Plan, prepare

Making new year’s tax saving resolutions

At this time of year, we think about New Year’s resolutions, and it’s also a good time to start planning our tax affairs before the end of the tax year on 5 April. As you think about 2019 and your goals for the coming year, we can help to start you off on the right financial footing. It’s well worth spending some time in January to think about your money so you can achieve your goals as quickly as possible.

Tax planning might not sound very exciting, but it can have a dramatic effect on your personal finances. The Government and HM Revenue & Customs (HMRC) continue to clamp down on what they regard as tax avoidance and unacceptable tax planning. But there is still much that can legitimately be done to save or reduce tax.

Meeting your financial goals
Tax planning is one part of meeting your financial goals. By taking action now, it may give you the opportunity to take advantage of appropriate reliefs, allowances and exemptions, and consider whether there are any relevant decisions that you need to make sooner rather than later. Many of the tax and investment planning opportunities available require action to be taken before 5 April 2019.

While some people avoid making New Year’s resolutions for fear that they will only break them, people who make financial New Year’s resolutions are more likely to end 2019 in better financial shape than when they began.

Ready to put the tips into action? 
Here we’ve provided some of the main areas you may wish to discuss with us, if appropriate to your particular situation.

Topping up your pension
Pensions are now more flexible than they have ever been and remain extremely tax-efficient. You’ll receive tax relief at the basic rate of 20% on contributions made to personal and workplace pensions. So for every £80 you pay in, HMRC will top it up to £100. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% through your self-assessment tax return. However, if you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

But you’ll need to watch out for the annual pension allowance. This is the limit on the amount that can be contributed to your pension each year while still getting tax relief. For the 2018/19 tax year, for most people it’s £40,000, or the value of your whole earnings – whichever is lower. Lower allowances may apply if you have already started drawing a pension, or if you are a higher earner with income plus pension contributions that total above £150,000.

If you’ve used your full allowance in the current tax year but not in recent years, you may also (depending on your circumstances) be able to ‘carry forward’ any annual allowance that you haven’t taken advantage of in the three previous tax years. There’s also the Lifetime Allowance to consider. If the value of all your pensions is more than £1,030,000, anything over this limit will be taxed when you start using it.

The value of pensions can go down as well as up, and you may not get back as much as you put in.

Taking your ISA to the max
One of the easiest ways to reduce your tax bill is to shelter any returns above your allowances in an Individual Savings Account (ISA), which is a tax-efficient wrapper. For the 2018/19 tax year, you can put up to £20,000 into an ISA. For a couple with two children, the total ISA allowance available to the family is £48,520, which comprises £20,000 for each adult plus £4,260 of Junior ISA allowance per child.

You can choose to hold all of that in a Cash ISA, or put it into a combination of investments, including funds, shares, gilts and bonds through a Stocks & Shares ISA, or you can invest in peer-to-peer lending through an Innovative Finance ISA. Alternatively, you can split your allowance between a Cash, Stocks & Shares, Innovative Finance and Lifetime ISA. (LISA)

However, with a LISA, you can only allocate up to £4,000 of your £20,000 allowance. You also must be aged between 18 and 39 when you start and can deposit up to £4,000 per year until your 50th birthday. The Government will add an annual bonus of 25% (up to a maximum of £1,000 per year) to any savings.

The principle purpose of a LISA is for the proceeds to be used to either (a) purchase a first home or (b) provide you with funds to help you in your retirement after you have attained age 60. This means that, if the money is withdrawn for any other purpose (and unless the saver is in serious ill health), the 25% government bonus will be withdrawn, and the proceeds will also incur a 5% charge.

You won’t be taxed on returns from savings or investments held in an ISA, nor will you have to pay Capital Gains Tax (CGT) on any of the profits you make above the annual CGT allowance, which in the 2018/19 tax year is £11,700. The standard CGT rate is 10%, while the higher rate is 20%.

Getting personal with your allowance
Everyone has a certain amount of income they can earn each year without paying Income Tax, known as their ‘personal allowance’. For the 2018/19 tax year, this amount is £11,850.

Your personal allowance is in addition to the Personal Savings Allowance (PSA). Since April 2016, savings interest has been paid tax-free, which means that most savers no longer have to pay Income Tax on the savings income they receive.

Your PSA depends on which Income Tax band you are in, with basic rate taxpayers entitled to a £1,000 allowance, while higher rate taxpayers receive a £500 allowance. Additional rate taxpayers are not eligible for a PSA.

Investors also have a dividend allowance, which means that individuals receive their first £2,000 in dividends tax-free, but any dividends above this amount will be charged at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Take advantage of your marriage vows. If one spouse is a higher rate or additional rate taxpayer and the other doesn’t pay tax at all, it could be more tax-efficient to put the account solely in the non-taxpayer’s name. This would give that spouse full ownership of the account, so you’ll need to make sure you’re both happy with the arrangement.

Keeping your inheritance in the family
ISAs and pensions are the two big ways to shelter your money from tax, but there are other tools at your disposal. Your estate is valued when you pass away and chargeable to Inheritance Tax (IHT) at 40%, although the first £325,000 nil-rate band (NRB) is exempt. Anything that goes to your spouse is also exempt.

Married couples and those in registered civil partnerships can also benefit from an additional family home allowance, which makes it easier to pass on the family home to direct descendants without incurring IHT charges. This was introduced on 6 April 2017, starting at £100,000, and will be phased in gradually until the total IHT threshold reaches £500,000 per person in 2020/21.

The residence nil-rate band (RNRB) acts as a top-up to the current IHT NRB and works in a similar manner by reducing the value of your estate that is subject to IHT at the full rate of 40%. It is potentially available for deaths on or after 6 April 2017 where, in general terms, an interest in the family home is left under your Will to your children, grandchildren or other lineal descendants. The RNRB is offset against the value of your estate ahead of the NRB, and the maximum RNRB amount allowed on a death in the 2018/19 tax year is £125,000.

Current tax rules also enable you to give away up to £3,000 free of IHT each tax year. You can give away more than this amount if you want to, but you must live for at least seven years from the date of the gift for it to be exempt from IHT.

Don’t leave your tax return until the last minute
The deadline to submit your tax return online is 31 January. Failure to meet the HMRC deadline can result in penalty fines or extra interest charges.

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.

Gifts of the financial variety

The best gift you can ever make to your grandchild or grandchildren this festive period will have a longer-lasting impact

Your grandchild or grandchildren may want the latest toy or gadget this Christmas, but how about giving them a present that can help their financial future? UK tax laws allow children to receive pension contributions of up to £3,600 a year from the moment they are born.

HM Revenue & Customs will currently give tax relief of £60 per month on a £240 a month contribution. The money is locked away until the recipient reaches age 55, but it means they can’t ‘fritter away’ their inheritance!

More self-reliant
Instead, the money becomes available at a time when they may really need it – to pay off a mortgage or fund their lifestyle in retirement. After all, children born today are unlikely to enjoy the same level of retirement funding that the current baby boomers are enjoying. They’ll need to be more self-reliant, as dependence on the State is likely to diminish and company benefits such as final salary pension schemes disappear.

Tax-efficiency
There’s another reason why it may make sense for you to do this, and that’s tax-efficiency. If you’ve taken your tax-free lump sum from your own pension, the remaining fund will either be in ‘income drawdown’ or you will have purchased an annuity. What you may not realise is that even if you are not actually taking an income from your remaining pension fund, it’s still classed as ‘in drawdown’. This means it could be subject to a 55 per cent tax charge when you die, so your beneficiaries could receive just 45 per cent of your remaining pension fund [1].

Inheritance tax purposes
Using income from your drawdown fund could help move the money out of this 55 per cent death tax environment. Similarly, if you’ve taken out an annuity and have surplus income, then putting the money into your grandchild’s pension may also help move money out of your estate for inheritance tax purposes.

Once the contribution is made into the grandchild’s pension, the future investment growth of those contributions belongs to your grandchild, creating significant longer-term value compared to leaving the money within your estate.

[1] Drawdown money is subject to a 
55 per cent death tax if paid as a lump sum to beneficiaries.

While annuities are generally guaranteed to be paid, remaining invested and using drawdown means that the value of your pension, and the income from it, can go down as well as up. Therefore there is a chance that you may not get back as much as you would by using an annuity. Drawdown is a high-risk option which is not suitable for everyone. If the market moves against you, capital and income will fall. High withdrawals will also deplete the fund, leaving you short on income later in retirement. The value of investments and the income from them can go down as well as up. You may not get back as much as you invested.

Make writing your will your top 2014 New Year resolution

Save your loved ones from any additional stress at what is likely to be a very difficult time

As much as we might not want to think about it, we are all going to die one day. Most of us know that we should write a will, but most of us never get round to it. Do you fall into this category? If the answer is ‘yes’, as the New Year approaches make writing your will your top 2014 resolution.

Writing a will gives you peace of mind that your wishes will be respected after you die and, by making those wishes clear, you can save your loved ones any additional stress at what is likely to be a very difficult time. Not writing your will could have serious consequences for those you leave behind. If you die without getting your financial affairs in order, your money, personal belongings and even your home could go to the person you least want to have them, and your loved ones could lose out.

Get your financial 
affairs in order

  • Specify exactly how you want to divide up your assets, including any property, savings, business interests, personal effects and even pets – known in legal terms as your ‘estate’
  • Appoint a guardian to care for your children as well as making specific financial provisions to help them do so (otherwise, it will be up to the courts to decide who looks after any children under 18 who are left without a parent)
  • Use your will to save tax and potentially reduce or eliminate the amount of inheritance tax that may need to be paid on your estate
  • 
Protect your assets for future generations and give yourself peace of mind that your affairs are in order

How will your estate 
be shared out?
In England or Wales (some areas of the law and legal procedures are different in Scotland), if you die without a valid will, laws known as the Rules of Intestacy will determine how your estate is shared out. Importantly, only spouses or registered civil partners and certain blood relatives can inherit under these rules – unmarried partners who are not in a civil partnership cannot benefit, nor can relations by marriage or close friends, even if there are no qualifying blood relatives (in which case your estate will pass to the Crown).

A difficult financial position
Not having a will can mean lengthy delays in distributing your assets, in some cases years, which could leave your nearest and dearest in a difficult financial position, depending on your situation.

Family lives are often now more complicated, with more couples divorcing and second marriages and second families on the rise. In such cases, it is even more important to have a suitable will in place.

It is also essential you remember to review your will, especially when life changes occur. 
Life events such as a second marriage will revoke any previous wills, and a divorce will cancel any benefit to a former spouse, unless the will specifically states that divorce should 
not affect the entitlement.

Reduce a potential tax burden
Currently, if you leave behind an estate worth more than £325,000 (2013/14 tax year), inheritance tax (IHT) is levied at 40 per cent on anything above this threshold. If this is likely to apply to you, writing a will could help you reduce the potential tax burden on your beneficiaries.

It makes sense for a married couple to write their wills in conjunction with each other as, usually, the IHT is only an issue on the second death. Careful planning on the first death can, however, sometimes reduce the total eventual tax liability

This is because bequests between spouses are exempt from IHT and so it is easily possible to avoid any tax liability at that stage. The issue is delayed rather than avoided altogether, so the will of the first to die should be written with that in mind.

Also exempt are gifts to charities. Any money you leave to charity is not taxed, and if you leave more than 10 per cent of your estate to charity, any IHT payable on the remainder will be charged at a reduced rate of 36 per cent.

The Financial Conduct Authority does not regulate Taxation & Trust advice or Will Writing.