July 2024

Jul 25

A Guide to Gifting

By FAS | Inheritance Tax

Our advisers provide holistic and independent advice to clients with a wide range of different financial circumstances and objectives; however, one common discussion point for many clients centres around the rules for gifting money, and how to avoid tripping off a tax charge when making a gift.

There are many reasons that individuals may wish to make a gift. A popular reason is to provide a younger relative with funds towards a house deposit, or cover university costs. Others may look to gifting as a method of reducing the value of their estate that is chargeable to Inheritance Tax.

It is, however, important to seek expert advice before undertaking any estate planning, as the rules can be difficult to understand, and actions taken can have unexpected and expensive consequences.

What constitutes a gift?

It may seem a simple question, but it is important to note that a gift needs to be outright to be effective for tax purposes. In other words, the donor of the gift is not able to derive any benefit from the asset that is gifted. If they do, they are likely to fall foul of the reservation of benefit anti-avoidance rules, which could render the gift as being null and void. The most common example of such a gift is when parents gift their main residence to their children, and then continue to live in the property. This is a clear example of a reservation of benefit, unless a market rent is paid by the parents.

Annual gift exemptions

Each individual has an annual gift exemption, where gifts below this figure can be made each year without incurring a potential charge to Inheritance Tax in the future. The annual gift exemption is only £3,000, and sadly this figure hasn’t been increased in more than four decades. Despite the size of the allowance, the annual gift exemption can still be of value, in particular as a couple could each use their annual gift exemption. In addition, if you haven’t made gifts in the previous tax year, this can be carried forward to allow a potential total gift of £12,000 per couple in a single tax year.

One source of confusion is the fact that the £3,000 allowance needs to cover the total of gifts made in a tax year. You can also make small gifts of up to £250 per person each tax year, so long as you have not gifted to that individual under another allowance during the same tax year.

Finally, gifts can be made to a relative who is getting married or entering a civil partnership. Parents can give £5,000 each, grandparents can give £2,500 each and you can give £1,000 to any other person.

Tax treatment of larger gifts

There is no limit to the amount you can gift each tax year; however, any gifts made in excess of the annual gift exemptions outlined above could carry a potential Inheritance Tax charge. For a gift in excess of the annual gift exemption to fully escape your estate for Inheritance Tax purposes, you need to survive more than seven years from the point the gift is made. If the donor of the gift fails to survive seven years, the value of the gift will use up part of their nil rate band, which is the first £325,000 that you can give away on death before Inheritance Tax becomes payable. Where any amount of the gift exceeds the nil rate band, Inheritance Tax is charged on the surplus and is payable by the donee (i.e. the person receiving the gift). There is, however, taper relief that reduces the amount of Inheritance Tax charged, so long as the individual has lived more than 3 years after making the gift.

Making regular gifts

Another way of making a gift without tax considerations is to make regular gifts out of surplus income. This is a confusing rule, and great care is needed if relying on this rule when making gifts. Firstly, the gift can only be made out of income that is truly surplus to your requirements, after all regular spending is taken into account. Secondly, the gifts need to be regular in nature, that is to say that they follow a pattern. For example, if you have truly surplus income over expenditure of £10,000 per annum, and pay this amount each year to your child or grandchild to help pay for school fees, this is likely to be accepted as a regular gift out of surplus income.

The gifts out of surplus income rule cannot be used if the person making the gift reduces their standard of living to make the gift, or uses capital for this purpose. A useful tip for those relying on this rule is to make a careful note of income received and outgoings in a tax year, to help demonstrate that the gifts have been made from income that is truly surplus to requirements.

Avoiding common pitfalls – the importance of advice

Before planning any gifting, it is important to take stock of your own personal financial position. It is understandable that many would not hesitate to offer a gift to help family members, or look to take action to reduce a potential Inheritance Tax charge on their estate; however, many people underestimate potential costs that can arise, particularly in later life, when care fees or private medical expenses may need to be met. By taking holistic financial planning advice, the impact of gifting can properly be assessed to see whether any material damage to your own financial position will result after making the gift.

Deciding which assets to gift can also lead to adverse tax consequences. Where some will have available cash to make a straightforward payment, others may need to sell down assets, be they property or investments. These actions can create an unintended tax consequence for the one making the gift.

It is also important to seek holistic advice, as assets such as the value of personal pensions may not aggregate with other estate assets when assessed for Inheritance Tax. This may cast a different perspective on any planning required.

Finally, there are a number of tools available at our disposal that can assist in estate planning. One such example is the ability to arrange a limited life assurance policy that can be used to pay the Inheritance Tax if the individual making a larger gift doesn’t survive the requisite seven years after making the gift.

Speak to one of our experienced advisers who will be pleased to provide advice on the options and assess the impact of any actions taken.

Jul 18

Helping business owners reach their financial goals

By FAS | Business Planning

Whether making strategic decisions, managing staff or building relationships with customers, running a business takes time, focus and energy. In our experience, business owners often don’t have the time to pay enough attention to their own financial planning goals. In addition, business efficiency can also be improved by sensible financial planning. Indeed, as the prospects for your business and personal financial goals are closely aligned, seeking tailored financial planning advice can assist business owners to plan ahead for the future with confidence.

At FAS, our experienced advisers can help business owners meet their financial objectives. In this article, we take a look at three common scenarios where the independent advice we have provided has proved beneficial.

Scenario 1 – Profit extraction via pensions

Business owners need to decide the most appropriate method of extracting profits from their business to fund their ongoing costs and lifestyle. Most business owners that we advise pay themselves a modest salary, and receive funds to cover their personal expenditure via dividends. But what about profits made by the business in excess of their living costs?

Profits made by a business are subject to Corporation Tax, which is charged at 25% for companies with profits over £250,000; however the rate reduces to 19% for small businesses with profits under £50,000. This tax charge can effectively be saved if the company arranges a pension contribution on behalf of the business owner, as such contributions are usually treated as a legitimate business expense and deductible from profits liable to Corporation Tax. Furthermore, there is no National Insurance liability either, which would be the case if the additional profits were drawn as salary.

Pension planning using Employer Contributions can be a very sensible and tax efficient method for the business owner to reduce their company’s Corporation Tax bill, and build up retirement savings for their future use. This is particularly powerful when business owners move closer to retirement, as funds drawn through Employer Pension Contributions could be accessed if required.

Tax legislation does, of course, change from time to time, and the new Government could bring about changes in pension legislation. We therefore recommend seeking advice before taking any action.

Scenario 2 – Protecting business interests

We often come across business owners and shareholders who don’t consider the potential impact of the death or serious illness of a business owner or key staff member. This could mean years of hard work are placed in jeopardy, and could compromise a business owners retirement plans.

Losing key personnel to death or serious ill health could have devastating consequences for the future success of the business and its’ employees. Some businesses may even face wind up or closure due to the loss of an individual who is vital to the success of the business. Key Person protection is an insurance that provides a cash benefit to the company in the event of the death, diagnosis of a terminal illness, or a specified critical illness, of a key individual in the business. The funds paid through the policy could be used to help cover any potential reduction in profits as a result of the missing individual, meet ongoing business expenses, or pay for recruitment and training costs for a replacement.

We have also seen instances where the structure of the business could potentially lead to difficulties in the event of the death of a shareholder. It is quite common for a shareholder in a small business to prepare a Will that leaves their shares in the business to their spouse or children on death. This is understandable, as the value of the shares are then left to the benefit of family members. That being said, the spouse or children may not have any interest in being a shareholder in the business and may prefer to sell the inherited shares to other shareholders. This may also be the desired outcome from the other shareholders’ perspective.

The shares will, of course, have a value and other shareholders may have difficulty raising the necessary finance to purchase the shares. This is where a Shareholder protection policy, arranged in an appropriate manner under a Trust arrangement, can provide the necessary funds to the other shareholders so that the deceased shareholder’s shares can be purchased from the estate.

Scenario 3 – Keeping business cash productive

We have come across many successful firms, who have built up substantial balances in cash. Naturally, some of these funds will be needed for day-to-day cashflow; however, funds that are truly surplus to these requirements should really be working hard for the business, and more often than not, they simply languish on a business bank account earning little, if any, interest.

The obvious first step is to look for business deposit accounts that pay more attractive rates of interest. Many banks offer such accounts, but rates of interest differ greatly. At FAS, we have assisted business owners in finding suitable deposit facilities to keep surplus funds productive.

Many business owners are unaware that businesses can make capital investments using business funds, which are held in the name of the company. Where excess funds held by a business are unlikely to be needed in the short or medium term, investing in a diversified portfolio of investments could generate superior returns over time and potentially lead to growth in the value of the business. Corporate investments are an area where specialist advice can add significant value, not only in terms of selecting an appropriate investment strategy aligned to the investment time horizon, objectives and tolerance of investment risk, but also to make sure the investment will not have any impact on the status of the company, which could lead to adverse tax consequences in the event of the sale of the business in the future.

Saving business owners time and money

As demonstrated above, there are many ways that independent advice can help business owners achieve their personal financial planning goals and help grow their business. In addition to the services described in the three scenarios above, our experienced advisers can also provide independent advice on a range of employee benefits, such as death in service and private medical group policies and help establish group pension plans. Speak to one of the team to start a conversation about the ways we can assist.

Jul 11

Funding long term care costs

By FAS | Financial Planning

As we move into later life, our financial priorities often shift, and funding the potential cost of long term care is a common concern that is shared by many clients. This is not surprising, given the rapid increase in the cost of care over recent years. According to recent figures from Age UK, the average weekly cost for a place in a nursing home is £1,078, although there are substantial regional differences, and we have come across situations where clients are paying significantly higher fees than the average figure quoted.

Funding options

Local authorities have a duty to arrange and pay for appropriate levels of care, following an assessment of the individual’s needs; however, this financial assistance is only available to those with less than £23,250 in capital, and this figure includes the value of all assets, including property.

Depending on the needs of the individual requiring care, an assessment could decide that NHS continuing healthcare is available, which could cover some or all of the cost; however, if the individual is not eligible for continuing healthcare, and they hold assets greater than £23,250, they will be expected to make a contribution towards care costs.

Self-funding care costs can be a daunting proposition, where decisions need to be reached at a time of stress and concern when an individual is being moved into care. At this point, family members, or their attorneys if acting under a Lasting Power of Attorney, may find independent financial planning advice to be of significant value, to help consider the options and agree an appropriate strategy to meet the ongoing care costs.

Our approach to care fees planning

When we first meet clients who potentially have care needs, we undertake a full assessment of their capital assets. Quite often, we meet those who have investments and other assets that have not been professionally managed, and our analysis uncovers investments or pensions that could have been otherwise overlooked. Once we have assessed the capital position, we look at income sources (e.g. state pension, private pension, attendance allowance, investment or property income) to begin to work out the shortfall between the cost of care and other essential costs (such as personal care items and spending money) and their sources of income.

Once this assessment has been carried out, we can provide advice on the options for consideration. Depending on the level of shortfall, it might be the case that the care costs could be met through income alone, although this is not common and is typically reserved for those with significant personal pension or rental income. In most instances, the cost of care is likely to erode capital, with the rate of erosion dictated by the shortfall between income and expenditure. There is, therefore, a need to consider how best to meet the shortfall and preserve as much capital as possible.

Immediate Needs Annuities

One option that can bridge the gap between income and care costs is to purchase an immediate needs annuity plan. This is where capital is paid to a provider, who in turn will pay a monthly level of income that can be used to meet the shortfall between income and care fees. This income is usually tax-free and paid direct to the care provider.

Each plan is individually underwritten, with the single premium payable dependent on the age, health, life expectancy and care needs of the individual. In our experience, the premiums payable on such policies can be very expensive; however, despite this, some may value the certainty that a care fees annuity can bring.

A further factor to consider is that there is no return of capital to loved ones in the event of death of the individual in care, unless a capital protection element is purchased, at an additional cost.

Finally, the reality of how long an individual stays in care needs to be taken into account. Office for National Statistics analysis shows that for those aged 85 to 89 years in care, the average life expectancy is 3.6 years for women and 2.6 years for men. The purchase of a care fees annuity could, therefore, potentially only pay out for a limited period of time, leading to returns that offer poor value from a large capital outlay used to purchase the annuity.

Investment options

In many cases, adopting a sensible approach to investment from capital raised either from the sale of the main residence or other assets, is the preferred option. We provide advice to clients (or their attorneys or deputies) to construct a bespoke investment plan, after considering the level of shortfall and precise composition of existing assets held.

Cash will naturally have a part to play in any sensible investment arrangement where care fees are payable. It is, however, important that cash funds remain productive, and held in a tax-efficient manner. We can assist clients in establishing an appropriate strategy and provide advice as to the right level of immediate cash to hold.

For sums not immediately required, there are other asset classes, such as Equities, Corporate and Government Bonds and alternative assets, that could be considered to try and achieve superior returns to those available on cash. Our experienced advisers can recommend an appropriate investment strategy, which often focuses on lower risk assets, and aims to stem the rate of erosion, so that the capital can fund care provision for an extended period, or leave additional capital to loved ones on death. The strategy is then regularly reviewed, so that it adapts to any change in circumstances.

Naturally, there are many factors that need to be considered in any investment strategy, including the time horizon for investment, the tolerance to investment risk accepted and income requirements. Tax-efficiency and ease of access to funds will also be important considerations. We can also arrange regular withdrawals from investments at an agreed level to ease the administrative burden by moving cash to cover ongoing care costs.

Investing funds for someone else under a Lasting Power of Attorney introduces an added layer of responsibility. An attorney is duty bound to act in the best interests of the donor, and unless the funds available for investment are limited or the attorney has sufficient skill and knowledge, attorneys should consider whether they need to obtain independent financial advice. This advice can provide valuable reassurance to attorneys who are tasked with the responsibility of handling the financial affairs of the donor, and also provide evidence that appropriate advice has been obtained.

The power of advice

When an individual goes into care, decisions taken to fund ongoing care costs require careful consideration, to make the most of funds available. Our experienced advisers can provide independent advice on the options from across the market place and build a bespoke plan of action. Speak to one of our team if you, or a loved one, needs specialist advice in this area.

Jul 04

Don’t leave it too late to create a financial plan

By FAS | Financial Planning

Irrespective of our age, financial obligations shape the decisions we reach on a day-to-day basis. For those with young families, the cost pressures of mortgage or rent payments, childcare costs and household bills undoubtedly take priority, and it is easy to consider longer term financial objectives, such as retirement planning, as being something that can be put off until later in life.

This is reinforced by the results of a survey carried out by the Department for Work and Pensions, published in 2022, where 2,655 people aged 40-75 were asked a series of questions relating to retirement and providing income in later life. Of those surveyed, 24% did not hold a private pension at all, and 16% had not started saving for retirement.

The reality is that failing to take control of your financial future at an early stage can lead to missed opportunities, which could compound over many years, and potentially lead to a less comfortable retirement. There are, however, a number of steps you can take to improve your financial future, and working out a financial plan with a regulated financial adviser can help you achieve your longer-term goals.

Take control of pensions

With the introduction of auto-enrolment, most employed individuals now hold and contribute to a workplace pension scheme. Indeed, as individuals move jobs, most accumulate a number of pension arrangements during their working life. Holding multiple pension plans can make understanding the overall value of pension savings, and the potential income in retirement they could provide, more complicated. Furthermore, keeping abreast of the performance of defined contribution pension funds is more difficult across multiple plans.

This is a crucial point, as the difference between strong performing investment funds, and those offering an average performance, can compound over years and lead to a significant difference in the accumulated value of your pensions, and the level of income that can be generated, at the point of retirement.

Default pension funds tend to produce broadly similar returns irrespective of the pension provider; however, taking an active role in selecting good performing investment funds can produce a significant improvement over the performance of the default pension option. Many pension arrangements now offer “lifestyle” options, which automatically reduce the level of risk as you near retirement. This automated approach may not be appropriate for the options you wish to consider at retirement and doesn’t take into account prevailing investment market conditions or economic prospects. By engaging with a financial planner, an impartial assessment of your arrangements can be undertaken, which can help identify weak performing funds and allow changes to be made to improve performance or align the portfolio with your tolerance to risk and other preferences.

Performance is only one aspect where financial planning can assist in producing a better outcome. The charges levied by some pension contracts, particularly older style arrangements, can be expensive compared to modern platform-based plans, and these additional costs can be a further drag on investment growth within the pension fund.

Plan ahead to retire earlier

The State Pension age continues to increase and in our experience, many do not wish to continue working until their State Pension becomes payable. Engaging in the financial planning process at an early stage can make the possibility of retiring early a reality. Increasing the amount contributed earlier in life means that the contributions have longer to grow, and working with a financial planner can help adjust the contributions over time to ensure that they are affordable and invested appropriately.

Tax planning throughout your life

Tax relief received on pension contributions is one of the key benefits that sets pensions apart from other methods of retirement planning. Most individuals can get tax relief at their marginal rate of tax on pension contributions up to the annual allowance, which is currently £60,000 or 100% of relevant earnings if lower, although lower allowances apply to higher earners or those who have drawn a flexible income from their pensions.

Not only does the tax relief received on contributions provide a boost to growth in pension value, it can also help you avoid falling into a tax trap. One such example is the income tax charge that applies to people in receipt of Child Benefit, where either their income (or their partner’s income) is more than £60,000 per annum. Pension contributions made by an individual will have the effect of reducing the adjusted net income amount and potentially help avoid the income tax charge. Similarly, the 60% tax trap on income between £100,000 and £125,140 per annum can be avoided by making pension contributions to reduce adjusted income.

It isn’t just pensions where careful planning can yield tax advantages. Many people are finding they are paying more income tax on savings and investments due to static tax bands, and the reduction of the Capital Gains Tax (CGT) annual exemption is leading to more individuals paying CGT on the disposal of investments. By using tax advantaged vehicles, such as an Individual Savings Account (ISA), savings and investments can be sheltered from Income Tax and CGT.

Engaging with a financial planner can help identify opportunities to save tax throughout your working life, with each step towards greater tax-efficiency ensuring that your assets work as hard as possible to achieve your financial goals.

Don’t forget protection

One area of financial planning that is often overlooked is the need to protect your family’s finances, should an unforeseen event, such as death or serious illness, occur. Focusing on planning for retirement is all well and good; however, the best laid plans could be seriously compromised should the worst happen. It is important to ensure that adequate life cover is in place, and other forms of protection, such as Critical Illness cover, should be considered, too. It is also important to make a Will, to ensure your wishes are laid out, and ease the burden on loved ones. What is often not considered is that your Will can be a powerful tool that can be used to aid tax and estate planning.

Summary

With life’s pressures, younger people may be tempted to put off planning for retirement until later; however, in our experience starting a sensible financial plan at an early age could provide a more comfortable retirement. Engaging with a financial planner can also bring peace of mind that your financial circumstances are being reviewed regularly and promote tax-efficiency across your financial arrangements.

Our expert financial planners are independent, and can provide unbiased advice using a holistic approach, which takes into account retirement savings, investments, protection and other financial planning objectives. Speak to one of the team to arrange a review of your retirement savings or investments.