Monthly Archives

April 2021

Multi- Generation Family Walking Along the Beach

Making tax-efficient gifts out of surplus income

By | Tax Planning

People often think that passing on large sums of wealth to loved ones is only possible after their death. But making regular financial gifts during your lifetime can be a highly tax-efficient way to reduce the value of your taxable estate, and give your loved ones a helping hand when they most need it.


Now that life is beginning to return to ‘normal’, at FAS we have started to see an increase in the number of clients who want to talk to us about planning for their future, making changes to their personal finances, and doing more to help their loved ones. One area that has been discussed with several clients is how to use their surplus income – in other words, money left over after all of their regular financial commitments have been met – in ways that benefit their family, friends, or even charities. Clients are keen to put that money to good use now, rather than waiting until it forms part of someone’s inheritance.


Gifting out of surplus income

Lots of people, particularly those in retirement with healthy pensions and other sources of income, such as rent on additional properties, may find themselves with income that’s surplus to requirements after all of their outgoings have been paid.

If you regularly have an income left over, it could be in your best interests to consider using this money to provide a regular financial gift. Not only does this allow you to make a financial contribution to an individual that could really benefit, but it is also a well-recognised and completely legal way of reducing the potential inheritance tax liability that will one day be calculated on the value of your estate. That is because whereas most gifts of large amounts can still be liable for inheritance tax, a gift made from surplus income is immediately outside of your estate for inheritance tax purposes.


A gift made from surplus income is not liable for inheritance tax

Here is why. In most instances, making gifts to friends or family of amounts of more than £3,000 runs the risk of incurring an inheritance tax bill. HMRC calls such gifts ‘potentially exempt transfers’ and applies the ‘seven-year rule’ when determining the amount of inheritance tax the gift can become liable for.

If the person making the gift lives for at least seven years after the gift is made, there is no inheritance tax to be paid by the person receiving the gift. However, if the person dies within the first three years of the gift being made, the gift could be liable to the full 40% inheritance tax charge, which is payable by the recipient of the gift. For gifts made between three and seven years before death, HMRC reduces the IHT charge for each full year the person who made the gift survives (known as ‘taper relief’).

However, one of the biggest advantages of making a gift out of surplus income is that there is no seven-year clock for the giver or the receiver of the gift to keep an eye on. But that is only as long as the Executors of the person’s estate can prove that the gift was indeed made from surplus income.


What are the rules around gifts?

To qualify as a gift made from surplus income in HMRC’s eyes, and therefore exempt from inheritance tax calculations, the following three conditions will need to be met:

  • There should be evidence that clearly shows the gift was intended to be made regularly and was part of the giver’s normal expenditure – a good example of this would be an annual amount of £3,600 gross paid into a grandchild’s pension.
  • The gift was made out of the post-tax income and was not the proceeds of a transfer of capital assets. Common sources of post-tax income used for gifts can include pension income, rent from property, interest and dividends, or even employment earnings.
  • The giver of the gift must still be left with enough of an income to maintain their present standard of living, without having to resort to using capital to meet their needs.


What kinds of gifts can be made?

As well as helping clients to set up regular cash gifts, we often talk to people who choose to use their surplus income to pay for school fees, to make regular payments into an Individual Savings Account (ISA) or Junior ISA, or even to fund pension contributions for children or grandchildren over several years. At FAS, we can help you to determine the level of surplus income available to you, as well as providing you with helpful advice on the best way to put that surplus income to work.

Make sure you keep records of any gifts you make

Whatever gifting option you choose, it is essential to keep financial records that can be used to prove your intentions after your death. Such records will be required by the Executors of your Estate to claim the ‘gift exemption’ from HMRC when it comes to valuing your estate. One of the easiest ways to do this is to write a letter to the person (or people) that you will be making gifts to, clearly stating your intentions and establishing a pattern of gifts for the future.


What happens after your death?

After your death, the Executors of your estate will be expected to demonstrate that the gift was intended to be both a regular occurrence and also a part of your normal expenditure. They will be required to complete Form IHT403, and provide details of sources of income (such as pension, rental, or investment income) and expenditure (such as household bills, holidays, and entertaining) for the years that any gifts from surplus income were made. If you intend to make regular gifts, it is a good idea to talk to us about dealing with the necessary paperwork on an annual basis that will make the estate handling process much easier when the time comes.



Rather than worrying about leaving an inheritance tax liability, making regular gifts out of surplus income can be an extremely effective way to reduce the taxable value of your estate. It is also a great way to do something meaningful for your loved ones, as you get to see them enjoy the benefits of their inheritance right now, rather than only after you have gone.


If you are interested in discussing estate planning arrangements or your tax situation with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

Bird and worm next to a clock representing early bird catches the worm

Why early-bird ISA investors may catch the best returns

By | Investments

Now that the new tax year has started, people often ask us whether they should use their Individual Savings Account (ISA) tax allowance early, or wait until the end of the year? While many people leave it to the last minute, there are several reasons why it makes sense to invest early instead.


There is nothing like a hard deadline to focus the mind. It’s why tax year-end has traditionally been the busiest time of year for financial planners, as we work with clients to ensure they make the most of any available tax allowances. One area that is always busy for us is helping people with their ISA subscriptions.


ISAs remain popular with savers and investors

ISAs have become one of the most important building blocks for anyone looking to invest for their future. After all, ISAs allow you to shelter any investment gains or interest earned from the taxman, which means any money held within the ISA wrapper has the potential to grow more quickly.

As a reminder, you can save up to £20,000 annually into an ISA in each tax year. This limit applies to Stocks and Shares ISAs, Cash ISAs, and Innovative Finance (also known as peer-to-peer) ISAs, so there are plenty of options to choose from, and you can spread your ISA allowance between different ISA types. But ISA allowances operate on a ‘use it or lose it’ basis. In other words, if you do not make an ISA investment during a particular tax year, you cannot ‘roll-over’ the allowance to the next one. So, it makes sense to leave using up your ISA allowance at the very last minute, rather than to not use it at all.


Making the best use of your annual ISA allowance

Human nature being what it is, lots of people leave it until the last minute (11.59 on 5 April, to be precise) to get their ISA application completed. And then they tend to forget about their ISA for 12 months before repeating the process all over again.

Many people make the mistake of leaving their ISA investment until the end of March, perhaps because they are focused more on the tax benefits associated with an ISA, instead of thinking about it as an investment vehicle. While there is a strong temptation to wait, knowing that you have a full year to make the most of your ISA allowances, it is important to remember that investments need time to grow, so the more time you give them, the better the potential outcome.


Investing for income and growth

As an example, this year the FTSE 100 index is expected to generate an average dividend yield of 3.8%, which is an improvement on last year’s historic yield of 3.2%. If you hold off investing until close to the end of the tax year, your investment has missed out on a whole year of tax-free income. More importantly, your ISA will also be missing out on the potential of tax-free growth on the value of the shares in your ISA portfolio. Growth cannot be guaranteed, of course, but the theory is that the more time you leave your ISA invested, the longer it has to potentially grow, and the larger your investment pot will ultimately be.


‘Averaging in’ with regular investments

Starting your investment sooner means you could boost your overall ISA pot in the longer term, but not everyone is able to invest the full £20,000 ISA allowance at the beginning of every new tax year. So, instead of investing the whole amount into your ISA at the last possible minute, you might want to consider spreading regular amounts across the 12 month-period instead. Investors call this ‘pound-cost averaging’ because paying in regular amounts reduces the overall volatility of your investment.

How does pound-cost averaging work? Well, imagine if you pay £20,000 into your ISA in March, just before the tax year end. That money will be used to invest in different funds or stocks and shares at a set date in March when your investment will be subject to how overall stock markets are performing at that point in time. If valuations are high at that point, you will end up paying more for your investments than you would have had you invested at a different time.

It can be particularly painful to invest a large amount into your ISA, only to see stock markets take a tumble soon after, which means your investment is already in negative territory. ‘Timing the market’ is very difficult to get right. But by paying into your ISA regularly, using your regular amounts to purchase assets at different times and at different prices, you eliminate the possibility that the whole value of the ISA subscription will be bought when markets are at their peak. It is a simple way of taking the guesswork out of investing, avoiding uncomfortable market highs and lows, and spreading the risk out over a full year instead.

One final point to remember is that using your ISA allowance at the beginning of the tax year, instead of at the end, gives you the advantage of time, which is always the most precious commodity. Using your ISA allowance early can make a real difference to the returns on your investment, and give you the best possible chance to grow your wealth over the longer term.


If you are interested in discussing your ISA or investment portfolio with one of our experienced financial planners here at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

Silhouette of man's head with brain highlighted in white with a pound symbol

The psychology of investing – knowing when to cut your losses

By | Investments

Sometimes, investors can be their own worst enemies. As Warren Buffett once said: “If you cannot control your emotions, you cannot control your money”. We explore the emotional side of investing, identify some of the negative behaviours that frequently trip people up, and we also give some advice on keeping emotion out of your investments.


Recognising and understanding investor behaviour

It is worth remembering that money is an incredibly emotional subject for people. People’s relationship with money usually begins at a very early age, and emotional responses can often overpower rational thinking when things are not going as well as a person had hoped.

Perhaps the biggest challenge investors must come to terms with is their own attitude towards investing. Studies have shown that it is more painful to lose money than it is pleasurable to win money – even when the amount is the same. Many investors find this aspect about themselves hard to come to terms with. Ingrained attitudes often make people too risk-averse when it comes to investing, which can often mean they miss out on significant returns over the longer term. To avoid this, you should think about some of your own personal psychological biases before deciding whether to buy or sell any investment.


Pride and prejudice

It is also common for investors to feel unable to admit when they’ve made a mistake. One of the most frequent examples of this we see is where investors continue to hold on to the shares in a failing company, in the hope that it will eventually recover. The old investment wisdom is to “run your profits and cut your losses”, but most people tend to do the opposite. They sell their profitable investments too soon and they let their loss-making investments keep going while they wait for a change in fortune.

People often let emotions sway their investment decisions because they have a personal attachment to the investments they own. Perhaps these investments were left to you by a relative, or they did particularly well in the early years after you first bought them. We often make the point that investments or companies don’t have feelings or attachments to you, so why have feelings or attachments to them? Taking a personally detached view from your investments is a good way to start making better investment decisions overall.


Forgetting that past performance is no guide to the future

Every investment comes with the warning that past performance is no guide to the future, but it remains a warning that most people struggle to heed. It’s far too easy to fall into the trap of ‘outcome bias’, which is the tendency to evaluate a decision based on the outcome of previous events, without giving enough consideration to how those past events developed.

To put it another way, you may decide to back the same horse in the Grand National that won last year’s race. But all of the factors that resulted in that horse winning (the condition of the horse on the day, the ground conditions, the weather, how competitor horses fared, and on and on) are not going to be replicated identically this year. Even if the same horse does in fact win again, it will have faced different conditions when achieving victory this time around.

Simply relying on the past to do the hard work for you, instead of carrying out helpful research and finding the right investment for right now, is unlikely to lead to positive investment results over the longer term.


Poor timing

Emotional investing is often an exercise in bad market timing. Greed and fear are powerful motivators, and one of the main reasons why investors lose money is they execute an investment decision out of greed or fear (or both), at a time when it is not in their best interest to do so. Examples of the greed/fear dynamic at work include:

  • Seeing others making large profits on an investment and jumping in without thinking about the risks involved. This is also the “fear of missing out” (Bitcoin is a good example of this).
  • During periods of market volatility, investors often sell their investments while values are falling, thereby crystalising their losses and potentially missing out on any recovery.
  • Following the herd, and simply doing whatever the rest of the market is doing.


So how can you stop being emotional with your investments?

Emotional investing usually takes place when events trigger our own individual responses to money and convince us that we should behave differently because the stakes are higher than we had expected. Sadly, there is not much that any of us can do about human behaviour, apart from being aware of it and learning to control it, rather have it control us.

But there are two ways to invest that help to lower the emotional stakes and reduce the risk of getting the timing of the investment wrong. The first of these is pound-cost averaging.


Pound-cost averaging

One of the most effective ways to remove emotion from investment decisions is to use pound-cost averaging. This is a strategy where you plan your investments in advance, and then invest regular amounts at set intervals. The benefit of this approach is that it removes the risk of regretting your investment. Instead, investing smaller amounts means that you get to buy fewer shares while the price is high, but more shares when the price is lower.

The key to the pound-cost averaging strategy is to stay the course and recognising that those periods when the value of your investment is lower can actually work in your favour over the longer term.



The second most effective way to reduce the impact of emotion on your investments is through diversification. Holding a larger number of investments means that the impact of market volatility on your overall returns is more likely to diminish (as not all of your investments will behave in the same way). In normal market conditions, a well-diversified investment portfolio should offer some comfort that the losses suffered by some of your investments are offset by gains made in others.

However, it is important to understand what counts as true diversification. It’s not just about owning shares in a few different companies, or investment funds from different providers. At FAS, we can help you to create a diversified portfolio that invests across a wide range of different asset classes, geographical regions and industry sectors, as well as investments that invest for income or capital growth. An investment portfolio made up of all these various types of investments should offer increased protection that leaves your investments well-placed to cope with a range of different market conditions, and leaves you feeling much less stressed about what could go wrong.


Final thought

Investing without emotion is easier said than done. If it was easy, there would be far fewer headlines of stock market tumbles. But just because other investors struggle to keep their emotions in check, this doesn’t mean you have to follow them. An understanding of your own attitude towards money, and personal risk tolerance, is a good starting point.

It helps to be able to take a step back to see what is driving current market conditions and valuations. Once you can recognise that others are acting irrationally, you stand a better chance of leaving them to get on with it. Or, to use another Warren Buffet pearl of wisdom: “Outstanding long-term results are produced primarily by avoiding dumb decisions, rather than by making brilliant ones.”


If you are interested in discussing your investment portfolio with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

Senior woman in a wheelchair being cared for by nurse

Counting the cost of care: don’t leave it too late

By | Investments

With care home costs continuing to increase, and pensions struggling to keep up, it is essential to come up with a long-term investment strategy that aims to match the cost of long-term care to reduce the risk of you – or someone you love – running out of money during retirement.

A worrying number of British pensioners are struggling to pay for care during retirement, according to recent statistics. Analysis from Age UK published in 2020 revealed that, in just one year, the number of pensioners whose assets have been effectively ‘wiped out’ due to the cost of paying care home fees has risen by more than one-third. Putting it another way, care bills are wiping out the finances of 100 people in the UK every week of the year.


Care costs are rising

Anyone who has looked into the costs of long-term care, perhaps on behalf of a parent, knows just how expensive those costs can be. According to health data provider Laing Buisson, in 2019-20, the average cost of a residential care home for an older person in the UK increased to £672 a week. Or, put another way, that’s an average annual expense of £34,944. In most instances, a person’s pension will be just a fraction of that amount.

 And, for those who are in urgent need of being placed into a nursing home – offering round-the-clock care – the costs of care are even greater. Between 2019 and 2020, the UK average nursing home cost increased by 5% to £937 a week, or £48,724 a year. The fees a person can expect to pay for nursing home care are significantly higher in London and the South East.


Will you have to pay for your own care?

While healthcare is provided free by the NHS, most of us will be required to pay some or all of the costs of our own social care in later life. Local authorities will provide financial support for people whose assets and income are below a set amount, but broadly speaking, anyone with savings or assets worth more than £23,250 can expect to pay for their own care costs. Most people hope to pay for care by using income from their pension, savings, and investments or income generated by other assets, such as the sale proceeds from their main residence, or rental properties. But it’s important to make plans that determine the most cost-effective way to pay for care, which is where we can definitely help.


Optimising capital and income to pay for care home fees

At FAS, we often talk to families looking for advice on what to do when a parent or loved one needs to go into care. The first thing we point out is that when large fixed costs are being paid every month (such as care home costs of £5,000 per month), cash in the bank usually doesn’t last very long. So, instead of thinking about relying on savings or a pension to pay for care, we usually tell families that it’s a much better idea for us to help devise an investment strategy that will help to ensure all known fixed monthly costs can be covered for as long as possible.


How can an investment strategy help with care costs?

From our perspective, we know that good financial planning can make it possible to plan for care without fully eroding a person’s capital, whilst also effectively ring-fencing the family’s future inheritance. It starts with calculating the costs of care over the longer term and identifying suitable investments that have the right risk and return objectives.

By matching liabilities with income, we are able to find and recommend investments capable of growing at a rate of return that will aim to ensure the rising costs of care continue to be met. This really emphasises the importance of investing your money with the aim of generating a meaningful return, rather than leaving it sitting idle in cash. This is particularly relevant given that care costs have a tendency to rise by more than inflation each year, which means you need the income you generate from your investments to be able to do the same.


Buying care insurance

As a last resort, another area where we might be able to help is with arranging care insurance. This insurance (also known as an ‘immediate needs annuity’ or ‘immediate care plan’) will automatically cover the cost of care fees for the rest of a person’s life, in exchange for a one-off lump sum payment. Just as with pension annuities, care insurance payments can be set to provide a flat payment monthly, or arranged to rise in line with inflation. However, these types of policies are only available to those with a restricted life expectancy.



No one should be left to worry about how to pay for a loved one’s long-term care. And, with careful planning, it should be possible to structure someone’s finances to ensure care fees can be paid for as long as required, without the money running out. If you’re in this position, talk to us. Our knowledge of this complex market means we have considerable experience of coming up with tailored care funding strategies designed to suit individual needs. The sooner you get in touch, the more peace of mind you will have.


If you are interested in discussing the above with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

Gavel laying across book entitled Powers of Attorney

The importance of arranging a Lasting Power of Attorney

By | Financial Planning

Setting up a Lasting Power of Attorney is an important step you should take to make sure your loved ones can make the important decisions about your health and your financial wealth on your behalf, should you become incapacitated through ill health or accident.

We live in an era when people are likely to live for many more years than previous generations would have expected. But with more people living longer, it has become increasingly commonplace that many will reach a point in their life when they are no longer able to make decisions for themselves.

Sadly, this is only likely to become more commonplace. According to Alzheimer’s Research UK, one million people in the UK will be diagnosed as living with dementia by 2025, and this will increase to two million by 2050. A person’s risk of developing dementia rises from one in 14 over the age of 65, to one in six over the age of 80.

When the person who has been in charge of the family finances all their life is no longer capable, it can become increasingly difficult for their family to ensure that the right decisions are being taken. So, as we all get older, it becomes even more important to make sure we get our affairs in order, and one of the best ways to do this is to arrange a Lasting Power of Attorney (LPA).


What is a Lasting Power of Attorney?

An LPA is a legal document that lets you appoint someone you trust to make decisions on your behalf, should you become unable to make those decisions for yourself in the future. There are two different types of LPA:

  1. Property & Affairs LPA – which lets the person/s you appoint make decisions about your property and finances.
  2. Health & Welfare LPA – which lets the person/s you appoint make decisions about your health care and medical treatment.

You can choose to set up one or both types of LPA, and you can nominate the same person or elect to have different attorneys for each. However, just because you’ve set up an LPA, it doesn’t mean that you instantly lose control of the decisions that affect you. You can be very specific on the LPA about when the attorney acting on your behalf is able to take control. All LPAs must be registered at the Office of the Public Guardian, which is the government body responsible for the registration of LPAs before they can be used.


Who can be your attorney?

You can nominate anyone to be your attorney, provided they are 18 years old or older. However, for a Property & Affairs LPA, your attorney cannot be bankrupt or the subject of a debt relief order. Whoever you choose, you should bear in mind that they will need to be someone that you trust to make decisions for you, and will be able to act responsibly and in your best interests. It’s always worth having a conversation with the person you’re considering to nominate as your attorney, so you can explain your wishes and your preferences, along with what you expect of them.


What are the benefits of setting up an LPA?

Having an LPA in place will make things easier for you and your family should you start to become incapacitated. For example:


  • Once the LPA has been set up, it will become easier to have discussions with your family, both in terms of your wishes now, and what you want to happen in the future. An LPA is a great way to make sure everyone is on the same page. It can also help your attorney to become familiar with all your financial and legal arrangements.
  • With a Property & Affairs LPA, you don’t have to step away entirely from the decision-making process. You can ask your attorney for help with your decisions but still have the final say yourself.
  • Arranging an LPA will make things considerably less complicated, time-consuming, and expensive for your loved ones should they need legal permission to act on your behalf in the future.

What happens if someone doesn’t have a Lasting Power of Attorney?

If you lose mental capacity and don’t have an LPA arranged, your family will have to apply to the Court of Protection to become your appointed ‘deputy’. The Court of Protection will make an assessment and appoint someone that it believes is a suitable appointee. This deputy will then make financial decisions on your behalf. It’s worth recognising that the person the Court appoints may not be the person you would have intended. It’s also worth noting that the process of appointing a deputy can take considerable time to resolve.


LPAs and Discretionary Fund Management

For obvious reasons, when it comes to managing someone’s investments, the subject of exactly what an attorney is legally allowed to do becomes more complicated. Many people who have been placed into the role of attorney may not feel qualified to make strategic investment decisions, and feel this type of responsibility is best left to professionals with the experience and qualifications to make the right decisions.

Therefore, subject to the donor’s consent, it is important that any LPA document contains specific wording that provides express permission to delegate investment management decisions to an existing or new discretionary investment manager. If the document does not provide this permission, Attorneys will need to take decisions themselves following advice from an investment professional or they will need to apply to the Court of Protection to obtain retrospective consent before they instruct any investment decisions.


How we can help

Quite often, it is the parent in need of care who holds all the family assets in their name. At FAS, we have been made aware of several cases where family members have found it difficult to make long-term care provisions for a parent who was no longer capable of making their own decisions.

In these instances where no LPA has been put in place, family members have spent considerable time and money trying to take control of the parent’s assets to pay for their care, while experiencing lengthy delays trying to get a determination from the Office of the Public Guardian. These cases have convinced us that families should really start talking about the importance of LPAs long before they think an LPA will ever be needed. We can help to ensure that any LPA drawn up contains the necessary wording to delegate investment decision-making to those best placed to manage the investments.



As with writing a will, the most important aspect of an LPA is that it gives you the power to make a decision when you choose to, rather than leaving it too late to have your say. Creating an LPA at the same time as you write your will could potentially save you and your family a great deal of money and distress further down the line.


If you are interested in discussing arranging an LPA with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.