Spring 2012

This newsletter is for general information only and is not intended to be advice to any specific person. You arerecommended to seek competent professional advice before taking or refraining from taking any action on thebasis of the contents of this publication. The FSA does not regulate tax advice, so it is outside the investmentprotection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme. The newsletter represents our understanding of law and HM Revenue & Customs practice as at January 2012.

In this issue: The tax year-end approaches • The pensionsrevolution continues • Investing for growth • AutumnStatement surprises • Time to revisit commercial property?©

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The tax year-end approachesWith the prospect of tax cuts increasingly distant, year-end tax planning hasbecome more relevant than ever in cutting your contribution to the Exchequer.

Spring 2012 page 3

Chancellor George Osborne’s past twoBudgets have introduced a wide range of taxchanges, some of which have yet to take fulleffect. These changes mean that the checklistfor year-end tax planning in 2011/12 is notthe same as in previous years.

The list you need to consider before theChancellor rises to speak in March includes:

Pensions provision

The start of the new tax year on 6 April willsee several important revisions to pension taxlaw taking effect, as we explain in ‘Thepensions revolution continues’ on page 4.However, many changes took effect last Apriland some are now part of year-end planning.For example, the reduced £50,000 annualallowance and the new carry forward rulesboth apply in 2011/12 and could impact onyour year-end pension contributions.

Rumours that the Chancellor would endhigher rate (and additional rate) tax relief onpension contributions re-emerged in the runup to the Autumn Statement. Just in case Mr Osborne is unable to resist the £12 billiona year extra income this time around, itwould be a wise precaution to make anyplanned 2011/12 pension contributionsbefore Budget Day (21 March).

ISAs

Your 2011/12 ISA contribution limit is£10,680, rising to £11,280 from 6 April2012. Maximising your ISA investment willusually make sense because:

� Dividends and income from fixed-interestsecurities held within a stocks and sharesISA are free of personal UK tax, althoughyou cannot reclaim dividend tax credits.

� Interest earned on deposits in a cash ISAare also UK tax-free. However, the returnson offer reflect the fact that the base rateshows very few signs of moving above0.5%.

� Gains made within ISAs are free of capitalgains tax (CGT).

� There is nothing to report on your tax return.

Your CGT annual exemption

While 2011 was not a profitable year formany major stock markets, if you have heldshares or share-based investments for severalyears you may well have unrealised gains. Itcould be advisable to realise some of thesegains before 6 April. In 2011/12 you cancrystallise gains of up to £10,600 withoutany liability to CGT. The exemption cannot becarried forward, so you lose it if you do notuse it.

Inheritance tax (IHT)

The £325,000 IHT nil rate band is frozen untilApril 2015, making it all the more importantto use your annual IHT exemptions. The main£3,000 annual exemption can be carriedforward, but only to next tax year (2012/13),and then can only be claimed once the2012/13 exemption has itself been used up.If you and your partner have not made anygifts since 6 April 2010, you could nowjointly give away £12,000 free of IHT.

The value of tax reliefs depends on yourindividual circumstances. Tax laws canchange. The Financial Services Authority doesnot regulate some forms of inheritance taxplanning.

Spring 2012 page 4

The pensions revolution continues The world of pensions continues to change rapidly, with more changes fromApril and further announcements from the Government.

The start of the new tax year on 6 April marks several important changes to pensions.

Contracting out If you are currently contracted out of the state second pension (S2P) via apersonal pension or a money purchase occupational scheme, your contracting out will endautomatically on 5 April 2012. The funds built up in your private pension arrangement willremain, but from 6 April you will start to accrue S2P.

National insurance contributions (NICs) If you are contracted out via your employer’soccupational scheme, then your (and your employer’s) NICs bill is set to rise from April. Forfinal salary schemes, the contracting out NICs rebate falls from 1.6% to 1.4%. For moneypurchase schemes, the rebate disappears completely because contracting out will have ended.

Lifetime allowance The standard lifetime allowance, which normally sets the maximumtax-efficient value of pension benefits, will fall from £1.8 million to £1.5 million. If you haveexisting primary or enhanced protection, the reduction will have little, if any effect. However,if you have no protection, then you may need to consider the option of claiming fixedprotection, which was introduced last year.

Broadly speaking, fixed protection allows you to keep the £1.8 million lifetime allowance, butonly if no further contributions are made to your pension arrangements and you accrue nomore benefits. You must claim fixed protection by 5 April 2012, so if this protection might berelevant to you, please contact us as soon as possible.

Two other aspects of pensions were thesubject of announcements late last year,but their impact will be longer term.

State pension age (SPA) The timetablefor SPA increases has been changed. Themove to 66 has been put back by sixmonths, but the rise to 67 will now beintroduced eight years earlier thanpreviously planned, between April 2026and April 2028.

Auto-enrolment The start date for auto-enrolment into pension arrangements forsmall employers is to be put back by 13 months, to May 2015.

For more information and advice on thesechanges, please contact us.

The value of tax reliefs depends on yourindividual circumstances. Levels, bases andreliefs from taxation are subject to change.

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For example, China remains the strongest‘growth story’ among major economies, withgross domestic product (GDP) growth in2011 estimated by the World Bank at 9.1%.Yet over this period the Chinese stock marketwas down 16%. In contrast, the US, withaverage GDP growth over the same period of1.7%, saw its stock market rise by 8%.

So the reality is that national GDP figures tellyou very little about the opportunities andprospects for business. Given that economicforecasting is notoriously unreliable,investment managers prefer to focus onbusiness conditions in general and thespecific experience of individual companies.

That has led some managers to launchinvestment funds focusing on what they seeas growth areas regardless of the GDPnumbers. Examples include:

� Natural resources: increasing demandfrom emerging markets is likely to meansteady growth in revenues and profits formining and energy companies.

� Infrastructure: the huge need for newfacilities in emerging markets, and renewalof those in the developed world meansproject managers, planners, builders andengineers can all expect increasing orders.

� Agriculture and timber: risingpopulation numbers are driving a need toimprove production and productivity.

� Healthcare: fast-increasing basic needs inemerging markets, plus ageingpopulations in developed nations, meanbig growth in demand for medicines andmedical services.

There’s always value

Meanwhile, another group of investmentmanagers continues to emphasise ‘value’.Rather than high growth, what they look forare companies with strong finances, steadybusinesses and good dividend payments toshareholders. Most such companies are well-established and big – they include oil,pharmaceuticals, supermarkets and utilities.

‘Equity income’ funds often invest primarilyin businesses like these, which may not beentirely recession-proof, but are strongenough to survive and to gain market sharefrom businesses that don’t endure. Ininvestment terms there are always somegood opportunities available, regardless ofthe general economic climate.

Past performance is not a guide to futureperformance. The value of your investmentscan go down as well as up, and you may notget back the original amount invested.

Spring 2012 page 5

Investing for growth

The notion that economic growth is good and lack of growth is bad is one ofthe few things politicians seem to agree on. But as far as investors areconcerned, the emphasis on growth can be misleading.

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Spring 2012 page 6

Autumn Statement surprisesThe Chancellor’s Autumn Statement had a few surprises to set against thegloomy economic forecasts.

The Autumn Statement, together with a raft of draft legislation issued a week later, hasrevealed a good slice of what will be in the spring Budget. There is still likely to be the oddrabbit-out-of-the-hat, which all Chancellors find difficult to resist, but the broad outline isclear.

Income taxThe main personal allowance will rise by £630 to £8,105 in 2012/13. Other allowances, suchas the personal age allowance, will rise by about 5.6%. However, you will not gain the fullbenefit of the increased personal allowance if you are a higher or additional rate taxpayer, asthe basic rate band will shrink by £630 at the same time, leaving the higher rate tax startingpoint unaltered at £42,475. The £100,000 starting point for phasing out the personalallowance and the £150,000 additional (50%) tax threshold are also unchanged.

National insurance contributions (NICs)After the 1% increase in all rates in 2011/12, NICs rates will generally be unchanged in2012/13. The lower thresholds will increase in line with inflation, while the upper thresholdsare frozen. However, the changes to contracting out could mean your NICs bill rises in2012/13 (see ‘The pensions revolution continues’ on page 4).

Capital gains tax (CGT)In a surprise move, the Chancellor announced that he would be freezing next tax year’sannual CGT exemption at £10,600 rather than increasing it in line with the consumer pricesindex, as he had previously announced.

Tax creditsFor 2012/13 the child element of the ChildTax Credit (CTC) and disability elements ofWorking Tax Credit will rise by 5.2%, while allother tax credits will be frozen. However, ifyou currently receive the family element ofCTC, worth a maximum of £545 a year, youmay find that it disappears in the new taxyear.

This stems from a change originallyannounced in June 2010, bringing down theincome threshold at which the credit isphased out from the current £40,000. Morerecently, there have been reports that theGovernment is looking at taking CTC awayfrom higher rate taxpayers.

The value of tax reliefs depends on yourindividual circumstances. Levels, bases andreliefs from taxation are subject to change.The Financial Services Authority does notregulate tax advice.

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Time to revisit commercial property?Commercial property is aninvestment sector that has largelyavoided the recent market volatility.

While the world’s stock markets experiencedregular and dizzying bouts of volatility in2011, UK commercial property returns werevery much steadier. At the time of writing,overall returns for 2011 are estimated to bearound 8% by the Investment PropertyDatabank (IPD), the property performancemeasurement company.

The value of investments and income fromthem can go down as well as up and youmay not get back the original amountinvested. Past performance is not a reliableguide to future performance.

The secret behind last year’s steadyperformance is that over three quarters ofthe return is attributable to rental income.Across the commercial property market as awhole, rental levels have held steady, despitethe difficult economic conditions. The othercomponent of property returns – capitalgrowth – has almost disappeared. Indeed,commercial property values remain wellbelow their peak levels of June 2007, beforethe financial crisis hit.

According to the IPD, UK commercialproperty is attracting interest from a widerange of investors, both based in the UK andfrom overseas. A recent report suggestedthat in the City of London over half of alloffice floor space is now in foreignownership.

Investment in commercial property is verydifferent from residential buy-to-let. As ageneral rule, commercial property tenantstake long-term leases with regular upward-only rent reviews, and are responsible for themaintenance and insurance of the property.

The amount of investment required ismarkedly different. Whereas the averageresidential property is worth around£165,000 according to Nationwide, theaverage value of commercial property in theIPD monthly index is over £9 million.

The high value of investment-gradecommercial property means that if you wantto invest in this sector, the only practicalroute is through some form of collectivefund.

There is now an extensive choice of funds,although some funds with the property labelinvest in property company shares ratherthan directly into bricks and mortar. For moredetails of the underlying strategies of theavailable funds, please contact us.

Spring 2012 page 7

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Spring 2012 page 8

The Courtyard

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Kirk Rice LLP is a limited liability partnership registered in England & Wales (Registered Number: OC354936). A list of members

is open for inspection at its registered office, The Courtyard, High Street, Ascot, Berkshire, SL5 7HP

Kirk Rice LLP is authorised and regulated by the Financial Services Authority to provide financial services, and is registered to

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Tel: +44 (0)203 004 2232

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Inflation rates are set to fall, but thepast damage remains. What ishappening to inflation?

Annual inflation reached 5.6% lastSeptember, based on the retail prices index(RPI). That was its highest level since June1991. Inflation has since started to drift back,with RPI down to 4.8% in December 2011,and the general expectation is that the fall willcontinue well into 2012. The Chancellor’sfinancial watchdog, the Office for BudgetaryResponsibility (OBR), calculates that annualRPI inflation will be 3.3% by the end of 2012and 2.9% in the following year. The Bank ofEngland is similarly optimistic that inflationwill drop.

Three letters sum up one of the main reasonswhy there is a widespread consensus thatinflation will fall: VAT. In January 2011, the

standard rate of VAT increased from 17.5% to20%, but there was no such increase at thestart of this year. Thus 2012 has startedwithout tax-driven price increases, so inflationshould be lower.

Over the last two years (to December 2011),the RPI has risen by just under 10%. In otherwords, £1 in December 2009 has the buyingpower of 91p today.

These price increases mean that you shouldconsider reviewing your financial plans now, if you have not done so in the last 12 months.For example, your life cover and incomeprotection should normally be adjusted in linewith inflation – £10,000 cover in place twoyears ago needs to be £11,000 today, just toretain the same purchasing power. Regularsavings too feel the draft from inflation. Forexample, if you started setting aside £250 amonth at the start of 2007, to maintain thereal value of that investment, you should nowbe saving at the rate of £295 a month.

Inflation will also mean that your retirementplanning could need a reassessment. Theerosion of value caused by recent inflation willstill be there when you retire, unless you makeappropriate adjustments. That could meanhigher contributions, a later retirement dateor a combination of the two.

The value of tax reliefs depends on yourindividual circumstances. Tax and pensionslaws can change.

Getting to grips with inflation

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