone collection of the balance but they may only agree to this if the outstanding tax return has been completed and filed.

So it’s still important to complete and file the return?

Absolutely, for many reasons. Firstly it is your legal responsibility to complete the tax return not your agent, who may be your accountant. It is you who will be prosecuted not your agent. Secondly, if the return is not filed with ITD by the following 6^th April, you will receive an additional penalty of £200. Finally, it is possible for the default assessment to become final and conclusive, in which case it may not be revised even if your true liability is less, which could have serious consequences. For example you may lose your entitlement to deductions and other reliefs.

Any other reasons?

Plenty. If you are a subcontractor then outstanding tax returns may affect your ability to get a subcontractors certificate. As a business it may be difficult to get government contracts because your tax affairs are not up to date. Finally if you are seeking a loan the lender may want confirmation that your tax affairs are up to date because they want comfort that there are no liabilities which have not been taken into account.

Can the return be filed online?

Yes. It is possible to manage all your tax affairs online including filing your tax return, certain other returns and receiving assessments and notices from ITD and reviewing previous returns and assessments. You can also pay any outstanding liabilities online. You should consider online filing as an alternative. Register and enrol at www.gov.im/onlineservices

Any other points?

You shouldn’t delay filing your return just because you are missing some figures, for example you may not have received an interest paid certificate. You can estimate the figure on your return but you must be careful to tick the box to show that it is a provisional amount. This is equally important with income. If you do not then you may be making an inaccurate return and could be liable to interest and penalties.

We are very happy to provide any information we can to assist with the completion of your tax return. The earlier you get the information the sooner the return can be done.

Inheritance Tax in the Isle of Man? What next?

Inheritance Tax in the Isle of Man? What next? I thought that would get your attention. Being asked to write an article about such a riveting subject as inheritance tax (IHT), when most people in the Isle of Man believe it has nothing to do with them, is a challenge. This is even more true if you consider that more than half of our population do not even have a Will with the most common justification being ‘I haven’t got around to it yet’.

Both these matters are beyond most people’s time horizon and put as far out of their minds as possible since none of us like the idea of dying – at all. Unfortunately at some time we all have to face the idea that no-one gets out alive.

Isle of Man residency has the advantage of excellent tax rates and for the most part that includes no IHT. However, there are traps to be aware of, but with the correct professional advice, these can be planned for and possibly even avoided.

UK ‘Situs’ Assets. It is quite usual for people living permanently in the Isle of Man to hold UK assets, particularly property and investments. If these assets are in your personal name and valued at over £10,000, your executors (or estate administrators if you haven’t made a Will) are going to need to obtain a UK grant of Probate/Letters of Administration to distribute the assets. IHT can arise even if you are born and bred in the Isle of Man if your UK assets are over the current IHT threshold. Therefore without the correct planning your estate is liable to get an IHT bill to pay before the assets are released. With proper advice the IHT exposure mentioned above can be completely avoided.

The various options available usually include the use of an Isle of Man company or an offshore Life Assurance Bond. The former option means ownership of the asset is transferred to the company: this means the individual then owns shares in an Isle of Man company rather than a UK asset. The method of transfer of the asset from the individual to company merits careful consideration to avoid unnecessary tax liabilities: in some cases the use of a trust may also be contemplated. Not only can correct tax planning ensure that IHT is avoided it can also avoid the necessity for UK probate.

A really important note is that where UK equities, for example, are held by a stockbroker/investment manager in their nominee name, they may not be protected from taxation. Use of the broker’s nominee name does not avoid exposure to IHT and anybody who is holding UK assets under the misapprehension that the nominee name will protect them from IHT should obtain professional tax advice immediately.

The Deemed Domicile Rule. An issue which we come across on a regular basis is where an individual has moved from the UK to the Isle of Man within the last three tax years. Even though this person or family has made the Isle of Man their permanent home and intends to stay here, their estate and any gifts they make are still within the scope of IHT for at least that period. Beyond this IHT can still be an issue; for example if the individual is seriously ill and has to attend the UK for treatment, or has to go to the UK to care for elderly and sick relatives. You may need to consider planning carefully to ensure potential IHT liabilities are mitigated or avoided altogether.

Isle of Man Domicile? Someone living in the Isle of Man having made the Island their permanent home or perhaps was born in the Isle of Man but is currently living elsewhere on a temporary basis may be in the advantageous position of having an Isle of Man domicile. The big advantage of Isle of Man domicile is that their estate, for the most part will not be subject to any Isle of Man estate taxation. But, if the individual holds UK assets, for example, UK property, a portfolio of UK investments or a beneficial interest in a trust with UK assets then IHT may apply. This is because any UK assets held by a non-UK domiciled individual are potentially exposed to IHT rates at 40%. This exposure can be relevant in two circumstances: firstly, if any of these UK assets are gifted, perhaps to an individual or a trust and secondly if the individual dies holding UK assets. We often find that people delay getting proper financial, taxation and Will planning advice due to a lack of understanding of their current and future financial positions.

What can you do? By spending some time with a Financial Planner with an up to date knowledge of both the UK and IOM tax regimes, it is possible to then meet with an advocate and/or tax adviser fully armed with a statement of of assets and liabilities, along with a better understanding of your estate planning wishes which I’m sure do not include gifting assets to HMRC in the form of 40% tax!

Sources; Chartered Insurance Institute AF1 syllabus, PKF (IOM) LLC

Is your Isle of Man tax return for 2009/10 late?

There was 6 October 2010 deadline for submitting 2009/10 personal tax returns. If the Income Tax Division had not received personal tax returns for the year ended 5 April 2010 by 6 October 2010, taxpayers were charged a £100 penalty.

If the return has still not been received by the Division by 6 April 2011, a further £200 penalty will be charged. Even if the penalties are paid, the tax return must still be submitted and people may be prosecuted for failing to do so.

So the message is, if you can think of something better to spend 200quid on and would rather avoid going to court, and the associated hassle and legal costs, get your tax form in!

More free financial planning talks planned for March and April

TLC Business Solutions and Thornton Associates, with the support of the Isle of Man Government, have arranged a series of free talks on financial planning for ordinary people. The new series leads on from the success of their first talk on the same topic, held in November last year.

TLC is a leading Manx corporate training company and Thornton Associates is the Island’s only firm of Chartered Financial Planners. The Managing Directors of the two companies, Sue Gee (TLC) and Sharon Sutton (Thornton Associates) first teamed up to provide a government backed seminar last year, which was met with overwhelmingly positive feedback. Over one hundred people attended the talk, designed to encourage people on average incomes to think about the details of financial planning, and 99% of attendees who left feedback said that they had gained something useful from it and would recommend it to a friend. One audience member said, “It was fantastic; the message was received and uncovered the steps to plan for my future – it was a great use of an hour!”

There will be a series of four talks spread throughout March and April on different subject matters, all of which will be hosted at the Claremont Hotel. They will open for coffee and registration at 5.15pm, with the seminars starting at 5.45pm and lasting one hour. They are supported by the Department of Economic Development and are open to anyone over the age of 18.

The first talk is on the 9^th of March and will feature Sue and Sharon, covering similar ground to their previous event. Sue commented on the talk: “It is a myth that only affluent, high net worth or rich people need to plan financially for the future; it is actually more important for those of us who have less disposal income because we need to make the money work harder for us. If you didn’t hear about the last talk in time or couldn’t make it along, I would really encourage you to try it out – it’s free, after all.”

Feedback from the last talk suggested that there were three areas in particular that attendees wanted to hear more about: debt management, wills and pensions. Sue and Sharon have addressed this by arranging three additional talks in this series. The second talk is on the 16^th of March and will cover the subject of wills. Sally Bolton, Principal of Corlett Bolton and Co legal practice, will lead the seminar, which will cover areas such as what your assets are and how to manage distribution via a will. Andrea Tabb will present the third seminar on the 22^nd of March. Andrea is the Advice Centre Manager at the Isle of Man Office of Fair Trading and will outline how to use credit while avoiding debt problems. Finally, Sharon Sutton will provide the last talk of this series on the 6^th of April, on the subject of pensions and how to get the most out of them.

Sharon commented on the new series of talks: “We were very pleased by the success of the last seminar and it is good to see the Isle of Man Government supporting further talks. The feedback from the last event has given us the opportunity to understand more precisely the subjects that people struggle with and we have been able to tailor this series to address some common concerns in greater depth.”

To register for any of the free financial planning talks, call Janet on 664 789.

7 ways to help you save

During such tough economic times, it is understandable that so many people stick their heads in the sand when it comes to their money. see http://bit.ly/axSutw

By applying few simple financial resolutions, you can transform your personal finances to get to a much healthier financial position.

Here are seven saves you can make.

1 – Make your own budget

It surprises me how many people have simply no idea how much money they spend each month – or where the money goes. This is the roadmap to working out where you want to get to. Working out and sticking to a monthly budget is all about spending less than you earn. If you achieve this, month on month, you will be in a better financial position at the end than you were at the start. By deciding in advance where you will spend your money, you should make it easier to avoid the temptation to spend on frivolous/unnecessary items. Review it on a regular basis so you can compare where you planned to spend your money with where you actually spent it.

2 – Avoid being ‘in the red’

Short term debt (credit cards, store cards, overdrafts, etc) are expensive. Debt is a drag on your ability to meet other financial goals and an emotional drag on your attitude towards money and personal finances. Make clearing short-term debt a priority before starting to save towards other plans. Prioritise debt over savings. Don’t take on more short-term debt. I like the idea of setting and marking a “free-from-debt” day on your calendar. If you do, make sure you achieve it.

3 – Plan for the future

Starting a pension should be a big priority for many people. We constantly hear that we will need to save more and work for longer. This has a lot to do with us living longer (if you want to see that in graph form see fig.1) and lower interest rates (which broadly determine annuity rates) which means you need a larger pot of money to generate income to live off. You cannot rely on the State for a sustainable level of income in retirement so this means you need to use a pension or other investment vehicle to create your own sources of income for later life; if you ever want to stop work that is.

4 – Pay less tax

Nobody wants to pay tax but it is the social responsibility of those who earn to pay it. However, many of us fail to take the simple steps that enable us to pay less tax and maximise our tax allowances.

The steps you can take to pay less tax include making tax relieved contributions into pensions either personally or via an employer arranged scheme where by sacrificing salary by paying directly into such a scheme, not only do you receive income tax relief at source, but also get National Insurance Contribution savings for both you and your employer – who in turn may consider adding their NI saving into your pension as a further incentive/enhancement.

A trip to your financial planner may help you arrange this and identify further opportunities to save paying tax on your investments – and ensure you find out all relevant social/state benefits and allowances are being claimed/assessed for. We don’t have ISA’s and Child trust funds in the Isle of Man so it is important you plan using the tools available.

5 – Make a will

If you don’t have a Will, you must make one. You can write your own Will but there are some major risks involved with a DIY approach, so meet with an advocate to get this organised. If you die without a Will, i.e. ‘Intestate’, your estate will not be distributed according to your wishes; in many cases where remarriages have occurred, the family structure can be more complex (it is worth pointing out here that marriage voids existing wills unless made in contemplation of the marriage). So don’t risk dying ‘Intestate’. Anyone making a will in the Isle of Man, especially with any connection to the UK should consider the tax consequences of making it (or transferring ownership of assets when you are alive for that matter), not only to you personally, but to your beneficiaries. Ensure you obtain financial advice in this area to avoid giving you or your loved ones an unwelcome tax bill.

At the same time give some thought to family financial protection, particularly what would happen to your family from a financial perspective if you were to die, lose your income or contract a critical illness such as cancer- we all know someone whose life has been affected by cancer. It is possible to insure against most risks but you need to quantify them first. If you have existing life assurance plans, review them to make sure they remain competitive and appropriately structured. For example you might discover that the cover you have in place is now redundant or that you are paying over the odds for the level of cover you have.

6 – Always shop around

Always shop around. The Internet makes it quick and easy to compare prices on just about any product or service.

These days you can use the Internet on your mobile phone handset to compare prices when you are physically in the store about to make a purchasing decision. This can be useful if you need some ammunition to haggle with the shop assistant before parting with your cash.

However, do consider the benefits of shopping ‘local’; you’re keeping someone in a job who supports the same economy in which we all participate. They may be collecting VAT for our economy and are unlikely to have the same buying power whilst having to pay for heat, light, rent and salaries. I would also question whether Amazon would turn up with a loan washing machine when ours broke 3 weeks ago like the MEA did (thank you).

7 – Meet with an Independent Financial Adviser

During 2010 carry out a comprehensive review of your personal finances with an impartial Financial Planning professional who has access to the tools and knowledge needed to improve your current and future position. Most IFA’s offer a free initial consultation with no obligation so they can identify areas that they can help you with and you can grill them about their qualifications, experiences and charges.

Sharon Sutton is a Chartered Financial Planner at Thornton Associates Ltd; www.thorntonfs.com

She is a member of the IOM CII local council, the Personal Finance Society & a committe member of the FPIBA

Sources; www.brilliantwithmoney.co.uk www.courts.im http://cazalet-consulting.com/

follow Sharon on twitter; http://twitter.com/sharonsutton99

Accountants and solicitors want to boost IFA referrals

By Nicholas Paler | Citywire | 08:00:00 | 13 April 2010

The majority of solicitors and accountants believe they can increase their referrals to IFAs, research from JPMorgan Asset Management (JPMAM) has found.

More than 80% of the 198 accountancy and solicitor firms surveyed said there was ‘potential to increase their level of referrals’ to advisers.

A large proportion of firms regularly recommend clients to IFAs. A total of 43% of accountants and 36% of solicitors refer clients once a month, while a further 26% and 20% respectively do so once a quarter.

In total only 10% of accountants and 3% of solicitors currently referred clients to IFAs once a year or less.

The report also said advisers are at an advantage in setting up professional connections.

JPMAM estimated there are 22,000 registered IFAs, compared with 128,000 practising solicitors and 119,000 chartered accountants. ‘The two other advice professions outnumber IFAs at least four to one – a fact that should put IFAs at an advantage in the professional connections market,’ the report says.

Sifa managing director Ian Muirhead (pictured) agreed there was an opportunity for advisers to work more closely with solicitors in particular, thanks to the upcoming Legal Services Act which comes into force next year.

‘Solicitors’ business models are too reliant on transactions, and they will need to offer more services to clients going forward, so potentially there is tremendous demand there for IFAs,’ he said.

JPMAM said solicitors and accountants prioritised chartered and certified status above all else when looking for advisers to recommend, with 96% of accountants and 94% of solicitors citing it as the most important factor when evaluating an IFA.

JPMAM also found accountants and solicitors were not keen on setting up official businesses with IFAs, with only 5% of respondents looking to establish an internal IFA business or launch a joint venture with an IFA-firm.

They are also less concerned with how advisers are remunerated, with only 40% of respondents actively seeking out a fee-based IFA when recommending them.

Tories pledge to review IR35 tax legislation

Controversial tax law was fiercely resisted by IT contractors

Written by Dawinderpal Sahota

Computing, 06 Apr 2010

The Conservative Party announced last week that it plans to review the controversial IR35 tax legislation if it gets into power after the 6 May general election.

The IR35 legislation was introduced by the Labour government in 2000.

HM Revenue and Customs said that IR35 was introduced to prevent an individual avoiding tax on payments for services by providing those services through an intermediary.

Many self-employed IT contractors who were previously trading as ” independent companies” were particularly hard hit by IR35. As well as claiming they would no longer benefit from tax breaks on travel or training, many said they would have to quit IT contracting altogether and find more lucrative work.

The Conservatives claim that IR35 has cost business £73m over 10 years but has barely raised any revenue for the Treasury.

Shadow business minister Mark Prisk criticised Gordon Brown for making it harder to be self-employed at a time when Britain should be open for business.

“For the last 13 years, Labour have constantly meddled with the tax rules for freelancers and self-employed,” he said. “IR35 has especially proved to be over-complex, uncertain and often unfair.”

He said that a Conservative government would undertake a fundamental review of current arrangements with the aim of providing a “clearer, lasting and fairer tax regime”.

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