Issuu

PRIVATE CLIENT Newsletter

PROSPERITY www.albertgoodman.co.uk APRIL 2021

welcome

Spring is upon us and 12 months on from the start of the first national lockdown due to COVID-19, we now have a roadmap out of lockdown 3 and a new normal. We can start to see family and friends not just on Zoom but face-to-face, make some tentative plans for the future and have the post lockdown haircut! The financial markets have had an interesting journey with investment returns over 12 months being very positive, as markets reopen and governments worldwide continue to support their economies, the next 12 months will offer the potential of more opportunity. In this edition we look at the tax efficient opportunities to help you plan for your future, how you can protect your family and what you can do if you cannot work due to an accident or long-term illness. Also find out how we can show you what the future might look like and whether selling your business now can realise future plans and objectives. I hope they strike a chord and if you need to know more please pick up the phone, drop an email or arrange a Zoom!

Mike Seagrove Director

P R I V AT E C L I E N T

CO N T EN T S

Income protection

05 - 05 Individual savings accounts

07 - 08 Cash flow planning - Business sale - Was the offer enough?

Action required on your trust!

Income over £100k - Pension planning - Big tax savings!

Investors’ relief

Agricultural property relief

13 - 14 Tax year planning 2021/2022 / Pension investment checklist

INCOME PROTECTION Recently, sick pay has been highlighted for those that are unable to work due to COVID-19 but it’s not a new problem. According to the HSE, in 2018/19 23.5million working days were lost due to ill health. Serious ill health is likely to affect 1 in 4 women and 1 in 5 men before retirement 1. Statutory Sick Pay is just £415.35 per month and only payable for 28 weeks, thereafter you may be entitled to Employment & Support Allowance (ESA) which could be £113.55 per week. Could you pay your bills on £113.55 per week? Income Protection could provide a solution to individuals, it will pay an agreed benefit after a deferred period. The deferred period is the time between making a claim and the benefit commencing and can be between 1 week and 52 weeks. The longer the deferred period then the lower the premium. Self-employed and employed individuals can apply for a policy and it could cover up to 60% of your earned income. 1

Critical Illness.org.uk

The benefit is generally payable for the period you are unable to work or reach the policy end date. Plans should be established on an “own Occupation” basis, i.e. if you are unable to follow your occupation rather than “any” occupation. Some plans will pay for a shorter period, usually around 2 years in order to reduce the premium. Plans can be structured so that they match any sick benefits you might receive from an employer. We always think about life cover or critical illness cover, but these will generally provide a lump sum.

Christian Hartnell

Consultant

christian.hartnell@albertgoodman.co.uk 04 P R O S P E R I T Y N E W S L E T T E R

INDIVIDUAL SAVINGS ACCOUNTS Individual savings account (ISA) allows you to save tax-free into a cash savings or investment account. ISA accounts are offered by banks, building societies, insurers, asset managers and National Savings and Investments (NS&I). They’re popular because you don’t pay tax on: • interest earned on cash in an ISA • income or capital gains from investments in an ISA If you complete a tax return, you do not need to declare any ISA interest, income or capital gains on it. However on your death the value of your ISAs will be added to your other assets to work out if Inheritance Tax needs to be paid by your estate (unless the ISAs are invested in Business Relief qualifying investments and held for the minimum 2 year qualifying period). If your spouse or civil partner dies you can inherit their ISA allowance – this is as well as your normal ISA allowance, so in addition you can then add a further tax-free amount up to either: • the value they held in their ISA when they died • the value of their ISA when it’s closed How ISAs work - there are 5 types of (ISA): • Cash ISA - savings in a bank & building society account, some National Savings & Investment products • Stocks and shares ISA – shares in companies, unit trusts & investment funds, corporate bonds & government bonds 05 P R O S P E R I T Y N E W S L E T T E R

• Innovative finance ISA – peer-to peer loans i.e. loans that you give to other people or businesses without using a bank, crowdfunding debentures i.e. investing in a business by buying its debt • Lifetime ISA – cash, stocks and shares • Junior ISA – cash, stocks and shares, until child’s 18th birthday. Putting money into an ISA • Every tax year you can put money into one of each kind of ISA. The tax year runs from 6 April to 5 April. • You can save up to £20,000 in one type of account or split the allowance across some or all of the other types. You can only pay £4,000 into your Lifetime ISA and £9,000 in a Junior ISA in a tax year. • So for example you could save £11,000 in a cash ISA, £2,000 in a stocks and shares ISA, £3,000 in an innovative finance ISA and £4,000 in a Lifetime ISA in one tax year. • You’ll keep your savings on a tax-free basis for as long as you keep the money in your ISA accounts. It’s possible to transfer any non-ISA shares you already own into an ISA - but only if they’re from an employee share scheme. You cannot transfer any peer-to-peer loans you’ve already made or crowdfunding debentures you already hold into an innovative finance ISA.

Withdrawing your money You can take your money out of an Individual Savings Account at any time, without losing any tax benefits but first check the terms of your ISA to see if there are any rules or charges for making withdrawals. There are different rules for taking your money out of a Lifetime ISA. If your ISA is ‘flexible’, you can take out cash then put it back in during the same tax year without reducing your current year’s allowance. Your provider can tell you if your ISA is flexible. Example: your allowance is £20,000 and you put £10,000 into an ISA during the 2020 to 2021 tax year. You then take out £3,000. The amount you can now put in during the same tax year is: • £13,000 if your ISA is flexible (the remaining allowance of £10,000 plus the £3,000 you took out)

• If you want to transfer money you’ve invested in an ISA during the current year, you must transfer all of it. • For money you invested in previous years, you can choose to transfer all or part of your savings if the Provider allows this. • If you transfer cash and assets from a Lifetime ISA to a different ISA before the age of 60, you’ll have to pay a withdrawal fee of 25%. Restrictions on what you can transfer You can transfer cash from your innovative finance ISA to another provider - but you may not be able to transfer other investments from it. Check with your provider for any restrictions they may have on transferring ISAs. They may also make you pay a charge. The value of your investments can fall as well as rise and is not guaranteed.

• £10,000 if your ISA is not flexible (just the remaining allowance) Transferring your ISA • You can transfer from one Provider to another at any time - useful if the rate on your cash ISA account has reduced. • You can transfer your savings to a different type of ISA or to the same type of ISA.

Claire Musson

Director

claire.musson@albertgoodman.co.uk 06 P R O S P E R I T Y N E W S L E T T E R

CASH FLOW PLANNING - BUSINESS SALE - WAS THE OFFER ENOUGH? CASE STUDY Mr & Mrs x had been offered £6million for their successful business. They wanted to know if this offer would enable them to meet their short-term objectives and support them for the remainder of their lives. Whilst they appreciated that £6million was a large figure, they were only 54 and 52 years of age and had no idea as the longevity of this value. Therefore, they required a cash flow plan. Mr & Mrs X wanted to achieve the following in the short and longer term: • Pay off all existing mortgages on day one and complete renovations on their main residence. • Gift a total of £1.5million to family on day one. • Annual expenditure of £200,000 per annum until they attain age 70.* • From age 70, the annual expenditure would reduce down to £150,000 per annum.* • At age 70, a further cash injection of £500,000 from proposed downsize. *

Expenditure assumed to increase by inflation (2.5%) per annum.

In addition to the proceeds of the business sale, the clients existing assets were also incorporated into the cash flow model to give a full overview. These assets included pension funds and a buy to let property.

07 P R O S P E R I T Y N E W S L E T T E R

The result of this cash flow is displayed below:

The forecast below confirms that the £10million would allow them to meet all of their objectives and have an inflation adjusted income for life.

After analysing the full situation, we were able to confirm that the offer of £6million would not be sufficient to meet their objectives. The business proceeds were able to meet the short-term objectives but would be exhausted by age 61. At this point we were able to identify that the pension funds could then be used to provide an income, but they would also be exhausted by age 65. This means that Mr & Mrs X would not be able to sustain their required standard of living if they accepted the offer of £6 million. Having understood the position, the clients were extremely grateful for the service and wondered if we could work backwards to work out the optimum sale price. This would allow them to see what offer they could accept and meet their objectives. Having run through various scenarios, we were able to determine that the optimum sale price would be £10million. The key factor that the clients found extremely useful was that the cash flow forecasts can be completed ‘live’ with the clients present. This allowed the clients to make minor amendments throughout the process.

Summary Whilst the cash flow is simply a projection of a scenario, it gave the clients comfort in knowing that the offer they received was not sufficient for their needs. They were unlikely to be able to counter the offer up to the level of required assets, but it allowed them to show evidence as to why they would not accept that offer. Cash flows are extremely important for anyone that is going through a change in circumstances. As well as business sales, cash flows are extremely useful for individuals approaching retirement that want to understand the longevity of their pension assets. If you would like to discuss a cash flow plan of your own, please get in touch and we will be happy to discuss this in more detail.

Calum Butt

Consultant

calum.butt@albertgoodman.co.uk 08 P R O S P E R I T Y N E W S L E T T E R

ACTION REQUIRED ON YOUR TRUST! Trusts are a useful tool for planning the distribution of wealth for both practical and financial reasons. They come in a variety of forms, and work by allowing you to settle assets into the Trust by removing them from your estate while often making provision for retaining an element of control over the settled assets. By removing assets from your estate, you can determine who benefits from them and potentially make tax savings in the process. If you have a Trust that is required to complete a tax return, you should be familiar with HMRC’s Trust Registration Service and no further action is required provided your trust has been registered and you are complying with making annual declarations via this service. This applies to Trusts with any kind of ‘tax consequence’ whether that is inheritance tax, income tax or capital gains tax. If you have any other Trust, even if its dormant or a ‘pilot’ trust, you will soon be required to register the trust with the Trust Registration Service. At present, the service is not open for these registrations, however it is expected to be open sometime this summer. Unfortunately, an agent’s authorisation with HMRC to act on behalf of a Trust for self-assessment purposes does not apply to this registration and so a new authorisation will need to

be put in place as part of the process if you would like an agent to deal with this on your behalf. At the moment, while waiting for the service to open, we are preparing for the changes behind the scenes, however, we will be sending a letter containing further detail of the process to all lead Trustees of clients affected by this new requirement in due course. If you would like any further information on the Trust Registration Service or your obligations, please do get in touch.

Melissa Murnane

Tax Consulting

melissa.murnane@albertgoodman.co.uk 09 P R O S P E R I T Y N E W S L E T T E R

INCOME OVER £100K - PENSION PLANNING – BIG TA X SAVINGS! As I have mentioned in articles before, contributing to a pension can be a great way to help build wealth, particularly due to the tax relief that is available to increase the contribution. Here, I want to set out just how effective these tax savings can be for somebody where their income breaches the £100K threshold and they therefore start to lose their tax free personal allowance of £12,570. Where your income is between £100,000 and £125,140, you will pay an effective tax rate of 60%! For example, let’s say that you earn £100K exactly and you receive and £10K bonus. Due to the loss of part of your personal allowance, you will only receive £4K of this bonus and £6K will go to HMRC in tax. To some, this will be outrageous. Especially as I have ignored the national insurance cost here, which will cost you another 2%! This is where pension planning comes in. If you were to sacrifice that bonus of £10K in exchange for an employer pension contribution, or simply pay £8K net (£10K gross) into your pension fund, then you would preserve your personal allowance. This will enable you to get £10K into your pension fund at a net cost of just £4K after tax relief. The tax saving here is therefore £6K. Let’s look at another example, where the salary is still £100K and the bonus is now £25K. If you take the bonus, you will receive roughly £10K in cash, ignoring national insurance. The other £15K will go to HMRC in tax.

If you were to sacrifice that bonus for a £25K employer pension contribution or pay £20K net (£25K gross) into your personal pension fund, you would be able to get £25K into your pension at a net cost of just £10K. The tax saving is therefore £15K. If you or any of your family, friends and colleagues have income above £100,000, or any unused pension annual allowances, please give me a call to see whether you or they could benefit from some significant tax savings as a result of this kind of planning. Great care needs to be taken if you are in some kind of defined benefit pension scheme where you are guaranteed a pension in retirement based upon your career earnings. Please get in touch with our Financial Planning Team if this is the case.

Alex Covey

Tax Senior

alex.covey@albertgoodman.co.uk 010 P R O S P E R I T Y N E W S L E T T E R

INVESTORS’ RELIEF It has long been the case that private companies struggle to get equity investment. Investors’ Relief was introduced in the 2016 Budget to encourage this kind of investment. Private companies are notoriously risky, so a tax incentive is needed to encourage potential investors. Originally branded as an extension of Entrepreneur’s Relief (now called Business Asset Disposal Relief [BADR]), it was actually introduced as a stand-alone relief but is similar in many ways to BADR. The headline is that it provides for a 10% tax rate on gains when the shares are sold. There is a lifetime limit of £10 million of gains. What kind of companies can I invest in? This relief is strictly limited to trading companies or trading groups. In this context trading excludes property letting and holding investments. A small amount of non-trading activity is permitted within a trading group but it must not exceed 20% of the company’s, or group’s, overall activities. The shares must be a new issue by the company, on or after 17 March 2016, you cannot buy them from an existing shareholder, and you must pay in full in cash. You then have to hold the shares for at least three years before making a sale that could qualify for the relief.

the trustee nor a beneficiary of the trust can be an employee of the company. You can have a seat on the board of directors provided it is unremunerated and shares may be held jointly or by a partnership if desired. Given the three-year holding period the first qualifying disposals are likely to be in 2019/20 tax year. If you think you may qualify and haven’t claimed, there is still time to amend your return and reduce your tax liability.

Who can invest? Any individual can invest provided they are not connected to an employee of the company. Trustees can also invest provided the beneficiary has an interest in possession in the shares. Again, neither

Andrew Law

Senior Manager andrew.law@albertgoodman.co.uk

011 P R O S P E R I T Y N E W S L E T T E R

AGRICULTURAL PROPERT Y RELIEF We have all seen the adverts on television for life insurance saying how important it is to plan your finances to avoid large funeral costs for your loved ones, but what about a large inheritance tax (IHT) bill? Agricultural property relief (APR) is one way in which you can significantly reduce the IHT due on your estate, as well as on lifetime transfers. What is APR? APR allows you to claim up to 100% IHT relief on the agricultural value of land or buildings, including: - Farm buildings - Farmhouses & cottages - Woodlands with trees that are planted and harvested at least every 10 years - Buildings used for breeding and rearing horses and the associated grazing for stud farms - The value of milk quota associated with the land - Controlling shares in a farming company The market value of the land does not necessarily equate to the agricultural value of land because it may include the potential development value of the land. The agricultural value is the value of the land assuming it can only be used for farming purposes. Example: You transfer a plot of land with planning permission for 10 houses to be built with a market value of £1 million to your child. The agricultural value of the land is £250,000 and meets all other criteria to qualify for APR. APR can only be claimed on the £250,000, with the remaining £750,000 being a potentially exempt transfer (PET) for IHT purposes. How Much Relief? In all but one scenario, where land or buildings qualify for APR, the relief will be at 100%. Where the land is let out to a farmer and a lease has been in place since before 1 September 1995, APR is only available at 50%, providing the lease has at least 2 years left to run at the date the land is transferred. If any one of these three criteria are not met, APR is available at 100%. Qualifying Activities Agricultural property is defined as land or pasture that is used to grow crops or rear animals intensively. Some other activities also qualify such as woodlands and stud farms as mentioned above. However, APR is not available on

property that is used for: - Liveries - Horse racing - Letting (including holiday lets) - Market gardening - Commercial woodland (including growing Christmas trees) Period of Ownership In order to qualify for APR you need to have owned the property for at least two years if the property has been occupied by yourself or your spouse or civil partner. If the property has been occupied and farmed by someone else, you will need to have owned it for at least 7 years. Farmhouses and Cottages The amount of APR available on farmhouses or cottages is dependent on whether the building is of an appropriate size and nature for the farming activity that is being carried out. If the building is larger than necessary for the level of farming activity, then relief may not apply. For example, a large 8 bedroom mansion with several reception rooms with 5 acres of adjoining farmland is unlikely to qualify for APR. A cottage or farmhouse must be occupied by someone who is carrying out farming activities on the property. This could be the owner, someone leasing the farm, or a farm employee. The building also qualifies where it is occupied by a retired farm employee or the spouse or civil partner of a deceased farm employee. If you have any questions about how you can qualify for APR, please get in touch.

Kathryn Loader

Tax Consulting

kathryn.loader@albertgoodman.co.uk 12 P R O S P E R I T Y N E W S L E T T E R

TA X YEAR PLANNING 2021/2022 PENSION INVESTMENT CHECKLIST The Chancellor, Rishi Sunak, presented his second Budget on Wednesday 3 March 2021. Interestingly there were no major announcements in respect of pensions other than with reference to the individual pension Lifetime Allowance. The lifetime limit sets the maximum figure for tax relief savings that an individual can build up over their lifetime.

and interest do not count). This could be less than your annual allowance.

The Chancellor introduced legislation to remove the annual link to the CPI increases for the next 5 years. This means that the standard Lifetime Allowance will remain at £1,073,100 for the tax years 2021/2022 to 2025/2026.

• Pension contributions are currently subject to an annual allowance of £40,000. This is the maximum that collectively you and your employer can contribute per tax year without you having to pay tax on any of the contributions.

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 (or £3,600 if more). 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 13 P R O S P E R I T Y N E W S L E T T E R

• 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 2021/2022 tax year and there has been no provision made to adjust these figures following the last 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 £300,000. 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 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 similar rules in respect of the funding of defined benefit pension schemes and the implementation of the Alternative Annual Allowance again introducing a cap on funding. • 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.

Paul Holt

Chartered Financial Planner paul.holt@albertgoodman.co.uk

14 P R O S P E R I T Y N E W S L E T T E R

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.

TAUNTON | BRISTOL | CHARD WESTON-SUPER-MARE | WE YMOUTH | YEOVIL