Financial Planning

More people than ever are considering the potential impact of Inheritance Tax (IHT) on their wealth and looking for ways to protect assets from tax on death. Amongst a range of different options, gifting assets away to family members is one of the simplest methods of reducing the value of your potential estate, mitigating an IHT liability, and transferring family wealth to the next generation.

Making outright gifts is, however, not always possible or the gift could result in unintended consequences. If the beneficiary of the gift is under the age of eighteen, they cannot receive gifts directly. Grandparents gifting larger sums to their children could inadvertently add to their children’s IHT concerns due to the value of their own assets. We regularly see situations where family members are gifted funds to help purchase a home, only for a relationship to break down, leading to dilution of family wealth through a divorce settlement.

Instead of gifting funds directly, settling money in Trust can be an effective planning tool that helps protect family wealth and avoids the pitfalls that can arise when making outright lifetime gifts.

There are a range of different Trusts that individuals can establish, with an Absolute (or Bare) Trust being the simplest. This is where funds in Trust benefit a single individual, usually a minor, who accedes to the Trust capital at the age of eighteen. A more flexible arrangement is, however, often preferred, where the donor can retain control over when assets held in Trust are paid to beneficiaries.

Increased flexibility

Discretionary Trusts provide this flexibility, as the Trust wording allows the funds held in Trust to be paid to anyone within a pool of potential beneficiaries. Trust wording will often allow children, grandchildren, and great-grandchildren of the settlor to benefit, although it could also include other named beneficiaries. The Trust is flexible in that it allows the Trustees to decide who receives funds from the Trust, and when. The following provides an example of how gifting into a Discretionary Trust would work in practice, to protect family wealth.

Mr & Mrs Smith own property and other assets valued at £2.5m and wish to gift funds across generations of their family. They have not undertaken any lifetime gifting previously. Mr & Mrs Smith each gift £325,000 into a Discretionary Trust, which avoids any immediate Inheritance Tax charge as this is within their Nil Rate Bands. Mr & Mrs Smith appoint themselves as Trustees, to retain control over the Trust assets, but also appoint their daughter as an additional Trustee, to ensure continuity in the event of death of one or more of them.

The potential beneficiaries of the Trust are any of Mr & Mrs Smith’s children and grandchildren. The Trustees invest the Trust funds in a diversified managed investment portfolio and future growth is therefore outside of the Smith’s own estates. Beneficiaries receive Trust capital at various intervals, to help grandchildren through further education, and to provide one older grandchild with a deposit for their first home. The remaining funds held in Trust continue to grow over the longer term, enabling future generations of the family to benefit. After seven years, the gift into Trust falls outside of Mr & Mrs Smith’s estate for Inheritance Tax purposes.

Wider planning options

When using a Discretionary Trust, the Settlor (i.e. the person setting up the Trust) cannot benefit from the Trust, if the gift is to be effective for IHT planning. There are, however, a range of different options that can provide the Settlor with access to the funds gifted into Trust, whilst ensuring that the funds held in Trust grow outside of their estate.

Discretionary Gift Trust arrangements allow the Settlor to receive a regular stream of capital payments from the Trust, and the value of the gift for IHT purposes may be subject to a discount, based on the age and health of the Settlor. Loan Trusts are a further alternative that can be effective in certain circumstances. The Settlor lends funds to the Trust, which can be repaid to the Settlor if required, whilst growth in the value of the Trust capital is outside of the Settlor’s estate.

Tax considerations

Discretionary Trusts can be powerful tools when it comes to protecting family wealth. They are, however, subject to a more punitive tax regime than individuals, with interest and savings income taxed at 45% and dividends at 39.35%. It is therefore important to consider the most appropriate method of establishing the Trust and arranging the Trust assets, to avoid unnecessary tax liabilities.

Most transfers into discretionary Trusts are Chargeable Lifetime Transfers (CLTs). Unlike gifts to individuals, which are Potentially Exempt Transfers, CLTs may give rise to an immediate IHT liability if the value of gifts exceeds the Nil Rate Band. Discretionary Trusts are subject to a liability to IHT on the 10^th anniversary of the creation of the Trust and each 10-year anniversary thereafter, and a potential IHT charge is also payable when assets leave the Trust. These charges are, however, modest when compared to the rate of IHT charged on death.

Administrative matters

In addition to tax considerations, Trustees will also need to ensure that they properly administer the Trust, including registering the Trust with HMRC, via the Online Registration Service, and filing annual tax returns as required. It is, therefore, essential that Trustees keep good records and seek advice from an Accountant or Solicitor. Where FAS provide Trustees with investment advice, we can provide detailed reports of income and capital events for each tax year, to simplify the reporting process.

The need for tailored advice

It is important to consider Trust planning as one of a range of options available which can help mitigate a potential IHT liability. Each option has benefits and drawbacks and therefore selecting the right path, or paths to take, will depend on your individual circumstances. Our experienced advisers can show you examples of various Trust planning advice we have given to clients, to help you select the right option. Speak to one of the team to start a conversation.

In our weekly Wealth Matters newsletter, we try to keep our readers up to date with developments in financial markets, changes in legislation and financial planning opportunities. In a break from our usual content, we ran a series of articles last year giving an insight into how FAS operates on a day-to-day basis, which proved popular, judging by the feedback we received. Twelve months have passed since the publication of our initial “behind the scenes” articles, and as FAS continues to grow, we would like to bring you up to date with recent developments within the business.

2025 – a busy year!

2025 thus far has proved to be an incredibly busy year for FAS, with the team expanding, and internal systems evolving to continue to meet the highest standards of service. Whilst the business was already growing rapidly, the pace of growth has accelerated even faster this year. It is clear there is an ever-greater need for individuals and businesses to seek independent, professional financial advice. A key driver of this has been the various changes in legislation affecting a range of UK taxes, and an increased awareness of the need to ensure that pensions and investment plans are appropriately managed and reviewed. We have also seen a greater call from clients for individual and tailored advice to ensure that family wealth can pass between generations, reducing or eliminating an Inheritance Tax liability.

To deal with the increased demand, we have expanded our team by 30% over the last twelve months. The adviser, paraplanner, compliance and administration teams have all been strengthened, with experienced and dedicated team members helping to enhance the levels of service we provide to clients. We strongly believe in a collegiate and collaborative approach to our work. All staff are integral to the running of the business and there is a mutual respect amongst colleagues for the role everyone plays.

The team are based within our Folkestone and Maidstone offices, and we believe working closely together in an office environment promotes more efficient administration, and amongst the adviser and paraplanner teams, encourages discussion around planning opportunities, and the outlook for investment markets. Being office based ensures the combined years of experience across the adviser team can work together on complex financial planning scenarios, together with input from our highly qualified and experienced paraplanners.

Growth in the business continues to be fuelled by the client referrals we receive. Many existing clients have been kind enough to pass on our details to friends, family, and colleagues, which is the best compliment we can receive. We also regularly receive referrals from professional firms across Kent, London and the South East, who trust FAS to provide their clients with bespoke financial planning advice.

Procedural upgrades

FAS has not only invested in additional personnel over the past year. We have also continued to invest in technology over the last twelve months, to improve the service we provide. One key enhancement has been the increased use of digital signature systems, which allow clients to electronically sign application forms and declarations. Electronic signatures not only avoid postal delays and ensure rapid processing, but many clients have also commented that they find digital signatures far more convenient. We have also introduced new software solutions that provide detailed cash flow analysis, which help support our retirement planning recommendations.

The FAS Investment Committee work continues to evolve, with enhancements to our research, methodology and investment process. Committee members now schedule more frequent meetings with leading fund managers and have access to a wider range of research and analysis, which continues to expand. The FAS Investment Committee also now provides more regular updates on investment performance and strategy and undertake enhanced analysis to compare investment performance against market peers. The analysis also reviews the open market to ensure that our investment functions provide value for money. In addition, FAS have negotiated fund discounts with leading fund houses, passing on lower fund costs to our clients.

Chartered Status and the Community

FAS is proud of our Chartered status, which is a mark of distinction which signifies a public commitment to professional standards and technical competence. Continuing professional development, whether through further examinations, or regular targeted learning and study, is undertaken by all staff throughout the year. We are fully cognisant of the rapidly changing financial planning landscape and continue to evolve the professional development programme undertaken by the team to meet these challenges.

Links with the local community have also been strengthened over the last twelve months. FAS are a sponsor and key supporter of the Kent Charity Awards, which recognise the amazing work undertaken by local charities. In addition, FAS sponsor the Kent Life Food & Drink awards, and this year, we are also a lead sponsor of the Kent Law Society. We remain proud to be able to support these local events and organisations.

Into the future!

Whilst 2025 has been a year of rapid growth for FAS, we will not lose sight of our core ethos, which prioritises client relationships and focuses on providing quality advice and exceptional service. We are also acutely aware of the need to avoid complacency and will continue to invest in our team and systems to meet growing demand over the months and years to come.

We hope this update has been of interest. We always welcome feedback, so please do get in touch if you have any questions or comments.

As a new academic year begins, families turn their attention to the rising costs of education. Whether saving for university costs or funding private schooling, early planning can make a significant difference. We are increasingly seeing grandparents and other older relatives who wish to help fund education costs of younger generations, easing the financial burden on their children, and undertaking Inheritance Tax planning at the same time. With the right planning, this can be an effective and tax-efficient strategy.

The cost of private and further education

For some families, investing in a private school education is a priority, with evidence showing that students from private schools often outperform national academic averages. However, private education comes at a significant cost – not only in terms of school fees, but also when factoring in uniforms, extracurricular activities, trips, and other associated expenses.

Private education fees were a hot topic of debate last year, after the Government’s decision to impose VAT on school fees from January 2025. The average cost of an annual independent day school place is around £18,500 per annum, and the imposition of VAT on fees only increases the financial burden on parents. In addition, recent reports suggest HMRC are reviewing cases where parents made advanced payments to schools, to determine whether these payments are also liable to VAT.

University education comes with a substantial price tag. Tuition fees are subject to a cap of £9,535 per year in the UK, which means a typical three-year degree could result in over £28,000 of student debt being accumulated for tuition alone. Additional costs, including accommodation, food, travel, course materials, and entertainment, significantly increase the financial requirement. While Tuition Fee Loans cover course fees, Maintenance Loans, which are means-tested based on household income, rarely cover the full cost of living. For the 2025/26 academic year, Maintenance Loans have risen by just 3.1%, leaving a widening gap that families often need to fill themselves.

For those starting courses since August 2023, student loan repayments only begin once earnings exceed £25,000 per year; however, interest applies to the outstanding balance, with the rate of interest linked to increases in the retail price index. This means that the debt does not erode over time due to inflation, which is the case with other debt, such as mortgage loans.

The burden on parents

Parents looking to help their children through further education may well find that this comes at a time when they may also be focusing on other financial priorities, such as retirement planning and maximising pension contributions. Balancing these competing goals can present a challenge; however, starting to save well in advance of a child entering higher education allows families to spread the cost over a longer period and potentially reduce the financial pressure later.

For longer term investments, leaving savings on cash deposit is likely to see the value of those savings erode in real terms. Choosing an investment strategy that reflects the investment time horizon and holds a diversified portfolio including global equities and bonds could generate higher returns over time, albeit investment risk also needs to be considered.

Tax efficiency should form an important part of the planning process. Sheltering investments within an Individual Savings Account (ISA) wrapper could provide tax-free growth and income. The exemption from Capital Gains Tax offered by an ISA can be particularly helpful when withdrawals are taken to cover fees that become due.

Help from older generations

Grandparents and other older relatives often wish to contribute towards school and university costs, both to invest in their grandchild’s future, while also reducing the financial pressure on the parents. At the same time, we are seeing many people actively consider the potential Inheritance Tax liability that could be due on their estate, particularly given the upcoming change to legislation that will mean that unused pension funds become liable to Inheritance Tax from April 2027. For older relatives, gifting money for the purposes of funding education costs can, therefore, not only help younger family members, but also reduce the potential liability to Inheritance Tax.

In these cases, it is important to carefully consider how best to help fund expenses in the most tax-efficient way possible. Annual gifts of up to £3,000 are typically exempt, but larger capital gifts may be subject to Inheritance Tax unless the donor survives seven years from the date of the gift.

The benefits of arranging gifts out of surplus income are often overlooked. These rules are not straightforward; however, if income earned by the donor is truly surplus to expenditure, regular gifts of surplus income could be a method of contributing towards the cost of education without concerns that the value of the gift could be clawed back if the donor fails to live seven years.

For more advanced planning, a Discretionary Trust, with the grandchildren as potential beneficiaries, could be an alternative way to build a fund to cover education expenses. Grandparents could settle funds into Trust when grandchildren are young and invest with the aim of growing the fund over time. Once grandchildren need funds for education fees, the Trustees can release funds tax-efficiently, to cover ongoing educational expenses as they arise. Discretionary Trusts have wider applications than funding education costs and can be a powerful tool for wider estate planning and protecting family wealth.

Start planning early

Whether covering the costs of university or private school fees, the best way to meet education costs is to start planning as early as possible. By putting a structured and tax-efficient strategy in place, you can help ensure that your children – or grandchildren – have access to the educational opportunities you want for them. For older generations, such planning can also have the dual benefit of reducing a potential Inheritance Tax liability.

Our experienced advisers can provide independent and holistic advice on how best to fund your family’s education expenses, and how to reduce a potential liability to Inheritance Tax. Speak to one of the team to start a conversation.

When undertaking a comprehensive review of a client’s financial assets, we often find that clients hold one or more products managed by NS&I, or National Savings & Investments in old money.

In today’s fast-moving savings market, NS&I has adapted to offer a more streamlined range of products. Although NS&I’s savings products have unique financial backing, the rates of interest offered can easily be bettered by other providers. In addition, apart from one remaining tax-free option, the tax-efficiency offered by historic NS&I Bonds is no longer available within the existing product range.

Backed by HM Treasury

Originally established in 1861 as the Post Office Savings Bank, NS&I is the UK government savings bank and aims to provide a secure place for individuals to save while helping the government finance public spending. As at September 2024, 24 million customers hold savings products with NS&I, and collectively NS&I manages more than £200 billion on behalf of savers across their range of savings products.

NS&I products are backed by HM Treasury, making them among the safest financial instruments available in the UK. This makes them more secure than typical bank accounts, which are only protected up to £85,000 under the Financial Services Compensation Scheme (FSCS).

NS&I provides funding to HM Treasury, and the Budget in November 2024 outlined the government’s intention to increase the amount of money sought from NS&I deposits, to £12bn for the 2025/26 tax year. This would provide a welcome boost to HM Treasury; however, NS&I needs to balance its role in raising government finance with the need to avoid distorting the wider savings market by offering rates that are significantly higher than competitors. Given the current range of products offered by NS&I, we feel there is little chance of that occurring.

Fixed Rate savings in a crowded marketplace

NS&I Savings Bonds are still the cornerstone of the product range. Interest earned on the current range of Bonds offered by NS&I is subject to Income Tax, which does little to set the products apart from fixed rate Bonds from other banks and building societies. The interest rates currently offered on the flagship British Savings Bonds lag market leading rates by some margin on each of the 1,2,3 and 5-year terms offered, and the only reason for considering NS&I over any other provider is if you want greater protection for deposits over £85,000.

The NS&I Green Savings Bonds offer even worse value. The Bonds currently pay 2.95% gross Annual Equivalent Rate for a 3-year term, which is over 1.25% lower than the market leading rate payable on a 3-year Bond. The ethical credentials of the Green Savings Bond also require closer scrutiny, given the woolly promise that HM Treasury will aim to match deposits into the Bond in chosen green projects.

Other products lag behind

Amongst other savings products offered by NS&I, rates are similarly disappointing compared to other savings options. The NS&I Direct Cash ISA currently pays interest of 3.50% per annum, almost 1% lower than the market leader, and the cash Junior ISA, which allows tax-free savings for those up to the age of 18, pays just 3.55% per annum, again some way behind other providers. Taken in the round, the range of savings products are uncompetitive, and better returns can be obtained by considering options across the marketplace.

Premium Bonds

The only bright spot in NS&I’s current lacklustre product line-up are Premium Bonds. These are NS&I’s most popular product, with over 22 million accounts holding savings up to the maximum £50,000. Premium Bonds don’t pay interest in the traditional sense. Instead, savers are entered into a monthly prize draw with tax-free prizes ranging from £25 to £1 million. This appeals to people who enjoy the “lottery” aspect while keeping their capital safe.

The annual prize fund rate will fall to 3.6% from August, leaving the headline rate below alternative savings options that offer almost instant access; however, given the fact that prizes are tax-free, Premium Bonds may appeal to Higher and Additional rate taxpayers.

Falling interest rates

We feel the current range of products offered by NS&I are disappointing, and apart from Premium Bonds, the rates offered by the government backed institution can be easily beaten elsewhere; however, whilst we would encourage savers to review their NS&I accounts, perhaps a more fundamental review of the level of savings you hold would be a sensible step to take.

UK base interest rates have fallen four times in the last 12 months, and further cuts to interest rates are likely during the autumn, and into 2026, as the Bank of England look to stimulate the stagnating UK economy. Savings rates are, therefore, likely to fall further over the next year, and savers should also be wary of the recent increase in the Consumer Prices Index (CPI), which rose to an annual rate of 3.6% in June, the highest level since January 2024. Savers often ignore the eroding impact of inflation, which coupled with falling interest rates, could mean that deposits lose value in real terms.

As an alternative to medium and longer-term cash savings, a cautiously invested managed portfolio may be an ideal solution to consider for surplus cash deposits. By allocating the largest proportion of the portfolio to fixed interest securities and cash-like instruments, volatility can be kept in check, and adding an allocation to equities can aim to boost returns and provide protection against inflation. A cautious portfolio strategy may also be a sensible option to consider for those who rely on income from their savings.

Selecting the right asset allocation and investment selection is a key component of any successful strategy, and our advisers can take a holistic approach to your savings and wealth and provide independent advice on alternative options where surplus cash deposits are held. Speak to one of our experienced team to start a conversation.

Amidst the confusing and complex UK tax system, quirks in the tax rules often lay traps for the unwary, which can seriously damage your wealth. Amongst these are so-called “cliff edges”, where a small increase in income leads to a disproportionately large loss in benefits or a sharp rise in tax. You can, however, avoid these traps by sensible financial planning.

60% Marginal rate of Income Tax

One of the most striking cliff edges occurs when an individual’s income exceeds £100,000 in a tax year. Most people are familiar with the progressive tax bands of basic rate, higher rate and additional rate income tax; however, less well known is that the Personal Allowance (i.e. the amount that an individual can earn before tax is payable) is tapered once income exceeds £100,000 and is completely lost once income exceeds £125,140.

With £1 of the Personal Allowance being lost for every £2 of income above £100,000, this creates a marginal tax rate of 60% on earnings between £100,000 and £125,140, as the individual not only pays 40% income tax, but an effective 20% tax on top in respect of the lost Personal Allowance.  Once National Insurance is considered, an employed individual takes home just 38p out of every pound of salary earned between £100,000 and £125,140.

The £100,000 threshold also impacts the ability for working parents to obtain Tax-Free Childcare. This Government scheme provides up to £2,000 per annum towards childcare costs, based on the level of contributions made. For example, paying £8 into the childcare account will result in a £2 top-up from the Government. To qualify you (and your partner, if you have one) both need to be in work and receive at least the national minimum wage; however, if either parent earns more than £100,000, you are ineligible for the scheme. Likewise, any parent with income above £100,000 would also lose 15 hours’ worth of free childcare that is available for 3- and 4-year-old children.

Take action to save tax

The cliff edge when income exceeds £100,000 can certainly have a disproportionate impact on the amount of tax paid and eligibility to certain benefits. The good news is that those affected can take steps to bring their net adjusted income below this threshold and save significant amounts of tax.

Any pension contribution made by an individual into a personal or workplace pension will reduce their net adjusted income, as the pension contribution effectively extends the basic rate band by the amount contributed. For example, an individual with income of £110,000 would lose £5,000 of their Personal Allowance. By making a net pension contribution of £8,000 (£10,000 gross), their adjusted net income falls to £100,000, thus restoring the Personal Allowance in full and making an effective 60% tax saving.

Those considering pension contributions should be aware that there are limits to the amount you can contribute to a pension each tax year, and higher earners may be subject to a lower annual pension allowance.

Pension contributions are not the only way to reduce your adjusted net income. Donations to charity which are eligible for Gift Aid would also have the same effect of reclaiming the lost Personal Allowance.

Inheritance Tax Taper

Tax cliff-edges do not only apply to Income Tax. Inheritance Tax rules also use tapering, which add further complexity to an already unpopular tax.

The standard nil-rate band, which is the amount an individual can leave to loved ones on death is £325,000, and assuming a married couple leave everything to each other on the first death, the nil-rate band is transferable, so that the second of the couple to die can leave £650,000 free of Inheritance Tax.

Since 2017, an extra residence nil-rate band has been available when passing on a residence to direct descendants. This is currently worth £175,000, bringing the potential total Inheritance Tax-free threshold for a married couple to £1 million; however, the residence nil-rate band is reduced by £1 for every £2, where the net estate is worth more than £2 million. By way of example, an estate valued at £2.7m would fully lose any residence nil-rate band, leading to an additional £140,000 Inheritance Tax liability.

It is important to regularly consider your Inheritance Tax position, so that action can be taken to reduce the amount of tax paid by your estate. You should, however, bear in mind that the value of the estate on date of death – and not now – will form the basis of any Inheritance Tax paid, and growth in the value of assets over time should also be considered. Furthermore, the value of defined contribution pensions that are unused will form part of your estate from April 2027 onwards.

There are a range of strategies that can be used to reduce the value of an individual’s estate for Inheritance Tax purposes. Gifting is the most obvious way of reducing the value of the estate; however, you should also carefully consider your own financial needs in later life, which may involve care costs, together with any unintended tax consequences on the recipient of the gift. This is where independent financial planning advice can help in looking at your personal circumstances, to consider the most appropriate plan of action.

The benefit of personalised advice

We have highlighted cliff edge tax thresholds that effect both Income Tax and Inheritance Tax, which can lead to disproportionately higher levels of tax, and for working parents, could also impact on assistance with childcare. Our experienced advisers at FAS can consider your personal financial situation and provide advice on effective ways both to reduce your tax burden and ensure your investments, pensions and other arrangements are professionally managed and reviewed. Speak to one of the team to start a conversation.

Many turn to accumulated savings as a way of generating an income. Those in retirement may use savings interest to supplement state and workplace pension income. Others may use deposit interest earned to fund discretionary spending. Whatever the reason, savers may well have been pleased with the interest received on deposits over the last two years, which are a far cry from the meagre returns paid to savers during much of the last decade.

A mistake that is commonly made is the assumption that cash savings are risk-free. It is true that the balance on a savings account does not fluctuate in value, unless funds are added or withdrawn; however, the hidden risk in holding cash is the eroding impact of inflation. Last year provided something of an historic anomaly, as the Bank of England base rate regularly exceeded the prevailing rate of Consumer Price Index (CPI) inflation, meaning that savers enjoyed a brief period when deposits provided a positive real return.

This brief period of positive real returns may, however, be ending. The Bank of England cut the base interest rate to 4.25% in May, the fourth cut in less than a year, and further cuts are expected over the coming twelve months. This is despite the sharp uptick in CPI in April, which saw a jump to 3.5%, although we expect inflation numbers to ease later this year as economic growth slows once again.

The pace and timing of future action by the Bank of England Monetary Policy Committee will depend on how the UK economy fares in the face of a higher overall tax burden, the ongoing threat of tariffs and consumer confidence. The trend for base rates is, however, now firmly downward.

Diversify away from cash

Naturally, everyone should aim to keep a sensible balance on cash deposit, to meet everyday costs and unexpected contingencies; however, given the likely trajectory for UK base rates over the coming year, those with larger deposits should take the opportunity to consider alternatives that could provide a sustainable level of income, without taking excessive levels of risk.

The first alternative to consider are fixed income investments. When a government or company wishes to finance their ongoing debt obligations, they often do so by issuing a loan note. In the case of government debt, these are known as Gilts in the UK, or Treasury Bonds in the US. Company debt is often labelled as a Corporate Bond. Most loans have a similar structure, whereby the issuer pays regular interest, at set intervals, and at the maturity of the loan, repays the principal of the loan to the lender. This predictable income stream makes government and Corporate Bonds an ideal method of generating a sustainable income.

Investors should, however, be aware that bond prices fluctuate on a day-to-day basis according to underlying market conditions and can also be influenced by the perceived financial strength of the issuer. In the event of a bond issuer failing to repay the interest or principal at maturity, the bond is said to be in default, whereby losses can occur.

Bond prices are also influenced by expected levels of inflation, and interest rate expectations. This is particularly true for longer dated bonds, which tend to be more volatile than short-dated issues, where the proximity of the maturity date increases the predictability of returns. By focusing a fixed income strategy on bonds with shorter maturities, attractive levels of income can be achieved with low levels of volatility.

The second alternative to cash deposit are equities (company shares). Part of the return from holding equities are regular distributions of excess profits which are paid to shareholders in the form of dividends. Many companies have a strong track record of dividend payment and a company that enjoys a robust performance may well look to increase its’ dividend payment over time, which could potentially offset the effects of inflation.

Dividends are, however, not guaranteed, and changes in the fortunes of the company in which shares are held can not only impact the share price, but also the potential for dividend growth. Indeed, a company that begins to struggle may look to cut its’ dividend or cancel it altogether.

The importance of advice

Those who rely on a sustainable level of income should review their cash deposits and potentially seek to diversify surplus funds into alternatives, such as fixed interest securities or equities. It is, however, important to seek impartial advice before considering employing cash savings elsewhere in the pursuit of an income stream.

Firstly, the time horizon for investment needs to be evaluated. Both bonds and equities are designed to be held for the longer term (i.e. at least a period of five years) as holding risk assets over a shorter period only increases the investment risk. The second important consideration is to ensure that you are comfortable with the volatility that will be encountered when moving away from cash deposits. For those used to seeing a static balance on a savings account, adverse movements in bond or stock prices may be unsettling in the initial stages of an investment strategy.

The benefits of taking a holistic approach

The risks of diversifying away from cash deposit can be reduced by building an appropriate and well diversified portfolio, which is tailor-made to suit your requirements. At FAS, we recommend the use of collective investments, which invest in a wide range of different individual positions (thus avoiding stock specific risk) and blend a number of these collectives to achieve further diversification.

As we adopt a holistic approach to financial planning, we will also take into consideration the appropriate level of funds that should remain on deposit and ensure that these deposits remain productive. We will also look to maximise the tax-efficiency of any portfolio strategy.

If you are holding surplus cash deposits and wish to generate an attractive level of sustainable income, then speak to one of our experienced advisers.

New clients to FAS often agree to transfer existing investment portfolios they hold with discretionary fund managers, to our management. As a result, the advisers at FAS regularly have the opportunity to review the performance, management style and charging structure of what we would term “traditional” discretionary fund management services, from some of the biggest names in the industry.

As you might expect, our analysis produces some variances in results, depending on the fund manager employed. There is, however, sufficient commonality across a range of different discretionary fund managers to draw meaningful conclusions and reinforces the need to regularly review the investment performance and costs of any discretionary managed service.

Investment selection

When we review investment portfolios managed by other discretionary fund managers, we do so in an objective and unbiased manner. We have the mantra that if performance is consistent, and the portfolio volatility and risk match the objectives of the client, it may be best to take limited action. We do, however, notice a series of trends emerging from our ongoing analysis, which suggests that many of the largest UK discretionary managers adopt a very similar approach to each other, leading us to question whether the blend of investments held within portfolios really suits the client circumstances.

Firstly, many discretionary managers choose to directly purchase Gilts (UK Government Bonds), to form part of their fixed income exposure within a portfolio. Whilst Gilts do have an advantage in terms of their Capital Gains Tax treatment over collective investments holding a wider range of bond positions, we feel the focus on UK Government debt can miss out of the potential for superior returns from good quality corporate bond alternatives.

The second common theme we have identified is the use of investment funds domiciled outside of the UK. These funds often carry higher charges, which push up the overall cost of ownership, and potentially limit returns. There is a myriad of investment options available to UK investors that are UK domiciled, which remain significantly more popular to UK investors than those domiciled overseas. Indeed, the Investment Association produced data at the end of 2024 that showed that 83% of collective funds held by UK investors were held in funds domiciled in the UK. It could be that the common use of an overseas fund is a case of loyalty to a particular boutique fund house that the firm has used for many years; however, given the breadth of choice available within UK domiciled funds, we question the effectiveness of this apparently common trend.

Finally, we note the quantity of holdings that tend to be present within traditional discretionary managed portfolios. We often see portfolios with upwards of 25 or 30 different holdings, which we feel can cloud performance by spreading the portfolio allocation too thinly to good performing funds. Diversification is, of course, an important factor in risk mitigation; however, we would argue that this can be successfully achieved with a more compact and well organised portfolio.

Investment style and charges

We have often commented on our view of the blend of active and passive investment funds that we prefer to see within a well diversified portfolio. Passive funds dominate industry fund sales, and for good reason, as they provide wide exposure through a particular index with low costs. Our analysis shows that where passive investment styles are ideal for some markets, they are less than optimal for others.

Actively managed funds can provide additional returns over and above the target index, by adopting a more concentrated approach. Strong performance from an active manager can easily justify the additional costs associated with active management, which can be 10 or 15 times higher than an index tracking fund investing in the same sector or region. Conversely, weak active management can lead to underperformance of wider indices, with associated higher charges.

Through our analysis of traditional discretionary managed portfolio services, we note that the bias tends to be heavily weighted to active funds, with only limited exposure to passives. As a result, the blended portfolio cost may well be higher than average. Whilst cost and value should not be conflated, where performance is also modest, we have found clients with other discretionary managers are often paying more than they should, for less than stellar returns.

Absence of wider financial planning

Using a discretionary fund manager may ensure that your investments are reviewed and changed at regular intervals. The function of regular rebalancing and risk adjustment is a key component of any sensible investment approach – leaving investments in place without review for an extended period is unlikely to produce good results over the longer term.

The review carried out by a discretionary fund manager may, however, only extend to the funds themselves, and save for use of the annual Individual Savings Account (ISA) allowance, there may be little scope for wider financial planning.

This is not the fault of the discretionary manager. Their remit is to manage a portfolio of funds; however, this function only forms part of a bigger financial puzzle for most client circumstances. This is where an independent and holistic firm, such as FAS, can add significant value, by undertaking a full and comprehensive financial review, providing advice on multiple tax wrappers (such as Pensions and Investment Bonds), esoteric investments such as Venture Capital Trusts and Inheritance Tax solutions and other associated areas, for example protection policies.

The importance of critical review

Given the many examples we have noted, anyone using a discretionary fund manager should regularly undertake a critical review of the service they are receiving. Investors should question the investment performance, both on an absolute and relative basis compared to peers, and the costs and charges of the service. At FAS, we can undertake an impartial review of an existing investment strategy and undertake additional key analysis, looking at areas such as risk and volatility, which can be difficult to assess without expert advice. Speak to one of our experienced advisers to discuss your existing discretionary manager.

One of the most important choices facing investors is where to place long-term investments. The choice of investment vehicle can influence the tax-efficiency of the strategy, the overall cost of the arrangement, and the potential for growth. For many investors, an Individual Savings Account (ISA) offers a tax advantaged route which is ideal for long-term investment, whereas Pension contributions receive tax relief, and Pension savings benefit from tax-free growth whilst invested. Beyond Pensions and ISAs, the tax implications of any investment plan need to be considered. There is, however, a further option that investors could consider, that can defer a tax liability or in some circumstances, remove it completely.

Investment Bonds in focus

Investment Bonds are products offered by life insurance companies, which combine features of both insurance and investment. For the uninitiated, Investment Bonds can appear complex structures, given the decisions that need to be taken when establishing the Bond, and the tax treatment of gains. This is where independent advice can prove invaluable in navigating the options available.

In simple terms, the first option when choosing an Investment Bond is whether to purchase a Bond from a UK based provider (so-called “Onshore” Bonds) or an International Bond provider, who may be based in Jersey or the Isle of Man. These are known as “Offshore” Bonds. As this choice will also dictate the tax treatment of the Bond, this decision requires careful consideration.

Unlike an ISA or Pension, Investment Bonds do not provide tax-free growth. They do, however, allow the investor to defer an income tax liability, whilst providing regular access to a proportion of the original investment. Investors can withdraw up to a maximum of 5% of the original investment each policy year, without triggering an immediate tax liability, although adviser charges are deemed to be withdrawals, and form part of the annual 5% allowance. As a result, the investor can potentially withdraw 100% of the original investment over a 20-year period, without any immediate tax considerations. The example below demonstrates the ability to draw regular sums from an initial investment of £200,000 into an Onshore Investment Bond.

Any withdrawals made above the accumulated 5% allowance, either as a larger lump sum or full policy surrender, is deemed to be a Chargeable Event and the gain is assessed for Income Tax on the investor.  The precise level of tax payable will depend on whether the bond is held Onshore or Offshore, and the tax position of the investor. Further tax mitigation can be achieved through a mechanism where the gain is effectively “spread” over the number of years the Bond has been held.

Wider investment options

Historically, Investment Bond solutions were exclusively provided by the largest UK insurers, such as Aviva, Scottish Widows and Standard Life. This has presented challenges in terms of investment selection, as most contracts of this type offer a restrictive range of fund options from which to select. More recently, leading investment platforms have introduced modern Investment Bond contracts, which allow complete freedom of investment choice, including Discretionary Managed options. This wider range of options greatly enhances the attractiveness of an Investment Bond structure. In addition, such platform-based solutions are also competitively priced when compared to older insurance products.

Tax efficiency

The availability of more modern Investment Bond solutions is testament to their growing popularity as an investment option, much of which is due to changes in tax legislation.

The reduction of the Capital Gains Tax (CGT) annual exemption from £12,300 to £3,000 over recent years means that investors holding direct equities, or investment funds outside of an ISA or Pension, are more likely to face a CGT liability when disposing of investments. This is not a concern for investments held within an Investment Bond, as funds can be freely switched without creating a chargeable event.

The availability of the annual withdrawal allowance is another benefit, as this allows investors to establish a stream of regular payments, by way of an “income” without considering the tax implications.

Specialised uses

Investment Bonds can also be a sensible option when trustees consider how to invest trust funds, although this very much depends on the type of trust and objectives. As an Investment Bond doesn’t produce any income (unless a Chargeable Event occurs) or capital gains, this can ease the burden of administration on trustees.

Discretionary trusts are a particular example where an Investment Bond could be an option to consider. As such trusts pay Income Tax at a rate of 45%, the Bond structure defers this tax liability until a beneficiary requires funds from the trust. At this point, segments of the Bond can be “assigned” to the beneficiary, to encash at their personal rate of tax, which may well be lower than the rate that would apply if surrendered by the trustees. Whilst this could be a sensible way to structure an investment for this particular type of trust, it would not be appropriate for others, and we therefore recommend that trustees seek bespoke advice tailored to the precise terms of the trust.

The value of independent advice

The decisions behind the selection of an appropriate investment strategy can be complex and multi-layered. Aside from selecting the correct asset allocation and investment provider, the choice of product will influence the tax-efficiency of the arrangements, the costs and flexibility offered. Investment Bonds could be an ideal solution in certain circumstances; however, it is important that the right investment vehicle is chosen to meet the needs of each individual. As an independent firm, we can recommend products and solutions from across the marketplace without restriction. Speak to one of our experienced advisers to discuss the options in more detail.

Buy to Let has remained a popular investment option for many years, as landlords have enjoyed the benefits of a buoyant rental market, and rising property values. Investor appetite may, however, be waning, judging by recent data collated by estate agent Hamptons. Their data suggests the proportion of homes purchased by landlords has fallen to the lowest level since 2009, accounting for just 9.6% of purchasers in January.

It is not only new landlords who appear to be reconsidering property purchases. Those with existing Buy to Let properties are also considering selling, with National Residential Landlords Association research from last Autumn suggesting that 40% of landlords questioned were considering selling one or more properties in the next 12 months.

It is not difficult to see why landlords may be reaching this conclusion. Increased tenant’s rights, and an end to so-called “no fault” evictions, higher mortgage rates and an increased tax burden may all be contributing factors. Further legislative changes, including the recent announcement that all rental properties must meet tighter energy performance ratings, also adds to the uncertainty.

We frequently speak to clients holding rental properties, who are considering reducing their exposure to residential property. This decision needs careful consideration, as undertaking a property disposal is an expensive process, both in terms of fees and timing. The most appropriate way forward will be determined by the overall financial circumstances of the individual in question, with many variables to consider.

Increased liquidity

One of the most compelling reasons to consider an alternative to property investment is the increased liquidity that investments in assets such as equities and bonds can provide. Most regulated investment options provide access within a few working days, whereas raising funds from a property may be a long and expensive process. Other forms of investment, potentially using collective investments holding a blend of equities and fixed interest securities, can easily be realised should funds be needed for any reason.

Tax inefficiency

Profits from property rental income are liable to income tax in the hands of an individual, at their marginal rate of tax. Some allowable expenses can be deducted from rental income, such as insurance, professional costs, property repairs and maintenance. Buy-to-let mortgage interest payments can also be deducted; however, this tax relief has been restricted to 20% since 2020, meaning that higher and additional rate taxpayers have seen the tax they pay increase since the previous relief system was withdrawn.

By way of contrast, investors considering alternatives such as equities and fixed income securities have tax wrappers such as the Individual Savings Account (ISA) available where tax-free income can be generated. Whilst the ISA subscription is restricted to £20,000 per tax year, other options such as Investment Bonds can also provide tax-efficiency, and on equity investments held outside of a tax advantaged wrapper, the rates of tax on dividends are lower than on property income.

Capital Gains Tax (CGT) is another consideration for those selling a property. Successive Budgets have reduced the CGT annual exemption to just £3,000, although joint owners can use both allowances to offset the tax liability. Periods when the property was occupied by the owner can provide Private Residence Relief, and costs in selling the property can also be deducted. Finally, significant improvements made to the property may also be an allowable deduction. CGT is charged at 24% for higher rate taxpayers, whereas basic rate taxpayers pay CGT at 18%. CGT is due within 60 days of completion and therefore those selling property need to calculate the gain quickly to avoid a late payment penalty and/or interest.

Changing legislation

One of the most challenging aspects of property investment is navigating changes in legislation, which threaten to reduce the attractiveness of property investment. Firstly, landlords will need to comply with updated energy efficiency rules, where all rental properties will need to hold an Energy Performance Certificate (EPC) of at least C by 2030. This could force landlords into expensive upgrades to their rental properties, and damage investment returns from affected properties.

The Renters Rights Bill, which is expected to become law during the Summer, may well provide tenants with greater stability, but may lead to higher costs and greater difficulty removing problem tenants. Amongst the measures included in the Bill, so-called “section 21” evictions will be outlawed, meaning landlords will no longer be able to end a tenancy without a valid legal reason. Whilst the new legislation may not have any impact for landlords with good tenants, dealing with issues may become more problematic and costly.

Tailored advice is key

As you can see from the various factors listed above, the decision to sell an investment property is rarely straightforward; however, in our experience, landlords are more readily questioning whether they should consider alternative investment options, a decision which may be underpinned by static or falling house prices in the coming years.

In most instances, an investment strategy designed to produce an attractive level of natural income can compete with net income yields from property investment, particularly when the tax-efficiency that investment wrappers can provide is considered. Taking a diversified approach, and blending investments across different asset classes and sectors, can help reduce risk, and using equities can also produce capital appreciation over time, in addition to the income yield. Not only can a diversified portfolio be more tax-efficient than property investment, such an approach can also prove to be lower maintenance and less hassle.

Our experienced advisers can take a holistic view of your financial circumstances and provide independent and unbiased advice on the options available. We can also look at ways to offset a CGT liability through investments that provide tax relief on investment. Speak to one of the team if you hold investment property and are considering alternative options.

We are regularly asked to provide advice to parents and grandparents who wish to invest for their child or grandchild’s future, potentially to help with higher education costs, or towards a deposit for their first home, the cost of which has increased significantly over recent years. Data from Statista shows that the average deposit for first-time buyers in England in the 2022/23 tax year was £53,414. This is more than double the average deposit a first-time buyer needed to find in 2017/18, according to Savills. Even more stark is comparing the data to 1997/98, when the average first-time buyer deposit stood at just £2,200.

With the pressures of modern living, many young people will struggle to save for the average deposit, amidst costs of rent, household bills and living expenses. It is, therefore, often the case that children turn to the “Bank of Mum and Dad” for help, which could well coincide with a time when parents are aiming to clear mortgages of their own or trying to focus on their retirement planning.

Arranging appropriate investments for children can ease the financial burden for families and help provide the necessary funds to help pay for further education, or a house deposit. There are, however, decisions that need to be reached in respect of the structure of the investment plan, and whether to grant the child access to the funds at 18.

Tax-efficiency, but drawbacks

Two of the most popular methods of arranging children’s investments are structured so that the funds automatically belong to the child on their 18^th birthday, which may not be a sensible step.

A Junior Individual Savings Account (JISA) allows a maximum investment of £9,000 per annum, and this can be funded by parents or other relatives, which can help with Inheritance Tax (IHT) planning. The JISA benefits from tax free returns and automatically converts to an adult ISA at 18.

A bare trust is another tax efficient way to save for a child’s future. The funds in trust belong to the child but are managed by the trustees (usually parents and grandparents) until they reach the age of 18. All income and gains generated within the trust are assessed on the child, except when the trust is created by a parent. In this case, income that exceeds £100 per tax year is assessed on the parent. It is important to note that this rule does not apply to grandparents.

Maintaining control

A common conversation point with clients are the risks involved when giving control of an investment to a child at the age of 18. Many parents and grandparents have concerns that the child may not make financially responsible decisions at this point in their life. As we mentioned above, the most common uses of investments for children are funding university costs or using the funds towards a deposit on a house; however, funds are unlikely to be needed for either purpose at the age of 18. Student loans cover the cost of tuition fees, and maintenance loans may cover some of the costs of living. The average age of a first-time buyer is 33 years old, and realistically, it is unlikely that anyone turning 18 will have sufficient earnings to support mortgage payments.

The risk is, therefore, that the child could use the funds for other purposes, such as holidays or socialising, and given the lack of control, could lead to disappointment that funds have been used unwisely, or could generate unwanted family friction.

The alternative is to exert control over when the child gains access to the funds. This is often a more palatable option; however, there are drawbacks that need to be considered. Instead of a bare trust structure, where the child owns the investment from the age of 18, a discretionary trust offers far greater flexibility and control. The trustees have complete discretion as to when funds are paid, and to which beneficiary. This is an ideal way of avoiding automatic access at 18, whilst still gifting funds, so that they leave the parent or grandparent’s potential estate. Discretionary trusts do, however, suffer a more punitive tax regime, which starts with the gift into trust and covers both income tax and capital gains tax. Additionally, discretionary trusts also suffer a potential charge to IHT at each ten-year anniversary.

Despite these drawbacks, careful planning can help reduce the tax burden significantly, and investment structures such as investment bonds can also avoid the need for trustees to account to H M Revenue & Customs each year. Segments of the Bond can be assigned to beneficiaries at a time trustees agree is appropriate, which could ease the tax burden further.

An alternative option is for parents and grandparents to set up separate investment accounts for their children, which remain held in the name of the parent or grandparents. Often such accounts carry a designation, to ensure that the investments remain separate to other accounts held. Naturally, such an approach would not be effective for IHT purposes as the investment remains in the name of the parent or grandparent, and the owner remains liable for income tax and capital gains tax; however, with careful selection of tax wrapper, a more tax-efficient approach can be adopted.

Getting the right advice

Parents and grandparents who wish to save for the next generations can explore a range of options, each with positives and drawbacks. Perhaps the best starting point to consider is whether you are content to give automatic access to the funds at 18 years old. In many cases, maintaining greater control is attractive, and with careful planning, the more onerous tax burden can be effectively managed. Our independent advisers have years of experience of advising parents and grandparents in this area. Speak to one of the team to start a conversation.