Clients with larger estates may not be aware of all the tools to address the Inheritance Tax issue.

While typical tools such as discounted gift trusts, life insurance and simply spending and gifting the estate remain valid options, for substantial estates there is another solution that may be a good idea.

I asked a specialist in the field of Family Limited Partnerships (FLPs) to explain a little more about this relatively unknown solution to Inheritance Tax planning.

Susanne Beveridge is a solicitor working for Brodies Solicitors LLp in Edinburgh. Brodies are well knowledged in this field.

Susanne says

“Since changes to the inheritance tax (IHT) treatment of trusts were introduced in 2006, trusts have looked much less attractive as a vehicle for passing down substantial wealth to future generations.  Any assets passing to a trust from a married couple or civil partners over the value of two IHT nil rate bands (currently £650,000) are now subject to immediate and ongoing IHT charges throughout the lifetime of the trust.

Family limited partnerships (FLP) can provide a solution as a means of passing such wealth (ideally minimum investment of £1m) down the generations without the prohibitive IHT treatment of the trust regime yet critically allowing control to be retained over the assets.  The benefit of assets being gifted to a partnership rather than to a trust is that for IHT purposes this gift is treated as a potentially exempt transfer and therefore, provided the individual making the gift survives for 7 years and retains no benefit from it, then the value of the gift will drop out of their estate.

A partnership is established to hold investment funds for various family members. The partnership will have one or more limited partners (who are not entitled to take any part of the management of the firm) and one or more general partners (who are responsible for the whole management of the limited partnership).  Each partnership agreement will be structured according to the assets proposed to be transferred (bearing in mind the capital gains and income tax implications), the family members (including whether or not there are minor children) and the intention of the donor of the assets.

A FLP will be a collective investment scheme and therefore as a regulated activity this must be carried on by a Financial Services Act authorised operator who will ensure that the appropriate reports and administration are complied with.

Specialist advice will be required in every case to ensure that the FLP is structured in the most suitable way according to the exact circumstances.  FLPs are fast becoming the vehicle of choice for wealthy individuals wishing to pass on their wealth to the next generation.”

If you feel a Family Limited Partnership may be worth considering for your estate then why not give me a call to discuss the area in more detail. With experts like Brodies available to assist an IHT solution is now very real.

The Financial Services Authority would have us believe that economic sectors like India and China are much higher risk than developed sectors, ie UK, Europe and US.

My view has been for sometime now that we should look carefully at this description. Personally, I consider these sectors are much stronger propositions, long term as they don’t have the levels of debt that developed nations have and furthermore have a long way to go in terms of growth potential.

If you look at risk in terms of volatility then indeed India and China probably are higher risk and will remain so.

However. if you look at risk in terms of debt and growth potential, as indeed many clients do, then it is my personal view that these sectors should be a vital inclusion in any client portfolio, and are a lot less risky than the regulator would have us believe.

I raised this point with Stuart Parks this morning in a conference call. Stuart is Head of Asian Equities for Invesco Perpetual, and held in high esteem by the Industry due to his experience in the Far Eastern Markets in particular India & China.

He agreed with my view completely in that India & China are less risky than we are led to believe, if you consider risk in terms of growth potential long term. However, if you look at risk from the perspective of volatility then indeed they remain higher risk. When markets are doing well we will see potential high returns, but equally when things are not so good the losses could be substantial!

For those clients wishing to consider these investment areas then please give me a call to arrange a time to meet and consider such opportunities in more detail.

Anthony Bolton’s fund which many of you took my advice and invested in has had a strong 6 months. The share price has increased in value by 27.9p in the £, as at the 8th November. Anthony has easily outperformed the index the fund is compared to by more than 5%

So strong has been the performance, that it is trading at a premium.

Fidelity have indicated they may now issue more shares in the Trust to combat the rising premium.

If you invested in the fund you may well receive an invitation (probably in January 2011) to buy more shares to maintain your holding which is optional, but in my opinion represents a good long term investment. Feel free to give me a call should you have any queries on the matter.

China’s performance will slow in the next couple of years but in my view will continue to outperform the other indexes by some distance.

There has been a great deal of speculation about interest rates rising and the Bank of England (BoE), once again pumping money into the economy via its process of Quantitative Easing (QE).

My view is this. Based on feedback from fund managers, that John and I listen to on a regular basis, interest rates are likely to remain low for at least the next 12 months and probably the next 2 to 3 years.  I feel there is a significant chance that BoE will not use QE in the short term. If it does I do not believe it will be this year, possibly after the next inflation report in January.

I think there is a bigger chance of QE being required in the 2nd half of 2011 as the Goverments’s austerity measures start to kick in and take effect.

What does this mean for Corporate Bonds?

I recommended many clients invest in lower risk bonds back in 2008 and 2009 when many advisers were pulling their clients out of them. Historically corporate bonds have represented a good home for monies where clients wanted less risk.

Typically if interest rates rise then corporate bond values fall, and vice versa. While many “experts” were suggesting we should pull clients out of bonds, back in late summer 2009, expecting interest rates to rise this year we made the decision to sit tight. Our view was the recovery was still to unstable for a sudden hike in interest rates to materialise. In addition, we felt there was a strong chance of Government change, which could easily mean a change in approach to dealing with the recession and recovery.

As it turned out this happened on both fronts. The coalition adopted a different approach to Labour which eased the pressure on interest rates. Similarly the sudden recovery never materialised.

This led to substantial returns on the capital values of Bonds, and strong growth on our client portfolios. Granted some equity funds did better but bearing in mind bonds are considered much lower risk, the returns were most satisfactory.

My view is that corporate bonds remains a good place for monies to sit. Whilst we wont see 20% or 30% returns on funds as we have experienced this year, we may well see high single digit returns over the next 12 months.

In other words, holding bonds remains, in my view a good idea, for the time being and particularly as part of a balanced portfolio.

Any queries or concerns then please give John or I a call.

China’s GDP for Q2 2010 reached US$1.377 trillion, significantly surpassing Japan’s US$1.288 trillion total, to become the world’s second largest economy behind the US. China has displayed a three-decade rise to dominance, evolving from Communist isolation to become an emerging superpower.

China led both the emerging markets and the developed world out of recession in 2009, displaying economic resilience and laying the foundations for other commodity-exporting nations to stage their own recoveries. China has now overtaken the US to have the largest automobile market in the world, as well as surpassing Germany to becoming the leading global exporter according to Bloomberg.

This growing economic strength enhances the investment potential offered by the country:

* Japan is unlikely to retake the number two slot and analysts predict the gap between the two countries will only widen further going forward – so China looks set to maintain its high profile, raising the status of both the emerging and BRIC markets (Brazil, Russia, India & China)

* Four of the world’s ten leading companies (by capitalisation) are Chinese, highlighting the country’s growing dominance in the global investment universe

* China is challenging the balance of both military and financial power to enhance its global influence

World Bank forecasts show China could overtake the US and claim the number one position sometime around 2025. According to HSBC GIF Chinese Equity Fund manager Richard Wong, this possibility will be largely shaped by the country’s ability to adapt to the changing economic environment.

Richard Wong states that the key will be how China adapts to an environment where reliance on developed economies to fuel exports will be significantly less than in the past and where consumption growth will have to, for the first time, outstrip growth in the broader economy.

So, China looks as though it could emerge from financial crisis in a strong position – to the benefit of both its domestic markets and the wider emerging market region.

So the long and the short of it is the “BRIC” nations are likely to be the nations that offer real growth in the future as the developed west, including Europe, UK and U.S. look to repay debt and rebuild their banks. This is likely to be the case in the next 5yrs at least. Never forget that equities markets regardless of where they are, go up and down and Regulators consider the “BRIC” nations higher risk for various reasons.

My view is though, that India and China will outgrow the US in the next few years and the short sighted view of the regulators in classing them as being higher risk will prove to be wrong. So for those clients looking at these type of opportunities, there are a range of funds now available in these sectors worth considering. Why not give us a call to discuss the options?