Monthly Archives: July 2021

START PLANNING YOUR LEGACY TO MITIGATE OR REDUCE INHERITANCE TAX

Inheritance Tax planning is a way of arranging your wealth with the various tax reliefs in mind so that your loved ones don’t pay more tax than they legally need to.

If you’ve worked hard throughout your lifetime to grow your wealth, you may hope it will help to safeguard the financial security of your loved ones after you’ve gone. But without careful planning in your lifetime, you could leave them with less than expected after the Inheritance Tax bill is paid.

Proper planning can help you pass on as much as possible to the people you choose by avoiding additional unnecessary tax charges. But there is a perception by some people that Inheritance Tax only affects the rich, which is untrue.

CURRENT AND FUTURE NEEDS OF YOUR LOVED ONES

When you’re getting on with life, it’s not easy to stop and think about what will happen to your estate (such as your property, possessions, investments and cash) when you’re no longer around. That’s why it’s important to make sure that any assets you’ve built up over your lifetime aren’t subject to Inheritance Tax unnecessarily after your death, and that your loved ones, and any organisations close to your heart, benefit from your estate as you intended.

By reviewing your wealth and obtaining professional financial advice, you will be able to consider the current and future needs of your loved ones and how you can benefit them whilst preserving your assets.

INHERITANCE TAX FACTS

Every individual has an Inheritance Tax ‘nil-rate band’ of £325,000 in the current 2021/22 tax year (the UK tax year starts on 6 April each year and ends on 5 April the following year). This means that you can pass on up to £325,000 worth of property, money and other assets with no Inheritance Tax to pay.

Above this threshold, Inheritance Tax is normally levied at 40%. So, as a simple example, if you were to pass on wealth of £425,000, the first £325,000 would be tax-free, and the remaining £100,000 would be taxed at 40%, creating a tax liability of £40,000 for your personal representatives to pay out of your estate, therefore leaving less for the recipients of your estate.

However, there are many tax reliefs and rules that can minimise the amount of Inheritance Tax due. You can leave your entire estate to a surviving spouse or registered civil partner with no Inheritance Tax due. But there are many other, lesser-known rules and reliefs that can also apply.

The current Inheritance Tax nil-rate bands will remain at existing levels until April 2026.

HOW INHERITANCE TAX PLANNING WORKS

Inheritance Tax planning is a way of arranging your wealth with the various tax reliefs in mind so that your loved ones don’t pay more tax than they legally need to.

It works best when the process is started many years in advance. Certain transfers of capital may only become free from Inheritance Tax if you survive for seven years after they are made, so Inheritance Tax planning cannot be rushed.

Of course, Inheritance Tax is not the only consideration when it comes to arranging your finances – you also need to ensure that your wealth works for you in your lifetime. So, this planning must work in harmony with other areas of financial planning. It’s a precise and personal process.

THREE STEPS TO MITIGATE OR REDUCE INHERITANCE TAX

The rules and reliefs that are most beneficial to you depend on your personal and financial situation. The advice you receive will be different based on whether you’re single or married, if you have children or grandchildren, if you own your own business, or on many other factors.

That said, here are three tips that many people could benefit from.

1. THE RESIDENCE NIL-RATE BAND (RNRB)

As well as the Inheritance Tax nil-rate band mentioned earlier, there is an additional nil-rate band that applies when passing on a property that was your main residence in your lifetime. This is an additional Inheritance Tax-free allowance for ‘qualifying’ home owners with estates worth less than £2.35 million (where one residence nil-rate band is available) or £2.7 million (where two residence nil-rate bands are available), that can result in you being able to pass on up to £500,000 when you die before Inheritance Tax has to be paid using the nil-rate band and residence nil-rate band.

If you leave a property that has been your main residence at some point, to a direct descendant (which includes a child, adopted child, stepchild, foster child, grandchild or great-grandchild), you’ll qualify for the residence nil-rate band, which is currently £175,000. So, by using both nil-rate bands, the total tax-free portion of your estate will be £500,000.

If you are a surviving spouse who inherited the total estate of your deceased partner, you also inherit their nil-rate bands. So, in this scenario, you would be able to pass on up to £1,000,000 free of Inheritance Tax (including £350,000 of property using the RNRB capped at the property value if less) and a further £650,000 of your combined estate). This assumes the estate on both first and second deaths wasn’t over £2 million.

2. LIFETIME GIFTS

One way to minimise your Inheritance Tax bill is by gifting money or assets during your lifetime rather than waiting to pass on your wealth until after your death. However, in some situations, a gift can create an Inheritance Tax liability.

To be sure that yours doesn’t, follow these rules:

• Small gifts (up to £250) to different individuals are typically free from Inheritance Tax. This rule is intended to cover any birthday gifts, Christmas gifts, etc.
• Larger gifts are free from Inheritance Tax up to a total of £3,000 in each tax year. If you don’t use your total allowance in one tax year, you can carry it forward to the next year as long as you also use up the current year allowance.
• Wedding (or registered civil partnership) gifts are free from Inheritance Tax up to a certain value, which depends on your relationship to the recipient. If you are their parent, the limit is £5,000. If you are a grandparent or great- grandparent, the limit is £2,500. In any other case, the limit is £1,000.
• Regular gifts out of income – unlimited amounts as long as made regularly out of surplus income such that standard of living isn’t affected.

3. A DEED OF VARIATION

In some cases, you might have carefully arranged your wealth for Inheritance Tax purposes, but you then inherit money or other assets in someone’s Will that would result in your estate exceeding your available nil-rate bands.

Rather than accepting this inheritance (which you may not need and would likely leave to a loved one later), you could execute a Deed of Variation so that it is passed directly to that loved one immediately. It will not be counted as part of your estate.

WHAT WILL YOUR LEGACY LOOK LIKE?
To learn more about Inheritance Tax planning and find out which rules and reliefs could benefit you, we would be pleased to discuss your circumstances and make recommendations based on your needs.
If you would like to discuss your situation, please contact us for more information.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS.

ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE RULES AROUND INHERITANCE TAX ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

THE VALUE OF INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION & TRUST ADVICE, DEEDS OF VARIATION & WILL WRITING.

WHAT YOU NEED TO CONSIDER AT EVERY LIFE STAGE

When you’re starting out working in your 20s, you may not be thinking about retirement in 40 years’ time. The same goes for your 30s, 40s and even 50s. There is always something on the horizon you could be saving for besides your retirement.

No matter how old you are, it’s always a good time to review your pension savings and update your retirement plan.

Understanding your retirement goals during each decade is key to making sure you are able to enjoy and live the lifestyle you want, and which you’ve worked hard for, when you eventually decide to stop working

STARTING TO SAVE IN YOUR 20S

Though you’re decades away from retirement, your 20s are an important time for pension planning. That’s because the investments you make in these early years will benefit from the most growth potential.

When you start work, if applicable to your situation, you’ll be automatically enrolled into your employer’s workplace pension scheme and they will start to make contributions on your behalf.

You should definitely not opt out of this – even if you feel you could do with the money now.

STAYING ON TRACK IN YOUR 30S

By your 30s, you may have additional financial responsibilities, such as children and a mortgage. These can make it difficult to dedicate as much money and attention to your pension as you’d like.

One way to stay on track is to review your pension contributions at least once a year and make sure you’re increasing them as your income grows. Another consideration is to check your investment strategy. With decades remaining before you’ll access your pension, you might choose to take a higher- risk approach now, and then gradually move into lower-risk investments as retirement grows closer.

ACCUMULATING IN YOUR 40S

If your salary follows a typical trajectory, it is likely to start peaking when you’re in your 40s, making this decade a crucial time for pension accumulation. You should, by now, also have a good understanding of the income required to support your desired lifestyle, which will help you plan your retirement income.

Based on this, you’ll know if you need to adjust your pension contributions to save enough.

At this life stage, you might have changed employers several times, so it might be sensible to check that you have all of the details for any old pensions and, if not, look to track them down

MAXIMISING YOUR CONTRIBUTIONS IN YOUR 50S

If your pension contributions have fallen behind in any of the previous decades, it’s crucial to catch up now. As well as your salary sacrifice contributions, you might consider adding lump sums to your pension to help you reach your retirement goal.

If you plan to do this, make sure that you’ve checked what your annual allowance for this tax year is, and how much unused annual allowance you have from the last three years. This will determine how much extra you can contribute and receive tax relief on. For the tax year 2021/22 the annual allowance is £40,000. This includes both contributions paid by you and contributions paid by your employer.

Alternatively, if you’ve stayed on track with all your pension contributions and your savings are at a very healthy level, you might need to take steps to manage your Lifetime Allowance. Currently, the maximum you can accrue within your pensions in your lifetime is £1,073,100, so if you’re anywhere near that number you should seek professional financial advice.

PREPARING TO RETIRE IN YOUR 60S

In the decade before retirement, some people may choose to take a lower-risk investment strategy with their pension savings than
in previous years. While this may limit the potential growth of your investments, it can also reduce fluctuations in value, which can help you to plan your retirement income with more confidence.

You’ll also need to weigh up your options for accessing your pension. You might want to take a lump sum or several lump sums, or you might want to take a regular income. There are advantages and disadvantages to each approach, and decisions you make now will affect your income throughout your retirement.

ADVICE FOR ANY AGE – With so much going on in your life – from family and work to pursuing your passions – retirement planning may not be your priority. But it’s your pension and overall financial situation that will allow you to keep up your current lifestyle and enjoy your golden years. Speak to us today and make sure your plans are on track for the retirement you want.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION WHICH ARE SUBJECT TO CHANGE IN THE FUTURE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS-TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

HOW TO MINIMISE A CAPITAL GAINS TAX BILL

The rules around Capital Gains Tax (CGT) are complex and they differ depending on your financial situation. It’s a complicated tax and, as a result, some people may get confused about how much they should expect to pay.

WHAT IS CAPITAL GAINS TAX?

Capital Gains Tax is a tax payable on the profits (or ‘capital gains’) you make from selling certain assets. These assets include some property, items of value such as art, jewellery or collectables, company shares or other investments, and businesses or business assets.

HOW MUCH IS CAPITAL GAINS TAX?

The rate of CGT you pay can vary, which sometimes catches people out.

Firstly, you have a CGT tax-free allowance (of £12,300 in the current tax year, though this can change). The UK tax year starts on 6 April each year and ends on 5 April the following year. If you make more than this in capital gains, you’ll be charged a different rate depending on the asset that you sold and your Income Tax band.

Higher rate and additional rate taxpayers pay 20% CGT, or an increased 28% when selling residential property (other than a main residence, the home that you live in).

Basic rate taxpayers pay 10% CGT, increasing to 18% for residential property, unless their total capital gains (minus the 2021/22 personal allowance of £12,570), when added to their taxable income, would place them in a higher tax bracket. If this is the case, they will pay the rates above.

HOW CAN YOU PROTECT YOUR ASSETS FROM CAPITAL GAINS TAX?

Some assets can be sold free from CGT, including your main residence (in most cases, though CGT can sometimes apply), and personal belongings worth less than £6,000.

In some cases, you can protect your assets from CGT by keeping them within an Individual Savings Account (ISA) wrapper. Assets that can be held in an ISA include bonds, company shares and investment funds. Any returns generated by these investments are free from Income Tax and CGT as long as they are held in an ISA.

However, you can only contribute up to £20,000 into an ISA each tax year, and once you have used your ISA allowance any further investments will not be protected.

HOW ELSE CAN YOU MINIMISE YOUR CAPITAL GAINS TAX BILL?

For assets that can’t be sold free from CGT and can’t be held within an ISA, there are other methods you could potentially use to minimise your CGT bill.

USE YOUR FULL TAX-FREE CAPITAL GAINS TAX ALLOWANCE

If you have any unused tax-free CGT allowance in one tax year (£12,300 per tax year 2021/22 until 2025/26), it might be a good opportunity for you to realise some investment gains. If you can spread your gains over several years, you could choose to take only up to the tax-free CGT allowance in each year. The CGT allowance is reset every year and cannot be carried forward.

TRANSFER ASSETS TO YOUR PARTNER

If appropriate, you could transfer assets to a spouse or registered civil partner without paying CGT and share assets between the two of you to take advantage of both of your CGT allowances.
If you have exceeded both allowances, it might make sense for any partner who is in the lower tax bracket to realise further gains, as the rate of CGT they pay may be lower. Any transfers must be genuine and outright gifts for this to be effective.

OFFSET LOSSES

If you have sold any assets at a loss in the current tax year, you can offset this loss against other gains you have made. As long as you register a loss with HM Revenue & Customs, within the following four tax years, you can continue to offset it against any future gains indefinitely.

SELL AND BUY BACK WITHOUT WAITING 30 DAYS

You could sell an asset and then your spouse immediately buys it back, which is known as the ‘bed and spouse’ technique. You could sell the assets, before immediately buying them back within an ISA and protecting them in an ISA (the ‘bed and ISA’ technique). There is also the ‘bed and SIPP’ method. This method sees people saving for retirement sell their assets, before buying them back within their Self-Invested Personal Pension (SIPP). These are ways of making use of your CGT exemption – if you wanted to sell and repurchase the same asset yourself in order to realise the gain there has to be a gap of 30 days between sale and repurchase.

DEDUCT COSTS

Any costs that you have incurred in the process of buying or selling an asset can be deducted from the profit you have made when calculating the CGT due. This could include auction fees, solicitor’s fees, stamp duty, et cetera.

REDUCE YOUR TAXABLE INCOME

Your rate of Capital Gains Tax is based on your income. This means that you could lower your bill by lowering the Income Tax that you’re liable to pay. You could contribute more of your income into your pension pot, helping to avoid this money being taxed, or by making charitable donations.

USE TAX-EFFICIENT INVESTMENT VEHICLES

We’ve already discussed Stocks & Shares ISAs, but another investment vehicle you could use to protect your wealth from CGT is a pension. Other investment vehicles are also available to help you manage Income Tax, CGT and Inheritance Tax. However, due to the complex rules and variety of options available, you should always obtain professional financial advice before investing.

LET’S TALK TAX – If you’d like to explore or have any questions about how to reduce a potential CGT bill, please get in touch to discuss your specific circumstances and review the options available to you.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION & TRUST ADVICE.

ANSWERS TO THE MYTHS ABOUT YOUR PENSION QUESTIONS

If you are approaching retirement age, it’s important to know your pension is going to finance your plans.

Pension legislation is extremely complex and it’s not realistic to expect everyone to understand it completely. But, since we all hope to retire one day, it is important to get to grips with some of the basics.

It’s particularly helpful to become aware of the things you may have thought were facts that are actually myths. Here are some examples.

MYTH: THE GOVERNMENT PAYS YOUR PENSION

Fact: The government pays most UK adults over the pension age a State Pension, which is currently:

• Retired post-April 2016 – max State Pension of £179.60 a week
• Retired pre-April 2016 – max basic State Pension of £137.60 a week (a top-up is available for some, called the Additional State Pension)

Not everyone is eligible for the full amount, which requires you to have at least 35 qualifying years on your National Insurance record. If you have less than ten qualifying years on your record, you’ll receive nothing.

Even if you receive the full amount, you’ll usually need to supplement it with your own pension savings.

MYTH: YOUR EMPLOYER PAYS YOUR PENSION

Fact: Most people are automatically enrolled into a workplace pension. Your employer is usually required to pay a minimum of 3% of your salary into it and you must also pay a minimum of 5% of your salary.

If you keep your contributions at the minimum level, it might be difficult to save enough for retirement. As life expectancies grow longer, your retirement can be almost as long as your working life. It’s therefore important to put aside a portion of your earnings to create a pension pot that will enable you to receive the income and live the lifestyle you want during retirement.

MYTH: YOU CAN’T SAVE MORE THAN YOUR LIFETIME ALLOWANCE

Fact: There is a lifetime allowance on the benefits you can access from your pension, which is currently £1,073,100 (tax year 2021/22). That doesn’t mean that you can’t withdraw any more after that, but it does mean that you’ll pay a tax charge of up to 55%. However, there are ways of withdrawing the money with a tax charge of 25%.

MYTH: YOUR PENSION PROVIDER’S DEFAULT FUND IS SUITABLE FOR EVERYONE

Fact: Most pension default funds will start out with a high-risk strategy and steadily move your capital into lower-risk investments, such as bonds and cash, as you get closer to retirement. This is to reduce volatility in the value of your investments so that you can have a higher degree of confidence in how much you’ll eventually end up with.

If you don’t plan to purchase an annuity, you don’t necessarily need to reduce volatility before retirement. You may be leaving some of your money invested for several more decades, in which case a higher risk strategy may be more appropriate.

MYTH: ANNUITIES ARE OUTDATED

Fact: There was a time when almost everyone bought an annuity when they retired, and that time has passed because there are now alternative ways to access your pension savings.

But annuities still have a useful role for generating a retirement income and can be an appropriate product for some people. Unlike other pension withdrawal methods, such as drawdown, an annuity offers a fixed income for life, so there’s no risk of your money running out. That’s a crucial benefit for many pensioners.

MYTH: YOU CAN’T PASS ON A PENSION

Fact: If you’ve used your pension savings to purchase an annuity, the income from this will usually cease when you die. But if you have pension savings that you haven’t used to buy an annuity (for example, if you’ve been taking an income through drawdown), what’s left can be passed on to a loved one.

If you die before the age of 75 there will usually be no tax to pay by the beneficiary. Otherwise, they will need to pay Income Tax according to their tax band

LOOK AFTER YOU FUTURE:

There’s a whole lot to think about when you’re planning for retirement. Is it worth paying into private or workplace pensions? Are you saving enough? Which investments should you choose? All these unanswered questions can make planning feel a little overwhelming. To review your situation or consider your options, please contact us – we look forward to hearing from you.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN

AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION WHICH ARE SUBJECT TO CHANGE IN THE FUTURE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

INVESTING TODAY TO HELP MAKE A BETTER TOMORROW

In a fast-changing world, sustainability is a growing concern for investors.

Sustainable investing funds position investors to manage the risks associated with environmental, social and governance (ESG) factors, capture the opportunities and contribute to positive change.

The tremendous toll of the coronavirus (COVID-19) pandemic crisis – on health, economic wellbeing and everyday activity – has precipitated a widespread reassessment of the way we live our lives. For governments, businesses and investors, an essential question has been to understand the sources of resilience during this past year and how to build on them to prepare for any future crises.

INFLUENCING POSITIVE CHANGES

If you’re someone who wants to make a positive difference, you might be interested to know how you, your money and the things you care about could all benefit from sustainable investing. At its core, ESG investing is about influencing positive changes in society by being a better investor.

Investment into ESG funds has been growing at an accelerating pace over the last five years. Recent research suggests that 9% of investors currently hold ESG investments[1], with 12% of investors saying they don’t currently hold ESG investments but plan to in the next year. 17% say they are likely to make their first ESG investments in 2022 or later. These numbers suggest a snowballing rate of ESG investing adoption over the next few years.

RESISTANCE TO FUTURE CRISES

As the nation emerges from the COVID-19 pandemic and begins to rebuild the economy, there is the opportunity to rebuild based on new principles. ESG concerns can be embedded in the recovery, to create an economy with more resistance to future crises. Companies are also under growing pressure to report transparently on their ESG- related practices.

More people today understand the increasing importance of responsible investing in investment decisions and it’s arguably the most important investment trend of recent decades. ESG strategies factor environmental, social and governance considerations into the investment process, with the goal of generating long-term, sustainable returns for investors.

Responsible investing is about ‘doing the right thing’, encouraging sustainability and contributing to positive, lasting change.

• Environmental – Renewable energy, lower carbon emissions, water management, pollution control.
• Social – Labour practices, human rights, data protection, selling practices, corporate supply chains.
• Governance – Board makeup, corruption policies, auditing structure.

APPROACH RESPONSIBLE INVESTING

There’s no single, universal way to be a responsible investor, but these factors will enable the growth of ESG funds by giving investment managers more options to invest in, and improved ways to assess and monitor, the ESG rating of an investment.

While ESG investing is an opportunity you might be eager to explore, there are some considerations. Your investments must align not only with your values but also with your growth expectations and risk appetite. As with any approach to investing, you should choose the funds that are right for you and obtain professional financial advice to understand the market you want to invest in.

LOOKING TO BOOST PORTFOLIO PERFORMANCE
It’s a common misconception that investing responsibly means accepting lower returns but, increasingly, evidence says otherwise. Adding an ESG criteria could help boost portfolio performance. This investment ethos also delivers benefits beyond the bottom line and recognises that modern-day investment should be a matter of long-term ownership and sound stewardship. Speak to us for more information or to discuss your requirements.

Source data: OnePlanetCapital 09 March 2021

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME

FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.