Monthly Archives: September 2022

PREPARING BOTH ‘THE FAMILY’ AND ‘THE MONEY’ FOR THE TRANSITION OF WEALTH TO THE NEXT GENERATION

If you want to pass wealth on to your children and grandchildren, it’s wise to contemplate when it might be best to make that gift. Should you transfer wealth during your lifetime—or after?

Some people may find compelling reasons to avoid giving away wealth during their lives. They think that transferring substantial portions could mean they might not have enough to maintain their lifestyles; their beneficiaries might not use the wealth wisely, or at least in a way they’d want it used; and wealth might end up outside the family because of a child’s divorce or other misfortune.

SENSITIVE TOPIC

Understandably, money can be a sensitive topic even among the closest of families. But you will have a better chance of passing on assets tax- efficiently in a way which is acceptable to all family members if you discuss and plan how to do this.

There are a number of considerations to take into account when deciding when the best time is to transfer wealth to your family. These include your age, the age of your beneficiaries, the value of your estate, the types of assets involved, tax implications and your personal circumstances.

NEXT GENERATION

Transfers made during your lifetime may be subject to Inheritance Tax, depending on the value of the assets involved. Gifts made more than seven years before your death are usually exempt from Inheritance Tax. Also the value of assets can change over time, so it’s important to consider this when making a transfer. For example, property values can go up or down, and investments can become more or less valuable.

Your personal circumstances will also play a role in deciding when to make a transfer. For example, if you need access to the money yourself, then it may not be the right time to transfer wealth to your family. Alternatively, if you’re looking to pass on your business to the next generation, then you’ll need to consider when is the best time for them to take over.

Here are four important considerations that should be a part of any family wealth transfer plan:
Age: One key factor to consider is your age. If you are younger, you may have more time to accumulate assets and grow your estate. However, if you are older, you may want to consider transferring wealth sooner rather than later in order to maximise the amount that can be passed on to your beneficiaries.

Age of Beneficiaries: Another key consideration is the age of your beneficiaries. If they are young, they may not need the money immediately
and it can be used to help them further their education or buy a property. However, if they are older, they may need the money to support themselves in retirement.
Value of Estate: The value of your estate is another important factor to consider. If your estate is large, you may want to consider transferring wealth sooner rather than later in order to minimise Inheritance Tax liabilities. However, if your estate is small, you may not need to worry about Inheritance Tax and can afford to wait until later in life to transfer wealth.

Types of Assets: The types of assets involved in the transfer of wealth are also important to consider. If the assets are liquid (such as cash or investments), they can be transferred immediately. However, if the assets are illiquid (such as property), it may take longer to transfer them.

ADHERING TO THE FAMILY’s VALUES AND VISION
Taking all of these factors into account will help you decide when the best time is for you to transfer wealth to your family, but it’s important to discuss wealth transfer with them sooner rather than later to maximise your options.

Families must overcome many hurdles to ensure their wealth is protected and continues to accumulate over the generations while still adhering to the family’s values and vision.

IS IT TIME WE HAD A TALK ABOUT FAMILY WEALTH TRANSFER?
Transferring wealth to the next generation is an ongoing process – and it is extremely important to keep talking as a family. Making a decision about when to transfer wealth to your family is also a personal one. It’s important to seek professional advice to make sure that you’re making the best decision for your circumstances. To discuss your family wealth transfer plans, please contact us.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING. TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING.

INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE.

TAX LAWS ARE SUBJECT TO CHANGE AND TAXATION WILL VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES.

WHAT IF I COULD MAKE MY WEALTH MORE TAX-EFFICIENT?

We all want to leave a legacy and make sure the ones we care about most are well taken care of when we’re gone. That’s why making plans for Inheritance Tax is so important, to have confidence that your children, grandchildren and those you hold dearest will be taken care of long into the future.

Inheritance Tax is a tax on the estate of someone who has passed away. The standard Inheritance Tax rate is 40% in the current 2022/23 tax year. Your estate consists of everything you own. This includes savings, investments, property, life insurance payouts (not written in an appropriate trust) and personal possessions. Your debts and liabilities are then subtracted from the total value of your assets.

PASSING ON YOUR MAIN RESIDENCE TO DIRECT RELATIVES
Every person in the UK currently has an Inheritance Tax allowance of £325,000 (frozen until April 2026). This is known as the nil-rate band (NRB). In 2017, an extra allowance was introduced to make it easier to pass on your main residence to direct relatives (i.e. a child or grandchild) without incurring Inheritance Tax. This allowance is currently £175,000, known as the residence nil-rate band (RNRB), and is on top of the standard nil-rate band of £325,000.

A tapered withdrawal applies to the RNRB when the overall value of an estate exceeds £2 million. The withdrawal rate is £1 for every £2 over the £2 million threshold.

ALLOWED TO USE BOTH TAX-FREE ALLOWANCES
If you are married or in a registered civil partnership, you are allowed to pass on your assets to your partner Inheritance Tax-free in most cases. The surviving partner is then allowed to use both tax-free allowances. Provided the first person to pass away leaves all of their assets to their surviving spouse, the surviving spouse will have an Inheritance Tax allowance of £650,000 (£1 million if they are eligible for the RNRB).

According to recent figures released by HM Revenue & Customs (HMRC), more estates in the UK are now paying Inheritance Tax than ever before.

PAYING INHERITANCE TAX UNEXPECTEDLY

Inheritance Tax receipts totalled £6.1 billion in the 2021/2022 tax year, up £729 million on the year prior. This 14% increase marks the largest single-year rise in Inheritance Tax receipts since the 2015/2016 tax year. The increase is the result of the ongoing freeze on the nil-rate Inheritance Tax band and residence nil-rate Inheritance Tax band.

Many more families are finding the total value of their estate – driven by a rapid growth in house prices, savings and other assets – is likely to be above £1million at the point of death, meaning many more estates could end up having to pay Inheritance Tax unexpectedly.

START CONVERSATIONS WITH YOUR LOVED ONES
In the 2019/20 tax year, there were 23,000 such deaths, up 4% on the year prior. Given this data only covers to the start of the pandemic, this number is likely to have risen considerably over the past couple of years as asset prices grew.

With many more estates likely to be subject to an Inheritance Tax bill, it remains important that you have a conversation with your loved ones sooner rather than later so that you all fully understand your estate, the value of it and the potential to pay an Inheritance Tax bill.

SAVE YOUR FAMILY THOUSANDS OF POUNDS
When discussing your Will and any potential Inheritance Tax liability, there are things that can be put into place to mitigate or reduce a future payment.

That’s why planning for Inheritance Tax is a fundamental part of financial planning. It could potentially save your family thousands of pounds in Inheritance Tax payments when you die and ensure that your wealth is preserved for future generations.

WHAT WILL YOUR LEGACY LOOK LIKE?
We understand every situation is unique. We’ll help you to identify any specific issues and recommend the changes needed to help you meet your long-term wealth protection goals in the most tax-efficient manner. To find out more, please speak to us.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING. TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING.

INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE.

TAX LAWS ARE SUBJECT TO CHANGE AND TAXATION WILL VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES.

81% AREN’T SEEKING FINANCIAL ADVICE

Self-employed people are at risk of financial hardship if they don’t have sufficient provision in place. Without a regular income, it can be difficult to cover expenses and also save for the future. In many cases, the self-employed are unable to claim for many of the benefits that employees are entitled to, including statutory sick pay.

Being self-employed also means you don’t have the luxury of having an employer to rely on for sickness cover or health insurance, which can make you extremely vulnerable to loss of income or unexpected financial shocks.

WITHOUT A REGULAR INCOME

So if you’re self-employed, it’s essential you’re prepared for anything by having the right protection in place. According to new research, over half (57%) of self-employed workers in the UK rely on personal savings when they are not working, yet a worrying 81% aren’t seeking financial advice[1].

Being self-employed can offer numerous benefits, such as flexible hours and the opportunity to work with a wide range of people, but self-employed workers can also face financial vulnerability. Over two-thirds (64%) of those who are self-employed in the UK revealed they are without a regular income, with just one in five (23%) receiving a monthly pay packet.

OWNING A BUSINESS

The research also found that almost half (48%) of self-employed people see their income fluctuate as a result of owning their own business, with a similar proportion (49%) putting this down to being a freelancer, contractor or consultant.

As the cost of living rises and private rents in the UK increase at the fastest rate in five years, a quarter (24%) of those surveyed said they only had enough money to cover such costs for three months if they were unable to work.

VULNERABILITY TO FINANCIAL SHOCKS

With the research highlighting the group’s vulnerability to financial shocks and the importance of expert financial advice, one in three (31%) of those surveyed don’t think they can afford professional advice, while one-quarter (24%) say they hadn’t thought about seeking professional financial advice.

Not being eligible for Statutory Sick Pay (SSP) can prove a real problem for the self-employed and their financial resilience – during the pandemic, a fifth (21%) of all applications to the Test and Trace Support Payment scheme were from this group, according to a Freedom of Information request by The Community Union.

SECURE FINANCIAL PROTECTION

And while many have taken steps to secure financial protection for themselves and their families, 13% of self-employed workers in the UK still don’t have critical illness cover or life insurance.

Of these respondents, just under a third (31%) said these forms of protection aren’t a financial priority, one in four (25%) said they were prepared to risk not being covered, while a similar amount said they didn’t require these policies (27%) or couldn’t afford them (24%).

HOW CAN I PROTECT MY INCOME WHEN I’M SELF EMPLOYED?

When you’re self-employed or a contractor, you get the perk of being your own boss, but you wave goodbye to traditional employee benefits like company sick pay. Getting income protection is one step you could take to provide a financial safety net if you’re unable to work because of illness or injury. To find out more, get in touch.

FINANCIAL PLANNING ESSENTIAL TO HELP BALANCE PRIORITIES

As the cost of living crisis continues to rise, midlifers are set to be impacted particularly hard. This is because many midlifers are still paying off mortgages and other debts, while also trying to support their families. This means that they often have less disposable income than younger people.

In addition, midlifers are more likely to face redundancy or early retirement, which can make it even harder to make ends meet. And, with life expectancy increasing, midlifers are also likely to need to pay for more health care and other costs in their later years.

FINANCIAL RESPONSIBILITY COULD RISE

According to new analysis, the financial responsibility of people in midlife (40 to 60 years old) could rise significantly in 2022. Midlifers who provide financial support to adult loved ones (17%) could be impacted twice by the cost of living crisis, due to increases in their own household bills and those of the adult loved ones they support.

Households are likely to see their income affected by a minimum of £1,200 this year due to tax rises and soaring energy bills[2], which could see midlifer households’ essential bills increase by at least 10% (from £12,457 a year to £13,657). This is on top of the £3,577 that midlifers already provide in financial support to their adult loved ones.

STEEPEST LEVELS OF SUPPORT

The effect could be a particular problem for people aged 40 to 44 years old, who face the steepest levels of support. Despite the fact that their household income is at its highest point (£38,956 on average), their outgoings (£13,491) and non-mortgage debt (£19,149) combined with their financial support for loved ones (£4,195) are the highest of any other group in midlife.

People in midlife who provide financial support for their loved ones are often called upon to help with the cost of monthly essentials, so are likely to suffer from the rising cost of living twice. As the data shows, this is particularly true for people in their early forties, who have high outgoings and tend to provide a greater degree of financial support.

IT’S GOOD TO TALK

The cost of living crisis is putting a significant strain on many household budgets, and is leaving some midlifers struggling to make ends meet. All of this means that you need to be especially careful about how you manage your finances. To discuss your situation or to find out more, please contact us.

ENSURING AN EQUAL DIVISION OF ALL THE ASSETS WITHIN THE MATRIMONIAL POT

The breakdown of a marriage is often referred to one of the most traumatic and stressful events anyone can go through. Divorce can also be a costly experience, often including legal fees, a new home, a new car and new childcare costs. So, it’s perhaps predictable that so many need to rely on savings or credit cards for support during this time.

When dealing with finances on divorce, the starting point is an equal division of all the assets within the matrimonial pot. It’s critical that, as part of the separation process, couples take time to think about and discuss one of their single most valuable assets, their pension.

RELEVANT FACTOR IN ANY DIVORCE

It’s common that one party will have significant pension provision, and the other party may have little or none. Clearly, this could be a relevant factor in any divorce.

Figures show that in 2020 there were 103,592 divorces granted in England and Wales, but with a new law that came into force on 6 April 2022 making it much easier for couples to get divorced through a ‘no fault’ plea, this figure is likely to increase in the coming years.

IMPACT OF DIVORCE ON FINANCES

Thinking about family finances may be the last thing couples want to do at this difficult time. However, it’s important to understand the impact that divorce will have on finances, including pensions.

The UK currently holds £15.2 trillion pounds in household wealth. Private pensions represent the biggest single component of this wealth – at around 42% of the total (£6.4 trillion). Agreeing a fair separation of this pension wealth at a time of divorce will be critical to the future financial wellbeing of both parties.

AVERAGE AGE REACHES AN ALL-TIME HIGH

As a result of divorce, as many as nearly one in five (19%) say they will be, or are, significantly worse off in retirement. The average age for getting divorced has reached an all-time high of 47 years and 5 months for men and 44 years and 9 months for women, so it’s fair to assume that the levels of wealth accumulated in couples’ pension pots may also be fairly high.

The research suggests that one in seven (15%) of divorced people didn’t realise their pension could be impacted by getting divorced and more than a third (34%) made no claim on their former partner’s pension and it was not included as an asset in the settlement when they did divorce.

SIGNIFICANTLY WORSE OFF IN RETIREMENT

Worryingly, almost one in twelve (8%) divorcees say they didn’t have their own pension savings as they were relying on their partner to finance their retirement. As a result of divorce, as many as one in five (19%) say they will be, or are, significantly worse off in retirement. It’s critical that, as part of the separation process, couples take time to think about and discuss one of their single most valuable assets, their pension.

To supplement their income following a divorce, a third of divorcees (32%) said they dipped into their savings; one in five (20%) used credit cards for everyday living expenses; a similar number (18%) borrowed from friends or family; and just over one in seven (15%) regularly sold clothing/toys/other household items just to make ends meet.

FUTURE RETIREMENT INCOME AT RISK

One in eight (12%) respondents admitted to having to go out to work, having not worked before their divorce, or get a second job (10%). Worryingly, one in eight (12%) also cut back, or cancelled, their pension contributions – putting their future retirement income further at risk.

There are several options available to the Family Court when dealing with pensions at divorce – pension sharing, earmarking and offsetting against other assets. It can often be a very complex issue so, as well as hiring a family lawyer, couples should consult a professional financial adviser to walk them through the pension valuation and financial process.

HOW CAN WE HELP WITH YOUR PENSION?
If you’re going through a divorce, one of the many things you’ll need to think about is your pension. What will happen to it? Who will get what? These are important questions to ask, because pensions can be a significant asset in a divorce settlement. If you would like to discuss your options, please contact us.