Tax-Year-End (5 APRIL) is approaching FAST and its time to take full advantage of all those tax benefits and allowances, that not many people utilise.
This is Tip #4 of the blog series with the main topic of Pre-Tax-Year-End tax planning. If you missed Tip #1,#2 and #3 on Venture Capital Trusts and Enterprise Investment Schemes and How to maximise your allowances, head over to our blog page.
The tax tips are to help make sure that you best utilise your Tax-Year-End options and today we focus on Inheritance Tax
What is Inheritance Tax (IHT)?
Inheritance Tax (IHT) is a tax on the estate (the property, money and possessions) of someone who has passed away.
How much IHT will I pay?
The current rate of IHT is 40%, each individual has a basic nil rate band of £325,000. There are various scenarios where this may not hold true, you may have an additional nil-rate band from either your late spouse or passing your main residence to a direct decedents. You may also have a reduced nil-rate band from gifts made throughout your lifetime.
We are experts in this field so click below for one of our advisers to give you an estate appraisal.
Residence Nil Rate Band (RNRB)
The Residence Nil Rate Band (RNRB) – also known as the home allowance -has been introduced recently. Provided certain conditions are met, the home allowance gives you an additional allowance to be used to reduce any IHT liability against your home.
The RNRB allowance is currently £150,000, but it will rise to reach £175,000 in 2020/21.
IHT Gifts, Reliefs & Exemptions
Some gifts and assets are exempt from IHT, such as wedding gifts and charitable donations. Relief might also be available on certain types of property such as farms and business assets.
You can gift up to a value of £3,000 each tax year, click below to find out more on how we can help you optimise your gifting allowance.
*utilising these allowances are provider timeline dependent.
Tax-Year-End (5 APRIL) is approaching FAST and its time to take full advantage of all those tax benefits and allowances, that not many people utilise.
This is Tip #3 of the blog series with the main topic of Pre-Tax-Year-End tax planning. If you missed Tip #1 and Tip #2 on Venture Capital Trusts and Enterprise Investment Schemes, check out the AWM blog.
These tips are to help make sure that you best utilise your Tax-Year-End options and this week we focus on Maximising Your Allowances*
Maximise Your ISA Allowance
The maximum you can contribute to an ISA this tax year is £20,000. This is a very tax-efficient investment vehicle so please contact us if you want to discuss making further contributions or finding out if you still have any allowance remaining. Remember that if you don’t use the allowance now, you will lose it!
As part of the £20,000 ISA allowance, it’s also possible to invest up to £4,000 in a lifetime ISA which receives an annual government bonus of up to £1,000 a year. Under-18s or those who wish to save on behalf of a minor can put up to £4,368 into a junior ISA.
Maximise Your Gifting Allowance
Everyone is able to gift £3,000 to someone and it will be immediately outside of your estate for inheritance tax. You can top this up to £6,000 if you didn’t use the allowance in the previous tax year too.
Top-Up Your Pension
Another way to reduce tax and at the same time boost your retirement pot is to make sure you use up your entire annual pension allowance, which is currently £40,000.
Questions you have about optimising your pension contributions:
Do you have unused allowances from previous tax years which expires soon and may be utilised?
Have you reviewed your pension contributions?
Should you pay more into your pension?
Are you aware of the potential inheritance tax benefits of maximising your pension fund?
Once you earn more than £150,000, your annual allowance starts to fall, known as the ‘tapered annual allowance’. The tapered allowance applies if your ‘adjusted income’ is more than £150,000. Adjusted income is your total taxable income – so salary, dividends, rental income, savings interest, plus employer contributions. If your total adjusted income is between £150,000 and £210,000, you lose £1 of annual allowance (starting at £40,000) for every £2 of adjusted income. Once your income reaches £210,000, you’ll be left with an annual allowance of £10,000.
If your total pension savings exceed the lifetime allowance of £1.055 million in 2019/20, you may be liable to tax when you draw benefits.
Capital Gains Allowance
Everyone has a Capital Gains Tax allowance of £12,000 in this tax year. You can deliberately create a gain on an investment to use the allowance, so that when the investment is finally encashed you may not have any Capital Gains Tax to pay.
*utilising these allowances are provider timeline dependent.
Tax-Year-End is approaching and its time to take full advantage of all those tax benefits, that not many people seem to know about.
This is Tip #2 of the blog series with the main topic of Pre-Tax-Year-End tax planning. If you missed Tip #1 on Venture Capital Trusts, head over to the AWM blog.
These tips are to help make sure that you best utilise your Tax-Year-End options and today we focus on Enterprise Investment Schemes (EIS).
What is EIS?
Introduced in 1994, the Enterprise Investment Scheme (EIS) is a UK government scheme designed to encourage investment in small or medium sized companies. They do this by offering tax reliefs to individual investors who buy new shares in these smaller companies.
An individual can invest anything up to £1 million (or £2 million given at least £1 million is invested in Knowledge-intensive businesses) per tax year for tax relief.
To access an EIS an investor needs to invest in the shares of a small, unlisted company. Small means 250 employees or less, and maximum gross assets of £15 million (before the investment). Unlisted means that the company is not listed on a major stock market.
Investing in small companies is generally riskier than buying shares in large companies. However, small companies can grow very quickly.
The Different Types
There are two approaches an investor can access EIS investment:1. Direct/Single EIS Company
An investor can invest directly in EIS qualifying companies and can choose which companies to invest in. These types of opportunities are more suitable for sophisticated investors who have good knowledge and expertise to assess and understand the companies they invest in.
2.EIS Fund/Portfolio
Most of the offers in the EIS space are in the form of an EIS fund or portfolio service provided by EIS investment managers who have the expertise to source and assess deals and build a portfolio of multiple EIS companies for clients on a discretionary basis. Through investing in an EIS fund or portfolio, you can benefit from the fund manager’s experience and expertise of deal picking and at the same time achieve a level of diversification within the portfolio.
AWM’s Recommendations
AWM has a dedicated investment team researching investment offers in the whole of market. We have a rigorous selection process in place, aiming to find the best EIS offers in the market for our clients. If you would like to hear more about your options please contact us by clicking below.
Important Facts
It’s important to note that Enterprise Investment Schemes are not a viable option for everyone. We cannot guarantee the investment will take place to accommodate the 2019/2020 Tax-Year-End.
Ascot Wealth Management will only recommend individuals to invest in EIS qualifying companies after undertaking enhanced due diligence on the individual and ensuring they are suitable for the recommendation, this includes a High Net Worth Suitability Assessment. The general risks associated with EIS investment has been listed below which will apply for all EIS. There would also be deal-specific/sector-specific risks in EIS offers that need to be further considered at the specific EIS fund level or on a deal by deal basis.
Please click below to find out more about the potential risks of EIS or chat with one of our advisers to find out what the most viable option is for your personal situation.
*utilising these allowances are provider timeline dependent.
Tax-Year-End is approaching and its time to take full advantage of all those tax benefits, that not many people seem to know about.
AWM will be running a series of blog posts on Pre-Tax-Year-End tax planning over the next week, so stay tuned. The aim of the blog series is to help make sure that you best utilise your options and today we focus on Venture Capital Trusts.
What is a Venture Capital Trust?
A Venture Capital Trust (VCT) is a company whose shares trade on the London stock market. A VCT aims to make money by investing in other companies which are typically very small and are looking for further investment to help develop their business.
Tax Benefits
Income Tax Relief: Up to 30%
Tax-Free Dividends: The dividends you receive from the VCTs you invested are tax-free.
Tax-Free Capital Growth: You won’t pay any Capital Gains Tax on profits from selling your VCT shares
The Different Types
VCTs commonly fall into three broad categories based on the profile of underlying companies a VCT invests in:
Generalist: Investments are usually made in unquoted companies across a wide range of sectors.
Specialist: Investments are made by a VCT fund manager specialising in a defined investment sector (e.g. healthcare, technology, environmental and media).
AIM: – The VCT makes investment mainly in companies whose shares are listed on the Alternative Investment Market.
AWM’s Recommendations
AWM has a dedicated investment team researching investment offers in the whole of market. We have a rigorous selection process in place, aiming to find the best VCT offers in the market for our clients. If you would like to hear more about our panel then please contact us by clicking below.
VCT Versus EIS
VCTs normally have a lower minimum investment amount which usually ranges from £3,000 to £6,000 compared to EIS fund which usually starts with £10,000 or more.
VCTs’ are usually more diversified than an EIS fund. A VCT would normally have 30 to 80 underlying companies while an EIS fund may normally have 4 to 15 underlying companies.
VCTs can pay out dividends and are tax-free, providing you with a regular early realisation of the investment while EIS companies normally do not pay out dividends. If they do the dividend is not tax-free.
Important Facts
Its important to note that VCTs are not a viable option for everyone. VCT’s are not FSCS protected and investing in a VCT is dependent on market capacity and we cannot guarantee the investment will take place to accommodate for the 2019/2020 Tax-Year-End.
Please click below to find out more about the potential risks of VCTs or chat with one of our advisers to find out what the most viable option is for your personal situation.
*utilising these allowances are provider timeline dependent.
It’s key to plan ahead for life’s unexpected events as anything can happen at any time. It is therefore crucial to have your affairs in order should the worse happen. One of our recent cases just reaffirmed the importance of planning ahead.
After undergoing an operation, Sally* contacted our estate planning team to inquire about a Lasting Powers of Attorney (LPA)[i] to enable her family to make financial and medical decisions should the need for this arise.
On the back of the meeting, Sally decided she would like to consider the LPA and a follow up meeting was scheduled for a few weeks later. What couldn’t have been predicted was that during this time, Sally’s condition deteriorated and she was re-admitted to hospital. Her doctor has explained that she cannot now sign an LPA due to her mental capacity and, as such, her family are unable to make decisions regarding her medical care or finances.
The only option that remains now is to apply to the Court of Protection to become Deputies which unfortunately can take months and is considerable more expensive than an LPA.
It’s not always easy to talk about sensitive topics like this but it is important to have plans in place should the worse happen.
Please get in contact with our in-house estate planning adviser if you need any advice or assistance. Remember that the initial assessment is free.
*name changed
[i] A lasting power of attorney (LPA) helps you appoint people you trust to act on your behalf if you should lose mental capacity.
Enterprise Investment Schemes (EIS) are tax-efficient schemes created by the UK government during 1994 and which have since raised over £20 billion in investment. They were designed to encourage individuals to invest in smaller high-risk companies in return for a range of attractive tax reliefs that they could not obtain via directly investing into the companies.
There are a few qualifying rules to meet the EIS requirements. Firstly, investors cannot control more than a 30% stake in any company invested through EIS and can only invest up to £2 million per year, provided anything over £1 million is invested in ‘knowledge-intensive companies’. In addition, eligible companies must have:
Fewer than 250 full-time employees
Gross assets not exceeding £15 million
‘knowledge-intensive’ companies will be able to receive up to £10 million in EIS funding in a year
Held the shares for at least three years from the date of issue of the shares or three years after commencement of trade
There are a number of benefits which are as follows:
Income Tax
Income tax relief of 30% is available to individuals for the entire invested amount in EIS. This tax liability reduction is up to £300,000 per tax year. Therefore, if you make an investment of £10,000 you can save £3,000 in income tax.
Capital Gains Tax
No Capital Gain Tax is payable/due on disposal of shares provided they are held for three years.
By investing in EIS qualifying shares, investors can defer Capital Gain Tax on gains realised on different assets. To be able to receive this relief, investors must subscribe for EIS shares during the period of one year before or three years after selling or disposing of the asset. Deferral relief is unlimited and can also be claimed by investor whose interest in the company exceeds 30%.
Inheritance Tax (IHT)
Shares in EIS qualifying companies will generally qualify for Business Relief for IHT purposes. Relief can be at rates up to 100% after two years of holding the investment, therefore any liability for IHT is reduced or eliminated in respect of such shares.
Venture Capital Trusts (VCT)
VCTs began in 1995 to encourage investments into early stage companies based in the UK. Due to the risks associated with early stage investments, HMRC offered investors generous tax breaks for investors taking such risks. VCTs therefore have great similarities to EIS qualifying products, but the key difference is EIS allows direct investments into qualifying companies whereas a VCT is an investment into a trading company that then goes onto provide the start up funding.
To qualify, the VCT must satisfy a number of rules to gain investors tax relief:
The VCT must be unlisted at the time of investment with no plans to IPO unless it is onto AIM
The company must have less than 250 employees
The company must have been established less than seven years ago
Funding raised by the company cannot be more than £15million from VCT funds
Tax Relief
As mentioned, in order to encourage investors to take VCT risk HMRC offer tax reliefs, including:
Income Tax
Similar to EIS investing, you receive 30% income tax relief on the amount you invest, but shares must be held for five years as opposed to three with EIS. It is also important to the note the maximum amount eligible for tax relief is £200,000.
For example, if you invest £10,000 into a VCT, £3,000 will be taken off your income tax bill at point of completing your tax return.
Dividends received via VCT’s are also tax free
Case Study 1: EIS recommendation
A long term client of ours, who is a high net worth client and running his own Ltd Company, was looking at reducing the amount of tax he pays whilst also experiencing an investment. Before recommending this type of product we had to ensure he understands the risks especially the illiquidity nature and we had to account for how experienced he was with these types of unregulated financial products. These products although offering tax incentives, are not covered by FSCS (Financial Services Compensation Scheme) nor can the client complain to the Ombudsman. After taking the above into account, we recommended a £10,000 investment into one of our EIS schemes. As this was his first experience investing with an EIS, we only recommended a relatively small amount to start off with and to ensure he still maintains a suitable emergency fund and enough cash that is not locked in an investment. During his next tax return, he was able to obtain tax relief at 30% of his investment which was £3,000 of his £10,000 investment.
Case Study 2: VCT recommendation
A high net worth client of ours aged 61, was in the process of winding down for retirement and was targeting an income of £5000 per month. After performing our necessary due diligence in ensuring he understands the risks that as those mentioned above, we recommended a VCT as one of the investments to achieve this. He had already fully utilised his ISA allowance, was already invested in structured products and peer to peer lending so we recommended a VCT as the next investment. He was also looking at a tax relief investment which the VCT would provide along with capital gains free growth and tax free dividends, the latter of which could be used to provide an income. The VCT also allowed for another avenue of diversification in his portfolio.
Inheritance Tax (IHT) is a sensitive subject and one that you should be considering and thinking about even throughout the early stages of your lifetime. Your early years are deemed your accumulation phase as this is where you will see the majority of your wealth building.
IHT can be due on an individual’s estate when they die if their estate is valued at more than their available nil rate band (£325,000 in 2019/20). Your NRB is reduced by any non-exempt transactions made in the seven years prior to death. A range of IHT exemption are available to reduce your IHT liability; I am going to discuss benefits and drawbacks of trust planning.
A trust is a way of managing assets (money, investments, land or buildings) for people. There are different types of trusts and each taxed differently.
Trusts involve:
the ‘settlor’ – the person who puts assets into a trust and stipulates the terms of the trust
the ‘trustee’ – the person who manages the trust and ensure compliance with the settlors wishes
the ‘beneficiary’ – the person(s) who benefits from the trust
Trusts are set up for a number of reasons, including:
to control and protect family assets
when someone’s too young to handle their affairs
when someone can’t handle their affairs because they’re incapacitated
to pass on assets while you’re still alive
to pass on assets when you die (a ‘will trust’)
Gifting to a Trust
Gifting to the trust has a tapering allowance against IHT, demonstrated through the following decreasing basis:
For an investment of £325,000 (maximum gift each 7 years without incurring a lifetime charge); your IHT liability would be £130,000 at 40%, if you gift it to a trust you would see the following reductions:
Trust Options
Family Gift Trust (FGT)
Probably the most traditional method of reducing IHT liability, but still hugely popular and very effective having stood the test of time is a lump sum gift into a family gift trust. We feel this could be hugely beneficial to many individuals, as we could place some savings into this trust to start the 7-year clock and take it outside of your estate for IHT purposes. You can only gift up to the nil rate band in any 7 year cycle without incurring an immediate 20% IHT liability (lifetime rate).
Positives: Simple and traditional form of IHT mitigation.
Negatives: Seven Year clock must be survived, and the control of money is lost.
Gifting Outside of Normal Expenditure
While the lump sum Family Gift Trust option mentioned above is certainly the most traditional and vanilla method of reducing an IHT liability, we will now move on to discussing more tailored uses of Trusts and allowances.
The first of these methods is “Gifting outside of Normal Expenditure”. With this method you would regularly and continuously use excess income to gift, there is no seven year clock. Assets gifted outside of your expenditure are considered immediately outside of your estate.
This option only allows for regular gifts to be made when they are from income and the value transferred leaves you with sufficient income to maintain your usual standard of living. It is particularly appropriate for high earning individuals who can afford to gift a larger amount on a regular basis.
Positives: No need for lump sum to be gifted away. This is a progressive method of IHT mitigation, and the money gifted is immediately outside of estate.
Negatives: Control of money is lost.
Annual Allowance Gifting
Another key strategy is to utilise the individual annual exemption. The first £3,000 of an individual gift in a tax year is immediately exempt from IHT. The exemption can apply to transfers into trust as well as outright gifts. The exemption can cover a single gift or several gifts up to this amount. It can also cover the first part of a larger gift. Once the current tax year’s annual exemption has been used, it is possible to bring forward any unused annual exemption from the previous tax year.
Positives: Effective and efficient way of utilising an annual allowance.
Negatives: Limited to £3,000 per year.
Flexible Loan Trust
This method is not as commonly used as the previous Trust strategies, however it continues to be a viable option, especially whereby a Lump Sum is looking to be gifted away, and an ongoing income is sought.
This method encompasses the following key steps:
Lump sum of money is loaned to a Trust
The Trusts invests this money inside an Investment Bond
As the money has been given as a loan, it effectively freezes the IHT liability on this amount.
All growth on the money invested belongs to the trust, and not to the lender.
The loan can then be paid off over time, ideally when income is required. Thus the money received back from the Trust would be used and not retained in the estate.
Overall, this can be an effective option in order to “freeze” ones IHT liability on a sum of money.
The Flexible Loan Trust is an effective estate-planning solution for clients who wish to achieve IHT savings over time and wish to have continued access to their original capital. Even though a discretionary trust is established, there are no immediate IHT consequences to consider.
Positives: Allows growth to accrue on investable assets outside of the estate instead of building additional wealth.
Negatives: The capital used to loan to the trust falls back into the estate at the date of death.
If any of these options discussed are of interest to you or you are just starting to consider the impact IHT could have on you and your loved ones then please get in contact with us for a free initial consultation.
There is no change to dividend tax rates in 2019/20:
The tax-free dividend allowance is £2,000
Basic-rate taxpayers pay 7.5% on dividends
Higher-rate taxpayers pay 32.5% on dividends
Additional-rate taxpayers pay 38.1% on dividends.
Pensions contributions receive full income tax relief, this means it only costs basic rate taxpayers £80 to save £100 (20 per cent tax relief) while higher rate taxpayers only need to pay £60 to save £100 (40 per cent tax relief).
You got a pay raise and your salary is now on the threshold of the 40% tax rate. How do you avoid the potential tax trap?
Luckily, it may be possible to avoid it after all because any contributions you make into your pension are deducted from your salary before you are taxed. In other words, your taxable salary is reduced.
Example 1
Sally earns a gross salary of £50 000. On this salary, she pay basic rate tax of £6 900 and higher rate tax of £3 650. If Sally was to make a pension contribution of £3 650, her gross taxable income would reduce to £46 350 saving her £1460 in tax thus avoiding the tax trap.
Total tax savings after pension contribution = £1 460 (40% tax trap).
Example 2
Barbara earns a gross salary of £110 000 and is a Higher Rate Tax payer
Barbara contributes £10 000 of her salary to her pension on an annual basis reducing her taxable income to £100 000 per year. By doing this, she saves £6 000 on her potential tax bill of £34 360.
*Personal allowance of £6,850 due to the tapering of income above £100,000 (whereby you sacrifice £1 of personal allowance for every £2 of income until your personal allowance is £0)
Total tax savings after pension contribution = £6 000 (60% tax trap).
Remember that the Tax Year end is coming up on 5 April. Act fast so we can help you submit those tax returns!
Note: Don’t leave it until the last minute. Remember to allow 10 working days to get funds in place.
If you lived to be 90, will your pension be sufficient?
According to the Office for National Statistics the average life expectancy at birth for a UK male is 79.2 and 82.9 for their female counterparts. However, in 2017 alone there were 579 776 people aged 90 which begs the question, will your pension be enough if you lived to be 90?
Saving plans, such as pensions, were developed in another time when the typical retirement might only last a decade. Since the introduction of a UK state pension in 1908, life expectancy has increased by 36 years due to scientists tackling life shortening diseases yet the retirement age has barely changed.
Some help is available already – the government is offering a generous tax relief on pension contributions while employers will save on your behalf. It is important to start saving as early as possible as for each year you delay saving for retirement, or don’t save enough, the proportion of your annual earnings you’ll need to put aside for your “golden years” will increase.
What are your options? You can start investing into a pension scheme today and make regular contributions to it or you can also look at investing into an investment scheme that suits your risk appetite to supplement your pension income.
The good news is you don’t have to find retirement solutions by yourself, contact us for your free initial meeting today.
