Financial management and tax planning for the Lloyd family

Managing Your Money

Olly Lloyd and Leona Lloyd-Cardle are a young couple, with enough means to provide a more than decent living for themselves and their children. Still, the couple encounters some financial challenges, and these are due to two distinctive issues. On the one hand, Olly is rather unfamiliar with issues of financial management, and is quite a stranger to taxes and other financial matters. On the other hand, the second problem is constituted by the spending patterns of his wife -- Leona -- who is running credit on top of credit.

In this setting of the financial issues encountered by the young family, the role of the financial consultant is that of providing advice on four distinctive issues, perceived as most important for the Lloyd family. These four issues refer to the following:

Tax liabilities

Tax implications of Olly's future income

Financial management suggestions for Leona, and last

Stability of the children's future.

a) Tax liabilities

The tax liabilities represent the money owed to the state, as specific percentage of the income generated. Specifically, the tax liability is the sum of money that an individual has to pay the state when they have earned money through a taxable event. This taxable event could include instance such as salaries and wages, premiums and bonuses, the sale of an asset, an inheritance and so on.

The tax liability is an obligation and a legal claim. In case one defaults on this obligation, the government has the right and the power to confiscate specific assets or accounts, in an effort to recuperate what the individual owes the state (Investopedia, 2011).

In the case of the Lloyd family, taxes would be applied as follows:

Annual income of £125,000 (salary), for which a £43,000 tax is owned to the state (Listen to Taxman, 2011)

Annual bonus of £60,000, taxed at a 20 per cent rate, to a total of £12,000

Advisory fees of £25,000 + £ 185,000 + £25,000 = £235,000, taxed at a 50 per cent rate, for a total owned of £117,500

Income from property of £40,000 taxed at a 40 per cent rate, for a total owned sum of £16,000

Dividends of £17,600 + £21,750 = £39,350 taxed at a 32.5 per cent rate, for a total owned sum of £12,788

Government stocks of £9,650 + £14,500 = £24,150 -- exempted from tax

Gains from bank interest of £23,000 + £3,500 = £26,500 taxed at a rate of 20 per cent, for a total owned to the state of £5,300

Building society interests of £8,250 + £16,750 = £25,000 taxed at a rate of 20 per cent, for a total of £5,000

Foreign dividends of £4,000 + £1,500 + £86,000 + £58,000 = £149,500, taxed at affix rate of £30,000 (HM Revenue and Customs, 2009)

Properties of £1,500,000 + £520,000 + £60,000 = £2,080,000 -- no ad valorem tax for owned properties

In this setting then, the tax owned by the Lloyd's to the UK government is of £43,000 + £12,000 + £117,500 + £16,000 + £12,788 + £5,300 + £5,000 + £30,000 = £241,578.

c) Suggestions for financial management

Leone Lloyd-Cardle is, without a doubt, facing severe problems. In order to restore the responsibility and stability of her financial decisions, the following financial management recommendations are made:

Discussing the problem with her husband. Having reached such a high level of debt indicates severe problems which cannot be overcome by Leona herself. She needs support and help, both moral as well as partnership and financial aid.

Dividing the money entering the household into three categories -- savings money, the children's accounts and spending money. The money allocated for spending should represent the lowest category and should always come in last. By doing this, the family creates stability and future financial constancy, as well as a context in which Leona learns how to make do within imposed restrictions.

The elimination of all credit possibilities so that the family does not run any more debt.

If necessary, Leona and Olly should participate to sessions of financial counseling so that they become more responsible regarding their money.

d) Financial future of children

Finally, in order to ensure the future financial stability of their children, Olly and Leona should create savings accounts in the name of their children. They should constantly feed these accounts, based on the incomes made. They should establish a minimum contribution, such as 20 per cent of all monthly income, and when possible, they should make additional contributions.

The accounts opened in the name of the children should be focused on savings more than investments. If investment packages are also purchased, these should reveal low levels of risk. Lower levels or risk imply lower gains, but still higher than the rate offered by banks for deposits. The money invested is guaranteed and the risk for losses is decreased.

Overall, the final conclusion in the case of Olly Lloyd and Leona Lloyd-Cardle is that of using common sense and sensible judgment in the management of their money. Being artists, they are less interested in financial matters and tend to focus on other dimensions of life. Nonetheless, they should approach the issue of money management through a better structured means, in which they continually assess their incomes against their spending. The rule of thumb is that of always spending less than they earn. Additionally, savings should be emphasized on first, and spending should occur after savings have been set aside.

For the year to come, the recommendation for the fiscal management of the Lloyd family is that of being reserved in spending and focusing on saving and stability instead. This recommendation is derived both from the analysis of the family's earning and spending patterns, as well as from the correlation with the overall state of the economy. Specifically, in a setting of continued economic crisis, the recommendation for all economic agents and individuals would be that of consolidating their positions, increasing stability and implementing prudence in all financial decisions (Davis, 2009).

References:

Davis, E.P., 2009, Financial stability in the United Kingdom: banking on prudence, OECD Economics Department Working Papers, No. 717, http://www.ephilipdavis.com/uk%20financial%20stability%20oecd.pdf last accessed on December 19, 2011

Inmann, P., 2008, Traders predict house prices will fall by 50% in four years, The Guardian, http://www.guardian.co.uk/business/2008/jun/09/housingmarket.houseprices last accessed on December 19, 2011

2009, Residence, domicile and the remittance basis: operation changes, HM Revenue and Customs, http://www.hmrc.gov.uk/briefs/income-tax/brief1709.htm last accessed on December 19, 2011

2011, Tax liability, Investopedia, http://www.investopedia.com/terms/t/taxliability.asp#axzz1gxx7hXX1 last accessed on December 19, 2011

2011, Listen to Taxman, http://listentotaxman.com / last accessed on December 19, 2011

Tax on selling property, Direct Gov, http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_4016337 last accessed on December 19, 2011