Tax Planning

Plan ahead in advance of tax changes from April

By | Tax Planning

Capital Gains Tax (CGT)

After being significantly cut in April 2023, the annual CGT allowance will be halved from 6th April 2024, and will see many more individuals subject to CGT in the next tax year.

The Finance Bill 2022 introduced the first reduction in the annual CGT exemption, reducing the allowance from £12,300 in 2022/23 to £6,000 in the current tax year. From 6th April, this exemption will halve to just £3,000 and the legislation confirms this allowance is fixed until any further legislative changes are made.

CGT is payable on the net balance of gains and losses made over the course of a tax year when assets – such as property and investments – are sold. A direct result of the lower annual allowance is that many more people will pay CGT, with those holding substantial investment portfolios that are not in a tax-efficient wrapper, such as an Individual Savings Account (ISA), facing mounting annual CGT bills. The rate of CGT on the disposal of investments is, thankfully, not punitive. Those who pay basic rate income tax will pay CGT at 10% and higher rate taxpayers pay 20%. Higher rates of CGT are, however, charged when disposing of residential property.

Impact on portfolio planning

The reduced allowance is likely to challenge investment strategies, and could potentially lead some to reach the conclusion that they should avoid disposing of investments for fear of triggering a tax charge. Another way to reframe the decision is that you still retain at least 80%, or possibly 90%, of the gain made above the allowance, and the sale could provide the opportunity to realign an existing portfolio. This could prove to be a sensible move, if the investment has grown substantially and the level of risk has increased by virtue of the larger holding. It could also be worthwhile if the investment is underperforming and the proceeds are used to reinvest into another asset with improved prospects.

There are steps you can take to maximise the available allowances. Investments held in joint names can use both CGT allowances as the gain is deemed to be shared, and if investments are held in an individual’s sole name, arranging a transfer between spouses could help make use of available allowance that would otherwise be wasted.

Any CGT liability needs to be declared to HMRC, and even when the net balance of gains and losses falls below the new £3,000 annual allowance, disposing of assets valued at more than £50,000 will also trigger the CGT reporting requirements. This is likely to mean that many more individuals will need to complete a Self-Assessment Tax Return in the future.

Dividend Allowance

Alongside the reduction in the CGT allowance from 6th April 2024, the Dividend Allowance is also being further reduced to just £500.  The Dividend Allowance is a tax-free allowance that covers dividend income received, and captured the first £5,000 of dividend income received in 2016. This allowance was cut to £2,000 in 2018, and was further reduced to £1,000 in the current tax year.

According to Treasury data, the latest cut to the Dividend Allowance is likely to impact over 3 million individuals, from those who hold investment portfolios to company directors who are largely remunerated through dividends.

The changes are likely to be felt the most by investors with smaller portfolios of individual shares or collective investments, who may be faced with paying dividend tax for the first time. Dividend tax is charged at 8.75% for basic rate taxpayers, and therefore the impact may appear relatively light; however, the rate is hiked to 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.

Take action before April

According to Treasury figures, the combined impact of the CGT allowance changes and reduction in the Dividend Allowance will generate over £4.6bn of revenue over the next four years. This represents a significant additional tax take for the Exchequer, although investors can take steps to minimise the impact of the changes.

Firstly, the changes present an ideal opportunity to review an existing investment portfolio, to consider whether funds or stocks need to be sold in the current tax year to crystallise a gain within the CGT allowance. We often meet clients who have not reviewed existing portfolios for some time, and carry investments with large capital gains that would be crystallised on disposal. With the reduction in the CGT allowance, the tax implications of disposal will need to be carefully managed, although investors would be well served to consider the performance and future prospects of an investment, when reaching a decision that creates a CGT liability.

Using tax allowances, such as the ISA allowance, can be effective ways of minimising the impact of the tax changes. ISAs have been a staple of financial planning for many years, and the benefits of regular use of the ISA allowance, in conjunction with other tax efficient investment wrappers, could reduce tax bills in the future.

Seek advice

The reduction in the annual CGT and Dividend Allowances is likely to impact many investors from April, and for individuals with sizeable investment portfolios that are rebalanced and reviewed regularly, CGT liabilities may well be increasingly unavoidable. That being said, future liabilities to both CGT and Dividend Tax can be reduced by planning ahead and using annual exemptions where possible.

As a Chartered independent firm, we can advise on solutions from across the marketplace, and are very used to providing advice on existing investment portfolios and how these can be made more tax-efficient. Speak to one of our experienced advisers to discuss the impact of the changes from April and how it will affect your portfolio.

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Tax Planning for Higher Earners

By | Tax Planning

Amidst a landscape of rising costs, the amount of Income Tax collected by the Exchequer is increasing. Much of this is due to the Personal Allowance – which is the amount you can earn before paying any tax – and Income Tax bands being frozen. This freeze was introduced in 2021 and was expected to remain in place until 2026;  however, Chancellor Jeremy Hunt extended the freeze for a further two years in last year’s Autumn Statement. Static tax bands create a so-called “fiscal drag” as increasing wages and earnings push individuals higher up the tax bands. Furthermore, the Additional Rate Tax threshold, which is the level where 45% Income Tax becomes payable, has been lowered from £150,000 to £125,140 from April. As a result, higher earners would be well advised to consider financial planning options that could potentially reduce the amount of tax they pay.


Make use of the ISA allowance

Those with higher earnings should look to make use of their annual Individual Savings Accounts (ISA) allowance, as ISAs enjoy a preferred tax treatment, whereby all income, interest or dividends generated from the assets held in the ISA are exempt from Income Tax, and any gains made on disposal are free from Capital Gains Tax. This is of particular benefit to higher earners, who may not benefit from any Personal Savings Allowance.

An ISA can hold Cash or Stocks and Shares and other investments, and irrespective of which ISA or ISAs are selected, the total contribution limit across all ISAs in the 2023/24 Tax Year is £20,000. Taking full advantage of the allowance is important for anyone who pays Income Tax on their savings or dividend income, or wants to avoid Capital Gains Tax on future gains.


The advantages of pension planning

The starting point for many higher earners is the ability to save into a pension. Qualifying contributions into a pension receive tax relief, which is paid at the highest rate of income tax that you pay. If you’re a basic rate taxpayer, you’ll get 20% tax relief, but higher rate taxpayers receive tax relief of 40% and additional rate taxpayers receive 45% relief.

For those that earn between £100,000 and £125,140, effective tax relief of 60% is available. When an individual’s taxable income reaches £100,000, their Personal Allowance is tapered, losing £1 of allowance for every £2 of additional income. Once taxable income reaches £125,140, the tax-free Personal Allowance is lost completely. As a result those with earnings between £100,000 and £125,140 pay an effective tax rate of 60% on this portion of their earnings.

Pension contributions have the effect of extending the tax bands, which can mean that those earning between £100,000 and £125,140 not only receive tax relief at 40%, but also reclaim part of their Personal Allowance, too.

When making pension contributions, careful consideration is needed as there are a number of tax traps to catch the unwary. Individuals can contribute up to 100% of their relevant earnings, although this is subject to an Annual Allowance of £60,000 in the current Tax Year. It is important to ensure that earnings qualify for pension contributions – property rental income from a buy to let property, for example, is not normally considered to be relevant earnings.

In addition, those receiving taxable income above £260,000 need to consider the taper that applies to the Annual Allowance, which reduces the amount you can contribute by £1 for every £2 of income above this level.

Given the complexity of the rules, we recommend higher earners seek advice before taking any action. Pension contributions need to be affordable to your circumstances, and the key to effective pension planning is to make sure the contributions work hard in terms of investment performance. This is where regularly reviewing your pension investments can make sure that the portfolio remains appropriately invested for the prevailing and expected conditions.


Venture beyond

Beyond ISAs and Pension contributions, there are other tax efficient investments that can reduce an individual’s tax liability, but also provide a helping hand to small businesses. Venture Capital Trusts (VCTs) were introduced in 1995 as a way of encouraging investment into Britain’s small and entrepreneurial businesses. As these investments tend to be of higher risk, and some smaller companies can fail, VCTs offer up-front tax relief of 30% on qualifying investments. This tax relief is retained as long as the investment remains qualifying and is held for at least 5 years. In addition to the tax relief, dividends paid by the investments within a VCT are tax-free and any gains on disposal are also free from Capital Gains Tax.

Whilst the tax advantages are attractive, it is important to recognise that VCTs are a high risk investment, and should only be considered by investors who are willing to accept a significant risk of capital loss. VCTs range from investing in companies that are already profitable, to those quoted on the Alternative Investment Market (AIM) and some that specialise in early stage investments, and as a result, the risks and potential returns can vary significantly. Many VCTs have produced strong returns over the long term, when factoring in the tax relief on investment and dividend income, but others have performed poorly. This is why we recommend seeking advice before considering these investments.


The benefits of advice

Those who pay higher rate or additional rate tax – or indeed business owners or shareholders who receive a high level of dividend income – should take the time to consider the amount of tax they pay. By considering financial planning options, many will find that they can reduce their tax liability.

Speak to one of our experienced financial planners here for expert advice on the options open to you.

A graphic showing a piece of paper with 'Capital Gains' handwritten on the page and wooden squares with letters on scattered across it. The wooden squares spell out 'tax' beneath 'Capital Gains'.

Plan ahead to avoid Capital Gains Tax

By | Tax Planning

None of us want to pay more tax than is absolutely necessary, but when it comes to Capital Gains Tax (CGT), the impact of the tax liability is cushioned to an extent by the fact that CGT only applies when you have made a profit from selling an asset. Furthermore, generous annual CGT allowances that have applied in the past have meant that liabilities to CGT could be at worst minimised or potentially avoided altogether.


Reduction in annual exemption

The status quo changed in the November 2022 Budget, when Chancellor Jeremy Hunt announced that the annual CGT exemption – which is the total amount of gain an individual can make on assets in a tax year – would fall from £12,300 per annum to £6,000 from April 2023, and then fall again to just £3,000 from April 2024. These significant reductions to the annual CGT exemption will make it more difficult to manage gains effectively to avoid a potential CGT liability and will undoubtedly increase the revenue generated from CGT receipts. The Office for Budget Responsibility estimate that £17.8bn will be raised from CGT in the 2023/24 tax year. This is the equivalent to £620 per household or 0.7% of national income.

The rate of CGT that an individual pays depends on the asset being sold, and their overall tax position. Higher Rate taxpayers automatically pay CGT at a rate of 28% on gains from residential property, and 20% on the sale of other assets, such as investments. It is possible to pay a lower rate of CGT, at 18% for residential property sales and 10% for the sale of other assets, but only if the gain – when added to an individual’s taxable income in the tax year – remains within the basic rate band.


How financial planning can help

We often meet new clients who have held investments for a long period of time, without reviewing or changing their portfolio of investments. Buying investments and retaining them for the long term has been a popular mantra for investors over the years; however, by not reviewing investments regularly and making decisions to use the available allowances, gains can build up over time. As a result, a hefty CGT bill is created on disposal.

With careful planning, individuals can minimise their potential CGT liability. At FAS, as part of our regular financial planning review process, we consider the performance, asset allocation and strategy adopted within an investment portfolio. We also consider the portfolio structure to look to ensure that individual assets do not grow out of shape compared to the rest of the portfolio. This avoids introducing additional investment risk and volatility, as well as helping to avoid a potential CGT problem in the future.

Regular use of the Individual Savings Account (ISA) allowance is an important component of many financial plans. ISAs provide exemption from CGT and Income Tax and by investing in an ISA, investments can grow over time without any CGT considerations. A popular way of using the ISA allowance is through a “Bed and ISA” transaction, when investments held outside of an ISA are sold and the proceeds used to repurchase the investment within the ISA wrapper. The sale could potentially be liable to CGT, though any future disposal from within the ISA would be exempt.

Married couples also enjoy greater flexibility in managing potential gains. Transfers of assets between spouses are not deemed to be a disposal, and therefore it may be possible to transfer investments between spouses to make the best use of the available allowances, and potentially reduce or eliminate a potential CGT liability.


Advice to landlords who are selling

Another area where we are called on to provide advice is to individuals who are looking to sell buy to let or holiday properties. Regulatory pressure on landlords has been steadily growing, and with house prices expected to fall modestly over the next 12 to 18 months, some landlords are considering selling up with the aim of diversifying into other assets.

Whilst property investors can deduct their expenses incurred in the sale of the property, and can also claim other allowances to cover capital spent on improvements, many investors will still find themselves with a large CGT liability when selling a property, in particular if it has been held for many years. We can look at options to mitigate this liability, which include tax efficient investments such as Venture Capital Trusts (VCTs), which provide Income Tax relief on the investment made, which can be used to “offset” CGT payable elsewhere. This is a high risk and complex area, and therefore seeking expert advice is critical.

By taking a holistic approach, we can review an individual’s overall financial position, and look to recommend solutions designed to replace lost rental income and achieve greater diversification. In addition, investors often find that liquidity improves when holding investments, as assets are available to access quickly and efficiently when compared to holding bricks and mortar. Finally, tax efficiency can often be improved significantly, given the ability to use ISAs and other tax efficient savings vehicles.


Take steps to review your position

The revenue generated by CGT receipts is likely to increase further as the annual CGT exemption halves again next year, and more individuals are subject to CGT on disposal of assets. CGT is only payable when making a gain, but nonetheless, the amount of tax due can be minimised by careful financial planning.

Speak to one of our experienced team here to review your existing portfolio or discuss tax-efficient planning opportunities.

Graphic of a house wrapped in ribbon held by a hand, representing the gifting of a house deposit

The financial pitfalls of gifting a deposit

By | Tax Planning

With mortgage rates hitting levels not seen in fifteen years, and house prices remaining close to record highs, taking the first step to owning property is becoming more difficult than ever for first-time buyers. Many find themselves under further pressure to purchase as a result of rising rents, which are increasing on the back of more expensive borrowing costs for landlords, and the general rise in the cost of energy, food and transport.

In this situation, parents and grandparents often take the view that gifting funds to younger family members, to help towards a deposit or provide assistance with other housing related costs, can be seen as an advance on a future inheritance.


The bank is open for business

The “Bank of Mum and Dad” is one of the UK’s largest lenders in terms of the value of gifts and loans arranged. According to data from Legal & General, around £9.8bn was gifted by the Bank of Mum and Dad in 2021 alone. The spike in mortgage rates, general increase in the cost of living, and high house prices is likely to drive the lending stream from the parental bank even higher this year. The trend of helping family with housing costs could be one of the factors behind the fastest ever drawdown from UK savings accounts. The Bank of England reported households withdrew a net £4.6bn from banks and building societies in the month of May, reversing a trend that has seen savings gradually increase over time.

We understand parents and grandparents are keen to provide assistance, and in many cases, the gifted funds can make a substantial difference to the prospects of a first-time buyer being able to secure a property, and also potentially taking out a smaller mortgage in the process. There are, however, a number of pitfalls that parents and grandparents need to consider before parting with their cash.


Tax considerations

Any gift – be it by way of a deposit for a house or for another purpose – could potentially be liable to Inheritance Tax. Each individual can make gifts of £3,000 per tax year and therefore a married couple could gift £6,000 of capital (plus £3,000 each from the previous tax year if not used) without any Inheritance Tax concerns. Any amount gifted above this exempted amount is treated as a Potentially Exempt Transfer (PET). Whilst no Inheritance Tax is due immediately, the person making the gift needs to live seven years from the date the gift is made, for the gift to fully escape Inheritance Tax.

Other than the annual gift exemption, when your child gets married, parents can provide a wedding gift of £5,000 each and grandparents can give £2,500 each, free from Inheritance Tax concerns. In addition, if you receive more income than you need to live on, you may be able to make regular gifts out of surplus income. The rules here are complex and we recommend seeking advice if you intend to start a regime of gifting out of excess income.

Depending on the source of the gifted funds, there may be other tax considerations, such as a potential Capital Gains Tax liability that could arise if shares or investments are sold to provide the funds, or an investment property is sold. It is important to recognise that any such liability will fall on the parent or grandparent who is making the gift.


Keep it in the family

Another pitfall is the potential for relationship or marital breakdown. Parental gifts are often provided to children who intend to purchase a property with a partner or spouse. It is important to consider what would happen in the event of relationship breakdown, which could potentially lead to the other party walking off with part or all of the value of the gift. Taking appropriate legal advice, and preparing a suitable Declaration of Trust that protects the value of the gift, could avoid this situation arising.

Parents and grandparents would also be well advised to consider the effect that unequal gifts could have on younger family members. Many are keen to treat family members equally, and this may be impossible at the time the gifted deposit is made. Furthermore, other family members may be too young to receive funds, or may not be in need of capital at the same time. This is where the use of Trusts can be helpful. By creating a Trust, family members can be named as beneficiaries and the Trustees can pass assets to them at the appropriate time. Trust planning does have a number of drawbacks and is, again, a complex area that often requires taking specialist financial and legal advice.


Looking after your interests

Whilst parents and grandparents often want to be generous in helping younger family members, we often find that their own needs and requirements are not properly considered. Parents need to carefully review their own financial needs in later life, and consider the impact that gifting funds could have on their ability to fund a comfortable retirement. It is also important to consider that the capital gifted will no longer be available to the parents or grandparents to cover any unexpected expenditure. As many will require some form of care in later life, gifting capital could reduce the level of care or support that can be afforded. It is worth remembering that it is unlikely that the recipient of the gift will be in a financial position to return the favour if funds are required.


Seek financial and legal advice

There are a number of financial and legal considerations that need careful thought before providing gifts or loans to family members to assist them to purchase a property. It is a good idea to seek legal advice to protect “family wealth” from a potential relationship breakdown, and also look at the implications the gift may have on any existing Will in place.

At FAS, we can provide assistance to parents and grandparents who wish to use their funds to help younger family members. We can advise on which assets are gifted, and the potential financial impact of any actions taken on their financial security.

Speak to one of our experienced advisers here to start a conversation.

estate planning written on a mini whiteboard with leaves next to it - Inheritance Tax receipts rise again

Preserving Family Wealth

By | Tax Planning

As we get older, our financial priorities often begin to shift, and many start to consider preserving the wealth they have accumulated during their lifetime for the next generations.  It is only natural that we would want to leave family wealth to those who mean the most, and in the most tax efficient way possible. It is easy to forget that accumulations of wealth through salary or earnings have already been taxed on receipt, and with assets above the Inheritance Tax nil rate band subject to a tax charge of 40%, this can lead to a significant reduction in the value of the net estate.


Inheritance Tax receipts rise again

The main band for Inheritance Tax remains at £325,000, which is the level it has been set at since 2009, and this band will remain at this level until 2028 at the earliest. As asset values grow, more estates are becoming liable to Inheritance Tax, and it was of little surprise to see the HMRC data for April, which showed that Inheritance Tax receipts reached £597m for the month of April alone, an increase of £90m on the same month last year. Inheritance Tax receipts now account for a growing proportion of the overall Tax take, with the Office of Budget Responsibility predicting the Treasury will collect £45bn in Inheritance Tax over the next 6 years.

There are, however, steps you can take to mitigate the liability to Inheritance Tax on your potential estate and with careful planning, greater sums of family wealth can be passed on to the next generation. As holistic financial planners, we take the broadest view of a client’s financial circumstances, and conversations with clients about potential Inheritance Tax concerns and estate planning are a feature of the regular ongoing reviews we conduct. By starting conversations early, appropriate mitigation can be put in place in time so that hard-earned wealth can be preserved for family members.


The importance of seeking advice

We often see clients for the first time, who haven’t given any consideration to Inheritance Tax planning. With rising house prices, increasing wealth through investment and surplus income receipts and inheritance they may themselves receive in the future, clients are often surprised at the amount of Inheritance Tax that could be payable on their death. Naturally, clients will often have more significant financial priorities to attend to in mid-life, such as saving to provide a retirement income, paying off existing debts, or covering the costs of University for their children. As clients get older, however, conversations about wealth preservation generally become more focused, and we work with clients to set in place a financial plan to tackle the potential tax liability.

It is very important to seek professional advice and guidance on an ongoing basis to make the most of any Inheritance Tax mitigation and avoid any potential issues that mitigation could cause. For example, making gifts of assets to children and grandchildren is a perfectly rational strategy to consider; we, however, have seen cases where clients have decided to make large gifts to family at an early stage in retirement, without considering the longer-term implications. They then find themselves in need of capital that now isn’t available to them, as the capital has been gifted and spent. Likewise, we have come across individuals who have put in place complicated -and often costly – arrangements that may not be effective for Inheritance Tax mitigation.

Finally, it is important not to leave Inheritance Tax planning too late in life, as this can limit the range of options available. This is where regular financial planning reviews can assess the need to consider Inheritance Tax planning as circumstances and objectives change over time.


Keeping actions taken under review

Another complication of this type of planning is the potential for changes in legislation to impact on Inheritance Tax planning that has already taken place. Of course, any advice can only work within the existing set of tax legislation, and we, like everyone else, are peering into the darkness in trying to determine what the rules will look like in years to come. Given the increasing relevance Inheritance Tax receipts now have as part of the overall Treasury revenue, it is fair to say that any reduction in the amount of Inheritance Tax received would need to be found through alternative taxation. For this reason, we look to plan ahead with clients, and as part of a wider financial planning strategy, can include solutions that aim to provide Inheritance Tax mitigation, but can also be altered if tax rules change in the future.


The value of planning ahead

The latest figures from HMRC are a stark reminder of the amount of tax received from families, where planning and taking appropriate steps could potentially have reduced the tax burden faced by the next generation. We provide advice to many families, where two, three or four generations of the same family are clients or have been clients during their lifetime. As those clients have benefitted from ongoing holistic advice, we have undoubtedly saved clients many millions of pounds in Inheritance Tax that would otherwise have been payable. That is the value obtained by seeking advice and planning ahead.


Our experienced holistic financial planners can help you consider estate planning as part of a wider financial review.  Contact us here to start a conversation.

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

Avoiding the most unpopular tax

By | Tax Planning

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

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


The most unpopular tax

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

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


Thresholds frozen

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

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

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


Gifting rules

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

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


The family home

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


The importance of planning ahead

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

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


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

Note on yellow background reading '2023 Budget' referring to Spring Budget 2023 announcement

A Budget for Pensions

By | Tax Planning

The Budget statement was clearly focused on the economically inactive and included a series of measures designed to aid individuals back to work. The proposed changes to childcare provision have captured most of the headlines; however, there were also significant changes to pension rules which will affect many individuals, and a tax reduction for business capital expenditure.


Lifetime Allowance abolished

Perhaps the most surprising measure announced was the abolition of the Lifetime Allowance (LTA) tax charge from 6th April 2023. The LTA caps the amount an individual can hold in their pension without paying a tax charge. Individuals who breach the LTA – which was as high as £1.8m in 2010 but stands at £1.073m today – currently pay a 25% tax rate on income withdrawals above the LTA limit, with lump sums in excess of the LTA being taxed at 55%. This charge will be removed from 6th April 2023 and the LTA will be abolished altogether from 6th April 2024.

Following concerns that senior professionals are being forced into early retirement for fear of being subject to increased taxation on further pension accrual, press speculation had suggested the LTA would increase to £1.5m or £1.8m; however, the announcement that the LTA is to be abolished entirely is something of a surprise and opens a wide range of financial planning opportunities for those where the value of their pensions exceed – or are expected to exceed – the LTA.

The maximum amount of Tax Free Cash an individual can draw represents 25% of the current LTA, which is a maximum of £268,275. Despite the abolition of the LTA, the maximum amount of Tax-Free Cash available will remain capped at the current level. Those who hold existing Lifetime Allowance protections will still be entitled to the higher amount by reference to the specific protection held.


Increased Pension Annual Allowance

The amount an individual can save into a pension each year, and receive Tax Relief, has increased from £40,000 to £60,000 (or 100% of earnings if lower) with effect from 6th April 2023. This is a very helpful increase for higher earners, for members of a Defined Benefit scheme, or for those who wish to fund large lump sum contributions. The ability to Carry Forward any unused Annual Allowance has been maintained and coupled with the abolition of the Lifetime Allowance, further increases the attractiveness of pensions as a long-term savings vehicle.


Taper tweaked

Whilst the Annual Allowance has been increased from the start of the Tax Year, higher earners will still be subject to a Tapered Annual Allowance. The threshold income level, at which the Annual Allowance starts to taper, has been increased from £240,000 to £260,000, and the minimum Tapered Annual Allowance has increased from £4,000 to £10,000. Whilst this is still restrictive, the rules have been relaxed slightly to provide more scope for those with earnings that exceed the threshold income to fund contributions without being subject to a Tax charge.


Money Purchase Annual Allowance changes

In a move to encourage those who have already accessed their pensions to return to the workforce, the Money Purchase Annual Allowance (MPAA) has been increased from £4,000 to £10,000. Anyone who flexibly accesses a pension is subject to the MPAA in the future and whilst the restriction remains, the more generous allowance will allow those who have taken pension benefits in the past to make a meaningful level of contribution if they continue to work.


Growth forecast upgrade

As usual, the Budget provided an update on the state of the UK economy. Forecasts from the Office for Budget Responsibility (OBR) now show that the UK is unlikely to enter a technical recession this year. Contrary to more pessimistic forecasts made last year by the Bank of England, the OBR indicated the economy will shrink by 0.2% this year before recovering. The OBR also forecasted UK Consumer Price Inflation would fall more sharply than anticipated, pencilling in a year end forecast at 2.9%, compared to the current rate of 10.1%.


Savings Allowances unchanged

Mr Hunt confirmed that the Individual Savings Account (ISA) and Junior ISA (JISA) allowances would remain unchanged for the forthcoming Tax Year at £20,000 and £9,000 respectively. The starting rate band for savings will also be maintained at £5,000. The Help to Save scheme, which provides a bonus on regular savings for those on a low income, will be extended for a further 18 months.


Business Capital Expenditure

From 1 April 2023, investments made by companies in plant and machinery will qualify for a 100% first-year allowance for main rate assets. This exemption will last for 3 years and will mean UK companies will be able to write off the full cost in the year of investment.


A significant change

As with all Budgets, the devil is in the detail; however, it is clear from the measures announced that Pensions have received their biggest shake-up since the introduction of the Pension Freedom rules in 2015. The abolition of the Lifetime Allowance and increase to the Annual Allowance now provide significant additional scope for tax-efficient planning, cementing the attractiveness of a pension as a planning tool.

Contact one of our experienced advisers here to discuss the impact of the changes on your pension savings and consider new opportunities as a result of the Budget.


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

Graphic of the word Tax with a pair of scissors representing tax changes in the new Tax Year

Tax Year end planning

By | Tax Planning

With the end of the Tax Year just around the corner, now is the time to consider any important planning decisions that are needed to ensure that your finances are as tax efficient as possible. This is particularly important as allowances are often lost if not used. The beginning of the next Tax Year heralds a number of changes to tax allowances affecting both Capital Gains Tax and Income Tax, so perhaps even more than ever, it is a good time to reassess the tax-efficiency of your investments and savings.


Make use of the ISA allowance

Individual Savings Accounts or ISAs have become a popular choice for savers and investors over recent years, as they enjoy a preferred tax treatment, whereby all income, interest or dividends generated from the assets held in the ISA are exempt from Income Tax, and any gains made on disposal are free from Capital Gains Tax. An ISA can hold Cash or Stocks and Shares and other investments, and irrespective of which ISA or ISAs are selected, the total contribution limit for adults across all ISAs in the 2022/23 Tax Year is £20,000. Taking full advantage of the allowance is important for anyone who pays Income Tax on their savings or dividend income or wants to avoid Capital Gains Tax on future gains.

The Junior ISA allowance is £9,000 in the current Tax Year. Junior ISAs let you save and invest on behalf of a child under 18 in a tax-efficient manner, and as with the main ISA allowance, this allowance is lost if not used.


Review Investment Portfolios

For those who hold investments outside of an ISA, it is more important than ever to consider whether it would be sensible to use the annual Capital Gains Tax allowance. This allowance covers the gain on disposal of assets (such as shares, investments and second properties) and in the current Tax Year, the allowance is £12,300 per person. In the 2023/24 Tax Year, this allowance will more than halve to £6,000 and then halve again to just £3,000 in the 2024/25 Tax Year. Any gains in excess of this allowance are taxed at 10% or 20% (in the case of investments) and 18% and 28% (for property), with the tax rate dependant on the overall tax position of the individual.

The Capital Gains Tax allowance can’t be carried forward, so it is important to consider whether it would be appropriate to sell assets to use the available Capital Gains Tax allowance, in particular as the allowances will be significantly reduced in future Tax Years.

The annual Dividend Allowance is also reducing from 6th April 2023. In the current Tax Year, the first £2,000 of dividend income is tax-free; however, this will fall to £1,000 for the 2023/24 Tax Year, and then to £500 from 6th April 2024. This will mean many individuals who currently avoid Tax on their dividends will begin paying 8.75% (for a basic rate taxpayer), 33.75% (for a higher rate taxpayer) and 39.35% (for an additional rate taxpayer) on dividend income that exceeds the reducing allowance.

Anyone with an investment portfolio that is not held in a ISA should be actively reviewing their investments to see if any action is warranted before the end of the Tax Year. This is where a comprehensive and independent review of existing portfolios could be a sensible step to take, not only from a tax-efficiency perspective, but also in terms of portfolio asset allocation and structure, and to review whether the portfolio continues to be appropriate for your needs and objectives.


Contribute to a Pension

As we approach the end of the Tax Year, now is the time to consider whether it is appropriate to make further pension contributions. Most individuals can make contributions of 100% of their earnings or £40,000 (whichever is the greater) in each Tax Year. Any unused Pension Annual Allowance can be carried forward for up to three tax years, and therefore anyone wishing to use any unused 2019/20 annual allowance has until 5th April 2023 to do so. For anyone who does not have a pension in place, and wishes to make large contributions in the future, making a contribution in the current Tax Year could mean that any unused Allowance in this Tax Year can be carried forward for use in the next three Tax Years.


Inheritance Tax planning

The annual Gift exemption is an annual amount that you can give away without having to pay any attention to the Inheritance Tax implications of making the gift. The annual exemption is £3,000 per individual, and couples could therefore give £6,000 away each Tax Year. This exemption can only be carried forward for a single Tax Year, so it is important for those who want to maximise this exemption to take action.

In addition to making gifts out of capital, surplus income can also be gifted away under certain circumstances. These rules are complex, but in short, if you have sufficient income and the amount you wish to gift does not reduce your standard of living, then making regular gifts of excess income could be sensible planning and reduce a potential liability to Inheritance Tax. We believe it is important to seek advice and guidance if you are planning to take advantage of these rules, and also to keep good records of actions taken.


The benefit of a holistic financial review

With the end of the Tax Year fast approaching, making use of available allowances is always important; however, we feel the changes to Capital Gains Tax and Dividend Allowance in the next Tax Year warrant extra attention before 5th April 2023. Speak to one of our experienced financial planners who will be able to undertake a holistic review of your finances to see whether any action is needed before the end of the Tax Year.


If you are interested in discussing the above further, please speak to one of our experienced advisers here.


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

Receipt reading Capital Gains Tax

Making use of the Capital Gains Tax allowance

By | Tax Planning

Tax efficiency is an important part of any sensible financial plan, and by using the annual Individual Savings Account (ISA) allowance, or saving into a tax advantaged plan such as a personal pension, investments can be left to grow over time without undue tax considerations. Where investments are held outside of a tax advantaged wrapper, making use of allowances on an annual basis, by reviewing an investment portfolio regularly and considering appropriate changes to the way the portfolio is structured, can give the best chance of avoiding a tax headache later.

We often come across historic investments that have been held for many years outside of an tax wrapper, such as an ISA. As many of these holdings have been in situ for a long period, they often show significant gains over the original purchase price. As a result, selling these assets could generate a liability to Capital Gains Tax (CGT).

CGT is a tax that could be charged on the profits made when selling, transferring or gifting assets, including shares and other collective investments, property that is not your main residence, or personal possessions worth £6,000 or more. Certain assets with limited lifespan and personal motor vehicles are exempt from CGT, unless they have been used for business purposes.

When CGT is charged, higher-rate taxpayers currently pay CGT at 20% on gains from investments and at 28% on gains from residential property. For basic-rate taxpayers, these rates may be reduced to 10% and 18%, respectively.


Use it or lose it

Every individual receives an annual CGT exemption which enables tax-free gains to be made. In the current Tax Year, the allowance for individuals is £12,300. The allowance is provided on a use it, or lose it, basis. It can’t be carried forward into the next tax year, so it makes sense to use the tax-free allowance each year, which could reduce the risk of incurring a significant CGT liability in the future.

This can be particularly helpful for assets such as shares and investments, that carry large gains. A proportion of the investment can be sold to make use of the allowance, and by consistent use of the allowance on an annual basis, larger positions can be reduced over a period of time.

Of course, when it comes to investments, the decision to sell assets is more complex than simply looking at the tax considerations. For example, the underlying market conditions could mean that selling an asset to crystallise a gain is made at a time when investment values are lower. Conversely, the prospects for an investment may be positive and selling to use the CGT allowance could limit future gains. This is why it is important to consider the bigger picture and take advice before reaching a decision.


Carry forward the losses

When multiple transactions are carried out in the same Tax Year, the gains and losses are offset against each other to reach a total gain for the Tax Year. For example, making a gain on an asset of £10,000 and a loss on another asset of £2,000 would lead to a net gain of £8,000. However, if the net result of the combined transactions shows a loss, this loss can be carried forward to be used against gains made in excess of the annual allowance in future Tax Years. To make use of loss relief, H M Revenue & Customs need to be informed that a loss was made within four years of the end of the Tax Year in which the asset creating the loss was sold.


Double up the allowance

Whilst the CGT allowance is individual, assets held jointly can make use of two annual allowances, meaning a combined annual allowance of up to £24,600 could be available. This can be particularly helpful when assets that cannot easily be divided or partially sold over time, for example an investment property, are sold.

Married couples can also make use of the exemption that applies to assets gifted between spouses. Such transfers are exempt, and as a result, one spouse can transfer assets to another to make use of an unused annual exemption.


Bed & ISA

One of the most useful methods of using the annual CGT allowance is to sell down assets that carry uncrystallised investment gains, and repurchase the same, or similar assets, within an ISA. As the ISA is tax-exempt, all future growth will be tax free. This transaction is known as a Bed & ISA, as assets need to be sold one day, creating the capital gain and then purchased on a following day. It is important to remember that this transaction will lead to a short period of time when funds are not invested, which could work to your advantage or disadvantage.


The future of CGT

Outside of the annual allowance and other measures to potentially reduce a CGT bill, it is important to point out that the rate that CGT is charged is relatively low – particularly for non-property transactions – compared to other rates of tax. That being said, according to data from H M Revenue & Customs, the Treasury took in £14.2bn of receipts from CGT in the 2020/2021 tax year, an increase of 42% over the previous year.

Looking ahead, reform of the CGT rules appears quite likely over coming years. Given any future Government may be looking to increase the overall tax take, making changes to CGT could yield additional revenue without potentially being seen as making a politically unpopular decision, when compared to, say, increasing Income Tax or National Insurance rates.

For this reason, it may be an appropriate time to consider long standing investment positions and take independent advice as to the best way to deal with those investments, both from the perspective of long term investment performance, and tax efficiency. If you hold assets that could be liable to CGT, speak to one of our experienced advisers for impartial advice and guidance.

If you would like to discuss the above further then speak to one of our advisers here.


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

Piece of paper torn back to reveal text reading Inheritance Tax

Get relief from Inheritance Tax

By | Tax Planning

The recent news that Inheritance Tax (IHT) receipts jumped by 14% in the 2021/22 financial year was of little surprise, given the IHT tax take has been steadily increasing for some years. The total amount of IHT raked in by the Treasury was £6.1bn in the last financial year, and the Office for Budget Responsibility predict the IHT bill will increase to over £8bn by 2026.

With property prices rising over recent years, coupled with long term increases in the value of other assets, more and more families are finding the estates of their loved ones are subject to IHT. The Nil Rate Band – the amount you can give away before IHT is charged – is frozen until at least 2026, and it is therefore unsurprising that the expected IHT receipts are set to rise.

For those where their estate is likely to exceed the IHT threshold, the good news is that sensible financial planning can help ease the potential tax liability. There are a number of methods to look to mitigate an IHT bill, and one tool available are assets that qualify for Business Property Relief (BPR).


Relief after two years

BPR was introduced in the 1976 Finance Act, and it was created to allow small businesses to be passed down through generations without facing a large IHT bill. The scope of the Act has widened so that it now allows investors of qualifying companies, as well as the business owners themselves, to obtain relief.

The tax relief is granted once an individual holds shares in a qualifying company for a minimum period of two years. The shares need to be held by the individual so that the qualifying assets remain held by them at date of death, and the shares must remain qualifying throughout the holding period.

The two year holding period is certainly more attractive than the requisite timescale needed for gifts made by an individual to escape IHT. Gifts in excess of annual exemptions are known as Potentially Exempt Transfers, and remain in an individual’s estate for a period of seven years.

A further advantage investments that qualify for BPR have over the gifting route is that funds are retained by the individual. If access to the capital is required, then the shares can be sold to raise the necessary funds. Of course, the value of the shares sold will return to the potential estate for the purposes of the IHT calculation.


BPR and AIM shares

To qualify for BPR, shares need to be purchased in unquoted companies, or selected shares listed on the Alternative Investment Market (AIM), which is a UK market primarily used by smaller companies. A wide range of investment managers have produced Discretionary Managed portfolios of shares that they believe will qualify for BPR, either through investments in unquoted companies, or through qualifying shares that are listed on the AIM market.

Where investment managers use unquoted companies, they will often adopt an investment approach whereby funds are allocated in businesses that engage in trades such as renewable energy, property or business lending. These types of strategy often look to generate modest returns over time. Shares in AIM are likely to be more volatile, due to the often unpredictable nature of smaller companies, where business fortunes can often change rapidly.

Whichever approach is adopted, it is important to acknowledge that buying shares in smaller or unquoted companies, is likely to carry additional risks than investing in larger and more well-established companies. In particular, the shares of unquoted companies may be harder to sell.


Political interference

Whilst IHT tax legislation has been stagnant for some time, a risk of any longer term planning is that the tax rules are changed after plans have been put in place. This could potentially have the effect of undoing prudent measures to restrict or eliminate the tax bill.

IHT is an easy tax to collect, as the personal representatives of an estate that is liable to IHT cannot obtain the grant of probate to deal with the estate until the IHT has been paid. Furthermore, beneficiaries of estates that are liable to IHT may be perceived by some quarters as receiving a large inheritance, and potentially makes IHT a soft target when it comes to raising revenue.

Both Tory leadership candidates have mooted that they would review the current IHT regime if they were elected as Prime Minister, and opposition parties have also laid out plans in previous manifestos to reform the way that estates are taxed. Reform of the IHT rules is likely in the longer term, and it is therefore important that plans can adapt to potential changes.


Get the right advice

Given that IHT planning is carried out with longer term objectives in mind, it is important to obtain appropriate advice from experienced financial planners. Investments that qualify for BPR are complex and given the wide choice of options available, it is important that providers and products are selected carefully. At FAS, we are adept at providing clients with comprehensive IHT planning advice as part of our holistic advice service.

If you would like to discuss how to reduce the impact of IHT on your estate with one of our experienced advisers, 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 circumstance.