A to Z House Insurance

A to Z House Insurance

In regards to house insurance, the main policies individuals can obtain are:

  • Building
  • Contents
  • Combined Buildings & Contents

Building Insurance

This policy ensures that the structure, fixtures & the fittings of your home is covered. This type of insurance is compulsory if you have a mortgage.  If you rent, there is no need to have this insurance as it should be covered by your landlord. You are usually covered against events such as flooding, fires and vandalism etc, but it is vital that you check your terms and conditions to clarify what you are covered for.

Contents Insurance

This policy covers your belongings within your home. Although not compulsory, it is a policy individuals should consider if you have expensive or sentimental items. This policy usually protects you against theft and damage of your belongings within your home and garage.

Combined Buildings & Contents

This policy includes cover for the structure & your belongings; this policy is most suitable to individuals who own their homes.

It is important to be aware that just because you have insurance, it doesn’t protect against everything. Often home insurance won’t cover you for events such as terrorism and general wear and tear. Therefore, individuals must take care when reading the small print in order to determine what your own policy covers.

Making a Claim

When making a claim, it is important to be aware of several factors:

  • Excess
  • Accidental Damage
  • New for Old

Excess

If you make a claim, the excess is the amount you pay towards the cost. If your policy has a higher excess cost, your premiums will generally be cheaper. This is because in the event of you claiming, the provider will be paying out less.

Each policy usually comes with a compulsory and a voluntary excess. For example, if your laptop was stolen and your claim was £400 and you had an excess of £100, you would receive £300 for your claim as you would have had to pay your agreed excess cost of £100. If your cover also involved a voluntary excess, for example £50; this would mean you would pay your compulsory £100, and your voluntary £50, giving you a sum of £250.

Subsidence is when the ground beneath your home begins to sink. Building insurance often covers damage caused by subsidence so when it comes to claiming for this, the excess can be very expensive, depending on your terms and conditions it can range between £1,000 and £5,000.

Accidental Damaged

Cover for accidental damage to buildings or contents can often be limited within home insurance policies. Many providers may offer the feature of extra cover for accidental damage, but this usually results in an added cost. Therefore, it is very important that you check your terms and conditions in order to clarify what your own cover consists of.

New for Old

Depending on your cover, you can be entitled to brand new products or you may only receive products that are equal to the value at the time of damage or theft etc. In certain circumstances, insurers may only offer the cost of actually repairing the product rather than replacing it.  Therefore, the small print must be studied to understand your cover.

Several other features of house insurance can often be forgotten, but it is essential to be aware of what your individual policy covers you for:

  • Garden Cover
  • Trace & Access Cover
  • High risk Items
  • Personal Possession Cover

Garden Cover

Although buildings and contents cover may include some cover for your garden, the level of this cover will differ with different insurers. Many individuals may underestimate the value of their gardens with the equipment and plants etc so for some individuals, garden cover should be considered.

Trace & Access Cover

This cover involves finding the source of water or gas leaks. Frequently, in these events the costs can add up fast and can be extremely disruptive to your day to day life. Like garden cover, the levels of cover for trace & access can vary and may not actually be covered within your standard policy. If you are covered for trace and access, it can aid with paying for the process of finding the damaged pipes and repairing the problem. Therefore, it is important to check within the small print to establish whether this cover is included or whether the insurer is willing to add this onto the policy.

High Risk Items

Insurance of high risk items is not necessarily the most expensive items held within your home but the items which are mostly likely to be stolen. Usually, insurers ask you to record the contents in your home you feel are the high risk items; this then aids the insurer to determine the premium that is best for you and whether that will actually cover you for high risk item insurance. Cover for these items can be found within standard cover but sometimes they can be limited. Therefore, it is key that you are informed of what high risk items are included in your cover, if any.

Personal Possession Cover

Although contents insurance covers belongings within your home, they don’t cover your belongings that are stolen, damaged or lost away from the home. Some policies automatically include this cover within their standard terms so reading the terms and conditions can help you establish whether your needs are catered for.

Need an insurance quote? Call Heritage today.

The Basics of Business Property Relief

The Basics of Business Property Relief

The Basics of Business Property Relief (BPR)

Business Property Relief or BPR is an area of tax planning that has become increasingly popular in recent years in the mitigation of inheritance tax (IHT) liabilities. Originally designed for entrepreneurs passing on family firms, BPR gives full relief from IHT on assets held for a minimum of two years. But of possibly greater significance is the fact that investors in assets such as portfolios of Alternative Investment Market (AIM) stocks retain access to their investments.

Investments that qualify for BPR include agricultural land, plant, machinery, forestry and suitably qualifying companies listed on AIM and the Enterprise Investment Scheme (EIS). Specifically, AIM stocks must be ‘trading companies’ to qualify for BPR, so things like resources stocks and most property companies do not qualify. Importantly AIM shares can now be held within an ISA wrapper, further sheltering the investment from Income Tax and Capital Gains Tax.

It is also worth noting that investments that use BPR are generally regarding by tax planners as the final stop, after the basic IHT reliefs and trust options have been used, or where the need to retain control of assets is paramount. BPR schemes are typically high risk.

This table summarises what qualifies for business relief & the rate of relief that can be obtained.

Type Rate of relief
A business or an interest in a business. 100%
Unquoted securities which on their own or combined with other unquoted shares or securities give control of an unquoted company 100%
Unquoted shares 100%
Quoted shares which give control of the company 50%
Land or buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership 50%
Land or buildings, machinery or plant available under a life interest and used in a business carried on by the individual 50%

The investment within property/shares must be kept for 2 years in order to qualify for relief.

It is important to be aware that there are many situations where relief is not achievable, for example when:

  • the business mainly deals with stocks, shares or securities, land/buildings or in the making or holding investments;
  • the business is subject to a contract for sale or being wound up;
  • the business is a not-for-profit organisation;
  • the business generates investment income only;
  • the business asset is already qualifying for agricultural relief;
  • the business asset was not used for mainly business purpose within the immediate 2 years from passing it on from wills/gifts;
  • the business asset is not intended for future use within the business and;
  • Loans are made to a business.

It is possible to acquire some relief if a part of a non-qualifying asset is used within your business. 

Important also seek professional advice before considering any tax schemes.

Mortgages Explained

Determining the most appropriate type of mortgage can be difficult due to the numerous choices available along with the desire to achieve the most cost effective.

FIXED

A fixed rate mortgage is when the interest rate remains the same throughout the period of the deal. Therefore, if the interest rate changes, your mortgage payments are guaranteed not to vary. This gives you the peace of mind of knowing how much your mortgage payments will be each month and can help you greatly with budgeting. Within this type of mortgage, if the interest rates were to fall, it is important to be aware that you will not benefit from a reduction in mortgage payments. You are contracted in with this deal for the length of the agreed period, which usually lasts between 1 and 5 years.

TRACKER

A tracker mortgage is linked to the Bank of England base rate where the interest rate tracks the Bank of England base rate at a set margin above/below what your mortgage provider has contracted. Therefore if the interest rates were to increase, your monthly mortgage repayments would increase. This is the risk with a tracker mortgage; you can’t ensure the level of security you receive with a fixed mortgage. On the other hand, if interest rates were to fall or remain low as they currently have been, your mortgage payments would be less.

DISCOUNT

A Discount mortgage links to the lenders standard variable rate (SVR). A certain discount rate is determined and this rate is discounted off the SVR. However, if the SVR goes up, this will increase your mortgage payments. Likewise, your mortgage repayments will fall as the SVR falls. It is important to be aware that the lender can increase the SVR regardless of the Bank of England base rate. Therefore, your repayments can vary unexpectedly.

OFFSET

An offset mortgage links your savings to your mortgage debt. Usually you would gain interest on your savings; instead of this, an offset mortgage enables individuals to use their savings to pay less interest on their mortgage. Essentially the interest you would have gained from your savings, replaces the interest you should be paying on your mortgage. This mortgage feature can often result in individuals paying off more of their mortgage each month, therefore clearing their debt quicker, whilst saving a significant amount in interest (within the terms of your lender’s early repayment charges). The rates on these mortgages can often be higher than those of others so individuals with smaller amounts of savings often stick with a normal mortgage.

As well as a variety of types, there are several repayment methods in which you can decide to pay back your mortgage. Therefore, below gives a short description on the range of repayment vehicles obtainable which may aid with determining the suitable one for you.

REPAYMENT (CAPITAL & INTEREST)

A repayment mortgage is the most popular of the repayment vehicles and you in essence make monthly payments for a contracted period, paying back the initial capital and the interest. Each month your mortgage balanced will reduce and if the agreed payments are kept up, your mortgage will be repaid at the end of the agreed term.

INTEREST-ONLY

An interest only mortgage allows you to only pay the interest due on the amount borrowed every month. This means that repayments will be significantly lower than a repayment mortgage however, you will still owe the initial loan amount acquired. At the end of the term, the capital would usually be paid using an endowment, ISA or pension etc. Lenders may often check within the term that you are adding to savings or that you continue to hold a sufficient amount in order to pay the capital back. The interest rate paid can be at a fixed or variable rate, similar to the repayment method.  Individuals can often find it difficult to be issued an interest only mortgage due to the risk.

COMBINED REPAYMENT & INTEREST-ONLY

A combined mortgage offers the chance to have a part-repayment and part-interest-only deal. At the end of the agreed term, some of the initial capital will still need to be repaid. Different lenders will have different terms and conditions regarding this repayment method.

What is Inheritance Tax

What is Inheritance Tax

Inheritance Tax (IHT) is the tax on an estate when an individual dies. Although many individuals express a valid argument that tax has already been paid on those assets; its main purpose is to redistribute income across the economy.

Individuals have an allowance of £325,000, whereby they are free from IHT. If an individual’s estate overtakes this allowance, the remaining value will be taxed at 40%. Married couples can benefit from a joint tax free sum of £650,000 (upto 100% of the surviving spouses allowance).

Methods to Reduce / Mitigate IHT

• Trusts – placing cash/investments/property into trusts automatically moves those assets out of your estate and after 7 years, no IHT can be charged. Growth from any of these assets fall outside of the estate immediately.

• Charity – donating at least 10% of your assets to charity can help reduce your inheritance tax charge to 36% instead of 40%.

• Whole of Life (WOL) policies – these protection policies take regular contributions of your income and guarantee you a sum assured, if placed into a trust; it puts that money outside of your estate, reducing your inheritance tax by spending regular excess income. The sum assured could also be used to pay any Inheritance tax payable.

Gifts – gifts can be made, after seven years, this gift no longer falls within your estate, (if you no longer receive the benefits) therefore this money/investment/property will be free from IHT. However, certain gifts can be made which immediately falls outside of your estate such as:

Exempt gifts

Some gifts made during your lifetime are exempt from Inheritance Tax because of the type of gift or the reason for making it. Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:

• parents can each give cash or gifts worth £5,000
• grandparents and great grandparents can each give cash or gifts worth £2,500
• anyone else can give cash or gifts worth £1,000

You have to make the gift on or shortly before the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift this exemption won’t apply.

Small gifts

You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can’t give more than £250 and claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether. You also can’t use your small gifts allowance together with any other exemption when giving to the same person.

Changes in the taxation of Pensions

Changes in the taxation of Pensions

Current Rules Proposed Rules
Death before age 75, from funds that have not been accessed
Tax-free lump sum Tax-free lump sum
Taxable pension income Tax-free pensions income
Death before age 75, from funds that are in drawdown
Lump sums taxed at 55% Tax-free lump sum
Taxable pension income Tax-free pensions income
Death after age 75
Lump sums taxed at 55% Lump sums taxed at 45%*
Taxable pension income Taxable pension income

 

*proposed to change to the marginal rate of income tax from 2016/17

A to Z of Trusts

Trusts

Trusts are legal arrangements where one or more trustees are made legally responsible for holding assets. These assets are placed into a trust for the benefit of one or more beneficiaries.

There are many purposes to a trust:

  • Protect & control family assets;
  • Reduce IHT and to;
  • Protect assets for vulnerable individuals (children, individuals who are incapacitated)

A trust consists of a:

  • Settlor (Puts the assets into the trust);
  • Trustee (Legal owners of the assets held in the trust, they manage the assets and decide how its distributed- however it must be in line with the type of trust made) and a;
  • Beneficiary (Individuals who benefit from the assets and the income gained in the trust)

Different Types of Trusts

Bare Trust

These trusts ensure that the assets set aside, will go directly to the beneficiaries stated. The beneficiary holds the absolute right to the assets within the trust and at the age of 18 can legally demand that the assets are transferred to them. Income tax is charged on the interest gained and the income received through any stocks & shares invested. The stated beneficiary is liable for the income tax charged on the income of the trust.

Loan Trusts

These trusts are established by individuals who wish to give themselves an interest free loan, which can be paid back at any time. After 7 years, that trust automatically falls outside of your estate, which means less inheritance tax is paid. The capital and growth is still legally for the beneficiaries but the settlor can choose to take withdrawals to supplement their income. In the event of the death of the settlor, the capital to repay that loan is taken out of the estate, which initially reduces the amount of IHT to be paid also.

Discretionary/Accumulation Trust

Discretionary trusts are those which the legal ownership of the assets is of the trustee, whereby they run the trust with the hindsight of benefitting the beneficiary. Likewise, they have the freedom to decide how to use the trust’s income and how to distribute that income.

Accumulation trusts are when trustees accumulate the income gained and add it to the existing capital in the trust until the beneficiary reaches the legal age in which they are entitled to receive their income/capital from the trust.

In both discretionary trusts and accumulation trusts, income is taxed at the special trust rates, apart from the first £1,000 of trust income, which is known as the ‘standard rate band’. Income that falls within the standard rate band is taxed at lower rates, depending on the nature of the income – as shown in the tables below.

However, if the person who put the assets into the trust (the settlor) has more than one trust, the £1,000 standard rate band is divided by the number of trusts they have. If the settlor has more than 5 trusts, the standard rate band is £200 for each trust.

Trust Income up to £1,000:

Type of Income Tax Rate 2014 to 2015 Tax Year
Rent, trading & savings 20% (Basic Rate)
UK dividends (such as income from stocks & shares) 10% (dividend ordinary rate)

Trust Income over £1,000:

Type of Income Tax Rate 2014 to 2015 Tax Year
Dividends & distributions 37.5% (dividend trust rate)
Other income 45% (trust rate)

Interest in Possession Trust

These trusts give the beneficiary direct ownership of the income received through the trust, less any expenses. Therefore, although the beneficiary receives all the income gained from the trust, they are not entitled to the capital held.

Trustees are responsible for declaring and paying Income Tax on income received by the trust. They do this on a Trust and Estate Tax Return each year.

There are different tax rates depending on the type of income:

Type of Income Tax Rate 2014 to 2015 Tax Year
Rent, trading & savings 20% (Basic Rate)
UK dividends (such as income from stocks & shares) 10% (dividend ordinary rate)

Interest in possession trusts aren’t normally taxed at the special trust rates of tax that apply to non-interest in possession trusts. However some items that are capital in trust law are treated as income for tax purposes when received by trusts. Depending on the type of item they’re either taxed at the trust rate of 45% or the dividend trust rate of 37.5%.

Settlor-Interested Trusts

This trust exists when the settlor benefits from the income/gains held within the trust. These trusts are not types of trust in themselves, but can be any of the above trusts. The settlor is responsible for all the income tax charged but if the trustees receive an income, they must pay the tax on that income.

Chargeable Lifetime Transfers Vs Potentially Exempt Transfers

Depending on the amount gifted/transferred into a trust during the last 7 years, you may have to pay Inheritance Tax (IHT) immediately. If this amount exceeds £325,000, (£650,000 for a married/long term couple) you will have a 20% tax rate to pay, with an additional 6% of the value of trust every 10 years.

Potentially exempt transfers are only liable for tax if the individual making the gift/transfer dies within the 7 years of setting up the trust.

Quick Mortgage Approval

Helpful Tips for Quick Mortgage Approval
With recent changes, mortgage lenders have become more strict and fussy with the clients they want to lend too, even looking into people’s lifestyles. Every lender has its own methods in deciding whether it wants to lend money to you. It’s almost like a beauty parade where lenders compare you to its own ideals. If you fit within a lenders criteria, bingo, you’ll be accepted or like a lot of people, possibly rejected. Most lenders score card / criteria is based on several factors, such as; the size of loan, the size of your deposit, employment status and income, outgoings, existing debts and importantly credit rating.

Check your Credit Score
Lenders essentially use a computer system to review your credit report and decide whether or not they want to borrow. Now this is not just a pass or fail, you could almost be a A,B,C or D Rating. This essentially can mean an A rating can borrow more than a B or C, so it’s important to know what your credit rating says about you. Most Credit Reference Agencies (companies who compile credit data) offer a free trail where you can obtain a free credit report for 30 days, this is a must! Correcting errors on your credit file could save you thousands along with avoiding a silly mortgage decline.

• Are all the items relating to you and are they correct?
• If you’re not on the voters roll, make sure you get on it!
• Close any old accounts that are no longer used
• Don’t apply to 10 different lenders at once, keep searches to a minimum; if you are rejected by a lender don’t just throw yourself at the feet of the next one
• Remove any financial links which no longer apply
• Stay within your credit limit and avoid overdrafts where possible

Deposit
The bigger your deposit the greater security the lender has and so the lower risk they class you. So even if you don’t have a great credit score, if you have 15% + deposit you start to look more attractive to the lender.

Add £100 on top of deposit
Putting down a little bit more than the minimum deposit required can boost your attractiveness to the lender, or at the very least cut the amount of documentation it wants to see. All mortgages have a maximum loan-to-value (the amount you borrow compared to what the property’s worth) but it’s best to borrow just under this, if you can.

Paperwork
Lenders now have to see proof of your income before they can offer mortgages, so it makes sense to get your paperwork together in advance. Sending all the paperwork in one batch speeds up the process as it reduces the chances of your application being reviewed by more people. Many lenders won’t accept printed internet bank statements so you may need your bank(s) to send you original copies. Prepare these a few weeks in advance in case you need to wait for the originals to arrive.

Seek Professional Advice
Mortgage Advisers don’t just sell mortgages, they can help you get a mortgage by drawing on their experience and knowing which mortgage provider to place you with. Good mortgage advisers can also find exclusive deals you didn’t know existed and the best mortgage advisers will hold your hand through the whole process, from start to finish, ensuring the right documents and information is provided at the right time.

Care has been taken to ensure that the information is correct however Heritage Financial Solutions Ltd neither warrants, represents nor guarantees the contents of the information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Heritage Financial Solutions Ltd is authorised and regulated by the Financial Conduct Authority 618320.

What are Gilts?

What are Gilts?

Gilt is a bond issued by the British Government which are very simply, units of debt. The term originated In Britain and is referred to as debt securities that had a gilt ‘edge’. These are effectively an IOU issued by the treasury and bought by investors.

How do Gilts work?

When buying these ‘units’, you are effectively lending money to the Government, which promises to pay you back the full amount at a set date, along with interest. Gilts are issued at par £100 and are traded on the open market, which means you can see the gilt before its redemption date, in which case you might not recoup your initial investment. But it also means that you can buy gilts below par (£100) and hold them till redemption to make a profit, or possibly, buy them above par and make a capital loss. People who usually invest in Gilts are big banks, pension funds and millions of ordinary savers through investment companies. Many of the bond funds are held in the open market.

Gilts prices rise when the Bank of England cuts the base of the interest rate and fall when the base rate goes up. So gilt yields rise and fall with interest rates. This is one of the great attractions of conventional gilts and you can lock into high yields that will be maintained no matter how far rates fall.

Conventional gilts are the simplest form of government bond and are the largest share of liability in the Governments portfolio. There are other types such as index linked gilts (IGs), which form the largest part of the gilt portfolio after conventional gilts. Here it is related to movements in the Retail Prices Index (RPI) this is again linked to inflation. Another type of gilt is called a ‘Strip’ – effectively a zero bond that is sold at a discount at the nominal value. Strips are separately traded non-interest bearing bonds with all the return derived from the capital appreciation that results as the bond reaches maturity.

How to buy?

With looking at the concept you need to understand the gilt ‘yield curve’, which is simply a graph plotting the relationship between gilt yields and their maturity date. The graph differentiates gilts in issue by maturity and redemption yield.

Gilts can either be bought directly from the DMO at its outright gilt auctions or through the secondary market. Bidders at auctions can choose to participate through a gilt-edged Market know as (GEMM) – a form of broker – who can bid directly by telephone to the DMO on the bidder’s behalf, or by completing an application for, providing they are members of the DMO’s Approved Group of Investors.

Gilts in Pension?

Pension funds are by far the biggest buyers as they need to meet payments when they retire. They are also used by individuals who are looking for a steady income or as part of a balanced investment portfolio. Savers in stock market-linked company pensions typically have their money moved into gilts near retirement. This is called ‘life-styling’ and is designed to protect the pot from share-price wobbles. Higher prices make it more expensive to buy a set income. So retirees are getting less for each pound in their pot.

Types of Risk

Inflation Risk

Inflation Risk is the chance that the cash flows from an investment won’t be worth as much in the future because of the changes in purchasing power due to inflation. Inflation causes money to decrease in value at some rate, and does so whether the money is invested or not.

Inflation in the United Kingdom has hit a four year low, in which The Bank of England will now be under less pressure to raise interest rates. Inflation is now subdued we don’t need to think about it. The only real danger of this is that Britain could contract a nasty dose of deflation – in which the Japanese faced. This would include falling prices, stalled demand in expectation of a further price slide and curtailed investment.

Credit Risk

The risk of loss of principal or loss of a financial reward steaming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation they have. Credit risk arises whenever a borrower is expected to use future cash flows to pay current debts they have. Investors are compensated for assuming credit risk by the way of interest payments from the borrower or issuer of a debt obligation.

Credit is closely linked to the potential return of an investment, most notably being that the yields on bonds correlate strong to their perceived credit risk.

An example of this would be to say if higher the perceived risk, the higher the rate of interest that investors will demand for lending their capital. Credit risks are calculated based on the borrowers’ overall ability to repay. The calculation for this includes the borrowers collateral assets, revenue generating ability and taxing authority (such as for government and municipal bonds.)

Currency

A risk arises in currency from a change in price of one currency against another. Whenever investors or companies have assets or business across different countries, they face currency risk if their positions are not hedged.  Any business that operates across different territories that use different currencies will face currency risk. Businesses will be hurt and helped in different ways from exchange rate movement.

Examples of this are:

  • If you’re a British manufacturer and your main market is Europe, you will benefit when the pound weakens. The euro you receive in return for you goods will be worth more pounds therefore your profit increases. And vice versa if the Euro is weaker than the pound you will lose money.

Risk in Stock Markets

The Market risk is the possibility for the investor to experience losses due to the factors that affect the overall performance of the financial market. Market risk, also known as ‘systematic risk’ cannot be eliminated through diversification, thought it can be hedged against it. The major Market Risk is natural disaster as this will cause a decline in the market as a while as an example of market risk. Other sources of market risk are:

  • Recession
  • Political turmoil
  • Changes in interest rates
  • Terrorist attacks
1567