Monthly Archives

April 2023

Apr 27
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financial impact of dementia

The financial impact of dementia

By | Financial Planning

The diagnosis of any serious illness can be physically and emotionally draining for families, however, being diagnosed with dementia can be particularly challenging. As cognitive decline tends to be a progressive illness, the burden on finances over time can be significant and losing the ability to make decisions can lead to difficulties in managing money on a day-to-day basis. Any financial risk can be reduced by thinking ahead, as forward planning can keep your affairs in order and help family members organise your finances effectively, if you are unfortunate enough to lose capacity and the ability to make decisions for yourself.

 

Sobering statistics

Sadly, dementia cases are rising rapidly. According to figures commissioned by the Alzheimer’s Society, there were 900,000 people living with dementia in the UK in 2019. This figure is expected to almost double to 1.6 million by 2040. Looking at global figures, it is estimated that 139 million people around the World will be living with dementia by 2050.

Whilst often considered to be an illness developed by older individuals, 42,000 people under the age of 65 in the UK are living with dementia. Early-onset dementia can pose particular risk for family finances since those developing the illness may still be working and need to consider how to cover mortgage costs and pay for the upkeep of dependent children.

 

Make a Lasting Power of Attorney

It is important to consider what would happen to your affairs, if you suffered from cognitive decline, and were unable to make decisions that impact your finances or well-being. This is particularly important when an individual holds investments, property or other assets that cannot be managed easily.

Given the stark figures for dementia cases, it is important that individuals take responsibility and get their affairs in order by creating a Lasting Power of Attorney (LPA). This is a legal tool that lets you appoint someone (an attorney) you trust to make decisions for you if you are unable to make those decisions yourself.

There are two different types of LPA. The first covers your Property and Affairs and the second covers your Health and Welfare. In both instances, the attorney steps into the shoes of the individual granting the power and has the same legal status. For example, an attorney can undertake relatively simple tasks such as paying a bill or collecting benefits, as well as dealing with more complex decisions, such as selling a property or managing investments.

An attorney is duty-bound to always act in your best interests and consider your wishes in any decisions they make on your behalf. For this reason, most people will appoint a family member as their attorney, as this is someone who knows you well and you trust to make the right decisions for you.

Once the LPA has been created, it needs to be registered with the Office of the Public Guardian (OPG). In the case of the Property and Affairs LPA, this can be used as soon as it has been registered; however, the Health and Welfare LPA can only be used once you are unable to make decisions yourself.

 

It is not too late

Whilst forward planning can provide reassurance that your affairs are in order, many people do not make a LPA in advance of the diagnosis of dementia. It is important to note that a diagnosis does not prevent an individual from making a LPA, but it is advisable to get the documents prepared as soon as possible. A medical assessment by a qualified professional is likely to be required to ascertain whether the individual has the mental capacity to make an informed decision to be able to create the LPA.

 

The consequences of not taking action

If an individual loses capacity, and no LPA has been prepared, then typically an application is made to the Court of Protection, who will appoint a deputy to manage your affairs on behalf of the Court. Whilst a deputy has similar powers to an attorney, the deputy is appointed by the Court, and not by you. This appointment may, therefore, not concur with your wishes. Furthermore, the process of appointing a deputy is costly and long-winded and this could lead to considerable delays in being able to make financial arrangements, such as paying for care costs.

In addition, a deputy is placed under greater control and supervision by the Court, and needs to prepare an annual set of accounts, covering decisions and financial transactions taken. A deputy may also need to arrange a “security bond”, which is an insurance policy that protects the assets of the patient.

 

Keep your Will up to date!

In addition to preparing a LPA, everyone should make a Will. This sets out an individual’s wishes on death and helps make life a little easier for family members at a time of great stress and sadness. As with the LPA, the diagnosis of dementia would not prevent an individual from making a Will; however, it may well be advisable, or even necessary, to obtain expert medical evidence that an individual has the capacity to make the Will.

 

How FAS can help attorneys

At FAS our advice is that all individuals should consider making a LPA. It is sensible planning which can avoid significant cost, delay, and worry for loved ones. You can either prepare LPA documents through the Government web service or contact a Solicitor who can provide advice and prepare the documents and application for you.

We are very familiar with providing advice to attorneys, where planning decisions such as covering the cost of ongoing care, or managing existing investments are needed. Our financial planning team have extensive experience in dealing with dementia cases. If you have any queries or concerns, please do give us a call.

If you would like to discuss the above in more detail please contact one of our experienced advisers here.

 

Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice.

Apr 20
0
Row of pots of money, one labelled 'Inheritance', one labelled 'Family' and one labelled 'Tax'

Avoiding the most unpopular tax

By | Tax Planning

Whilst death duty can be traced back to 1694, modern Inheritance Tax (IHT) was introduced two hundred years later, when the value of land was taxed in order to reduce the Government deficit. These historic forms of taxation only affected the very wealthy, and a very small proportion of estates were liable to IHT.

Increasing wealth, particularly from rising property prices, has now significantly increased the revenue raised by IHT. Reports from H M Revenue & Customs confirmed that IHT receipts topped £6.1bn in the 2020/21 financial year, a 14% increase on the previous year, and the largest rise since 2015. The trend appears to be consistent in the 2022/23 tax year, when reviewing tax receipts from IHT for the 9 months to January 2023.

 

The most unpopular tax

Whilst we all suffer tax in one form or another during our daily lives, the taxation of assets on death is a highly unpopular measure. According to findings from a survey conducted by Opinium for Hargreaves Lansdown in 2021, IHT beat Income Tax and taxes on spending and investments, when those polled were asked to name the most hated tax in the UK. The findings of the 2,000-person poll revealed that Inheritance Tax (named by one in four people (24 per cent), beat income tax (including income tax and national insurance) into second place, polling 17 per cent.

It is not hard to see why IHT is so unpopular, and at a rate of 40% above the available exemptions, IHT is highly punitive. Government revenue from IHT is only likely to increase, due to the freezing of the Nil Rate Band, which is the amount an individual can leave on death without a charge to IHT applying. This has been set at £325,000 since 2009, and the recent Budget confirmed this level would be frozen until at least April 2028. Of course, over this time, asset values have risen strongly, and the real value of the Nil Rate Band has therefore become lower over time.

 

Thresholds frozen

In addition to the Nil Rate Band, the Residence Nil Rate Band can also be used to offset IHT, but only for those who leave a property to a direct lineal descendent. This band, which provides qualifying estates with a further allowance of £175,000 towards the value of a property, has also been frozen until April 2028.

Combining the two allowances, for those who are married with children, will raise the potential threshold before IHT becomes payable to £1m. This assumes on the death of the first of a married couple, assets are left to the surviving spouse, and as gifts between married couples are exempt, the Nil Rate Band of the first of a couple to die is not used. This unused allowance can be transferred to the surviving spouse to use on their estate and the same is true for the Residence Nil Rate Band.

With many more families now likely to face the scenario where an estate is liable to IHT, the importance of forward planning is greater than ever. There are several ways you can seek to reduce the impact of IHT, and one of the options is to gift assets during an individual’s lifetime. It is, however, important that careful thought is given to the tax consequences of making a gift, and the impact such a gift can have on the financial security of the donor.

 

Gifting rules

Any gift of cash, or assets, could have IHT consequences. Each individual can make gifts totalling £3,000 per tax year and therefore a married couple could gift £6,000 of capital (plus £3,000 each from the previous tax year if not used) without any IHT concerns. The annual gift exemption is pitifully small, and those with significant IHT concerns are unlikely to resolve them by making gifts that fall inside the annual gift exemption.

Any amount gifted above the annual exemption is treated as a Potentially Exempt Transfer (PET). No IHT is due immediately; however, the person making the gift needs to live seven years from the date the gift is made for the gift to fully escape IHT. This leaves some families facing the prospect of gifts made within seven years of death being clawed back into the value of the estate and assessed for IHT if the donor of the gift dies. A special form of life assurance policy can be taken out to protect the value of the gift, so if the donor of the gift fails to live seven years, the insurance covers the IHT liability on the gift.

 

The family home

A trap individuals can fall into is to gift the family home away to children but continue to live in the property. This could well fall foul of the Gift with Reservation rules. Such a Gift occurs when an individual gifts an asset, but continues to benefit from it, and if HMRC rule that a Gift has been made with Reservation of benefit, the value of the asset would still be assessed as being owned by the donor of the gift, when IHT is calculated on death.

 

The importance of planning ahead

IHT is deeply unpopular, and more estates are becoming liable to tax; however, by planning ahead, the impact of this tax can be avoided or even eliminated. Taking the right advice is so important, as traps lie in wait to catch out the unwary. Our experienced holistic financial planners can fully assess the potential IHT liability on your estate and talk you through the options to mitigate the tax burden.

If you would like to discuss the above in more detail please contact one of our experienced advisers here.

 

Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice.

Apr 13
0
How financial planning can help in divorce - broken heart with rings next to a gavel on a blackboard with writing 'divorce'

How financial planning can help in divorce

By | Divorce

A divorce can be one of the most stressful and emotional experiences you could face, and dealing with the financial aspects of the divorce can be the most challenging.

Decisions taken at this time can have lifelong implications, and whilst it is possible to deal with the divorce process without professional help, most individuals going through a divorce will look to use a solicitor to work through the legal aspects; however, many aren’t aware of the role a financial planner can play in providing advice, particularly in complex divorce cases where property, pensions and investments are held by the couple.

 

Disclosure of assets

To achieve a financial settlement following divorce, both spouses will need to provide a full disclosure of their assets and income. This includes all pension arrangements, and in some cases, assessing the value of a pension for this purpose can be difficult.

Other than the marital home, the value of pensions can be the largest assets held, although many divorcing couples initially overlook pensions and focus on property and savings. There are different types of pensions and in the case of Defined Benefit or Final Salary pensions, the true value may not be immediately apparent; however, by obtaining a Cash Equivalent Transfer Value (CETV), it is possible to compare the value of a Defined Benefit pension against a Defined Contribution arrangement.

 

Pension decisions

Once the pension value has been established, spouses can begin to take decisions about how pensions are dealt with as part of the overall financial settlement. There are three core options as to how pensions are dealt with.

The first is a Pension Sharing Order, where the value of a pension is divided as part of the settlement. Once a settled position has been reached, the value agreed is transferred to another pension arrangement in the name of the recipient. Spouses in receipt of a pension credit will need to hold a pension to receive the pension credit, and this is where obtaining independent financial advice can help the spouse receiving the credit to arrange the pension transfer into an appropriate pension plan, which is invested in accordance with their needs and objectives. An advantage of this option is that a clean break can be achieved, which is often desirable.

The second option is a Pension Attachment Order. This differs in that pensions are not separated, but instead, a percentage of the pension is paid at the time that the ex-spouse receives their pension. This is normally arranged in respect of Defined Benefit pensions and can provide both an ongoing income and/or a lump sum. This option does not provide a clean break and can delay payment of the pension until the point is reached when the ex-spouse draws their pension. It also leaves one party with control over the ability to manipulate the pension to their advantage, such as drawing a pension flexibly, which could leave the other out of pocket.

Finally, Pension Offsetting is an option some couples consider as being the most appropriate way to deal with pension assets. This is where pension assets are offset against other assets held by the couple. As an example, often seen, an ex-spouse may forego receipt of a share of a pension in exchange for sole ownership of a property. These decisions can be far reaching and taking independent advice can help identify important points to consider. For example, not receiving a pension can leave a shortfall of retirement income, which may be difficult to replace.

 

Investments and savings

Achieving an appropriate split of existing investments can be difficult, and there can be tax consequences to consider. In particular the loss of tax efficient savings vehicles such as Individual Savings Accounts (ISAs) can lead to unintended tax liabilities, if investments are divided as part of a financial settlement. If investments are sold as part of a financial agreement, gains made on the investments sold could give rise to Capital Gains Tax.

 

The family home

One asset that has more emotional connection than others is the family home. Getting the right financial planning advice can assist in determining whether keeping the family home is a realistic proposition, and taking a holistic view can help consider wider affordability issues and longer-term considerations, such as planning for retirement.

 

Protection needs

One aspect that is often overlooked is to assess the level of life assurance, critical illness and other cover, in light of the changing circumstances. For example, a spouse may have relied on a Death in Service benefit from their ex-spouse to cover an outstanding mortgage. Once the divorce has been finalised, alternative cover may well need to be arranged.

 

After the divorce

Once the divorce has been finalised, seeking independent advice can help restructure your financial arrangements for the future ahead. Part of the divorce settlement may involve the receipt of a lump sum, and seeking advice can help to invest this in a tax-efficient manner, to suit your needs and objectives in the short and longer term.

 

Seek professional guidance

It may not be an instant thought to contact a financial planner in the event of divorce. There are, however, many areas that holistic advice can add value, in terms of looking at the potential consequences of a particular course of action and helping restructure financial arrangements post-divorce.

Our experienced planners at FAS often work closely with solicitors in Kent and the South East to assist clients in their divorce planning requirements. Speak to one of the team here if you need assistance.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Apr 06
0
Jigsaw puzzle with pieces labelled 'Financial' and 'Planning' - new tax year 2023

New tax year, new opportunities

By | Financial Planning

The start of each tax year brings a new set of tax allowances and is traditionally a time when investors take stock of their existing arrangements and look for planning opportunities. The series of measures announced in the Budgets in November and last month herald some significant changes that will now come into effect, with a number of potential planning opportunities to consider.

 

Pensions overhaul

A range of new pension legislation comes into effect from 6th April, and provides significant opportunities for individuals looking to accumulate their pension pots, anyone whose pensions are close to the Lifetime Allowance, or indeed those who have already begun drawing a pension flexibly.

The pension Annual Allowance, which is the maximum that an investor can contribute to a pension each tax year, has increased from £40,000 to £60,000. It is important to remember that any contributions made are always capped by the level of relevant earnings (salary or self-employed income). The new allowance of £60,000 provides much greater scope for individuals to make a higher level of contribution, and in particular, provides a valuable opportunity for Directors to arrange substantial Employer Pension contributions.

Anyone who has flexibly accessed a pension in the past, has seen the limit for further pension contributions limited to just £4,000 each year, as they are subject to the Money Purchase Annual Allowance. This allowance has been increased to £10,000 from 6th April 2023, and provides scope for those returning to work after taking retirement to make a more meaningful level of pension contribution.

The biggest single change in the March Budget was the announcement that the Lifetime Allowance for pension savings is to be scrapped. In the 2023/24 tax year, this allowance remains in place; however, the tax charge for breaching the Lifetime Allowance has been reduced to 0%. The level of Tax Free Cash available when taking a pension hasn’t been increased, but the removal of the punitive tax charge for breaching the Lifetime Allowance provides new opportunities for those wishing to pay more into their pensions, or for anyone with pension savings above the allowance, to draw more out of their pension. As ever, planning around these areas can be complex, so we recommend speaking to one of our experienced independent financial planners for advice.

 

Investment tax changes

Anyone who holds investments outside of an Individual Savings Account (ISA) should look to consider how tax efficient their portfolio is, as changes to the taxation of dividends may lead to more individuals paying tax on their dividends. The Dividend Allowance, which covered the first £2,000 of dividends in the 2022/23 tax year has been halved to just £1,000 for 2023/24 and a further halving of the allowance will follow in the 2024/25 tax year.

Consider the position of an individual who holds £30,000 in investments (either directly held stocks or Unit Trusts) outside of an ISA, that generate a dividend yield of 4%. In past tax years, the Dividend Allowance would have easily covered this income, thus avoiding any tax liability. With the smaller allowance now in place, this would mean that £200 of the dividend income would be subject to tax at 8.75% for a basic rate taxpayer, or 33.75% or 39.35% for a higher or additional rate taxpayer respectively.

By placing the investments inside an ISA, dividends would be tax free; however, investors need to be even more careful to consider the Capital Gains Tax (CGT) consequences of any actions taken, as the CGT allowance has more than halved from £12,300 to just £6,000 in the new tax year.

The start of a new tax year is also an ideal time to consider the existing investment strategy, and if you hold investments that have not been reviewed for some time, now would be the ideal opportunity to overhaul an existing portfolio.

 

Tax tune-up

Whilst the amount we can earn in a tax year before paying Income Tax hasn’t changed, more people may well find themselves subject to Income Tax on their earned income, or from pension sources, from the start of the new tax year. Pensioners in particular need to pay attention to the impact of the 10.1% increase to the State Pension coming into effect, on the amount of Income Tax they could pay on other income, such as private pension or investment income.

Other tax traps exist, including the lowering of the starting point where Additional rate Income Tax is paid. The reduction from £150,000 to £125,140 will mean that higher earners will end up paying an additional 5% Income Tax on income between £125,140 and £150,000. Coupled with the taper on the Personal Allowance (which isn’t new, but is nonetheless painful) this is the ideal time for higher earners to take stock of their financial position and consider planning opportunities to reduce their tax bill.

 

Take a holistic view

We have outlined just a handful of the most important changes that come into effect from 6th April, but there are more that should be considered, depending on your particular circumstances. This is where holistic financial planning can provide significant value, in assessing the bigger picture and taking into account your personal circumstances to look for ways to improve tax-efficiency and streamline investment strategies. A conversation with one of our experienced independent planners could well help identify changes that take full advantage of the new opportunities.

 

To discuss the above in more detail please contact one of our experienced advisers here.

 

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.