Prosperity News - April 2023

WELCOME

Welcome to the Spring edition of our Prosperity Newsletter.

As the days get longer and the temperatures begin to rise, spring is on its way. It’s a time of renewal and warm weather - a welcome break from those cold winter months!

This issue focuses on a number of topics, including private school fees, what to do when someone dies, mortgages and tax year end planning. There is something here for everyone!

Private school fees are an important consideration for many families. It can be difficult to navigate the financial aspects, but we can help make it easier.

The death of a loved one is a difficult time for everyone involved, It’s important to know what steps need to be taken.

Mortgages are an important financial decision for many individuals and families. We can help you find the right mortgage for your needs, as well as provide advice on how to best manage it over time.

Tax year end planning can seem complex, but it’s something that we take seriously. We’ll help you understand the process and make sure that you don’t miss any important deductions or credits.

We hope this newsletter provides some useful information to help you manage your finances more effectively. If you have any questions or concerns feel free to contact us at any time. We’re here to help you make the most of your financial situation and provide personalized advice tailored to your unique needs.

Reme Holland Financial Planning Partner

BUSINESS RELIEF - CASE STUDY

Tom sold his shareholding in his trading business two years ago for £750,000. With no family members interested in taking over, Tom and his wife felt the time was right to enjoy the cash that this provided.

They made gifts of £200,000 from their cash to each of their children 4 years ago. Reducing the Inheritance Tax (IHT) that would be paid from their estate was important. They had taken out life cover for 7 years to cover this gift. Sadly, Tom lost his wife 12 months ago. The policy taken out on his wife paid out the sum assured into trust. Since Tom’s health has deteriorated too.

Tom met with his Albert Goodman Financial Planner to discuss what options there might be to reduce the Inheritance tax that would fall on his estate. Tom was advised that because he owned shares in his company, these may also have qualified for Business Relief (BR). Meaning that the value of these shares could have passed to the children IHT-free, but now he has the equivalent value in cash, the full amount would be subject to IHT, because of the value of his estate.

A potential solution

After discussing with Tom his investment experience and risk and his ability to bear a financial loss, it was felt that Tom might be a client, suitable to consider for an investment that would offer the possibility of benefitting from BR.

Our Financial Planner explained that there is a two-year holding period needed before an asset can qualify for relief. However, Tom owned shares in his business, and where these shares qualified for BR and are sold and reinvested within three years, the money he received from the sale of the shares could regain business relief against IHT immediately.

Risks:

We advised that BR-qualifying investments are made in the shares of unquoted/qualifying AIM-listed companies. They are regarded as higher risk than a portfolio that would hold assets that are listed on the major stock market exchanges. This higher risk is compensated by the favourable tax treatment of the investment.

Its important Tom understands and accepts that the value of these investments may fall or rise, and that Tom/his estate may get back less than invested.

Application of BR is not guaranteed. It’s assessed by HMRC on a case-by-case basis. Success is dependent upon Tom’s investments meeting the BR qualifying criteria at the time of his death.

Funds remain in Tom’s ownership and are available at any time. However, withdrawals and the timing of these withdrawals, cannot be guaranteed as the asset will be held in unquoted or AIM-listed companies that may not offer the same liquidity, as shares held on a major stock exchange. If you would like to know more and if this may be suitable for you, please get in contact.

The contents of the article are for information purposes only and do not constitute individual advice. The Financial Conduct Authority does not regulate Inheritance Tax Advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Michael Seagrove Director and Chartered Financial Planning Consultant

MORTGAGES 2023

Increasing interest rates make mortgage reviews an integral part of good money management. While mortgage rates may be ticking up, there are still some excellent deals and opportunities to explore. A mortgage review can help to save you money and secure beneficial mortgage terms and loan types for your current financial situation. Those most at risk are typically a generation that has grown up on interest rates of sub 2%, the sudden increase can place an enormous strain on a family budget. In previous years, the bank of Mum and Dad has been one of the top 5 biggest lenders but with house prices predicted to drop in 2023 this may not be a viable option.

Following the impact of the so called “mini-budget” in September, rates on borrowing had jumped, they have however started to move down as speculation is growing that the Bank of England will not raise the base rate as high as had been expected back in 2022.

It is important to remember that mortgages have a long life-span and as changes occur, it might be necessary to adjust your mortgage terms in order to maximize financial benefits. It is just as important for landlords, any finance arrangements should be reviewed on a regular basis, ensuring that you are maximizing the potential return on investment while respecting your ability to fulfil payment obligations.

Albert Goodman Financial Planning offer whole of market, independent mortgage advice, speak to us today about your options.

“Your home may be repossessed if you do not keep up repayments on your mortgage”

Reme Holland Financial Planning Partner reme.holland@ albertgoodman.co.uk

HOW TRUSTS MAY BE USEFUL VEHICLES FOR GRANDPARENTS WANTING TO PAY SCHOOL FEES

With the cost of private schooling for many families being their most expensive outlay, many grandparents are considering how they can assist their families with this expense and will want to consider tax efficient ways to pay for the school fees.

One way is to use a trust which can be a very useful tool in overall inheritance tax planning. This article explains how this might work.

What is a trust? A trust is an arrangement whereby a person (settlor) gives assets to another person (a trustee) who holds property for the benefit of others (beneficiaries).

Trusts allow settlors to gift assets out of their estate without making an outright gift to an individual. This can be useful to safeguard family assets by allowing a beneficiary to benefit from the assets without the asset being owned by them. This is particularly beneficial where the beneficiary may be considered too young to own the asset outright.

Trusts used for the payment of school fees would usually be discretionary in form. What this means is that trustees would be given the discretion to decide who, when and how a beneficiary benefits from a trust. The class of beneficiaries could include children and grandchildren. For example, the settlors could settle a rental property on trust. The trustees could continue to let the property. The rental income could be distributed to beneficiaries or direct to a school to settle school fees.

Trustees would normally have the discretion to distribute either income or capital to beneficiaries. Trust income would be amounts received for rents, dividends or interest etc. and capital would be the original investment plus any capital growth.

There are tax consequences for settlors, trustees and beneficiaries but if structured the right way, they can be very tax efficient.

Settlors tax position: on creation of the trust there is a potential charge to inheritance tax on the amount gifted. However, there is a nil rate band which is the amount which an individual can gift to a trust without incurring an inheritance tax liability. This assumes that other similar gifts have not been made in the preceding 7 years. If the Settlor survives at least 7 years from the date of the gift, then those assets are removed entirely from the settlor’s

estate. For a couple, this saves Inheritance tax of £260,000 in their estate (£650,000 * 40%).

When a settlor gifts an asset to a trust, the settlor is treated as disposing of that asset at market value and potentially capital gains tax is due. There is no capital gains tax on the gifting of cash and there is a potential postponement of capital gains tax by way of holdover whereby the trustees take on the asset at the settlors base cost, therefore postponing any capital gains tax charge.

Trustees tax position – the trustees are charged to income tax and capital gains tax on income and gains arising in the trust and may need to complete an annual income tax return. Any income tax paid by the trustees is used as a tax credit when income payments are made to beneficiaries. Depending on the tax position of that beneficiary, they may be able to claim some or all of that tax credit tax back from HMRC. Trusts can be very income tax efficient when there are beneficiaries with tax free allowances available e.g., grandchildren.

Most trusts will also have a periodic charge to Inheritance tax and when any capital is distributed to a beneficiary (known as a proportionate charge). The maximum rate is 6% on the value of the trust at the time and is only levied on the value of the trust which is in excess of the nil rate bands which were available on the creation of the trust. There are tax reliefs for certain assets and if the trust is structured in the right way, utilising reliefs and nil rate bands, then the charge can be minimised.

If you would like more information or advice on setting up a trust to pay school fees or as part of your tax planning, then please do get in touch.

Ruth Powell Tax Director

@ albertgoodman.co.uk

TAX YEAR PLANNING 2022/2023 PENSION INVESTMENT CHECKLIST

The chancellor Jeremy Hunt presented his first budget on 17 November 2022. Interestingly there were no major announcements in respect of pensions.

It is however helpful to remind ourselves of the prevailing Lifetime Allowance which sets a limit on the maximum figure for tax relief savings that an individual can build up collectively within their pensions over their lifetime.

Legislation was previously introduced to remove the annual link to the CPI increases. This means that the standard Lifetime Allowance will remain at £1,073,100 for the tax years 2022/2023 to 2025/2026.

As we move into the new tax year, thought should be given to making the most of the tax reliefs and allowances which are available.

What follows is a summary of the main points to consider.

When making personal contributions, your payments will attract tax relief at your marginal rate of income tax on gross contributions of up to 100% of your net relevant earnings up to the £40,000 annual allowance (or a maximum gross amount of £3,600 if more than this figure). Even non tax payers receive basic rate tax relief if the contributions are made for a pension operating relief at source such as a personal pension plan.

Personal tax relievable contributions are restricted to your net relevant UK earnings which are earnings from an employment or trade only (dividends, rental income and interest do not count). This could be less than your annual allowance.

Pension contributions are currently subject to an annual allowance of £40,000. This is the maximum that collectively you and your employer can contribute in any one tax year while benefiting from tax relief.

If you have sufficient earnings, or if your employer is making the contribution on your behalf, you and your employer can use unused annual allowances from up to the previous 3 tax years, provided you have a UK registered pension in those tax years. This is known as carry forward.

If you don’t have any UK relevant earnings but are less than 75 years old and UK tax resident you can still contribute up to a maximum of £3,600 gross per annum, receiving tax relief at the basic rate (20%). The good news here is that you can also pay into someone else’s pension including your partner even if they don’t have earnings or a child or grandchild on the same basis.

What is the position if you are a higher earner?

In April of 2016, the government introduced what is known as the Tapered Annual Allowance. Originally this meant that for the tax years 2016/2017 to 2019/2020, the standard Annual Allowance of £40,000 reduced by £1 for every £2 of your adjusted income above £150,000 (adjusted income is taxable income from all sources plus employer pension contributions).

However, following the budget in 2020, the chancellor announced that the Tapered Annual Allowance limits were increasing for the 2020/2021 tax year. The threshold and adjusted income limits are now £200,000 and £240,000 respectively. This remains for the 2022/2023 tax year and

there has been no provision made to adjust these figures following the chancellor’s last Autumn Statement budget.

The subsequent increases removed many people from being affected by the tapered annual allowance. For some very high earners, the position has however worsened as the minimum annual allowance after tapering is now £4,000 (instead of £10,000). This affects those with adjusted income over £240,000. Once adjusted income reaches £312,000 or more, the minimum annual allowance of £4,000 applies.

If you have sufficient annual allowance (including carry forward), you may be able to make a personal contribution to reduce your income to £100,000 which will restore your tax free personal allowance in full (or any contribution that reduces your income below £125,000 will reinstate some personal allowance.

If you benefit from bonuses, there may be opportunities to exchange a bonus for an employer pension contribution. This results in both employer and employee National Insurance savings whilst also offering the employee income tax savings and the employer, a corporation tax saving. The latter is likely to become more pertinent given the increases to corporation tax rates announced by the chancellor in the last budget.

For business owners there remain opportunities in respect of pension contributions and the treatment of profits.

For many directors, taking profits as a pension contribution can be an efficient way of drawing remuneration and reducing both their and the company’s overall tax bill.

Additionally, there is no employer or employee National Insurance payable on pension contributions.

If you are approaching retirement, there are opportunities to boost your pension pot.

Again, it is important to think about making pension contributions before you access your pension benefits. If you are looking to take advantage of the current rules and surrounding pension income drawdown flexibility for the first time, you need to structure your income to avoid triggering the Money Purchase Annual Allowance. Once triggered, this will reduce the opportunity to fund a defined contribution pension tax efficiently, to just £4,000 annual with no ability to carry forward. There are also complex rules in respect of funding a defined benefit pension.

It is important to ensure that you take financial advice so that any planning undertaken is right for you and that you understand the full implications in respect of your overall tax position, wider financial planning arrangements and state benefits. The figures detailing income tax bands being quoted relate to England. Tax Bands and income tax do vary in Scotland

The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.

Paul Holt Chartered Financial Planning Consultant

WHAT TO DO WHEN THE WORST HAPPENS

Coming to terms with the loss of a loved one and coping with the various stages of grief is one of life’s biggest challenges. Having to then deal with the estate of that loved one can seem like a daunting and complicated matter, but with recent changes to the way one deals with probate and the supply of information to HMRC, families and executors could be worrying unnecessarily.

This article briefly outlines the process of dealing with someone’s estate.

Register the death – within 5 days for a certificate for a burial. Contact your nearest register office and would normally be done by a relative.

Arrange the funeral – check the Will (if there is one) for any specific instructions.

Notify – there is a tell us once service offered by the government which will notify all the government agencies including HMRC, DVLA, Department for Work and Pensions, Passport office. You will also need to notify banks, landlords, utility companies, societies, clubs, financial advisors etc.

Gather information on the estate, identifying assets, debts, and liabilities. Value assets and determine if there is Inheritance tax to pay. An executor will need a snapshot of the deceased’s estate on the date of death. There are different ways to value certain assets but generally it is the open market value on the date of death. Assets will include property, cash, chattels, investments, trust interests. The executor will need to also identify if assets are held jointly with others, as this will affect the valuation of assets. Debts and liabilities will include mortgages, outstanding loans, care home fees and amounts due to HMRC.

Consider if the estate needs to be reported to HMRC. An inheritance return IHT400 and supplementary forms is required if inheritance tax is due. The return is also required in certain circumstances for example if the deceased gave away over £250,000 in the 7 years before they died, made gifts in the 7 years before death but continued to benefit (for example gave away a painting but continued to hang it on their own wall) or left an estate worth more than £3m.

Apply for probate. The grant of probate gives the executors the authority to administer the estate in accordance with the Will (or Intestacy rules if there is no Will). Generally, executors will not be able to enter into any contracts without having received the grant of probate or register assets in their name or register assets into the name of beneficiaries. Not all estates require probate for example if the deceased only had a small amount of savings, held only joint property, or only held land as joint tenants. The probate application can be made online or by completing the form PA1P and send to HMCTS Probate office who will also require the original will and death certificate. The current court costs for probate are £273 plus £1.50 for each additional copy.

Distribution of estate – once probate is received (which currently can take approx. 8 weeks) the executors will be able to administer the estate. This includes settling liabilities, selling assets, reporting income and gains of the estate to HMRC, making distributions to beneficiaries and advertising for any unknown creditors and beneficiaries to come forward.

This is a very brief overview of the process. There is often tax planning to be considered too before the completion of the IHT 400 and prior to the estate being distributed to ensure that maximum tax reliefs are utilised. Do contact us if you would like to talk though any estate or probate matter.

Ruth Powell Tax Director

FUNDS FOR RETIREMENT - CASE STUDY

Since retiring and selling their Business, Mr & Mrs B have invested the sale proceeds and used the portfolio to provide them with an income and lump sums for their children’s house deposits.

In order to enjoy their standard of holidays, help the children financially and maintain the finer things in life, Mr & Mrs B understand they are spending more than their portfolio returns each year and the amount they have invested is going down. Knowing this means it is paramount the portfolio works as hard as possible for them. Maximising returns for minimal volatility to provide peace of mind as they move into their later years.

Over the years they have worked with a discretionary fund manager, using available tax allowances, such as their ISAs and minimising tax on their investment returns. Now the portfolio is straightforward to manage and tax efficient and they do not require the bespoke service they once needed.

Mr & Mrs B instructed AGCFP to explore investment options, with a particular focus on reducing costs where possible without compromising long term returns. We were able to change the investment management style to a Model Portfolio Service. The level of risk exposure was very similar and whilst past returns are no guarantee of future likely returns, they were interested to learn the investment returns of the Model Portfolio had been higher than their own investments over recent years.

A standout difference for the clients was the considerably lower cost. We were able to save them in the region of £5,000 in fees in the first year and more than £12,000 in subsequent years. Once Mr & Mrs B decided to move ahead with the change, we prepared the paperwork and liaised with the investment managers to implement the change for them.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The above information is for guidance only and does not constitute advice which should be sought before taking any action or inaction.

Louise Osborne Financial Planning Partner louise.osborne @ albertgoodman.co.uk

Albert Goodman Chartered Financial Planners is the trading style of Albert Goodman Financial Planning Ltd, which is authorised and regulated by the Financial Conduct Authority.