Estate agents – a question of trust

Fee dishes the dirt on an unscrupulous estate agent

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Mary Portas reveals her high street rescue plan

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More tax-avoidance loopholes for the ultra-wealthy may provide a boost for Brit-Art manufacturing

“The hands of a healer”, those blessed appendages of gifted individuals whose mere touch can make all sorts of maladies simply go away. Brit-Artists have joined the saints, gurus and fakirs. The malady our arty countrymen can cure by the application of their hands is tax flu. Like alchemists turning lead into gold, they can turn rubbish into multimillion pound objets d'art of tax dodging.

As Britain gradually slips back to “Victorian levels of inequality”, loopholes are being opened for the wealthy to avoid tax by exercising their gracious patronage. It is not from benevolence, but for tax avoidance that they can making donations to charities, the nation, and to eager entrepreneurs looking for startup investment. And, as a welcome relief from the usual government policy of taking from the poor to give to the rich, some of these tax changes take from the rich to give to the extremely rich.

Make no mistake, in spite of their protests the wealthy have been very well served by our tax system. This is evident from the graph produced by the IFS, showing that tax on the wealthy has been slashed by nearly 40% between 1978 and 2011.

It is not just the income tax burden that has been lifted from the rich. Other taxes the rest of us pay have been waived through circuitous bypasses. The Daily Telegraph reported that a third of houses sold for more than £1m dodge paying stamp duty, costing £1billion in lost taxes (i.e. saving the wealthy £1billion in taxes). This wheeze is pulled off by placing ownership of the house into a company. Instead of selling the house, paying 5% stamp duty on the property transfer, you sell the company and pay just 0.5% stamp duty on the equity transfer. And for an annual fee of £30,000, the government sells around 5,400 non-doms the right to avoid tax on overseas income that the rest of us have to pay. These 5,400 each paid an average £1million in tax on their UK income according to the Treasury, a tantalising reflection of the amount they manage to avoid by paying what is to them a paltry £30k protection money to the treasury. All strictly legally.

However, in this time of national crisis, when every tax-pound goes to digging the nation out of its mire of debt, our taxmen have striven to shave back the tax-avoidance privileges from the merely wealthy to benefit only the extraordinarily wealthy.

Up until the 2011-12 tax years, individuals were allowed to contribute up to £255,000 per year to their pensions tax free. From 2011-12 this limit was brought down to £50,000 per year – which is still more than most contribute in a lifetime. However, a new loophole to provide solace for the extra-rich opened up in the Chancellor’s Autumn Statement last month:

“To encourage investment in new start-up companies the Government will launch a new Seed Enterprise Investment Scheme (SEIS) from April 2012, offering 50 per cent income tax relief on investments, and will offer a capital gains tax exemption on gains realised in 2012-13 and then invested through SEIS in the same year”

This tax relief of up to 78% including the Capital Gains Tax (CGT) exemption was described by the Financial Times newspaper as “astonishing” and is only useful to the sort of people who could appear as investors on Dragons Den. Revenue lost through this loophole is being paid for by freezing the capital gains threshold at £10,600, a tax only paid by the wealthier among us. A transfer from those who are wealthy to those who are extremely wealthy, instead of the usual taking from the poor to support the rich as is happening with pensions and benefits.

Charitable donations are also being rewarded by the taxman. A new 10% off inheritance tax offer has opened up for those who leave 10% of their estates to charity. And a further new loophole allows collectors to donate “objects” to offset their inheritance tax, income tax, and corporation tax. Of course, these "objects" can't be the odd looking teapot you found in your granny's loft. They have to be "pre-eminent objects", so don't bother heading down to the Antiques Roadshow to see what you can save.

In the words of the anonymous poet, “Great gifts are guiles, they expect gifts again”. The most guileful gifts are the ones that are inestimable and invaluable. And that is where our Brit-Artists come in. Art is worth as much as someone will pay for it. Tracey Emin, one of that ilk, sold her unmade bed for £150,000 on the basis that it is art. Brit-Art, from glasses of water to a light being switched on and off, are nothing if not of incalculable value.

A high-roller wanting to combine these astonishing tax breaks could do it thus:

Phase 1: invest in a Seed Enterprise Investment Scheme

• Spend £250,000 setting up a new company
• The company invests in hundreds of beds, and invites Tracey Emin to jump on the beds, totally messing them up. Value estimated around £150,000 a piece.
• The company flips a few quid at the local street sweepers in return for the road-kill they pickup, and invites Damien Hirst to stuff them. Hirst’s earlier efforts in taxidermy have sold for £millions
• The company invests in some stationery, and invites Martin Creed to reprise some of his signature works: a piece of paper crumpled into a ball; a chunk of blue-tac pressed against a wall. Creed’s work is on sale for thousands.

Phase 2: donate “objects” to the nation and to charities

From the products of this company, the wealthy investor can harvest his share of ‘art’ of inestimable value. Let’s say our investor is worth £50 million. At his demise, his estate would be liable for inheritance tax at 40% on the value above the £325,000 IHT allowance – a tax bill close to £20million. To cover this, the executors of our investor would have to turn up for a meeting with HMRC with:

This is not as unlikely as it sounds. Dave “I know nothing” Hartnett, the senior civil servant in charge of tax, wrote off £millions of penalties on Goldman Sachs over supper inspite of claiming that he knew nothing about Goldman tax affairs (video of Hartnett's discomfort at being called a liar by a committee of MPs is well worth watching - it takes a while, so bring snacks). Ignorance is no bar to writing off tax at HMRC. Ignorant taxmen and their appointees, over a good supper, could view the art and allocate it a value with a handshake.

We must not blame the ultra-wealthy who make use of these loopholes. It is difficult to disagree with Lord Clyde, a Scottish judge, who said in 1929:

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"

Those who obey the law should not be easily sanctioned. It is the law that is made an ass by the donkeys in the Treasury who draft it and the mules in HMRC who enforce it.

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New tax-avoidance loopholes for the ultra-wealthy may provide a boost for Brit-Art manufacturing

“The hands of a healer”, those blessed appendages of gifted individuals whose mere touch can make all sorts of maladies simply go away. Brit-Artists have joined the saints, gurus and fakirs. The malady our arty countrymen can cure by the application of their hands is tax flu. Like alchemists turning lead into gold, they can turn rubbish into multimillion pound objets d'art of tax dodging.

As Britain gradually slips back to “Victorian levels of inequality”, loopholes are being opened for the wealthy to avoid tax by exercising their gracious patronage. It is not from benevolence, but for tax avoidance that they can making donations to charities, the nation, and to eager entrepreneurs looking for startup investment. And, as a welcome relief from the usual government policy of taking from the poor to give to the rich, some of these tax changes take from the rich to give to the extremely rich.

Make no mistake, in spite of their protests the wealthy have been very well served by our tax system. This is evident from the graph produced by the IFS, showing that tax on the wealthy has been slashed by nearly 40% between 1978 and 2011.

It is not just the income tax burden that has been lifted from the rich. Other taxes the rest of us pay have been waived through circuitous bypasses. The Daily Telegraph reported that a third of houses sold for more than £1m dodge paying stamp duty, costing £1billion in lost taxes (i.e. saving the wealthy £1billion in taxes). This wheeze is pulled off by placing ownership of the house into a company. Instead of selling the house, paying 5% stamp duty on the property transfer, you sell the company and pay just 0.5% stamp duty on the equity transfer. And for an annual fee of £30,000, the government sells around 5,400 non-doms the right to avoid tax on overseas income that the rest of us have to pay. These 5,400 each paid an average £1million in tax on their UK income according to the Treasury, a tantalising reflection of the amount they manage to avoid by paying what is to them a paltry £30k protection money to the treasury. All strictly legally.

However, in this time of national crisis, when every tax-pound goes to digging the nation out of its mire of debt, our taxmen have striven to shave back the tax-avoidance privileges from the merely wealthy to benefit only the extraordinarily wealthy.

Up until the 2011-12 tax years, individuals were allowed to contribute up to £255,000 per year to their pensions tax free. From 2011-12 this limit was brought down to £50,000 per year – which is still more than most contribute in a lifetime. However, a new loophole to provide solace for the extra-rich opened up in the Chancellor’s Autumn Statement last month:

“To encourage investment in new start-up companies the Government will launch a new Seed Enterprise Investment Scheme (SEIS) from April 2012, offering 50 per cent income tax relief on investments, and will offer a capital gains tax exemption on gains realised in 2012-13 and then invested through SEIS in the same year”

This tax relief of up to 78% including the Capital Gains Tax (CGT) exemption was described by the Financial Times newspaper as “astonishing” and is only useful to the sort of people who could appear as investors on Dragons Den. Revenue lost through this loophole is being paid for by freezing the capital gains threshold at £10,600, a tax only paid by the wealthier among us. A transfer from those who are wealthy to those who are extremely wealthy, instead of the usual taking from the poor to support the rich as is happening with pensions and benefits.

Charitable donations are also being rewarded by the taxman. A new 10% off inheritance tax offer has opened up for those who leave 10% of their estates to charity. And a further new loophole allows collectors to donate “objects” to offset their inheritance tax, income tax, and corporation tax. Of course, these "objects" can't be the odd looking teapot you found in your granny's loft. They have to be "pre-eminent objects", so don't bother heading down to the Antiques Roadshow to see what you can save.

In the words of the anonymous poet, “Great gifts are guiles, they expect gifts again”. The most guileful gifts are the ones that are inestimable and invaluable. And that is where our Brit-Artists come in. Art is worth as much as someone will pay for it. Tracey Emin, one of that ilk, sold her unmade bed for £150,000 on the basis that it is art. Brit-Art, from glasses of water to a light being switched on and off, are nothing if not of incalculable value.

A high-roller wanting to combine these astonishing tax breaks could do it thus:

Phase 1: invest in a Seed Enterprise Investment Scheme

• Spend £250,000 setting up a new company
• The company invests in hundreds of beds, and invites Tracey Emin to jump on the beds, totally messing them up. Value estimated around £150,000 a piece.
• The company flips a few quid at the local street sweepers in return for the road-kill they pickup, and invites Damien Hirst to stuff them. Hirst’s earlier efforts in taxidermy have sold for £millions
• The company invests in some stationery, and invites Martin Creed to reprise some of his signature works: a piece of paper crumpled into a ball; a chunk of blue-tac pressed against a wall. Creed’s work is on sale for thousands.

Phase 2: donate “objects” to the nation and to charities

From the products of this company, the wealthy investor can harvest his share of ‘art’ of inestimable value. Let’s say our investor is worth £50 million. At his demise, his estate would be liable for inheritance tax at 40% on the value above the £325,000 IHT allowance – a tax bill close to £20million. To cover this, the executors of our investor would have to turn up for a meeting with HMRC with:

This is not as unlikely as it sounds. Dave “I know nothing” Hartnett, the senior civil servant in charge of tax, wrote off £millions of penalties on Goldman Sachs over supper inspite of claiming that he knew nothing about Goldman tax affairs (video of Hartnett's discomfort at being called a liar by a committee of MPs is well worth watching - it takes a while, so bring snacks). Ignorance is no bar to writing off tax at HMRC. Ignorant taxmen and their appointees, over a good supper, could view the art and allocate it a value with a handshake.

We must not blame the ultra-wealthy who make use of these loopholes. It is difficult to disagree with Lord Clyde, a Scottish judge, who said in 1929:

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"

Those who obey the law should not be easily sanctioned. It is the law that is made an ass by the donkeys in the Treasury who draft it and the mules in HMRC who enforce it.

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Liebrary: Hedge funds consistently deliver higher returns, NOT

As we pointed out in an earlier post, the maths shows that overall bankers' performance is no better than a monkey can do picking stocks at random - effectively like an index tracker. 


An academic study has found that Hedge Funds, who justify massive remuneration to their staff by their superior performance, actually perform only a teensy bit better than the market average. The industry gets away with this fib simply by not including their bad performances in their figures.


If premier league football clubs could rank themselves this way, they would all be champions with 100% wins - because they would not report the times they lost or drew.


Alpha is the posh term for the profit an actively managed fund earns over the index linked market average. Hedge Fund managers justify their vast remuneration by claiming consistent average returns of 3%-5% above the market. And they have managed to fool academics, regulators, and most importantly investors for years. The study shows that average returns are closer to 0.05% per quarter above the market.


Extracts from report:

• [Hedge funds manage] over $1.97 trillion in assets and accounting for over one-third of equity trading volume in the United States.
• Many studies of hedge fund performance document significant alpha in hedge fund returns, with estimates ranging from 3-5% annually
• Proponents of hedge funds argue that the lack of regulation, unique organizational features, compensation arrangements, and manager skill are the primary reasons for their superior track record
• An alternative explanation, however, is that the empirical estimates of hedge fund performance are overstated and come from biased data sources.
• Hedge funds are not required to report their returns to any regulatory body, yet some funds voluntarily disclose their performance to data vendors, likely as a means of attracting capital.
• Funds with poor performance have a strong incentive to withhold their returns from these databases.
• Because studies of hedge fund performance only examine funds that choose to report, estimates of alpha are likely missing the worst performing hedge funds.
• As a result, it may be that the superior performance of hedge funds documented in the literature is an illusion stemming from the self-selection bias inherent in hedge fund performance data.

The report found that "the self-selection bias in commercially available hedge fund data is severe", and "the average fund’s alpha falls to 5 bps/quarter". Far from excess returns of 3%-5%, this study suggests the actual excess return is 0.05% per quarter (1 bps = 0.01%. Financial markets like to talk in 'basis points' (bps) because a "50 basis point" swing sounds so much more dramatic than half a percent).


This 'self selection' of hedge fund performance data is demonstrated in the table below. The table shows the average investment returns of funds starting from the worst tenth of the funds, and moving up to the best tenth. The "Database Returns" are those reported by funds to databases used to provide industry wide return figures. The "Non Database Returns" include all figures, including those not reported to the database and which are therefore not included in industry-wide return figures.

The figures for the best funds are very similar - showing they all submit reports. The figures for the worst funds are very different, showing that many choose not to submit their results. Also, funds that fail and are shut down can be stripped out of the database entirely. This creates the extremely rosy picture fund managers like to paint about themselves to justify their fat fees.

***Below was added August 2012***
Table taken from a book by Simon Lack - "The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True."


Comment about this table in a review of the book by Felix Salmon of Reuters:
"The main thing that you’re looking at here is the final line. If you look at the money that investors made by investing in hedge funds, it comes to $70 billion — a number substantially smaller than the $379 billion that the hedge funds managed to skim off in fees. Now the $70 billion is profit over and above the risk-free rate of return on Treasury bills. But it’s not the end of the story. Because funds-of-funds were very popular for most of this period, investors also paid some $61 billion to them. Which left them with the grand total of $9 billion in profits, compared to the $440 billion that the hedge-fund industry took in fees."

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Why tackling high pay is in the national interest

By Deborah Hargreaves, Chair of the High Pay Commission

British business is facing a crisis. The public has lost faith in the corporate sector, which it sees as monolithic, money-grabbing and uncaring. Excessive pay for company bosses has added to the malaise. As those on middle and low incomes face a sharp squeeze in their living standards, corporate leaders are awarding themselves 49% pay rises. These bosses see little irony in then lobbying to repeal the 50p top rate of tax paid by those on £150,000 or more. These are the same leaders who are arguing for real-term cuts to the minimum wage, because, after all, aren't we all facing times of unparalleled austerity?

Directors' hypocrisy over pay reinforces the view among the public that businessmen are "in it for themselves". It is worrying that trust in big business has sunk to this extent when there is so much emphasis on the private sector leading us out of the economic crisis. In polling for the High Pay Commission, 79% of those questioned said pay and bonuses were out of control.

Our year-long inquiry has led us to believe that excessive top pay levels are not only corroding trust in business but also damaging society and the economy as a whole. In the last 30 years we have seen rewards channelled upwards. The top 0.1% of earners have pulled away from the rest at a rapid pace. In 1980, for instance, the boss of Barclays was earning 14.5 times average pay at the bank; the current boss, however, is on 75 times the average, representing a 4,899% rise over that 30 years.

During the same period average UK wages have gone up threefold and pay for a senior policeman or schoolteacher has risen sixfold. Of course, leading Barclays today is a different proposition, but the lives of a policeman and headteacher have also changed beyond recognition in that time.

Since the mid-1970s the general workforce's share of GDP has shrunk by 12%. For years, this sleight of hand went unnoticed – we all felt we were getting richer on the back of a rising housing market. But as the economic crisis has started to bite, the fact that company bosses seem to be living in a different world has become increasingly apparent.

The story of the last 30 years is not just one of corporate greed, although that is part of it. Companies say they have to compete in the global market for talent, and pay accordingly. This has gone hand-in-hand with the cult of the superstar chief executive – someone who can sort out a company's woes and make a lot of money for shareholders.

Yet our research has shown little connection between pay and performance; top executives rarely cross the world in search of work and even when they do, the role can be too much for just one person.António Horta-Osório was recruited in March from the Spanish bank Santander to run Lloyds Banking Group on a package of pay and shares reported to be worth £12m, but eight months later is off with stress. Maybe we are just expecting too much from our top bosses.

Just as important, we have found that large gaps in pay undermine employee engagement, leading to low levels of motivation, effort and co-operation. Pay is too often set by a closed shop of individuals on remuneration committees with little regard to the conditions among the rest of the workforce, and the packages have become so complex that even shareholders struggle to understand how much they are worth.

Pay in publicly listed companies sets a precedent. When it rewards failure, it sends out the wrong message about business and is clearly a symptom of a poorly functioning market. High levels of inequality in income contribute to sectorial imbalances, regional disparities and asset bubble inflation.

Society suffers too when there are huge income disparities. When the gap widens, it does not encourage aspiration or cohesion but rather disengagement and social unrest. Academics have warned that inequality can lead to instability, with poorer groups pursuing their objectives outside the mainstream.

We believe it is imperative to tackle excessive pay not just for the greater good of society but for businesses and the health of the economy. There is gathering momentum behind the idea of the need to address the excesses of capitalism, and we could be at a tipping point where companies risk losing all credibility through their attitudes to pay.

Interestingly, many business leaders we interviewed revealed they were motivated by goals other than money. And when pay is important to them, it is often as a means of measuring themselves against rivals. Unquestionably, some of Britain's more reflective businessmen are already sensitive to the public debate around pay, and see the current system as unsustainable.

Nevertheless, we do not expect anything to change overnight. We need to effect deep cultural change; we need to ask what sort of society we want to live in and shift priorities accordingly. As an important first step, we have produced a 12-point plan of action, basing our recommendations on the key principles of transparency, accountability and fairness.

We advocate getting back to basics: reducing packages to a base salary that would make directors' pay more comparable with the rest of the workforce. This would eradicate those big bonuses that appear so easily won as to have become a part of base salary, no matter how well an executive's firm performs.

Remuneration committees should have the flexibility to award one performance-related element, preferably of shares to be held over the long term. We are also calling on boards to produce one figure for each executive's remuneration – at the moment this is nowhere to be found and when worked out, is always hotly disputed.

We also want to see the reform of committees that set pay, with a worker representative elected by the staff to inject a little common-sense thinking into the closed-shop mentality. These committees are meant to set top pay with regard to what is happening in the rest of the company but often only pay lip service to that remit. A staff rep could remind them of the pay freeze that might be in place for employees at the moment.

Other reforms would help move towards greater fairness in setting pay or at least get firms talking about what is fair. We have seen cross-party support for many of our recommendations, and we will continue to develop them. But we are calling on companies to recognise that it is in their best interests to act now to resolve this, before more draconian rules are imposed from above.

Deborah Hargreaves is chair of the High Pay Commission

This article first appeared in The Guardian

Graphics are from the High Pay Commission report "Cheques With Balances: why tackling high pay is in the national interest"

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Liebrary: Are public sector pensions ballooning? The government's own figures show this is not true.

A succession of government reports have shown that public sector pensions are not ballooning out of control, as is shown by this summary of government figures produced by the Institute of Fiscal Studies: 

And yet all the main political parties - Conservative, LibDem and Labour - are united in continuing to spout the opposite. 

Even without the shenanigans currently being fought over – raising retirement age; changing inflation link from RPI to CPI; changing from final salary to career average – the cost would stabilise (as shown by the Treasury 2004 forecast). This is inspite of the overall population aging, as is shown by the Office of National Statistics graph below. 

The ONS population pyramid graph shows how the population will age between 2010 and 2035. ONS figures state that the number of retired people in the UK will grow by 28%, from 12.2 million in 2010 to 15.6 million in 2035. 

Inspite of this growth in numbers of pensioners, there is still no explosion in pension costs as a share of national income. This is because national income is expected to grow more than enough to support this. The current proposals being pushed through actually bring the pensioners' share of national income below the current level, inspite of pensioners being a bigger share of the population.

The Hutton proposals will reduce the share of wealth, inspite of the share of pensioners rising. Why?

Pensions are paid for by company profits and tax. Cutting pensions is nothing about affordability, and everything about moving wealth from the poor to the rich. 

And that in a country that is already the most unequal in Europe, according to OECD stats:

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A complex forecast over pension fees

Chris's pension fund manager chum chews over the obscenely large slice he takes from your savings pot

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