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Financial Guidance Thread

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View Goal Machine's Profile Goal Machine Flag The Cronx 01 Jun 20 10.55am Send a Private Message to Goal Machine Add Goal Machine as a friend

Inheritance Tax (IHT) and how to reduce tax on your estate on death

As Benjamin Franklin said “There are two things certain in life: death and taxes”. With IHT you can even leave a large tax bill after life! The good news is that this can often be avoided with careful planning made in advance.

WARNING Inheritance Tax planning is a complex area. This article is designed to be high level and I have purposely excluded some of the finer detail for ease of reading. This is intended for guidance only to help you understand your own position which may highlight a need to review your current arrangements.

So, what is Inheritance Tax? It is a one-off tax charge, payable by the beneficiaries of your estate on assets above a £325,000 threshold. Assets over £325,000 are subject to a whopping 40% tax charge. Assets below the £325,000 nil rate band can be inherited tax free.

Where 10% or more of the estate is left to charity, the tax charge on the remainder reduces to 36%.

If you are married, your £325,000 nil rate band can be transferred to your surviving spouse upon death.
The most common assets included within your estate are:
• Main Residence*
• Second homes/holiday homes/rental properties
• Cash, savings & ISA’s
• Personal belongings such as cars and artwork
• Gifts made within 7 years prior to death**

*The government introduced the Residence Nil Rate Band (RNRB) in April 2017. The RNRB is £175,000 per individual and exists in addition to the £325,000 nil rate band. Like the nil rate band, it can also be transferred to the surviving spouse on death. This was designed to protect the family home if being passed to direct descendants. If the home is valued at less than the RNRB, the RNRB is reduced to the value of the home. The RNRB has a tapered reduction for estates with a total value exceeding £2m.

To give an example: Peter & Alice are married and own joint assets which include £500,000 in cash savings and their main residence valued at £600,000. Peter dies, leaving everything to Alice. Peter’s nil rate band of £325,000 plus his RNRB of £175,000 transfers to Alice.

Alice dies soon after with everything to be inherited by their children. Alice has her own £325,000 nil rate band, her own £175,000 RNRB, plus what was transferred from Peter on his death (£325,000 nil rate band + £175,000 RNRB).

The result is that Alice effectively has a £1m nil rate band (nil rate band x2, plus RNRB x2). As the estate is valued £1.1m, the first £1m is inherited tax free, with the £100,000 excess subject to a 40% (£40,000) IHT charge to be paid by the children.

**If death occurs within 7 years of the gift, the value of the gift is deemed to be part of the estate for IHT purposes. Should this gift take the value of the estate over the £325,000 nil rate band and death occurs within 3 years of the gift, the excess will be subject to the full 40% tax charge. There is then a tapering as follows:

• Death between years 3-4 is a 20% reduction
• Death between years 4-5 is a 40% reduction
• Death between years 5-6 is a 60% reduction
• Death between years 6-7 is an 80% reduction

To use the same example as before, lets now assume that Peter gifted his son & daughter £100,000 each four and half years before his death. This £200,000 is added to the other £1.1m of assets bringing the estate value to £1.3m. The 40% charge to the £100,000 excess remains as before. With regards to the £200,000 in gifts, as death occurred between 4-5 years ago, there is a 40% reduction. So (£200,000 x 40%) - 40% = £48,000 tax charge on the gifts.

To make things more complicated (sorry!), although the taper relief reduces the amount of tax payable, it does not reduce the value of the transfer for the purposes of calculating the total value of the estate. I won’t provide examples of this as it gets even more complex.

Commonly held assets which are excluded from your estate include:
• Pension funds
• Benefits paid as a result of a Life Assurance claim (if set up under trust)
• Investments held within an Enterprise Investment Scheme, and AIM ISA or a Seed Enterprise Investment Scheme
• Gifts made over 7 years ago
• Trusts, providing the trust was set up more than 7 years ago.

What solutions are there to reduce the value of my estate?

Order of expenditure

The easy one is to spend your savings and ISA’s first, whilst leaving your pension until last. Not only will your savings and ISA’s reduce your estate, the income from these is completely tax free, whereas pension withdrawals are taxed at your marginal rate.

Annual gift exemption

An individual can make a £3,000 annual gift which is exempt. If it has not been used in the previous year, it can be carried forward for 1 year only. For example, Mr Eagle gifted his son £1,500 last year. This year he can gift £4,500, as he is carrying over the unused £1,500 from the year before.

Furthermore, a transfer to an individual is exempt if it was made as part of the transferor’s normal expenditure. This is allowed if the gift comes from income, and the transferor was left with sufficient income to maintain their standard of living. To give an example, Mr Eagle is in receipt of his State Pension and Final Salary Pension which total £30,000 per year. He only requires £23,000 per year to maintain his standard of living. This means he can gift the £7,000 difference to his son each year, if he choses to. This will be exempt from tax.

Gift before it’s too late

It’s no good trying to offload your assets when you’re on your death bed as it will fall foul of the 7-year rule. Do this whilst you are still healthy. After making the gift, you may wish to consider a ‘gift inter vivos’ insurance policy which is a form of decreasing term assurance designed to cover the IHT liability should you die within the 7 period after the gift.

Use of a trust

Like a gift, the creation of a trust is a transfer of value for IHT purposes, meaning it could still fall foul of the 7-year rule. A trust differs from a gift in that the assets are held and managed by the trustee for the benefit of the eventual beneficiary. These may be useful whereby the beneficiary is a child and the intention is for the child to receive the assets in future, when they are a responsible adult.

Business Property Relief

These are high risk investment products, which give investors the opportunity to invest in small start up companies. The most common on the market are in the form of ‘Enterprise Investment Schemes’, ‘Seed Enterprise Investment Schemes’ and ‘AIM ISA’s’. Be warned, that these products have the opportunity for significant gains and losses. The government offer generous tax breaks on these products to encourage individuals to invest in small start up companies. From an IHT point of view, investments purchased fall outside of your estate once held for two years.

If you have made it to the end, well done! As mentioned at the start, this article is deliberately high-level to give some rough guidance. There are some gaps in the above, but feel free to ask questions either on the thread or via PM.



Edited by Goal Machine (01 Jun 2020 10.58am)

 

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View Badger11's Profile Badger11 Flag Beckenham 01 Jun 20 12.46pm Send a Private Message to Badger11 Add Badger11 as a friend

Thanks Goal Machine.

So I have a pension fund if I understand correctly that will not be counted as part of my estate for IHT?

 


One more point

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View Goal Machine's Profile Goal Machine Flag The Cronx 01 Jun 20 1.54pm Send a Private Message to Goal Machine Add Goal Machine as a friend

Originally posted by Badger11

Thanks Goal Machine.

So I have a pension fund if I understand correctly that will not be counted as part of my estate for IHT?

You're welcome. Yes, you are correct, provided it is either in Flexi Access Drawdown or uncrystallised.

Worth bearing in mind that with pension funds, should you die before age 75, the beneficiary will receive the proceeds tax free.

If after 75, the beneficiary will be taxed at the marginal rate upon withdrawal.

 

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View Pinkfluff1981's Profile Pinkfluff1981 Flag 03 Jun 20 2.28pm Send a Private Message to Pinkfluff1981 Add Pinkfluff1981 as a friend

I’m a newbie on the financial seen.. I’ve just recently invested a small amount in some shares and funds. Stocks and shares isa, funds and share accounts and a sipp pension. I’ve never had a pension and I self employed so the idea is to pay monthly into the sipp pension for my retirement and use the stocks and shares isa and funds and share accounts to play with throughout life buying and selling and hopefully make some money. Short term and long term I intend to invest to save some money and hopefully make some in the next year to do my bike license and buy a bike. Then after just use it for saving into each year for holidays etc

My question is does anyone have any experience in doing this sort of thing and give any tips?

I’ve basically invested in 20 shares and 2 funds all varying in industries and sectors to hopefully have a balanced variety to make up for the ups and downs. A rather modest amount of £2500 spread between them all.

 

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View Goal Machine's Profile Goal Machine Flag The Cronx 03 Jun 20 2.58pm Send a Private Message to Goal Machine Add Goal Machine as a friend

Originally posted by Pinkfluff1981

I’m a newbie on the financial seen.. I’ve just recently invested a small amount in some shares and funds. Stocks and shares isa, funds and share accounts and a sipp pension. I’ve never had a pension and I self employed so the idea is to pay monthly into the sipp pension for my retirement and use the stocks and shares isa and funds and share accounts to play with throughout life buying and selling and hopefully make some money. Short term and long term I intend to invest to save some money and hopefully make some in the next year to do my bike license and buy a bike. Then after just use it for saving into each year for holidays etc

My question is does anyone have any experience in doing this sort of thing and give any tips?

I’ve basically invested in 20 shares and 2 funds all varying in industries and sectors to hopefully have a balanced variety to make up for the ups and downs. A rather modest amount of £2500 spread between them all.

Hi Pinkfluff, I noticed your message on the other thread, thanks for re-posting on here.

So you are aware, I am regulated Independent Financial Adviser, so am familiar with this type of situation.

As a bit of guidance, you might wish to consider segmenting your investments into a 'short term' pot - i.e. to pay for your bike and licence and a 'long-term pot' - i.e. your pension.

The general principle is that the longer the time horizon, the more investment risk you can afford to take. As an example, if you had money invested in a high risk strategy to buy your bike next year and the stock market crashed by 30% the week before, you wouldn't be able to afford your bike.

Long term (your pension/SIPP), this scenario wouldn't be an issue as the markets have time to recover.

Buying direct shares as you have done is considered to be very high risk as you are backing one company to perform well. Unless you are confident around how to read company balance sheets and know the company inside out, this is effectively a gamble.

A fund is managed by a professional investment manager who does know how to read the balance sheets and the investment will be diversified across a portfolio of shares/bonds/property/cash.

Stock market investments are volatile and not really appropriate for short term investments. Long term, you can be confident of positive returns.

I hope that provides some guidance? - I'll send you PM

 

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View BlueJay's Profile BlueJay Flag UK 03 Jun 20 4.42pm Send a Private Message to BlueJay Add BlueJay as a friend

Originally posted by Pinkfluff1981

I’m a newbie on the financial seen.. I’ve just recently invested a small amount in some shares and funds. Stocks and shares isa, funds and share accounts and a sipp pension. I’ve never had a pension and I self employed so the idea is to pay monthly into the sipp pension for my retirement and use the stocks and shares isa and funds and share accounts to play with throughout life buying and selling and hopefully make some money. Short term and long term I intend to invest to save some money and hopefully make some in the next year to do my bike license and buy a bike. Then after just use it for saving into each year for holidays etc

My question is does anyone have any experience in doing this sort of thing and give any tips?

I’ve basically invested in 20 shares and 2 funds all varying in industries and sectors to hopefully have a balanced variety to make up for the ups and downs. A rather modest amount of £2500 spread between them all.

It sounds like you have your head screwed on. Always good to plan for the future. I'm guessing there will be varying opinions as to whether investing now is the opportunity of a lifetime, or plagued by pitfalls, but of course some companies are more recession proof than others.

One piece of advice I've heard is that it's "time in the market, not timing the market" that's important. People often try to pre-empt further gains when a companies shares are rising fast, or sell if their shares drop in value, where often sitting tight would be a better option.

 

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View BlueJay's Profile BlueJay Flag UK 03 Jun 20 4.45pm Send a Private Message to BlueJay Add BlueJay as a friend

Originally posted by Goal Machine

Hi Pinkfluff, I noticed your message on the other thread, thanks for re-posting on here.

So you are aware, I am regulated Independent Financial Adviser, so am familiar with this type of situation.

As a bit of guidance, you might wish to consider segmenting your investments into a 'short term' pot - i.e. to pay for your bike and licence and a 'long-term pot' - i.e. your pension.

The general principle is that the longer the time horizon, the more investment risk you can afford to take. As an example, if you had money invested in a high risk strategy to buy your bike next year and the stock market crashed by 30% the week before, you wouldn't be able to afford your bike.

Long term (your pension/SIPP), this scenario wouldn't be an issue as the markets have time to recover.

Buying direct shares as you have done is considered to be very high risk as you are backing one company to perform well. Unless you are confident around how to read company balance sheets and know the company inside out, this is effectively a gamble.

A fund is managed by a professional investment manager who does know how to read the balance sheets and the investment will be diversified across a portfolio of shares/bonds/property/cash.

Stock market investments are volatile and not really appropriate for short term investments. Long term, you can be confident of positive returns.

I hope that provides some guidance? - I'll send you PM

Great advice here. I invested in an ISA with Vanguard recently. I know sod all about the area really and just intend to deposit a bit ever now and again and not become overly obsessed with the highs and lows of it all.

 

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View Goal Machine's Profile Goal Machine Flag The Cronx 03 Jun 20 6.41pm Send a Private Message to Goal Machine Add Goal Machine as a friend

Originally posted by BlueJay

It sounds like you have your head screwed on. Always good to plan for the future. I'm guessing there will be varying opinions as to whether investing now is the opportunity of a lifetime, or plagued by pitfalls, but of course some companies are more recession proof than others.

One piece of advice I've heard is that it's "time in the market, not timing the market" that's important. People often try to pre-empt further gains when a companies shares are rising fast, or sell if their shares drop in value, where often sitting tight would be a better option.

Quite right, BlueJay. The stock markets are so efficiently priced that it's so difficult to time. Even for professionals.

The moment news breaks, its almost instantly priced into the market. For all we know, a major world event could happen this evening which will effect the prices tomorrow. We can't see into the future. We can guess at trends but there are no guarantees.

Here is a short article with some interesting statistics by Schroders [Link]

 

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View Goal Machine's Profile Goal Machine Flag The Cronx 05 Jun 20 11.27am Send a Private Message to Goal Machine Add Goal Machine as a friend

Investment Scams - the warning signs

Hello all, thought I should drop in a short article following a conversation I had with a prospective new client yesterday.

The poor lady has been a victim of a scam after investing £82,000 in 2018 into a company called 'London Capital & Finance'. She was told she would get "secure 8% returns" by investing in mini bonds. The legal battle continues, but her, along with another £287m of peoples investments look to have gone down the pan following the collapse of London Capital & Finance. This is a real life changing horror story.

This was an unregulated investment, meaning it was not covered by the Financial Services Compensation Scheme (FSCS).

If in doubt, always seek impartial advice from a financial adviser. If it sounds too good to be true, it probably is.

The warning signs:

Unexpected contact – Traditionally scammers cold-call but contact can also come from online sources e.g. email or social media, post, word of mouth or even in person at a seminar or exhibition.

Time pressure – They might offer you a bonus
or discount if you invest before a set date or say the opportunity is only available for a short period.

Social proof – They may share fake reviews and claim other clients have invested or want in on the deal.

Unrealistic returns – Fraudsters often promise tempting returns that sound too good to be true, such as much better interest rates than elsewhere.

False authority - Using literature and websites that are hard to distinguish from the real thing, claiming to be regulated, speaking with authority on investment products.

Flattery – Building a friendship with you to lull you into a false sense of security

Here is a link to the FCA website where you can check an investment or pension you have been offered: [Link]

Equally, feel free to contact me via PM if you are suspicious about an investment you have been offered.

 

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View BlueJay's Profile BlueJay Flag UK 06 Jun 20 5.46pm Send a Private Message to BlueJay Add BlueJay as a friend

Originally posted by Goal Machine

Quite right, BlueJay. The stock markets are so efficiently priced that it's so difficult to time. Even for professionals.

The moment news breaks, its almost instantly priced into the market. For all we know, a major world event could happen this evening which will effect the prices tomorrow. We can't see into the future. We can guess at trends but there are no guarantees.

Here is a short article with some interesting statistics by Schroders [Link]

A good read, thanks. It no doubt makes sense to adopt a more structures and long term approach like this, rather than the reactionary approach some comes more naturally to us. I notice that the stock market is still firing on all cylinders this week. I wonder if it's going to continue that trend for the next few months due to the money pumped in. All things considered, it's fascinating to see the level it's at.

 

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View AERO's Profile AERO Flag 06 Jun 20 5.49pm Send a Private Message to AERO Add AERO as a friend

When you have time Goal Machine. Capital gains Tax ?

 

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View Goal Machine's Profile Goal Machine Flag The Cronx 07 Jun 20 10.01pm Send a Private Message to Goal Machine Add Goal Machine as a friend

Originally posted by AERO

When you have time Goal Machine. Capital gains Tax ?

Hi Aero, I'll get that done over the next couple of weeks. Did you see my PM?

 

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