What has happened over the last few weeks in personal finance? (07/05/2020)

Category: News

Furlough and tax bills

Many SMEs are making errors on their applications for the Government’s furlough scheme. This means they will have to repay thousands of pounds to HMRC later. Many small business applications for the furlough grant include the cost of their Employer’s National Insurance Contributions (NICs) for furloughed employees. However, for many SMEs that cost is already being covered by the Government.

Under the existing Employment Allowance, businesses that pay less than £100,000 in NICs each year can apply for up to £4,000 of tax relief on that bill. This relief is used by many micro-businesses to reduce their National Insurance bills to zero. HMRC is currently paying furlough scheme claims to businesses as quickly as possible. But those who overclaim by mistake will have to pay that money back to HMRC later.

This is an unexpected cost that they are unlikely to have budgeted for. An unexpected bill of several thousand pounds from HMRC is the last thing small businesses will want to see as they fight to recover from the economic shock of coronavirus. If they are not incredibly careful with their furlough scheme applications, they are putting themselves at risk of just that.

Support for the self-employed

HMRC has begun contacting customers who may be eligible for the Self-Employment Income Support Scheme (SEISS). Chancellor Rishi Sunak recently announced this as part of the Coronavirus Job Retention Scheme. Those who are eligible will be able to claim a taxable grant worth 80% of their average trading profits up to a maximum of £7,500 (equivalent to three months’ profits), paid in a single instalment. HMRC is also inviting customers, or their agents, to go online and check their eligibility for SEISS.

To get confirmation from the eligibility checker, individuals should have their unique taxpayer reference (UTR) and NI number ready. They should also make sure their details are up to date in their ‘government gateway’ account.

Individuals are eligible if coronavirus has adversely affected their business. They need to earn at least half of their income through self-employment; have trading profits of no more than £50,000 per year; traded in the tax year 2018 to 2019 and submitted their self-assessment tax return on or before 23 April 2020 for that year. HMRC is using information that customers have provided in their 2018 to 2019 tax return, and returns for 2016 to 2017 and 2017 to 2018 where needed, to determine their eligibility and is contacting customers who may be eligible via email, text message or letter.

ESG investment popularity increases

Investment decisions based on environmental, social and governance (ESG) factors are growing in popularity. This is despite investors having a limited understanding of what they entail, research has found. The 2020 Financial Adviser survey, conducted by fund data company FE fundinfo, reveals 56% of advisers have increased the amount of client money they have invested in ESG funds over the past year. However, 62% believe that their clients do not understand what ESG investing involves.

Among ESG factors, the research also reveals investors primarily favour funds that have limited or zero impact on the environment. A quarter of financial advisors listed environmentally friendly investments as their clients’ preferred ESG consideration. This was followed by ethical investments (e.g. avoiding certain companies, sectors, or industries) at 24%. Companies with strong corporate governance or focus on social impact or Islamic finance seem to be less of a concern for investors. 8%, 4% and 3% of advisers said this would be their clients’ primary ESG motivation. The research also found advisers believe demand for ESG investments, is coming from investors themselves.

Coronavirus and the property market

One of the best ways to judge how much a property is worth is to see what is being asked for similar homes, or how much they have sold for recently. Monthly house price reports from sources as the Land Registry and Rightmove are the best tools for this. These offer an overview of thousands of homes for sale. However, with the market on hold for the foreseeable future, these indices will take months to offer enough data again.

Commentators believe it is particularly difficult to predict whether house prices will fall and by how much. This is because the nature of the current crisis is different from previous downturns we have seen. The 2008 house price crash was in part caused by tough restrictions on borrowing. By comparison, we have pent-up demand and freely available mortgages at low rates. This could see house price growth settle before returning to the gentle increases previously seen.

Equity release as an option

Many people are looking for ways to supplement their incomes now. If you are over the age of 55, you have a couple of extra options in the forms of equity release and pension withdrawals. But what are the pros and cons of each? And which is going to be best for you?

Equity release is a type of mortgage product allowing you to unlock some of the equity you have built up in your property. You borrow against the value of your property, with the loan, and the interest charged, paid once the property is sold when you die or move into care.

Of course, the lockdown has impacted the way these lenders offer their deals. They cannot conduct physical valuations for example. Also, many who would borrow are self-isolating so cannot enjoy the face-to-face advice which is part of the process. What is more, early indications are that the rates on equity release products are increasing.

One attractive option for some borrowers, particularly now, is that you can go for a drawdown lifetime mortgage rather than a lump sum. Effectively you arrange a ‘cash facility’ that you can tap into as and when you need it. This flexibility may be particularly valuable if you are just looking to supplement an income that has taken a temporary hit. It also tends to cost less than releasing a lump sum in one go. There are of course plenty of downsides to equity release.

There is no getting away from the fact that it is going to work out more expensive than a traditional re-mortgage, for example. Part of this is the fact that the interest rates are higher. Another is as you are not making repayments as you go that interest is then charged on the entire loan, meaning it can ramp up significantly. That does not mean it is the wrong choice for you. You may not be able to get a traditional re-mortgage anyway, but it should be considered carefully before you sign up. One important thing to bear in mind is that no matter what happens, your loved ones will at least not be left owing money should you live for longer than expected. Lenders have adopted a ‘no negative equity pledge.’

Financial education for children in lockdown

Getting teenagers to think about saving for their old age is a mammoth task at the best of times. With the stresses of the coronavirus health crisis, it may now seem impossible.

As the financial effects of lockdown are felt, now might be an appropriate time to discuss the value of money. Ease your teenagers into the world of finances by getting them to complete the Bank Statement Challenge. Devised by Sian Bentley, a teacher from Leicester, all you need is a bank statement from a few months ago and one from during the lockdown period. Go through the statements with your kids and compare your spending then and now. This is a straightforward way to talk about the family’s finances. In real terms, this can show the effect coronavirus is having on your budget.

With a concrete example of the value of money in their minds, you can introduce other concepts, like the power of investing to grow their savings.

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