What should you do to reduce, or even eliminate, an Inheritance Tax burden?

Inheritance tax (IHT) in the UK may be one of life’s unpleasant facts but IHT planning and professional advice could help you pay less tax on your estate. With the current thresholds set to remain at £325,000 for individuals and £650,000 for married couples and registered civil partnerships until 2014, now the time to consider reviewing your potential liability and finding out what you could do to reduce, or even eliminate, this burden.

Everything you have of value

IHT is usually payable on everything you have of value when you die, including: your home, jewellery, savings and investments, works of art, cars and any other properties or land, even if their overseas.

When you die, your assets become known as your estate. Any part of your estate that is left to your spouse or registered civil partner will be exempt from IHT. The exemption is if your estate that is left to your spouse or registered civil partner is domiciled outside the UK. Then the maximum you can give them before IHT may need to be paid is £55,000. Unmarried partners, no matter how long-standing, have no automatic rights under the IHT rules.

IHT is usually payable on death but there are certain circumstances, if you put assets into certain types of trusts, for example, when IHT becomes payable earlier.

Taper Relief

Taper Relief applies where tax, or additional tax, becomes payable on your death in respect of gifts made during your lifetime. The relief works on a sliding scale up to seven years and is calculated on the number of years before your death in which a transfer is made. The relief is given against the amount of tax you’d have to pay rather than the gift is set when it’s given, not at the time of death.

Writing a will

One of the most important things you can do to help reduce the amount of IHT you may have to pay is write a will. If you die without a will, your estate is ‘divided-up’ according to the pre-set formula and you have no say over who gets what or how much tax is payable.

Gifting it away

The taxman allows you to make a number of small gits each year without creating an IHT liability. Remember, each person has their own allowance, so the amount can be doubled if each spouse or partner uses their allowance.

You can also make larger gifts but these are known as Potentially Exempt Transfers (PETs) and you could have pay IHT on their value if you die within seven years of making them. Any others gifts made during your lifetime that do not qualify as a PET will immediately be chargeable to IHT. These are called Chargeable lifetime Transfers (CLT) and an example s a gift into a Discretionary Trust.

The Taxman lets you give the following as exempt transfers:

• Up to £3,000 each year as either one or a number of gifts. If you don’t use it all up one year you can carry the remainder over to the next tax year. A tax year runs from 6^th April one year to the 5^th April in the next year.
• Gifts of up to £250 to any number of other people – but not those who received all or part of the £3,000.
• Any amount from income that is given on a regular basis provided it doesn’t reduce your standard of living. These are known as gifts made as ‘normal’ expenditure out of income.
• If your child is getting married you can gift them £5,000, is a grandchild or more distant relative is getting married £2,500, and a friend or anyone else you know £1,000

If you have any queries about Inheritance Tax, then you can get in contact with a financial adviser at 01424 777156.

What is an ISA?

An Individual Savings Account (ISA) is a tax efficient wrapper. Within an ISA, you pay no capital gains tax and no further tax on the income, making it one of the most tax efficient savings vehicles available.

What types of ISAs are there?

There are two main types of ISAs: Cash ISAs & Stocks and Shares ISAs.

Cash ISAs work in the same way as normal savings accounts. You choose if you a fixed rate accounts, an easy access (or instant access) account or a regular savings account. The only difference is you don’t pay income tax on the interest you earn.

With a Stocks & Shares ISA, you can invest in individual stocks and shares or investment funds. Any profit you make is not subject to Capital Gains Tax. However, you pay 10 per cent tax on dividend earnings.

Who can save in an ISA?

Anyone who is 16 or over and a UK resident can save money in a tax-efficient Cash ISA but to save in a Stocks & Shares ISA you need to be at least 18.

How much can I invest?

As of April 2011, the ISA limit increased for everyone by £480 to £10,680 per tax year. Of this, the maximum amount you can put into a Cash ISA is £5,340, and then the remainder can be invested into a Stocks & Shares ISA.

Alternatively, you may choose to allocate the entire £10,680 into a Stocks & Shares ISA.

When should I invest?

As long as you have not exceeded the current £10,680 ISA limit you can invest in an ISA at any point during the tax year and, depending on the ISA provider, you can allocate lump sums or monthly contributions that fit around your lifestyle.

Will ISAs always be tax-efficient?

The government has promised to keep ISAs indefinitely. However, the tax treatment of ISAs may change in the future.

Can I transfer my existing ISA money?

You can transfer the money saved in a Cash ISA to a Stocks & Shares ISA, even if it saved in the previous tax years, without affecting your annual ISA allowance.

For more information regarding ISAs, Contact us and we will be happy to help.

Here are a few tips when it comes to pension planning.

1. Start saving for your pension early

It may seem really obvious but the younger you are when you start a pension, the better, because it means you’ve got more time to make contributions and there is more time for those invested contributions to grow. According to a study published in September 2010 by Aviva, in conjunction with accountants Deloitte, the UK adults now need to save an average of £10,300 every year to catch up.

2. Join your employer’s occupational pension scheme

If your employer offers membership of an occupational pension scheme, join it. These are employer-run schemes that have trustees who are responsible for the schemes being run properly, legally and fairly. If your employer has a scheme, it is almost always in your interests to join because of the employer contribution, which is in effect a tax-free benefit. More than one million people who could join company schemes don’t, according to the National Association of Pension Funds.

3. Take advantage of tax relief from HMRC

Make the most of tax breaks. Tax relief reduces your tax bill or increases your pension fund. Anyone, including children and non-taxpayers, can receive tax-relief from HM Revenue & Customs (HMRC) to help increase their pension. The way you get tax relief on pension contributions depends on whether you pay into an occupational, public, service or personal pension scheme. Contributions attract basic-rate tax relief. So £80 paid into a pension is automatically increased to £100 before costs. High earners can achieve the same effect by paying in £60, subject to complex and charging restrictions.

4. Increase the control over where you invest your money

Unlike most traditional personal pensions, a self-invested personal pension (SIPP) offers you different investment options and gives you more choice and control over where you can invest your money. There are significant tax benefits. The government contributes 20 per cent of every gross contribution you pay. If you’re a higher or additional tax ratepayer, the tax benefits could be even greater.

When you wish to withdraw the funds from your SIPP, currently between the ages of 55 and 75, you can normally take up to 25 per cent of your fund as a tax-free lump sum. The remainder is then made available to provide you with a taxable income. As with all investments, the value of the fund you have invested can go down as well as up and you may not get back as much as you invest. The increase cost and control of a SIPP will generally come with higher charges, so for individuals not requiring the additional flexibility, a traditional personal pension may be more appropriate.

5.  Pay extra National Insurance contributions

Consider paying extra National Insurance contributions (NICs) to increase the state pension. This is most likely to benefit women who have taken time off work, perhaps to bring up children. However, you need to beware of means of test. There could be risks associated with buying back missing years of your NICs and you should always obtain professional financial advice. Although buying back missing years can be a good deal, the government won’t go out of its way to tell people about this with its finances stretched.

If you have any questions, contact Mike Robertson Associates at 01424 777156.

Setup an emergency fund

Setting up an emergency fund is very important. The reason for needing it is if you lose your job or your car broke down, you can continue paying bills or pay for the repairs. Experts recommend you keep between 3-6 months of your expenses in an instant savings fund.

Setting goals will help you determine how much you want and when to put into the fund. Getting into the routine of putting money in will become easier the more you do it.

Two types of funds that are on the market are:

• Instant access savings account - these are designed for instant withdrawals of money. You may also get a cash machine card. This means that you can withdraw money 24 hours a day from an ATM.
• Regular savings account – these are accounts that are for people who put money into an account regularly. They have a limited amount of withdrawals a year.

Saving for major purchases

A lot of people save for such things as a new car or a deposit to buy a new property. Making a plan will help you save more efficiently. Things you may want to consider are:

• the price of the product
• when you would like to make the purchase
• how much you need to save monthly

There are many types of savings options. One of these is an ISA. ISAs also known as an Individual Savings Accounts allow you to save money tax-free. There are 2 different types of ISAs:

• Cash ISAs
• Stocks & Shares ISAs

You can choose to have either or both. You can only have one of each. The maximum limits for both ISAs are £10,680. The full amount can be invested into a stocks & shares account or £5,340 can be invested into a cash ISA with the rest going into a stocks & shares ISA.

Learn the value of money

Think of money as the hours you had to work. For instants, if you wanted to buy a laptop for £600 and you earned £6 an hour, you will have to work 100 hours get that laptop. Your emergency fund and savings should come before luxuries.

Having a plan for your monthly expenditures can help you see where there are unnecessary purchases. Money that you save can be invested into your pension.

Things you may want to consider when making a plan are:

• phone bills
• utility bills
• savings
• food bills
• rent
• mortgage
• other monthly purchases

You can save money on:

• cancelling your SkyTV contract
• lowering your mobile phone tariff
• eat out less
• buy cheaper food products

https://www.utilitywarehouse.co.uk is a website that sells things such as gas, electric, mobile phones and broadband at a cheaper rate. They also give you one bill.

Saving for a pension

Pension plans can help you when you reach retirement age. It may seem a bit soon to start saving for a pension, but the earlier you start, the more money you will have in future. There are a few options when it comes to pension plans. Some options you can choose from are:

• PP (Personal Pension)
• SIPP (self-Invested Personal Pension)
• Final salary pension scheme
• money purchase pension scheme

Pensions can be complicated, so talking to an MRA financial adviser will benefit you. You can call MRA on 01424 777156

Use credit cards wisely

Many people fall into the trap of getting into financial trouble when using their credit card. You should always keep track of how much you have spent. Only use it if you have no other option, but make sure you pay back the balance every month. If you do not really need a credit card you should cancel it. Balances will have interest put on top of it. For example, you have an interest rate of 16.9% then that’s £169 extra for every £1000 a year.

If you have to get a credit card, then shop around for the best deal that can include:

• A low annual percentage rate (APR)
• Low or no annual fees
• All other charges (late payment fees, transaction fees, over the limit fees, etc
• Grace periods
• Credit limits

Seek financial advice

Seeking financial advice can help you manage your money more responsibly. A financial adviser can see how your finances are in future and also if something were to happen, it will show how your finances will suffer as a result. This can help you greatly to see areas you can save money. If you do choose to hire someone, they will charge you by either an initial charge or an annual charge.

If you pay higher rate tax you will not receive tax relief automatically on your personal pension contributions unless you claim it. This means that someone earning more than £42,475 in the current financial year could potentially be losing a fifth of the value of their pension if they are not actively claiming back higher rate tax relief of their contributions.

Claiming tax back

If you pay income tax on your earnings before any personal pension contributions, your pension provider claims back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your personal pension, you end up with £100 invested in your pension fund.

If you are a higher rate tax payer paying 40 per cent, you may be able to claim an additional tax relief. Depending on how much you earn over the higher rate tax band, any additional tax relief could range from between a further 1 per cent up to a maximum of 20 per cent.

Additional rate tax payers
From 6 April if you are an additional rate tax payer and pay 50 per cent, you may also be able to claim additional tax relief at your highest rate. Depending on how much you earn over the higher rate tax band and your level of contribution , any additional rate tax relief could range from between a further 1 per cent up to a maximum of 30 per cent.

Claiming higher rate tax relief on personal pension contributions is for many people the single most important relief they can claim, yet hundreds of thousands could be missing out. To obtain your additional tax relief you must file a tax code. To do this, you have to contact your local tax office.

Full tax relief straight away

If you are employed, usually you employer will take occupational pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what’s left. So whether you pay tax at basic, higher or additional rate you receive to full relief straight away.

The population and economic growth in these markets has created a potentially massive high-consuming middle class estimated to be more than one billion people by 2030, according to the world bank, April 2010.

Emerging markets have large reserves of natural resources and these reserves should also aid their future prosperity as commodities continue to be in high demand.

In addition, many emerging markets have lower government debt burdens than developed nations and ma have large holdings of foreign exchange. This means that spending in most emerging markets has not been dramatically curbed by the recession, as has been the case in many developed nations, which has allowed further stimulation of their economies and infrastructures to continue while some domestic markets have waned.

Investments in emerging markets are by nature generally considered to be a higher risk. The value of these investments and the income from them can go down as well as up and you may not get your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

As a Member, Mike Robertson is able to work as a Financial Neutral in Collaborative Family Law, helping you and your family lawyers in the main areas of your finances that are typically affected by divorce:

• your retirement plans/pensions
• the family home
• your investments
• your business
• your future income requirements
• education planning
• child care
• qualification for state benefits
• potential inheritances

 
Resolutions’ 6,000 members are all dedicated to promoting a non-confrontational approach to divorce and separation.  In collaborative law, each person has their own lawyer and you all meet together in the same room to work things out face to face.

Our aim is to help you ensure that the financial side of matters does not add to your concerns.  We are here to offer advice and guidance to enable you to make more informed decisions on all aspects of your finances.

If you want to know any more about Resolution, Collaborative Law and the part an IFA plays in mediation, visit our new Resolution Section

Whilst reading the article a few points came to light which MRA felt were worth exploring.  The article followed 4 readers who were looking to retire.

One point that was not discussed during the article was the extent of advice that the readers were receiving during the retirement process.

Whilst a Financial Adviser has no control over the stock markets or fund values, it would be interesting to find out if the pension policies discussed had actually been invested in funds that matched the readers attitude to risk.

None of the readers mentioned whether they had explored annuities from providers other than their current pension providers.  With the rise of general insurance comparison sites such as moneysupermarket and comparethemarket, it should be of no surprise that many retirees have the option to shop around to find an Annuity that is most suitable for their needs.

Lastly, some of the decisions made by the readers were quite extreme.  Such decisions should be made following advice from a Financial Planner, who can take a forward looking and considered approach to your finances.

A Financial Planner will assess your current position, set goals and will help to ensure you are best prepared for your future.

The National Employment Savings Trust (NEST) is being introduced next year by the government to help people save more for their retirement.

OPTION TO OPT-OUT

It will involve workers who are not already a member of a ‘recognised workplace pension scheme’.  Employees will be auto-enrolled by their employers and will be given the option to opt-out.  The employer will eventually have to pay a minimum of 3 per cent (initially this is being phased starting from 1 per cent paid by the employer and 1 per cent paid by the employee) of ‘qualifying (band ) earnings’.  The overall minimum contribution will eventually be 8 per cent and if the employer pays the minimum of 3 per cent the employee will have to pay 5 per cent (with 1 per cent of this coming from tax relief).  HSBC found that 23 per cent of people, when told about NEST, said they didn’t like the idea of some of their wages being paid into the scheme.

NEW AUTO-ENROLMENT

The new auto-enrolment obligations will impact on employers of all sizes and will be phased in between 2012 and 2016.  Employers will have responsibility for paying contributions into a pension – both from them and their employees – as well as communicating with staff and ensuring the pension scheme is compliant.  The hope is that these new auto-enrolment obligations will help the estimated 7 million workers who are not putting money aside for their retirement to start saving for tomorrow, today.  While the NEST scheme is available to all employers, it has features that may make it suitable for some and less desirable to others.

National Employment Savings Trust is regulated by the Pensions Regulator.