Year & Tax Planning

Year End Planning.

This month we look at tax planning, auto-enrolment, tax relief on pensions and annuities

Saturday, 1st February 2014

The start of the year is the perfect opportunity to review your tax affairs and finances since it is the lead up to the end of the tax year on 5 April, giving you enough time to make changes and adjustments and maximise the tax-saving opportunities on offer.

Here are some ideas for those looking to do some year end tax planning:

Individual Savings Accounts (ISAs) offer an income tax and capital gains tax free from investment. The maximum allocation for investment is set each year and for 2013/14 tax year the limit for adults is £11,520. The full allocation can be put into a stocks and shares ISA or up to half (£5,760) can be invested in a cash ISA. It is advisable to invest as much of your ISA allowance as you can afford to since returns are tax-free.

It is worth noting that 16-17 year olds are not only entitled to open an adult cash ISA at £5,760 but they can also have a Junior ISA account £3,720 which is a combined £9,480.

Another way to make more of your finances for the future is to maximise your pension contributions. The benefit of a pension is the valuable tax relief they offer. For a basic rate taxpayer there is a saving of 20p in tax for every pound you make in pension contributions. For a higher rate taxpayer this rises to 40p in tax for every pound you contribute. For additional rate taxpayers, a saving of 45p in tax for every pound you contribute is applicable.

The law currently states the annual allowance for pensions savings that benefit from tax relief for a tax year is set at £50,000. However, this is due to be reduced in the new tax year 2014-15 and will be set at £40,000.

Further savings can be made through using ‘carry forward’. This allows savers to contribute more than the annual allowance without incurring tax charges. Through carry forward, any contributions which exceed the annual allowance in one tax year can use unused allowance from the previous three years. The maximum amount that can be carried forward from any given tax year is £50,000. In order to carry forward tax relief from an earlier tax year, you must have been a member of any registered pension scheme in that tax year.

Though the majority of people would not have pension savings worth more than the £1.5 million lifetime allowance (reducing to £1.25 million from 6 April 2014), if you do have pension savings worth more than this when you take your benefits, you will be liable for the lifetime allowance tax charge on the excess unless you have some form of lifetime allowance protection.

There are two new forms of protection being introduced from April 2014; fixed protection 2014 and individual protection 2014 – these can be used to protect individuals who have built up pension pots of more than £1.25m but no more than £1.5 million. Applications for fixed protection 2014 have been available since August 2013.

The rules are complex but with fixed protection 2014 you can fix your lifetime allowance at £1.5 million, meaning that you can take pension savings worth up to £1.5 million without paying the lifetime allowance charge. To get fixed protection 2014 you must apply before 6 April 2014. However, you can not have fixed protection 2014 if you already have primary, enhanced or fixed protection. The individual protection 2014 will only be available for those with pension savings in excess of £1.25 million on 5 April 2014.

Another option is investment in Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EISs). These are designed to help small higher-risk businesses raise the finance to help them grow and develop. Investors in these types of schemes get tax reliefs in return for investment as well as spreading investment over a number of companies.

VCTs must be approved by HMRC and tax reliefs are only available to individuals over 18 and not trustees, companies or others. Investment in VCTs brings with it certain tax reliefs including Income Tax and Capital Gains Tax. VCTs are also exempt from Corporation Tax on any gains arising on the disposal of their investments.

For VCTs, income tax relief is at the rate of 30% of the amount subscribed for new ordinary shares – this relief is only available for the tax year in which these ‘eligible shares’ were issued and also provided that you subscribed to them on your own behalf, the shares were issued to you and you hold them for at least five years. VCTs may not be subject to Capital Gains Tax (CGT) on any gain upon disposal of shares since CGT exemption is available for both newly issued and second-hand shares.

With EISs, the company must comply with a number of rules for at least three years after investment before tax relief can be given. The maximum amount for 2012-13 onwards on which relief can be obtained is £1 million. The relief is available for the year of assessment in which the shares are issued. For investors who have received income tax relief and the shares are disposed of after being held for a qualifying period, any gain is free from CGT.

Which ever way you approach it, the more you manage to save now, the more comfortable your future retirement is likely to be.

Auto-enrolment – We’re here to help

New research has highlighted the concerns of small business owners over introducing Automatic Enrolment (AE) of workers into workplace pension schemes.

The results of a survey of 600 small business owners carried out by business software specialists Sage revealed the biggest auto-enrolment fear of business owners was the impact on their cash flow, cited by 29 per cent.

A lack of understanding of the new legislation was the key concern for almost one in ten (9.5 per cent) respondents while the biggest worry for just under nine per cent was the increased administrative burden and updating payroll processes. The findings were published on 8 November.

Auto-enrolment of eligible workers into qualifying workplace pension schemes began with the largest firms in October 2012.

As the initiative gathers pace, employers with between 249-499 employees will start to auto-enrol in January and February and smaller employers will not be far behind, for example employers with 50-61 workers will come on board between August 2014 and April 2015. All employers will be brought on board by 2018.

If you run a smaller business, the date when you need to start enrolling your employees may still seem a long way off – but if you want to get auto-enrolment right, you need to start planning as soon as possible.

Alongside the concerns highlighted by the Sage survey, employers also need to consider a range of issues including funding the contributions they must make to their workplace pension scheme and either putting in place a compliant pension scheme if they do not already have one or making sure that an existing scheme meets auto-enrolment requirements.

They also need to understand which of three categories of worker their workforce falls into. Based on age and earnings, each category of worker has different rights, entitlements and employer communication obligations.

As we have pointed out in previous Newsletters, if employers wish to have the choice of using life companies as their potential AE provider, then some are warning of capacity issues and demanding consultations commence at least six months prior to the AE staging date.

At French and Associates, we can provide advice and guidance for your business on the introduction of an auto enrolment for your business. Alternatively, we can provide an assessment of the pension schemes you currently have in place and can suggest changes in line with new legislation. For more information, please contact us to talk about auto-enrolment.

The Alternative Investment Market (AIM) – one way to protect your inheritance

Unfortunately, thanks to current inheritance tax (IHT) rules, the taxman can take a large slice of an individuals’ estate when they pass away and with no apparent plans to change the threshold, which is currently frozen at £325,000 until at least April 2018, this will continue to be the case.

However, with the right planning and professional advice, there are a number of ways to protect your assets and minimise or even eliminate IHT liabilities altogether.

Here are some of them:

Discounted Gift Trusts (DGTs)

Discounted Gift Trusts (DGTs) are a popular choice among individuals wishing to make the most of their wealth without it being liable to IHT because there are no limits to the amount you can invest. A DGT also offers tax-deferred income from the investment during your lifetime at a level which suits you.

Although part of your investment will be exempt from IHT immediately, it can take a long time before it becomes fully IHT exempt (seven years later) meaning that the investor remains liable for IHT if they die within that time period.

Business Property Relief (BPR)

For those people who do not wish to wait seven years to become IHT exempt, one alternative could be Business Property Relief (BPR). This tax incentive was created to allow small businesses to be passed down to future generations without actually acquiring any IHT liability.

BPR rules state that any qualifying investments benefit from 100 per cent IHT relief after only two years (qualifying investments include shares in trading companies quoted on the Alternative Investment Market (AIM) or unquoted UK businesses).

Other benefits of BPR include the fact that investors get to retain access to their investment which then allows them to build capital value, take a regular income or simply dispose of their holding when they wish. Products benefitting from BPR allow the ability to transfer between spouses, following the death of the first spouse, without losing the two year qualification period and as a result, only one spouse or partner needs to survive for two years for their BPR-based investment to be exempt from IHT.

Individuals who have accumulated substantial sums in ISAs may find that, although they are tax efficient, they are still liable to IHT. However, new ISA rules were introduced in August 2013 allowing investors to hold shares in qualifying AIM companies and many AIM shares qualify for BPR, effectively removing them from the inheritance tax bracket if they have been held for at least two years.

When it comes to reducing inheritance IHT liabilities, with the right financial planning, BPRs and DGTs can be a great solution; especially given the current laws are now affecting a large proportion of the population who would not class themselves as particularly wealthy.

Our expert team at French and Associates can help you optimise your tax position and provide guidance on how to make the most of your options, including investment into the Alternative Investment Market (AIM) and how it can help with inheritance tax mitigation. For more information, please contact us.

Britons share in £75bn inheritance

UK adults inherited £75 billion in just two years, according to new official figures.

The Office for National Statistics revealed on 29 October that 1.6 million adults – 3.6 per cent of the adult population – received an inheritance worth at least £1,000 between 2008 and 2010.

While half of those inheriting received less than £10,000, one in ten inherited £125,000 or more and just one-fifth of inheritances added up to £57 billion.

Nearly nine in ten inheritances (88.4 per cent) were partially made up of money or savings. Land or property formed part of 19.5 per cent of inheritances and personal possessions such as jewellery or collectibles were included in 12.4 per cent.

Almost half of inheritances (46.8 per cent) came from a parent or parent-in-law while just over a fifth (22.5 per cent) came from grandparents and a fifth (11.1 per cent) from an uncle or aunt. One in 20 inheritors (five per cent) were remembered by a non-relative, like a friend or neighbour, in a will.

Exactly half of those inheriting property sold the assets while another 17.9 per decided to make it their home.

Of those inheriting non-property, nearly two in three (61 per cent) decided to save at least part of it, one in seven used at least part to pay off debts (15.6 per cent) and nearly one in ten (9.4 per cent) chose to give all or part of their inheritance away.

The substantial sums being passed on through inheritances highlight the value of expert advice and early tax planning in mitigating future inheritance tax liabilities.

At French and Associates, we can provide expert advice on maximising inheritance tax efficiency. For anyone who believes they may be liable to IHT, it makes sense to take advice sooner rather than later, so for more information, please contact us.

Pension savers miss out on £229m in tax relief

Failing to claim pensions tax relief is costing higher rate taxpayers almost £250 million a year, according to research from the Prudential.

It revealed in October last year that, based on the findings of a survey of higher rate taxpayers, more than a quarter (26 per cent) of those with defined contribution pension schemes were failing to claim the full tax relief worth 40 per cent they were entitled to.

The Prudential estimated that around 182,500 higher rate taxpayers were failing to maximise their tax relief, losing out on £229 million in the process.

It said the amount of tax relief not being claimed could be even higher as another 15 per cent of higher rate taxpayers with defined contribution pension schemes did not know whether they were claiming the relief, which could be worth up to £1,255 a year. The Prudential urged higher rate taxpayers to act now to check whether they were claiming the maximum they were entitled to and to reclaim any tax relief they had missed out on in the past.

Taxpayers who fill in an annual tax return can claim for contributions paid as far back as the 2011/12 tax year. If the taxpayer does not complete a self-assessment return, claims can be backdated for up to three tax years. For claims going back to the 2010/11 tax year, the deadline is 31 October 2014.

Members of occupational pension schemes receive basic and higher rate tax relief automatically through their payroll. But members of personal pension schemes, including SIPPs (Self Invested Personal Pensions) and stakeholder pensions, only receive basic rate 20 per cent tax relief automatically. They need to claim the additional relief through their annual tax return or by informing HM Revenue & Customs.

Pensions and related tax issues can be complex, so it makes sense to seek professional advice. For more information please contact one of our experts at French and Associates who can provide advice and guidance on how to maximise your tax relief.

Annuities – are they worth the bother?

Pensions minister Steve Webb, who has sparked controversy with a range of proposed reforms to the pension system has questioned the wider suitability of annuities as a means of providing retirement income.

He said: “If annuities were designed for a world where people retired and lived for ten years, but now they retire and live for 30 years, then we need a rethink.”

Annuities are insurance policies which convert a lump sum – usually the proceeds of someone’s pension contributions made through their working life – into an income which is paid for the remainder of their life. Once the annuity is bought, the process cannot be reversed.

Although annuity rules have been slightly relaxed in recent years they are still bought by 400,000 retirees each year. With annuity rates currently very low – a £100,000 savings pot will buy a 65 year-old man income of about £450 per month – resentment toward the annuity system is rife and mounting.

There are also doubts about the value offered by the insurers who provide annuities, as well as about the role of commission-hungry brokers who act as middlemen between insurers and savers.

As The Telegraph has reported, Steve Webb recently suggested changing the rules to allow annuitants to swap providers if they are able to improve their returns by doing so. Insurers have not welcomed the suggestion.

When questioned further at a pensions industry event in London recently, Mr Webb widened his criticism of annuities and said the entire concept needed to be looked at.

“We are moving from a world where annuities lasted for a relatively short term to where they are supposed to cover a very long-term,” he said. “A switchable annuity is perhaps one solution.”

One of the key recent reforms by the insurance industry has been the promotion of the “open market option” whereby savers are alerted to the fact they may be able to get a better annuity income by shopping around for the best-paying policy. Mr Webb also questioned this, suggesting it might discourage savers from the possibility of doing without annuity altogether.

When planning for your retirement, it is always recommended that you seek professional advice in order to get the best solution for you. At French and Associates we provide comprehensive retirement strategies which are tailored to individual needs and requirements as well as securing your finances for the future. For more information, please contact us.