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FAS

Mar 03
0
Mature woman reviewing business finances - business planning benefits

Business planning benefits

By | Business Planning

Why business owners need to find time to focus on financial planning

As anyone who runs a business will appreciate, time is a precious commodity. Making strategic decisions, effectively managing staff, and building relationships with customers and suppliers mean that business owners rarely have time to consider the important role that sensible financial planning can play in both the success of the business and the long-term financial security of key individuals.

 

Profit extraction via pensions

Whilst the long-term goal is to make the business more successful over time, business owners need to make sure that they don’t ignore their personal finances and in particular their retirement plans. By making regular pension contributions, business owners can save for retirement in a tax-efficient manner. Depending on how the business owners are remunerated will determine the most tax-efficient way that pension contributions are made, and we recommend business owners seek independent investment and accountancy advice to choose the most appropriate route. Pension planning can be particularly useful when business owners near retirement, providing a tax-efficient method of extracting profits from the business.

 

Protecting your interests

In our experience, many business owners, shareholders, and key personnel are running huge risks by not holding adequate protection against the worst-case scenario. The death or serious illness of a business owner or key individual in the business could have devastating consequences for the future success of the business and its employees.

A situation we commonly come across is where a shareholder in a small business leaves shares in the business to their spouse on death. However, the spouse may not have any interest in being a shareholder in the business, and would prefer to sell the shares in the business to other shareholders. This would involve other shareholders needing to raise finance to buy the shares, which often can be prohibitive. By arranging shareholder protection in an appropriate manner, life assurance would be arranged in a tax-efficient way to provide the necessary funds for the surviving shareholders to buy the shares from the spouse.

Another common risk that is often ignored is the potential for death or serious illness of a director, owner, or key member of staff, without whom the business would face significant risks to profitability and success in the future. By arranging appropriate cover, in the event of ill-health or death of the key employee, policy proceeds are paid directly to the business to help replace the key person and help cover any profit loss.

 

Benefits to retain key staff

A crucial component of any successful business is the ability to recruit and retain key staff. As an indirect result of the pandemic, some industries have faced an imbalance between vacancies and applications, exacerbating the need for employers to stand out from the crowd. One method of achieving this is to offer key employees a strong package of employee benefits, which can be arranged in such a way that they are tax-efficient for the business. Death in Service, essentially a group life policy, is a cost-effective way of providing life assurance for key staff. Additionally, arranging a Group Private Healthcare policy is another attractive benefit that can work to the benefit of the employee, and also the employer, as a way of ensuring that staff return to work as quickly as possible after suffering ill-health.

Another valuable benefit is for business owners to arrange enhanced pension arrangements for key personnel. Whilst many firms choose to use a Master Trust arrangement such as NEST or People’s Pension to provide their employees with a pension under the auto-enrolment legislation, these schemes tend to offer employees limited choice and can be expensive. By providing key staff with bespoke pension advice, and setting up a Group Personal Pension or Individual Pensions, this can provide staff with a greater range of options and competitive terms.

 

Making company cash work harder

Many successful firms tend to carry large balances in cash, and if these accumulated funds are not earmarked for any business purpose, leaving surplus funds on a company bank account will mean that funds are left unproductive. In particular, given the current levels of inflation at present, cash is generally producing a negative real return (i.e. taking inflation into account) of around -5% per annum. Business owners should consider funds that truly are surplus to immediate requirements (but might be required in the longer term business strategy) and consider alternative options that aim to keep funds productive. This can be in the form of term deposits or other interest-bearing cash, or a cautiously managed investment portfolio, aiming to produce positive returns over time, with lower levels of volatility. Business owners should always seek advice before proceeding, as investing significant sums could have implications in respect of the trading status of the company; however, we will be able to work with your company accountant to avoid any adverse consequences.

 

How we can help busy business owners

It is our experience that business owners generally appreciate the benefits that independent financial planning can bring, but rarely have the luxury of time to consider these options in more detail. That’s where FAS can assist. As a Chartered practice, we can provide a comprehensive service, considering a company’s protection needs, implementation of employee benefits packages, and reviewing business owners’ personal finance, thus avoiding the need for business owners to deal with these aspects individually.

If you are interested in speaking with one of our experienced financial planners to review your business needs, please get in touch 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 circumstances.

Feb 24
0
Hand holding globe

FAS Market Outlook

By | Investments

The tension between Russia and the West over Ukraine has been building in recent weeks, and Russia’s incursion into Ukraine has clearly escalated the crisis. We explain why investors should stay calm and why we feel there are good reasons to take an optimistic view.

 

Likely fallout from the crisis

So far, 2022 has seen investment markets give back some of the gains made in 2021, firstly due to higher levels of inflation, and secondly as a result of the increased tensions between Russia and Ukraine. Whilst most global markets have seen modest falls over the year to date, as ever, it is important to take a rational look at events, and consider the bigger picture for investment markets over the remainder of this year and beyond.

As a direct consequence of the increased tensions, oil prices have climbed, breaching the $100 a barrel mark. Higher energy costs are likely to exacerbate the inflationary pressure in the short term; however, our view remains that inflation will moderate as we head towards the end of the year. Naturally, the higher oil price is likely to benefit oil producers and energy companies generally. Likewise, the imposition of sanctions on Russia and Russian interests by the West could lead to further falls in Russian equities, and the value of the Russian rouble. For this reason, we would recommend investors favour developed markets rather than emerging markets in these conditions.

 

Reasons to be optimistic

To counter the potential downsides of the increased tension, there are a number of good reasons to be positive despite the newsflow. With Covid-19 restrictions easing around the world, the headwinds from the Coronavirus pandemic are starting to subside, which should allow Western economies to continue to grow over the remainder of 2022. Apart from a small number of recent disappointments such as results announced by Meta (Facebook) and Peleton, corporate earnings have generally matched or beaten market expectations over recent months, and forecasted profits remain strong in many sectors of the economy.

Another reason for optimism is that markets have already fallen back over the last six weeks and may, to some extent, have already priced in some of the potential risk from further escalation of the Russian incursion.

Finally, the increased geopolitical risk could potentially lead central banks to take a more measured view over the pace of interest rates increases over the remainder of 2022. Markets would almost certainly view this in a positive light.

 

Volatility is part of the process

Global markets are digesting a regular stream of news from events in Russia and Ukraine, which is likely to lead to continued volatility in the short term. Volatility is a measure of how much an asset rises or falls in value over a given period of time, and all of our investment strategies focus on limiting investment volatility over the longer term.

It has been noticeable that volatility has not increased significantly over recent weeks and overall levels of volatility are significantly lower than levels seen at the beginning of the pandemic in March 2020. We see this as a positive sign that market participants are prepared to take a measured view of events.

 

Learning from the past

Many investors will clearly recall the market gyrations seen at the start of the pandemic just less than two years ago. We counselled clients at that time to stay calm and remain invested through the very high levels of volatility seen at the time. Of course, history tells us that this was a sensible course of action to take as global markets had recovered their losses by the end of 2020.

Similarly, we avoided recommending clients take action to try and trade the volatility seen at the time, and this remains our recommended course of action now. To quote an often used market adage “it is time in the markets, not timing the markets” that produces long-term returns.

Furthermore, investment should always be viewed as a medium to long term process, and investor focus should always remain on the longer term goals and outcome, rather than short term fluctuations in market conditions.

 

Review your portfolio

Diversification is a key part of our investment process, and for many investors should be a cornerstone of portfolio construction. Holding too much exposure to any one area or asset class can lead to greater than expected volatility, which can be reduced by spreading funds across a range of different assets, sectors and geographies. If your portfolio is not regularly reviewed, our experienced team at FAS would be happy to take an impartial review of your investments, to consider how they are invested and the level of diversification.

 

Stay the course

From a global security point of view, it is clearly unsettling to see the destabilising effects of the military action. However, when it comes to investment strategy we  recommend that investors remain calm and focused on the wider economic outlook. Naturally, the team at FAS will continue to monitor markets closely as the situation unfolds.

 

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

Feb 17
0
Graphic of a green globe alongside wooden blocks spelling out ESG

Investing with purpose

By | Investments

Investing for the future has taken on new meaning in this world of climate emergency, the continuing Covid-19 pandemic, and our growing awareness of how our actions might affect current and future generations. Environmental, social and governance (ESG) concerns now underpin many investment strategies, with the goal of minimising harm to the world and its people while also generating returns.

Investing in line with ESG practices is a rapidly growing area of the investment fund market. UK investors transferred almost £1bn a month on average into responsible investment funds in 2020. By the end of September 2021, the figure was £1.6 bn, up to two-thirds of total net retail fund investment in that month.

UK investors now have £85bn in responsible investment funds. Between September 2020 and September 2021, the sector saw 87% growth (versus 17% across funds overall), according to the Investment Association (IA).  So why now?

Three main factors are behind the move to ESG in the past few years:

  • a bigger role by organisations such as the Principles for Responsible Investment;
  • an improvement in ESG performance data and investor tools; and
  • demand from ‘millennial’ investors, now aged 25 to 41, mid-career, and inheriting the reality of climate change and social unrest (87% of high net worth millennials invest based on a company’s ESG record).

In the last year, the Covid-19 pandemic and the COP26 summit in Glasgow have both led to greater interest in the responsible investment agenda.

 

Performance

Ethical investing was once positioned as a choice of principles over returns. A shift in global policy and advances in technology mean responsible funds now consistently outperform non-ethical equivalents. So, one of the traditional arguments against investing with conscience has all but disappeared.

Analysis of funds covering 23 comparable sectors found in the 12 months to 1 July 2021:

  • Ethical funds had produced an average overall return of 19.87%.
  • The average return of funds outside the ethical category was 17.89%.
  • At a sector level, ethical funds outperformed on average in 13 of the 23 sectors.

 

Defining ESG investment

ESG investing is about choosing to consider the treatment of the planet, people and management structures in order to receive financial returns in a way that is aligned with personal ethics and concerns about the world. This may mean:

  • avoiding certain sectors;
  • excluding specific companies; or
  • picking a theme with personal importance and investing in projects trying to achieve particular goals or change.

ESG investing lets investors align the way they use their money with their principles, often as part of a lifestyle of ethical consumerism that considers the supply chain of everything we use, from plastic waste to modern slavery.

 

Future-proof investing

Global sustainability challenges are forcing us to rethink traditional ways of working and living. Companies that once looked like solid and stable investments now face new risks to their profits, including from:

  • food shortages;
  • drought;
  • rising sea levels and floods;
  • conflicts over resources and land;
  • data privacy

ESG investing is considered a way of future-proofing returns by investing sustainably, choosing industries concerned for both people and the planet, in order to make long-term profits.

Example: Cleaner energy electric vehicle (EV) sales are expected to grow globally by 27% a year between now and 2030. Add in remote updates to EV functionality and entertainment, and investors get dual returns: consumer demand for less harmful products, and software subscription deals

 

Your values

Matching investments to your values means deciding what is most important to you. You may need to compromise to achieve all your goals.

The pandemic has made a larger number of investors look at ESG criteria more closely in the context of intergenerational planning and wealth transfer. In a recent survey from Prudential, 61% of participants said they now care more about the environment and the planet than they did before Covid-19. One in five are more worried about ESG issues now they have children or grandchildren.

The report found an increased appetite for ESG investing among:

  • 60% of millennials;
  • 44% of Gen X;
  • 35% of baby boomers; and
  • 45% of all investors now only want to invest in sustainable companies and funds.

However more than a third (36%) of UK adults admit they do not know where their current investments, including workplace and private pensions, are invested.

While interest in ESG investing has increased across the board, a generational divide exists over priorities when it comes to choosing investments. Climate change is a more pressing issue for older high net worth individuals, with 55% ranking it their top ESG issue. Social and governance issues ranked lower; only 9% put diversity among their top three ESG concerns.

Younger investors in the 18 – 34 range, however, prioritised social issues.

  • 45% said diversity should be companies’ top priority;
  • 64% judged companies by their responses to Covid-19; and
  • 60% were concerned by unequal financial and social hardship caused by the pandemic.

This divergence of opinion in ESG investing has the potential to cause friction for intergenerational financial planning. A good financial planner can guide you on how best to find compromise for children or grandchildren.

 

Pitfalls

While ESG investment is currently experiencing a positive surge, as with every strategy, there are some key issues that investors should bear in mind.

To cash in on the ‘green pound’, and jump on the bandwagon of demand for ethical investments, some companies are rebranding as ESG-focused in a way that’s not entirely honest.

Some ESG funds take a liberal view of what they allow to make it easier to achieve returns. This ‘greenwashing’ can make it hard for ordinary investors to choose genuine ESG investments.

Greenwashing can be cynical marketing, or it can be an oversimplified view of a company or sector that fails to take into account hidden ESG risks. Examples include:

  • Fishing, once seen as ‘green’ versus meat, is the largest contributor to ocean plastic.
  • Soybeans are the second largest driver of deforestation after cattle, a fact largely hidden from investors in ETF indexes.
  • The Australian government found modern slavery of Uyghurs in the supply chains of at least 82 well-known global brands.

Remember, just because a company, project or fund is marketed as ESG or ethical or sustainable doesn’t necessarily mean it will turn a profit or achieve anything worthwhile.

 

How we can help

When researching ethical investment funds for client portfolios, we believe in asking the same clear-headed questions of an ethically focused fund as any other potential investment:

  • What is it doing better than its peer group?
  • What growth has it achieved and what is it doing to achieve more?
  • What problem is it solving and how is it measuring its success at that?
  • Is it good value for money?

At FAS we can help you to understand how to translate the values that are most important to you into a suitable ethical investment portfolio that reflects your principles and financial goals.

So, if you wish to create a financial plan based on your wishes to build and pass on long-term, sustainable investment returns to your children and grandchildren, speak to one of our experienced financial planners who can help you to embrace the world of ethical investing.

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

Feb 10
0
Different colourful spices in an array of spoons

Making the most of ISAs

By | Savings

Individual Savings Accounts, universally known as ISAs, were introduced in 1999. Given their tax-free status, they have become a popular choice for savers and investors over the years. From relatively simple beginnings, there is now a wider range of ISA options available and we explore ways that individuals can make best use of their annual ISA allowance, and make existing ISAs work harder.

 

Why use an ISA?

The primary reason for the ISAs popularity is the preferred tax treatment, which is enjoyed by all ISAs. Interest received on bond and cash investments held within an ISA is tax free and does not count towards your personal savings allowance.  For Stocks and Shares investments, all capital gains and dividends are free of UK tax and dividends received within an ISA are ignored when considering your available dividend allowance.

 

Two becomes five

Originally, there were only two types of ISA available. The Cash ISA, which is a simple deposit account offering either instant access or an interest rate for a fixed period of time, and a Stocks and Shares ISA, which allows investment in any share listed on a recognised stock exchange, together with Collective Investments, such as Unit Trusts.

Over the years, the list of available types of ISA has expanded, and with these changes, ISAs have become more complex. Junior ISAs were introduced in 2011, and are available to those aged under the age of 18. These ISAs can either hold Cash or Investments and automatically convert to adult ISAs when the child reaches the age of 18.

ISAs that aim to give individuals a helping hand onto the property ladder were introduced in 2015, via the Help to Buy ISA. This is now closed to new investors, being replaced with the Lifetime ISA. This ISA is open to individuals aged between 18 and 39, and allows investors to save towards a deposit on their first home, or to use the accumulated savings towards their retirement.

 

Stick to the limit

Whilst ISAs once had simple to understand investment limits for each Tax Year, with the varying types of ISA now available, careful consideration of the annual limits is now needed.

Irrespective of which ISA or ISAs are selected, the total contribution limit for adults across all ISAs in the 2021/22 Tax Year is £20,000. The Lifetime ISA annual limit is £4,000, although this forms part of the overall £20,000 limit that adults enjoy. The Junior ISA has an annual limit of £9,000, although by a quirk in the rules, children aged 16 or 17 can also subscribe £20,000 into a Cash ISA, in addition to the Junior ISA allowance.

 

Transferring an ISA

One feature of traditional ISAs, which is not widely understood, is the ability to transfer an ISA from one provider to another, and also to transfer a Cash ISA to a Stocks and Shares ISA and vice versa. ISA transfers, which are carried out in a prescribed manner, retain the tax privileged status of the ISA, and do not interfere with the ability to make the full subscription in the current Tax Year. There are a number of caveats that need to be followed, including the need to comply with the overarching rule that an individual can only have one Cash ISA manager and one Stocks and Shares ISA manager in use at the same time, with money paid in from the current Tax Year.

 

Transfer rules and the inflation headache

The simplest form of ISA transfer is the ability to move Cash from one Bank or Building Society account to another deposit taker. Using the prescribed ISA transfer method, these transfers are straightforward and should take no more than 15 business days. The new account manager applies to the existing account to transfer the balance which arrives into the newly opened ISA.

Cash ISA transfers between banks and building societies can be useful to move funds to another bank offering a better rate of deposit interest. However, given the very poor rates of interest offered on savings accounts generally, and the increase in the rate of inflation over recent months, transferring between Cash ISA providers is likely to simply mean moving from one account offering negative real interest rates (i.e. after taking inflation into account) to another.

We are seeing an increase of clients in this position, and one potential solution is to consider transferring a Cash ISA to a Stocks and Shares ISA. This opens up a range of investment options within the ISA, from Equities (Shares), Corporate Bonds, Gilts and other Fixed Interest investments, to Commercial Property and Commodities, which aim to provide investors with superior returns to Cash in this period when interest rates remain low and inflation is rising quickly.

To demonstrate historic returns from assets other than cash, the chart below shows the return you would have received from Cash Savings (represented by the Bank of England Base Rate plus 1% per annum, with interest reinvested) compared to the total return achieved FTSE100 index of leading UK shares, over the last 10 years. Whilst obviously showing greater volatility, historic returns from Equities over the longer term have comfortably exceeded those achieved from holding funds on Cash deposit.


Important. Source : FE Analytics, January 2022. The graph shows the compound growth of the Base Rate plus 1% per annum with income reinvested, compared to the total return (growth in index value plus dividend income) from the FTSE100 index since January 2012. This graph is presented for illustrative purposes. Past performance of any investment is not necessarily a guide to future returns. The value of investments can go down as well as up and you may not receive a return of your original capital.

 

Let FAS guide you

Any investment other than Cash will introduce an element of investment risk, and it is important to consider whether this is appropriate to your circumstances. This is where our experienced planners at FAS can help, by discussing the options with you and overseeing the ISA transfer process so that the valuable tax benefits are retained on transfer.

For more information on ISAs click here for our helpful guide, or contact one of our planners here to discuss your requirements.

 

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Feb 07
0
Group of women laughing together

Different patterns, different needs…

By | Financial Planning

While it’s estimated that by 2025 around 60% of UK wealth will be held by women, the Covid-19 pandemic has exacerbated some basic inequalities for some. The challenge for women across the board is making the most of their financial resources – whether stretching a smaller amount to last longer or growing surplus wealth to best effect.

Financial planning for women guide

In our newly launched guide, we explore the specific needs across every stage of life so that you know your money is working for you…

View guide here»

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

 

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Jan 27
0
2022 against background of generic investment stats and graphs

A not so Happy New Year? It’s too early to tell…

By | Investments

Compared to the positive market returns enjoyed last year, 2022 has started in a turbulent fashion, with investment markets seeing selling pressure over the first three weeks of the year. Despite the increase in volatility, we feel this is, once again, a time for investors to stay the course.

Since the new year, the mood in investment markets has darkened, with risk assets seeing falls across the board. The catalyst for this weakness is a combination of a number of factors, rather than being the result of a single defined cause. Inflation is remaining stubbornly high and indeed increasing across developed economies. Higher energy costs, increased costs of shipping, scarcity of components, and labour shortages are all feeding into uncomfortable inflation readings. The actions taken by central banks to combat inflation will be watched more closely than ever, although we would hope that the Federal Reserve and Bank of England will continue to take a measured approach to higher prices, and continue to offer markets forward guidance of the path they expect to take.

On top of the concerns over inflation, the tense situation between Russia and Ukraine is also spooking investors. The threat of conflict is rarely taken as a positive by markets, as the risk and potential economic fallout is hard to quantify. In this case, a further concern is the potential disruption to European energy supplies.

Whilst Covid-19 measures are easing in the UK, it is important to note that this is not the case around the World. Omicron variant numbers remain high across the US and Europe and it would be unwise to write off the potential for Covid-19 to wreak more economic damage.

Taking these factors into consideration, it is perhaps not surprising to see markets take a step back in the short-term. It is, however, important to remember the speed at which economies and investment markets have recovered from the worst effects of the Covid-19 pandemic, almost two years ago. 2021 saw gains from most asset classes and sectors, with only a few exceptions, and irrespective of the factors dominating market attention at the present time, a pause for breath and consolidation was always likely to happen.

Despite the gloomy picture painted above, there are reasons that investors should remain positive. Corporate earnings have, by and large, held up very well, and given the waning impact of Covid-19, supply chain issues – which have been ongoing since the start of the pandemic – should begin to ease. Not only will this help industries from many sectors of the economy, but may also help ease some of the inflationary pressures later on in the year. Companies remain cash rich and further merger and acquisition activity remains likely. This is often seen as a further sign of confidence.

Unlike the very high levels of uncertainty seen at the start of the pandemic, we do not believe the price action seen during the first trading days of 2022 is a matter for great concern. Whilst our view could change as events unfold, the global economy is in a better place than it was two years ago, and in any prevailing market conditions, there are always investment opportunities to explore that could lead to outperformance.

Bouts of higher volatility, as we are seeing currently, are not comfortable, but are an essential part of the investment process. In conditions such as those being experienced currently, our recommendation to clients is to remain invested in a diversified portfolio of assets, which offers allocation to a range of asset classes and good geographic spread. It is also worth noting that returns on cash are deeply negative due to elevated inflation and unless central banks take dramatic action to increase base rates, which we feel is highly unlikely, cash returns may well remain deeply disappointing for the foreseeable future.

As always, the team at FAS remain vigilant to the prevailing conditions, and remain on hand to discuss market conditions with our clients. If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.

 

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Jan 20
0
Wooden blocks with hand picking up one reading Trust

What you need to know about the UK Trust Registration Service

By | Financial Planning

With the deadline for registration now just six months away, we look at the steps trustees need to take to ensure they remain compliant with the regulations.

Trustees have to perform a number of duties to fulfil their role effectively; however, some may not be aware of the Trust Registration Service (TPR) and the additional requirement for trustees to comply with the new registration process.

Set up in 2017, the HMRC Trust Register was introduced to improve transparency of the beneficial owners of trust assets. Under new Anti-Money Laundering Directives adopted at the time, trustees will need to provide details of the trust, as well as information relating to the settlor (the individual or individuals creating the trust), trustees, and potential beneficiaries of the trust assets. For each interested party to the trust, the service will ask for the name, date of birth, national insurance number, and address to be registered, and if the trust is being registered for the first time, details of the assets held in the trust will need to be provided. You should be able to find these details in the trust deed.

As it stands currently, only those trusts who have UK tax to pay need to register using the Trust Registration Service. These are known as Taxable Trusts, and these include trusts that are liable to income tax, capital gains tax, inheritance tax, or stamp duty land tax.

The introduction of the Trust Registration Service casts a wider net, with many trusts that do not incur a charge to UK tax now faced with having to register for the first time. October 2020 saw the expansion of the Anti-Money Laundering Directives and as a result, so-called “Express” Trusts – even if there is no tax to pay – are now caught under the Trust Registration regime.

The term “Express” Trusts does not relate to their speed, but instead relates to those created intentionally by a Deed, by an express, or inferred declaration of trust. These are trusts that do not have an immediate liability to any UK tax, such as those used in estate planning.

One common type of Express Trust that will be caught by the expanded Registration Service are Bare Trusts. These are perhaps the most common form of trust, which are often found written into wills, when assets are left in a simple form of trust for a beneficiary who is below the age of 18. Assets in this type of trust are held by the trustees until the beneficiary reaches the age at which they automatically become entitled to the assets held in the trust. There is usually no tax liability to report on Bare Trusts as the UK tax liability is incurred by the beneficiary and not the trustee, and in the past trustees have not had to be involved in reporting to HMRC.

This all changes with the introduction of new rules, and Bare Trusts are caught within the remit of the Trust Registration Service. Bare Trusts created by way of deed, such as a gift from a grandparent during their lifetime into a trust for the benefit of grandchildren, will need to be registered on the service by the deadline, whereas those created by a will need to be registered if the trust is still in existence two years after death of the settlor.

For these Express Trusts, the deadline for registration has been pushed back a number of times since the measures were first announced. The deadline has now been confirmed as 1st September 2022, and all Express Trusts in existence on 6th October 2020, or created after this date, will need to have registered by this date. Trusts created after 3rd June 2022 will have 90 days to register on the service.

A small number of Express Trusts can avoid the registration process, with these being limited to Charitable Trusts, UK registered pension schemes, and trusts where a disabled person is a beneficiary.

Following the first registration, the trustees will need to ensure that the Register is updated each tax year, and in addition trustees need to be aware of the need to inform HMRC each time there are changes to the beneficial ownership of a trust, for example whenever a trustee retires from their position or is appointed, or when beneficiaries change.

Trustees need to be aware of the requirements of the Trust Registration Service and if the trust needs to be registered, ensure that they comply with the registration process by the deadline. HMRC have provided an online registration service, or trustees may wish to ask their accountant to register the trust if they act as agent for the trustees. For more information on registering a trust visit Register a trust as a trustee – GOV.UK (www.gov.uk)

At FAS, we have long provided independent investment advice to trustees and guided them in respect of their duties. Whilst the responsibility rests with the trustees to register the trust correctly, we are on hand to give guidance to trustees if required.

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

 

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Jan 14
0
A collection of different cryptocurrencies

Crypto – investment or gamble?

By | Investments

Cryptocurrencies are regularly in the headlines and growing in popularity, but are they really investments?

Cryptocurrencies, of which Bitcoin is the most famous (or notorious, depending on your viewpoint), are not currencies in any practical sense of the word.

Think of the pound in your pocket:

  • It has the backing of a state-owned central bank;
  • its value is stable, give or take the longer-term impact of inflation; and
  • it can be easily used in any financial transaction as a method of payment.

Graph illustrating Bitcoin in 2021

Source: Investing.com

According to the Financial Conduct Authority (FCA), in the UK, 2.3 million people own some form of cryptocurrency, with an average holding of about £300 – meaning that cryptocurrencies account for about 0.1% of UK household wealth. Other research shows ownership to be concentrated largely among Generation Z – 45% of 18–29-year-olds have placed some money in cryptocurrencies and half of those have gone into debt doing so. However, 10% of cryptocurrency holders in the UK are over 55, with potential inheritance tax and legacy issues for their estates.

Many of these new investors may believe these virtual currencies are socially as well as personally beneficial. But with the huge amounts of energy required in cryptocurrency mining just one area of controversy, they may not be simply a benign option for those seeking to sidestep traditional investing.

HMRC has recently entered the fray, seeking to contact holders of crypto assets to remind them that they would owe tax on any profit from disposal of cryptocurrencies, whether from sale, exchange, or where used for goods or services in the limited areas available.

Some cryptocurrencies called stablecoins, such as Tether, aim to have a fixed value (often linked, ironically, to a traditional currency). However, most cryptocurrencies have anything but a stable value, as none have central bank backing and it can be difficult or near impossible to buy anything with them.

Despite these factors the cryptocurrency market has grown at a breakneck pace: over the last five years to November 2021 its value has increased from USD $16 billion to USD $2,600 billion. The FCA does not directly regulate cryptocurrencies. However, UK cryptocurrency businesses are required to register with the FCA and comply with money laundering rules. The regulator makes clear in its consumer guidance (see fca.org.uk/consumers/cryptoassets) that:

  • Cryptocurrencies are regarded as “very high risk, speculative investments”;
  • purchasers are unlikely to be covered by the main investor protection schemes; and
  • if you choose cryptocurrencies, “you should be prepared to lose all your money”.

Scams, particularly using social media and involving offshore companies, are another high risk of the cryptocurrency market. One international scheme, the subject of an in-depth podcast investigation, operated in over 175 countries to the tune of $4 billion but turned out to be a complex scam with the founder still apparently unaccounted for.

As the Bitcoin graph shows, it is possible to make – and lose – large amounts in cryptocurrencies. With the development and growing popularity of app platforms making ‘trading’ and tracking more accessible and convenient, you may be tempted to join in. But be warned – other, less exotic, and better regulated investments could well be a wiser choice. As always, if you wish to discuss in more detail, please give us a call.

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

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Jan 07
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Woman at laptop reviewing tax allowances - What current tax issues should you be aware of

Time for a tax planning tune-up?

By | Tax Planning

With several factors putting the dampeners on income just now, including tax increases due to take effect this year, now is a good time to make sure that you’re making full use of any tax allowances that are available.

One of the services we provide at FAS is to help our clients ensure their income, their investments and their savings are as tax-efficient as possible. Why is this important? Because taxes can become a significant drag on the performance of your assets, and could reduce your overall wealth. Even small amounts can really add up over the years. While tax efficiency should never be the primary consideration of any investment decision, it makes sense to take advantages of any tax allowances you are entitled to.

 

What current tax issues should you be aware of?

Earlier in 2021 (back in March, to be precise) Chancellor Rishi Sunak announced that all income tax thresholds would be frozen at current levels until 2026. This was confirmed in the October Budget announcement. This means:

  • The amount of money that people can earn tax-free stays at £12,570.
  • The ‘basic rate’ tax band for earnings of between £12,571 to £50,270 remains at 20%
  • Earnings of £50,271 to £150,000 will be taxed at the ‘higher rate’ of 40%
  • Anything over £150,000 will be taxed at the ‘additional rate’ of 45%

Of course, while a tax ‘freeze’ doesn’t sound too worrisome on its own, the government is counting on it earning them more revenue, as earnings rising with inflation will push more people over the thresholds, thereby leading them to pay more in tax. As a reminder, consumer price inflation in Britain reached 4.6% in November, its highest level in nearly a decade, thanks in part to soaring energy prices pushing up household bills. We expect inflation to ease later in the year and into 2023, but even so, the squeeze from higher costs and an increased tax burden is likely to be felt by many this year.

 

National Insurance is on the rise

One tax that is on the rise is National Insurance. From April 2022, employees, employers and the self-employed will all pay an extra 1.25p in the pound in National Insurance. This move was announced in September, and the additional income generated will be used to help fund health and social care costs. The increase is expected to cost an employee earning £20,000 an additional £130 each year, whereas someone earning £50,000 can expect their National Insurance contributions to increase by more than £500. From April 2023, National Insurance will return to its current rates, but the extra tax will stay in place – albeit collected under the newly titled ‘Health and Social Care Levy’. However, unlike with National Insurance contributions, the new levy will also be paid by state pensioners who are still working.

Overall, with income tax thresholds frozen, higher inflation and National Insurance contributions hiked up, now really is a good time to make sure your personal finances are as tax-efficient as they could be. The best place to start is to make use of existing tax allowances.

 

Individual Savings Account (ISA) Allowance

Every UK taxpayer aged 18 or older is entitled to a £20,000 annual ISA allowance, and you do not have to pay any tax on your income generated or gains made within the ISA. There are four types of ISA currently available:

  • Cash ISA
  • Stocks and Shares ISA
  • Innovative Finance ISA
  • Lifetime ISA (which has an annual limit of £4,000)

You can save up to the full annual allowance in one type of ISA or split the allowance between them. However, the Lifetime ISA has an annual investment limit of £4,000. As a reminder, the tax year runs from 6 April to 5 April the following year, and you can’t carry any unused allowance over to a new tax year. The ISA allowance resets back to the annual limit on 6 April. ISAs are one of the simplest, most flexible, and most popular ways to invest tax-efficiently, and they really are a great starting point for investors and savers of all sizes.


Personal Savings Allowance

The Personal Savings Allowance (PSA) was introduced back in 2016, and means that most UK savers are no longer required to pay tax on their savings income. For example:

  • Basic rate taxpayers can receive up to £1,000 a year in savings income tax-free.
  • Higher rate taxpayers have an annual PSA of £500 before they start paying tax on their savings income.
  • Additional rate taxpayers do not receive a PSA and must pay tax on any savings income they receive on savings outside of their Stocks and Shares ISA or Cash ISA.

 

The Starting Rate Band

One tax allowance that gets relatively little attention is the Starting Rate Band for savings. This is a tax band which applies to savings income that falls within certain limits. If any of your taxable savings income falls within the first £5,000 of the basic rate band, you will not be required to pay any tax on that taxable savings income, as the starting rate for savings income is zero.

However, the savings band is not available if your non-savings income (excluding dividend income) exceeds the sum of the personal allowance (and blind person’s allowance, if claimed) and the savings band. There’s no question that the Starting Rate Band isn’t widely known about, and is perhaps unnecessarily complicated. This is why it’s worth getting your financial situation, including your savings and investments checked by us, so we can determine which allowances apply.

 

Dividend Allowance

If you own shares in a company, you can earn money from those shares in two ways – either from any dividend payments the company makes, or by selling the shares for a profit. When it comes to dividends, all UK taxpayers are entitled to an annual tax-free dividend allowance of £2,000. However, if the dividends you receive are above this amount – and the shares are held outside of an ISA wrapper – you will be liable to pay tax at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.

 

Dividend tax rates are increasing

However, from 6 April 2022, dividend tax rates will be increasing by 1.25%. The new rates will apply to dividends taken as income in the 2022-23 tax year. In practice, this means that those who pay tax on dividend income through their tax code will see their dividend tax bill increase from next tax year. Those who pay tax via self assessment will have until 31 January 2024 to pay the increased amount of tax on next year’s dividend income.

It’s likely that many people will be left with higher tax bills as a result of this increase, but if this applies to you, there are some options on how to minimise the tax burden. For example:

  • Make full use of your ISA allowances: the simplest way to reduce the amount of dividend tax is to hold dividend paying investments within an ISA.
  • Increase your pension contributions: Dividends paid on investments held in your pension are also tax free, so maximising your pension annual allowance each year could be another tax-efficient way of saving for longer-term goals.
  • Invest as a couple: If you’re married or in a civil partnership, and your partner pays tax at a lower rate, you could potentially reduce your overall dividend tax bill by holding some investments in your partner’s name.

With a bit of tax planning, it’s possible to minimise the cost implications of freezes, tax hikes and higher inflation. If you talk to us, we can review your financial situation, along with your savings and investments, to ensure they are as tax-efficient as possible. There’s nothing to lose from having a tax tune-up, and you could save a considerable amount in the long run.

 

If you are interested in discussing 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 tax planning or financial advice.

Dec 31
0
Timeline of years with coins - Carry forward pension allowances

Carry forward pension allowances

By | Pensions

For anyone approaching retirement, making the most of your pension annual allowance is a vital part of your pre-retirement planning. But you may be surprised to learn that individuals are allowed to take advantage of any unused pension allowances from the previous tax years. It’s called ‘carry forward’ and we think it’s a concept that more people need to be aware of.

But let’s take a step back. At FAS, we believe pensions are some of the most tax efficient investment vehicles available. For a start, payments made into a pension automatically qualify for income tax relief. In other words, the government pays you money to encourage you to put more into your pension! Income tax relief is paid at the basic rate of 20%, which means that for every £80 you put into your pension, the government will top this up with another £20. Higher and/or additional rate taxpayers can claim income tax relief at their marginal rate via their tax return, thus further increasing the value of pension planning.

But this generosity does have its limits. For example, pension rules state a person cannot pay more into their pension annually than they have earned. Additionally, to limit the amount of ‘free money’ the government gives to people paying into their pension, it has capped the annual amount an individual can pay in while still claiming income tax relief. For most people with a defined contribution pension, the ‘annual allowance’ places a limit of £40,000 (or 100% of earnings if lower) on the amount a person can place into a company pension (or self-invested personal pension – known as a SIPP) while still being able to claim tax relief. Any amount paid into the pension beyond this threshold is not eligible for relief.

What is the carry forward concept?

While the annual allowance means pension contributions eligible for income tax relief is capped at £40,000 in each tax year, the carry forward concept makes it possible for people to make use of any unused pension allowance not claimed in the previous three tax years. So, if you made pension contributions of £25,000 in each of the previous three tax years, you can carry forward the remaining £45,000 in unclaimed annual allowances (£15,000 x 3) on top of your current tax year allowance.

As you can imagine, this is a very valuable tax break, and one that appeals to individuals who may have sold a business, are close to retirement or hold large sums on deposit they would like to put into their pension. However, carry forward does come with a few conditions that must be met. For example:

  • Carry forward can only be used where pension input amounts exceed the standard annual allowance for the relevant tax year.
  • You must earn at least the amount you wish to pay into your pension in the tax year you are making the contribution for (so if you, for example, want to make total contributions of £100,000 you must earn at least £100,000 in that tax year). This doesn’t apply if your employer is making the contribution on your behalf.
  • You must have been a member of a UK-registered pension scheme (not including the state pension) in each of the tax years from which you wish to carry forward from.
  • You must use any unused annual allowance from the earliest year first (you can only go back three years) and can only use it once. This means carry forward cannot be used a second time.

Who fits the profile to use carry forward?

In our experience, carry forward is considered particularly useful for the self-employed, especially those whose earnings fluctuate from year to year, as well as individuals planning on making a large pension contribution before they reach retirement age. Here’s a theoretical example.

Case study: Meet Connor

Connor is self-employed and has been paying £2,000 a month into his personal pension for the last five years. Over the last 12 months, Connor has been working on a large contract. He expects to make a profit of £120,000 for the 2021/2022 tax year.

Connor knows that he can reduce his tax bill and increase his retirement pot by contributing more into his pension. On top of his monthly contributions, Connor wants to make a £40,000 lump sum payment into his pension.

As Connor is already making monthly contributions to a personal pension, the first step for him is to work out the total of these once tax relief has been applied. The easiest way to calculate this is to divide £2,000 by 20%, or £2,500. Connor’s gross annual pension contributions – including tax relief –  are therefore £30,000.

Connor wants to pay a further £40,000 lump sum payment into his pension. After applying basic rate tax relief (using the same principle shown above – £40,000 divided by 20%), Connor knows the total gross pension contribution is £50,000.

Given Connor’s annual allowance is £40,000, after deducting his total monthly pension contributions of £30,000, he has £10,000 available to use in the current tax year. Connor can use carry forward and use the unused allowances over each of the last three tax years (£10,000 x 3) on top of the £10,000 available in the current tax year, to pay his lump sum without exceeding the annual allowance and losing available tax relief.

How can we help?

The carry forward rules might seem complicated, and it’s important to understand their limitations. But here at FAS, we have considerable experience of helping individuals to make the best use of their available allowances, and help to get the full benefits from the carry forward rules. In the right circumstances, carry forward can really help to fund a pension before retirement.

If you are interested in discussing your defined contribution pension arrangements 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.