Category: Tax Planning

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one in seven widows are missing out on valuable tax breaks

New data reveals that thousands of widows are missing out on valuable tax breaks on money inherited from their late husbands or wives.

In 2015, the government introduced a new rule that allows spouses to claim an extra ISA allowance. This allowance, known as an Additional Permitted Subscription allowance (APS allowance), is available to the surviving spouse or civil partner of a deceased ISA investor, where the investor died on or after 3 December 2014.

According to the Tax Incentivised Savings Association (an ISA trade body), around 150,000 married ISA savers die each year. However, just 21,000 eligible spouses used their APS allowance in the 2017-18 tax year, meaning they may be paying more tax than they need to pay.

Many bereaved spouses are unaware of the extra protections they can claim on, while others find the process difficult and confusing.

It is thought that many of those who lose out are widows whose husbands pass away without informing them of the exact nature of their financial affairs. In some cases, widows only discover large sums of money long after their husband’s death.

Situations like this have led to many to call for greater transparency between spouses around their financial affairs. A culture of privacy around financial matters is rife among the ‘baby boomer’ generation, where the higher earner often manages the money and investments. This can leave the bereaved in a precarious position, especially if they don’t know what bank accounts, investments and companies their spouse may have managed.

If your partner has left funds held in an ISA to someone else, you’re still entitled to APS. For instance, if your partner left an ISA of £45,000 to their friends and family, you can use your APS allowance to put an extra £45,000 into an ISA of your own.

Think you might be able to claim? You can apply through your late partner’s ISA provider. You will need to fill in a form, similar to when you open an ISA.

Sources
https://www.telegraph.co.uk/personal-banking/savings/one-seven-widows-missing-valuable-tax-breaks/

Inheritance Tax – Could there be a better alternative?

Inheritance tax is enormously unpopular to say the least. A YouGov poll found that 59% of the public deemed it unfair, making it the least popular of Britain’s 11 major taxes. What’s more, the tax has a limited revenue raising ability, with the ‘well advised’ often using gifts, trusts, business property relief and agricultural relief to avoid paying so much.

As it stands, the tax affects just 4% of British estates and contributes only 77p of every £100 of total taxation. This puts the tax in the awkward position of being both highly unpopular and raising very little revenue. At the moment, the inheritance tax threshold stands at £325,000 per person. If you own your own home and are leaving it to a direct descendant in your will, this lifts the threshold by an additional £125,000 in the 2018-19 tax year (the nil-rate band), to £450,000. Anything above this is subject to a 40% tax.

Inheritance tax is seen as unfair because it is a tax on giving (while normal taxes apply to earnings) and it is a ‘double tax’ on people who have already earned – and been taxed on – their wealth.

However, the Resolution Foundation, a prominent independent think tank, has suggested an alternative.

They propose abolishing inheritance tax and replacing it with a lifetime receipts tax.

This would see individuals given a lump sum they could inherit tax free through their lifetime and would then have to pay tax on any inheritance they receive that exceeds this threshold. The thinktank suggests that by setting a lifetime limit of £125,000 and then applying inheritance tax at 20% up to £500,000 and 30% after that would be both fairer and harder to avoid.

They predict that a lifetime receipts tax would raise an extra £5 billion by 2021, bringing in £11 billion rather than the £6 billion inheritance tax currently raises. In a time of mounting pressure on public services like the NHS, this additional revenue would be welcomed by many.

Moving away from inheritance tax would reduce many of the current ways to manage the amount of assets an individual is taxed on upon death. For instance, people would not be able to reduce the size of their taxable estate by giving away liquid assets seven years prior to their death.

The Resolution Foundation also suggests restricting business property and agricultural relief to small family businesses.

The lifetime receipts tax is, at the moment, just a think tank recommendation and is not being considered by the government.

However, the government are trying to introduce changes to probate fees that would see estates worth £2 million or more pay £6,000 in probate fees, up from the current rate of £215. This proposal has seen little support in the House of Lords and the government may consider scrapping the tax.

Sources
https://www.telegraph.co.uk/tax/inheritance/government-could-back-disguised-death-tax-following-lords-pressure/
https://www.accountancyage.com/2018/05/03/inheritance-tax-is-unfit-for-modern-society-and-should-be-abolished-says-think-tank/

how best to help your grandchildren finacially

Grandchildren & financesBeing a grandparent is an exciting time of life. You get all the enjoyment of doing fun activities with your grandchildren but can hand them back at the end of the day. Part of that pleasure is knowing that you can help them financially. Often you’re at a stage of your life where you’re comfortably off and in a position where you want to give a helping hand to the next generation.

The plus side of this is that you get the opportunity to make a real difference to your grandchildren’s lives. The downside is that the regulations around inheritance tax (IHT) can be confusing and the red tape overwhelming at times. By taking steps to find out what the rules are though, you can make life easier for family members and still be confident that you have enough money for your own retirement dreams.

One important consideration is the timing of your gift. If there’s a new arrival in the family, the financial needs will be very different than if it is to help older children. For example, the priority may be to help the newborn’s family move to a more spacious home or to help with private school fees for a primary school-aged child. Later on, it may be to help with driving lessons, pay for school or university fees or enable them to get on the housing ladder. You may decide you want to leave your money to your grandchildren in your will, in which case it is vital to plan your giving in advance in a tax efficient way.

IHT will be levied on your estate at 40% when you die, so if you’re giving money away now that will have an impact later. The nil-rate band is a threshold of £325,000 for the value of your estate. Anything above that will be taxed. Making monetary gifts can take the money out of the ‘IHT net‘ but remember this only applies for the seven years after you made the gift. It’s worth exploring some extra allowances such as being able to give £3,000 of gifts per tax year (your annual exemption) as well as an allowance for small gifts and wedding/birthday gifts.

There are a number of alternatives to make your gift. If the money is needed before age 18, a trust structure is a tax-efficient way to give money, while still giving you some control on how it is used. A Junior ISA can also be a good option as it grows tax-free, building up a fund for driving lessons or university fees. You can’t open the JISA on your grandchild’s behalf but you can pay into it up to their annual limit, currently £4,260. If they’re older, you might want to consider a lifetime ISA for a housing deposit. Again, you can’t open it for them as a Lifetime ISA can only be opened by someone between the ages of 18-39 but if your grandchild opens one, it’s a way for them to save up to £4,000 a year and get a 25 per cent government bonus on top.

Whatever you opt for, you’ll have the feel-good factor of helping the next generation in a way that is right for both you and them.


Sources
https://www.telegraph.co.uk/money/smart-life-saving-for-the-future/gifting-money-to-grandchildren/?utm_campaign=tmgspk_plr_2144_AqvY5NdHbz57&plr=1&utm_content=2144&utm_source=tmgspk&WT.mc_id=tmgspk_plr_2144_AqvY5NdHbz

what is the tapered annual allowance and how could it affect you?

One of the key advantages of saving for your retirement through a pension scheme is the tax relief you receive on the money you contribute, usually available at your usual rate of tax. The ‘Annual Allowance’ limits the amount of contributions both you and your employer can make to your pension in a year which benefit from tax relief, and is currently set at £40,000.

However, in April 2016, the government also introduced the ‘Tapered Annual Allowance’, which reduced the annual limit for those whose total income exceeds £150,000. This amount includes your salary, bonuses, dividends, savings interest and employer pension contributions. For every £2 of income above £150,000, your Annual Allowance will be reduced by £1, up to a maximum reduction of £30,000. So that those who receive a one-off increase in pension contributions from their employer are not unfairly caught out, the government also ensured that the Tapered Annual Allowance only applies to those whose taxable income before employer pension contributions is above £110,000.

Looking at some examples shows how the Tapered Annual Allowance works. Andy receives a salary of £160,000 in the 2017/18 tax year, with a further £16,000 of pension contributions from his employer. This gives a total income of £176,000, which is £26,000 over the £150,000 limit. Andy’s Annual Allowance is therefore reduced by £13,000 (half of that amount), meaning the amount of his pension contributions which can benefit from tax relief during 2017/18 is lowered from £40,000 to £27,000.

Bethany, meanwhile, earns a salary of £195,000 in the same year, with her employer making £15,000 of pension contributions. Her income from rental properties, savings and a share portfolio amounts to £20,000, giving Bethany a total income of £230,000, exceeding the £150,000 limit by £80,000. As half of this amount is £40,000, Bethany will receive the maximum reduction of £30,000. She will therefore only receive tax relief on up to £10,000 of her pension contributions in 2017/18.

If the Tapered Annual Allowance affects you and you’re wondering whether there are any legal workarounds which can be implemented to avoid being hit by it, the short answer is that there aren’t. Of course, if your total income decreases then your Annual Allowance will increase again. But apart from either earning less or reducing the amount you and your employer contribute to your pension (neither of which is a good idea), as long as your total income is over £150,000 you will be subject to the current rules,

Sources
http://scottishwidows.co.uk/knowledge-centre/retirement/annual-allowance.html
https://www.rsmuk.com/ideas-and-insights/tax-facts-2018-2019#Pension%20contributions

 

4 tips for keeping your books in order in 2018

Whether you’re someone who prides themselves on having their accounts in order every year, or you’ve just had yet another last-minute scramble to submit your tax return before the deadline at the end of January, the start of a new calendar year is a great time to review your books and ensure they’re all in order for the twelve months ahead. Here are our top four tips for 2018 in terms of your accounts, ensuring your bottom line is secure and most likely giving it a bit of a boost too.

  1. Get the tax man on your side – okay, maybe you’re unlikely to be inviting ‘the tax man’ to the pub on a Friday night, but it’s a good idea to keep HMRC on side for your business. The HMRC website is the best way to get up to speed with everything you need to know and all the latest accountancy developments for your business. And, if you’re in doubt about anything, get in touch with the tax authorities sooner rather than later and find out the answer. Forewarned is forearmed, as they say.
  2. Make your accountant’s life as easy as possible – your accountant’s job shouldn’t be to make sense of your business’s incomplete and poorly kept books. Not only does keeping your records in a reasonable order for them keep your costs low and reduce the likelihood of any unexpected fines coming back to haunt you, but it also frees up the time you’re paying your accountant for – to offer advice and save your business money over time. So, with that in mind…
  3. … When it comes to finances, keep everything – all your receipts and invoices need to be logged and traceable. Digital technology makes this easier now than ever, as paperwork can often be provided electronically and anything that can’t, can be scanned and linked to your records. As long as you keep your records up to date, you shouldn’t find yourself turning your business upside down for that one vital receipt you can’t find come the next tax deadline.
  4. Simplicity is key – Keeping financial records doesn’t have to be complicated; in fact, the simpler you can make your system, the better. That way you’re not having to decipher your own labyrinthine puzzle to understand your own business accounts. This will also make it far less likely that you’ll miss any unpaid invoices and have to chase them several months down the line. If your records have got out of control, the new year is a great time to start afresh with a modern system that works for you and your accountant.

    Sources
    https://www.pandle.co.uk/top-tips-getting-books-order-2018

what does the nil rate band really mean for me?

Changes to inheritance tax (IHT) came in earlier this year, affecting the allowance for those wanting to pass on their home to members of the family. But as the changes are being rolled out over the next few years up to the 2020/21 financial year, it can be hard to know if and how the changes will affect you.

The current amount you’re able to leave in your estate without incurring IHT is £325,000, known as the nil rate band (NRB). Anything above this amount incurs 40% tax, with certain exceptions, such as gifts to charities, being able to lower that percentage. Any transfers between spouses or civil partners are exempt from IHT even if your estate exceeds the NRB, with married or civil partnered couples having £650,000 – twice the NRB limit – to offset against their combined estate.

Introduced in April this year, the residence nil rate band (RNRB) adds a further £100,000 to the NRB. This will then increase by £25,000 each year up to 2020/21, when it will reach £175,000. Each person will therefore have a maximum allowance of £500,000, with surviving spouses having an allowance of £1 million to offset against IHT when their partner’s allowance is transferred to them.

The RNRB differs from the NRB in that it doesn’t apply to lifetime transfers, such as transfers into trusts or gifts given by an individual within a period of seven years before they died. This means that whilst the NRB could potentially be consumed through gift-giving in the last seven years of a person’s life, the RNRB would still be fully available.

Back in 2015, when the RNRB was first discussed, there were concerns over discouraging older couples from downsizing or selling their home to move in with a relative or to residential care. Since then, however, the rules have been readjusted so that the allowance can still be utilised by those who sell up or move to a smaller home before their death, as long as the deceased leaves the downsized property or equivalent valued assets to their direct descendants.

Whilst there’s no limit on how much time passes between the downsizing or property sale and death, the transaction needs to have taken place after 7th July 2015 in order to qualify. RNRB also only applies to one property which the deceased needs to have lived in at some point before dying, meaning that buy-to-let properties or those in discretionary trusts don’t apply. If the deceased owned multiple homes, personal representatives are able to nominate which property should qualify for RNRB.

It’s also important not to fall into ‘the sibling trap’ – leaving a home to a sibling rather than a direct descendant such as a son or daughter, which disqualifies them from being able to use the RNRB.

Sources
https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band
https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band
https://www.theguardian.com/money/2017/apr/01/inheritance-tax-relief-1m-residence-nil-rate-band
http://dev.cs.mail-first.co.uk/inheritance-tax-recent-changes-need-know-plan/
http://www.voice-online.co.uk/article/death-and-taxes-uk

what impact will the election period have on my pension and ISAs?

The market reaction to Theresa May’s decision to call a snap general election to take place on 8th June was, thankfully, relatively minor. After reaching a record high in March 2017, the FTSE 100 dropped by 3% following the Prime Minister’s surprise announcement last month. Compared to the negative reactions experienced following both the 2012 eurozone crisis and the Chinese economy concerns at the start of 2016, this was reasonably slight.

Whilst the election period brings uncertainty, almost every general election in the last two decades has not caused the FTSE 100 to become more volatile in the weeks either side of election day. It’s therefore more than likely that the markets will continue without any major disruption, even if a new government comes into power. It’s usually only genuinely unexpected results which cause markets to rise or fall considerably, with the most recent example being the referendum vote for Brexit last year.

There are, however, still things you can do to minimise any impact of the election on your pension pot or savings accounts.

A well-diversified investment portfolio – a mixture of bonds, shares, property and cash across different sectors and countries – means you’ll be spreading risk and making it more likely that a rise in one sector will soften the blow of a fall in another. It’s likely that you’ll have a particular outcome in mind for your investments, whether that’s securing your retirement in the future or reaching a particular financial goal by a certain time, so sticking to this is the right thing to do rather than becoming distracted by any short-term ups and downs in the markets.

Look out for any investment perks that are brought in soon after the election result as in order to raise revenue, most new governments will introduce policies to help you grow your finances. Don’t forget about the benefits already available to you either, such as ISA and pension allowances, as these can also be a good way to protect your savings from any market volatility. Lastly, drip feeding your investments month by month can be a good way to combat uncertain markets – you might not capitalise fully on a market high, but you’ll avoid losing out during any sudden lows.

Sources:
http://www.which.co.uk/news/2017/04/how-will-the-general-election-affect-my-pensions-and-isa/

is buy-to-let no longer such a good deal?

It wasn’t all that long ago that investment in buy-to-let property was seen as a straightforward way to generate an income for yourself. However, recent changes made by the government mean that turning a profit through buy-to-let in today’s property market is set to become much more difficult. Each case is individual, and the profitability of a property isn’t as simple as looking at the price of the property and the amount of rent it generates each month, but for many, buy-to-let will soon no longer be the attractive investment opportunity it once was. So what has changed?

From the start of April 2017, the amount of tax relief that can be claimed by a landlord on the interest on their buy-to-let mortgage has fallen. Higher rate taxpayers used to be able to offset all of their mortgage interest against their rental income before they calculated how much tax they owed, but this year they will only be able to offset 75% of the interest. This percentage is then set to reduce again to 50% in 2018 and 25% in 2019. No interest at all will be eligible to be offset in 2020, with a 20% tax credit being introduced instead.

Not only does this mean that investors are set to face growing tax bills over the next few years, even if their income has not increased, but it also means that some taxpayers currently on the basic rate will be pushed into the higher rate tax bracket when their rental income is taken into account. It will also have an impact on means-tested benefits, with some set to lose out on these through the new system.

For existing landlords, there are options to soften the blow of the new tax arrangements. Some buy-to-let owners, particularly those in the priciest areas of the country, such as London, are selling their properties in order to reinvest in multiple properties elsewhere. As companies are not subject to the new tax laws, purchasing these properties through a company will prove to be a better choice financially even taking into account potential capital gains tax.

As residential mortgages are usually at a lower rate than buy-to-let mortgages, another option for landlords is to remortgage their main residence and use the money raised to reduce their buy-to-let mortgage. A buy-to-let offset mortgage is also possible, although this option will only be open to those who meet the eligibility criteria. However, the option that around two thirds of landlords have said they plan to go for is raising rent, with the average increase expected to be between 20% and 30%.

Sources
http://www.thisismoney.co.uk/money/buytolet/article-4313456/Where-invest-buy-let-yield-beat-tax-hike.html
http://www.telegraph.co.uk/investing/buy-to-let/new-buy-to-let-tax-works-andhow-beat/

Is working part of your retirement plan?

A recent study analysing the income statistics for pensioners has found that more people aged over 65 are continuing to work after they officially retire. Figures suggest that the amount of pensioners doing so is around 13%, an increase from just 8% over the past ten years. That figure might sound small, but it equates to 1.1 million people boosting their monthly income during retirement. The median amount earned per week is £296, which adds up to £15,400 per year.

Choosing to remain in employment can be down to a need for extra income, but staying employed has also been shown to provide many physical and mental benefits, as well as helping to keep up social activity and giving a sense of purpose, which some feel they lose after giving up work.

For some, the decision to remain in employment of some kind is simply down to a love of working. If you’ve had a long and fulfilling career doing something you enjoy, retirement can come as a shock to the system. Continuing in some capacity by reducing your hours or passing on responsibilities can alleviate this feeling, allowing you to ease into a new way of life at a pace you are happy with. There may also be the chance to try something new that wasn’t possible before reaching retirement age. Carrying on working in a different role or a new industry altogether can give the opportunity to pursue an interest you’ve harboured throughout your working life with the added bonus of being paid to do so.

If you are nearing retirement or are already retired and you’re thinking of continuing work in some way, it’s worth knowing how it can affect your pension, depending on how you go about it. All state pensions and most private pensions can be deferred, the benefit of this being that your pension will be able to continue growing which, in turn, will give you more money to enjoy when you do stop working completely.

You can also choose to begin drawing your pension whilst continuing to work, but anything you draw will count as income, so any income from both earnings and your pension over your personal allowance will be taxed. You won’t make National Insurance contributions once you’re over state pension age, however, which puts a little more money back into your pocket

building your financial future

Sources

http://www.onrec.com/news/news-archive/nearly-one-in-seven-over-65s-boost-pensions-by-working
http://www.moneycrashers.com/reasons-working-after-retirement/
https://www.saga.co.uk/magazine/money/work/careers/the-rules-around-working-part-time-in-retirement#

Help To Buy vs Lifetime: Which ISA is best?

 

Set to be introduced in April 2017, the Lifetime ISA essentially offers an alternative to the Help To Buy ISA. With two competing options on the table, it’s important to know which is best for you and your needs, as whilst they have some similarities, there are also key differences between the two.

The Help To Buy ISA allows you to save up to £200 each month to save for a deposit on your first home. The government then boosts your savings further to the tune of 25% up to a total limit of £3,000, as long as you’re a first time buyer purchasing a property priced up to £450,000 in London and up to £250,000 everywhere else in the UK. There is no minimum deposit each month, and you’re also able to pay in £1,000 when the account is opened that doesn’t count towards your monthly savings.

Available up to Autumn 2019, anyone aged sixteen or over is entitled to open a Help To Buy ISA. The accounts are limited to one per person, which means both people in a couple can have an account and benefit from the bonus.

The new Lifetime ISA is based on similar principles but has several important differences, with the most important being that it can be used either to save for purchasing your first home or as money put away as a pension for later in life. There’s no limit on how much you can save each month as long as you don’t go over the yearly cap of £4,000.

Again, the government offers a 25% bonus, but this is paid whether you use the money to purchase your first home up to a price of £450,000 anywhere in the country, or keep it for later in your life. Any money that’s taken out before your 60th birthday and not used for purchasing your first home will forfeit the government bonus plus any growth or interest earned from it, as well as incurring a 5% charge. If you wait until after you’re 60, you can take out everything tax-free.

As you will be allowed to have both a Lifetime ISA and a Help To Buy ISA, you can choose to do this, but you will only be able to use the bonus from one of the two accounts to buy a home. As the Lifetime ISA is essentially replacing the Help To Buy ISA, it makes sense to opt for the newer style of account after they are introduced next April. If you want to set up an ISA for your child, however, you could consider opening a Help To Buy ISA on their 16th birthday then transferring the savings to a Lifetime ISA two years later which will allow you to take full advantage of the government bonuses

As always, seeking professional advice to establish what is right for you and your objectives has to be paramount.  This article is intended to give information only and not advice.

building your financial future

Sources: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508117/Lifetime_ISA_explained.pdf, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414027/FTB_factographic_final.pdf