interest-rates

It’s been a week of ups and downs for the British economy.The inflation rate zooming up to 2.9% on Tuesday was a nasty shock. Unemployment falling to 7.8% from 7.9% yesterday was a pleasant surprise (though as Merryn Somerset Webb points out on our blogs page: What’s good about the employment data?, you shouldn’t take this at face value).

Taken together, these two data points have got many people believing that Britain’s now out of recession.

We’re not so sure. But whether or not the UK economy is – sort of – getting back on track, another risk is growing. Interest – and loan – rates could start rising again sooner than expected.

So what does that mean for you?

Everyone knew that the annual rate of growth in the UK consumer price index (CPI) would rise above the Bank of England’s 2% ‘target’. Bank boss Mervyn King has been warning about it for ages. And the experts were, on average, going for annual inflation of around 2.6%.

But 2.9% was very much top of the range. If the headline CPI goes over 3%, Mr King has to write to the Chancellor to explain why. And there’s a very good chance some Bank stationery will soon be pressed into service. Just this week, the governor said inflation “would be likely to rise over 3% for a while”.

However, there’s no need to worry. Mr King also reckons this should be temporary. Inflation “should return to target in the medium term”. That’s when the nasty effects of energy price hikes and VAT returning to 17.5% are supposed to drop out of the calculations.

So that’s all right then.

Or maybe it’s not – on several counts.

The Bank’s forecasting track record is not good
First, the Bank’s forecasting track record isn’t great. As Edmund Conway points out in The Telegraph, it’s generally behind the curve. “Even when you strip away those volatile bits and pieces and look at core inflation, prices are rising faster than anyone expected. According to the Bank’s forecasts in early-2009, core inflation ought by now to have dropped beneath 1%. It’s now up to 2.8%”.

Second, a lot of the inflation damage has been caused by the weak pound. Sterling has undergone its biggest depreciation since Britain left the gold standard in the 1930s. That may have lessened the damage done by the global recession as UK goods have become cheaper to buyers outside the country. But the other major effect is to inflate the price of imported goods.

The fallout takes time to filter through, but now it’s working its way into shop prices. Sure, the pound is recovering against the euro right now. But that’s mainly because the currency markets are getting spooked about eurozone problems, such as a possible debt default by Greece. It’s not because Britain has become a great place to invest once more.

Also, if we’re right that the US dollar is about to rally: (Two British stocks to buy as the dollar rebounds), the pound is likely to fall against it. So the cost of imported raw materials priced in dollars, such as oil, could keep rising too.

And don’t forget that the Bank has printed almost £200bn of extra pounds over the last year in its ‘quantitative easing’ programme. That’s an awful lot of additional sterling supply. It could eventually depress the value of our currency once more.

Third, the country’s dole queues have shrunk. Not a lot, but job losses were expected to continue for many months after the recession ended. If unemployment has already peaked, the economy might be turning up again. And fewer people out of work would mean more disposable income becoming available to pay higher prices. Also, some reckon Britain isn’t merely out of recession. Goldman Sachs sees the UK growing faster than both the US and Europe next year.

ukproperty

Throughout the last two years in 2008 and 2009, there has been a decline in property prices, exacerbated by a difficult economic climate in the UK, the rest of Europe and the USA. Confidence has fallen over the last 18 months or so. However, property prices in 2009 increased by about 6%. For prices during 2010 opinion is split as to whether the property market will remain buoyant or decline.

Property in the South East of England

Some areas of the UK are expected to do better than others in terms of property prices. The London property market and also in the South East is typically strong in terms of maintaining property price growth, and it’s predicted during 2010 that this will remain the same. London property is always in high demand and the relative shortage of homes available at market has pushed prices up from 2008.

Cricklewood and Brent Cross Property

Other areas in London are also well worth considering for property investors. In North West London, property in Cricklewood, for example, are well worth a look, as is property in Brent Cross, as these parts of London are going to be regenerated and have been allocated multi-billion pound regeneration funding. Tower Hamlets property is also worth looking at, as it is in line for regeneration after the 2012 Olympics, with the opportunity of thousands of new homes and a new school.

Home Counties Property

Property in the Home Counties has remained resilient and prices here increasing slightly in the last year, largely because of the high demand and low availability of good properties on the market, particularly Home Counties property at the luxury end. During 2010, property prices should remain stable as investors and buyers look around for properties within easy commutable reach of London.

Property in Birkenhead

Moving North, property in Birkenhead in The Wirral is also worth considering for investment, as there is a major regeneration programme being implemented at a cost of billions of pounds, with new homes, entertainment and leisure venues and a new hotel being built in the area.

Property in Yorkshire

Property in Yorkshire is also worth considering for investment and property capital growth, particularly in and around Yorkshire market town hotspots such as Skipton, Ripon and Wetherby. Typically in market towns, there is a large demand for property because of the picturesque surrounding of these towns, and their distance to Leeds is also favourable with commuters who work there. For these reasons, property here is very desirable, combined with low availability, maintaining a higher property price level in these areas.

Telford Property

Property in Telford is worth considering as Telford is undergoing a large investment and redevelopment programme, with new homes being built that will improve the area. A large international conference facility centre, similar to the ICC at Birmingham, will also create jobs and help the Telford economy. For investors, Telford property is good option, as there will also be demand for accommodation that can be rented on short-term lets, particularly with business renters and organisations requiring properties for their employees.

East Glasgow Property

In Scotland, property prices have seen a decline, particularly in East Glasgow; property here has been negatively affected by there being too many homes available as well as the recession. However, there is some hope on the horizon with a $200 million investment planned for the area to start this year and the generation of a brand new residential area in what used to be wasteland.

Property in Bournemouth

Another area to consider for investors looking for buy to let properties is Bournemouth. Property here keeps not only a high rental yield, but also one of the highest in the UK. This is particularly so at the lower end of the market, so this may be a profitable investment over the long term.

OUKDN-UK-BANKS

The fall from grace has been quite dramatic, the share prices, on average, have dropped by fifty percent in the last years, is it therefore time to invest in the UK banking sector?

I have watched in amazement over recent weeks the massive drop in share prices of some of the banking shares in England. I have been following, as an example, the Barclays share price. I was thinking of buying some of the shares if they were to fall as low as £4 a share. They are now only a shade higher than £3. It seems as if the shares of Barclays have dropped by 3% each day for the last ten trading sessions. I have now decided to take the plunge if and when the shares fall to £2.60 a share.

Another company that is of interest to me is Lloyds TSB Group. These shares have not performed much better than Barclays and I also have decided to purchase them if they fall as low as £2.60 a share.

These trades are to be invested over the longer term. I believe there is likely to be quite a large amount of volatility for some time to come, both of the above companies share price may well drop even further than the £2.60; that is the chance you take. Surely however the share prices of both firms will be higher than £2.60 in ten years time.

These are just my thoughts and should not be seen as advice; I am not a financial adviser and am therefore not eligible to give advice.

Other banking shares that have also had a tough time in recent months include HBOS and Bank of Scotland and Alliance & Leicester. I would personally love to invest in all of these companies, if only I had the money.

As you can no doubt tell, I personally feel that the time is nearly right to start investing in some of the UK banking shares; I am certainly going to be.

tax-image

Trying to invest tax efficiently can be frustrating when the playing field keeps changing. With taper relief, it used to be really efficient to have a large AIM portfolio – now it isn’t. You used to get capital gains tax rollover through VCTs – now you don’t. However, there are still plenty of ways to invest in a tax-efficient way.

The most obvious for any stock market investor is of course the ISA. You can put £7,200 this year, unless you’re over 50, in which case you can invest £10,200 – next year, that goes up to £10,200 for everyone. Over time, you can build a fairly significant ISA portfolio.

An ISA will give you several advantages. No CGT. No income tax on dividends (though you still pay 20% through the tax credit which can’t be reclaimed). And no need to fill in anything about it on your tax form. While the income tax break isn’t significant unless you’re paying higher rate tax, the CGT tax break can be very useful. You can take profits on your positions without having to worry about whether you’re going to incur CGT. A £100,000 portfolio might only generate £4,000 in dividends a year – but you’re much more likely to incur over the £9,200 capital gains tax threshold of profits.

Now you can also gain efficiencies by investing in a SIPP (or indeed any other pension scheme). The tax benefit here is up front – you can claim your contributions as an allowance against your income tax liability. I won’t go into it in detail now, but subject to the lifetime and annual limits this can be an efficient way to invest.

VCTs are another useful break. These are investment trusts which invest in smaller companies and comply with various stringent regulations; you can invest up to £200,000 a year (rather a lot more than with an ISA!) and you can get 30% tax relief on that. To get the up-front tax relief you have to subscribe to a new VCT issue. But there are also advantages to buying second-hand shares, since all VCT dividends and capital gains are tax free. So if you have a large enough portfolio to be paying CGT most years and can’t shelter all of it in an ISA, if you ask me, VCTs make good sense as an investment.

What’s wrong with VCTs? Plenty. They invest in smaller companies so can be high risk. And they are often very illiquid, so really not suitable if you’re going to need the money. I don’t like to call it ‘investment’, but for more active investors wanting to make some of their capital gains tax free, spread betting has its attractions. The Inland Revenue says it’s not investing, it’s gambling – so there is no tax payable on your winnings. If, of course, you have any.

The tax man will inevitably take some of what you earn – and rightly so! But its worth doing your research and using your tax allowances and tax-free savings schemes to the full. That way, you can minimise what you’re giving to the government – and do so, I hasten to add, completely legitimately!

investing1

Capital Gains Tax Holding UK investment via an offshore company would look at first glance to be a good way of avoiding UK capital gains tax. As the company is non UK resident,and provided the assets aren’t used for the purpose of a UK trade they will be exempt from UK capital gains tax (or more correctly corporation tax on the capital gain).

Note though that this tax exemption only applies if the company retains the cash until the shareholder is non UK resident or if the cash is retained overseas. Any extraction of the proceeds would be taxed to the extent that they were remitted to the UK. So whether a simple dividend is paid or if the company is liquidated and a capital distribution is paid the cash would need to be retained offshore. If you wanted to enjoy the proceeds in the UK you’d need to think about methods of remitting the proceeds with minimal UK tax implications.

A big problem with using an offshore company is in ensuring it’s controlled from overseas. If it was controlled from the UK it would be UK resident and as such taxed in full on any capital gains realised. If the company owns UK assets it makes it more difficult to avoid the company being classed as UK resident.

Inheritance taxUsing an offshore company is a big advantage for inheritance tax purposes, as it converts a UK asset into an overseas asset. As non UK domiciliaries are not subject to Inheritance tax on overseas assets they can then avoid tax on the UK property owned by the offshore company. One point to note here is that it’s important that the company shares pass on registration. They will then be classed as located where the share register is – which if this is outside the UK will ensure that the shares are excluded property.

Income taxA directly owned foreign holding company can at the most only achieve only a a partial avoidance of UK tax. Income tax, unlike capital gains tax is still taxed on UK source income. Therefore even if an offshore company is used, UK tax will still be charged on UK income.

However there are benefits to be obtained from using an offshore company. For example there can be a saving of higher rate tax as non resident companies are subject to the lower or basic rate of tax in respect of UK source income. Note though that you can obtain some income (eg UK bank interest) free of UK tax. This is because tax on this income is restricted to tax deducted at source if the recipient is a non resident.

SummaryAn offshore company investing in the UK can look to achieve the following tax benefits:

Avoidance of capital gains tax
Avoidance of inheritance tax
Partial avoidance of income tax
Anti avoidance rulesAside from the company residence position – which is always an issue where you have an offshore company with UK shareholders there are also the anti avoidance provisions to consider.

Note that there is also the related issue that if an individual exercises control over the company and makes it UK resident there is a risk that he may be a shadow director and any benefits provided to him (or his family) from the company would be charged to income tax.

The main anti avoidance provision that applies to income is S739. Although there is an exemption for non UK domiciliaries this does not apply to the company’s UK income.

Therefore if the offshore company had UK investment income this provision would deem the income of the company to be that of the person establishing/transferring to the company originally.

Another useful point to note is that S739 applies to any foreign registered company.

When can the anti avoidance rules be avoidedOne is where the UK individual buys a company that already has the UK investments in it. Provided he doesn’t inject any further assets to the company he shouldn’t be within the scope of the legislation (as he’s not made a transfer of assets resulting in income accruing to the company).

Secondly there is the motive defence which applies where the transfer was not for the purposes of avoiding UK tax, and was for a wholly commercial purpose. One case where this is more easily satisfied is where a non domiciliary established the company before coming to the UK.

When can the offshore non resident company be used as a tax shelter for UK investments?It can be used to avoid UK Inheritance tax It can be used to avoid UK tax on any capital gain It can be used as a partial shelter for UK income if S739 is avoided in one of the above ways.

However any extraction of the income or proceeds from the company to the UK would be subject to UK tax. Therefore ideally income/proceeds should be retained overseas.