PAYING FOR CARE – DEJA VU VU VU

FIGURES UPDATED JANUARY and MARCH 2015

Budget 2013 confirmed that the care cost cap would begin from April 2016 and the cost of bringing it forward would partly be met by extending the freeze on the Inheritance Tax threshold for three more years 2015/16 to 2017/18 - see para 1.196.

A Government comes to power. It commissions a report into how we pay for the growing cost of care for an ageing population. In July, just before Parliament disappears for the summer and more than a year after the report was published, the Government responds. It says it will improve the means-test which assesses what help people get with the cost – including raising the upper capital limit above which no help is given. And it promises a loan scheme to ensure that no-one would be forced to sell their home to pay for care.

Yes, it is 27 July 2000 and the last Labour Government publishes its response to the Royal Commission on Long Term Care which it commissioned in 1998.

The more I read that twelve year old document the more astonished I am at how similar it is to the recent Coalition Government response to the Dilnot report on long term care which it commissioned shortly after coming to power in 2010. In 2000 there are plans to improve the lot of carers, set common principles for assessments for care needs in different parts of the country, and provide for individually tailored care packages. And of course the announcement of a national scheme to let people pay the cost of their care after death from the proceeds of their home. It began in 2001. 

2012

Roll forward a dozen years and the same plans are rediscovered. Not least the ‘announcement’ on 11 July 2012 of, ahem, a national scheme to let people pay the cost of their care after death from the proceeds of their home. It was an astonishing triumph of PR over substance. And the bait was duly taken up by all media outlets – from the Daily Express to Radio 4’s Today programme – repeating as if it was a fact that 40,000 people a year would no longer be forced to sell their home to pay for their care.

In fact no-one – I repeat NO-ONE, again NO-ONE – can be forced to sell their home to pay for their care. The figure of 40,000 is more than double the actual number who do sell their homes to pay care home fees. Some of the 19,000 who do are deceived into it by cash-strapped local councils who wrongly tell them they must, aided and abetted by false headlines in the press. But some choose to use the value of their home to pay for better care than the local council will give them. And why not?

The scheme introduced by the last Government in October 2001 was “to ensure that people… are not forced to sell their homes as soon as they enter residential care.” It would “help…people who do not want to have to sell their homes in their lifetimes to pay for their care by making loans more widely available”.

Over the years the scheme became compulsory. In 2009 the Department of Health issued a circular LAC (DH)(2009)3 which said Ministers expected councils to offer deferred payment schemes and “it is the Department’s view that if a local authority were to have a policy of never exercising its discretionary powers to make deferrals, it is likely the courts would find this to be unlawful.”

We know that in 2012 8,500 people were in such schemes in England with a total debt of £197 million – an average of £23,000 each. And by 31 March 2014 that had grown to 12,458 individuals with a total debt of £273.8m - an average of £21,978 each. Lawyer Lisa Martin of Hugh James confirms that in her long experience anyone who asks for a deferred payments scheme – and insists they have a right to it – will get one. But even if they don’t all they have to do is refuse to pay. The local council still has to provide care and can let the bill clock up and take a charge against an empty home so it is paid after death. That power was given nearly thirty years ago in s.22 of the Health and Social Services and Social Security Adjudications Act 1983 (HASSASSA).

In either case no interest is charged on the debt while the resident is in care and that concession lasts for an extra 56 days with a formal deferred payment scheme.

So the Universal Deferred Payment Scheme – carefully pre-announced on 11 July before the detailed documents were published – was not new at all. Even the wording was familiar

2000: “to ensure that people… are not forced to sell their homes...in their lifetimes.”

2012 “so that no-one is forced to sell their home in their lifetime to pay for care”

The only new thing – kept carefully under wraps in those morning tours of the broadcasting studios – is that it will actually cost the heirs more than the present scheme because interest is charged on the debt from the start. That could add a few thousand pounds to the amount taken from the estate when the scheme starts in April 2015. And buried in the 150 page draft Care and Support Bill is the planned repeal of s.22 of HASSASSA to make sure there is no way out.

CAP ON IT

The other key change announced in principle in July 2012 was the cap on the cost of care. But that was a deception too. The Dilnot Commission on Funding of Care and Support proposed that the cost of care be capped. He suggested that a lifetime cap of around £35,000 would be ‘fair’. But that cap was only on the care element of the costs – the residential board and lodging charges of up to £10,000 a year would still have to be paid. And the cap is not an amount of money – it is the amount of care that £35,000 would buy at local council rates. The Government revealed in its Progress Report on Funding Reform (Figure 6) that it reckons £35,000 would buy 100 weeks of care. Someone paying £500 a week for that care would still have to buy 100 weeks-worth and spend £50,000 before the cap applied.

Figure 12 indicates that the Government has done costings right up to a cap of £100,000 which would mean paying for more than five year’s care before the cap kicked in. That would achieve its stated objective to “look at how reform consistent with the principles of the Commission’s model can be implemented, but at a lower cost to the public purse” (p23). In other words cheaper. But every penny that is spent will go mainly to wealthier groups as those with no resources get all their care paid for already. Even with a cap at £100,000 about half a billion pounds more a year would go to the richest fifth of the population (Figure 13). No wonder the Government gave no commitment about what the cap would be or when it might be introduced.

AMENDED UPDATE: With a cap at £72,000 then it would not in fact kick in until 72000/350=205 weeks of care had been paid for. If a real person - as opposed to a local council - paid £500 a week for that care they would have spent £102,500 before the cap kicked in. And they would have been paying hotel costs of £11,960 a year for nearly four years, so £150,000 gone before the cap fitted. By then most residents would have died or used up all their funds.

NOTES

You can marvel at the July 2000 The NHS Plan: the Government’s response to the Royal Commission on Long Term Care.

www.dh.gov.uk/prod_consum_dh/groups/dh_digitalassets/@dh/@en/documents/digitalasset/dh_4082154.pdf and read my summary of how the plans turned out in 2001 www.paullewis.co.uk/archive/saga/2001/000901.htm

The recycled plans are in the 2012 White Paper Caring for our future:

reforming care and support www.dh.gov.uk/health/files/2012/07/White-Paper-Caring-for-our-future-reforming-care-and-support-PDF-1580K.pdf  and the finance details are in Caring for our future: progress report on funding reform

www.dh.gov.uk/health/files/2012/07/2900021-Progress-Report_Accessible-11.07.2012-v2.pdf

Statistics on 2102 deferred payment schemes http://www.adass.org.uk/images/stories/Press12/ADASS_BudgetSurvey2012Summary.pdf
2014 figures in email 27/02/2015 from Jonathan.Gardam@adass.org.uk

You can read how to get the NHS to pay for your care www.paullewis.co.uk/archive/saga/2012/20120601Works.htm

If the NHS won’t pay here is why you still do not have to sell your home to pay for care written by me in each of the last three decades

2010 www.paullewis.co.uk/archive/saga/2010/201005Works__Care_Home_Costs.htm includes my fact check on the false 40,000 figure

2001 www.paullewis.co.uk/archive/saga/2001/000301.htm  

1994 www.paullewis.co.uk/archive/saga/19941101HoldOnToYourHome.pdf

HOW TO MOVE YOUR CURRENT ACCOUNT

A brief poll of my tweeps found the overwhelming majority of those who had moved their current account found it easy and trouble free. The ones who hadn’t moved were afraid it would be difficult. But almost no-one had encountered problems.

Step 1: Pick your new bank. Which really means decide why you're leaving the old one. Is it for moral reasons – you just don’t like the way banks behave. Or you're fed up after computer failures. Or you want better customer service or to be paid interest on your current account? And remember not only banks have current accounts. Five building societies do as well and so do 24 credit unions. See WHICH BANK below.

Step 2: Go to the website of your chosen bank (or building society or credit union) and apply for a current account. I say ‘apply for’ because you can choose your bank but it might not choose you. The bank (etc) might say no if you have an overdraft or a poor credit record. If so try another. If it happens again see BAD RISKS below.

Step 3: Your new bank (etc) will ask if you want to move your direct debits and standing orders to your new account. Say yes and that should happen automatically without a payment being missed. Print off a list yourself and check with your new bank. It can be a good time to check you know what they are all for and cancel those inactive direct debits.

Step 4: You will normally have to tell your employer or pension provider to pay your money into the new bank account. The same applies to any tax credits or benefits – tell HMRC and DWP. In fact tell everyone who is due to pay you money. Some banks will do this for you. If you have a debit card registered to pay at online sites remember to change those details too.

Step 5: Do not close your old account. Keep a balance in it to meet any payments that might not have changed. Check frequently that things have happened correctly. There may be the odd hiccup but they are soon put right if you keep your eye on things. The whole process should take less than a month or so. The official timetable - agreed by the Financial Services Authority so the banks must do it - is here  

http://www.thesmartwaytopay.co.uk/sitecollectiondocuments/account_switching_timeline.pdf. But note that when it refers to a number of 'days' that excludes weekends and public holidays.

Step 6: After a couple of months close your old account.

You’ve moved banks!

If you have a complaint about the moving process you should make it in writing to the bank. If it is not resolved within eight weeks go to the Financial Ombudsman Service www.financial-ombudsman.org.uk/consumer/complaints.htm. You can also call the Ombudsman office for advice.

WHICH BANK?

There are dozens of banks in the UK.

The five big banks are Lloyds/Halifax, Barclays, RBS/NatWest, Santander, HSBC/First Direct. They can offer the best deals and the fastest service. The way they treat customers can vary greatly. First Direct is usually top. You can find out the ones with most complaints here

www.fsa.gov.uk/library/other_publications/commentary/firm_spec

Some banks will pay you to open a current account. Some pay interest on the balance. Some want a minimum amount going in each month. Some will try to sell you an account you pay for each month but always resist as they are almost never worthwhile. Check the overdraft charges.

There are five smaller banks. None of them plays the markets with your money like the big five do. Co-operative is about to buy 632 branches from Lloyds and will then be the sixth biggest in terms of branches. It is a mutual and has an ethical policy about where it invests its (your) money. Smile is its online bank. Yorkshire Bank and Clydesdale Bank are both owned by National Bank of Australia. Handelsbanken is Swedish owned and has 115 branches in the UK. It prefers wealthier customers. Virgin Money now has 75 branches and will operate current accounts later this year. Metro Bank is mainly inside the M25 with a dozen or so branches but is growing rapidly and says it offers specially friendly service in its branches. More about four of these banks www.paullewis.co.uk/archive/saga/2012/20120301Works.htm.

Five building societies offer a current account. Nationwide is by far the biggest and the only one which is a ‘clearing bank’ – in other words it does not have to rely on one of the big five to process its accounts. With a total of 800 branches – including its subsidiaries Cheshire, Derbyshire, and Dunfermline – it is seventh in branch numbers after an expanded Co-operative. The other four societies with current accounts are Coventry, Leeds, Norwich & Peterborough, and Cumberland.

Building societies are mutual organisations which are owned by their customers. So there are no shareholders taking dividends out of the company. Their directors are paid far less than the directors of big banks. And they do not gamble money on international markets.

Twenty four credit unions offer current accounts. They may take longer to process payments but all should do payments by the next working day. They are generally small organisations with the advantages and disadvantages that brings. And there may not be one in your area. You can find a list here www.abcul.org/about/productsservices/cuca and find the credit unions that you can join here www.findyourcreditunion.co.uk. Credit unions are mutual organisations too.

In Northern Ireland there is Northern Bank which will soon take the name of its owner Danske Bank. First Trust Bank is owned by Allied Irish Bank AIB. Ulster Bank is part of RBS Group. And Bank of Ireland has many branches.

BAD RISKS

If a bank does not like you it does not have to do business with you. If you have an overdraft it is harder to move your current account. If your credit record is poor – and that can just mean you don’t have any credit cards or a mortgage or loan – then you may be rejected. Other things that give you a bad credit score are moving home frequently, not being an owner occupier, having late or missed payments on your record or court judgements for debt against you.

You can check your credit record at the three credit reference agencies. You have a right to a copy for just £2. You can get those here

http://experian.co.uk/consumer/statutory-report.html

www.equifax.co.uk/Products/credit/statutory-report.html

www.callcredit.co.uk/stat-report-online/

If there is an error on your record the agencies must correct it. If you have a poor record but there was a good reason for it or there is a dispute over a payment, you can add a ‘notice of correction’ which has to be read by anyone using the record.

The credit reference agencies will all try to tempt you to pay them every month for regular reports, credit scores and other extras. There is no need to do that. But if you want a free credit report then sign up to the free 30 day trial they offer and cancel it as soon as you get the first. If you cannot see how to cancel it on the website just tell your own bank to cancel the payment authority. It has to do that and refund any payments taken subsequently - see http://paullewismoney.blogspot.co.uk/2012/04/continuous-payments-racket.html. Callcredit has a subsidiary called Noddle which offers a free credit report for life. It makes its money by encouraging users to do deals with financial service providers.

Some banks will expect a minimum income and others will not want customers whose only income is from benefits. All the big banks have agreed to offer a basic bank account even to bad credit risks. These accounts do not have overdrafts but most do allow direct debits and standing orders. If you have been bankrupt in the last six years or you have a fraud flag by your name you may be rejected. The organisation that records fraud allegations is called CIFAS. You have a right to know if it does have your name on its fraud database. But it may be very hard to find out much else about it. Contact CIFAS here www.cifas.org.uk/enquiries_and_complaints. Ask which bank made the fraud allegation so you can challenge it with that bank. Banks are very resistant and difficult about providing any information if fraud is suspected. If you are not guilty of any fraud and all your attempts to put things right have failed then threaten CIFAS with court action for spreading damaging and false information. See http://news.bbc.co.uk/1/shared/spl/hi/programmes/money_box/transcripts/money_box_30_june_12.pdf and search for Fred.

IN PRAISE OF CASH

A lot of people ask me where they should invest £XX,000 from redundancy/mother’s estate/house sale etc?

I always reply that I never give investment advice because investments can lose you money and I never want to give advice that has cost people anything. I know invested money can go up but it can also go down. And by the time those selling you the investment have taken initial charges, annual fees and hidden costs from your money, the investment has to do very well indeed to leave you any profit. Generally it doesn’t beat cash. And it certainly won’t guarantee to do so.

So I always advise people who suddenly have a few thousands or tens of thousands of pounds which they are not using – put it in cash. Unlike investments cash cannot go down. It just goes up. Which helps you sleep at night. And the same goes for tens or hundreds of pounds or even hundreds of thousands.

But you have to make sure that your money is safe and the return is worthwhile.

Safe

Up to £85,000 saved in a UK registered bank, building society, or credit union is guaranteed by the Deposit Protection Scheme run by the Financial Services Compensation Scheme (FSCS). The limit is ‘per registered institution’. So money in two banks which share a licence will only be protected up to £85,000 in total. That can be confusing. For example Derbyshire Building Society, Dunfermline Building Society, and Cheshire Building Society are all owned by Nationwide Building Society and operate under one licence. So if you have £85,000 in one of them any money in any of the others will not be protected – only the total between all four will be safe up to £85,000. www.fscs.org.uk

It gets even more confusing with the banks. Bank of Scotland, which owns Halifax and Birmingham Midshires, operates under one licence. But that is separate from the licence of its owner Lloyds Banking Group. But Cheltenham & Gloucester, also part of Lloyds, does not have its own licence so money in it counts as part of any money in Lloyds itself.

The Financial Services Authority publishes a brief guide to major banks and building societies and how they are linked www.fsa.gov.uk/consumerinformation/compensation/brands

And moneysavingexpert has a useful online tool to check other banks a brand is linked to www.moneysavingexpert.com/savings/safe-savings#whatcounts

Your money is safe up to that limit even if the bank holding it went bust. Although a bank going bust is very unlikely, I still recommend keeping below the limit. Just as I always wear a seatbelt even though I do not expect to have a collision.

Most banks operating in the UK are regulated here and covered by the FSCS. But those which have their home in another EU state can be regulated in their home country. Technically they operate here as a branch. If the bank did fail you would have to go to the compensation scheme in its home country. The amount protected is slightly less. It is €100,000 – which at the moment is worth just over £80,000.

Banks based in countries outside the EU have to be regulated and registered in the UK so the £85,000 limit applies. And some EU based banks – such as Santander and Bank of Ireland UK – are separately licensed and protected in the UK.

The amount protected is per person. So for a couple with a joint account up to £170,000 is protected in the UK and €200,000 in the rest of the EU.

If you have more money than you can easily divide into £85,000 chunks you can get it all protected by using National Savings & Investments. It is 100% backed by the UK Government up to any amount. But its rates are generally quite low. Some are tax-free and the combination of 100% protection and 0% tax can make them attractive to people with a lot of money who pay higher rates of tax. More at www.nsandi.com

Worthwhile

People often complain that their money is earning nothing in a savings account. And that can be true. First Direct for example, which is part of HSBC, pays 0.05% on its basic savings account. So on £1000 it would pay you 50p a year for the use of it – even though it would be making £10 a year or more by lending it out. No wonder people say rates are rubbish!

But it is not just the fault of the banks. If we search out the best savings deals we can earn more than 3% on instant access accounts and more than 4% if we are prepared to leave it in one place for four years.

These rates come with catches. The 3% instant access accounts all offer a ‘bonus’ for a year or so. After that the rate will fall down to something pathetic like 1% or 0.5%. So you must move your instant access money at least once a year.

One interesting alternative is offered by a bank called Investec. It has two accounts where it guarantees to pay the average of the top ten or top five accounts on the market. In exchange you must give it three or six months’ notice to withdraw cash. It is currently paying more than 3%. You need at least £25,000 to open the account.

Remember that if you commit to a savings account that is a fixed rate for a fixed period such as one year or even four, you cannot get your money out early. If you do you will pay a hefty penalty. And although 4% a year or more over four years may seem a good rate now, if interest rates start to rise it may seem poor value by 2016. So it is a gamble on future interest rates.

You can check good savings rates at www.savingschampion.co.uk. I like this site because its top buys are not influenced by deals it has done with the providers. You can also use www.moneyfacts.co.uk to find the best buys. But beware that MoneyFacts’ first offerings will not necessarily be best buys – they will be clients. To get the real top rates, click on ‘savings’ then use the search to put in your criteria and then click on ‘sort’ in the column ‘AER’ to make sure the best really are on top.

Inflation

People who want to sell you investments often say that inflation destroys cash. And that £1000 today is worth 3% less in a year's time because inflation is 3% (or whatever it is). It is true that in the long term inflation destroys wealth of any sort that you hold. But inflation applies equally to the value of investments as it does to cash. So although high inflation is undesirable for those with money, it is irrelevant to the discussion about the value of cash versus investments.

Remember too that with an investment you have to add fees and charges onto inflation before you will make a real penny. So the inflation rate for investments is always higher than it is for cash. Always.

If a financial sales person mentions inflation, ask what guarantees they will give that the value of your investments will beat inflation. And when they say things by way of a 'reply' just repeat 'yes but what is the guarantee?' Then put it in cash.

Remember too that if you have debt then inflation is your friend. And who has the biggest debt? The Government which says it wants to control it!

Tax

The interest earned on savings is taxable. All banks and building societies deduct tax at 20% from the interest automatically. If you are a basic rate taxpayer that means tax is paid and you need not worry about it. If you are a non-taxpayer you can register to have the interest paid gross and claim it back from past years back to 2008/09. HMRC says there is around £200 million waiting to be claimed http://www.hmrc.gov.uk/incometax/tax-free-interest.htm. If you are just above the tax threshold then you may be able to claim half the tax deducted back. This is very complicated to work out but there is some help here http://www.hmrc.gov.uk/taxon/bank.htm

If you are a higher rate taxpayer you must tell HM Revenue and Customs so the extra tax can be collected either through self-assessment or your tax code.

If you are part of a couple and one of you pays tax and the other doesn’t you can save tax by holding the savings in the name of the non-taxpayer. To do that the money must be transferred into the name of the non-taxpayer. If you split up then the money will belong to just that person.

If you pay tax then your first savings account should be an ISA where interest clocks up tax-free. You can put up to £5,640 into one this tax year 2012/13. Again move your money each year to keep up with the best rates. You do that by opening up a new ISA and getting the new provider to do the transfer for you. Do not just take it the money out and put it in a new ISA. If you do then it will lose its tax-free status.

Enjoy your cash!

SHOULD YOU MOVE YOUR BANK ACCOUNT?

I tweeted on 2 July that if the banking fiasco that has affected millions of customers of RBS, NatWest, and Ulster Bank had affected me I would be taking my business elsewhere. Was that a recommendation for others to leave those banks? And if so why?

The fundamental job of a bank is to accept money into our account, pay money out as instructed, and keep an accurate record of the balance. The three banks of RBS Group failed to do that from 20 June after an overnight failure of the software that updates accounts with the previous day’s changes.

As a result money destined for accounts was not correctly allocated, online banking was suspended, direct debits and standing orders were not paid. There were problems with the use of debit cards and many people could not take money from cash machines because their balance did not include credits of pay or pensions that had been made but were not recorded on their account.

For reasons that are not clear the RBS computers had no adequate back up procedure in place and the failure meant that some data was lost from the system. Retrieving that information involved manual inputting which took so much time that the updates for future nights were held in a queue.

The problems for customers continued as the data was corrected and checked and then the backlog was processed in chronological sequence. But the bank has now admitted that was done first for RBS accounts, then for NatWest accounts and only now is it getting round to Ulster Bank accounts.

“Unfortunately for our customers in Ireland, Ulster Bank payments follow in sequence after those of NatWest and RBS. This is because of the way the technology was set-up at the time the 3 banks were integrated.” (see http://group.Ulster Bank.com/media/press-releases/republic-of-ireland/2012/02-07-12.ashx)

Although RBS customers came first and NatWest second the Group will still not confirm – twelve days after the initial error – that the problems of all the 11.5 million RBS customers and 3.5 million NatWest customers have been resolved.

But it does admit that the problems are continuing en masse for the 1.9 million customers of Ulster Bank in Northern Ireland and the Republic who will have to wait longer to get accurate access to their own accounts. It now hopes it will be resolved by the week of 16 July:-

"It is our expectation that by the week beginning 16 July the vast majority of customers will return to a normal service, but some residual reconciliations may be required."

In other words customers of Ulster Bank will be without the correct balances on their accounts and access to money paid in for around four weeks. That will cover paydays on four Fridays and one month-end.

So yes, if I had an account affected by this shambles I would be moving my business to another bank. That would not be out of pique or revenge or just plain anger. But if a bank cannot do the basics – taking in money, paying it out and keeping an accurate balance – over an extended period, why should I stay?

Is that a recommendation that others should move? No. But they should consider their options carefully.

OTHER BANKS
Of course, moving your money to another bank is no guarantee you will avoid problems. It is not just customers of RBS Group who have been affected by its computer failure. The 100,000 customers of Thinkbanking, which banks with RBS, could not access their money until Friday 29^th and had another short outage on the morning of 7 July. Ten thousand current account customers of Cumberland Building Society were similarly affected – though they were all protected by the Society itself and had few problemssaw little of the problems. Many small business customers who use Streamline to process credit and debit card payments failed to receive their takings for 20, 25, and 26 June until the morning of Monday 2 July. And unknown numbers of people whose employer banked with RBS, NatWest, or Ulster Bank did not receive their money on time. Some are still waiting.

Even if you open accounts with several unconnected banks there is no guarantee that a failure in one will not affect you if that is the one which receives your regular payments of wages, pensions, or benefits.

Some tweeps have also told me they want to avoid banks that engage in so-called ‘casino banking’ – taking in our deposits and then betting them on the international markets. We know at least one – Barclays – tried to rig the very markets its traders were placing bets on. But RBS, HSBC, and Lloyds are said to be among dozens of banks implicated in the same shady business.

The Co-operative Bank does not engage in casino banking and has a published ethical policy. It looks set to grow when it acquires 632 branches of Lloyds. Three other small banks – Metro, Handelsbanken, and Virgin – do not use money in deposit and current accounts for gambling on the markets. You can read about these four banks here http://www.paullewis.co.uk/archive/saga/2012/20120301Works.htm

There are also five building societies which offer current accounts – Coventry, Cumberland, Leeds, Nationwide, and Norwich & Peterborough.

And 24 credit unions also offer current accounts - here is the list http://www.abcul.org/about/productsservices/cuca

Many of these smaller players still use a big bank as its 'clearing bank' and you may find that payments take longer to go in and out of your account than it would with one of the big five. 

This blog contains information not a recommendation. And remember that whatever you do with your money, if the computers of a major clearing bank go down you may still be affected.

GROWTH BOND TO TEMPT SAVERS

The Treasury is trying to work out how to tempt individual savers use some of the £500 billion cash they have in the bank to fund its ambitious National Infrastructure Programme.

If it can be done it would fulfil two key objectives. First, savers would get a bit more than the dismal 3% or so that is currently on offer even to active savers who move their money regularly. Second, it would get new money into roads, rail, trams, housing, telecoms and so on which would create jobs, help companies and boost the economy. And all without it being booked as Government debt.

But both parts are tricky. Savers with cash in the bank are cautious. They want to know that their money is safe. Even if it does not go up very much, cash uniquely cannot go down (and email me if you are thinking 'what about inflation?' it would take too long here). So any growth bond would have to offer a clear hope of a better return than cash but some sort of protection against loss.

And that brings us to the second tricky part. How to keep the loan - for that is what it is - off the Government books? It already has a debt of more than £1 trillion and is expected to borrow another £120 billion in 2012/13. The Coalition is committed to borrowing less not more. So is it possible to bypass the national accounts by getting savers to lend money directly for infrastructure projects? I am told by someone close to the process that it is this step which is proving very difficult. Especially if savers are to be given any sort of government guarantee.

A similar scheme is being developed by the UK's pension industry. The National. Association of Pension Funds will soon be piloting a Pension Investment Platform to pump initially £2 billion into infrastructure projects. Eventually it could be ten times as big. Like any professional investor the funds want certainty and a good return. One example might be road building or widening. The income stream would come not from a toll - too risky and the M6 toll road has lost money every year since it opened - but from a Government payment per vehicle. They hope for returns of 2% to 5% above inflation.

Retail investors might be tempted with rather less than that. Especially if the offer was sweetened by making returns tax free. There is nearly £400 billion in ISAs, half in cash, just on that promise. But to tempt cash savers with money in the bank the growth bonds would need some sort of protection against loss. And that has to be done without adding the loan to the Government's debt.

If that trick can be pulled off then an infrastructure programme funded by the public would fit in well with Liberal Democrat policy and the public statements of deputy Prime Minister Nick Clegg.

If it can't then growth bonds seem unlikely to leave the bright ideas box and enter the real world.

THE END OF FREE BANKING

The end of free banking in the UK was signalled on 24 May 2012 by Andrew Bailey.

If you wonder who he is, then have a look at a £10 note. His signature will be there as Chief Cashier. Andrew Bailey has now been promoted to Executive Director at the Bank of England. And from next year he will almost certainly be a deputy Governor of the Bank and Chief Executive of the Prudential Regulation Authority.

Never heard of the PRA either? Don’t worry it doesn’t exist yet. It is one of the two separate regulators that will emerge when the Financial Services Authority splits in two next spring. The other is the Financial Conduct Authority. The PRA will be able to intervene in the market if it feels that major financial institutions are not behaving in the public interest.

And on 24 May Andrew Bailey told us what he would like to do when (OK, ‘if’) he takes on that role.

“the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying.”

And he warned “it may require intervention in the public interest, not least because it is a way to encourage greater competition.”

In other words he would use his powers to make banks charge us all for our current accounts.

The "myth" of free banking

Most people in the UK believe that they have ‘free banking’. If they keep their current account in credit then there is generally no charge for most of the services the banks perform for us including making and receiving payments, keeping our money safe and letting us have free access to our money through a network of 36,000 cash machines.

Those are valuable services and – free as they seem – someone has to pay. In fact we all pay the cost in two ways. First the banks lend out our money at a profit. Second they charge us heavily when we go overdrawn or travel abroad.

The Office of Fair Trading estimated that banks made £8.3 billion between them from personal current accounts in 2006 – more than they make from savings accounts and credit cards combined.  Most of that was made up of £4.6 billion from interest earned on our money (and charging us high rates of interest when we are overdrawn) and £2.6 billion from direct overdraft charges.

That is why Andrew Bailey believes free banking is a myth and that competition would be better if we paid openly for the valuable services the banks provide us with.

Why they don’t charge

The banks would love to charge us for our current accounts and the services they provide with them. And they all offer us the opportunity to pay for a current account – the charges range from £24 to £300 a year. But most people wisely turn down the offer of paying for a current account they could get without paying a fee. The banks bundle in an insurance policy or two – which most people do not need – and other benefits which – with the odd exception – are generally not worth the monthly cost.

But there is an insurmountable barrier that stops the banks charging all of us for the banking services on our 130 million current accounts.

If one of them started charging for all its current accounts then it would lose customers to competitors who continued to offer free banking.

But if they agree to do it together they will be guilty of anti-competitive behaviour and could be fined up to 10% of their turnover – potentially billions of pounds.      

So they are stuck with the present system. And that is why Andrew Bailey made it clear that he would like to cut that Gordian knot by intervening in the market to make sure they could charge. He would probably do that by saying that keeping the cost secret was anti-competitive and charging would encourage competition and that would ultimately be good for us.

Public reaction

If he does decide to intervene he faces several problems.

First, what do you do about the 9 million people who have a basic bank account? The banks agreed more than ten years ago to introduce these simple accounts with no overdraft facility. It was partly to reduce the number of people who had no bank account and faced higher costs and greater inconvenience in managing their money. The new accounts were also needed to help the Government’s own policy to pay state pensions and benefits directly into a bank account and scrap the costly system of paying them by giro or order book. The new Universal Credit, which will replace many benefits from October 2013, will only be paid through a bank account.

If there was a charge for all bank accounts some excerption would have to be made for people on benefits. And that would probably mean a tightening of the criteria for access to basic bank accounts – which currently are also used by those with poor credit records and on low incomes from work.

Second, public reaction from the middle swathe of society who do not go overdrawn and do not believe they pay for their banking would be hostile. Many are not on high incomes and would complain vociferously if the Government (as they would see it) forced them to pay for a current account which, through careful management, they currently keep free.

Third, a current account is now such an essential part of life that charging people to use one would seem like a tax on living. It would be particularly hard for those in low paid jobs whose employer insisted on paying into a bank account as most of them now do.

Fourth, would he ban any bank from not charging for a current account? If so, that in itself could be seen as the most anti-competitive move of all.

Andrew Bailey recognises some of these problems. He said “I know from last time I raised the subject that the reaction is mixed.”

But he warned that would not put him off.

“I am like a dog with a bone on this one, I don’t think we will have a retail banking industry that is properly serving the interests of the public until we tackle the dangerous myth of free in-credit banking. “

The official Bank of England line is rather milder. A spokesman told me “He was speaking to stimulate debate on an important topic.”

Sources

Personal current accounts in the UK, Office of Fair Trading July 2008

http://www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005.pdf

The future of UK banking – challenges ahead for promoting a

stable sector, Speech by Andrew Bailey at Westminster Business Forum 24 May 2012 http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech574.pdf

The final paragraph is the relevant one.

SELLING OLYMPIC TORCHES

There was controversy this week as an Olympic torch apparently sold on eBay for £153,100. The seller, Sarah Milner Simonds, told BBC Breakfast "it's not me to keep a shiny trophy on the mantelpiece when you can do something good with the money". She says she is going to give the money to a community gardening group. But she may end up with a very large tax bill as well. 

Any Olympic torchbearer who sells their torch may be liable for tax on the proceeds, even if they give the money to charity.

If the price fetched is more than £12,360 the torchbearer will have to pay Capital Gains Tax (CGT). If they give the money to charity through Gift Aid they may also have to pay some extra income tax depending on their own income and how much they give. 

CAPITAL GAIN

Capital Gains Tax is due on the gain - which is the difference between the selling price and the cost of the item including any expenses of the sale. 

The cost of the Olympic torch is low to the torchbearer. Those who are sponsored by Coca Cola or Samsung can simply keep the torch - the sponsors pay for them. Other torchbearers who want their torch can buy it from the London 2012 organising committee (LOCOG) on the day of their run for £215. Some will have paid slightly less – £199 – if they bought the torch well in advance of the start of the relay. There is an extra charge for a stand. The uniform is free.

(Incidentally, the torches cost LOCOG £495 each which is almost £4 million for the 8000 that were made.)

If the torch is sold on eBay total fees are likely to be around £41.30. Some special promotions can reduce that cost or increase it slightly. If the item is listed initially as one from which the proceeds will all go to charity eBay will waive the fees. But giving all the proceeds to charity may not be a good idea.

THE TAX

The torch counts as a ‘chattel’ – a personal possession. No Capital Gains Tax (CGT) is due if the selling price is £6000 or less. If it is less than £15,000 then the gain is limited to 5/3 of the selling price above £6000. So if the sale was for £10,000 then the gain is (£10,000-£6000) x 5/3 = £6,667. On that amount no CGT would normally be due as everyone gets a CGT allowance of £10,600 this year. Effectively this means that a sale price of up to £12,360 is free of CGT because the gain would count as (£12,360-£6000)x5/3=£10,600 under the chattels rule. That is equal to the annual CGT allowance in 2012/13 and so no CGT would be due.

If the selling price is more than £12,360 then some CGT would be due. The tax is levied at two rates – 18% and 28% – on the excess above £10,600. The calculation is complex and depends on the individual’s taxable income.

If they pay higher rate tax on their income in 2012/13 then the whole of the gain above £10,600 is taxed at 28%. If their income is lower than that then the gain above £10,600 is put on top of their taxable income after the tax-free personal allowance has been deducted. The chunk between their income and the level of higher rate tax is taxed at 18%. The balance above that is taxed at 28%. On a gain of £100,000 the tax would be at least £21,595 if the individual had no other income and up to £25,032 if they did.

All these calculations assume the person has no other capital gains in the year.

Capital Gains Tax is collected through self-assessment. The individual has a duty to notify HMRC of a gain in this current tax year 2012/13 by 5 October 2013. HMRC would then send out a self-assessment form for 2012/13. The individual would need to fill the return it online by 31 January 2014, though that date can be extended if HMRC did not notify the need to fill one in until after 31 October 2013. Deadlines for paper forms are earlier.

CHARITY

Even if the proceeds of selling the torch are given to charity CGT will still have to be paid. Gift Aid has the effect of reducing the rate of CGT so all the gain is taxed at 18% rather than some of it at 28%. But it does not wipe out the CGT liability.

For example, someone with a gross taxable income of £30,000 who sold a torch for a net profit of £50,000 would normally pay £9784.50 in CGT. If they gave the proceeds of the sale to charity the CGT would be reduced to £7092. They could pay that by giving just £42,908 to the charity. The CGT charge would be the same which they could meet with the £7092 withheld from the proceeds. The charity will claim Gift Aid relief from HMRC so will get another £10,727 making a total of £53,635.

However, the Gift Aid relief can lead to an extra charge of income tax. A Gift Aid donor has to have paid at least as much tax as the relief claimed by the charity. The tax paid can be a combination of income tax and capital gains tax in the tax year the gift is made in. If the donor has not paid sufficient tax they must reimburse HMRC for the gift aid relief in excess of the tax they have paid.

So in some circumstances where income is low and the gift is large there could be extra tax to pay.

In the example above if the individual’s income was £20,000 rather than £30,000 and they retain £7092 to pay the CGT and make a gift of £42,908 the total tax they have paid is £7902 CGT and a further £2379 on their income of £20,000. That total is £9471. But the charity would reclaim £10,727 gift aid relief on the £42,908 donation and the £1256 difference between the two (£10,727 - £9471 = £1256) has to be paid in extra income tax. The charge could be avoided if the individual gave the charity £37,844. That would leave the proceeds of the torch as follows: to charity £37,884. To CGT £7092. And to self £5024. The charity then claims £9471 gift aid relief which is exactly the amount of tax the individual has paid. In total the charity gets £47,355.

CONCLUSION

Anyone who has sold a torch for more than £12,360 should see a qualified tax advisor or accountant whether or not they want to give some or all the proceeds of the torch to charity.

Anyone who is wondering if they would ever be caught should remember that  HMRC is already chasing more than 30,000 online sellers to get their tax sorted out and it monitors eBay and other online selling sites. It would be very easy for HMRC to identify everyone who sold an Olympic torch on eBay. And HMRC knows they were acquired for next to nothing.

Anyone who has not yet sold their torch but would like a charity to benefit can avoid all these problems by giving the torch itself to a registered charity and let the charity sell it. No CGT is then payable by the donor or the charity. Do not let the charity try to claim Gift Aid relief (an extra 25%) on the amount realised for the torch. That would involve the donor keeping ownership until the charity sold it on their behalf. The donor then gives the proceeds. So back to paragraph one.

To qualify for Gift Aid the organisation has to be a genuine charity. That is

•  an organisation in England or Wales registered with the Charity Commission
• an organisation in Scotland registered with the Office of the Scottish Charity Regulator  
•  a Community Amateur Sports Club (CASC) registered with HMR
• an organisation in the EU or Iceland or Norway accepted by HMRC as a charity for Gift Aid donations

If the organisation you want to give to is not a charity then Gift Aid is not possible. The CGT would usually be more. But you would of course be free to give the balance after tax to the organisation.

And what will Sarah Milner Simonds have to pay in tax if she gets her £153,100? Depending on her income and how much she gives to a registered charity her CGT bill will be between £25,000 and £40,000 CGT and she may have to pay some extra income tax as well.

NOTES

My thanks to the two accountants, the Chartered Institute of Taxation, and HMRC who all helped me understand this arcane nonsense. Any errors are entirely mine. Do not rely on this article to make financial decisions – always seek professional advice from a qualified accountant or tax advisor first.