Where’s the money going?

One of the most common questions I get asked when on my visits to Advisors is - “What are people doing with the money once they’ve set up an ITC self-administered structure?”

Let me state first that what follows is an observation of movement of existing and new money. As you know, ITC does not offer investment advice, so please don’t confuse the following as a recommendation. If you require any advice in relation to the following, please contact your Advisor.

With our compliance department now satisfied, I think the best way to answer the above question this is to look at the main areas of client interest in 2012.

 

Area 1 - Deposits

The banks thirst for deposits during 2011 and average inflation at 1.65%, made it very easy for investors to achieve “Real” growth with little or no risk.

It was noticeable in 2012 that the banks had changed their tune and were pushing headline rates down and this is expected to continue throughout 2013.

Despite the downward pressure on deposit rates, demand from clients has remained strong and an expected inflation rate for 2013 of 1.3% (HICP) is unlikely to dent this demand.

What we have seen, however, is a shift from short term deposit accounts to the more long term.

These trends are backed up by statistics from the Dept. of Finance.

• Deposits from Insurance Corporations and Pension funds increased by 6.9% in 2012.
• Shorter term deposit rates (less than 2 years) reduced from 3.57% in Jan 2012 to 3.35% in Nov ’12.
• Longer term deposit rates (more than 2 years) increased from 2.37% to 2.42% over the same period.

It’s no surprise that ARF clients are the biggest supporters of deposit strategies. Their age profile means that they have less appetite for risk. This has resulted in over 60% of ITC ARF funds being held in deposits.

We contacted the insured companies towards the end of 2012 regarding the charging structure of their ARF products. An annual management fee of 1% is very common.

This probably explains the inflows to the ITC ARF. Choosing an annual management charge of 0.5% gives most clients a reduction in fees, full access to the deposit markets and covers the Advisors continued work of research, recommendation and implementation.
 

Area 2 - Broker Portfolios

What I’m talking about here is where the Advisor has built their own offering for clients through the use of insured funds, stockbroking accounts and funds, deposit agencies etc.

The ITC products work really well in providing Advisors and clients the structures for choice and control of investments.  

The Advisor assists the client in understanding their attitude to risk/loss, and then builds an agreed portfolio around their goals and objectives.

The strengths of this approach are obvious. The client has a better understanding and more involvement in the process. This gives the client more clarity and control. There are more touch points with the client which, results in a much stronger relationship between the client and Advisor.

For many reasons (to be covered in a future blog), we believe that this type of strategy will continue to grow in 2013 and beyond.
 

Area 3 – Property

We’ve seen a significant pick up in activity for both Commercial and Residential property and the following gives an indication why we have had this activity from existing clients and new clients moving away from traditional insured funds.

• The consensus from the major estate agents is that for prime commercial property in the major cities, prices have stabilised.
• Residential property continued to fall in 2012. In Dublin it was down 2% and down 9% for the country as a whole. But South County Dublin saw an average increase of 3.1%. (Daft.ie)
• Rental yields are averaging 8.8% and the average residential property price was €140k. (Allsop Space/Goodbody 8/12)

The one thing we haven’t seen is leverage. The lenders experience of negative equity and overall impairments has obviously affected their appetite to lend. Will lending to pensions happen again? Yes, I believe so, but in prime property and with lower loan to value ratios.

Martin Glennon QFA CFP® 

Corporate Account Manager
Independent Trustee Company

Personal Insolvency Act 2012

The Personal Insolvency Act was signed into law by a busy President on Stephen’s Day.  Many column inches have been devoted to its impact on debtors and creditors alike, but little has been written about its effect on pension schemes. However, amendments introduced at a very late stage by the Minister of Justice and Equality in the Seanad will potentially have a significant impact on schemes.  Advisers must be aware of them.

There are 3 important principles:

•   An individual’s pension fund will not, in itself, be available to creditors. 

Specifically, under the Act a pension fund will not pass to the “official assignee in bankruptcy” of an individual made bankrupt; nor will it count towards a person’s asset exemption limit for the purposes of qualifying for the basic Debt Relief (which is the first of the 3 debt relief mechanisms under the Act); and nor will a person who enters into a Debt Settlement Agreement or a Personal Insolvency Arrangement (the second and third relief mechanisms) be required to surrender their pension fund.

This rule backs up existing legislative requirements preventing the assigning or charging of pension funds and indeed the recent case of EBS v Hefferon & Kearns with which we were involved.

• On the other hand, “pensions in payment”, i.e. pension benefits being paid out to a pensioner, will be available to creditors and the official assignee or trustee in bankruptcy.  Benefits which have been deferred by the pensioner will also be available.  So, any pension income actually being received or receivable will be at risk.

However, a person who enters into a Debt Settlement Agreement or a Personal Insolvency Arrangement under the Act will not be required to draw down a pension early.  An important protection.

• Where “excessive contributions” have been made to a pension arrangement within 3 years prior to a bankruptcy or a person entering into a Debt Settlement Agreement or a Personal Insolvency Arrangement, the court can order that those contributions are made available to creditors.

Broadly, this is good news and should provide comfort to pension scheme members that their pension funds are protected.  However, at present Approved Retirement Funds (ARFs) are not regarded as “approved retirement arrangements” for the purposes of the Act and so ARF funds are not protected.  While this is consistent with Revenue’s view that ARFs are not pensions, many would consider it unfair in that they are quite rightly regarded by clients as their pension funds.  The Minister is empowered to bring other pension arrangements within the ambit of the Act and it is to be hoped that he will do that in the case of ARFs.

One final recommendation for all advisers. When advising on the set-up of a pension arrangement, advisers must always bear in mind the security of the arrangement in relation to creditors.  If it were needed, the Personal Insolvency Act emphasises the importance of appreciating that not all pension structures are treated the same by the law.  Clients must be advised accordingly. 

Jeremy Mitchell

ITC Consulting

Budget 2013 - Philanthropy

Our budget coverage continues this week with a focus on philanthropy.

In 2012, the Department of Finance launched a consultation process on proposed changes to the system of tax relief available on donations to charities and other approved bodies.  As a result of that process, the Minister has decided that charitable donations will be subject to a “new, simplified tax relief regime”.

The old regime distinguished between PAYE donors and self-assessed donors. The tax relief on donations made by PAYE individuals to a charity could be claimed by the charity providing that the donors and the charity complete various forms each year. 

If, for example, a PAYE donor made a gift of €250 to their children’s school and completed the CHY2 form, the school could reclaim €173, being taxed at the marginal rate, from Revenue.  On the other hand, if the same gift was made by a self-assessed taxpayer, the tax relief went to the taxpayer and not the school.

This distinction was abolished for all donations made after 1^st January 2013. Henceforth, tax relief on all donations, whether by PAYE or self-assessed donors, is available for reclaim by the charity only.

Unfortunately, charities will not be able to claim relief at 41%, but at a “blended” rate of 31%.  So, in the above basic example, the amount claimable by the charity is €112, to give a total gift of €362, compared to the old €423.

Perhaps the most important point, though, is that the system for reclaiming the relief has being considerably simplified to reduce the administrative burden on charities. For example, charities are now able to use “enduring” declarations from donors that could last up to five years.  This is very much to be welcomed, but it is incumbent on the charitable sector to hammer home the need for smaller charities in particular to make the effort to reclaim the relief as significant sums are currently not being claimed and charities are losing out.

Interestingly, this section of the Minister’s speech was entitled “Philanthropy”, which is perhaps a recognition of its increasing importance in an era when government spending is being severely cut back and more reliance than ever is being placed on private giving.

Of course, given the Budget, the resources available for private giving from Irish residents has dwindled. This was perhaps obliquely recognised by the Minister in his reference to philanthropists outside Ireland who, he said, “would be interested in making significant donations to initiatives that would aid Ireland’s economic recovery, if our tax system were changed to ensure suitable recognition of such donations”.  He has referred this issue to the Joint Oireachtas Committee on Finance and Public Expenditure Reform for examination and to revert with its recommendations.  While there is no indication as yet what proposals may result, it does seem a shame that consideration is being given to recognising gifts made by people from abroad at the same time as such recognition is being withdrawn from self-assessed taxpayers at home.

Jeremy Mitchell

Director

ITC Consulting

Budget 2013 - Capital Taxes

As you know, Budget 2013 took place on December 6^th 2012. In light of the upcoming Finance Act we continue our coverage on the main changes that took place. 

In line with previous Budgets, there were further changes in relation to capital taxes, which will have a significant impact on estate and succession planning. The headline changes were:

 

• Increase in the Capital Acquisitions Tax (CAT) and Capital Gains Tax (CGT) rates to 33% from 30%. These changes were effective from 6^th December 2012.  

• A reduction in the CAT tax free thresholds by 10%. This change was also effective from 6^th December 2012. The Group A threshold is now €225,000, the Group B threshold is €30,150 and the Group C threshold is €15,075.  

• An increase in the rate of DIRT and exit tax from life assurance and investment fund products to 33% and 36%. This applied from 1^st January 2013.  

It is worth remembering that around four years ago the Group A threshold was around €520,000 and the CAT rate was 20%. To illustrate the changes, using a simple example, if a child inherited an asset worth €600,000 in 2008, there would have been a CAT liability of around €16,000.  Under the new regime with the same facts, the CAT liability would be around €123,000.

There does not appear to be a change to the tax rate applicable on the transfer from an ARF to a child over 21. The 2012 Budget changed the applicable rate to match the CAT rate.  That may change in the Finance Act later this year.

Another change which may be of interest is contained in the summary of Budget measures which provides for a roll-over relief for agricultural property on disposal of farmland where the proceeds are re-invested in farmland to enable farm restructuring. This measure is subject to EU approval.

It was noticeable that there were no announcements restricting capital tax reliefs. It is to be hoped that the lack of mention means they will be left as is. However, it is possible that restrictions will be introduced in the Finance Act early this year. So, if there is any chance of you or a client undertaking the sale or transfer of a business or business asset in the near future, you should take advice to see if any potential changes in the upcoming Finance Act might affect your ability to rely on these valuable tax reliefs.    

Barry Kennelly
Associate Director
ITC Consulting

Budget 2013 - Business

The first measures announced by the Minister in Budget 2013 were a series of initiatives designed to help the SME sector – the 10 Point Tax Reform Plan.  The importance of the sector was highlighted by figures set out in an accompanying paper from the Department of Finance. The paper shows that 99% of businesses in Ireland are SMEs and they account for almost 70% of people employed in the State, with 64% of private sector workers being employed by indigenous non-exporting firms and 56% by indigenous non-exporting SMEs.

Without going into any detail, the 10 points cover positive changes and extensions to the 3-year corporation tax relief for start-ups, the close company surcharge on undistributed income, the R&D tax credit, the VAT cash receipts basis threshold, the foreign earnings deduction, the EII scheme and stock relief and CGT for farmers, as well as reviews of venture fund CGT and reducing the compliance burden on micro enterprises.  None of these changes is particularly momentous in itself, and that was acknowledged by the Minister, but it is hoped that the cumulative effect will help drive employment growth in the sector. Beyond the 10 Point Plan, there were various announcements, including:

- The by now usual “100 per cent” commitment to the 12.5% corporation tax rate.

- The extension of film relief to 2020. Interestingly, though, it was indicated that from 2016 access to it may be closed to retail investors, which would mean the death of the various film schemes that have been promoted in recent years.  Quite how it will operate beyond 2016 is not yet clear.

- The removal of “top slicing relief” on “termination” or ex gratia lump sum payments for employees on the portion of that payment which is in excess of €200,000.  This is a very valuable relief by which the taxable element of any such payment is subject to the taxpayer’s average tax rate over the previous 3 years.  Unfortunately, this relief is being abolished for sums in excess of €200,000, so that the excess will be taxed at the marginal rate, which will be considerably in excess of the average.


However, and this could be a useful planning point for advisers and their clients to consider, the change does not take effect until 1^stJanuary 2013, giving a few weeks for appropriate action to be taken to avail of top slicing relief before it is restricted. It is worth noting that while such payments are usually made when an employment contract is being terminated, it is also available for major changes in the nature of the employment.

There were announcements of other measures, including various funding supports for SMEs and other businesses, as well as the usual hike in excise taxes, but in general the feeling is that an attempt has been made, within the tight constraints within which the government feels obliged to act, to help businesses.  Whether they will have anything other than limited value remains to be seen.

Jeremy Mitchell

Director 

ITC Consulting
 

Budget 2013 - Local Property Tax

Not since the abolition of the maligned Residential Property tax in 1997 have we had a tax based on the value of the dwellings of ordinary citizens.  However, in economically strained times the unpalatable becomes acceptable and frees politicians to re-consider long-abandoned revenue raising measures to make ends meet. And so with Budget 2013 the Minister of Finance announced the re-introduction into the tax code of the concept of a property tax, which from 1^st July 2013 will be levied on all owners of residential property; homes, second homes and buy-to-lets, situated within the State.

The news did not come as a surprise however, the Household Charge and the Non Principal Private Residence charge having cleared the way. The new tax will replace the Household Charge which is abolished from 1^st January 2013, and the Non Principal Private Residence charge which is due to come to an end on  1^st January 2014. Investors should note that there is an overlap for a period after 1^st July 2013 where they potentially are liable both to the new Local Property Tax and to NPPR.

The property tax is applied in accordance with an ingenious system, but basically at a rate of 0.18% of property valued up to €1M and at 0.25% on property above €1M.

Quite apart from the fact that the tax seemingly is breaking with a 15 year absence of property tax from the Irish tax code there a number of aspects of the tax which gives food for thought:

- Significant is the increase in the costs of owning property.  In his speech the Minister, somewhat disingenuously declared that the tax when compared to the Household Charge only represented an increase of €57 for a property worth €150k. He forgot to mention however that this comparison would only be valid for the year 2013 where only ½ year of tax will apply. In years to follow, the increase is €114. On a private residence worth €500k the owner has since 2011 paid an annual charge of €100. From July 2013 that figure is increased to €855.

- The tax is based on a percentage of the Gross Asset Value of the property. There are no deductions for the mortgage. For debt ridden Irish homeowners there are no deductions for the portion of the property “owned by the bank”. For many it will be a tax not on wealth but on debt.

- The Local Property Tax is in the main a tax on already taxed monies.  The homeowner above  who pays marginal income tax and PRSI has to make €1282.50 on average in order to pay property tax of €855 for 2014. With that fact in mind it is difficult to see how the Minister arrived at the conclusion that the property tax is “a better alternative to increased taxes on income” (but he did).

- The local aspects of the Local Property Tax are difficult to discern. After the mixed experience of involving the County Councils in the collection of the Household Charge, the Government is now reverting to centralisation. Yes, according to the Minister, the tax is meant to fund public services, and yes the Minister also made some references to the present administration’s commitment to local government – which pledge was backed up by some token powers granted to local authorities in the area of the rates applied. However, this new tax is prescribed by central  not local government,  it will all be collected centrally and the revenue from it distributed, also by central government, in much the same way as any other tax.

- Advisors should be tuned into the fact that there will be a separate tax return to complete in the Spring of 2013. The details of this tax return will be disclosed at a later stage.

- Where the NPPR and Household Charge legislation exempted property held in a discretionary trust, there is no such exemption with regards to Local Property Tax. The exemption in the NPPR and Household charge legislation has been used to exempt property held in pension schemes as pension schemes are often set up as discretionary trusts. This exemption, it seems, won’t be available with regards to property tax. Accordingly, investors with Irish residential property in their self-administered pension should contact their advisor or provider with a view to ensuring the tax compliance of their scheme.

Tommy Nielsen
Legal Officer
ITC Consulting

Budget 2013 - Pension Related Changes

In his budget speech, Minister Noonan declared that it was in everyone’s best interest that the Government encourage as many citizens as possible to continue to invest in pension schemes.  This does not seem to have been the Government’s view over the last few years with, among other things the introduction of the pensions levy and talk of cutting tax relief on contributions introducing a lot of uncertainty into the market.  A number of industry bodies over the last 12 months have been lobbying government in an effort to bring some certainty back in to the market. Now the minister appears to have delivered in this regard.  The positive news from a pension’s perspective in the budget was the clear statements that:

 

• The Pensions Levy will not be renewed after 2014; and
• Tax relief on pension contributions will continue to be available the marginal rate.

These are welcome statements as they will serve to lift some of the cloud that has been hanging over the pensions industry over the last few years.

The minister did announce, however, that future tax relief on pension contributions would only serve to subsidise pension schemes that deliver an income of up to €60k per annum.  These changes will not take effect until 1^st January 2014.  Therefore for now, the question remains as to how this measure will be implemented.  The minister appears to be leaning towards a further reduction in the Standard Fund Threshold (SFT), which currently stands at €2.3m and the minister described as being “very generous”. 

The question remains as to how €60k per annum will be valued for this purpose?  If the same valuation rules as were used for the calculation of the €2.3m threshold were followed, then the capital value of €60k per annum would result in a SFT of €1.2m.  The minister did state that the Government would engage in consultation with the industry on the specific changes required.  This dialogue has in fact already commenced and the proposal from the industry is to capitalise the €60k at a factor of 30 times plus the lump sum to give an SFT of €2m.  If this proposal is implemented, it is estimated that it will affect around 17,000 individuals.  When we consider that the average pension fund is around €100k, a reduction in the SFT should not discourage the majority of the market from continuing to fund for retirement.

The final pension-related change of significance is the provision allowing pension investors to withdraw up to 30% of the value of their AVCs for a three year period from 2013.  Income tax at the marginal rate will be payable on the funds accessed.  The Government estimates that €200m of funds will be accessed in this way over the three year period.  It remains to be seen whether this will apply solely to AVC’s or whether personal pension contributions will be included.  We will have to wait for the Finance Bill in the new year for the detail in that regard.

Overall, it appears that the Government are making a significant attempt to restore some certainty to the pensions market and to encourage investment in pension schemes once again.  While we will have to wait until 2014 for the detail in relation to the maximum tax relieved pension of €60k per annum, the forewarning provides an opportunity for those who may be affected to take action over the next 12 months.

Jennie Faughnan

Tax Consultant

ITC Consulting