The arithmetic means that the income range through which the 1-for-2 reduction in personal allowance bites is twice the actual allowance, £8,105 for 2012-13 and £9,440 for 2013-14. So, the range at present extends from £100,000 to £116,210, at which point the personal allowance is lost completely. The impact of this reducing personal allowance is to add income tax equivalent to one-half of the 40% higher rate, so an effective 60% rate, between the two figures.

Fortunately, there is a way that someone whose income is within or above the crucial range can beat the 60% tax whammy. This is reliant on the fact that, for Personal Allowance Income Limit purposes, the measure of income used is ‘adjusted net income’, which is computed by adding up taxable income from every source and deducting any outgoings that attract income tax relief.

Adjusting net income is key
Among the main items that reduce income during the adjustment process are gross pension contributions. This means that somebody earning more than £100,000 per annum could pay money into their pension plan to reduce their adjusted net income to £100,000 and thus have their personal allowance returned to its normal level. This has the rather more welcome effect of producing a 60% rate of tax relief.

The advantages of this tax-saving strategy are not only useful to those whose annual income is just above the £116,210 figure at which the Personal Allowance Income Limit takes full effect. Comparable tax savings could be gained where income is somewhat higher than that. Any individual for whom it makes sense to pay in extra pension plan contributions could thereby bring adjusted net income into the range or perhaps all the way down to the magic £100,000.

High earners taking advantage of this would, however, need to ensure that their aggregate pension contributions did not exceed either the Annual Allowance of £50,000 or Lifetime Allowance of £1.5 million; that could have undesirable tax consequences. The Annual Allowance level means that someone earning more than £150,000 would need to use available ‘carry forward’ of the allowance from prior years to bring their adjusted net income as low as £100,000. This is only possible while there are still eligible unused amounts available to carry forward.

Dealing with the impact of the Personal Allowance Income Limit is best done on the basis of recommendations from a professional adviser. (Figures based upon allowances and tax rates for 2012-13 unless otherwise stated. In his Autumn Statement, the Chancellor cut the Annual Allowance to £40,000 and Lifetime Allowance to £1.25 million with effect from the 2014-15 Tax Year.) High earners

In an anticipated announcement late in December 2012, the UK Government gave the go-ahead to re-start the controversial ‘gas fracking’ process to extract natural gas from rock, by injecting water, sand and chemicals under immense pressure. Ed Davey, the Energy Secretary, said this was a promising new potential energy source for the UK.

It is unsurprising that elderly care has become so controversial. We are living longer on average, with medical advances keeping our bodies working when we have a diminished capacity to look after ourselves. Controversy surrounds not only quality of care but also that thorny question: who pays? Should care fees come from the public purse regardless of someone’s means, or should they pay, even if that means selling the family home? It is all very complex and often political; and politics is not our field.

Advance planning helps
One thing is certain; it is normal to feel under pressure when a loved-one may need long-term residential care. Their need may stem from the sudden loss of a partner who cared for them or their own failing health if already living alone. Organising suitable long-term residential care takes time, so advance planning helps. If they agree, and with professional support, sort out their financial affairs, arranging (but not witnessing) an upto- date Will and perhaps a Lasting Power of Attorney.

We would all want the best for loved-ones and, if we subscribe to the ‘get what you pay for’ principle, hope to have some choice about residential care and not be dependent on where a local authority decides someone should go, perhaps with a low cost factor. So, as regards funding their long-term care, it is vital to make best use of their available financial resources to ensure choice, but not to ignore any support the state may have to offer. Currently, someone with assets above a certain value will not get outright local authority funding (this situation differs in parts of the UK). Whenever you are due for your state pension, the potential rate of return available could make a decision to defer taking it by half a decade potentially attractive.

Some authorities do offer self-funding residents help with fees via a secured loan, repayable when their home is sold. Also, self-funding care home residents retain entitlement to Attendance Allowance and, if they need nursing care, the NHS may contribute. The big question then is whether these sources, plus pension income and investments, will continue to cover fees for their remaining lifetime. Individual longevity is often uncertain; a possible solution is a care fees annuity bought from an insurance company with a capital sum to cover future fees, possibly allowing for annual rises, for as long as needed. Fees should not then wipe out remaining assets if a person survives longer than the norm.

The concept was kick-started by the introduction of the Personal Equity Plan (PEP) in 1987, when Nigel Lawson was Chancellor under Margaret Thatcher. The Tax-exempt Special Savings Account (TESSA) followed in 1991, conceived when John Major was Chancellor, though he had by the birth become PM. With the public becoming more aware of investment issues amidst privatisation and building society flotation fever, and interest rates (and the tax saved) being relatively high, TESSA was a huge success.

Enter the ISA
When John Major handed the keys of Number 10 to Tony Blair and Gordon Brown moved in next-door, the PEP and TESSA came under scrutiny and, inevitably, a change came in 1999. PEPs became stocks & shares Individual Savings Accounts (ISAs) and TESSAs became cash ISAs, with existing accounts converting to Tessa-only ISA (TOISA). It seemed that investors were drowning in a sea of acronyms, with the added complication of Mini and Maxi ISAs. Happily, things are simpler now, with the term ISA covering all variants.

The 2012-13 annual investment limit for an ISA is £11,280, with up to half of this, £5,640, in a cash ISA. The accounts are exempt from income tax and capital gains tax, although the 10% tax on UK company dividends is not recoverable. Although all ISAs operate under the same tax regime, they are far from being identical. Stocks and shares ISAs may contain direct shareholdings or collective investments and the risk characteristics and income generated vary, so professional financial advice is important. Investment may be by lump sum or monthly subscription and that applies also to cash ISAs, which pay different rates according to the choice of provider and account terms.

The ISA has maintained the popularity of previous schemes, so much so that a Junior version (JISA) was launched in November 2011. For those under-18s not entitled to a Child Trust Fund, the JISA allows up to £3,600 per annum to be invested in cash and/or stocks & shares, with tax breaks similar to ISAs. Parents and others can help youngsters gain a useful sum on reaching 18, usually with no access to the JISA funds before then.

IHT is levied at 40% on estates valued above a certain figure, though only on the amount above the threshold – in simplified terms, £325,000 for a single person and £650,000 for married couples and civil partners. This includes property; so, many people whose estates suffer IHT are not immensely wealthy. It is only natural to want your successors to gain maximum benefit from your estate and there are various legitimate ways to plan for and to mitigate the impact of IHT.

Offspring and IHT mitigation
A relatively simple way to reduce the size of your estate, and thus any IHT liability, is by giving assets to younger generations during your lifetime, perhaps when they most need it. There are possible snags to weigh up against the advantages. IHT may still be payable if you die within seven years of making such ‘potentially exempt transfers’ (PETs) in excess of the prescribed limits for outright IHT exemption. Other issues surround whether the recipient might fritter their windfall and whether you should retain your wealth for possible care fees.

If you decided to divest yourself of a very large sum but did not survive for seven years, a resulting IHT liability could have been covered by a ‘gift inter vivos plan’, a decreasing term assurance policy (held in trust) to cover the gradually decreasing potential IHT liability. Sometimes, despite carefully considered giveaways, an IHT bill may be inevitable and it is sensible to plan for this. IHT being payable before probate is granted can be awkward for your heirs if the estate is locked into property and other illiquid assets, so they could need a loan to pay the taxman.

Accessible money to pay IHT can be released from a whole of life policy. A sole or ‘joint life second death’ policy, according to circumstances, placed in trust for the beneficiaries and thus excluding its proceeds from the deceased’s estate, can provide the cash required. The premiums paid on this policy naturally reduce the estate. Cover may depend on health and other things, whilst premiums may sometimes be regarded as PETs or as chargeable lifetime transfers, so do discuss matters with your professional adviser to identify the best course for you.

Inheritance Tax Planning, taxation and trust advice are not regulated by the Financial Conduct Authority.

So, what are the changes? Well, in brief, financial advisers will offer independent advice (from across the whole market) or restricted advice (from a limited range of services and/ or products); a higher standard of qualification is being introduced and commission will be replaced by fees – which will need to be disclosed and agreed upfront, with the client. (This is just an overview – we’ll be delighted to provide more information.)

Finances never stand still
The changes come as a result of the FCA’s aim to improve the professionalism, integrity and credibility of financial advisers. If they just sound like confirmation of what you have already experienced as a client, we would like to think that is because we have always tried to conform to best practice and to constantly improve, providing an ever better service.

However, the new RDR rules are a useful reminder that things never stand still – not just for us but for you, the client. The FCA is right when it says that help and advice is needed now more than ever. Whilst this is perhaps a reference to the times we live in, what better time to take stock than the early weeks of the New Year, when it seems natural to make a new start, to do some financial planning for known events and the unexpected? A regular financial review is one resolution that would benefit most people.

Recent or imminent house purchase, marriage, family additions, inheritance, new job and other events may all necessitate a financial review. Other issues that require long-term planning, such as retirement provision, should also be brought into the review, ideally while you are nearer to the start of your working life than the end. Pension auto-enrolment, now being phased in, may add to the need for a cohesive pension strategy.

As 2013 gets underway, the new 2013-14 Tax Year cannot be far behind – about 13 weeks behind, in fact. This makes the January-March period a time to catch up with things that have tax implications, such as pension contribution levels. There may be scope to mitigate the impact of the new rules on qualification for Child Benefit, effective 7th January, by actions that reduce ‘adjusted net income’ and achieve a lower or zero tax charge on the benefit. It is also important not to overlook the opportunities provided by the 2012-13 ISA and Junior ISA allowances, usable until 5th April. Why not talk to us soon?

We thought we would give you an overview of the main points:

FUEL

• The 3p increase in fuel duty, planned for next January, is cancelled

BENEFITS AND PENSIONS

• From 2014/2015 lifetime allowance to fall from £1.5m to £1.25m.
• From 2014/2015 annual allowance to fall from £50,000 pa to £40,000 pa.
• Legislation will be introduced in Finance Bill 2013 to make these changes and will be published in draft on 11 December 2012. The Government also announced that they will discuss with interested parties whether to offer a personalised protection regime in addition to a fixed protection regime.
• Maximum GAD to rise from 100% to 120%.
• Date awaited – televised statement and web documents silent on this issue as we go to press…
• Basic state pension to rise by 2.5% next year to £110.15 a week.
• Most working-age benefits to rise by 1% for each of next three years.
• Child benefit to rise by 1% for two years from April 2014.
• Local housing allowance rates to rise in line with existing policy next April but increases in the following two years capped at 1%.
• Changes to welfare to save £3.7bn by 2015/16.

TAXES AND ALLOWANCES

• Basic income tax threshold to be raised by £235 more than previously announced next year, to £9,440.
• Threshold for 40% rate of income tax to rise by 1% in 2014 and 2015, from £41,450 to £41,865 and then £42,285.
• Main rate of corporation tax to be cut by extra 1% to 21% from April 2014.
• Inheritance tax threshold to be increased by 1% next year.
• Bank levy rate to be increased to 0.130% next year.
• £5bn over six years expected from treaty with Switzerland to deal with undisclosed bank accounts.
• HM Revenue and Customs budget will not be cut.
• ISA contribution limit to be raised to £11,520 from next April.
• No new tax on property value.
• No net rise in taxes in Autumn Statement.

ECONOMIC GROWTH

• Predicted to be -0.1% in 2012, down from 0.8% predicted in the Budget.
• Forecasts for next few years are: 1.2% in 2013, 2% in 2014, 2.3% 2015, 2.7% in 2016 and 2.8% in 2017.

GOVERNMENT BORROWING/SPENDING

• Point at which debt predicted to begin falling delayed by a year to 2016/17.
• Deficit is forecast to fall this year, as is cash borrowing.
• Deficit to fall from 7.9% to 6.9% of GDP this year, and to continue falling to 1.6% by 2017/18.
• Borrowing forecast to fall from £108bn this year to £31bn in 2017/18.
• £33bn saving to be made on interest debt payment predicted two years ago.
• Deficit fallen by a quarter in last two years.
• Government spending as share of GDP predicted to fall from 48% in 2009/10 to 39.5% in 2017/18.
• Spending review to take place in first half of next year.
• Departments to reduce spending by 1% next year and 2% year after.

JOBS AND TRAINING

• Unemployment expected to peak at 8.3%.
• Employment set to rise in each year of the parliament.

TRANSPORT

• Extra £1bn to roads, including upgrading A1, A30, and M25.
• £1bn loan to extend London’s Northern Line to Battersea.

EDUCATION AND FAMILIES

• £1bn to improve good schools and build 100 new free schools and academies.
• £270m for further education colleges.

INFRASTRUCTURE

• Ultra-fast broadband expansion in 12 cities.
• £600m for scientific research.
• Annual infrastructure investment now £33bn.
• £1bn extra capital for Business Bank.
• Gas Strategy to include consultation on incentives for shale gas.

OVERSEAS AID

• Promise to spend 0.7% on development to be honoured next year, but not exceeded.

Red Earth – Exhibition Flyer (Front)
Red Earth – Exhibition Flyer (Back)

Ron says:

“If you are looking for a unique and original Christmas present, which also supports a great cause, the education of children in rural Africa, then come and have a look.

The pictures you will see at this stirring exhibition are the result of an inspiring project that took place in Masindi, Uganda in August 2012.

All the materials necessary for the creation of these varied and vibrant paintings and drawings were taken to Masindi by Redearth.

Many schoolchildren came, most of whom learnt for the first time how to express themselves through charcoal, paint and pastels.

Any hesitancy at the start, when they were presented with the tools and materials for creating works of art, was soon displaced by exuberant, enthusiastic concentration as they produced these pictures from their lives and imaginations.

The children are pleased and excited to know that ALL the profits from the sale of their works at a gallery in LONDON, no less, will contribute to REDEARTH’S work in Masindi. The money will reach their village schools through the continuing training of their teachers.

This means that their education, and that of the brothers and sisters who will follow them, will continue to develop and improve, enhancing their life chances.

Each picture has the name of the artist, a photograph and a brief biography. Come and enjoy the works of art, the live Ugandan music on the opening night and the atmosphere.

The REDEARTH team look forward to seeing you there and hope you will buy some of these great pictures.”

PLEASE SUPPORT!

Read about it on FT Adviser

Direct Authorisation by the Financial Conduct Authority (FCA)
We are very pleased to announce that we gained Direct Authorisation status from the FCA on 3rd September 2012. This confers a large amount of responsibility on our firm but also gives us complete control over the direction and future of our business and importantly the levels of service we can provide for our clients.

This consequently means that we are no longer part of Blueprint, the financial services network of businesses that we joined back in 2005. As the name suggests, a Directly Authorized firm is monitored and complied directly by the FCA.

Change of Address
Having left our old network, we have had to find a new home. We have therefore recently moved from Moorgate to our new offices at 68 Lombard Street, a two minute walk from Bank tube station – take exit 6 and take 50 paces!

New Numbers
Our phone numbers have also changed – please note the new office phone number 020 7101 2817.

If you are passing the Bank of England, looking for Mervyn, or get lost in the maze that is Bank tube and need a cup of tea, then please feel free to call or drop in!