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Understanding your Capital Gains Tax position if you separate or divorce

Whilst your Capital Gains Tax liability might be relatively simple whilst living with your spouse or partner, there are changes that come into play if you separate or divorce.

The position is firstly defined by the new state of your relationship. If the marriage or civil partnership has not broken down but the two partners do not live in the same house, you are still treated as living together for Capital Gains Tax purposes.

In fact, you and your spouse or civil partner are treated as living together unless:

  • you are separated under a court order, or
  • you are separated by a formal Deed of Separation executed under seal
  • you are separated in such circumstances that the separation is likely to be permanent.

As well as this, if you or your spouse or civil partner were living together at some time in a tax year, you can transfer assets between you at any time in that tax year at no gain or loss, with no requirement that you should be living together at the time of transfer. If a transfer occurs between you and your spouse or civil partner after the end of the tax year in which you stop living together, there are rules to decide the date of disposal and the amount of consideration on disposal. HMRC acknowledges that the rules are complex, so analysing them closely in the company of an adviser may well be appropriate.

An example of the complexity can be found by looking at Private Residence Relief (PRR), which you may be entitled to during this period. PRR applies to any gain arising on the disposal of the only or main residence you had while living together. While you and your spouse or civil partner cannot have more than one main residence between you for the purposes of the relief at any time while you are living together, following separation, the residence which is your only or main residence for the purposes of the relief need not be the same as that which is your spouse’s or civil partner’s only or main residence for such purposes. The actual circumstances determine the PRR outcomes for both persons, within a complex set of rules applied over time by HMRC, who also advise those involved to seek professional advice.


Sources: www.hmrc.gov.uk

 

building your financial future

How do the new pension proposals affect you ?

On 14 January 2013, the Government published a White Paper [‘The single-tier pension: a simple foundation for saving’] outlining proposals to reform the State Pension into a single-tier State Pension. The White Paper also includes proposals for a regular and structured mechanism with which to consider changes to the State Pension age in the future:

 

http://www.dwp.gov.uk/policy/pensions-reform/state-pension/

 

Source:  DWP.GOV.UK

 

Should you require further information please do not hesitate to contact us on 01737 225665 or advice@conceptfp.com

 

building your financial future

Active v’s Passive Fund Management – ‘The Debate’ which is best?

One of the most enduring debates in the world of investment management is that between active and passive management. Which one provides clients with the best outcomes?

 Active management

Active managers build portfolios by choosing to invest only in companies that they believe will outperform their peers, also known as ‘stockpicking’. Active managers use a variety of techniques to decide which companies to invest in. In some years active managers will outperform and in others they will fail to achieve their benchmark.

 Passive management

Passive managers take a more systematic approach. They try and replicate a market or index by buying each stock in proportion to its market representation. There are different approaches to passive management along the theme of market replication. Supporters of passive management believe that markets are efficient and in general terms a Company’s share price reflects its true value, so there is little to gain from active stock picking. Let’s look at the key areas in more detail.

 Cost

Costs are almost always higher with active managed funds as there are additional costs associated with research and analysis. Conversely passive funds have lower costs due to the fact that the investment process is ‘systemised’. Cost is a key factor as an expense ratio of 2-3% on an active fund will have greater impact on the overall return than a passive fund with a lesser charge.

Performance

Here’s the big question, which one produces better return for investors? Unfortunately there is no clear answer to this, otherwise we wouldn’t be having the debate! The benefit of passive management is that the performance risks are more manageable as they will be closely aligned to the sector in which they invest, therefore eliminating a nasty surprise if the investment manager gets it completely wrong.

 By its nature it’s true to say that with passive management you will never significantly outperform your market benchmark. However, it could be argued that you are more likely to achieve your long term objectives with a passive approach as the degree of uncertainty is lessened.

 Risk

There is increased risk with active management as not only is there market or sector risk, but also the risk of the manager under-performing. Passive funds are not without risk. In addition to the inherent market risk there is also an element of manager risk as not all tracking methods are the same. Some will replicate the whole market, others will sample only a proportion of the index. As with active funds, the timing of buying and selling can also affect performance.

 What do the academics think?

There have been numerous studies comparing the two approaches. Academics tend to sit on the side of passive management, often quoting the ‘efficient-market hypothesis’; the basis of which is that generally market prices reflect all market information, therefore it’s impossible to systematically ‘beat the market’.

Summary

The key advantage of active management, the potential to beat the market, is only useful if you can consistently select the winning managers. There is no systematic way of ensuring this is the case as future manager performance cannot be predicted. However, some investors want to take additional risk in exchange for the chance of achieving a higher return.

When a passive fund is used you know in advance that you will be achieving a return that is approximately in line with the sector or market it’s tracking. This approach is one that is favoured by many advisers who are focused on helping clients achieve their investment goals with the minimum amount of risk.

The debate will continue amongst advisers who often have a preference for one or other methodology.  At Concept Financial Planning we do not have a preference for one over the other, what is important is the asset allocation decision, which we believe returns the majority of investment performance in a portfolio.  We use both methodology when selecting how to invest in the asset classes, as we believe a blend can give you the best of both worlds.  If you are looking to invest in UK equities and looking for dividend income can a index tracker fund provide you with this? Similiarly, why pay for active management on a gilt fund, when the cost can normally outweigh the addition return needed.

What is important however, and is crucially more the case with regards to active management on your portfolio, is that your investments are reviewed on a regular basis, this should include your risk profile and time scale for the investment to ensure that the asset allocation remains suitable and aligned to your financial goals.

Vist Concept Financial Planning

For more information on our Investment Management Philosophy and Process

University – Help for Parents

I know it is a common phrase – ‘The bank of mum and dad’, and as parents we always try and do everything we can for our children, but are we really helping them?

According to a recent survey produced by Skandia, the majority of young adults still rely on their parents for financial support.

Because of this attitude, an ever increasing worry and burden is being placed on these parents who ignore their own financial problems in order to help their offspring.

One of the most common ways for parents to help out their children is by raiding their own savings / retirement plans. At least 90% of the 750 couples surveyed were quite willing to sacrifice their own finances in order to meet their offsprings` expectations, making personal sacrifices in order to contribute towards holidays, clothes, house deposits etc. However, these parents using their savings could be making problems for themselves in the future.

Research from The Chartered Institute of Personnel and Development revealed that many older parents nearing retirement could be at risk of redundancy in today’s economic climate. Many who would like to continue working after the age of 65 can legally be forced to retire.
Dr. John Philpott (Chief Economist for the Institute) said ‘there would be hidden redundancies masked as early retirement’. This means that a company could place the financial burden on a pension scheme rather than themselves.

This survey gives an important insight into a group (25-32 yrs) that was previously seen as discerning consumers with high disposable incomes.