BUYING A SECOND HOME?

An influx of second-home buyers in 2021 continues the boom from the previous year. That five-year plan to buy a bolt hole by the sea or in the countryside has come forward considerably for many buyers.

With many people released from the daily commute, thanks to more flexible working, families are looking for the perfect second home for weekends and longer breaks.

The option to rent the property out and make a little extra cash is an attractive and lucrative perk.

Even before the pandemic, UK holiday home owners were able to charge for a week what you might expect to pay for a private villa with a pool in Greece if they had a place in a desirable location such as Devon or Cornwall.

Rental rates have gone through the roof since the pandemic with many families taking staycations. This trend could continue even with the restrictions lifted on much overseas travel now.

One measure of the boom has been an increase in the number of transactions liable for the second home 3% stamp duty surcharge.

It hit a new high of 84,700 in the second quarter of this year, dropping slightly to 70,000 in the third quarter[1].

The demand is set to continue with a recent report[2] suggesting that one in ten UK adults between the ages of 35 and 45 has made plans to buy an investment property in the next 12 months.

The practicalities

While the idea of a gorgeous bolthole (and potential money-maker) is compelling, there are many financial matters to ponder. Firstly, there’s the 3% stamp duty surcharge when buying an additional home, which is charged on top of standard stamp duty tax.

For a £500,000 property, a second homeowner would pay a total of £30,000 with the 3% added.

Unless you’re a cash buyer, there’s also the mortgage to consider. You will need a deposit of at least 15% and if you already have a mortgage on your primary home, you will have to meet affordability requirements to take out a loan on your new purchase.

Once you buy the property, remember that you will be to pay a second set of bills such as council tax, water, insurance and energy bills, not to mention the extra costs to maintain it and redecorate where necessary.

When you have got your head round the finances, you’ll want to find somewhere that will grow in value, be accessible and, last but not least, be the kind of place you and other holidaymakers will enjoy visiting time and again.

Considering being a landlord?

Investing in a buy-to-let property is still a compelling option for some investors. It’s essential to buy in the right area where the yield is right – and where there’s enough demand.

Many landlords suffered during the pandemic as tenants who suffered a loss of income needed payment holidays from rent. Others ending their tenancies to move back in with family, leaving many properties empty.

Now that life is returning to a more normal state, city-centre rents that dropped during the pandemic are rebounding and landlords are feeling more positive about the market.

A survey of 600 landlords[3], revealed that the proportion of landlords feeling optimistic is the highest it has been for five years. 

If you plan to rent the new place out as a buy-to-let property you have to take out a specialist buy-to-let mortgage and your deposit should be at least 25%.

Landlords must also brace themselves for maintenance costs and times when their rental property is empty.

Want to know more?

Having a professional mortgage adviser can help as second home mortgages can be more complicated than getting a standard home loan, depending on how you’re going to use the place. It can also help to have someone to crunch the numbers on expected costs – and returns – and consider your wider financial situation.

Don’t forget that if you decide to sell a second home further down the line, if its value has increased since you bought it you might have to pay capital gains tax.

Your home may be repossessed if you do not keep up repayments on a mortgage. The firm is not responsible for the content of external links.

Source:

[1] https://www.gov.uk/government/statistics/quarterly-stamp-duty-land-tax-sdlt-statistics/quarterly-stamp-duty-land-tax-statistics-commentary

[2] https://www.aviva.co.uk/aviva-edit/in-the-news-articles/how-we-live-2/

[3] https://www.paragonbankinggroup.co.uk/news/news-releases/landlord-confidence-hits-five-year-high

BUDGET 2021 ROUND-UP

Chancellor Rishi Sunak’s Autumn Budget marked the roadmap for rebuilding public finances.

While major tax rises had already been announced earlier this year, the Autumn Budget contained a number of new measures that will affect savings, investments, pensions and financial planning as a whole.

Here are some of the most important things you need to know:

TAXES ON EARNINGS:

Lower National Insurance thresholds[1] included in the Budget would normally mean workers pay less tax.

Yet the Budget also confirmed the increase in National Insurance by 1.25% from April 2022, which means that most taxpayers will be subject to higher NI from next year. The more you earn, the bigger the impact on take home pay.

The NI increase is not the only threat to income. By freezing the income tax thresholds until 2026 – announced in the March 2021 Budget – people on more modest salaries will also be dragged into higher tax brackets and pay higher tax bills.

A major report by the Institute for Fiscal Studies (IFS) [2] said that the combination of inflation and higher taxes would outweigh any wage increases for those on middle incomes. It warned that middle earners would be around £180 worse off next year compared to their present income.

CAPITAL GAINS TAX:

While there was no change for the capital gains tax thresholds in the Budget, the Chancellor announced that there will be an increase in the payment window for capital gains tax purposes in relation to UK property disposals. It has now been extended from 30 to 60 days. 

INHERITANCE TAX:

IHT thresholds were also unchanged in the Budget. The nil-rate band has been frozen at £325,000 since 2009/10, so IHT has been increasing in real terms over time. Had inflationary adjustments not been suspended, the nil-rate band would now be much higher at £417,000. 

SAVINGS AND INVESTMENTS

ISAs:

The annual ISA allowances were unchanged at £20,000 for the 2022/23 tax year and £9,000 for Junior ISAs meaning investors cannot shelter any more savings from tax.

The Budget also confirmed the rise to dividend taxes. Each investor can receive £2,000 in dividends a year without paying tax. Above that basic, higher and additional-rate taxpayers pay 7.5%, 32.5% and 38.1% respectively.

These rates will rise by 1.25 percentage points in April 2022. For basic rate taxpayers that means the rate will be 8.75%, and 33.75% and 39.35% for higher-rate and additional-rate taxpayers respectively.

GREEN SAVINGS BONDS:

The launch of the Green Savings Bonds was highlighted in the Autumn Budget. They were made available to customers via NS&I on 22 October. The NS&I Green Savings Bond is a three-year fixed-term savings product with an interest rate of 0.65%. Customers can invest between £100 and £100,000. Backed by a HM Treasury-backed 100% guarantee, they will be on sale for a minimum of three months.

PENSIONS:

The rate of pensions tax relief is often rumoured to be on the chopping block, but was left alone.

The allowance has been dramatically cut over the last decade and is now frozen at £1,073,100 until 2026. While this may appear high to most savers, it is leading to a growing number of workers risking breaching the limit. The Office for Budget Responsibility expects the CPI inflation rate to rise from 3.1% in September to 4% over the next year, which will further erode the real value of the lifetime allowance.

Rishi Sunak announced that the government will consult on changes to the charge cap – currently at 0.75% – for pension schemes to allow investment in illiquid future growth projects.

SPENDING:

While the cost of living crisis rages on with inflation rising, there was good news in that the planned rise in fuel duty has been cancelled. “After 12 consecutive years of frozen rates, the average car driver will now save a total of £1,900,” Mr Sunak said.

However, wholesale oil prices have been soaring, pushing up the price of a tank of fuel for drivers over the last few months.

The planned rise in alcohol duty has also been cancelled. In the future, the Chancellor will streamline duty rates which are currently different across many beverages.

Under the new regime there will be just six duty rates on alcohol – the stronger the drink, the higher the rate.

Domestic air passenger duty has been reduced for flights between airports in England, Wales, Scotland and Northern Island– the rate will halve to £6.50 from April 2023.

However, long-haul flights over 5,500 miles to destinations including Hong Kong, Singapore and Tokyo there will be a price rise of £7 per person travelling in economy. For destinations between 2,000 and 5,500 miles in economy will change from £84 to £87 – a rise of £3.

What can individuals do?

It’s worth doing everything you can to take control of your finances and save and invest as tax-efficiently as possible. With inflation rising it’s even more important to keep your money working hard.

That could mean taking advantage of tax breaks such as the annual ISA allowance and where possible consider having dividend-paying investments in an ISA where no tax is due, and ensure you think about inheritance tax planning sooner rather than later.

Source:

[1] https://www.gov.uk/government/publications/autumn-budget-2021-overview-of-tax-legislation-and-rates-ootlar/annex-a-rates-and-allowances

[2] https://ifs.org.uk/budget-2021

WHY IT COULD PAY TO TAKE A SIPP

Engaging with your financial needs in retirement is key to ensuring you have enough money for a secure future.

A self-invested personal pension (SIPP) is one way of boosting your pension savings.

Thanks to the valuable tax perks and flexible features it can be a powerful tool for retirement saving and wider financial planning.

A SIPP is not an investment itself. It’s a tax-efficient pension pot inside which investors can place a portfolio of investments.

Here are some of the compelling features of a SIPP that you need to know about:

A SIPP offers tax relief on contributions. All taxpayers get 20% paid by HMRC to the pension and if you pay income tax at a higher or additional rate you can claim relief from HMRC on your self-assessment tax return.

Up to £40,000 a year can be put into a pension. If you go over the limit you won’t get tax relief on further pension contributions.

The money invested in your SIPP grows free of capital gains tax and income tax.

Under current rules, at the age of 55 you can take up to 25% out of your total fund, without paying a single penny in tax. After the tax-free lump sum is taken, the rest of your withdrawals will be taxed as income.

SIPPs offer access to thousands of investment funds and you have complete freedom to choose how and where your SIPP money is invested within the options available.

Your investment choices can be changed at any time, so that your SIPP always reflects your own risk horizon and goals. This is useful because attitude to risk changes throughout life. For example, in the run up to retirement you are likely to want to shift a large portion of your pot into less risky investments.

3. Designed for all ages (up to 75)

While money saved into a SIPP cannot currently be accessed until you reach age 55 (57 from 2028), you can continue paying into an account until age 75. If you stop working you can continue to make contributions into your SIPP – and benefit from tax relief. Even a baby can have a pension. Currently up to £2,880 can be put into a pension (a Junior SIPP) for under 18s each year to which HMRC adds £720, making a total of £3,600.

4. SIPPS accept transfers

You can either start your SIPP from scratch with money that hasn’t been held in a pension before, or you can use it as a new home for other pension schemes you hold elsewhere. SIPPS allow you to transfer in from other schemes – private and workplace – so you can have all your retirement savings in one place. It’s important to check you’re not giving up any valuable guarantees attached to pension schemes by moving the money. It’s also crucial to consider any difference in annual charges before taking any action.

5. Tax savings for self-employed

The self-employed are entitled to all the same tax reliefs on pension contributions as employed people. Without a workplace pension scheme in place, a SIPP can help to build a pension pot for the future and save on annual tax bills.

6. Flexibility at retirement

When you reach the age of 55 you can start drawing money from your SIPP, regardless of whether you’re still working.

SIPPs allow you to convert your pension into an income drawdown account, which means you can take as little or as much as you wish as a one-off sum or regular income. Meanwhile, the rest remains invested.

7. Tax-efficient passing on of wealth

A pension is a very tax-efficient way to pass on your wealth. Your SIPP can be left to any beneficiary (or number of beneficiaries) that you choose, free of inheritance tax. If you die before age 75 there is no income tax to pay either. If you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate.

An adviser can help set up a SIPP with a portfolio of investments that are tailored to your needs and goals in retirement.

The golden rule as with all investment vehicles is – the earlier you start saving, the better.

MARKET VOLATILITY

AND RISK

Investors have much to think about when choosing and understanding investments. Extreme market volatility during the pandemic provided the most recent demonstration of how markets can swing wildly. Understanding volatility is vital to the overall process of choosing the right investments.

So what is it exactly?

Volatility is up-and-down movement of the market. It is a measure of risk but it is not necessarily the same as risk. A share can be high risk but not volatile, for example. Volatility keeps on changing, so there are periods of high and low volatility.

Volatility can be triggered by any number of things. The UK stock market can fluctuate because of problems on home soil as well as global issues. Goings on in the Eurozone, the US and problems as far flung as China all had a turbulent effect on markets. But volatility and short-term losses are inevitable and it’s important to accept they are part and parcel of investing.

It’s not possible to know when a big drop in the markets will hit. But the good news is that periods of losses are often followed by strong rallies, as we’ve seen since the coronavirus vaccines started to be approved and rolled out. 

Investors only worry about volatility when shares are falling. When this happens, remember that any loss or gain is only realised when holdings are sold. Until then, any losses (or gains) are just on paper.

It’s easy to fall into the trap of worrying about short-term movements, but since investments are for the long term, short-term volatility is not necessarily a reason to panic and make drastic changes.

Should you feel nervous, you can review the reasons why you chose your investments and take comfort that in time your savings should recover.

Risk is an important aspect of investing. The aim of an investment is to generate returns that will help to achieve your long-term goals. But this means taking some necessary risks to get there.

Matching your attitude to risk with your investments is crucial to getting the right portfolio for your needs. There’s no one-size fits all advice when it comes to investing, yet spreading risk is often said to be the golden rule of any stock market investment.

Strategies of long-term investing, diversification and regular saving will help smooth out any bumpy rides – in other words, volatile periods.

Diversification across different markets and asset classes will enable your savings to adapt to different markets, and crucially, reduce exposure to one individual area.

By investing regularly – a monthly amount – market dips can actually work to your advantage. When share prices go up, the value of your stocks rise. When they go down your next contribution buys more. This is known as “pound-cost averaging”. Regular investing also removes the need to get the timing right. Plus, buying stocks at a lower price means you get a higher return when the market swings back up.

The relationship between risk and return is an important one. All investments carry some element of risk but the higher the risk, the higher the potential return. But there are no guarantees. If you are considering an investment that offers high returns, ask yourself if you can afford to lose some or all the money you invest.

Your capital is at risk. The value of your Investments can go down as well as up and you may get back less than you invest.

INVESTING FOR GOOD – THE LOW DOWN

Investors are increasingly choosing to put their money into companies that seek to make the world a better place.  

Over half of advised UK adults surveyed now want to move into ESG investing, according to a new study by insurer Prudential^[1]

“ESG investing” is where the focus is on backing companies with strong credentials when it comes to environmental, social and governance (ESG) matters. 

There are businesses all over the world that are dedicated to the environment by developing cleaner energy, sustainable transport as well as reducing plastic waste. 

Under the “social” part of ESG, the focus is on a company’s treatment of staff and suppliers, and to what extent it upholds labour and human rights. 

Governance relates to issues include ensuring fair leadership of the business, matters of executive pay and its stance on shareholder rights. 

In 2020, the amount of money invested in funds which aim to be responsible in these areas trebled year on year from £3.2 billion in 2019 to £10 billion, according to The Investment Association^[2]

The Prudential study would suggest that these figures could grow substantially again this year, with 61% of respondents (who have a financial adviser to handle their investments) saying they care more about the environment and the planet than they did before the pandemic. 

While these numbers are encouraging, 36% admit they actually have no idea what their current investments – including pensions – are invested in.

While having a financial adviser means that investors don’t need to worry too much about understanding the finer intricacies of global stock markets, ESG is becoming a worthy talking point – perhaps the new dinner party topic.

At Tavistock our ACUMEN protection portfolio offers a one-size-fits all ESG policy which looks into seeking maximise risk adjusted returns, whilst prioritising investments that exhibit strong quantitatively verifiable ESG characteristics.

Of course, this is not all about our own moral compasses and desire to help improve our world.

Investing for good is also rewarding from a returns point of view.

The FTSE4Good index of ethical stocks has beaten the FTSE 100 index of leading UK stocks over one, three, five and ten years. Globally, the MSCI World SRI Index for socially responsible funds has beaten the MSCI World Index over three and five years[3].

When it comes to choosing your investments, rather than selecting the individual companies in which to invest, you can use funds that are dedicated to ESG investing.

There are broad funds that look to cover a wide range of issues, and more targeted funds that may look just to seek opportunities within one theme. For example, investing only in companies that are tackling climate change by contributing to the decarbonisation of the world economy.

Ready to explore ESG investing further?

Your adviser can talk you through the options for investing in ESG funds for your ISA or pension. There are plenty to choose from with more and more funds being launched each month.

Together you can find the investments that are seeking to improve areas you feel passionate about.

Source

[1] https://www.mandgplc.com/~/media/Files/M/MandG-Plc/documents/prudential/02-06-2021-Covid-increases-desire-for-sustainable-investing.pdf 

[2] The Investment Association: https://www.theia.org/media/press-releases/ps52bn-inflows-active-funds-december-second-highest-inflows-record

[3] https://www.fefundinfo.com/en-gb/news/esg-investors-setting-the-pace-for-change