One thing that makes my blood boil

Last week I decided to investigate whether and how to repay my kids student loans. What I discovered made my blood boil. For a start my daughter has a loan which is more than twice that of my son’s. He has a loan of £28,000 and has repaid about £8,000 and my daughter has a loan of £63,000 and just started work. This is unfair.

Secondly to decide what to do, needs a crystal ball to look into the future – Will my daughter want to give up work to care for a family, will my son die young, will either or both want to work in a less paid job such as a charity worker?

I asked both children what their plans were for the next 30 years – they have both started well – but none of us can foresee the future, there are so many imponderables!

One thing that is certain, is that student loans should either be paid in full or not at all but not in chunks  – and here is why…

The first thing to understand is that a Student Loan is not a loan – because after thirty years from drawdown it is written off – which could be good or bad depending on how much the graduate earns for the next thirty years after graduating.

The second thing to understand is that although it is collected by the employer it is not a tax – it is a contract. This means that if the graduate decides to work for ten years abroad, he or she is still liable to repay the student loan. Although there could be issues of enforcement since it cannot be collected through the employer, it is still due and graduates living abroad will be pursued!

The third thing to remember is that the graduate will pay more if he or she earns more – the amount is 9% on any income earned above £27,295 regardless of how much monies are outstanding on the loan – this is why the loan should never be paid in chunks because the repayments do not go down as the loan decreases.

This means that if the graduate inherits some money, or a relative wants to assist financially, but the ‘loan’ cannot be repaid in full, the graduate would be better off investing the monies until such time as the entire amount can be repaid – but this is not totally satisfactory because the investment will itself attract tax and be added as extra income on which the monthly repayment amounts are calculated.

The fourth thing to remember is that the interest rate which is added every month to the loan since the date of drawdown is the retail price index (RPI), and if above £27,295 the rate increases from the RPI to a maximum of 3% added to the RPI on earnings up to earnings of £49,130.

If the RPI is at 2.5% the rate of interest which is added to the loan per annum is 5.5%. This means that if the graduate has an income above £27,295 but does not have enough income to repay his entire loan in thirty years, he or she could be paying as much as three times the cost of the original education due to the addition to the loan of the interest.

We know that economists are predicting rising inflation which means that it is likely the loan will increase as inflation goes up..

The fifth thing to factor in, is if a grandparent is considering repaying the student loan this repayment is a gift to the graduate and if the grandparent fails to survive 7 years the repayment amount will attract Inheritance Tax at up to 40% which further increases the cost.

Of course, if a parent wishes to repay their kids student loan there is a relief from Inheritance Tax for gifts out of income. If the parent is in the fortunate position of having sufficient income to pay off student loans out of annual income then they should do so, because they do not then need to survive 7 years for the gift to fall out of inheritance tax.

As a Fellow of the Chartered Institute of Taxation and having spent several decades observing tax changes and human behaviour, I am staggered not to see more outrage at what is, for many graduates, deductions of more than 50% out of their income. This together with higher rates of taxation and national insurance, prospective rises of corporation tax rates and talk of reducing the £27,295 threshold at which the graduate starts to repay their loan to £23,000 taxation is a massive disincentive for any graduate to do well.

If I were a graduate wanting to do well, start a family and find a home – I would not be inclined to vote Tory, I would look around for a party which provided an incentive to work and do well, to encourage our students to study and give back to the country rather than demonstrating that to do well comes at a cost of deductions in excess of 50% and an incentive to employers not to employ rising stars because they need to earn so much more to keep what they need to start a family and find a home, when the cost of corporate taxation means there is less to go around.

It is simply not fair and makes my blood boil.

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Assisted dying - good or bad

Baroness Meacher’s bill went through the House of Lords last week.  It allows doctors to assist in the deaths of terminally ill patients. The way it works is for doctors to prescribe a lethal cocktail of drugs, which the patient can collect and personally administer at any time.

Assisted death is legal in some US states but does not always result in a pain free death. Most people would prefer a doctor administered lethal shot of morphine to allow the patient to ‘slip away’ under medical supervision. Taking a cocktail of drugs can in some cases take hours to deliver the end result and, in some cases, patients suffer seizures and ‘regurgitations’.

Assisted dying has however popular support, a recent YouGov poll showed that three quarters of Britons favour a change in the law. However, previous attempts by the Lords to reform the law have got stuck in the Commons.

The reason why it gets stuck is because it is a complex issue…

I am in the business of ‘death and taxes’ not to say I have witnessed first-hand the pain and suffering many people have to endure in the lead up to death, but I have probably a better understanding than most about these two certainties death and taxes.

When people get ill, they often become vulnerable and dependent on others. For many they feel – or are made to feel, - a ‘burden’ on their loved ones – who at this stage of their lives are often less loving than they were when their ill relative was well.

The bill provides for an assessment by two independent doctors to confirm the diagnosis, the patient’s mental competence and that the decision was not influenced by anyone else. It is this second limb that I have the most concern about.

Statistics from the US State of Oregon bear this out. 50% of those who chose ‘assisted suicide’ cited being a ‘burden’ on others as a reason. Many cite wanting ‘to do what is expected of them’ and they feel – or are made to feel – that they are being ‘selfish’ by staying alive.

One of my clients many years ago, was a leading lawyer in Australia who married one of her clients who was some twenty years older than her. Before getting married she asked him to undergo health checks and DNA samples, she said she wanted to have the ‘best years of her life’

Soon after they married, her husband was diagnosed with Diabetes and MS, within a year he could not travel easily and had difficulty going up and down the stairs especially steep stairs such as in the theatre.

She said to me in a quiet conversation ‘I did not leave my career to become a nurse’. Despite these bitter words she did look after him until his death some ten years later.

 Another conversation I had with a client who was similarly married to a partner much older than herself, she said ‘What I worry most, is for my husband to fall seriously ill, - I have told him I will send him off to Switzerland, I am not a carer, and he knows that. ‘I am not after his money, because he does not have any’. My client is not an unkind woman, simply stating what she sees as a fact.

I have seen many other normally kind people become bitter and cruel towards their sick relative. It is true the work involved with caring for the sick and elderly can be relentless and unremitting, preventing them from taking holidays meeting with friends, trips to the theatre or a concert and it is easy for bitterness to creep in – but there is another side to sickness – which is that of greed.

One client of mine was young, and wealthy. She had a grasping partner who comforted and cared for her while she was sick – but it came at a price. He made her feel loved but led her to believe that while ill she could not look after her finances. Bit by bit she transferred her wealth to him – and when she died her estate was insolvent.

This is not at all unusual, especially when there are many children from multiple relationships. This is the ‘wicked stepmother’ syndrome, and it is not a fairy tale. It seems that most mothers of the last brood of kids have an overwhelming urge to benefit their offspring at the expense of the older children – and will use all manner of tactics which are littered in novels about the rich and famous.

‘It is not fair to treat all your children equally, the older children can look after themselves’.

‘The older children need to be provided for by their mother – after all you gave her enough in your divorce’ and on it goes.

Private client professional lawyers must try to persuade clients to decide what to do while of sound mind and not dependent on others. But even the most experienced lawyer may find they are no match for a determined and greedy new wife with children of her own to provide for.

Wealthy clients need a range of private client services in a multitude of jurisdictions which is why I have formed Caroline’s Club – where networking works.         

It has now been running over a year and is an exclusive award-winning club of leading private client professionals keen to win business and build trust with clients.

Please let me have your comments and don’t forget to register for Caroline’s Club – it’s FREE to register and you can then learn more about our exclusive award winning club of leading private client professionals who are keen to win business and build trust with clients simply register here

Squeeze ‘em till the pips squeak

Rishi Sunak last week gave his autumn budget statement which introduced higher state spending on top of the highest hike in taxation seen since the 1950’s.

The Chancellor had made ‘historic tax increases’ this year, upping then by £40 billion, with the pledge to plough billions more into the NHS to tackle social care crisis and boost spending for other Whitehall departments

Chris Grayling former cabinet minister said ‘..we cannot plan a future as Conservatives, as a big state, high tax party. We are a small state, free enterprise party!’ – my thoughts precisely

I also agree with David Davis…’the area where I disagree with the government’s strategy is on the level of income tax, national insurance contributions and taxation generally, which in my view is likely to raise significantly less money than the Treasury spreadsheets tells them’

‘The simple truth is that the increases in [National Insurance Contributions] will undoubtedly depress growth and employment as a result, which will depress the tax take’

And the hint at lowering the taxes before the next election only makes matters worse. Let me explain…

If you are in business and thinking of expanding by taking on a few more employees, you will now be faced with higher national insurance contributions, and then if as a result you get an increase in profits that you are unable to enjoy because your business faces higher corporation tax at some point you will simply not bother – no incentive. Given the effort and risks taken to grow the business at some point it is simply not You will put off the planned growth for two years to see what the Chancellor will do then to lower taxes. This is precisely the time when the Chancellor will review the recovery to see when and if he can lower taxes – a vicious circle.

The government’s policy of high tax and high government spending at a time when we have seen the lowest growth in the average wage increases since the banking crisis, the impact of Brexit, the disastrous effect on many businesses due to the pandemic, and the now very real threat of inflation, -  is sheer madness

The Institute of Fiscal Studies, the UK’s leading tax and spending think tank is highly critical of the policy. We have seen an unprecedented hit to average earnings since the banking crisis in 2007/8 which is set to continue and is predicted to result in an overall fall in the average household income by 2027 from a projected average wage  rise had the banking crisis not intervened from £43,300 to £30,800 a fall of 42%.

The Resolution Foundation says the average household would pay £3,000 more in taxes because of the budget. This comes at the very time when economists are predicting an inflation rise of 4%. The combination of all these factors can only result in a flat recovery in household standards.

But it is not all doom and gloom – or is it? Over the hill has come a group of 30 millionaires who wrote to the Chancellor on the Wednesday before the Budget in an open letter, calling on the Chancellor to tax them and other rich people more because they can afford it ‘the cost of the recovery cannot fall on the young and on those with lower income’

The millionaires told the Chancellor to introduce a wealth tax on the nation’s richest people to ‘help pay for the recovery from the coronavirus and help tackle the yawning inequality gap’ 

But wait a minute – isn’t this what France did with disastrous results. It introduced and increased the wealth tax on France’s wealthiest residents with the result that France’s wealth creators, left France and came to live in London. Although there are at least 30 magnanimous millionaires who will stay put and pay the taxes on their wealth, there will be many more eager entrepreneurs, who have now discovered how easy it is to work remotely who will up sticks, go to live and develop their businesses, in other places which value their entrepreneurial skills more such as Ireland, Monaco, Italy or Portugal.

The millionaires also speak of increasing the capital gains tax rate to the same level of income tax. Again, tax increases very often dictate behaviour. The Laffer curve makes it clear that by increasing tax rates the tendency is for the tax payer to rearrange their lives to avoid it.

An entrepreneur can plan when to sell his or her business and so will delay the sale until such time as he or she is non – UK resident and outside the UK tax net. Then all he or she needs to do is to stay outside the UK for 5 years and the UK HMRC will get NOTHING! 

What these magnanimous millionaires will be fully aware of is that with their millions they can live and work where they like. There will come a point when it is not just a matter of not wanting to pay higher taxes that drives our entrepreneurs and employers out of the country, but these people simply will not want to live in a country under a government which delivers tax hikes at a time when poor households are suffering high inflation on their daily essentials with little prospect of higher wages. 

We cannot afford to do anything which drives our wealth creators out of the country – and the Conservative party should know this.

Please let me have your comments and don’t forget to register for Caroline’s Club – it’s FREE to register and you can then learn more about our exclusive award winning club of leading private client professionals who are keen to win business and build trust with clients simply register here

Emotional Governance

There is a saying in most countries for wealth to be dissipated in three generations; clogs to clogs, paddy fields to paddy fields and rags to rags – but there are enough exceptions to this general rule which proves this need not be.

In the early 1990’s I asked myself how a family can preserve wealth beyond the third generation. I started my research looking at how businesses thrive and started with corporate governance. I studied the Cadbury Report of Corporate Governance, the Greenbury Report of Corporate Governance, and the Combined Code of Corporate Governance. They pointed to processes, relations, roles and responsibilities and I wondered whether these principles  could be applied to family owned wealth – I coined the process ‘Family Governance’ which is widely used today.

But what does Family Governance entail?...                                         

Corporate Governance looks closely at the parties involved in managing and running a business organisation. It first identifies who they are and then looks closer at the rights and responsibilities of each paying close attention to where there could be conflict.

To give an example shareholders may want the business to pay out dividends, whereas senior management may wish to increase their remuneration, bonuses, improve their office environment and pile up business expenses. Then there could be a tension between the original family shareholders and the investor shareholders. The family may wish to put their own members on the board and look to the long term of the business whereas the investor shareholders may be looking for an exit in five or so years with a floatation or sale. 

Once the parties have been identified together with their roles and responsibilities it is then important to formulate chains of accountability and monitoring. It is an essential ingredient of good corporate governance that every participant knows what is expected of them, and then that person is held to account. There is an expression which I refer to in my book ‘Reimagining the role of the Private Client Professional’ – post lockdown – which is you ‘respect what you inspect’.

Family Governance has many similarities with corporate governance, in that it deals with asset ownership, succession and decision making, but it is then overlaid with emotion.  

Sibling rivalry, bitter disputes between former spouses and favouritism, are often where putting assets into a trust can be a benefit.

The family assets in trust are held by trustees who are obliged by law – to act in the interests of all the beneficiaries and if the family is in dispute the trustees need to act in a way which is best for all of them. This can be of particular interest when dealing with a family business owned by a trustee and one side wish to preserve the business to benefit future generations and the other side just wants to take their share and go.

This can lead to some very difficult emotional family issues, especially where one or more family members are competent in business and others are not. How can the trustees be fair to all family members?

It is in connection with this sort of situation where the services of our Podcast Professional of the week, Franco Lombardo are so important. Very often, in my experience the emotional baggage which clings to a greater or lesser experience of most families cannot be openly discussed because the family members do not feel ‘safe’ in discussing emotional issues with each other.

When the founder dies, or succession plans are being made to deal with such an event, the impact on the family is huge. Not only are they dealing with a bereavement but there is also a shift of power, which some may find difficult to accept and can give rise to some deeply held resentments and difficulties which can work to derail everything

Franco talks in his podcast about family members’ relationship with money. I have seen this all too often some family members cover up their feelings of inadequacy at not having business acumen by demanding their share – in cash to compensate, but if they succeed in making their demands it could ruin the business saddling it with debt which it cannot afford

This process I call from ‘dictatorship’ – when the founder is alive - to ‘democracy’ – to get the business and family on an even keel after the death of the founder without killing the golden goose.

From my experience this traumatic event needs to be addressed before the founder becomes ill or incapacitated and, in many cases, needs to involve the skills of numerous experts, such as Franco who is a member of Caroline’s Club. It may seem very expensive and possibly excessive, to engage so many professionals to put in place processes and mechanism but nothing can be as damaging or expensive as litigation following the death of a founder when the family goes to war armed with emotional resentment and baggage.

Better a stitch in time than nine.

Please let me have your comments and don’t forget to register for Caroline’s Club – it’s FREE to register and you can then learn more about our exclusive award winning club of leading private client professionals who are keen to win business and build trust with clients simply register here

Is the UK still attractive?

I am pleased and delighted to have received more requests from families seeking to move to the UK and in acquiring UK passports than I have for many years.

From my own myopic view, why would anyone want to come to live in the UK, there are gaps on the supermarket shelves because we cannot get the workers to pick the crops from the fields post Brexit, and if crops are picked, they cannot be delivered due to a shortage of lorry drivers?

Add to this the grim weather we have had in August I can think of nothing better than to get away, but not everyone is the same.

Take Alice she lives in Argentina, is divorced with three children aged 9, 11 and 13…

She wants to come to the UK for the education of her children and would like to get a British passport for herself and her children

Whether Alice can get a British passport depends on her circumstances when she was born.

If Alice was born before 1983, she may automatically be a British citizen. Given that she was born in Argentina she will need to show that her father was British, he was a citizen of the UK and colonies, married to her mother and was able to pass his citizenship onto Alice. This means he must either have been born in the UK, given UK citizenship in his own right, or had been working as a Crown servant when she was born

If, however Alice was born between 1983 and June 2006, the rules changed slightly. She can be a British citizen if her mother or father was a British citizen when she was  born).

In this situation as before Alice’s British parent must be able to pass on their citizenship to Alice.

In Alice’s case her father was British born and bred, and went to live in Argentina to marry Maria, a beautiful Argentinian woman, Alice’s mother. Her father and Maria were married at the time she was born and she was born in Argentina.

This means that Alice can apply for British citizenship. 

But what about the position of Alice’s children?

A person born after 2006 can apply for citizenship as before but in this case will only be eligible to apply if either their mother or father was a British citizen when they were born, with a citizenship which can be passed onto their children.

Alice was not born in the UK and acquired her citizenship only by means of her father’s citizenship at the time of her birth. Therefore, her children cannot automatically apply for British citizenship.

Alice and I explored what she could do if she came to the UK with her children for their education.

A child can apply for a passport if at the time they apply they are under 18, their mother or father was a British citizen when they were born and they’ve lived in the UK with their parents for three years before the date they apply.

They must also however be able to prove that they and their parents have not spent more than 270 days outside the UK during those three years and were in the UK exactly three years before the day the Home Office receives their application. 

If their parents are divorced or separated then only one parent needs to live in the UK with them, but both parents must consent to their application.

This is the ideal solution for Alice. She can apply for a British passport and come to live in the UK for her children’s education. When they have been in the UK for three years they can then each apply for a British passport. In three years they will still be under the age of 18 so can qualify.

The only thing Alice needs to commit to is to spend 270 days in the UK for each of the three years. She now needs to find somewhere to live and schools for her children – which is where Caroline’s Club comes in…

Please let me have your comments and don’t forget to register for Caroline’s Club – it’s FREE to register and you can then learn more about our exclusive award winning club of leading private client professionals who are keen to win business and build trust with clients simply register here