Category Archives: Financial Planning

10 Tips for Tax Year End Planning

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Every year each individual is allocated a number of different allowances so far as taxation, savings and investments are concerned. When assisting individuals, we can often use these tax reliefs and allowances as part of the overall process of financial planning.

We’re just six weeks away from the end of the current tax year and start of a new one, meaning the countdown is on to make the best use of tax breaks and allowances available.

Here we provide 10 tips on how to make best use of your allowances before 6th April 2018.

  1. Maximise annual pension allowance. The annual allowance for most individuals contributing to a personal pension is £40,000. With the cost of living rising and people having a tendency to vastly underestimate how much they will need in retirement, making the most of the allowable pension contribution (which also includes any contributions made by your employer) could make a significant difference to your pension pot when you decide to retire.
  2. Take note of carry forward rules. It is worth noting that carry forward rules allow unused allowances from the past three years to be utilised – a tactic that can help you pay in over and above the annual allowance in a certain year should you have the funds to do so. This is particularly relevant to those approaching the end of their working lives as they will have less time left to accumulate funds.
  3. Make the most of higher rate relief. Any individuals earning over and above £45,000 which is the basic rate threshold of £33,500 plus the full personal allowance (11,500 for the current tax year 2017/18) will be afforded additional rate relief when making personal pension contributions. It is not clear how much longer these reliefs will be available, so additional and higher rate taxpayers may wish to contribute an amount to maximise tax relief at 45%, 40% or even 60%.
  4. Sacrifice bonus for a pension contribution. If you usually receive an annual bonus, it could be worth speaking to your employer about sacrificing this in favour of an additional pension contribution. Depending on the size of the bonus, taking this approach could result in significant NI contribution savings for both employer and employee. Which could also be added to the pot, further enhancing your pension savings.
  5. Use ISA allowance. ISAs offer savers valuable protection from income tax and Capital Gains Tax (CGT) and the annual ISA allowance is on a use it or lose it basis. It is therefore worth considering maximising ISA contributions to the annual limit, currently £20,000 per annum. We now have some clients with significant fund values which can provide a valuable source of tax free income in retirement.
  6. Recover child benefit. Child Benefit is eroded by a tax charge if the highest earning individual in the household has income of more than £50,000, and is cancelled altogether once their income exceeds £60,000. A pension contribution will reduce income and reverse the tax charge, wiping it out altogether once income falls below £50,000.
  7. Regain personal allowance. Since 2010, individuals earning in excess of £100,000 per annum have been subject to a tapering of their personal allowance – £11,500 in the current tax year – which reduces by £1 for every £2 that their adjusted net income rises above £100,000. If your earnings are between £100,000 and £123,000, it is worth considering making additional pension contributions, ideally to bring your ‘taxable income’ below the £100,000 threshold, therefore allowing you to regain your full annual tax free personal allowance. This type of planning can result in an effective rate of income tax relief of up to 60%, meaning the net cost of a £23,000 pension contribution could be as little as £9,200.
  8. Review how you structure remuneration as a Director. Using pension contributions in combination with salary and dividends can prove to be an extremely tax efficient way to fund your remuneration package and is often of particular advantage to those over age 55 who can access their pension fund with immediate effect should they wish to do so. Pension contributions also provide an opportunity to extract value from your business over time and help to reduce your exposure to creditor and business risk.
  9. Avoid annual allowance tapering. If you are a higher earner (over £150,000) you may be aware that the annual amount you are able to pay into your pension may now be liable to tapering. Every £2 of ‘adjusted income’ received over and above £150,000 results in a £1 reduction in your annual pension allowance, until their allowance drops to £10,000.  If you have unused pension allowances from the previous 3 years, you may be able to carry these forward and make a personal pension contribution to reduce or remove the impact of allowance tapering.
  10. Pay employer contributions before corporation tax relief reduces. Another one for business owners – there are plans for Corporation tax, which currently stands at 19%, to reduce to 17% by 2020. Companies may want to consider bringing forward pension funding plans in order to benefit from the current rate of tax relief before the reduction.

 

Even if you’re just able to do one or two of these things, you’ll be in a better position in the long run.

For further help or advice specific to your circumstances, please get in touch with us and one of our financial advisers will be able to assist.

NB: The Financial Conduct Authority does not regulate tax planning.

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‘Cashing In’ – 5 Ways to Make More from Cash Savings

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We all like to have a bit of money tucked away in case of emergency. Expecting the unexpected is a sensible approach to take – having the money to pay for urgent repairs to your home, to have on hand for any unplanned purchases or to dip into if planning a big holiday provides peace of mind.

However, how much cash do you really need to keep in reserve?

If you’re receiving a regular income from working or drawing down from a pension, your cash funds can quickly accumulate. Upon review, we sometimes find that clients have cash funds well in excess of even a generous emergency fund!

We all know that interest rates on cash are pitifully low at the moment. Here are 5 ways in which you can better use surplus cash reserves.

Explore your ISA options

Although lots of people like the straightforward nature of cash ISAs, there are now so many more options to consider. If you are under 55 and still working, you might want to consider a Lifetime ISA.  Alternatively, if you anticipate saving for more than 5 years, a stocks and shares ISA is statistically likely to deliver a return on investment.  These can also be a good bet as any growth in the value of the shares, or any income you receive, is tax-free. If you’d like to put some money aside for younger relatives, JISAs can be good savings vehicles.

Remember that any contributions made into an ISA held in your name count towards your annual £20,000 ISA limit.

Investments

Investing directly in the stock market comes both with risks and potentially significant rewards. The markets have enjoyed a good run over the last 12 – 18 months, delivering generally strong returns.  Whilst investing in the markets can be a bumpy ride, especially to the unexperienced investor who lacks access to all the tools a professional analyst has, the long-term results speak for themselves. However, due to volatility in the markets, if you want the flexibility of accessing your money in the short term, investing in the stock market may not be the best route to take.

Top up pensions

Personal pension contributions can significantly reduce income tax liability. There are a number of ways in which tax relief can be achieved but, most commonly, basic rate tax at 20% is automatically claimed from HMRC by your personal pension provider and added to your pot.

If you’re a higher or additional rate taxpayer, you can claim further tax relief from HMRC.

Business cash

Cash doesn’t only mean money sat in your personal account – if you have a business, large amounts of cash in your business account could be put to good use. For example, making either regular or lump sum payments into a pension rather than drawing down as dividends has many positive outcomes. Not only can you save income tax , you are also moving money into an environment free from Inheritance Tax.

Spend it!

Yes, you heard us right! Having a ‘saving’ mindset is commendable, but not if it’s to the detriment of enjoying life while you can. After all, money is only one source of wealth – experiences and living a fulfilled life is another (arguably better) one.

To discuss any of the above strategies, please contact your usual adviser.

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Did You Know..? FSCS Cover of up to £1 Million Available for ‘Temporary High Balances’

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The majority of us are aware of the Financial Services Compensation Scheme (FSCS), which provides protection for consumers in the event that a financial services firm fails. The normal cover limit provided is £85,000 per person per financial services firm and protection applies to monies held within banks, building societies or credit unions that are regulated by UK regulators the FCA and PRA.

But did you know that deposit payments up to £1 million that are made in connection with certain events are also covered under the scheme’s ‘temporary high balance’ rules?

Introduced in July 2015, the extended protection was brought in to standardise the protection of money held in banks, building societies and credit unions across the EU. Under the temporary high balance rules, deposits over £85,000 are protected for up to six months from when the amount was first credited.

The types of ‘event’ that are covered under the scheme include:

  • Real estate transactions (property purchase, sale proceeds, equity release) relating to a depositor’s main or only residence
  • Benefits payable under an insurance policy
  • Personal injury compensation (unlimited amount)
  • Disability or incapacity (state benefits)
  • Claim for compensation for wrongful conviction
  • Claim for compensation for unfair dismissal
  • Redundancy (voluntary or compulsory)
  • Marriage or civil partnership
  • Divorce or dissolution of their civil partnership
  • Benefits payable on retirement
  • Benefits payable on death
  • A claim for compensation in respect of a person’s death
  • Inheritance
  • Proceeds of a deceased’s estate held by their Personal Representative

Whilst the standard £85,000 cover under the FSCS is widely known, this additional ‘temporary high balance’ protection has gone under the radar of many. However, it can actually apply in many situations. When in receipt of a settlement, proceeds from a property sale or another windfall, it’s important not to rush into making any decision. The temporary high balance cover provides peace of mind and space to think about what you want to do with your money.

For more details of the rules and how they apply, visit the FSCS website.

 

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Life After Death – The Lesser Known Benefits of ISAs

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As of 6th April 2017, the annual ISA allowance in the UK rose to £20,000. With this dramatic increase, the previous contribution level having been set at an annual maximum of £15,240, ISAs have once again been brought into the spotlight from a saving and planning perspective.

Here we look at a couple of the lesser known facts surrounding ISAs – particularly in relation to their uses and benefits following the death of an ISA account holder.

Inheriting an ISA

Under the previous rules ISA savings could be passed on to beneficiaries named in a Will or through the rules of intestacy, but automatically lost the tax-exempt ‘wrapper’ status enjoyed during life.

The new rules, brought in on 6 April 2015, allow the surviving spouse of a deceased ISA holder (including a civil partner) to not only inherit the cash from the ISA, but also to then use the funds, or funds from elsewhere, to make additional contributions to an ISA on top of their own annual subscription limit. This is known as an additional permitted subscription (APS).

Unlike a personal ISA allowance, the amount that can be invested via APS does not ‘reset’ at the start of each tax year but rather is a capped amount equivalent to the amount accumulated by the deceased in ISA wrappers prior to their death. The time period for using an APS is restricted to three years following the date of death, or if later, 180 days after the estate has been administered, although the rules differ slightly where an in specie transfer of non cash assets is elected.

APS allowances – what are the rules?

The rules are surprisingly flexible and are available whether or not the surviving spouse inherited the deceased’s ISA assets. So in theory, the ISA itself could be passed on to other family members whilst the spouse still gains the additional permitted subscription allowance up to the total value of the deceased’s ISA upon death.

Additionally, there is no cap on the potential APS allowance – the rules apply irrespective of how much the deceased had managed to save in an ISA.

When it comes to actually using the APS, the funds invested can come from inherited wealth or any other form of cash available to the surviving spouse. The surviving partner can choose where to transfer the inherited savings – either into a cash ISA or a stocks and shares ISA. They can:

  • Keep the money with the original ISA provider
  • Put the money with their own ISA provider
  • Open up a new cash ISA or a new stocks and shares ISA and place the additional subscription there.

It is worth noting that during the period, in which the estate is being administered, the funds from the ISA lose their tax free status and therefore any interest earned on savings will become liable to taxation.

Gresham clients will be well aware of the benefits of saving into an ISA from a long-term planning perspective and particularly the benefits of having a hybrid of pension/ISA pots when it comes to drawing an income for retirement. The death benefits associated with ISAs are lesser known, yet provide a tax friendly means of passing on wealth to a spouse in addition to a potentially substantial further tax free environment for them to use to accumulate wealth. This provides further options for married couples and can come as a particularly welcome bonus to those who are widowed unexpectedly early.

For further information about the rules in relation to inherited ISAs, please contact your usual financial adviser.

Example – Mr and Mrs Jones

Mr and Mrs Jones were cautious spenders and Mr Jones had managed to save £60,000 into ISAs held in his name. Upon his death, it was written into his Will that his ISAs be split between the couple’s two children.

Mr Jones passed away at age 61 on 2nd January 2017. As the estate is fairly straightforward to administer, it is anticipated that Mrs Jones will have until 2nd January 2020 to utilise the additional permitted subscription (assuming a cash subscription).

In theory, Mrs Jones’ total annual ISA contributions could therefore look like this:

2017/18
£20,000 Personal ISA allowance
£30,000 APS allowance
£50,000 Total allowable ISA subscription

2018/19
£20,000 Personal ISA allowance
£10,000 APS allowance
£30,000 Total allowable ISA subscription

2019/20
£20,000 Personal ISA allowance
£20,000 APS allowance (funds must be transferred in by 2nd January 2020, assuming a cash subscription)
£40,000 Total allowable ISA subscription

NB. The amount that can be contributed via the APS can vary each year and can be made via instalments or lump sum payments.

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The Trouble with IHT Planning

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Inheritance Tax planning is a thorny issue. With an ageing population along with rising house prices and consequent value of estates, trying to avoid a large Inheritance Tax liability is something that an increasing number of people are having to consider.

The current state of affairs

According to the latest figures, Her Majesty’s Revenue and Customs (HMRC) collected £4.7 billion in inheritance tax in the last financial year, a record sum since the introduction of the current system.

Whilst there are no planned increases to the main threshold for Inheritance Tax, as described in more detail here, an additional allowance known as the Residence Nil Rate Band (RNRB) was introduced in April 2017.

Outside of this, there are many estates that will have a surplus value in excess of the tax free bracket, with 40% tax payable on all funds over the applicable threshold on death.

Although many of us know the basic facts surrounding Inheritance Tax, as IFA’s, we find that there is often quite a gap between clients knowing about the rules and actually taking any action on them. This is usually down to one of two reasons – because there will almost certainly be a payoff; or because we don’t like to think about the inevitable – death!

Avoiding IHT vs. maintaining control

Due to Inheritance Tax rules, which require a seven year period between most gifts being made before it becomes free of tax liability, it is essential to leave enough time when Inheritance Tax planning. Although clients will generally want to avoid being liable for large sums of Inheritance Tax, we often find that when it comes to it, they are nervous about relinquishing control of their wealth. This may be for many reasons – perhaps they are unsure about letting go of their cash reserves, or else maybe they would sooner their children/grandchildren/relations make their own way rather than be handed an inheritance on a plate.

Whilst there are some Inheritance Tax strategies that can be implemented, such as the £3,000 ‘gift allowance’ per annum, these will not have a significant overall impact on larger estates.

Ignoring the ‘d’ word

As for avoiding thinking about death – there are few of us that like to embrace the thought of our own demise – especially if we still consider ourselves to be fit, healthy and active. However, making plans for the worst case scenario and actually putting them into action is the only sure-fire way of preserving the wealth you have put so much time and effort into building up. Simultaneously you can then rest assured that your loved ones will be sufficiently well placed financially in their own futures.

Are there any solutions?

If handing significant sums of wealth over into unchartered hands is a concern, it may be that there are other options rather than making outright gifts; such as utilising trusts with specified access dates and/or ages. Although technically still gifting this money to the beneficiaries, clients using this strategy can retain some control (but not benefit) over the assets.

Additionally, since the 55% death tax was scrapped as part of ‘pension freedom’ reforms, beneficiaries of inheritance via a pension stand to be much better off. Now, if a pension holder dies before the age of 75, they can pass their pension pot on without any tax implications.

If over the age of 75 upon death, withdrawals from the inherited pension are taxed at the recipient’s relevant income tax rate. These changes make pensions by far one of the most tax efficient ways to cascade wealth.

Ultimately, Inheritance Tax planning, as with any other form of financial planning, will involve making some serious decisions and being prepared to make certain sacrifices. Whilst it is likely that a compromise will have to be made somewhere along the line, Gresham’s role is to mitigate the impact this will have. For example, cash flow modelling can establish whether making lifetime gifts to loved ones is affordable and our up to date knowledge of financial products, along with allowances and legislation, goes a long way to helping you achieve your financial goals whilst retaining as much control as possible.

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  • CPD training for professionals

    Gresham Wealth Management is one of the few financial planning firms in the North West that are registered to deliver CPD training. Committed to supporting fellow professionals with their ongoing professional development and understanding of key financial planning measures, our team have delivered training to over 350 accountants and solicitors in the region. Not only do these sessions help to keep you and your team ‘in the know’ on current legislation, they also help to identify potential benefits to your firm and your clients. Get in touch with us to discuss arranging a tailor made session for you and your team.
  • Keyman Protection

    The death or prolonged illness of a key employee can put your business under financial strain. Keyman insurance compensates a business for the financial loss brought about by death or long term illness of a key employee.

    It provides a valuable cash injection to the business which can help with a potential loss of turnover and/or to provide funds to replace the key person.

  • Shareholder/Partnership Protection

    One of the great risks of a partnership or limited company is that one of your colleagues may die, with their share of the business passing to someone else. That person may have little interest in the business or be unable to meet the requirements of running the business. Equally a partner or shareholder who suffers a serious illness may not want to continue in the business after treatment and look to be compensated for their exit from the business.

  • Personal Injury Trusts

    Without a personal injury trust in place, you can lose entitlement to present and future means-tested state benefits, including local authority contributions to the cost of long-term care. We offer simple, jargon free advice to check if a personal injury trust is required on receipt of a claim, generally at no cost to you.
  • Retirement Planning

    Retirement Planning is a complex area which means different things to different people. How you plan for retirement can be wide and varied, but it must be planned for well in advance.

    You may have existing pension plans in place, like a company pension or personal pension plan or perhaps you’re just starting to save. Whatever your situation, Gresham Wealth Management Ltd can provide the right advice to create a retirement plan that’s tailor-made for you.

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