November 2007

Welcome to the 11th edition of our Financial Connection e-bulletin.

We hope that you enjoy these e-bulletins. If you have any queries, or would like to discuss any of the issues raised with one of our consultants, please call us on 0845 788 9933 and quote EM-4489.

Towry Law continues expansion with a move to a larger London office

As part of our further expansion, we are delighted to announce that we will be moving our London operations to new, larger premises. This move follows our continued growth over the past year and the recent acquisitions of Baker Tilly Financial Services and MLP.

We will be moving from our current offices in Queen Victoria Street and Bedford Square to a new 18,500 sq/ft office space in the prestigious New Street Square development in EC4. The premises are currently being fitted out for our 80 London staff and should be ready for occupation by the end of the year. These premises will provide a high quality environment, with some stunning views, for clients and professional contacts who visit. They will also give us enough space to accommodate our future growth plans.

We will occupy the top two floors of Number 6 New Street Square which is a key part of the 500,000 sq/ft development which includes 30,000 ft of retail and leisure space.

Please click here for a photograph of the office.

Dave Percy
Head of Ops & IT

Financial Times pod-cast

On the 19th October 2007, Andrew Fisher, Chief Executive of Towry Law, featured on a FT pod-cast discussing the Retail Distribution Review with Matthew Vincent, Personal Finance Editor at the Financial Times.

This is the review set up by the Financial Services Authority in response to recurrent problems in the financial advisory industry. We have discussed in previous bulletins that Towry Law is keen for the review to adopt five key principles:

• Fees not commissions
• Education not ignorance
• Integrity not stealth
• Holistic not limited
• Independent not tied

Further details of these principles are featured in the Towry Law document, "Independent Wealth Advice in the UK - A campaign to improve the integrity of the industry", which can be accessed on our home page.

Andrew's discussion with Matthew Vincent largely focused around two of these areas, fee-based advice (fees) and improving qualification levels in the industry (education).

Click here to listen to the pod-cast.

You will then need to "Select your show" of the 19th October. Andrew's piece starts after 11 minutes and 13 seconds. It is worth a listen.

Patrick Connolly
Marketing and PR Manager

Don't forget about commercial property

The demise of commercial property as an investment asset class has been widely reported in recent weeks, with many financial commentators arguing that now is the time to be reducing holdings or even getting out.

While such views can often hit the headlines, some further thought is required before any rash decisions are made.

The starting point is a realisation that nobody can predict the future. Industry experts have been predicting a fall in commercial property prices for a few years and, for that matter, in residential property prices for even longer. The reality is that no-one knows what is going to happen tomorrow, much less in the coming weeks, months and years.

In the words of renowned economist JK Galbraith, "We have two classes of forecasters: those who don't know and those who don't know they don't know." There is much truth in these words.

The suggestion that commercial property has fallen significantly in value this year also needs closer scrutiny.

In the year to date (to 31st October 2007):

The value of 'bricks & mortar' commercial property (IPD) has risen by 3.35%.

Where as

The value of property shares (FTSE EPRA/NAREIT UK) has fallen by 28.2%

(source: Lipper Hindsight)

A major reason why a number of high profile property funds have fallen in value is because they hold property shares instead of, or as well as, actual 'bricks and mortar'. Therefore it is important to understand exactly where property funds are investing. Bricks and mortar commercial property and property shares are two distinct asset classes. They have different characteristics and, as demonstrated above, there can also be a significant divergence in performance.

Towry Law only holds property funds that are fully invested in bricks and mortar commercial property. We believe that this asset class continues to have an important role to play within investment portfolios. It has the potential to be rewarding in the long-term, with the security of a regular income stream, and boasts excellent diversification characteristics. By contrast, property shares should only be held, in the appropriate low weighting, as part of the equity exposure.

There is, of course, no guarantee over how commercial property will perform in the future. However, this is the same for all other asset classes, which is why Towry Law recommends an appropriate blend of assets in order to effectively manage risk, whatever the future holds.

The biggest concern for commercial property may be an economic recession. However, even then, equities might be expected to perform even worse. In fact, in the recession of the early 1990s, at a time of huge oversupply, voids were still low and the vast majority of rental income was preserved. The last thing a company in trouble will do is stop paying rent.

Andrew Wilson
Head of Investment

2007 Pre-Budget Report

In his first Pre-Budget Report, Chancellor Alistair Darling announced a number of measures which need to be considered in managing wealth.

Inheritance tax

The first slice of an estate on death is taxable at nil per cent - hence, the 'nil-rate band'. Married couples and civil partners now have a transferable nil-rate band, effectively increasing the inheritance tax exemption for couples to £600,000 in the current tax year and rising to £700,000 from 6 April 2010. It has been a standard Towry Law practice to recommend a will trust of the nil-rate band to ensure it is not wasted on first death but a transferable nil-rate band will make planning simpler in some respects. It will also mean that it is generally no longer necessary to implement complex family home schemes on the first death.

The new rules are also generous in that they apply where the survivor dies on or after 9 October 2007 - so that existing widows, widowers and surviving civil partners may benefit where the nil-rate band was not wholly used on the first death, however long ago that occurred.

For wealthy couples, lifetime planning to reduce the taxable estate will still be important. Maximum use should be made of exemptions, such as the annual exemption of £3,000 and the ability to make entirely exempt gifts out of surplus income. The Towry Law Loan Trust may also be used to reduce the taxable estate without any impact on the nil-rate band, thus ensuring it is available in full to transfer to the survivor.

Those who are single or divorced obtain no benefit from the new proposals and also need to consider lifetime planning to reduce or avoid an inheritance tax bill on death.

Capital gains tax

Individuals are currently chargeable to capital gains tax at the appropriate rates for savings income (10%, 20% or 40%). The net chargeable gain - after losses, indexation and/or taper relief and the annual exempt amount - is treated as the top slice of income and is charged at the highest marginal rate. Trustees and estates are generally chargeable at 40%.

For disposals made on or after 6 April 2008, gains will be charged at a single rate of 18%. The new rate will apply to all individuals (whatever income tax rate is paid on savings income and including those who pay no tax on income) and to trustees and estates.

Indexation relief on assets acquired before 6 April 1998 and taper relief for non-business assets held since April 1998 for longer than three years will no longer be available. There are also changes for assets held since before 31 March 1982.

If you have assets held long-term, you may wish to consider if it would be favourable to make a disposal prior to 6 April 2008 so as to secure existing reliefs.

These changes also have a significant impact on the relative attractiveness of the life insurance investment bond as a wrapper for new investments. Tax on income and gains under investment bonds may be deferred but are then taxed as income and at the taxable person's highest marginal rate; gains under collective investments such as in the Towry Law Wealth Management Service will be taxable at the new flat rate of 18%. It is possible that the 2008 Budget will include further changes more favourable to investment bonds and we will therefore keep this issue under review. However, the proposed changes will be taken into account in any new investment recommendation.

Business owners

Owners of unquoted trading companies face a significant increase in tax on the sale of the business if taper relief is abolished from next April. Currently a shareholding in a family business will usually qualify for full business taper relief after just two years so that the maximum effective tax rate is 10%. After 5 April 2008 the rate will always be 18%.

There are signals that a concession for business owners will be included in the 2008 Budget but we anticipate that in future it will be much more important to plan for the sale of the business so as to reduce the chargeable gain. One method of doing so is to extract profits by way of pension funding, attracting tax relief on contributions and benefiting from a tax-favoured investment environment. Recent changes to pension legislation also mean that there is now more flexibility in taking benefits.

Michael Greenwood
Technical Liaison Manager

Market Commentary

Equity markets have been the main drivers of returns over the past year, despite set backs in February, and, more importantly, July and August. Asia and Emerging Markets have been outperforming for five years now, and this superiority was particularly marked over the past year. For example, the average pension fund investing in Asia was up 57%, whereas the average UK fund gained a more sedate 12%. The Emerging Market story remains intact, but some individual countries, such as China and India (and maybe even Brazil) look to be valued at bubble levels and the risk/reward trade-off does not appear to be in their favour. Nevertheless, investors, if history is any guide, rarely seem able to stop buying high and selling low, let alone rebalance their portfolios, and so further momentum purchases do seem inevitable. September was the record month for Emerging Market mutual fund inflows, and the last couple of months have seen more invested than in the whole of 2005 or 2006 - and this, of course, after five years of out performance (you can't buy historic returns!).

The returns from bond markets were rarely better than flat over the year. However, high quality bonds were seen as a safe haven during the uncertainty of July and August and rallied strongly. This emphasised their qualities and importance in portfolio construction terms, and was an important fillip, coming on the back of 18 months of unusually poor returns.

Commercial Property, another asset class to have been flat over the last year, or at least in terms of bricks and mortar, is held in Towry Law client portfolios. Many pension funds and private investors, however, will have invested in listed property company shares, where returns have been negative. Property transactions have been ebullient to say the least, in part due to the presence of leveraged speculators. These have now been priced out of the market by higher borrowing costs, and the froth is getting blown off valuations. This consolidation is a welcome event, as prices had run ahead of themselves and the long term growth rate of this asset class.

Future prospects

Whilst it is usually impossible to predict the future, make sense of all the variables, or assimilate all the information available to today's investors; it is nevertheless rare for the investment outlook to be quite as uncertain as it is now. Much of this is because no one knows how long it will be before the sub prime debacle fully plays out, and what impact this will have. Will the US enter recession (a sporting chance) and will this cause a contagion effect elsewhere in the Western world or indeed across the globe in entirety? Or can the emerging world finally decouple from Wall Street?

The last couple of months have seen stock markets worrying about whether the glass is half full or half empty, and with little real conviction as to how to price a dollar of earnings, especially when that dollar of earnings is now so uncertain.

One also has no idea how much worse the US housing market may get - 6% of sub prime mortgages sold in 2007 defaulted in their first 3 months - or whether there might be any similar action to play out in the UK. In the US, house prices were actually being propped up by sub prime borrowers (those that could least afford it and were the last to arrive at the party), and structured debt markets were being propped up by investors essentially in the same boat and both were overly reliant on borrowed money, which dried up quickly. Banks were quick to pass on the debt, but then found that those that bought it, such as hedge funds, often had credit lines to the self same banks, so like a bout of malaria, it repeated the visit and the problem.

One of the key benefits of multi asset class investing is the lower volatility of returns, and reduced downside risk. This can be helpful from a "sleep at night" perspective, but also comes into its own, from a mathematical angle, during more volatile periods. So, diversified multi asset class portfolios remain an intelligent investment choice for a future where few sensible analysts are prepared to forecast beyond the end of their own noses.

Andrew Wilson
Head of Investment

This Global Markets Commentary is solely for information purposes and is not intended to be, and should not be construed as investment advice.

Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

The opinions expressed are those of Towry Law Investment Management Limited on behalf of Towry Law Financial Services Limited and are made in good faith, but are subject to change without notice.

IMPORTANT NOTICE: Towry Law Financial Services Limited. Registered in England No. 607039. Towry Law Investment Management Limited. Registered in England No.793636. Towry Law Trustee Company Limited. Registered in England No. 1151146. Towry Law Pension Trustees Limited. Registered in England No.781047. All of the above firms are authorised and regulated by the Financial Services Authority. Towry Law Holdings Limited. Registered in England No.4773122. Towry Law Nominees Limited. Registered in England No.2988101. Towry Law Services Limited. Registered in England No. 5169111. The Registered Office of all these companies is Towry Law House, Western Road, Bracknell, Berkshire, RG12 1TL. Telephone 01344 828000.

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