Spring 2012 Welcome to the second edition of Financial Focus, Chartwell’s regular newsletter. We distribute our newsletter twice a year, to keep you abreast of financial markets, legislative changes and any other relevant news or developments that we think may be of interest. The newsletter is available by email link to our website, where you can view it or download a copy to keep. If you know of anyone else who may like a copy of our newsletter, then just complete their details under the ‘subscribe tab’ on our website. Likewise, if there are any items you would like us to cover in future issues, or if you have any comments to make regarding the content of the Newsletter, we would be delighted to hear from you. We hope you enjoy this issue. Getting to grips with inflation Inflation rates are set to fall, but the past damage remains. What is happening to inflation? Annual inflation reached 5.6% last September, as measured by the retail prices index (RPI). That was its highest level since June 1991. Inflation has since started to drift back, with RPI down to 4.8% in December 2011, and the general expectation is that the fall will continue well into this year. The Chancellor’s financial watchdog, the Office for Budgetary Responsibility (OBR), calculates that annual RPI inflation will be 3.3% by the end of 2012 and 2.9% in the following year. The Bank of England is similarly optimistic that inflation will drop, although the Bank’s inflation forecasting record in recent years has been far from perfect. Three letters sum up one of the main reasons why there is a widespread consensus that inflation will fall: VAT. In January 2011, the standard rate of VAT increased from 17.5% to 20%, but there was no such increase at the start of this year. Thus 2012 has started without tax-driven price increases, so inflation should be lower. Whether or not the economists are right about the future path of inflation, there is no doubting about its past. Over the last two years (to December 2011), the RPI has risen by just under 10%. In other words, £1 in December 2009 has the buying power of 91p today. Such a level of price increases means that you should consider reviewing your financial plans now, if you have not done so in the last 12 months. For example, your life cover should normally be adjusted in line with inflation or its real value will fall. In round numbers £100,000 cover in place two years ago needs to be £110,000 today, just to retain the same purchasing power. There are similar considerations for your income protection cover. If £30,000 a year was adequate cover for you at Christmas 2009, then today your cover should be £33,000. Regular savings feel the draft from inflation, too. For example, if you started setting aside £250 a month at the start of 2007, to maintain the real value of that investment, you should now be saving at the rate of £295 a month.This newsletter is for generalinformation only and is not Inflation will also mean that your retirement planning could need a reassessment. The erosion of valueintended to be advice to anyspecific person. You are caused by recent inflation will still be there when you retire, unless you make appropriate adjustments.recommended to seek That could mean higher contributions, a later retirement date or a combination of the two.competent professional advicebefore taking or refraining The value of tax reliefs depends on your individual circumstances. Tax and pensions laws can change.from taking any action onthe basis of the contents of thispublication. The FinancialServices Authority (FSA)does not regulate tax advice, so In this issue: Tax year-end approaches • The pensions revolutionit is outside the investmentprotection rules of the Financial continues • Investing for growth • Company car tax changes •Services and Markets Act andthe Financial Services Autumn Statement surprises • Time to revisit commercialCompensation Scheme. Thenewsletter represents our property? • Partnership and shareholder protection • Driving upunderstanding of law andHM Revenue & Customs your savings • Daring to say the B wordpractice as at January 2012.
Spring 2012 page 3The tax year-endapproachesWith the prospect of tax cuts increasingly distant, year-end tax planning has becomemore relevant than ever in cutting your contribution to the Exchequer.Chancellor George Osborne’s spring Budget will have plenty of I Dividends and income from fixed-interest securities held within aannouncements, but probably little that is unexpected. In any stocks and shares ISA are free of personal UK tax, although youevent, his past two Budgets have introduced a wide range of tax cannot reclaim dividend tax credits.changes, some of which have yet to take full effect. These changes I Interest earned on deposits in a cash ISA are also UK tax-free.mean that the checklist for year-end tax planning in 2011/12 is not However, the returns on offer reflect the fact that the base ratethe same as in previous years. shows very few signs of moving above 0.5%.There are a number of things you need to consider before the I Gains made within ISAs are free of capital gains tax (CGT).Chancellor rises to speak this coming March. I There is nothing to report on your tax return.Pensions provision Your CGT annual exemptionThe start of the new tax year on 6 April will see several importantrevisions to pension law taking effect, as we explain in ‘The While 2011 was not a profitable year for many major stockpensions revolution continues’ on page 4. However, many changes markets, if you have held shares or share-based investments fortook effect last April and some are now part of year-end planning. several years you may well have unrealised gains. It could beFor example, the reduced £50,000 annual allowance and the new advisable to realise some of these gains before 6 April. In 2011/12carry forward rules both apply in 2011/12 and could impact on you can crystallise gains of up to £10,600 without any liability toyour year-end pension contributions. CGT. The exemption cannot be carried forward, so you lose it if you do not use it.In particular, the carry forward provisions have created a deadline ofThursday 5 April 2012 for using up to £50,000 of unused Inheritance tax (IHT)allowance from 2008/09. The calculations involved are complex, soplanning is best started as soon as possible. The IHT nil rate band of £325,000 is now in the middle of a freeze that will last until April 2015. This means it is all the moreRumours that the Chancellor would end higher rate (and additional important to use your annual IHT exemptions.rate) tax relief on pension contributions re-emerged in the run up tothe Autumn Statement. Just in case Mr Osborne is unable to resist The main £3,000 annual exemption can be carried forward, butthe £12 billion a year in extra income this time around, it could be a only to the next tax year (2012/13), and then can only be claimedwise precaution to make any planned 2011/12 pension once the 2012/13 exemption has itself been used up. If you andcontributions before Budget Day (21 March). your partner have not made any gifts since 6 April 2010, you could now jointly give away £12,000 free of IHT.Tax saving with individual savings accounts (ISAs) The value of tax reliefs depends on your individual circumstances.Your 2011/12 ISA contribution limit is £10,680, rising to £11,280 Tax laws can change. The Financial Services Authority does notfrom 6 April 2012. The Junior ISA, introduced last November, has a regulate some forms of inheritance tax planning.limit of £3,600 which will not change in April. Maximising your ISAinvestment will usually make sense because: Low Value Consignment Relief (LVCR) may sound very technical, but did you know that if you have ever bought CDs, DVDs, printer cartridges or even health food supplements from the Channel Islands, LVCR has probably saved you VAT? LVCR currently means imported goods worth less than £15 escape VAT, but in November the Treasury announced it would be scrapping LVCR from 1 April 2012 for goods sent from the Channel Islands. That will affect not just the Channel Island websites, such as Play.com, but also many High Street names that sell CDs and DVDs online via the Channel Islands. So if your music and movie collection needs additions, act soon!