Category Archives: Financial Planning

Life After Death – The Lesser Known Benefits of ISAs

Nature Floating Flying Flower Growth Dandelion

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 in the previous article, of April 2017, an additional allowance known as the Residence Nil Rate Band (RNRB) will be introduced starting 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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A Quick Guide to Allowance Changes for 2017/18

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Income tax threshold increases

The personal allowance for income tax is going up to £11,500. Alongside this, the basic rate limit will be increased to £33,500, meaning higher rate tax will only be payable on earnings over £45,000.   The rates are slightly different for those residing in Scotland with the basic rate limit being set at £31,500, meaning higher rate tax will be payable on earnings over £43,000.

ISA subscriptions

The annual allowance for contributions to Individual Savings Accounts (ISAs) is going up significantly to £20,000 per person.

6 April 2017 will also see the launch of the new Lifetime ISA (LISA). Anyone aged 18 up to the age of 40 will be able to open a Lifetime ISA and contribute up to £4,000 a year; receiving a 25% government top-up. This can be done every year up until the age of 50, with penalty free access to the fund allowable from the age of 60, or if the money is needed to purchase your first property.

The main drawback of the LISA is that should you need to access your money before the age of 60 and you already own a property, you will be charged a fee of 25% of the total withdrawal; the only exemption to this being if you have been diagnosed with a terminal illness. It should also be noted that any contributions made into a LISA during any tax year will form part of your annual £20,000 ISA allowance.

The idea of the new LISA is to act as a complimentary savings scheme for younger savers and is not intended to be a replacement for traditional pensions. There are different benefits and drawbacks of the Lifetime ISA vs the Help to Buy ISA and traditional pension savings vehicles. For further help in this area, or if you need any advice regarding saving for children or grandchildren, please get in touch with your adviser.

Residence Nil Rate Band 

Whilst the normal IHT allowance of £325,000 will remain unchanged, the new Residence Nil Rate Band (RNRB) will be phased in over the coming years, starting from April 2017. Initially being introduced at a level of £100,000, the allowance will be applicable to individuals that own a home and have direct descendants, such as children or grandchildren.  It is proposed that the RNRB will increase annually until 2020 – to £125,000 in 2018/19, to £150,000 in 2019/20 and to £175,000 in 2020/21. The new allowance is in addition to the main £325,000 nil rate band thus providing a total potential allowance of £500,000 per individual.

As with the normal IHT nil rate band, the RNRB will be transferable between married spouses/those in a civil partnership. In theory therefore, a married couple with children/grandchildren who will inherit the main residence will have an overall allowance of up to £1 million by the start of the financial year in 2020.

However, for estates valued in excess of £2 million the RNRB will be gradually withdrawn or tapered away.

Comment

The changes scheduled from April 2017 present a positive overall picture for savers and investors.

So as far as income tax allowances and thresholds are concerned, the government say the new measures will benefit 28.9m individuals of whom 24.1m will be basic rate taxpayers (an average real gain of £56) and 4.9m will be higher rate taxpayers (an average gain of £233). It is anticipated that the changes will also take a further 424,000 individuals out of income tax altogether.

The increase in the annual ISA allowance is significant. Alongside tax-free returns, accessibility in the short term and the benefits of long-term retirement planning using ISAs, another compelling reason for utilising allowances where possible relates to the additional permitted subscription (APS).

The introduction of the new LISA will provide an additional means for younger adults to save for later life and could be worth considering alongside pensions and other savings vehicles.

Following significant rises in house prices over recent years, the RNRB will go some way to easing the growing concern of IHT planning. Although the introduction of the new allowance has been welcomed by many, it has its drawbacks. Notably the allowance will only apply to wealth tied up in your main residence and it can only be left to direct descendants – i.e. children, grandchildren, step, adopted or foster children. This effectively means that those without children/direct descendants are not entitled to the new allowance.

Additionally, although the new allowance will assist some property owners with IHT planning, house prices are predicted to continue to increase over the same period, so any benefit may be reduced respectively.

As a new allowance, it will be interesting to see how the RNRB pans out. However, providing qualifying criteria are met, the new exemption could save many clients a significant level of IHT.

For more information on any of the above allowance changes, please contact us.

 

 

 

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New Year’s Resolutions for your Finances

plan

New Year is a time for goal setting and objective making, as well as those notorious new year’s resolutions! Just as we make plans for other areas of our lives, so too should we consider what improvements we can make to our financial outlook.

Here are some areas you may wish to consider looking at with a view to improving your long-term financial outlook.

Review your spending

It may seem obvious but a good place to start when making financial changes is to look at your expenditure and identify areas where savings can be made. As well as looking to save on large areas of expenditure, such mortgage deals or household bills, there are also small changes we can make on a daily basis.  For example, the cost of a daily coffee on the way into work is around £2.50 per day, or £50 per month. Buying lunch every day when you’re at work costs around £5, equating to £100 per month. The cost of a weekly takeaway is around £20, so cutting this out could save £80 per month. Although the changes may seem relatively insignificant, there is little doubt that they all add up – as the above examples do to £2760 per year. Just remember the concept of marginal gains – small incremental improvements that together add up to a significant improvement. Financial changes that lead to even the smallest percentage improvement can build up more quickly than you might think.

Review your pension provisions and contributions

Once you have identified ways of making savings, or else suddenly have a windfall such as a bonus or reduction in monthly expenditure eg. saving on nursery fees when children start school, it can be tempting to increase expenditure on short-term extravagances, such as a fancy holiday or a series of treats for the family. Whilst this is human nature, these are the key opportunities that can make a real difference to your long-term planning. By channelling additional funds into your pension rather than flitting them away you will not only benefit from building a larger pension pot, but also the immediate benefit of tax relief.

Reviewing your existing pension provisions on a periodic basis is always a worthwhile exercise as it helps ensure they remain competitive and suited to your needs. It also continues to amaze me how often we come across pensions from previous employers that clients have simply forgotten about!  However, advice should be taken before any changes are made because some contracts have some features that would be very difficult to replace such as guaranteed annuity rates, guaranteed growth rates and enhanced tax free cash entitlements to name but a few. These benefits would be lost if you moved your pension to another provider so care must be taken to ensure you know exactly what you have.

Maximise allowances

Although the interest rates we can hope to achieve does little to entice us to save into ISAs, from a long-term planning perspective, ISAs still remain an attractive proposition. A long-term investment in a stocks and shares ISA will not only benefit from any gains in performance in a tax free environment, but any increases will also benefit from compound interest. Although there is no initial tax benefit to contributing to ISAs, the tax free benefit becomes available when making withdrawals and when combined with drawing a pension from 55, can present a highly efficient method of funding retirement. As well as being a tax-efficient way to draw an income, ISAs are also very flexible – unlike pensions allowing access prior to age 55 should you need access to the money for any reason.

Review your investments

Let’s face it, most people do not have the time, nor the inclination, to review and analyse their investment portfolios. Yet clearly, this is an area that can deliver great potential returns – or indeed losses – where large sums are invested. There is usually a trigger that first prompts someone to contact us with a view to becoming their financial adviser and sadly, this is sometimes because they have suffered the pain of making a poor investment decision. Although financial advice is difficult to quantify, the likelihood is that having a professional keeping a constant eye on the performance of your investments will ultimately leave you less exposed to losses – therefore more likely to make significant gains.

Be accountable to yourself

Even if you have a brilliant financial adviser giving you the best advice for your personal circumstances, the only person who can actually make a difference to your long-term financial outlook is you. Take the dawning of the New Year as an opportunity to set goals – write them down and hold yourself accountable to them. In the long run, it’s going to be far better value than that gym membership.

 

 

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No Surprises in Hammond’s First Autumn Statement

Autumn Statement

Today the Chancellor of the Exchequer, Phillip Hammond, delivered what was his own first major budgetary speech and the first since Theresa May took power.

It was a fairly ‘quiet’ affair so far as previous budgets and autumn statements have gone.

In what had been billed as the statement for ‘JAM’s’ (just about managing families), the major announcements related to a further increase to the National Living Wage, which will rise to £7.50 from April, a ban on lettings agency fees for tenants and a commitment of £3.7bn to fund the building of 140,000 new affordable homes.

So far as financial planning is concerned there were only a few relevant announcements and even those will have limited impact.

It was announced that:

  • The money purchase annual allowance (MPAA) – the annual amount individuals can contribute to defined contribution pensions after having previously accessed a pension flexibly – will be cut from £10,000 to £4,000pa. Introduced as a way of reducing ‘inappropriate double tax relief’, The Treasury anticipates it will make £70m from the move in 2017-18. Largely affecting those who have started to access their pension yet still continue to work, this move is somewhat of a blow, although it should be noted that ISA allowances are to rise to £20,000 a year from April 2017, providing a significant tax free savings environment.
  • A new 3 year savings bond with NS&I will be introduced at a rate of 2.2% pa. However, the amount that can be saved will be capped at £3000 which will, at best, result in a mere £66 in interest per annum.
  • Mr Hammond also reconfirmed that the tax free allowance for income tax would increase to £11,500 in April 2017, further rising to £12,500 by 2020. He further committed to previous pledges that the higher rate Income Tax threshold would increase to £50,000 by the end of the current parliament.

In many ways, the relatively benign nature of the Chancellor’s Statement was to be expected. With economic forecasts having been reduced in the wake of Brexit, continuing instability of the pound and uncertainty around Britain’s exit from the EU, this wasn’t the time for any major shockwaves.

However, with two Budget speeches to be made in 2017 ahead of changes to a single fiscal event in the form of an Autumn budget thereafter, perhaps Mr Hammond is simply holding back his ‘trump’ cards until next year.

For any advice in relation to the announcements made in today’s Autumn Statement, or to discuss your financial planning strategy with one of our IFA’s, please get in touch.

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