Working over the years with many workaholic entrepreneurs selling or about to sell businesses, we’ve discovered most have dreams; not all realise them.
Working over the years with many workaholic entrepreneurs selling or about to sell businesses, we’ve discovered most have dreams; not all realise them.
Currently, many entrepreneurs are postponing exiting during the credit crunch, but we are seeing a lot doing more pre-exit planning, including setting goals and diversifying their asset allocation. For example, in the past twelve months, the average UK equity fund fell over 22 per cent, but the average gilt fund rose by over 11 per cent.
With taxes rising in the UK, flexibility means that some entrepreneurs are planning to move to lower taxed jurisdictions. Wills are being updated – there is nothing like a fall in asset value and rising taxes for people to want their hard earned assets to go to people of their choosing, rather than HM Revenue and Customs (HMRC).
Visualise your future
Those who realise their dreams invariably have a good plan – with four key ingredients.
You should initially understand and work towards specific short, medium and long-term goals: a short term goal might target a net annual income of £120,000.
Using a mix of vehicles to achieve this makes sense. This might include ISA planning, Collective investments, Bonds and Shares. Each has a different tax treatment and, by using a combination, advantage can be taken of various allowances.
The current trends are for higher risk investors to select capital growth focused emerging markets, as economies like China are still achieving over 6 per cent per annum growth, despite declining or negative GDP in many parts of the world, such as the UK, US and Europe.
The more cautious investor is favouring cash, index linked gilts or quality corporate bond funds. As in any investment portfolio, it is important to understand the timeframe of the client.
What’s mine is mine
A long-term goal might be ensuring your estate passes to people of your choosing, rather than HMRC. In spite of recent changes to Inheritance Tax (IHT), much can be achieved by planning early. Strategies using nil-rate bands every seven years can be very advantageous. If a husband and wife aged 50 live for another 35 years – not uncommon these days – they could shelter five nil-rate bands apiece, at today’s rates amounting to £3.5 million, for a significant IHT saving of £1.3 million.
Using annual allowances every year is another option. We are allowed to gift £3,000 annually, free of IHT. Where a couple do this for ten years, the amount sheltered can be significant.
For high earners being heavily hit by recent pension rule changes, it makes sense to consider diverting surplus income to people of one’s choosing, as this type of gifting is immediately out of the donor’s estate and not subject to the seven-year gifting rule.
Each to their own
It’s often important to diversify holdings and understand how various asset classes perform over time. Invest in a range suiting your risk profile. Don’t be caught by volatility. A good way of illustrating this is the Scottish Widows UK Financial History Chart 1950 to 2008. During these six decades, the equity markets suffered significant falls. However, if one had invested £100 in various asset classes in 1950, it’s interesting to see what the value would be at the end of 2008.
The Widows’ chart shows that the UK Building Society Index would have a value of £1,554, which looks high, but inflation would have meant that in the RPI (retail price index), you would have needed a whopping £2,498 to keep apace of inflation. If you had bought the Gilt index in 1950 and reinvested the income, you would have £5,672. However, if you had bought the Barclays Equity Index, you would have £6,131 ex-dividend and £79,820 if you had reinvested the dividends.
Flexibility is also essential to ensure a good portion of your wealth is readily accessible. Family circumstances can change, and it’s good to have contingency funds to hand, particularly with unemployment rising fast in the UK and with some predicting that it could reach above three million. Typically, we recommend to clients that they hold at least six months’ living costs in accessible funds and spread these between institutions to have depositor protection.
Lastly, review your position by including a robust annual process to ensure your plan is working. A good annual review should revisit family objectives and check to see that your planning is on track. Currently, we are seeing more and more people taking steps to utilise their tax allowances, whether that be annual CGT allowances, ISA allowances, IHT allowances or Bond allowance.
There are strong feelings among the hard-pressed middle classes and high flying entrepreneurs alike that HMRC already takes too much of our earnings and assets. Families want to ensure that the funds they work hard to earn over a lifetime pass to people of their choosing and at times of their choosing, rather than to the Revenue.
After all, you want to be able to enjoy the proceeds of your hard work!
*Adeline Christy is Director – Wealth Management with Kudos Financial Services, Aberdeen, Glasgow and London.
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