Morton Fraser Peopletalk Bulletin Spring 2010

With the end of this tax year fast approaching we give you our “Magnificent Seven”; 7 tax tips which could potentially save you money.

1. Use your personal income tax allowance - Individuals have a basic personal allowance of £6,475 in the 2009/10 tax year. This is the amount of income most of us are entitled to before tax. With relatively simple planning, some income generating assets can be transferred from higher rate tax payers to a non-working spouse or civil partner, improving the tax efficiency of family income.
2. Use your Capital Gains Tax (“CGT”) allowance - Individuals have a Capital Gains Tax Allowance of £10,100 in the 2009/10 tax year. For couples it makes financial sense to use both spouses’ allowances so that gains of up to £20,200 are free from tax. Assets can be passed between spouses or civil partners without tax and such transfers should be considered where possible and advantageous.
3. Review your mortgage - If you have been fortunate enough to be on an attractive base rate tracking mortgage, the chances are it could be coming to an end in the near future. It may be the case that you will have accumulated cash in the bank which with careful planning could be offset against your mortgage; either to help reduce the outstanding mortgage term or save income tax on the interest you receive on savings.
4. Inheritance Tax (“IHT”) planning - IHT is charged at 40% on estates over £325,000 in the 2009/10 tax year and 2010/11 tax year. Individuals have an annual gift allowance of £3,000 per tax year, plus additional amounts in certain circumstances. Where appropriate you should consider making regular cash gifts out of surplus income.
5. Maximise your ISA allowance - There is no Capital Gains Tax on any gains within a Stocks and Shares ISA and there is no income tax on income paid out from it. Further, such income does not impact on age related allowances. The ISA allowance for all will be increased on 6 April 2010 to £10,200 and investments can be held in cash or stocks and shares, subject to certain limits. Now is a good time to take advantage of the tax saving benefits of ISAs.
6. Pension contributions - Pension contributions are extremely attractive and provide huge scope for large, tax efficient contributions. There are very few investments where the Government will contribute a further 20% or 40% depending on your income – pensions are one of the best. Salary sacrifice could also be useful depending on your situation. With National Insurance set to increase, this additional saving could be attractive and you should consider making additional pension contributions where appropriate.
7. Use Venture Capital Trusts, Enterprise Initiative Schemes and other investments to reduce tax bills and defer Capital Gains Tax - Venture Capital Trusts offer 30% income tax relief, subject to certain limits plus no income tax on dividends and no CGT when they are sold. Enterprise Initiative Schemes allow tax relief of 20% plus possible deferral of CGT liability. Enterprise Initiative Schemes can also be efficient from an IHT perspective.

This is intended as a generic guide and should not be taken as recommendations. However, we hope you will find these basic tax tips helpful and our Finance & Investment Team would be delighted to offer further assistance if required. Please contact Dorothy Kellas on 0131 247 1012.

The 2009 Market
2009 was one of the most turbulent years ever known for the British economy and, of course, the housing market suffered as a result. Volumes of sales were significantly down on previous years and prices slipped back to about the levels that they were at the end of 2007. Figures released by the ESPC suggest an increase in prices in Edinburgh of nearly 13% in the last Quarter of 2009 compared with the same period in 2008, but that was merely recovering lost ground, as prices had fallen by more than 10% in 2008. Perhaps a more meaningful comparison is the average house price of Edinburgh houses sold between September and December 2009, namely £218,043 and the equivalent figure for 2007, which was £215,168.

Stamp Duty
The picture last year varied across the country, with some markets holding up better than others, but we also had to deal with the introduction of the new Home Reports and the Stamp Duty “holiday” came to an end in December so, once again, the purchaser of any property which costs more than £125,000 has to pay Stamp Duty.

The Future in 2010
With unemployment in Scotland still rising, the property market is likely to feel the effects of the economic down turn for some time to come, but there are now clear signs of increased activity in the Scottish housing market, with more closing dates being set and, generally, more competition for properties. There is also some evidence that the banks are beginning to lend again and this is vital if we are to see a return of confidence amongst house buyers and house sellers. Our table below gives a snapshot of the main mortgage trends based on December 2009 data.

At Morton Fraser, we are taking the view that prices in Scotland will rise in 2010, but probably by no more than 5% above their 2009 levels and there may well be significant regional variation on that. The days of double-digit house price inflation are gone, for the present at least, and with most houses and flats selling at or around the Home Report Valuation, purchasers should not have to pay significantly ”over the odds” in order to secure properties. This is particularly true for properties in the first-time buyers’ range, with lenders no longer providing 95% mortgages. As a result, prices of one-bedroomed flats continued to nudge downwards last year, whilst larger flats and good quality houses elsewhere all saw something of a recovery.

The General Election – what impact?
Later this year there will be a General Election and there are always fears that this can create uncertainty, but our experience over the last 10 to 15 years has been that the residential property market is, by and large, unaffected by the possibility of a change of government. The economy, however, still faces great challenges, with inevitable cuts in public spending and, whilst we are of the view that the increase in market activity will continue, we do not think it will have a significant effect on house prices in the year to come.
For an informal chat about how we can help you buy or sell a home please contact George Clark on 0131 247 1018.

Mortgage Trends

• The cost of fixed-rate mortgages fell as market competition increased.
• The average interest rate charged on a 2 year mortgage for buyers with a 25% deposit dropped by 0.04% to 4.06% (the lowest rate since May 2009).
• A similar drop was seen in the average rate for a 5 year fixed rate deal for people borrowing 75% of their home's value, falling from 5.71% to 5.67%.
• More lenders started to offer 85% loan to value products and in some cases 90%.

Will these favourable rates remain?

• Inflation is now at around 2.9% (above Government target of 2%) and this may lead to base rate increasing sooner than hoped as a tool to control inflation.
• Low interest rates and competitive savings rate cannot be sustained forever – one building society has already announced that it will increase its standard variable rate despite the base rate remaining at the same level since March 2009. Others may well follow in their footsteps.
• With many people remaining on the standard variable rate due to the low levels offered, people must ask themselves whether they can afford a rate rise. If the answer to this is no then perhaps now is the time to consider a fixed rate before rates start rising.

For further mortgage advice please contact Nicola McDevitt on 0131 247 1070.

Wills and succession have been in the news lately, with the Scottish Government’s announcement that it intends to consult on the recommendations put forward by the Scottish Law Commission (SLC) for reform of the law of succession.

The recommendations, accompanied by a draft Succession (Scotland) Bill, have two main aims – to simplify the existing law, and to reflect the changing nature of family structures in Scotland, such as the popularity of cohabitation, the growing number of step-families, and the fact that we are living longer.

Despite these intentions, perhaps inevitably, the proposals remain complex. Furthermore, the law will never be able to account for all the possible combinations of both family and financial circumstances in a way which satisfies every individual’s wishes. Often, too, the assumptions we make about what will happen at law if there is no Will turn out to be inaccurate, with loved ones losing out as a result. Even with the reforms, therefore, the only way to be certain that your property is distributed the way you want it to be on your death remains to take advice and draw up a Will, including tax planning arrangements as appropriate.

This diagram summarises the main changes. As you can see, the resulting division of an estate might still surprise you.

What will happen next with these proposals? They might never become law, and even if some, or all, of them do, it is likely to be some time before legislation is proposed to Parliament. The revival of these debates once again highlights the advantages of making a Will – it remains the only way to be sure that your wishes will be carried out. If you would like more information or to discuss your needs, please contact Sue Hunter on 0131 247 1054.

We all enter into commercial contracts every day when we buy a ticket on the bus, or a coffee on the way to work. For obvious reasons we don’t expect these contracts to be in writing.

However, surprisingly, many people also enter into complex commercial contracts on the same basis, leaving them vulnerable if the contract isn’t performed as they had expected. For example, I have recently seen two complex agreements entered into with virtually nothing in writing: one a multi-million pound construction project, and the other, an international distribution agreement.

Why do you need ‘something in writing’?
Typically, the problems occur because people have differing views about what they have agreed to do, and with nothing documented in writing, there is plenty of scope for disagreement. In each of the examples mentioned above, this is exactly what happened.
In the case of the construction project, it was not clear whether the price was fixed, or variable (the customer thought it was fixed and the construction company thought it was variable); in the case of the distribution agreement, the flimsy ‘fag packet’ agreement was ambiguous and did not limit the manufacturer’s liability if the product failed to work, or was dangerous.
In each case, the lack of a properly drafted agreement resulted in acrimonious, costly and time-consuming disputes, and in both cases, court proceedings followed. The time, stress, unpleasantness and cost of such disputes cannot be underestimated, and in the worst cases, the effect on the business can be catastrophic.

The solution
At the very least, a well-drafted contract should cover:

• the identity of each party
• exactly what each party will do, and when
• how much each party will pay or be paid, and when
• what happens if one of the parties doesn’t perform
• how and why the contract can be ended
• what happens after the contract has ended
• a dispute resolution mechanism
• which law applies (Scots, English etc).

Depending on the circumstances, there may be other points to be covered (for example a limitation of liability in the international distribution agreement).

How does the written contract help?
In one of two ways:

1. If a lawyer draws up the contract, that process will clarify the exact intentions of the parties (for example, whether the construction contract was to be a fixed or a variable price). At that stage the parties may realise that they are talking at cross-purposes and they can either walk away, or negotiate and reach agreement.
2. After the contract is signed, any dispute should be able to be resolved, either by looking at the contract for clarification, or by using the dispute resolution mechanism to find the most efficient solution.

In the vast majority of cases in my experience, it would have been significantly cheaper (and much less stressful) to have paid a lawyer to draft the contract properly in the first place, than to have paid the legal fees for dealing with the dispute.

If you would like an initial ‘health check’ of your existing contracts or to find out what kind of contract you need, please contact Austin Flynn to arrange a free consultation on 0131 247 1260 or email Austin Flynn. It could save you much more than the cost of that coffee on the way to work.

Time to Train
Have you had your eye on a training course, but felt unable to request time off to attend? If so, you may be able to rely upon the Government’s new initiative, beginning on 6th April this year.

Guidance
The Government has published Guidance on “time to train” requests for both employers and employees. Basically, employees will be entitled to request unpaid time off for training and employers will be obliged to consider the request in line with certain procedures. The training must be relevant to your job and must help improve your employer’s business performance and your effectiveness in that business.

Request granted
If an employer grants an employee’s request, the employer must outline the details of the training in writing. The Guidance suggests employees keep a copy of these letters.

Request refused
Similarly, if an employer refuses a request then the employer must set out reasons why in writing. It is important to note that while an employer will be obliged to consider a request, the request need not be granted.

However, an employer may only refuse the request in accordance with the Guidance. The Guidance sets out specific reasons for which an employer may refuse a request. For example, an employer can refuse a request if additional staff cannot be recruited, if your absence would cause a detrimental impact on quality or if the training would not improve your effectiveness in the business.

Does this affect everyone?
In short, no. Only employees in an organisation of 250 employees or over will be able to request time to train from 6th April. Employees in smaller organisations will be able to request time to train from 6th April 2011. According to the Government, this will allow employers running smaller businesses time to ensure their procedures are correctly in place. Employees require 26 weeks continuous service to qualify for the right.

It is also worth noting that certain categories of workers will not be covered by the Guidance at all. These workers include agency workers, members of the armed forces and persons of school age.

Practical effect
So what will this mean in practice? Like the existing “right” to request flexible working, there is no obligation on the employer to agree to the request and employers will be able to justify refusal for one of the specified reasons. The right to make a complaint to a Tribunal for unreasonable refusal will no doubt make employers think twice about refusing such a request though. In addition, the fact that time off is unpaid and for the benefit of the business, as well as the employee, will mean that employers have little to lose and much to gain from agreeing to such requests.

Guidance
Guidance for both employers and employees is available on: www.bis.gov.uk/time-to-train

Morton Fraser Employment Protection Package
We have launched an Employment Protection Package for employers to provide a comprehensive solution to employment law issues.

The Employment Protection Package includes:

• Annual employment documentation health check
• 24 hour access to employment law advice
• Tribunal awards insurance cover of up to £250,000 including legal costs
• Affordable monthly fixed fee payments

Click here for further details or for a free quote: Employment Protection Package

If the Employment Team can assist you with any employment issue as an employee or as an employer please contact Lindsey Cartwright on 0131 274 1141.

Things you never quite get round to but you know you should…

• Make a Will – “I don’t like to think about it”
• Make sure I am getting the best mortgage rate – “do I have the time to bother?”
• Review my pension – “retirement seems so far off….”
• Get a cohabitation agreement – “we will never split up”
• Sort out my taxes – “all a bit of a headache”

There’s no time like the present!