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PrivateWealth
BULLETIN
For clients and contacts of the
Pinsent Masons Private Wealth team
Issue 5, Spring 2013
DUES ON
YOUR DOORSTEP
New rules affect tax-efficient
property vehicles
THE BASICS OF TAX PLANNING
Use all your reliefs and allowances
CUTTING IT
Can diamonds be a brilliant investment?
SUDDEN WEALTH
Windfalls can bring problems
www.pinsentmasons.com
Pinsent Masons | Private Wealth Bulletin
PrivateWealth
BULLETIN
Issue 5, Spring 2013
Welcome
In this issue
04
Closing the door on tax planning?
Owning an expensive home through
a company is about to become less
attractive.
08
The long view
Long-term wealth preservation is
difficult, but not impossible.
10
Building blocks of tax planning
Many reliefs and allowances are available
– are you using them to full effect?
14
Splitting assets
20 Sudden Wealth
A specialist UBS team shares the
advice they give to people who have
enjoyed a huge windfall.
22
For love and money
Diamonds can be a canny investor’s
best friend.
A long-running case illustrates the
complexities of dividing property assets
held in offshore companies.
24
They’re going fast
16
Don’t give up on equities
26
Contact us
Unfashionable, unpredictable... but
equities have a lot to recommend them.
New supercars from the world’s
greatest marques.
Key people in the Pinsent Masons
Private Wealth team.
Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated
by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’,
used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent
standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered
office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP and affiliated entities
that practise under the name ‘Pinsent Masons’ or a name that incorporates those words. Reference to ‘Pinsent Masons’ is to Pinsent Masons
LLP and/or one or more of those affiliated entities as the context requires. © Pinsent Masons LLP 2013.
But this, of course, means that it can be a
good time to invest – or at least, indulge
– in the purchase of high quality assets.
We look at the variety of goods which are
attracting investment in our low-growth
economy, with features on diamonds, with
their heady associations of glamour and
mix of pleasure and profit – and on luxury
supercars, an asset rather more prone to
depreciation but no less exciting for that.
But alternative assets have problems of
their own – exclusivity brings illiquidity,
with lower trading volumes meaning that
assets cannot be disposed of instantly.
The article ‘The Rise and Fall of Equities’
is a powerful reminder of the enduring
benefits of equities in a volatile market.
As ever, we combine exclusive ‘lifestyle’
articles with robust views and guidance
on the preservation of wealth, including
though prudent tax planning – timely,
given the new laws on the taxation of
high-value residential property. As high –
value divorce cases continue to dominate
the headlines, we also look at the thorny
challenge presented in establishing ‘who
owns what’ where discretionary trusts and
offshore companies have been used to
hold family assets.
Enjoy this issue.
KARL WOOLLEY
Partner, Head of Private Wealth
Edited and designed by Word of Mouth Communication www.wordofmouth.co.uk
02 Issue 5 Spring 2013
Welcome to this Spring edition of the
Pinsent Masons Private Wealth Bulletin.
It was with a degree of optimism that
our creative team chose the blossom
theme for the front cover, given the
Arctic weather conditions which
continue to grip London. The fiscal
equivalent of the bracing weather
continues to grip the economy and we
see only sporadic flares of recovery.
www.pinsentmasons.com
Spring 2013 Issue 5 03
Closing the door
on tax planning?
New laws have reduced the tax benefits
of holding expensive houses in offshore
companies, trusts and other such
structures. Paul Dufty, a Senior Tax
Manager at Pinsent Masons, explains the
new rules, and says that many people
with these arrangements may still
decide to keep them in place.
I
n last year’s Budget, the Government announced
significant changes to the taxation of high value
residential property. Some of these took effect
immediately. Others are starting this year, and
now that further details have been published we
are able to assess whether the Government will
achieve its stated aim: to “ensure that individuals
and companies pay a fair share of tax on residential
property.” In our view, the policy intent behind the
charge is flawed, and these changes will give concern
to many individuals who have caused no loss of
UK tax. Overall we expect that any increase in tax
revenue will be less than the Government hopes.
The new rules target wealthy investors, particularly
non-UK domiciled individuals, who use trusts and
company structures to hold their UK residential
property. Deciding to hold residential property in
this way can be for many reasons, including security,
but it also means in most cases that the value of
the property is outside of the charge to Inheritance
Tax (IHT) and so is fairly standard ‘non-dom’ tax
planning. For example, using an ‘Excluded Property
Trust’ places the trust capital completely outside the
IHT net. Similarly, if the trustees and/or the company
are non-UK resident, they do not have to pay Capital
Gains Tax (CGT) when they sell the property.
THE NEW RULES TARGET
WEALTHY INVESTORS,
PARTICULARLY NON-UK
DOMICILED INDIVIDUALS,
WHO USE TRUSTS AND
COMPANY STRUCTURES
TO HOLD THEIR UK
RESIDENTIAL PROPERTY.
The new measures amount to
an entirely new basis of taxing
UK residential property held in
corporate structures.
THE KEY TO
UNDERSTANDING
HOW THE NEW RULES
WILL WORK IS THE
CONCEPT OF A
‘NON-NATURAL
PERSON’.
What are the new measures?
The key to understanding how
the new rules will work is the
concept of a ‘non-natural person’.
From April this year, a non-natural
person is a company (both UK and
overseas); a collective investment
vehicle; or a partnership in which
one or more members is a company.
However, some corporate
entities are not counted as a
‘non-natural person’. These
include trustees, or a company
acting as a trustee of a
settlement; companies acting as
nominee for the beneficial owner
who is an individual; and bona
fide property development and
investment companies.
A non-natural person already
has to pay a higher rate of stamp
duty (SDLT) when it purchases UK
residential property costing more
than £2million. The higher SDLT
rate is 15%, compared to the
7% standard rate for properties
in that price band, so this adds
significantly to the overall
purchase costs.
“
Stamp Duty (SDLT) rates on residential property
Two further changes begin in April
this year. Both of them apply only
to non-natural persons.
1. An Annual Tax on Enveloped
Dwellings, or ATED, will be
levied on residential property
valued at over £2million.
2. When a ‘non-UK resident
non-natural person’ (such as
an offshore company) sells
residential property, Capital
Gains Tax will be charged on
any capital gains.
The Government has also
introduced a series of reliefs, so
that genuine property development
and rental companies are protected
from these charges. These reliefs
were extended in the recent
budget.
The Annual Tax on Enveloped
Dwellings
Individuals who hold property
in structures may find that is
better in the long run to continue
that arrangement and pay the
new Annual Tax on Enveloped
Dwellings (ATED).
The amount of ATED will
depend on the value of the
property on 1 April 2012 (or its
subsequent purchase price).
The table below shows the
different bands.
Property Value
SDLT
Rate
Under £125,000
0%
£125,001 - £250,000
1%
£250,001 - £500,000
3%
Property
value
ATED
2012-13
£500,000 - £1,000,000
4%
£2m - £5m
£15,000
£1,000,001 - £2,000,000
5%
£5m - £10m
£35,000
7%
£10m - £20m
£70,000
£20m+
£140,000
£2,000,001+
£2,000,001+ when purchased by certain non-natural persons
15%
ATED rates
The first ATED charge will arise
on 1 April 2013, and must be paid
to HMRC by 1 October 2013.
From 2014 onwards, it will be due
on 15 April each year. Properties
will remain in the same category
for the next five years, although
the charge will be index-linked.
In some situations, it may in
the longer term be more cost
effective to pay the ATED rather
than the IHT. For example, the
potential IHT on a property
valued at £20m is £8m. That is
equal to 57 years of the ATED at
current rates.
Capital Gains Tax
Capital Gains Tax is generally paid
only by UK residents, although
anti-avoidance legislation can,
in certain circumstances, treat
gains of non-resident trusts and
companies as accruing to
UK-resident individuals.
Gains on the disposal of high
value residential property by
non-UK resident non-natural
persons is subject to CGT
at 28% from April 2013.
What does this mean for
existing structures?
Looking at the big picture, the
new changes certainly do not
mean that all existing structures
are now ineffective and should
be abandoned. For a start, they
will remain effective as a means
of minimising IHT.
Revising the structure to
exclude a non-natural person
will avoid the ATED and the
future CGT when the property
is sold – but this will need to be
planned carefully. In many cases,
moving the property out of a
company will bring the property
IN SOME SITUATIONS, IT MAY IN THE LONGER
TERM BE MORE COST EFFECTIVE TO PAY THE
ANNUAL TAX ON ENVELOPED DWELLINGS
RATHER THAN THE INHERITANCE TAX.
within the IHT net. Revising
the arrangements will give an
immediate cash flow advantage,
because the ATED charge will not
be due, but must be balanced
against the risk of an IHT charge
at 40% on an asset that should
appreciate in value over time.
So care is advised.
For example, if the intended
beneficiary and occupant of a
£2million property has a short life
expectancy, it may be more costeffective to retain the structure.
The ATED is likely to end up
being less than the IHT charge
of £800,000 plus the costs of
revising the structure. On the
other hand, if the beneficiary has
a longer life expectancy, it might
be financially advantageous to
appoint the property out of the
company and look to manage the
IHT liability in other ways.
Another significant issue is
whether changes to an existing
structure can be made without
triggering tax charges. Certain
income tax and capital gains
anti-avoidance provisions
may apply. These will need to
be carefully considered and
quantified when deciding what
course of action to take.
In short, the question of
whether structures should be
retained or dismantled needs
to be considered on a case-bycase basis, taking into account
the personal and financial
circumstances of the beneficial
owners as well as the tax
implications.
Individuals who do not currently
own property in this way, but
are thinking of purchasing UK
residential properties valued at
over £2million, will also need to
take advice before they decide
how to structure the purchase.
In the extreme, the policy
may in fact promote SDLT
avoidance where prospective
purchasers are happy to pay
the new ATED because of the
potentially significant SDLT
savings made when purchasing
the enveloped property. •
FIND OUT MORE
Paul Dufty, Senior Tax Manager, Pinsent Masons
T: +44 (0) 20 7054 2637
E: [email protected]
The long view
David Greenyer, Private Client Senior Manager at
Brown Shipley, offers some thoughts on long-term
wealth preservation.
N
aturally, all high net
worth individuals want
to maintain and preserve their
wealth throughout their lives,
and then to pass it on intact
to the next generation. Several
things about the current
economic environment make
that kind of long-term planning
even more difficult than usual.
Inflation is relatively high, and
it’s easy to imagine scenarios in
which it goes higher still. The first
aim of long-term financial planning
is to beat inflation, so that goal
has become harder to reach.
At the same time,
governments around the
world need to close big gaps
between their spending and
their tax income. Whatever the
rhetoric about achieving deficit
reduction by cutting spending,
it would be wise to plan on
the basis that your taxes will
increase in the short and
medium term – or, at least, that
protecting your assets from the
taxman’s attentions will remain
challenging.
At Brown Shipley, we’ve been
helping clients with private
banking, financial planning
and investment for over 200
years, so we know a thing or
two about the long-term view.
Most of our client relationships
have existed for several years,
and often continue through the
generations.
Currently, one of the most
interesting tax-efficient
investment areas is the
“Alternative Investment Market”
(AIM), the London Stock
Exchange’s international market
for smaller growing companies.
Investing in the AIM can shelter
a portion of your wealth from
inheritance tax (IHT) – subject
to the assets being held for a
minimum of two years prior to
an individual’s death.*
Another popular way of
sheltering wealth is the use of
offshore bonds. The attractions
include: gross returns, no
internal tax charge, tax deferred
income, full fund management,
ready access and simple
administration. However, do
not fall into the trap of believing
they are all the same. Different
jurisdictions offer particular
attractions. Also, keep a close
eye on costs, which don’t need
to be high, but often are.
An offshore investment
bond offers gross roll-up of the
underlying investment providing
potential for greater growth
than a taxed fund. As the bond
is subject to life assurance
rules, it is possible to make
withdrawals of up to 5% per
year of the original investment
without incurring a tax charge.
In addition, segments can be
assigned to lower rate taxpayers.
This provides flexibility when
IHT planning.
These are just two of the
many ways in which you can
plan your wealth in the current
environment. If you talk to
experienced advisers, then they
will be able to suggest many
more, which are suited to your
particular circumstances. •
FIND OUT MORE
David Greenyer, Private Client Senior Manager, Brown Shipley
T: +44 (0) 20 7282 3387 E: [email protected]
Stuart McCarthy, Private Client Manager, Brown Shipley
T: +44 (0)20 7282 3225 E: [email protected]
Important information: This information is provided by Brown Shipley for information purposes only and does not constitute investment
advice. It is not intended to be a recommendation for investment. The value of investments and any income from them may fluctuate and
are not guaranteed. Investors may not get back the amount originally invested as past performance is no guarantee of future performance.
The tax reliefs referred to above are those available under current legislation, which may change, and their availability and value depend on
individual circumstances. *Investors should be aware that investment in companies listed on AIM carries a higher risk than equities on the
main market of the London Stock Exchange. The value of your investment may go down as well as up and investors may not get back the
full amount invested. Past performance is not a reliable indicator of future results. In addition, current tax rules governing investment into
AIM and available tax reliefs may change. The value of any tax benefits will be dependent on individual circumstances. The performance
of individual portfolios may vary from the Brown Shipley AIM portfolio performance due to factors such as stock selection and timing
of investment transactions. Brown Shipley cannot guarantee that all AIM investments made will qualify for relief from IHT or if they
do initially qualify that they will continue to do so. Each company’s qualification for IHT relief is subject to HM Revenue and Customs
approval at the time of disposal of the shares. Brown Shipley is a trading name of Brown Shipley & Co Limited, which is authorised by the
Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
THE BUILDING BLOCKS OF
It is usually the exotic tax
planning schemes that
hit the headlines. But you
can achieve a lot just by
getting the simple things
right, says tax planning
specialist Janet Hoskin, a
Partner at Pinsent Masons.
T
ax planning can sometimes
be mind-bogglingly complex.
But before you think about
entering highly sophisticated
tax schemes, it is useful to check
that you are making the most
of the more basic opportunities.
Here are ten areas to look at, and
simple steps to take. Together
they add up to an excellent
foundation for tax planning.
1
Savings
UK taxpayers aged over 18
can invest in Individual Savings
Accounts (ISAs). These can hold
cash, shares or both, and any
gains you make are tax-free. The
government sets a limit on the
amount you can invest per tax
year – £11,520 in 2013-14.
2
Investments
Some types of investment
bring significant tax advantages.
The Enterprise Investment
Scheme, or EIS, gives tax relief
when you invest in new shares
in certain trading companies
PLANNING
that are not listed on the
London Stock Exchange, or
certain other exchanges.
Income tax relief is given
at 30% on sums of up to
£1million invested in a tax year.
Even better, you don’t have to
pay Capital Gains Tax (CGT) on
any gains after three years.
Some shares qualify as
special Seed EIS, or SEIS. This
gives income tax relief at 50%
on an investment of up to
£100,000. The restrictions are
tighter; for example, the trade
must be less than two years
old. Again, CGT relief is
also available.
Income tax relief of 30% is
also available on investments
of up to £200,000 a year
in shares in Venture Capital
Trusts. These are a form of
investment trust which hold
shares in companies. Shares
must be held for five years,
but you don’t have to pay CGT
when you sell them.
3
Capital Gains Tax
Everyone has an annual
CGT exemption (£10,900 in
2013/14). Gains over this amount
are taxed at either 18% or 28%,
depending on your other income.
Each year, you should make
disposals to make full use of
your annual allowance. Any
losses you realise each year can
also be useful; you can set them
off against your gains to bring
down the taxable total. Losses
can also be carried forward into
future years.
Transfers between spouses
and civil partners can allow
you to make best use of your
allowances, losses and possibly
different tax rates.
Finally, remember that you
don’t have to pay CGT on your
principal private residence. If you
have more than one home then,
under certain circumstances,
you can change which of them is
CGT-free, so you should keep
this under review.
4
Income Tax
There are quite a few
simple ways to reduce your
income tax. Firstly, if your spouse
or civil partner has a different
income, it is worth reviewing
how you split your investments,
to ensure you are both taking
maximum advantage of your
personal allowance (£9,440 each
in 2013/14) and the basic rate tax
band (a further £22,570 each).
Pensions also have tax
advantages. Contributions to
registered pension schemes,
up to a maximum of £50,000
per year, qualify for tax relief at
the individual’s highest rate of
income tax. If you contribute less
than the allowance in any one
year, you can use the remainder
in any of the next three tax years.
When you retire you’ll have
to pay tax on the income that
the pension provides, although
you can usually take out up to a
quarter of the fund as a tax-free
lump sum first.
“
TRANSFERS BETWEEN
SPOUSES AND CIVIL
PARTNERS CAN
ALLOW YOU TO
MAKE BEST USE OF
YOUR ALLOWANCES,
LOSSES AND POSSIBLY
DIFFERENT TAX RATES.
IF YOU LEAVE 10% OF
YOUR NET ESTATE TO
CHARITY, THEN THE
INHERITANCE TAX RATE
ON DEATH CAN BE
REDUCED FROM 40%
TO 36%.
Any gifts to charity can also
bring tax relief if you make
a Gift Aid declaration. The
charity can then reduce its tax
bill by 20% of the gift’s value,
while the taxpayer can claim
back a further 20% (for higher
rate taxpayers) or 25% (for
additional rate taxpayers). You
can also claim both income
tax relief and CGT relief
when you give charities land,
buildings or listed shares.
5
Children’s tax
allowances
Children have a personal tax
allowance too. Although the
rules means that there’s
not much advantage in
parents giving money to their
children, grandparents can
fund investments for their
grandchildren to maximise
allowances.
Junior ISAs are available to
children who do not have a
Child Trust Fund. They are very
similar to the adult version, so
income and gains are tax free
– even if the parent provides
the funds. The annual limit for
contributions is £3,720.
You can also set up a pension
fund for a child, and contribute
up to £3,600 per year if they
have no employment income.
7
Wills and estate
planning
Having an up-to-date will is vital
to ensure your property passes to
those you wish on your death. In
2013-14, you can give £325,000
on your death without paying
Inheritance Tax (IHT).
This tax free amount can be
passed on to the surviving spouse
Entrepreneur’s relief
– so at current rates the second
This relief is available on
person can pass on £650,000
some unlisted trading company
tax-free. However, more benefit
shares and business interests.
can often be obtained if the first
It reduces the rate of CGT from
person’s allowance is fully used
28% to 10% for gains of up to
when they die.
£10million (the lifetime limit).
Your IHT bill can be reduced in
Planning to maximise this relief
other ways too, such as business
needs to be carried out more than property relief (available on
one year before a sale.
certain company shares and
business assets) and agricultural
property relief. You should review
your assets to make sure you are
not missing out on any opportunities
to use these. And if you leave
10% of your net estate to charity,
then the IHT rate on death can be
reduced from 40% to 36%.
6
8
Trusts
In many circumstances
trusts are no longer tax-efficient,
and they are now used more for
general estate planning. However,
trusts are still vital in saving IHT on
various death payments. You
should ensure that death
payments under life assurance,
death in service and pension funds
are all transferred into trust so that
no IHT is payable on your death.
9
Inheritance Tax
lifetime planning
Gifts of less than £3,000 per year
are tax-free. No tax is due on
larger gifts if the giver survives for
at least seven years after the gift
is made. If the giver survives for
more than three years, tax will
be due, but at a reduced amount.
In all cases, take care to ensure
that HMRC counts it as a ‘gift’ for
tax purposes. Regular gifts out of
income are IHT free. As always,
it’s wise to take expert advice.
10
Residence and
domicile
Special rules apply if you are
non-UK domiciled, non-UK
resident, or if you work full-time
abroad. If these apply then you
should check that your income
and assets are held in the most
efficient way. If you are non-UK
domiciled, remember that
you can opt in and out of the
remittance charge.
HMRC love to tell us that “Tax
doesn’t have to be taxing.” With
these simple steps, tax planning
doesn’t have to be either. •
FIND OUT MORE
Janet Hoskin, Partner, Pinsent Masons
T: +44 (0)113 294 5224
?
?
Splitting assets
Establishing who owns assets held in offshore
companies might be seen as a largely academic area
of law – until divorce proceedings begin. Kate Francis,
an Associate at Pinsent Masons, explains.
I
THE HUSBAND
FLAGRANTLY GAVE
FALSE EVIDENCE,
DELIBERATELY
SOUGHT TO
MISLEAD THE
COURT, AND USED
THE COMPANY
STRUCTURES NOT
ONLY FOR TAX
EFFICIENCY BUT
ALSO FOR TAX
AVOIDANCE – AND
STILL THE COURT
DID NOT FIND
IMPROPRIETY.
n the Autumn/Winter 2011
issue of Private Wealth
Bulletin, Michael Pulford looked
at the use of discretionary trusts
and offshore companies to
hold assets, and explained the
potential consequences during
divorce proceedings. These
issues have been brought into
the spotlight again by the recent
Court of Appeal decision in
P Resources Ltd and others v
Prest and others.
The case involved a husband
and wife who married in 1993 and
had four teenage children. They
lived to a high standard, primarily
in London, with other properties
in Nigeria and the Caribbean.
During their divorce, the wife
sought from the husband an
award of £30.4million, in addition
to a significant payment of child
maintenance. The husband said
that he could not afford that, and
proposed just over £2million.
At the first hearing, the court
had concluded the husband had
deliberately failed to give proper
disclosure of his financial position.
A key point was that the husband
was the sole shareholder of three
companies, incorporated in the
Isle of Man, which held various
properties, seven of which were
located in England. The court
decided those seven should be
transferred to the wife as part
of an award of £17million. The
companies appealed.
The Court of Appeal had to
decide whether the husband
was “entitled” to the properties
held by the companies, and
therefore whether he could
be ordered to transfer the
properties to the wife. That the
husband was in control of the
companies was fairly clear: he
was the sole shareholder, he
used them to fund his and the
family’s personal expenditure,
and one of the directors had
given evidence that the directors
operated the companies
without question in accordance
with the husband’s wishes.
The court ruled, however,
that control did not equate to
entitlement. As the court put it:
“[A] one-man company did not
metamorphose into the oneman simply because the person
with a wish to abstract its assets
was his wife.”
This case reiterates that
control of the company alone
was not enough: impropriety
must also exist.
In this case the husband
flagrantly gave false evidence,
deliberately sought to mislead
the court, and used the company
structures not only for tax
efficiency but also for tax
avoidance – and still the court
did not find impropriety. You
might ask, then, what would
count as impropriety and allow
the court to have recourse to
the companies’ assets. The
company’s involvement in some
form of impropriety is not itself
enough. Impropriety requires the
company structure to be linked
or used to avoid or conceal
liability: in other words, for the
company to be used as a facade
to conceal wrongdoing.
This case is a useful
reinforcement of the principles
that allow wealth protection
when holding assets within a
company, provided there is no
impropriety. A note of caution,
however. Even if a court cannot
order a company to transfer
assets to the owner’s wife, it
may include the husband’s
interest in the companies as part
of his overall financial resource,
even if not directly accessible,
and make orders accordingly
which give the wife a greater
share of other resources.
The court preferred not to
do so in this case, because the
companies’ properties were the
only assets which the wife was
likely to be able to get her hands
on easily.
The wife appealed the
decision, which was heard by
the Supreme Court earlier this
month and a decision is awaited.
Watch this space. •
FIND OUT MORE
Kate Francis, Associate, Pinsent Masons
T: +44 (0)20 7054 2540
The rise and fall of equities
Exotic asset classes are all the rage as
investors turn away from volatile stock
markets and rock-bottom bond yields.
But don’t be too quick to give up on
equities, say Christian Flackett and
Julian Howard of GAM London.
L
ast summer, a 1936 Mercedes-Benz 540K
Special Roadster (one of just 30 ever made)
sold for over £7m in an auction in California.
In November 2012, more than 350 works
by Andy Warhol were sold for a total of over
£10.7million at auction in New York. A few days
later, Jeff Koons’s Tulip sculpture achieved a
staggering £21.2m. One Christie’s official declared
confidently: “It’s highly likely that we’ll see a
continuation of records being broken.”
In property, a 45-bedroom mansion
overlooking London’s Hyde Park was recently
placed on the market for £300m.
Meanwhile, the growing Chinese predilection
for wine, especially Chateau Lafite, has been well
publicised. Three bottles of the 1869 vintage sold
for a record price of nearly £145,000 each at a
sale in Hong Kong two years ago.
What does all this tell us? For one thing, it tells
us that these assets are probably overpriced. More
LONG GONE ARE THE DAYS WHEN
A HEDGE FUND ACHIEVING CASH
+ 5% WAS THE NORM.
generally, it shows that investors are very keen
to diversify their portfolios into assets that were
previously thought of as being a niche interest.
You can see why. Interest rates around the
developed world are on the floor and government
bonds in the US, UK, Japan and Germany all
yield less than 2%. Some corporate bonds might
give you 5%, but with more risks attached –
companies can’t print money. Long gone are
the days when a hedge fund achieving cash +
5% was the norm. In equities, a short-term rally
notwithstanding, medium-term returns have also
been poor, with the MSCI AC World Index in USD
delivering an annualised return of just 2% per
year over the five years to end February 2013.
Then there’s the steady stream of
bankruptcies, frauds and scandals which have
kept finance and investing in the headlines for all
the wrong reasons.
Wine is not a liquid asset…
But alternative assets have problems of their own.
Exclusivity brings illiquidity: lower trading volumes
mean that assets cannot simply be disposed
of instantly at the click of a button. Specialist
brokers, intermediaries and auction houses have
to be dealt with, and will take a slice of the cake.
Supply and demand are volatile: it is not unusual
to see a total drought of either of them.
“
DIVERSIFICATION IS ESSENTIAL, OF COURSE, BUT THE UNABATED
INTEREST IN ‘FULLY PRICED’ ASSETS IS RISKY.
Admittedly, some unconventional assets have
been made more accessible by commoditising
and unitising. For example, you can now find a
couple of UK-based residential property collective
investment vehicles which allow you to get involved
in that sector for significantly less than the value
of a whole house in Mayfair. But they still have to
impose restrictions in case an investor wakes up
one morning and decides that he wants his money
back right now. After all, part-sale of a house is
impossible: you can’t sell the dining room to raise
money for a 10% investor redemption. Unitisation
cannot solve the liquidity issue on its own.
Blissful (and expensive?) ignorance
For collectibles and alternatives, the relative lack
of trading forums, reliance on infrequent auctions
and subjective independent valuations all make it
hard to appreciate what they are worth at any one
moment. This can breed a false sense of security
that such investments are somehow ‘more stable’
than investment funds or securities.
Classic cars are a good example. While they may
appear to be timeless collectors’ items, the market
for them is in fact prone to massive fluctuations
which only become apparent if you have to sell in a
hurry at the wrong time. Values dropped sharply in
the late 1980s and 1990s, leaving many investors
who had borrowed to finance their purchases badly
burned. Choosing the right classic car to buy takes
skill and a good deal of esoteric knowledge.
By contrast, if you buy a selection of blue-chip
stocks in the FTSE100 or S&P500, the chances
are that most of them will still be around and
frequently traded five years later. It will also be
easy to ascertain at any moment what you could
sell them for. This does mean that their volatility is
equally apparent. Years like 2008 can be scary for
stock market investors, but isn’t it better to know
what’s going on with your investments than to
wallow in blissful ignorance?
Case in point
Compared to some exotic asset classes, wine
would appear to be less prone to many of these
concerns. There is even an index – the Liv-Ex 100
Fine Wine Index. The associated exchange allows
240 member merchants and funds to buy and
sell fine wines. This is an impressive achievement
for the founders, but it still can’t compare to the
maturity and liquidity of the NYSE or LSE.
In the UK there is no dedicated wine exchange
regulator, and exchange-traded wines are usually
shipped directly from buyer to seller with quality
control, delivery and adherence to the exchange’s
rules left up to the parties themselves to sort out.
Fees are comparatively high, with some exchanges
charging up to 15-20% per transaction. Wine also
has its fair share of Bernie Madoffs. Label and
estate identity theft were rife until comparatively
recently; these days the greatest concerns are
storage integrity and whether your investment
actually exists.
Following fashion can be expensive
Diversification is essential, of course, but unabated
interest in ‘fully priced’ assets is risky. Following
the noise is a prescription for buying high, only to
then sell low in frustration further down the line.
In any event, investors who want a slice of the
fashionable action can access it through equities.
New-found Chinese wealth is as much in evidence
in the retail luxury goods sector as in the auction
rooms of London, New York and Hong Kong.
Holding listed luxury goods stocks is therefore a
perfectly good way to tap into this trend.
But there are even smarter plays out there.
How about the UAE shopping mall operator
benefiting from Chinese visitors coming to the
country to buy designer watches and handbags at
better prices than they can back home? Such an
approach carries with it all the advantages of listed
equity investment, but with less of the downsides
associated with the alternatives.
Finally, it is worth considering what an equity
actually is. You can’t live in it, drive it, gaze at it or
drink it, but it gives you something just as enticing
– a share in the future profits of a company.
Publicly owned companies were responsible for
revolutionary and highly lucrative technologies
like the railways, airliners, PCs, software operating
systems and the iPad. And they will soon bring
us the benefits of 3D printing, vertical farming,
crowd-funding, cloud computing and gene
therapy. Assets which can capture the wealth
generated by innovation and enterprise warrant
a long-term place in any diversified long-term
investment portfolio. •
FIND OUT MORE
Christian Flackett, Co-Head of Private Clients UK,
GAM London
T: +44 (0)20 7393 8812
A mixed blessing
Suddenly becoming wealthy might sound like a nice problem to have, but many people
are surprised by the emotional impact. Some even lose their new fortune almost as
quickly as they acquired it. Colette Lagueux of the Acquired Wealth Team at UBS AG
Wealth Management explains how to hold on to your windfall – and your relationships.
S
udden and unexpected wealth: what’s the
downside? In fact, this is often an unsettling and
emotionally difficult time. The Acquired Wealth team
at UBS specialises in helping people to manage the
problems that come with the indisputable pleasures.
Here are the first five steps we advise them to take
to ensure a happy and secure future.
1
Take your time
Take some time to get used to the idea of your
new wealth before you make any decisions. Wait
until the new pressures, expectations and emotions
have become less intense, then consider your next
moves with a cooler head.
2
Find the right financial team
For the first time in your life, you need a
financial back-up of investment, tax and legal
advisors. You’ll have to find people you can trust,
who have the necessary experience. Their advice
will help you navigate the financial landscape –
and, just as importantly, the emotional issues.
One UBS client said: “Following a protracted
divorce, I received a lump sum settlement payment
that I recognised was meant to support me forever.
The idea of relying on one pot of money to provide
me with my ongoing income was quite daunting.
I suddenly had a large bank balance but I was afraid
to touch it. We agreed my main objectives were
to make the wealth grow and last, whilst paying
an income. With this clarified we were able to put
together a low risk investment strategy that I was
comfortable with.”
4
“
ADVISORS CAN HELP YOU
LEARN ABOUT MANY THINGS
THAT YOU’VE PROBABLY NEVER
HAD TO CONSIDER BEFORE.
5
Monitor your finances
Once your financial plan is in place, meet
with your team of advisors regularly to ensure
that any changes to your situation or objectives
are reflected in the plan. Having additional
children, remarrying, needing a greater level
of income… all sorts of things can require a
change to your plan.
One of our clients put it well: “When I received
a large sum of money, I suddenly starting
receiving a lot of attention. People I hadn’t been
in touch with for years, distant family members,
banks, accountants… all getting in touch. It
caused me to start doubting people and what
they wanted from me. It took time and ‘hand
holding’ from my new advisors before I was able
to fully trust their good intentions. People in this
situation should expect patience, understanding
and education from their new team of advisors.”
Build a financial plan
You’ll then need a long-term financial plan
that’s right for you. Advisors can help you learn
about many things that you’ve probably never
had to consider before: investments and what sort
of return you might expect, tax, wealth planning,
succession planning, charitable giving. You may also
want to reduce taxes and risks to your wealth.
One of our UBS Advisors puts it this way: “We
work to understand a client’s true comfort level when
it comes to taking risk and the associated return
expectation. These conversations can be challenging:
I’ve heard of expectations of double digit returns with
zero risk, on more than one occasion! Saying that,
it’s our job to work with clients to make sure they
understand the risks they are taking and the realistic
level of return that might be achieved.”
3
It is also our responsibility to remind you that the price and value of investments and income derived from them can go down as well as
up. You may not get back the amount you originally invested. Past performance is not a reliable indicator of future results. UBS Wealth
Management is a business division of UBS AG which is authorised and regulated by the Financial Services Authority.
Consider your main objectives
What do you want to do with your wealth?
Different people give very different answers.
Discuss your long-term objectives with your
advisors, and explore how these can play out in
different scenarios. Think about clearing debts,
retirement, providing for children and family,
ongoing income and lifestyle requirements.
Finding the right partners: an example
A man won the lottery. He was overwhelmed by
the media attention and the many considerations
that confronted him, and felt a great weight of
responsibility. Working with UBS and Pinsent
Masons, the client followed the five steps above.
We helped him to create a financial plan and
an investment strategy that met his long-term
objectives so that he felt in control again. Once
he knew his long-term priorities were catered for,
he felt much more comfortable spending some of
the winnings and having some fun. •
FIND OUT MORE
Colette Lagueux, Director, UBS AG Wealth Management
Mark Goddard, Executive Director, UBS AG Wealth Management
For love… or money
Diamonds are eternally fascinating. They can also be a good investment if
you know how to cut the right deal, says jewellery expert Lewis Malka.
H
DIAMONDS CAN BE
ALMOST MAGICALLY
BEAUTIFUL, BUT
INVESTING IN
THEM REMAINS
A HARD-HEADED
DECISION.
ave you ever wondered
why there is no way to buy
diamonds on the stock market?
You can buy almost anything
else – sugar, gold, orange juice,
part of a football club – but you
can’t buy diamonds anywhere.
There is a reason. If you are
thinking of buying a diamond,
you have to examine it carefully.
The first thing you’re assessing
is The Four Cs: cut, carat, clarity
and colour. Each of these is vital.
Take clarity, for example. The
diamond’s internal characteristics
include features such as clouds,
cavities, graining, laser lines and
much else. These are often known
as ‘inclusions’. Which inclusions
a diamond has, and where,
makes a big difference to the
price. You also have to consider
the symmetry, fluorescence,
proportions and much else. An
impossible task without carefully
viewing it in person.
People increasingly ask me
about purchasing diamonds
as an investment. Their first
question is usually, “Will I get a
better return than I do on cash
in the bank?” The short answer
is no. If you buy a significant
diamond ring from any high
street jeweller, it will probably
take you 25-30 years to make
your money back on it.
The only sensible way
to purchase diamonds as
an investment is to go to a
reputable diamond trader, who
ABOUT THE AUTHOR
Lewis Malka is the owner
of Joseph Sterling Bespoke
Jewellers in London’s Hatton
Garden. He also sits on the
board of the London Diamond
Bourse. He regularly blogs
(blogaboutdiamonds.com) and
can also be found on Twitter
and Facebook.
might sell you a diamond at the
wholesale price. We all know
about the dangers of using past
performance as a guide to the
future, but the wholesale price
of diamonds has increased by
between 5% and 15% every
year since records began in the
1970s. My advice is that it’s
probably better to spend your
budget on one larger stone
than two or three smaller ones.
The larger a diamond, the rarer
it is. As with most things, rarity
makes for a better investment.
Coloured diamonds are rarer
still, and we have seen yellows,
browns, greens and reds coming
onto the market recently. These
will command an even higher
price and should make a profit
more quickly. Our records show
that these have gone up in
recent times by as much as 30%
year on year.
Pink diamonds are the
rarest of all. In November
2010, Laurence Graff bought
a 24.78 carat rectangular
pink diamond at auction for
£29million. You probably won’t
be surprised to hear that this
was the most ever paid for a
diamond. When he was asked
why he paid so much, Mr Graff
replied: “To reduce my tax bill
this year.” Diamonds can be
almost magically beautiful, but
investing in them remains a
hard-headed decision. •
FIND OUT MORE
Lewis Malka, Owner, Joseph Sterling Bespoke Jewellers
T: +44 (0)20 7404 4022
W: www.joseph-sterling.com
IF YOU HAVE A
FONDNESS FOR THE
CLASSIC BRITISH CAR
MAKERS, YOU’RE WELL
SERVED THIS YEAR.
They’re going fast
This year’s new supercars are in great demand and very short supply.
A
s we see the first signs
of spring, many people’s
thoughts might turn towards
sports cars and driving for fun.
Right on cue, the world’s most
luxurious car brands have set our
minds racing with some exciting
new models.
If you have a fondness for
the classic British car makers,
you’re well served this year. The
Jaguar F type is the successor
of the classic E type, revered
by car aficionados. It will be
taking on its German rivals
in the two-seater convertible
sector. Bentley have brought
out a new generation four-door
Continental Flying Spur and
the Continental GTC Speed
Convertible.
Rolls-Royce’s new models
include the new Wraith Coupé,
which is based on the Ghost
range. Aston Martin have
refreshed the Rapide four-door
coupé with the Rapide S.
Meanwhile, McLaren have
created the ultimate super car:
the P1. It will get 727bhp from its
3.8 litre V8, plus an additional
176bhp from an electric motor,
together delivering a combined
torque of 664lb/ft at 4,000rpm.
Power comes at a price – in this
case starting from £866,000.
For those with a passion for
the Italian marques, Ferrari have
the LaFerrari (the replacement
for the Enzo) and the F12, a twodoor V12 coupé. Lamborghini
will mark their 50th anniversary
with the new Veneno. Only
three will be produced, all of
which have already been sold for
€3million each. Then we have
the Aventador LP700-4 Roadster
that will arrive later this year and
a replacement of the Gallardo.
The waiting list for these cars
grows rapidly, and if you delay
then you’re left with a choice
between paying a premium to
jump to the front of the queue or
waiting, perhaps for 18 months.
You’ll have to move fast. •
FIND OUT MORE
Rob Groves, Owner, Groves Car Consultancy
T: +44 (0)20 3137 2829
W: www.thegrovesconsultancy.co.uk
ABOUT THE AUTHOR
Rob Groves is a trusted adviser
on prestige cars, with exceptional
knowledge and contacts throughout the
industry. He shares his passion with a
wide and well-established client base of
High Net Worth Individuals.
Contact us
To find out more about how Pinsent Masons can make your wealth work
for you, please get in touch with your regular Pinsent Masons contact or:
Karl Woolley
Partner, Head of Private Wealth
T: +44 (0)20 7054 2733
Jason Collins
Partner, London
T: +44 (0)20 7054 2727

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