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Sole trader vs limited company?

Archive for the ‘Commentary’ Category

Sole trader vs limited company?

Thursday, December 5th, 2019

When people are setting up a business, one of the first questions they have to grapple with is what legal structure they are going to trade under – sole trader, limited company or partnership.

If you’re one of our clients, you will already have made this decision but we thought it would be useful to give a quick outline of the differences.  

Sole trader

Being a sole trader is the most popular legal structure. Approximately 3.4 million sole proprietorships were created in 2017 and they accounted for 60% of small businesses in the UK. 

On the plus side, there are no set up costs and it’s very simple to get up and running. The only requirement is to inform HMRC by 5th Oct of your business’ second tax year. There is very little paperwork and you don’t have to have any dealings with Companies House. None of your information is held on the public record.    

As a sole trader, however, you are completely responsible for your business and its finances. You need to be aware that if your business goes bust or you have any business debts, your personal finances and assets could be in danger. Legally, your liability is unlimited.

It’s advisable, therefore, to take out small business insurance policies. This way you can avoid getting sued personally should there be any legal disputes. Remember, the buck stops with you! 

You and your business are treated as a single entity, which is also significant for tax purposes. You will have to pay tax on the profits that are above your personal tax allowance (£12,500 for the 2019/20 tax year). This is calculated through the self-assessment system and you will also pay Class 2 and Class 4 NICs.

Being a sole trader is thought to be less tax efficient than being a limited company as there is less opportunity for tax planning via the self-assessment system. 

Limited company

The second most popular legal structure is a limited company of which there were 1.9 million in 2017. There is a certain amount of paperwork required and you need to deal with Companies House but it is relatively straightforward. Note that your company details will be on public record.   

The main advantage of having a limited company is that you have limited personal liability should something go wrong. The business is treated as a separate entity from its owners so your own assets are protected.    

Despite the higher dividend taxes that were introduced in 2016, a limited company is still  considered to be more tax efficient. The company will pay corporation tax and dividend tax and employer’s Class 1 NICs on salaries, while staff pay employees’ Class 1 NICs on salaries. Under the limited company structure, there are more possibilities for tax planning by delaying dividends, for example, until a future tax year to minimise the tax liability. 

One of the disadvantages, though, is that you are obliged to prepare annual accounts which need to be filed with Companies House. You also need to file a full set of corporate tax accounts for HMRC. As a limited company, it’s advisable to use an accountant to make sure the accounts are done thoroughly.

In our article next month, ‘Do you need an accountant?’, we’ll be looking at this in more detail.  In the meantime, if you know anyone who has any questions about the right company structure for them, we’re always happy to have a chat.    

What does Brexit mean for house buyers and sellers?

Wednesday, November 13th, 2019

While you may be heartily fed up of the word, Brexit has unfortunately had a major impact on the UK property market. What has it meant for buyers and sellers? What might the best course of action be now?     

The Rightmove House Price index in October showed that the traditional ‘Autumn bounce’ or increase in activity failed to occur this year. This usually happens in September or October because people are eager to complete their sale before Christmas but this year, many buyers and sellers opted for a ‘do nothing’ approach.

This resulted in 13.5 per cent fewer properties being listed than in the same period the previous year. Average asking prices went up by just 0.6 per cent compared with an average rise of 1.6 per cent in the month of October over the previous ten years.          

Interestingly though, although thousands of potential sellers are holding back, the number of sales agreed has been almost the same when compared with the same period a year ago. It seems that those buyers who do decide to move are committed to making it happen, so more sales are being completed than is the norm.

In order to minimise any further impact Brexit may have on your plans to move house, consider the following points:      

First-time buyers?

Brexit has meant unpredictability, which may have an adverse effect on interest rates. If possible, first time buyers should try and take out a mortgage while interest rates are still low. Fixed term mortgages could be a good option so that repayments are Brexit proof for some time.

New build v.s old home?

The advantage of buying a new build through a government scheme such as Help to Buy is that it helps you get on the property ladder with a small deposit. New builds do come at a property price premium, though, which could land you in negative equity if prices dropped suddenly after Brexit. At the moment, an older home is considered a safer investment.    

Once in your new home, stay put  

Brexit or no Brexit, this is a good strategy. Moving in itself is expensive and house prices are likely to fluctuate so find a house you really like and that you will be happy to stay in for a good number of years.    

Already a homeowner?

Now could be a sensible time to move if you already own your own home, especially if you’re planning to move to London or the South East. Prices there have dropped by as much as five per cent, so provided houses are selling in your own area, it could be an opportunity to buy a property  that you’d previously considered out of your price range. 

Buying at auction

The advantage of this in these current times is that you have the guarantee of a quick purchase without getting embroiled in a long property chain. As long as you can afford the ten per cent deposit as soon as the auction closes, it could be an option worth exploring.          

Thomas Cook and the current state of auditing

Wednesday, November 6th, 2019

When the giant tour operator Thomas Cook collapsed and went into liquidation after 178 years in business, various factors were cited. The firm’s failure was attributed to its unsuccessful merger with My Travel in 2007, its soaring debts and the transformation of the travel industry due to the internet. Uncertainty over Brexit and the fact people stayed at home rather than booked a holiday abroad due to the 2018 heatwave no doubt also played their part. 

Much has been made in the press of the directors’ exceptionally high bonuses. But question marks must also be raised against the performance of the auditors.The travel firm failed despite having being given a clean bill of health by its original auditors, PwC, and again by EY, who replaced them in 2017. These are both major audit firms known as being part of the Big Four. By the time the firm collapsed it had a debt of £1.7bn, so why had an alarm not been raised earlier?

EY said there was ‘significant doubt’ as to whether Thomas Cook could continue as a going concern when the firm posted a first-half loss of £1.5bn in May 2018  and issued a third profit warning. But by that point there was little that could be done.  

So from an auditing point of view what lessons can be learnt?

The Financial Reporting Council (FRC), who is investigating EY’s audit, said it felt that auditors had lost their objectivity and had got too close to the firms they were auditing. Elizabeth Barett, executive counsel and director of enforcement at the FRC, said she felt audit firms were viewing the companies they are auditing as clients and focusing on delivering non-audit services rather than playing the role of independent reviewer. The regulator’s view is that the lines have become blurred which could lead to potential conflicts of interest.

In addition, the FRC criticised auditors for not being strong enough in challenging management and called on firms to adopt a more robust culture.        

The very fact that there had been three finance chiefs at Thomas Cook in two years should have highlighted that all was not well. The firm’s accounting methods had been questioned and when Sten Daugaurd took over as Chief Financial Officer in December 2018, he expressed surprise at the number of items classed as exceptional costs. But again, no action was taken.   

The FRC’s investigation can take up to two years to complete but in the session before MPs, the regulator gave the opinion that the auditors were complicit in the failings and not sufficient scrutiny had been given. 

The FRC itself has also been criticised, however, and questions raised as to why it didn’t see problems a long time ago when Thomas Cook carried out a refinancing in 2013.

With high profile cases such as Carillon and now Thomas Cook, proactive steps are being called for in order to reform the audit sector.

Climate change fears impact on ethical investing

Wednesday, November 6th, 2019

As pressure mounts on governments and financial institutions to do more to combat climate change, the demand for ethical investment opportunities is on the rise. 

Triodos Bank’s annual impact investing survey has found that nearly half (45%) of investors say that they would be keen to move their money to an ethical fund as a result of news surrounding the environment. When asked, investors state that they would put an average of £3,744 into an impact investment fund, marking an increase of £1,000 when compared with 2018. 

53% of respondents believe that responsible investment is one of the best ways to fight climate change and 75% agreed that financial institutions should be more transparent about where their money is invested. 

Gareth Griffiths, head of retail banking at Triodos Bank UK, said: “Many investors are no longer waiting for governments to take the lead in our transition to a fairer, greener society – they are using their own money to back the change they want to see.” 

Ethical investing isn’t a new practice by any stretch. In fact, some ethical funds have been available for the past 30 years, though they still only make up 1.6% of the UK industry total, according to research carried out by Shroders. 

That then poses the question, why haven’t they earned popularity in the past?

The old consensus was that investing ethically meant you were sacrificing performance for morality. A thought which seems to be changing, however, as research conducted by BofA Merrill Lynch found that a strategy of buying stocks that ranked well on ethical, social and governance metrics would have outperformed the S&P 500’s yearly result for the past five years. 

Further to this, a survey conducted by Rathbone Greenbank Investments found that over 80% of the UK’s high net worth individuals are interested in investing ethically. Many want to back the fight against climate change and plastic waste reduction but say that due to a lack of choice they still end up investing in fossil fuels or mining companies.   

The investment industry has recognised the change in attitude, leading to more and more fund management companies including ethical, social and governance factors in their core investment strategies. However, with the movement only just beginning to gain true momentum, it seems that time will tell when it comes to the mass adoption of ethical investment practices. 

If you have any questions about ethical investment and the impact it might have on your portfolio, feel free to get in contact. 

November Market Commentary

Wednesday, November 6th, 2019

The beginning of October brought us the Conservative Party conference and a plethora of promises and fiery speeches. Meanwhile world stock markets were tumbling on fears of a global sell-off and the US/Europe tariff war joining the US/China dispute. By the middle of the month President Trump declared himself ‘optimistic’ about trade talks with China. 

Come the end of October it looked like the World Trade Organisation (WTO) would allow China to impose tariffs on $3.6bn (£2.8bn) of US goods, a move that was confirmed in very early November.

Boris Johnson spent the early part of the month trying to persuade politicians at home and abroad to do – or vote for – a deal that would allow Brexit to happen on October 31st. By the end of the month he was preparing for a General Election – while his opposite number in the White House was facing yet more calls for his impeachment. 

Let’s look at all the events and figures in more detail…

UK

October was another month where the ‘retail gloom’ section has eclipsed all the others. Christmas is creeping up on us and reception desks in offices up and down the land will shortly be groaning under the weight of Amazon deliveries – as shops in our high streets continue to close. 

The month did start with some good news as Hays Travel stepped in to save the 555 Thomas Cook shops threatened with closure following the company’s collapse. But can Hays really save all the shops? There must be many towns where both companies have high street premises. 

Elsewhere it was the usual tale of woe as John Lewis went looking for discounts from its landlords, Bonmarché called in the administrators and Pizza Express said it was in talks to refinance a £1bn debt pile. 

A report in City AM highlighted the sharp fall in stores’ profit margins as operating costs continued to rise. Profit margins are apparently down from 8.8% in 2009/10 to 4.1% in 17/18, with retailers blaming inflexible leasing arrangements, high business rates and a 10% rise in operating costs over the last five years. 

Unsurprisingly, the BBC reported that 85,000 jobs had been lost in retail over the last twelve months, with the number of retail sector jobs falling (on a year-on-year basis) for the fifteenth consecutive quarter. 

November was, of course, scheduled to bring us Sajid Javid’s first Budget. One absolute certainty was that the phrase ‘reform of business rates’ would have featured in that speech, as the Chancellor looked to find ways to revive the national high street. With the General Election now scheduled for December 12th, any Budget is likely to be delayed into the New Year.

What of the rest of the economic news in the UK? 

There was certainly plenty of bad news in October: the Purchasing Managers’ Index in the service sector showed a ‘heightened risk of recession’. UK car sales in September were disappointing: house price growth is at its lowest for six years and UK productivity recorded its worst fall for five years. 

Meanwhile, climate change protesters Extinction Rebellion were targeting both London City Airport and the London Underground. 

Against that, figures released by the Office for National Statistics showed that the UK economy had grown by 0.3% in the three months to August. The ONS did not exactly cover itself in glory later in the month when it reported a £1.5bn ‘error in the public finances.’ Fortunately it was an error in the right direction, with the UK budget deficit being £1-£1.5bn less than the ONS had previously reported. 

By the end of the month the UK was gearing up for a December General Election – but the bad news was back, as consumer confidence dropped to minus 14 from the minus 12 recorded in September – the lowest level since July 2013. 

Perhaps this was reflected in the stock market. The UK’s FTSE 100 index was the only leading market we cover to fall in October. Having started the month at 7,408 it closed down 2% at 7,248. The pound, boosted by hopes of a deal with the European Union, went in exactly the opposite direction, rising by 5% in the month to close October at $1.2944.

Brexit: an end in sight?

For much of October, uncertainty looked set to continue as Boris Johnson tried and failed to get his new Withdrawal Agreement through the Commons. The House even sat on a Saturday – to the dismay of MPs who wanted to watch the Rugby World Cup – but it all proved futile. 

Reluctantly, the PM accepted an extension from the European Union, pushing the date of leaving the EU back for another three months. Now the uncertainty would go on until January of next year…

And then, on Tuesday October 29th Parliament finally voted for a General Election as the Liberal Democrats and SNP sided with the Government to by-pass the Fixed Term Parliament Act. 

The UK will therefore go to the polls on Thursday December 12th in – whatever anyone claims – will be an election about the future of Brexit. The battle lines are clearly drawn, and the Conservatives started the race with a 16 point lead over Labour. But the experts have been quick to point out that this will be an election where tactical voting will have a major part to play. There will certainly be ‘remain alliances’ in some seats: whether the Conservatives will eventually come to an agreement with the Brexit Party to counter that remains to be seen. 

Europe 

The big – and worrying – news in Europe was that the German economy appears to be heading for a recession, if it is not already in one. 

Figures released at the beginning of October showed that German industrial orders fell more than expected in August: this was due to weaker demand and added to signs that a manufacturing slump is pushing Europe’s largest economy towards a recession. 

Thomas Gitzel, economist at VP Bank Group, said that, “The German economy is [already] in the midst of a recession.” With the economy having shrunk by 0.1% in the second quarter, “The German government will come under pressure to give up its strict Budget policy,” added the economist.  

There was more bad news for Europe at the beginning of the month when the WTO gave the US the go-ahead to impose tariffs on $7.5bn (£5.8bn) of goods that it imports from the EU. It is the latest chapter in a 15 year battle between the US and the EU over illegal subsidies for rival planemakers Boeing and Airbus and – as Brussels threatened to retaliate – was largely responsible for the global share sell-off at the beginning of the month. 

Did October bring us the first moves towards a common European budget? European finance ministers have laid the groundwork for a shared financial mechanism, designed to be used ‘in the event of future economic shock’. Eurozone countries will be required to pay capped contributions into the fund and – presumably – be able to draw on the fund if they duly suffer an ‘economic shock.’ Countries who are struggling economically will be able to reduce their contributions by 50% ‘when necessary’. 

The end of October brought the news that Fiat Chrysler are in merger talks with PSA – owners of Peugeot and Vauxhall – to create ‘one of the world’s leading automotive groups, valued at around $50bn (£39bn). 

On the stock markets both the German and French indices enjoyed good months. The German DAX index rose 4% to close at 12,867 while the French stock market was up just 1% to close October at 5,730. 

US 

The US economy added 136,000 jobs in September as hiring continued to slow down: economists had been expecting a figure around 152,000. However, the previous figure of 130,000 reported for August was revised upwards to 168,000 and the two months taken together were enough to push US unemployment down to a rate of 3.5% – the lowest figure for 50 years. 

With Bill Clinton having famously said, “It’s the economy, stupid,” you would think – given those numbers – that Donald Trump would be a certainty to win a second term in the White House. Maybe not: November will see the Democrats continue their bid to have the President impeached, with Elizabeth Warren having emerged as the clear favourite to win that party’s nomination for 2020. 

Away from politics Microsoft was betting on ‘foldable not bendable’ as it unveiled folding devices with dual touch screens which it hailed as the future of mobile computing. There was more good news for Microsoft later in the month as it beat off competition from Amazon to win a $10bn (£7.7bn) contract from the Pentagon. The contract is for the Joint Enterprise Defence Infrastructure (‘Jedi’, obviously) and is aimed at making the US defence department more ‘technologically agile.’ 

Two companies, meanwhile, were having rather less successful months. First up was Facebook – where a host of big names were queuing up to disassociate themselves from the Libra cryptocurrency the company hopes to launch. Meanwhile Apple received any amount of flak for withdrawing an app – apparently under pressure from the Chinese government – which allowed protesters in Hong Kong to track the whereabouts of the police. To compound the misery, figures released at the end of the month showed iPhone sales slowing down. 

Perhaps Apple will be helped by the Federal Reserve’s decision to cut US interest rates for the third time in four months. As US economic growth for the third quarter slowed to 1.9%, the Fed cut rates to a range of 1.5% to 1.75%.

The Dow Jones index was up in October, but only by 129 points to 27,046 – leaving it unchanged in percentage terms. 

Far East 

October got off to a bad start for Japanese shoppers as the Government – pushing worries about a sales slowdown to one side – increased its sales tax for the first time in 5 years. The rate rose from 8% to 10%. 

But the country soon had even bigger worries, as it braced itself for Typhoon Hagibis, ‘the biggest storm for decades.’ Winds reached 140mph with some areas suffering from floods and landslides. 

China now has more ‘unicorns’ – tech start-ups valued at more than $1bn (£770m) – than the United States, but the figures for the third quarter showed the economy growing at its slowest rate since 1992. Admittedly that ‘slow’ rate was 6% – due to the continuing trade war with the US and falling domestic demand – but it was still below the government’s target of 6.1%. 

As anyone who has watched a news bulletin will know, the pro-democracy protests continued in Hong Kong and the economic consequences of the unrest were finally felt in October. With shops closed, public transport paralysed and tourists scared away, Hong Kong slid into recession in the third quarter, with the economy shrinking by 3.2% in the three months to September. That was much worse than the 0.5% contraction in the second quarter – and was well beyond economists’ worst fears. 

In common with all the major stock markets, those in the Far East fell at the beginning of the month in line with the global sell-off, but they had all – even Hong Kong – recovered by the end of October. Despite the typhoon, Japan led the way, rising 5% to 22,927 and Hong Kong’s Hang Seng Index shrugged off the news about recession to rise 3% to 26,907. The Chinese and South Korean markets were both up by 1%, closing October at 2,929 and 2,083 respectively. 

Emerging Markets

We have written previously about the economic problems in Argentina, a country that held an election in October. The winner was the centre-left candidate Alberto Fernandez in a vote inevitably dominated by economic concerns, with the recent – and continuing – crisis leaving a third of Argentina’s population living in poverty. 

It was a quiet, but profitable, month for Brazil, Russia and India as they all moved in the right direction in October. The Brazilian stock market rose another 2% to end the month at 107,220. The Russian market was up by 5% to 2,894 and the Indian market broke through the 40,000 barrier, ending October up 4% at 40,129. 

And finally…

With all this uncertainty around the world you’d be forgiven for harking back to ‘the good old days’. Shepherds in Spain did this by allowing their flocks of sheep – in their thousands – to follow ancient migration routes from the north of the country to the south for some winter grazing. What’s noteworthy about this annual event is that one of these ancient routes has, since the Middle Ages, been replaced with a large portion of the city centre of Madrid. Dodging sheep is certainly a change from their more popular running from bulls!

While we’re on animal news, rats hit the headlines when psychology professor Kelly Lambert taught them to drive. Strangely enough it was not the fact they were driving that shone the spotlight on the cruising critters. Instead, research found that driving reduced their stress levels… though they were not expected to sit a driving test.

And on that note, we wish you a great month.

How to retain your lifestyle in retirement

Wednesday, October 30th, 2019

Do you feel like you just go to work day in, day out, with the weeks quickly turning to months and the months to years?    

If that’s the case, you may be going through life with a vague notion that your pension contributions will be enough to give you a comfortable retirement without having done any precise calculations of late.      

Unfortunately, this means you could be on track for a significant shortfall. 

The pension and investment provider, Aegon, warns that members of Defined Contribution (DC) schemes will find that their retirement income will fall short of their expectations if they simply rely on the minimum automatic enrolment contributions and the state pension (currently £8,767). 

According to the insurer’s findings, most DC savers will need to increase their contributions to ensure they enjoy a similar lifestyle in retirement to their current one. It’s, therefore, worth taking stock as early as possible to find out how much more money you need to save.     

The figures Aegon used came from the government’s 2017 auto-enrolment review and highlighted broad target replacement rates (the percentage of an employee’s pre-retirement monthly income that they receive each month after retiring).          

Someone earning an average salary of £27,000 would need a 67 per cent replacement rate to maintain their lifestyle from pension savings of £303,900. They would require an income of approx £18,000 per annum in today’s money to continue to live in the way they were accustomed.    

On top of the state pension of £168.60 a week, a 22-year old earning £27,000 would need to contribute an additional 4 per cent to the current 8 per cent minimum combined contribution to reach their required monthly income. Failure to do so could result in a shortfall of £106,500. The extra contribution required would increase with age to:  

  • 13 per cent more for a 35-year old 
  • 29 per cent more for a 45-year old 

These figures are based on individuals just being in auto-enrolment schemes and having no existing pension pot. The additional percentages may sound steep but, with tax relief from your own employee contributions, it could cost as little as 1.6 per cent from your take home pay to reach the 4 per cent specified.

The key message is to take stock now. Think realistically about how much you will need to get close to maintaining your lifestyle once you retire. If a shortfall looks likely, explore the option of  paying more than the automatic minimum as early as possible. The longer you wait, the harder it will be to catch up.

Why the humble 50p could be worth investigating

Thursday, October 17th, 2019

The 50p has been in circulation for over fifty years. It was the world’s first seven-sided coin and was introduced to replace the ten shilling note. The humble 50p was no stranger to controversy upon its entry into the pockets of the population, with one headline, back in the 60s, referring to it as ‘a monstrous piece of metal’. 

Olympic sports, Beatrix Potter characters and even Paddington Bear have graced the tails side of the coin, leading to a whole host of different coins for collectors to get excited about. As with many collectible items, the rarer the item, the more value it holds. This then begs the question, which coins are the most valuable? 

Kew Gardens 2009

The rarity of the original 2009 coin has only increased since the coin’s re-release this year as part of the Royal Mint’s celebration of 50 years of the 50p. Many collectors have sought to get their hands on this rare find as they can now fetch around £100 when sold to the right buyer. A mere 210,000 of these coins were produced in 2009 to mark the botanical garden’s 250th anniversary. Just be sure to check the date if you happen upon one. 

Sports coins

There are many different sports-themed coins out there, with a large number produced for the 2012 Olympic Games in London. The rarest and most sought after of all the sports coins depicts an explanation of the offside rule. Other sports coins have been valued by the Scarcity Index as follows:

  • Triathlon – around £10
  • Wrestling – £7
  • Judo – £7
  • Tennis – £4
  • Goalball – £3

Character coins

The Royal Mint released another large collection of commemorative coins on what would have been author Beatrix Potter’s 150th birthday. The title of the rarest in the collection belongs to the Jemima Puddle Duck coin, which can fetch around £15 online. 

The other coins, however, hold little resale value, as there are a large amount of them in circulation. The next rarest in the collection is based on the character Squirrel Nutkin, which can sell for between £1 and £3, depending on the buyer. 

The rarest of them all

Although the Kew Gardens 2009 50p is considered one of the most sought after coins, it is by no means the rarest. While political relationships with Europe are currently frosty, back in 1992, a new 50p was released celebrating Britain’s entry into the Single European Market – which would later become the European Union. 109,000 of these coins were released into circulation before the decision was made to replace the larger 50 pence piece with the smaller, lighter design we know and love today.  

And there you have it… 

Of course, as with many collections, the value of a particular item is based purely on the value attributed to the item by the buyer. For some, the sentimental worth of a particular collectible may vastly outweigh the numerical value attached to it. But still, it may be worth checking behind the sofa or in a few lesser worn jackets, as you never know what hidden treasures you may find. 

Financial lessons for parents of students

Thursday, October 17th, 2019

If you’ve got a son or daughter at college or university, you could have some stark financial lessons ahead. Getting the grades may have dominated the household up to now but budgeting for their life as a student can require just as much focus.      

Tuition fees and student loans are usually top of the agenda. Most universities charge £9,250 for tuition fees but the financial help available to students for their living costs will differ. Maintenance loans are calculated according to where the student is going to study, where they plan to live and how much their parents earn.

As an example, the maximum maintenance loan is £11,672 if the student is an undergraduate,  studying in London and not living at home, but this would only apply if the gross household income was below £25,000 (after pension contributions). If the household income is greater than £67,000, the maximum a student can borrow for their living costs is £5,812. You would be expected to provide a parental contribution of £6,000 to make up the shortfall.              

A recent survey revealed that parents of students could be found to be contributing an average of £360 a month. Half of them said they had not anticipated that they would have to give as much financial help. Luxury items such as new cars and exotic holidays were sacrificed while six per cent of respondents said they had taken a second job.

Despite this, students faced an average monthly shortfall of £267, according to the 2019  National Student Money Survey. Although some had taken part time jobs, 49 per cent relied on  overdrafts and 14 per cent on credit cards.

Not surprisingly, the main expense is accommodation.This has soared in recent years due to the increasing amount of university accommodation being provided by commercial operators, which costs significantly more than traditional halls of residence. Students can find themselves paying up to £9,000 a year on rent in London and £6,366 elsewhere.

Students also get tied into lengthy commercial tenancies of up to 46 weeks. Some landlords may even charge for 51 weeks. To make things even more difficult, the rent may be due before the maintenance loan arrives.         

Despite the high costs, demand is high so students may be expected to start a tenancy in June for the forthcoming academic year. That can mean deposits of three months’ rent need to be paid in advance before the Easter term.

Parents are often called in to meet these costs and act as a rental guarantor. One advantage is that large providers like the Unite Group will allow you to pay by credit card so you can stack up lots of loyalty points. 

It’s an exciting new chapter of life and with a bit of careful ongoing planning and budgeting, you can make sure you minimise any surprises. 

Own a second property? Look out for Capital Gains Tax changes.

Wednesday, September 25th, 2019

There have been several changes relating to Capital Gains Tax (CGT) over the past few years. The coming years are set to bring more. Here’s our summary of some of the more important changes coming that might be coming into effect from April 2020. 

If you are thinking about selling a residential property in the next year or two, you need to know about proposed changes to the capital gains tax rules for disposals from April 6th 2020. 

If you only own one property and have always lived there, you should not be affected. However, if you own more than one property or you moved out of your only property for a period of time, you might face a capital gains tax bill. 

The two main changes you should be aware of are: 

Final period exemption 

The last period of ownership counting towards private residence relief will be reduced from 18 months to just nine. Currently, the final period exemption allows individuals a period of grace to sell their home after they have moved out. However, the government feels that individuals with multiple residences have been taking advantage, hence the reduction.   

Lettings relief

Lettings relief is set to be removed, unless you live in the property with the tenant. For UK property, HMRC must be notified and tax paid 30 days after completion rather than the January following the end of the tax year in which the disposal took place. Failure to pay on time will result in HMRC imposing interest and potential penalties. 

With no transitional measures in place, this means that higher-rate taxpayers previously expecting to benefit from the maximum potential relief of £40,000 could be lumped with £11,200 extra tax overnight. 

Here’s an example of how the new taxes could influence a sale:

Steve, a higher rate taxpayer, bought a flat in April 2009 for £100,000. He lived there for 6 years until April 2015 before moving out to live with his partner. He let the flat until 2020 when he sold it for £300,000. The sale was completed on 4th June 2020. 

If the contracts were to be exchanged before the April 2020 changes, a CGT of £6,618 would be due. However, after the deadline a CGT of £21,636 would be due, payable seven months earlier – this is due to there being a lower period of private residence relief and a lack of lettings relief. 

The next steps

The two above changes are set to be enacted as part of the 2020 Finance Act and at the moment are not definite. The consultation to these steps closed on 5th September 2019. Assuming that draft provisions reach the Finance Bill 2019-20, we will have to see if any changes are made to either after it is debated in Parliament. 

Marshmallows and financial planning

Wednesday, September 11th, 2019

The Stanford marshmallow experiment is one of the most famous pieces of social science research out there. It has arguably influenced the way that many people live their lives, in addition to providing plenty of fun and interest for those with young children who are in the ‘I’ll try this at home’ camp.

So what is the marshmallow test? 

A marshmallow is placed in front of a child, they are told that they can have a second one if they can go 15 minutes without eating the first one – then they are left alone with the marshmallow.

As you can imagine, many children ate the marshmallow as soon as the door closed, others fidgeted and wiggled as they tried to restrain themselves, eventually giving in. A handful of children managed to wait the entire time. 

Following the experiment, the children were monitored as they grew up and it was found that those who waited for the second marshmallow performed better in exams, had a lower likelihood of obesity, lower levels of substance abuse and their parents reported that they had more impressive social skills. 

In other words, it could be said that the ability to delay gratification is a trait that leads to valuable rewards in the future. 

So how does this relate to financial planning?

The results from the experiment can easily be applied to the way you save and invest money. Simply put, if you save rather than spend now, you’ll gain greater rewards in the future. 

How do you delay gratification?

Cutting out frivolous and impulsive purchases are a good start. Think to yourself: ‘do I really need this?’ Do you have to buy a coffee from the coffee shop near work? Do you have to eat out twice a week? Small acts of restraint can lead to a big pay off in the future. 

When it comes to building a financial plan, it’s important to identify the levels of savings required for achieving goals in the future. Are you aiming for an early retirement or buying a holiday home? Setting out these goals early and developing a plan will help you to streamline your saving strategies so that you remain on track. Just remember, one marshmallow now or many marshmallows later.   

Whatever you want to purchase: a boat, a house or a car, delayed gratification is an extremely valuable skill to learn when it comes to achieving your financial milestones. The more you see your savings grow, the more motivated you will be to keep going. It’s good to see your hard work pay off and over the span of a few years, you could see dramatic increases in your wealth and financial security.