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Hidden Assets, or an "Aunt Ada"

We have been advising a family about their investments for many years, gradually making all their investments tax free and minimising the effect of Inheritance tax.

Sadly the husband died recently and when the executor asked for valuations on three accounts unknown to us, we knew that something was wrong.

Even though we have been looking after this family for over twenty years these accounts were kept secret from us - why we will now never know - but the financial damage could have been incalculable.

There could have been substantial penalties and fines from failure to complete the probate application correctly, an increased liability to Inheritance tax as well as increased risk from doubled up investments. He has also paid far more income tax for years, all because for some reason he did not tell us, as his advisers, about all his assets.

This reminded me of Aunt Ada’s money.

Many moons ago I visited a couple to advise on investing the redundancy and pension lump sums the husband had just received on his retirement. Using all the “tricks of the trade” I suggested a portfolio of investments that kept the wife a non-taxpayer. (There is no point in investing money only to give 20% or more of any profit to the government.)

Imagine my surprise then when sometime later they rang to say the revenue was demanding income tax from the wife and imposing a fine for false declaration. I called to see them and read the offending letter from the Revenue which referred to interest from a Building Society account which was not included in her return.

“They’ve made a mistake” I said. “They think you have an Alliance and Leicester account”. “This one” she said, handing me a passbook in her name showing a healthy balance. “That will be it,” I sighed, “Why did you not tell me about it?”

“It’s not my money, its Aunt Ada’s and I just look after it for her.” “But it’s in your name, which makes you liable for the tax on it. It also makes you a taxpayer because the interest on this account takes you over the limit.”

She paid the tax and the fine and I made some changes to get her back to “tax free” status but it still took me seven years to stop the revenue sending her tax returns to complete every year.

The moral of these tales is tell your Independent Financial Adviser everything. Failure to do so can be very expensive indeed. We now call this situation an “Aunt Ada”!

First steps on the housing ladder

Taking those first steps on the housing ladder require careful thought as well as a pot of money! Two ways that may help soften the financial impact are joint ownership or making use of a ‘help to buy’ scheme.

Joint Ownership
Jointly owning a property can seem like an excellent idea and can allow a purchase that would otherwise be impossible. Whether you are buying with a parent, partner or friend, it’s vital that decisions are made at the outset about how the property will be owned and how the parties will contribute towards the mortgage.

There are various forms of co-ownership. Your solicitor will help you explore these and make sure the parties’ intentions and responsibilities are legally documented in order that, should the relationship end or the property is sold, both parties will know exactly what to expect. This is as important for unmarried couples entering into joint property ownership as it is for friends or relatives. It will cost a little more initially to have such an agreement drawn up, but it could save a lot of money in the long run, to say nothing of the potential heartache.

Help to Buy
This Government funded scheme is actually an equity loan. The scheme started in 2013 and will be available until 2020. It allows first time buyers to buy a brand new property with a 5% deposit; the Government loans up to 20% of the cost of the newly built home (or 40% in London to accommodate higher property prices) and the buyer must obtain a mortgage for the remaining 75%.

As you might expect, there are conditions attached; for example the home must be your only property ownership, it must not be sub-let to tenants and when the home is sold – or after 25 years – the loan must be repaid. For the first five years no fees are payable on the loan, but after that a 1.75% charge is added, which increases every year. However, if you are in a position to repay within five years, the scheme effectively offers an interest free loan.

Buying property is always a big decision and never more so than when it is your first home. By all means seek advice from friends and relatives who have gone through the home-buying process but also remember that expert legal advice is essential. Cutting corners is simply not a sensible option.

For helpful advice on buying or selling your home, contact Janice Anderson on 244153 or email
janice.anderson@birkettlong.co.uk .