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A series of unfortunate events

 A series of unfortunate events

The last few weeks have witnessed the volatility created when the market is spooked by events that are at face value detached from or irrelevant to factors which are conventionally believed to drive market performance. These distant events – geo-political risks – have the ability to undo the comfortable and justified progress made in sound economies. We have seen what can happen when there is no genuine market-related bad news, so what happens if these external tribulations combine with other things that we know can affect the market, and that we know are coming.

The UK has a solid, stable recovering economy. In July this year GDP finally surpassed its pre-crisis levels, albeit a year after Japan, three years after France, Germany and the US, and four after Canada. But the UK recession was the joint second deepest of the G7, as depicted in Figure 1 overleaf. And the recovery looks stronger and more sustainable, even compared to Germany, which is starting to see declines in growth again. And the US, the nation whose economic performance is most likely to influence our own, is also performing extremely well.

But the UK performs less well by some measures of comparison: GDP per capita for example. Because our population has risen faster than other economies, the UK statistics show a slower per capita recovery. That is one of the reasons that people say they are not “feeling” a recovery that is developing soundly if slowly.

But don’t read too much into the time taken to recover. As far back as 2009 the Organisation for Economic Cooperation and Development (OECD) predicted that the depth of the UK recession meant it would take longer than other similar economies to get back on track, at the time criticising the then Labour government for having no coherent plan to address the problem. But UK Plc has recovered in line or ahead of expectations.

But if a small or distant unforeseen event is to mark the apogee of the market, the chances are that it will occur when something else has already dealt the market a blow. That will likely be something closer to home and more connected to the financial markets. Some of these may seem quite contrarian given the undoubted strength of the economy. For example, the ending of quantitative easing – known as QE – in the US. The economy is strong and the bond buying stimulus is no longer needed, yet its removal may lead to market falls. This is in spite of many confident benchmarks in consumer confidence, output and employment, their contributions pushing stockmarkets close to all time highs. But markets in 2014 have been illogical and reactive. If several factors combine, based on the effects they have had in the past, it may cause a decline worthy of being called a correction. Or worse. Here are just a few of the sticks that might prod the bear.

  • October 2014. Ending of US “QE Infinity” through the taper

In December 2013 the Federal Open Markets Committee (FOMC) decided to start reducing its bond and treasuries buying program through a gradual reduction known as the “taper”. As long as nothing interrupts that schedule the asset purchases will have reduced from $85bn per month to zero by October. Everyone knows that it’s going to happen, just like they did with QE1 and QE2 in the past. But knowing didn’t stop market corrections happening on both occasions, to the tune of 10 per cent or so.

A major market decline in the US will influence the UK stockmarket perhaps to a similar extent.

This strategy bought a total of $85bn in US treasury & mortgage bonds each month since September 2012, but has been reduced since December 2013 by $10bn each month towards an eventual end. If that pace continues – $10bn at each FOMC meeting – then it will be finished by October.

The market reacted adversely to the announcement of the tapered reduction, but not to each individual $10bn reduction. Figure 2 opposite shows how on the previous occasions that QE was suspended the US markets fell well into correction territory.

At the end of QE1 the S&P 500 dropped 9 per cent. After QE2 and before QE3 – or QE “infinity” as it was dubbed as there was no planned end – it fell 11.65 per cent.

  • 18 September 2014. The vote on Scottish independence

There are a number of companies that will be directly and negatively affected by a Scottish “yes” vote. Scotland only accounts for about two per cent of the FTSE 350, but that includes some of the companies most vulnerable to change. They include banks RBS, and Lloyds, BG Group, Diageo and BAE Systems. The matter of a Scots currency – so far unresolved and not likely to be pretty – threatens all the banks in the UK. With the BOE removed from its responsibilities the question would be whether a Scottish Central Bank could provide the required funding backstop.

Some companies may benefit, including airlines, as there is a pledge to cut passenger air duty; and some property companies such as Derwent, Greta Portland Estates and Berkeley Group. But TSB floated recently, and chose not to be domiciled in Scotland citing the vote as a reason why.

A yes may also see the Scotland based fund industry under pressure through a resurgence of English loyalty. Uncertainty is the thing that might cause trouble, and the closer a yes gets, the more uncertain it becomes.

  • Emerging economies showing a declining rate of growth

After years of phenomenal growth many are slowing. Logically this is only to be expected, but the UK and US markets may react adversely to lower figures. China will only grow by 7.4 per cent in 2014. “Only”. But that is a reduction against earlier forecasts of 8.2 per cent in a country where a recession has been defined as growth under eight per cent – and not entirely as a joke.

The same applies to India and Brazil. Fellow BRIC Russia has become somewhat of a political outcast and economic output will inevitably suffer.

  • The base rate

In the UK the Monetary Policy Committee meets around the first week of each month, and with interest rate rises the proverbial elephant in the room, the bad news is really only a matter of “when” not “if”. That said, Mr Osborne did originally suggest that rising rates would only be a response to sustainable jobs growth. Then he said it might be a response to signs of sustainable jobs growth. But there are real fears that even the smallest increase in the base rate might tip the economy backwards as consumers cut expenditure to ensure mortgage payments are covered, something that the UK homeowner has been very robust in maintaining throughout the recession. The reduction in rates may have helped to otherwise stave off an increase in levels of mortgage default.

Even though the MPC are independent, it is thought that the chances of an increase beyond the current 0.5 per cent rate before the election are slim, though the most recent MPC minutes show a 2-7 vote that demonstrates that it is getting closer.

  • The general election in May 2015

This could be a UK election without Scotland, but without the Scots seats it may actually be good for the Conservatives. While the coalition has done so much better than expected overall – accepted that we all still feel somewhat poorer – the uncertainty of another term of government by bartered agreement with the LibDems – or worse UKIP – won’t go down well. The worst case may be if Labour can find a way back, when some major market declines would be likely. The best outcome for the markets would be for a government with a solid mandate, and one that will continue to let the public finances recover.

  • Tipping’s Mathematical Ratio

But there is another reason to be worried. In the August issue of The IRS Report Dr Roy Tipping predicted declines for UK indices from March 2015. Or even sooner. Using analysis from his mathematical stock picking program, TMR, he has successfully predicted significant market movements in the past, and so there is reason to heed his words.

The primary UK stockmarket index – the FTSE 100 – has not managed to make new index highs as we have seen in the US, but rather it has plateaued after a very bullish 2013. In spite of being just a fraction of a percentage point below the all time high set back in 1999, resistance has held and the FTSE 100 has not breached 6,900, and has fallen back from 6,850 on seven occasions in the last six months.

The combination of a seemingly impenetrable ceiling, some significant macro economic factors and the warnings of Dr Tipping ringing loud all say “be prepared”.

Roy Tipping accurately predicted the 2008 falls, to the gratitude of many investors and readers of The IRS Report. You can see his predictions at TheIRSReport.co.uk.


Even while the major economies and most of their partners continue to recover from the events of 2008, there is an air of uncertainty present that needs only a trigger to cause investor panic. No-one knows what that event might be, but if it happens during times of known uncertainty then the reaction and its effects may be amplified. We have seen what euro debt contagion fears did, we have seen pull backs because of Syria, Ukraine, Israel and now Iraq.

These events threaten investment values, so make plans to protect your positions by moving to cash, hedge or counter positions.


Is it time to look at gold again

Is it time to look at gold again?

The failure of equity markets worldwide to emulate America’s all time records lead some to conclude that the current equities bull run is running out of steam. And even if it weren’t, the mere talk about slowing down may have just that effect. It is the effect of actions on the market which determines prices, not the market that controls the price.

But other factors also influence the price of gold. Confidence in the centuries old London Spot Fixing price system was dented after Barclays were fined £26m for manipulating the price. The subsequent investigation led to the World Gold Council hosting a discussion on pricing overhaul. Some analysts believe the price may rise because of it.

Gold has always been regarded as a long term store of value – see Figure 1 – and the traditional safe haven as a countercyclical investment to shares. But is gold still the counterbalance asset for when stocks start going down?

When share prices start falling rapidly with no early perceived prospect of recovery, nimble investors dump some or all of their shares in favour of cash, gold and silver. There is no reason to think that won’t happen again next time, but it’s the “when” that is still vague.

While there is so far no real sign of share prices turning, there is a growing realisation that it’s a very long way back to the last significant bottom. Investors are hesitant with new US market highs every week since the spring, and the feeling is building that a correction is due. At the same time the price of gold appears to have bottomed out and turned upwards, in spite of the price fixing scandal.

Many factors drive the gold price

Gold is also the traditional hedge against a falling dollar, and with the exchange rate at over $1.70 to the pound that may also be a reason that gold is on the rise. More than with most other commodities, the dilemma is that it is usually impossible to pinpoint a precise reason for a rise in the value of gold since its price is driven by a combination of fundamental supply and demand plus a huge dollop of unpredictable emotion. It may not be as simple as the possible peaking of the stock markets. Making the wrong move may take away chances of more equity profits.

A gold price rising because of exchange rate hedging may be misinterpreted as a counter rise to a turning stock market. For a few years after the last major bear stockmarket in 2009, the euro crisis and the US government squabbles effectively combined to stop the share markets from overheating, but at the same time the gold price was depressed.

But markets react to what people do, and so an increase in gold interest will result in prices moving up which will in turn generate more interest, in particular from those gold investors who bought in late 2011 as the tide turned.

Here are the facts.

  • There are concerns that stock markets are over valued and overdue a correction.
  • That does not mean that a meaningful correction will actually happen.
  • If the market does correct itself – a five to ten per cent fallback – what happens in the UK is likely to be a reaction to a possible future correction in the US, where the market has been making new highs all year, unlike in London.
  • There are worries that gold could still come down further.
  • As Figure 2 shows, gold also displays a seasonal price increase trend – certain months of the year – every year – when it historically rises more.
  • A more robust and transparent gold pricing regime may bolster confidence and the price.

Some of these points are easier to address than others. Gold may well go up in value, but as a long term holding it is just as likely to come back down. And the FTSE 100 may still go on to new highs; there is unfinished business with the December 1999 high of 6,940. Many investors will use a breach of that 1999 high or new high beyond 7,000 as the measure that its time to get safe.

In the US the NASDAQ and S&P have been making new highs for months. Admittedly the DJIA has dragged its heels, for reasons to do with its construction and weighting that would pass most investors by, finally breaching 17,000 for the first time in early July. This may also signal a turn.

New market highs form resistance

Milestones are an important psychological element that the smart investor uses as a signal to take some profits, while perhaps keeping an eye on what might fuel more upward movement.

Other geopolitical influences have to be considered. The Middle East, Iraq, China and Russia are all simmering pots that may boil over. Anything that suggests a threat to stability or energy supplies will be reflected in the equity markets. But equally good economic news from the new superpowers China and Russia, or upturns in Japan that reflect global recovery, will see share prices moved higher on optimism.

The gold price has turned up from 4 year lows set in December 2013, gaining 15 per cent only to see most of it drift away again. But as you can see from Figure 2, the gold price has a tendency to move up in the second half of the year. Thirty years of cumulative data shows that buying gold or gold derivatives in July offers the best chance of buying an appreciating asset.

On the other hand respected investors have voiced their concerns that gold has further to drop. Quantum fund co-founder Jim Rogers says that every market should correct by 50 per cent every three to four years. Gold has not done that since 1999. In fact it had risen year on year for 12 years before 2013. He thinks gold has to get to $1,000 per ounce before an upturn can be firm. On the other hand, he says, if Iraq War Three starts he’ll be buying at $1,600.

Metals broker Kitco suggest that the gold cycle serves up a low every 8 years, and the last one was November 2008. That suggests that there will be another low point in 2016. It does not mean though that it will be lower than it is today.

In Figure 3 you can see the relationship between the S&P 500 tracking ETF, the SPDR Gold Trust ETF and the Market Vectors Gold Miners ETF with their prices rebased to the end of 2010. In 2011 the gold price peaked shy of $1,900 at the same time the S&P 500 was falling. Since then stocks have climbed away while gold languished. Throughout this period the gold miners index has faltered, mainly through low production and higher costs.

The rebased chart shows that gold is down 30 per cent since its peak while equities are up 70 per cent. Miners are down 60 per cent. The extended plateau for gold and the miners suggests that it should be closely monitored, but also that this latest uptick may be just another false dawn.

And so a sensible strategy might be to take some profits out of equities and buy gold. Of course it does not have to be physical gold, or even gold based. Companies that mine gold may equally mimic the patterns of the gold price.

Physical gold has security implications, but a few Krugerrands under the floorboards might suit those with a “survivalist” nature.

Buying gold or silver based ETFs – or ETF options – enables you to hedge quickly within the same share trading environment: no need to compare gold brokers. There are unit funds and investment trusts available, which might suit individual trading facilities, but ETFs now offer the most diverse choices for hedging with metals.

Conclusion: It makes sense to have a degree of preparedness, or protection. Checking and adjusting the balance of your investments as one market sector rises should be part of the regular management of a portfolio. Asset allocation reflects the market, the optimism and global stability. But the short answer is that it makes sense not to have all your eggs in one basket. Have something that can act as an insurance policy. Conventional wisdom is a range of 5- to 10 per cent in gold.

Until something absolute happens, equities seem most likely to stumble up and gold will stumble along. The balance of probabilities says gold will have another rise again soon. Beware predictions of massive gold values. In 2013 Goldman Sachs predicted $1,600 by 2014, but then revised it down. They were still far too optimistic. Back in 2011 figures as high as $5,000 were being freely bandied about.

When sentiment suggest that equities are overdone, gold will start to rise. And those who believe gold will always be a long term store of value will be cheered by the chart showing its minimal real return against the Swiss franc over the past 34 years.



DRD The new acronym that can legally pick your pocket

DRD The new acronym that can legally pick your pocket

The Chancellor’s last budget contained the announcement that he wanted to give HMRC the power to access the bank accounts of persons who they think owe them money. At first sight a worrying development in itself, though it was presented as being aimed primarily at those who had taken out tax avoidance schemes which had subsequently been overturned.

Schemes like Icebreaker used by Gary Barlow and friends in 2010 to offset taxes on invested money to slash their tax bills.

The consultation document was duly published on May 6th, and provoked widespread fears that the powers as drafted could be much more widely applied. But have the media cooked up a storm over nothing?

Maybe, if HMRC is an ethical and transparent organisation motivated to do things right. But it may not always seem to act that way, because it employs people, and people sometimes make mistakes.

There are countless stories of persons being told they owe tax who subsequently dispute it, and turn out to be right. But there are also those who describe nightmares of months and years defending themselves. And subject to a few stops and checks, HMRC now propose to just take the money they perceive as due.

While acknowledging that we all have the right to minimise the amount of tax we are liable to pay, the majority of taxpayers comply with HMRC rules by submitting returns and making payments on time.

Those that don’t fall primarily into two groups: those who dispute some element of the tax deemed as due, or those who just ignore HMRC in the futile hope that they’ll go away or forget.

And it is the advantage that these non-payers have over the majority of taxpayers that is now the focus for HMRC.

The consultation will culminate with legislation in the Finance Bill 2015. And when this is law HMRC will have the power to withdraw money from your bank, deposit and investment accounts, including ISAs and NISAs.

So if you owe tax, even if you consider it to be in dispute and being discussed, under this proposal HMRC will be able to help themselves to what is owed from your accounts.

The government says that this is not different from – and in many ways is fairer than – existing law in the US and other European countries.

The safeguards

There are safeguards though, they say. If you are an employer, they’ll not be collecting two months backlog of your PAYE without telling you. But they do refer to the 10 per cent of taxpayers who are late with their tax returns and can thereby “create a debt to HMRC”. They estimate that the new procedures could affect around 17,000 taxpayers each year – less than 0.2 per cent of self assessment taxpayers.

But that won’t stop some worrying. The cases where Direct Recovery of Debts or DRD can be used include – in addition to the obvious non-payment of capital gains and inheritance tax – VAT and national insurance contributions, and even the repayment of “overpaid” tax credits and child benefit, itself most likely the result of administrative error in the first place.

And there will have to have been an extensive communication chain that will have been ignored by the debtor prior to HMRC’s use of its new powers. The Revenue say that there will likely be nine attempts to contact the debtor, and a minimum of four attempts.

Those who owe but can’t pay will not be affected, as long as they are attempting to resolve matters through a Time To Pay arrangement and communicate with HMRC about payment.

But if you owe over £1,000 and have not completed a return, or have not acknowledged any reminders and notice of penalties, then you’d likely be a candidate.

There is one firewall: you’d have to have at least £5,000 in your accounts before HMRC can claim anything; they cannot leave you with less than £5,000.

And they would have to obtain 12 months of statements from each institution with which you hold assets to assess your spending patterns and hence your upcoming financial requirements. After satisfying themselves on this, they can instruct your banks to “hold” funds, and notify you of such, and also ask the bank to notify you as well. Being “satisfied” is of course a subjective standard, where the views of the taxman and the taxpayer might well diverge.

Guilty until proven innocent

You’d then have 14 days to either accept the decision, allowing the funds they have frozen to be allocated against tax due, or to provide proof that you’d be financially disadvantaged if they continued.

That may be all well and good for those rogues not paying their taxes when the money is available, because they either don’t want to or have forgotten.

But there will be many more that are marginal cases, legitimate cases going back years or where the safeguards might be mis-interpreted. The cases of overpaid tax credits for example, where money has been paid and presumably spent in good faith, and later found to be due for repayment: but logic suggests that there won’t be many people that have been overpaid – and so owe back – in excess of £1,000 who will also have deposits of more than £5,000 which would allow DRD to be applied. But other cases might find themselves on the HMRC radar.

Land stamp duty that has not been paid would almost certainly be more than £1,000. There have been many cases recently of errors or the deliberate non-payment of LSD, resulting in HMRC pursuing the home owner for the monies. Many will be in the low thousands, but still a surprise for a home owner under the impression that the LSD had been paid. Most notorious was the case of Wolstenholmes, the Manchester based solicitors who used the fact that the homeowner is responsible for LSD to deliberately manipulate LSD returns by using ficticious property values that would either not attract duty or be due just a small amount. Years after the firm was closed down by the ombudsman in 2009 homeowners found themselves being pursued for sums up to £30,000 in duty they thought had been paid, but that had in fact been pocketed by the directors of Wolstenholmes.

Had DRD been available the situation would certainly qualify.

There are ongoing investigations into tax minimisation schemes going back years, including the film industry schemes that were popular around 2000.

Fears are that HMRC will pursue the easiest cases first; it makes sense for them to prove its worth with some early results. Small companies with VAT disputes are already a major reason why some of them go to the wall. But if DRD comes in as proposed, they won’t even be able to dispute any tax claim without fear that the money will be taken regardless; if HMRC anticipate a future legal victory they will proceed, take the money immediately, but will give it back to you with interest if i) you go to court and ii) you win. Records show that HMRC wins about 80 per cent of cases.

The Treasury view is that it’s the same rules for tax dodgers as for normal PAYE taxpayers. After all, you don’t get to pay income tax at your convenience. It’s taken before it gets to you.

But in truth this is a completely different matter. Where there is a dispute the new rules mean you are being penalised in expectation of a future government legal victory: sort of guilty until proved inncocent. The state can now confiscate your money directly from your bank account and wait to see if you can afford to let the courts decide if you have broken the law or not.

You might be vulnerable if:

•           you have used a tax reduction scheme in the past, even if HMRC has been notified as required

•           you have not completed a return on time

•           you owe more than £1,000

•           and you have more than £5,000 in your combined accounts.


This might be the right thing if were targeted at only PROVEN illegitimate avoiders of tax, as the Chancellor implied when he announced it. But retrospective judgements, and the use of a big but rapidly-effective-stick for expediency are breaches of the moral fabric just as much as not paying due taxes.

It is likely that there will be more tabloid panic, closure of joint bank accounts, and hiding of money “just in case”. But if the money is hidden, is there then not a temptation not to disclose the income from it? This proposed legislation may be a classic example of the law of unintended consequences, and could tempt many, many more current taxpayers to consider even elementary avoidance just to try not to be wronged.

Property prices on the move again

Property prices on the move again

Relevant to: investing in uk property; understanding economic trends; Your “ideal” equity portfolio

It has been clear for some years that the UK residential property market has been substantially supported by a huge increase in properties owned by buy-to-let landlords. But now it may be owner occupiers who will increasingly be making the running again, thanks largely to cheap government-driven lending. But does this mark the return to a normal property market, or is this just another bubble which may burst the moment the cheap government money ends, as it surely will?

Recent years have posed a cruel irony for aspiring home owners. Interest rates have been the lowest for a generation, and – according to the Halifax House Price Index – house prices dropped more than 20 per cent from the 2007 peak. The deposit needed to buy a house leaped from zero per cent to up to 30 per cent.

Average house prices are currently the highest they have been for 3 years, since the false dawn of Autumn 2010 when prices recovered briefly, prematurely, from the April 2009 low, before retreating again in just eight months to an average of 20 per cent discount to the 2007 high of £200k, as shown in Figure 1 overleaf.

But in the last 12 months, prices are up five per cent again. What has changed is that the government has been pumping out more cheap money to the banks to lend, both to industry and homeowners, while simultaneously making it easier for some customers to meet the banks’ lending criteria. This leads the IMF and the Institute of Directors to fear that the combination is too close to the US mortgage guarantee schemes that in part triggered the financial collapse of 2008, a view even shared by the coalition Business Secretary, Vince Cable. Even the new Governor of the Bank of England has warned against the dangers of a new bubble, referring ominously to “new powers” the Bank has regained to rein in mortgage lending without necessarily raising interest rates.


There are two schemes in place: Funding for Lending Scheme (FLS) and Help to Buy. Currently only for buyers of newly built properties, Help to Buy (HTB) will be followed next year by a similar scheme for which existing homes will qualify. Neither scheme is expected to last indefinitely – not least because the next general election is less than two years away. But clearly the stimulus to the new build market is a major factor in the current price surge, as witnessed by the share prices of the likes of Bovis, Barratt, Galliford Try, Trafalgar, Taylor Wimpey, and Persimmon – as shown in figure 2. Even so, it seems probable that pent-up demand is outstripping supply, and will continue to do so, especially in major cities, further overheating what is already a simmering pot.

The Royal Institution of Chartered Surveyors, the RICS, expects new house starts to rise by 15 per cent in 2013 from 100,000 last year. But it doesn’t think that it will be nearly enough to meet a growing number looking to take the first steps to purchasing a property of their own. The recent enforced pause in home ownership has effectively created a backlog of aspiring potential buyers who are more able to meet the current mortgage lending criteria and are now ready to set foot on the ladder.

According to the Council of Mortgage Lenders (CML), there are now more first-time buyers than at any time since the spike last March when the stamp duty holiday ended, and also the highest since the end of 2007. And more of them are taking out mortgages with lower deposits, even though the average deposit proportion remains at 20 per cent; the government’s 20 per cent contribution to the 25 per cent requirement for a HTB mortgage may contribute to this.

And an increase in the volume of lower deposit – but more expensive – mortgages suggests that mortgage providers are at last making for innovative use of the government’s other stimulus package, the Funding for Lending Scheme. This is essentially cheap money for lenders to make available to borrowers, and the more they loan the cheaper it is for them.

Rising factors

So there is cheap money for home buyers, plus the Help to Buy scheme whereby the government contributes part of the deposit for first-time buyers (FTBs) – effectively joint ownership. Despite the prolonged squeeze on incomes, some would-be buyers have clearly been able to use their period of forced absence from the market to accumulate at least the 5 per cent deposit required of them.

Another factor is undoubtedly the continuing decline in mortgage rates, and probability that this may yet have some time to run. Five-year deals are now below 3 per cent, spurred by the Funding for Lending Scheme, but also by a confidence that the base rate will remain low for the majority of that time, as implied by the governor of the Bank of England Mark Carney. BoE statistics show that average 5 year fixed rates fell from 5.55 per cent in 2011, to 3.4 per cent in 2013. Real rates across the different mortgage types are down by 1 per cent on average. But while rates have come down, some fees have been increased so as to wipe out much or all of the benefit: some arrangement fees now reach £2,000.

A natural result of the recovery in house prices is that the house price to earnings ratio – one standard benchmark of affordability – has risen for eight months in a row. That means that house prices are moving faster than earnings, making home ownership less affordable now than it has been for the last 3 years. The figure stands around 5.7 in August 2013, well below the 7.3 recorded in 2007. This does not indicate that the rises are necessarily unsustainable, since this measure of affordability does not take into account the other currently favourable factor – declining interest rates.

The RICS reported that opinion amongst surveyors in June 2013 was more confident of an increase in house sales than at any time since 1999, the strongest reading since they started collecting data.

There are fears that the stimulus of Help to Buy and the FLS are going to stimulate the market too fast, and see a return of some of the unsavoury practices that periodically plague house buying, especially in boom times, such as gazumping. Yet on anything other than the shortest of horizons, this must be a time when interest rates can only realistically go up – even if it is not for a while. This could leave FTBs and other house buyers potentially vulnerable to any reversal in prices if the market were to cool suddenly.

Figures from the last census show that home ownership, once the goal of every ambitious youngster, fell amongst 25-34 year-olds to a new low of just 40 per cent in 2011 compared to 58 per cent a decade earlier, and is thought to have dropped even lower over the last 18 months. While reversing this decline may seem admirable, there are real fears that the government’s stimulus to the market may only be storing up problems for later.

The housing think tank Strategic Society Centre has suggested that landlords should not be allowed to buy new builds for let for a period of three years, to balance the market a little more toward the first-time buyer. They claim the lending market is too skewed in their favour in that landlords are likely to have greater capital and income. This may explain why BTL mortgages now account for nearly 13% of all mortgages, against under nine per cent in 2007. Whether that is due to an increase in BTL or the decline of private mortgages is not clear, but anecdotally the former seems more likely.

With a limited supply of new houses, and increasing demand, if that stock is taken up by landlords it can only further the trend for children taking longer to leave home and then to rent rather than buy.

Ironically many BTL landlords are small companies, who are therefore entitled to the loans made available from the FLS to further their business. And for lenders they are an attractive proposition, since lending against the security of a house, with a predictable return in a good market, and an asset that is easily valued and saleable if need be, in turn secures them 10 times the amount they have lent at very attractive rates to loan out again.

Could BTL find it has peaked if FTBs maintain their recent momentum? So long as the government is throwing money at lenders to lend, in many cases the landlord is still the better lending risk; and so long as rents continue to rise, it means that there is less disposable income available for tenants to save up for the deposit, suggesting that the time of the landlord is far from over.


So is there going to be a bubble? The Nationwide, still one of the most respected property institutions, does not think so. They think the price rises are supported by lower income tax, and the modest improvement in earnings and job prospects. Prices are still high compared to incomes, but with interest rates at historic lows, borrowers are not yet overstretched. Prices are rising but not yet running away, and it is the government’s Help to Buy scheme that has made a difference. The RICS suggest demand will remain strong, and that will add upward pressure.

The availability of incentivised loans for landlords will undoubtedly influence how this trend continues by reducing availability from a limited stock of properties. This could underpin a continued increasing house price trend.

Either way a side effect of increasing demand is likely to be the increasing share prices of house builders, materials manufacturers and suppliers.

Does investing cost more than you thought?

Does investing cost more than you thought?

Relevant to: Unit trusts and the risk factor; trading and investing in exchange traded funds; today’s stockmarket; investing and the internet

There are many references throughout SPI to the costs of various investments. Knowing what these are, and being able to reasonably compare similar investments, is critical to making the right decision. In the past the industry’s best cost measure has been the TER or Total Expense Ratio.
But the introduction and growing popularity of Exchange Traded Funds (ETFs), whose costs are much more transparent, has led some to start digging deeper to discover what the real costs of the traditional alternatives would look like if they were disclosed on the same basis. It transpires that the TER is far from total: the headline management fee is just the tip of the iceberg.
Hidden charges are present in almost all investment products, ranging from funds through to the new Defined Contribution Workplace (DCW) pensions, those that companies are currently setting up for their employees following the government’s progressive introduction of compulsory private pensions. Most employees enrolled will rely exclusively on their employers to provide a value for money service, but may only see a document to sign as acknowledgement of enrolment. They have no understanding of what they are buying or if it represents value.
And legislation that is intended to make investing and its costs clear and understandable to consumers may actually be working against them. Take RDR, the Retail Distribution Review, designed to stop “advisors” taking commissions from product providers, and setting new levels of academic qualification for anyone wanting to be called an advisor. RDR has arguably split the market into those that can and will pay, and those that can’t or won’t. And while investors with the knowledge and confidence to make their own investments should be able to do so with greater safety and effectiveness, the majority are likely to be at the mercy of indecipherable charging structures and unscrupulous, or at best opportunist, providers. Gareth Shaw, editor of Which? Money thinks that rather than save investors from mis-selling, it may drive them to mis-buying.
seeking clarity
You might think it would be a simple matter to compare the costs of two trading platforms offering ISA/SIPP accounts, and that at least one of the many “comparison” websites would be able to provide a clear side-by-side guide for two providers. But they don’t, or possibly can’t. Such platforms are often effectively just acting as introducers, and any comparison of their TER would be almost meaningless, since most of the real costs lie in the funds they invest in, or the brokers they use to make their investments. It is complex, but the which.co.uk website makes the best stab at it, though it does require you to read a list of 30 sub notes for clarification.
Shadow Pensions minister Gregg McClymont has suggested that the industry is not moving forward at all, but is rather walking slowly backwards. With one seventh of all public spending going to the retired, the last thing the UK can afford to happen is for private pension investments – intended to keep pensioners out of state care – to pay unnecessarily high charges, estimated by investment advisors SCM Private – run by investment managers Alan and Gina Miller – at as much as £16bn per year.
In an attempt to get this exposed, and to provide a transparent alternative to encourage the investment industry to change its ways, SCM Private have driven the True and Fair Campaign. Putting their clients’ money where they mouth is, they only invest in ETFs, where the standards of transparency set a benchmark for the rest of the industry.
T-F chart

A new pricing formula

They have proposed a code based on a single clear total fee, in pounds and pence, in a single understandable, common, fee format that is disclosed prior to purchase; and 100 per cent transparency of any investments made, with a list of assets published at least quarterly. Industry objections to this predictably fall into three main areas:
• that if investors knew the real costs, they would not invest,
• that it’s too difficult to calculate a single price, and
• that change should be voluntary rather than through legislation.
To put this in perspective, the Treasury itself shows that pensions on average cost 3.2 per cent per year, way over the headline “TER” band of 1-1.5 per cent. Other concerns include increased fees for “active management” of a fund, when only a small percentage is actually managed, the rest being passive through index tracking. Having costs cloaked like this would not be tolerated in any other industry.
If there is to be an – inevitably prolonged – effort to change industry practice, the other side of a pincer movement strategy is to make sure that those taking steps to ensure that they won’t be reliant on a state system are not penalised through their own lack of awareness.
Research shows that 62 per cent of British investors would be more confident, and would invest more, if there was full transparency. 74 per cent want a “one number” price system – through legislation if necessary – and 81 per cent would like a fees breakdown in an understandable format.
The True and Fair Campaign proposal for a schedule of fees – see figure 1 – also has a calculator that enables investors to check any of 7,000 funds listed to see what the real costs are. You can find this very useful tool at TrueAndFairCalculator.com.


British investors have been conned for far too long. Products such as ETFs, and the US investment industry as a whole, show that transparency on cost disclosure and the actual assets is not an impossible pipe dream. But it will take investors asking questions, and perhaps changing their investment strategies, to make platform and product providers and fund managers realise that they mean business.
Those already well into retirement have little hope of redress unless they can claim lack of true cost disclosure constituted mis-selling. But those thinking about it or just into it can probably benefit from rattling some cages. And of course those that have not started planning or saving yet will be the biggest winners – as long as they know enough to ask the right questions of the institutions to which they entrust their retirement funds.



Relevant to: the bulls, the bears, and you; how to play the gilt market; how to understand economic trends; investing in UK property.

At first sight, not much. Although it contained no less than 59 individual policy announcements, only two of them directly concerned individual investors, and neither comes into effect until next April. The full title of the document is the Autumn Economic Statement, but in fact this was almost entirely a political performance, and it is there that the real significance for investors lies.

The two specific investor-related measures coming into effect in April 2014 are:

•           the abolition of stamp duty on shares purchased by Exchange Traded Funds, in an attempt to woo some of them out of Luxembourg and Dublin and back to the City

•           tax relief on “social investment” – investment in equities or bonds linked to charities, community-interest and community-benefit companies. It is assumed the incentives will be similar to those for Enterprise Investment Schemes or Venture Capital Trusts, but may not be finalised until the full Budget.

The first may give a small boost to an already booming industry – but one which some believe, being derivative-based, is already marketing products with higher risks than many investors appreciate.

The government hopes the second may unleash up to £100m a year extra for charities and social enterprises, to give some more tangible muscle to David Cameron’s “Big Society” concept.

But the impact of both will be small against the overall implications of the broader economic framework unveiled in the Statement.

This is that the independent Office for Budget Responsibility thinks the UK economy will grow at a faster rate than its post war average for each of the next 5 years. It is this which enables the OBR to predict that the national debt will start falling as a percentage of GDP while the debt itself will, by definition, continue to increase each year until the annual deficit is finally eradicated, now hopefully by 2018; three years later than the Chancellor forecast when he first came to office.


Investors’ first reaction will be that this should underpin a sustainable bull market. That may indeed be correct but for two factors:

•           the sustainability of a debt-financed recovery; and

•           the impact of firstly the end, and secondly the unwinding of Quantitative Easing.

The current economic recovery appears to be financed entirely by running down savings and running up debt. Back in the 1970s Labour Chancellor Dennis Healey famously remarked he viewed this phenomenon in the same way he would seeing his mother-in-law drive his car over a cliff.

In its way it is good news: a sign that consumers are once more confident of the economic future and job prospects. But although personal debt levels are not yet back to where they were before 2007, it is not long before the Governor of the Bank of England is likely to be showing the same concern about the effect on the overall economy as he did with the government’s Help to Buy scheme on house prices.

Many economists argue that current asset levels – stockmarkets, house prices – represent a classic asset bubble, artificially inflated by the impact of the billions of pounds of money which the Bank of England has pumped into the banks through QE, and which it thinks it is going to get back one day. That this will mean higher interest rates is no secret, but the inevitable accompanying collapse in gilt prices is something about which current buyers seem in total denial.

What all that may mean for the stockmarket is less clear. Conventionally as interest rates rise, shares are seen as less attractive, though interest rates have some way to rise before they even equal the current yields on many good quality shares.

But intuitively if QE has created asset bubbles, then in some ways the bull market which ought to accompany a strongly growing economy may already have happened, to the extent the market might have stayed a good deal lower for a good deal longer if the QE programme had not been started in 2009; or at the very least, will severely limit the scope of the next bull market.

And there are some worrying harbingers – primarily from the other side of the Atlantic, which still often provides financial writing on the wall for the rest of the world. The feeding frenzy for Twitter shares in November on a valuation reminiscent of those at the height of the dotcom boom was a symptom of a booming and largely undiscriminating market for Initial Public Offerings, reflected to a degree in the UK by the massive oversubscription for Royal Mail shares. The danger is that investors become indiscriminate, and companies which would normally find it difficult to raise money are able to attract investors, simply because the average investor has nowhere else to go except bank cash deposits which yield virtually nothing.

But more worrying is evidence from America, where the rules on disclosure are ahead of the UK, that more founder investors in IPOs are selling some of their their shares during the normal 180 day “lock-up” period. This is a restrictive period normally applied to prevent new investors being taken for a ride.

According to Dealogic, no less than 26 US-listed companies have raised over US$7bn from share sales within the normal 6 month period during which founder sales are normally prohibited. Permission for such sales has to be granted by the underwriting banks who do so if they believe such sales will not affect the price short term. They also have an incentive to do so in the form of fresh fees from often substantial shareholdings which need to be privately placed.

Figure 1 shows that this level is now higher than at the height of the dotcom boom, with the exception of the very low volume year in 2008.

Figure 1. The number of US IPO companies where  insiders have made share sales, “busting” the 180 day lock up period has reached 26 so far in 2013.

Figure 1. The number of US IPO companies where
insiders have made share sales, “busting” the 180 day lock up period has reached 26 so far in 2013.

As with the banks underwriting Royal Mail, companies have an incentive to underprice their IPOs so they can convince the underwriters to let them offload more of their shares early. When insiders are looking to dump their shares and cash out, the rest of us should take note: and sooner than most of us did in 2000.


The Autumn Statement was the first real shot of the 2015 election campaign. By including action to reallocate some of the Green costs from energy bills to general taxation, it is clear utility companies are going to remain a political football until the election, and possibly beyond. The same may also apply to rail and bus company shares which are also likely to come under pressure in the continuing “cost of living crisis” debate which Labour has successfully highlighted.

The only comfort is that when in office, political parties of either hue realise very quickly that if they want to mobilise private investment for public enterprises such as fuel generation, investors have to expect some predictable return on their capital, and one which is not subject to periodic political interference.


When not to trust a trust

Care Home Fees and Trusts – When not to trust a trust

Relevant to: Keeping it in the family: inheritance tax and trusts; Life assurance as part of your total plan

When not to trust a trust. For most of us our house represents our main asset, the result of a lifetime of labour and love; and inflation. The prospect of losing the family home for any reason, for instance to pay the inheritance tax bill, has produced many schemes designed to remove the asset from the reach of the taxman, most of them ineffective.

But now there is a new threat. Many of us may need long-term care in our declining years, and care has always been a means tested benefit, but means tested in such a draconian way as to make HMRC’s Inheritance Tax look almost benign.

If you need to go into local authority care, they will assess your entitlement to any financial assistance. Under current rules if you live in England or Northern Ireland and your total assets — including the value of your house — are over £23,250, you do not qualify for the benefit and will have to pay in full for your care. They are not required to pay for all your care until you have less than £14,250. These figures are slightly higher in Wales and Scotland.

Since nowhere in the country can a habitable house be bought for less than this, it is clear the house will have to be sold sooner or later. This has spawned a new industry marketing schemes designed to shelter assets away from the grasp of the local authority.

But just as HMRC have always been able to seize assets “put in the wife’s name” if the purpose of such a transaction has been tax avoidance, so local authorities have the power to take the value of any assets into account which have been transferred elsewhere with the main purpose of avoiding them being assessed for benefit entitlement. It is known as deliberate deprivation.

There are ways of removing your assets from the watchful eyes of the authorities, but they require planning, and in some cases can come back to bite.

Your choice

In the first instance you must consider one choice: if you are resigned to needing to go into a residential care home, will it be local authority care, or would you want it to be private? If private care is your preferred choice, then paying for it from your existing income may be feasible, supplemented either by selling the home and investing the proceeds for income, or renting the house out. An alternative solution might be to release some equity, enabling you to return to the property later or at least maintaining the potential to keep it in the family.

Those planning in advance for the worst case scenario may purchase a care fees annuity, or “immediate” annuity. These assure a continuing amount will be paid however long care is needed, and can be increased by RPI or fixed amounts as needed. But they require a one off purchase, and there are only a couple of providers in the market. Annuity payments are not subject to tax if paid directly to the care provider.

There is then a hybrid situation where you can qualify for local authority funding for care, but actually reside somewhere that suits you better if you can pay the difference. This “top-up” method only works if family foot the bill, since by definition you will not qualify for local authority funding if you have assets above the limit.

As an alternative to requiring you to sell your house immediately, local authorities can instead take a charge on your house to cover the costs of care, an equity release of sorts. They are paid when the estate is sold, including interest. But there are increasing concerns that cash strapped authorities are paying out more for care and deferring payment to a point that they will become overstretched. The increasingly ageing population could soon be making demands that the local authorities just can’t meet.

But in an age of austerity it is natural to want to maximise what you can keep for a rainy day, quite apart from natural resentment by those who have led a thrifty life with the primary goal of passing something on to the next generation, and are now faced with losing some or possibly all of it, while others who have adopted a less conscientious — or less socially moral — lifestyle and spent everything as they go will have their costs covered by the state.

It doesn’t seem fair. But on the other hand, why should low earning tax-payers be contributing to the care costs of someone who actually has the means to pay for it? They may feel they are paying to maintain someone else’s inheritance. Long-term care on the scale now increasingly the norm, at home or residential, was never part of the NHS plans for which we have paid our national insurance contributions, despite the promise of support from “cradle to grave”.


Both political parties have long recognised the problem and established the Dilnot commission to recommend how to resolve it.

The latest proposals are that

• the threshold at which assets will be considered should be raised to £123,000, and

• the total amount that any individual will have to pay will be capped at £75,000.

But as ever the devil is in the detail. The £123,000 turns out to be an upper limit of a sliding scale. The bottom end is likely to be £17,500, so if you had £100,000 in assets then you would still have to pay some £300 per week. And the £75,000 cap applies only to the care element, and not to the residency component of a care home’s charges.

These changes are not scheduled to come into effect before 2017, and are intended to be covered by not increasing the IHT allowance beyond the £325,000 level where it has been for some years. The government hopes that the life assurance industry will rise to the challenge of writing policies to cover the individual’s cash needs, but until the scheme is up and running, anyone owning a home and contemplating residential care will be worried.

These concerns have presented an opportunity for others. Some eager accountants and lawyers claim that transferring the assets into a trust is a strategy which will work to keep them in the family. Some even market their services as “how to avoid care home costs”.

Accountants and lawyers are duty bound to tell you if their schemes are even crossing the intent of the law, but these neatly presented package solutions fail to point out the potential pitfalls.

The problem was revealed as long ago as 2011 by a BBC investigation into a trust package provider which made it quite clear that if a local authority can deny benefit entitlement if it believes that a trust was set up with the intent of depriving assets from assessment, then marketing it as “how to avoid care home costs” almost by definition defeats the purpose of the exercise. The local authority may be able to challenge its validity based solely on the company through which it was set up by or purchased. They can simply disregard the “fiction” of the trust if they deem that you have deliberately undertaken that approach in order to avoid paying for care.

For example, if your move into care is imminent, and you transfer your assets into a trust, you will be deemed to have deliberately hidden them from the assessment, and the authority will include them regardless. They must conclude that the intention to avoid charges must be a significant part of the reason for establishing the trust.

Power to recover

The National and Social Services Social Security Adjustments Act 1983 states that if deprivation occurred in the last 6 months it can recover sums paid out, but authorities have powers beyond that. If they believe that your financial position has been deliberately created to avoid depriving assets from assessment — for example by giving assets away to children — the insolvency laws allow them to look back even further, even beyond the IHT seven year rule.

On the other hand, if as part of prudent planning for your family the assets are in trust, and have been for some time, then they are most likely safe from assessment. History and intent are important. There is case law that supports both sides of the argument. One consideration is that the strategy or action has no IHT benefit, then it could be considered as deliberate deprivation.

And setting up a trust is not cheap. A simple one might cost less than £1,200, though the ones being aggressively marketed to avoid home care fees charge £3,000 or more.

Trusts tend to be seen by HMRC as tax avoidance, and so can have certain immediate tax implications too. Assets such as houses can be transferred in, but shares, including those in ISAs, have to be either sold and repurchased within the trust, or the balance left as cash to be used for other income generation. And if the sum of the asset being put in trust exceeds the IHT limit, currently £325,000, then an immediate tax liability of 20% becomes due. There will be ongoing charges for accountancy and the services of the trustees, and every ten-years an “anniversary” charge is due, a further tax payment up to a maximum of 6% of the value of the trust over the nil rate band. Your trust is subject to income tax too, at different rates for dividends or other income.

“Settling” assets into trust is also subject to the same rules on gifts, in that they are still subject to a tapering rate of inheritance tax if the donor dies within seven years. And any amounts paid out of the trust will also be subject to tax.

But the inclusion of the family home in any assessment of means is not automatic. If for example, your spouse, partner or relative aged over 60 still lives there, then the value cannot be included. Changing the way the assets are owned from joint tenants to tenants in common will also make it impossible for the local authority to claim that your proportion of the value of the home should be taken into consideration: it is as simple as sending a Deed of Severance to the land registry. In addition the property cannot be sold so long as there is another part owner. The proportions of the home owned by each need not be equal. In this way parts of the home could be left to children in trust, or directly and still keeping under the IHT threshold. Changing ownership from joint to common tenancy requires making a will, since “survivorship” — the automatic transfer of jointly owned assets — does not apply with common tenancies.

But trusts can cause some problems. Remember that if a tenancy in common is transferred to a trust, the surviving partner cannot sell or move without getting the permission of the trustees, who may not judge it in the other’s interest. And any capital gain on the house since it was put into the trust will be taxable at the trust’s capital gains tax rate.

In many situations setting up a trust can make sense, and should not be over complicated or expensive. It should however always be done by an expert with knowledge of your individual circumstances.

There is help available from several reliable websites, Saga, and Which? HMRC has explanations of the tax situation but it is complex even for professionals and depends on many variables.


The concerns over protecting family assets are real. And some people are being tempted to undertake increasingly dubious steps to try to ensure that what has been carefully accumulated over a lifetime does get passed on as planned. But your solicitor and/or accountant will be best placed to advise you, and normally for a fee much less than £3,000. A trust may well be the best thing for your circumstances, but such a significant strategy must warrant the use a professional.

For tax and trusts advice contact Jeff Parr at Chesapeake Associates. Email office@chesapeake.co.uk

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