ifa south issue 1
DESCRIPTION
IFA South Issue 1TRANSCRIPT
Image right fees
IFA(SOUTH)LLP50 per centtax rate Investing in a
new decade
Is the coming of a new tax regime on the horizon?
Mitigating the impact of the forthcoming rate increase
What opportunities could the future hold?
Tax factsWhat you need to know
Investment solutionsAchieving the most efficient mix of risk and return
Retirement planningTransferring pensions
ISSUE 1 n SPRING 2010
IFA (South) LLPSuite 33, Basepoint Enterprise Centre, Andersons Road, Southampton. SO14 5FETel: 02380 682586 Email: [email protected] Web: www.ifasouth.co.uk
IFA (South) LLP is an Appointed Representative of Independent Financial Advisor Limited which is Authorised and Regulated by the Financial Services Authority
InvestIng In a new decadeWhat opportunities could the
future hold?
RetIRement plannIngTransferring pensions
InheRItance tax plannIngYour questions answered
Investment solutIonsAchieving the most efficient
mix of risk and return
Image RIght feesIs the coming of a new tax
regime on the horizon?
pRotectIng key peRsonnel Managing the risk that could
ultimately threaten your
company’s profits
fInancIal Reasons to make a wIllPutting it off could mean that
your spouse receives less
InvestIng at a tIme of low InteRest RatesInvestment opportunities when
interest rates are low
tax factsWhat you need to know
50 peR cent tax Rate Mitigating the impact of the
forthcoming rate increase
Looking ahead to this new decade, what areas
could be seen as opportunities for investors?
emeRgIng maRkets It is estimated that the world’s population is set
to increase by 50 per cent in the next 40 years,
mostly from emerging markets, which include the
‘BRIC’ countries of Brazil, Russia, India and China.
While the proportion of people of retirement
age will increase in Western economies,
India should enjoy a demographic boost as a
large group of the populace enters the most
economically active part of their lives.
Although investing in a single country is a
high-risk strategy, diversification that includes
holdings within the BRIC countries and other areas
such as Mexico, Hong Kong, South Korea, South
Africa and Thailand could become an increasing
attraction to many investors.
healthcaRe An increase in an ageing population, particularly
in Western economies and Japan, will be seen as
positive for the healthcare sector over the next ten
years. Investors may be attracted by the potential
for higher returns driven by a need to spend
significantly more money by governments and the
private sector in the area of geriatrics.
agRIcultuRe It is forecast that, by the middle of this century, there
will be an additional 2.5 billion people in the world to
feed, leading to an increase in land and food prices.
With China’s shift to urbanisation and the emergence
of a powerful middle class in the developing world,
investors may be attracted to investment in soft
commodities such as cocoa, sugar, corn and wheat.
China’s evolutionary demographic shift,
when combined with the acute water shortages
that China and others may suffer during this
decade, could make for a highly rewarding
investment opportunity.
eneRgy Global urbanisation will also feed through
to growing demand for construction and
infrastructure and these projects should drive
demand for energy. The demand for uranium is
also set to continue this decade as a result of a
global resurgence of interest in nuclear power.
This is positive news for investors, with the
UK and other countries planning an aggressive
expansion programme for nuclear energy as it is
seen as one of the cleanest forms of producing
energy during this decade.
technology A greater exposure to the semi-conductor,
software, media and internet, communications and
computing industries means that investors are also
likely to be attracted to these areas this decade.
cuRRency Although currency is the most actively traded
asset class in the world, it still remains one that is
largely ignored by retail investors. Will this decade
see a change in investor sentiment?
ethIcalClimate change and water shortages could also
drive future investment returns for investors, turning
their attention to themes that include water, energy,
agriculture and forestry. n
These are specialised invesTmenTs and may noT be suiTable for everyone. They should only be considered as parT of a balanced porTfolio and professional financial advice should be soughT prior To invesTing. These could be high-risk invesTmenTs. if you would like To discuss how we could help you wiTh your invesTmenT requiremenTs, please conTacT us for furTher informaTion.
Investing in a new decadeWhat opportunities could the future hold?
In this issue
02
03
04
05
06
07
08
10
1112
INSIDE THIS ISSUE
02
WEALTH CREATION
There are a number of different
reasons why you may wish to consider
transferring your pension schemes,
whether this is the result of a change
of employment, poor investment
performance, high charges and issues
over the security of the pension scheme,
or a need to improve flexibility.
You might well have several different
types of pension. The gold standard is the
final-salary scheme, which pays a pension
based on your salary when you leave your
job and on years of service. Your past
employer might try to encourage you to
move your pension away by boosting your
fund with an ‘enhanced’ transfer value and
even a cash lump sum.
However, this still may not compensate
for the benefits you are giving up, and
you may need an exceptionally high rate
of investment return on the funds you are
given to match what you would get if you
stayed in the final-salary scheme.
Alternatively, you may have a money
purchase occupational scheme or a
personal pension. These pensions rely
on contributions and investment growth
to build up a fund.
If appropriate to your particular
situation, it may make sense to bring
these pensions under one roof to
benefit from lower charges, make fund
monitoring easier and aim to improve
fund performance. Transferring your
pension will not guarantee greater
benefits in retirement. n
effecTive reTiremenT planning requires an experT knowledge of The deTail of pension legislaTion and an abiliTy clearly To undersTand your individual long-Term objecTives and expecTaTions. we offer boTh. for more informaTion abouT The services we offer, please conTacT us.
Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements. They should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.
Welcome to the first edition of our wealth
management magazine.
Independent Financial Advisor Ltd was formed in
2006 with aspirations of providing financial planning
advice which covers all aspects of wealth, both in
creation and retention. We have created a network of
Chartered businesses with Chartered Financial Planners
working within these businesses, providing clients with
access to the highest qualifications in the profession.
Over the last couple of years the downturn in the
markets has highlighted the lack of service clients receive
from larger institutions and has provided IFA Group with
a rare window of opportunity to reshape the Financial
Services Sector.
We fully understand that our clients require the best
service; therefore we strive to fully understand their
needs and build long-standing relationships built on
mutual respect. We are a modern business at the
forefront of our industry with the latest systems and
technology and we maintain core traditional values of
honesty, integrity and trust.
We have recently opened our new office in
Southampton to cover the South of England, IFA (South)
LLP headed up by Malcolm Lay. Malcolm brings with
him 20 years of experience specialising in the group
pensions market, working previously at Director level
within a national benefit consultants practice and within
one of the big five accountants.
Along with this we have also added a specialist
division within the business to accommodate the growth
in specialist advice to professional sports people. Pro
Sport Wealth Management LLP is managed by Gareth
Griffiths who has 14 years experience of playing football
at professional level and 4 years as an IFA. Gareth is a
well respected figure within the PFA and is a trustee of
the PFA’s accident, benevolent and education fund.
I hope you enjoy this first issue of our magazine and find
it informative. If you require further information on any of
the subjects covered or on any other matter, please do not
hesitate to contact us.
Phillip Rose APFS
Chartered Financial Planner
Inside this issue
Retirement planningTransferring pensions
EDITORIALRETIREMENT
03
You don’t have to be seriously wealthy for
your estate to be subject to Inheritance Tax
(IHT) after you die. Currently, IHT is levied on
everything you leave over £325,000 (2009/10).
Inheritance tax planning is a complex subject
and it’s important to obtain professional
advice if you have any concerns about your
particular requirements, as this could save you
thousands of pounds of potential lost tax.
You might consider taking advice on IHT
planning to:
n Keep your assets within your family
n Protect your Nil Rate Band if you were to
die and your partner re-marry
n Protect assets passed to children or
grandchildren from the risk of them
becoming bankrupt or divorced
n Protect your assets from the need to fund
long-term care in later life
n Reduce an IHT liability
n Avoid an IHT liability
These are some of the typical questions
that we are asked by our clients:
Q: Should I write a will?
A: The simple answer is ‘yes’. It’s easy to put
off making a will. But if you die without one,
your assets may be distributed according to
the law rather than your wishes. This could
mean that your spouse or partner receives
less, or that the money goes to family
members who may not need it.
These are some of the financial reasons for
making a will:
n if you aren’t married or in a civil
partnership (whether or not it’s a same sex
relationship), your partner will not inherit
automatically. With a will, you can make
sure your partner is provided for
n if you’re divorced or if your civil partnership
has been dissolved, you can decide
whether to leave anything to an ex-partner
who’s living with someone else
n you can make sure you don’t pay more IHT
than necessary
Q: How can I minimise the value of my
estate for IHT purposes?
A: You cannot be taxed on money that was
never yours. It is sensible to ensure that as
much as possible is outside your estate.
Check that all current or new life insurance
plans are written under an appropriate trust.
Your existing life policies could be transferred
into such a trust. If your employer pays a
death benefit, complete a nomination form
and make sure any money goes directly to the
person you choose and not into your estate.
It is also worth thinking about legacies you
receive. Someone who benefits from a legacy
could divert that gift to another person. You
can apply for a ‘deed of variation’ within two
years of the death of the giver.
Q: What are the effects of getting married?
A: Anything you pass on to a spouse (the
same concession applies to same-sex
couples who register under civil partnership
laws) is free of IHT. However, legacies between
unmarried couples are not tax-free. This may
become a significant issue when a couple
jointly own their home, which could lead to
some people having to pay an IHT bill just to
continue living in their home.
Q: Can I gift my home to my children?
A: For many families, their homes are their
biggest asset. The government has clamped
down on schemes to get around the ‘gifts with
reservation’ rules. These allowed people to
give away homes, but still live in them. Now,
income tax can be charged for living rent-free
in a home you once owned. But there are still
ways to reduce IHT. Most couples who own a
home together are joint tenants. This means
that if one person dies, the other automatically
becomes the outright owner of the property.
The alternative is to register as ‘tenants in
common’, each owning half the property
absolutely. This means that on death, your
share may be left to someone else to keep
down the size of your estate.
Q: Are there any investments that will
enable me to reduce an IHT liability?
A: Some investments are given favourable
treatment for IHT purposes, including shares
in unquoted businesses, woodlands, farms
and farmland. Many shares on the Alternative
ESTATE PRESERvATION
Inheritance tax planningYour questions answered
04
WEALTH CREATION
Inheritance tax planning
Investment solutionsAchieving the most efficient mix of risk and return
Investment Market (AIM) also qualify for relief. Investing
in AIM shares is one way of reducing an IHT liability on
an estate. Qualifying AIM shares offer more IHT relief
than some other assets and qualify as ‘business property
investments’. If property is held as AIM shares in certain
trading companies for a period of at least two years, it
becomes eligible for Inheritance Tax Business Property
Relief at 100 per cent and will fall out of the estate for IHT
purposes. This relief is a relief by value, the shares being
treated as having no value for IHT purposes. Not all AIM
companies are eligible for Business Property Relief. Please
note that AIM shares may be more volatile than shares
listed on the main market, the London Stock Exchange.
There may also be a more limited market for AIM shares,
which are generally higher risk investments in smaller
company shares.
Q: Should I consider trusts to minimise an IHT liability?
A: When writing a will, there are several kinds of
trusts that can be used to help minimise an IHT
liability. On 22 March 2006, the government changed
some of the rules regarding trusts and introduced
some transitional rules for trusts set up before this
date. This is a very complex area of IHT planning and
professional advice should always be obtained.
Q: Could I use a life insurance policy to pay for a
future IHT bill?
A: A whole-of-life insurance written under an appropriate
trust could be used to provide a lump sum on death
that falls outside your estate. On death, the proceeds of
the policy would be used to settle the IHT liability. The
premiums are treated for tax purposes as a gift from
regular income. The advantage is that you retain your
wealth through your lifetime and so have the funds if, for
example, you need to go into long-term care.
Q: In which other ways can I reduce the value of
my estate?
A: Giving away money will reduce your estate, but will not
cut the tax liability immediately. You have to survive for
seven years for most gifts to escape the IHT net. However,
within that last seven years, the HM Revenue & Customs
(HMRC) allow gifts of up to £3,000 each tax year. Unlimited
gifts up to £250 per person per tax year are exempt, as
are payments of up to £5,000 for wedding gifts. The most
powerful concession is that regular gifts made from normal
income can be exempt from IHT. You must show you
have been giving regularly and are not materially reducing
your standard of living or running down savings. This
concession allows parents or grandparents to help children
without fear of IHT tax problems in the future. n
Timely decisions on how joinTly owned asseTs are held, The miTigaTion of ihT Tax, The preparaTion of a will and The creaTion of TrusTs can all help ensure your dependenTs are lefT financially secure. if you would like To discuss your parTicular siTuaTion, please conTacT us. don’T leave iT unTil iT’s Too laTe.
Do you currently have the most suitable
method of holding and structuring your
investments to achieve an efficient mix
of risk and return that is specific to your
particular objectives? And are you fully
utilising the income, capital gains and
inheritance tax advantages of these
investments, particularly as the taxation
regime governing them may be subject to
change in the future? We have provided
a selection of tax-efficient solutions you
may wish to discuss with us.
The over-50s were able to shelter
more of their money from the taxman
on 6 October last year when Individual
Savings Account (ISA) limits rose by
£3,000 to £10,200, or £20,400 for a
couple. Everyone aged 18 and over will
be given the new limit from 6 April 2010.
venture Capital Trusts (vCTs) enable
individuals to invest in unquoted and AIM-
listed firms, and give tax-free capital gains
as well as income (usually taxed at 32.5
per cent for 40 per cent taxpayers). They
also attract initial tax relief at 30 per cent,
which is an income tax relief that is given
as a tax reducer, as long as they are held
for five years. The maximum investment is
£200,000 a year. This type of investment
does come with a high degree of risk.
Enterprise Investment Schemes (EISs)
invest in firms typically involved in a
particular sector or project, and give
income tax relief of 20 per cent on up to
£500,000 a year, if held for three years.
Gains are tax-free, but not income, and
investments fall outside your estate for
inheritance tax purposes after two years.
This type of investment does come with a
high degree of risk.
EISs also allow you to defer Capital
Gains Tax (CGT) incurred in the previous
three years or the subsequent 12 months,
which is attractive if you paid at the old rate
of 40 per cent (in force until 6 April 2008).
While you still have to pay CGT on EIS
shares bought with tax-deferred funds, you
could save 22 per cent on past gains.
Onshore investment bonds are taxed
internally at the 20 per cent basic rate.
However, up to 5 per cent a year of the
original investment (a minimum of £5,000, but
no maximum) can be withdrawn for 20 years
without any immediate tax liability. And you
can ‘roll up’, taking 3 per cent income in one
year and 7 per cent the next. If you become
a basic rate or non-taxpayer when the bond
matures, there is no further tax to pay.
Gifting income-producing assets to
your spouse, where he or she is a lower
rate or non-taxpayer, could save high
earners a considerable sum. Say you had
a portfolio of investment properties worth
£500,000, which produced an income of
5 per cent or £25,000 a year. If you were
a high earner and held the investments in
your own name, you would be liable for
tax on the income of £12,500 from the
2010/11 tax year. However, if you gifted
the assets to a spouse who had no other
income, the first £6,475 would be tax-free
and the remainder taxed at 20 per cent,
so just £3,705, which equates to a £8,795
tax saving. This example is based on the
original owner having total taxable income
above £150,000 (hence the liability on the
£25,000 rental income would be 50 per
cent rather than 40 per cent). n
if you would like To arrange a review To discuss how we could help you save and invesT more Tax-efficienTly, please conTacT us.
05
The future relationship between the tax
authorities and Premier League clubs is set to
intensify even further following recent reports
that they are unlikely to reach an agreement
on a collective deal over image rights. This
topic which goes back more than a decade
has intensified in recent years as public
finances have come under more pressure.
The Premier League’s finance director
Javed Khan has conducted discussions
between representatives from the top 20
clubs, the objective to explore whether
they could agree a structure of payments
to satisfy demands from HM Revenue &
Customs (HMRC) over claims for up to
£60m in unpaid taxes and devise a workable
ongoing solution.
Rugby Union has already agreed with
HMRC officials to an arrangement whereby
the professional game will pay a percentage
of their image right fees directly to the tax
authorities. However, due to the complexities
involved in the professional football game it
is believed that a similar deal is unlikely to be
workable within football.
Within Manchester United’s recent
£504m bond issue prospectus, it states the
Revenue’s view is that “image rights may be
a form of remuneration and, as such, should
be taxed as income”.
HMRC is looking at players that receive
separate payments in order to license their
individual image rights, which would typically
be free of PAYE and national insurance and is
often channelled through an offshore company.
Today most Premier League contracts will
have an image rights clause. Experienced
agents say that the concept was invented
for good reason, and remained legitimate,
but conceded it had been exploited by some
clubs and players.
This has become a standard part of
contract negotiations, with many players
claiming that the club will benefit from their
image in some way - whether their name
appears on replica shirts or other merchandise
the club markets.
The clubs argue that the payments are
wholly legitimate licensing payments. But
HMRC suspects that in some cases image
rights contracts have simply become a
standard top-up to an employment contract.
With Spain, Italy and France all having
more advantageous tax regimes for overseas
players particularly since the announcement
of the new 50 per cent tax rate commencing
6 April 2010, many UK clubs are looking at
different ways to maximise their appeal.
A spokesman for HMRC said it could not
comment on individual cases but added: “The
government remains committed to ensuring
that everyone pays their fair share of tax and
that the minority who seek not to do so should
not succeed.” It said the onus was on any
business to clear any transactions over which
there was any “uncertainty” with HMRC.
Rather than going after individual contracts,
in 2006 the Revenue decided to take a more
structured approach. It discovered that many
image rights deals were based on games
played or goals scored, clearly linking them
with the players’ employment contracts.
Investigators examine correspondence
between players, agents, clubs and
accountants in order to try to prove the link.
HMRC set up a specific unit to investigate
and negotiate settlements with clubs. The
onus is now on clubs to prove that image
rights are of real value and are exploited as
such. That could leave smaller Premier League
clubs more exposed than those at the top
end. At least half of Premier League clubs are
now thought to be under investigation.
A Premier League spokesman confirmed
that it was continuing to try to broker a deal.
“Discussions are ongoing with HMRC to try to
reach a mutually acceptable position. Both sides
agree that it is acceptable for the assignment of
a proportion of income to image rights however,
the question is how best to decide what is a
reasonable level across a multitude of varying
contracts and levels of player.”
There is a precedent that a club can acquire
the image rights of a player through an image
rights contract for the purpose of exploiting
that image. But it’s got to be for commercial
reasons and you’ve got to look at each
specific one to make sure it’s commercial and
the club has tried to exploit it. n
TAx MATTERS
Image right feesIs the coming of a new tax regime on the horizon?
The onus is now on clubs to prove that image rights are of real value and are exploited as such.
06
A vital part of any business is the people who
work there. But what if something happened to
one of the key personnel in your business, for
example, if an important member of staff died
unexpectedly or became unable to work due to
a serious illness. This could have a considerable
impact on the core operations, sales and profit
of your business.
Key person insurance is cover that pays
out for loss in the event of either death or
disability of the important individuals within
a business and is designed to protect or
compensate the business.
Is youR busIness at RIsk?Small and medium-sized businesses could
be particularly at risk. However, there is a
solution – insurance that would replace the
lost profits caused by the loss of a key person.
Typically, the liability of any such insurance is
the estimated cost of the loss, for example,
in business or revenue lost, and/or the
replacement of that individual.
key peRsonnel to consIdeRn The people who create the business and
steer it in the right direction
n The people without whom your business
would lose sales and profits
n Directors, partners and shareholders
n Integral managers, or key IT development
specialists or development operators
types of coveRThere are various types of insurance policy
that can be used for this purpose. There might
be a short-term need for cover, for example,
during an important project. In this situation
a term assurance policy may be the most
appropriate solution. However, if the key
person is likely to remain with the business
for an indefinite period of time, whole-of-life
assurance may be more appropriate.
paRtneRshIpsCompanies and sole traders can affect
policies on employees. But partnerships in
England and Wales are not a separate legal
entity, so where the key person cover is for
an individual partner, the policy can either
be taken out jointly by all the partners, in
which case it becomes a partnership asset or,
alternatively, the key partner could take out a
policy and place it in an appropriate trust for
the other partners.
InsuRIng a key peRson The required level of insurance
taken out has to be justifiable. Factors to
be taken into account when estimating
the required level of cover will include the
profits that will be lost if the services of
the key individual are no longer available,
the expected cost of recruiting and
training a new person and the length of
time before that replacement is likely to be
fully established.
In the event that a loan may be called in on
the death of the key person, the amount of
the loan and the effect this would have on the
profitability of the business will also need to
be assessed.
To calculate the sum insured, it is generally
acceptable to use the individual’s earnings,
including bonuses and company perks,
multiplied by a factor of five to ten times
earnings. Alternatively, a multiple of profits
may be used, which would not typically
exceed two years’ gross profits or five times
annual net profit, divided by the number of key
people being insured.
tax ImplIcatIonsThe tax implications of this type of insurance
vary. Often, the premiums for key person
insurance will be allowed as a business
expense for corporation tax purposes, but
certain conditions will need to be met.
Where the policy proceeds are taxable,
the tax payable will be linked to the type
of underlying policy. Payments under a
key person term assurance policy will be
treated as a trading receipt and subject to
corporation tax. Bearing in mind that the
policy has been taken out to replace lost
profits and those profits would have been
liable to tax, this approach makes sense.
However, the payout from a whole-of-life
policy is treated differently, as it is considered a
capital item. As these policies are deemed ‘non-
qualifying’ for life assurance purposes, they will
be taxed as the company’s income. n
if you would like To arrange a review of your currenT corporaTe requiremenTs and discuss The opTions available To you, please conTacT us.
CORPORATE MATTERS
Protecting key personnelManaging the risk that could ultimately threaten your company’s profits
Key person insurance is cover that pays out for loss in the event of either death or disability of the important individuals within a business and is designed to protect or compensate the business.
07
ESTATE PRESERvATION
Financial reasons to make a willPutting it off could mean that your spouse receives less
08
ESTATE PRESERvATION
It’s easy to put off making a will. But if you die
without one, your assets may be distributed
according to the law rather than your wishes.
This could mean that your spouse receives
less, or that the money goes to family members
who may not need it.
There are lots of good financial reasons for
making a will:
n you can decide how your assets are shared
out - if you don’t make a will, the law says
who gets what
n if you aren’t married or in a civil partnership
(whether or not it’s a same sex relationship)
your partner will not inherit automatically,
so you can make sure your partner is
provided for
n if you’re divorced or if your civil partnership
has been dissolved you can decide
whether to leave anything to an ex-partner
who is living with someone else
n you can make sure you don’t pay more
Inheritance Tax than necessary
If you and your spouse or civil partner own
your home as ‘joint tenants,’ then the surviving
spouse or civil partner automatically inherits
all of the property.
If you are ‘tenants in common’ you each own
a proportion (normally half) of the property and
can pass that half on as you want.
A solicitor will be able to help you should
you want to change the way you own your
property.
Planning to give your home away to your
children while you’re still alive.
You also need to bear in mind, if you are
planning to give your home away to your
children while you’re still alive, that:
n gifts to your children, unlike gifts to your
spouse or civil partner, aren’t exempt from
Inheritance Tax unless you live for seven
years after making them
n if you keep living in your home without
paying a full market rent (which your
children pay tax on) it’s not an ‘outright
gift’ but a ‘gift with reservation,’ so it’s
still treated as part of your estate, and so
liable for Inheritance Tax
n following a change of rules on April 6,
2005, you may be liable to pay an Income
Tax charge on the ‘benefit’ you get from
having free or low cost use of property you
formerly owned (or provided the funds to
purchase)
n once you have given your home away,
your children own it and it becomes part of
their assets. So if they are bankrupted or
divorced, your home may have to be sold
to pay creditors or to fund part of a divorce
settlement
n if your children sell your home, and it is not
their main home, they will have to pay Capital
Gains Tax on any increase in its value
If you don’t have a will there are rules for
deciding who inherits your assets, depending
on your personal circumstances. The following
rules are for deaths on or after July 1, 2009 in
England and Wales; the law differs if you
die intestate (without a will) in Scotland or
Northern Ireland. The rates that applied before
that date are shown in brackets.
If you’Re maRRIed oR In a cIvIl paRtneRshIp and theRe aRe no chIldRenThe husband, wife or civil partner won’t
automatically get everything, although they
will receive:
n personal items, such as household articles and
cars, but nothing used for business purposes
n £400,000 (£200,000) free of tax – or the
whole estate if it was less than £400,000
(£200,000)
n half of the rest of the estate
The other half of the rest of the estate will
be shared by the following:
n surviving parents
n if there are no surviving parents, any
brothers and sisters (who shared the same
two parents as the deceased) will get a
share (or their children if they died while the
deceased was still alive)
n if the deceased has none of the above, the
husband, wife or registered civil partner will
get everything
If you’Re maRRIed oR In a cIvIl paRtneRshIp and theRe weRe chIldRenYour husband, wife or civil partner won’t
automatically get everything, although they
will receive:
n personal items, such as household articles and
cars, but nothing used for business purposes
n £250,000 (£125,000) free of tax, or the
whole of the estate if it was less than
£250,000 (£125,000)
n a life interest in half of the rest of the estate (on
his or her death this will pass to the children)
The rest of the estate will be shared by
the children.
If you aRe paRtneRs but aRen’t maRRIed oR In a cIvIl paRtneRshIpIf you aren’t married or registered civil
partners, you won’t automatically get a share
of your partner’s estate if they die without
making a will.
If they haven’t provided for you in some
other way, your only option is to make a claim
under the Inheritance (Provision for Family and
Dependants) Act 1975.
If theRe Is no suRvIvIng spouse/cIvIl paRtneR
The estate is distributed as follows:
n to surviving children in equal shares (or
to their children if they died while the
deceased was still alive)
n if there are no children, to parents (equally,
if both alive)
n if there are no surviving parents, to brothers
and sisters (who shared the same two
parents as the deceased), or to their
children if they died while the deceased
was still alive
n if there are no brothers or sisters then to
half brothers or sisters (or to their children if
they died while the deceased was still alive)
n if none of the above then to grandparents
(equally if more than one)
n if there are no grandparents to aunts and
uncles (or their children if they died while
the deceased was still alive)
n if none of the above, then to half uncles or
aunts (or their children if they died while the
deceased was still alive)
n to the Crown if there are none of
the above
It’ll take longer to sort out your affairs if
you don’t have a will. This could mean extra
distress for your relatives and dependants
until they can draw money from your estate.
If you feel that you have not received
reasonable financial provision from the
estate, you may be able to make a claim
under the Inheritance (Provision for Family
and Dependants) Act 1975, applicable in
England and Wales. To make a claim you
must have a particular type of relationship
with the deceased, such as child, spouse,
civil partner, dependant or cohabitee.
Bear in mind that if you were living
with the deceased as a partner but
weren’t married or in a civil partnership,
you’ll need to show that you’ve been
‘maintained either wholly or partly by the
deceased.’ This can be difficult to prove
if you’ve both contributed to your life
together. You need to make a claim within
six months of the date of the Grant of
Letters of Administration. n
09
If you are an income-seeking saver in search
of good returns from your savings in this low
interest rate environment, we can provide
you with the professional advice you need
to enable you to consider all the options
available. In addition, we can help you
determine what levels of income you may
need and work with you to review this as
your requirements change. Another major
consideration is your attitude towards risk
for return and availability. This will help to
determine which asset classes you are
comfortable investing in.
Cash, especially in the current climate, is
an important element for any income investor.
One option you may wish to discuss with
us is cash funds, dubbed ‘money market’
portfolios. These use the pooled savings of
many investors to benefit from higher rates not
available to individuals. They can invest in the
most liquid, high-quality cash deposits and
‘near-cash’ instruments such as bonds. But,
unlike a normal deposit account, the value of
a cash fund can fall as well as rise, although
in theory, at least, it should not experience
volatile swings.
Bonds are a form of debt, an ‘IOU’ issued
by either governments or firms looking to raise
capital. As an investor, when you purchase a
bond you are essentially lending the money to
the government or company for a set period
of time, which varies according to the issuer.
In return you will receive interest, typically paid
twice a year, and when the bond reaches
maturity you usually get back your initial
investment. But you don’t have to keep a bond
until maturity. You can, if you wish, sell it on.
Much of the government’s debt, including
the additional money being used to aid the
economy and refinance the banks, is in the
form of bonds it issues. Gilts are bonds issued
by the British government. The advantage of
gilts is that the government is unlikely to fail
to pay interest or repay its debt, so they are
generally the safest investments. Government
bonds pay a known and regular income (called
the coupon) and a lump sum at maturity
(called the par). They typically perform well as
the economy slows and inflation falls.
Corporate bonds operate under the same
principle as gilts, in other words companies issue
debt (bonds) to fund their activities. High-quality,
well-established companies that generate lots of
cash are the safest corporate bond issuers and
their bonds are known as ‘investment grade’.
High-yield bonds are issued by companies
that are judged more likely to default. To attract
investors, higher interest is offered. These are
known as ‘sub-investment grade’ bonds.
The risks related to investing in bonds can
be reduced if you invest through a bond fund.
The fund manager selects a range of bonds, so
you are less reliant on the performance of one
company or government. The ‘distribution yield’
gives a simple indication of what returns are likely
to be over the next 12 months. The ‘underlying
yield’ gives an indication of returns after expenses
if all bonds in the fund are held to maturity.
An alternative route to generating income is
by investing in stocks that pay a dividend. If
a firm is making good profits it can decide to
share this with investors rather than reinvest
it in the business, so essentially dividends
are the investors’ share of company profits.
Share prices of companies that regularly pay
dividends tend to be less volatile than other
companies, but remember that company
shares can fall in value. In addition, dividends
can be cut if a company finds itself in need of
extra cash.
Another way to invest in equities for the
purpose of obtaining a better income is via an
equity income fund. The fund manager running
the portfolio selects a wide range of equities, so
you are less reliant on the performance of any
one particular company, and will try to select
companies that pay regular dividends. n
There are many differenT ways To generaTe more income. we can help you make informed decisions abouT The invesTmenT choices ThaT are righT for you. any number of changing circumsTances could cause your income To diminish, some ineviTable and some unpredicTable – new Taxes and legislaTion, volaTile markeTs, inflaTion and changes in your personal life. To discuss sTrucTuring your income requiremenTs in a way ThaT minimises The impacT of These changes, please conTacT us.
INvESTING
Investing at a time of low interest ratesInvestment opportunities when interest rates are low
10
check youR paye code You should check that you are on the correct
code. Don’t just assume that if tax is being
deducted at source it must be right. If you
have been paying too much tax, you can claim
back the excess for up to six previous years.
If you have been paying too little, the Revenue
can claim it back.
make full use of youR peRsonal allowances We all have a personal allowance, currently
£6,475 (under 65) a year, which is the
amount you are allowed to earn before you
start paying tax. If appropriate, couples
should consider maximising their personal
allowances by channelling savings and
investments towards the person who pays
the least amount of tax.
consIdeR caRRyIng out a salaRy sacRIfIce Salary sacrifice means giving up the right to
part of your salary in exchange for a benefit,
such as an employer pension contribution.
Both you and your employer will save money
on National Insurance and the employer also
saves on Corporation Tax.
make the most of tax RelIef at youR hIghest maRgInal Rate on pensIon contRIbutIons You should make the most of tax relief
at your highest marginal rate on pension
contributions. This tax break is particularly
valuable if you are a higher rate taxpayer and
so potentially receive relief at 40 per cent
(2009/10) on your pension contributions that
fall within the higher rate band.
bRIng foRwaRd dIvIdend payouts to thIs tax yeaR If you are a high earner and work for a
family company or have your own company,
you may wish to consider bringing forward
income distribution from future years to this
tax year. If you pay yourself a dividend this
year, and assuming you are a higher rate
taxpayer, you would currently be paying an
effective rate of 25 per cent on dividends. But
from the next tax year you would, as a top
rate taxpayer, be paying an effective rate of
36.1 per cent on your dividends.
make suRe you ReceIve youR age allowance If you aRe oveR 65 Make sure you receive your age allowance if
you are over 65. This allowance is currently
worth £3,015 on top of the normal personal
allowance for those aged 65 to 74 and £3,165
for those over 75, taking their total personal
allowance to £9,490 and £9,640 respectively.
Those entitled to it should make sure they
claim it, as it is sometimes not included
automatically in an individual’s tax coding.
bRIng foRwaRd IncomeShareholders in their own businesses who take
money as dividends will be taxed at 32.5 per
cent until 5 April, rising to 42.5 per cent the
following day. On £10,000-worth of dividends,
you could save £1,000 in tax by bringing the
payment forward. Bear in mind, though, that
you would also have to pay the tax via your self-
assessment form a year earlier.
shaRe IncentIve schemesHigh earners could ask their employer to set up a
share incentive scheme ahead of the changes so
that, instead of taking cash bonuses, they would
receive shares in the firm. This converts income
taxed at up to 40 per cent today (or 50 per cent
from 6 April 2010) into gains taxed at the flat rate
of Capital Gains Tax (CGT) of 18 per cent.
defeR tax RelIefConsider deferring claims for tax relief until
the 2009/10 tax year has ended on 5 April,
boosting potential tax relief to 50 per cent
from 40 per cent.
RevIew famIly tRustsIt may be worth drawing income arising in a
family trust. This is taxed at 20 per cent on
up to £1,000 and 40 per cent thereafter, rising
to 50 per cent from 6 April 2010. However,
this will depend on the type of income, as
dividends would be taxed at either 10 per cent
(if within the £1,000 band) or 32.5 per cent
(42.5 per cent from 6 April 2010).
Even trusts with a small amount of income will
be subject to tax at 50 per cent. Alternatively,
beneficiaries could draw the income if their other
earnings are below £150,000 – beneficiaries
of a discretionary trust have no entitlement to
income. The trustees could choose to distribute
the income but it would have to come with a
40 per cent (50 per cent from 6 April 2010) tax
credit. The increase in tax rate will only affect
‘non-Income In Procession’ trusts which pay
RAT (‘Rate Applicable to Trusts’).
cRystallIse pensIon benefItsPeople in their early fifties who want to retire early
or release tax-free cash from their pensions may
wish to consider doing so before 5 April, when
the minimum retirement age goes up from 50 to
55. However, there are many instances where it
is not advisable to take the cash. For example,
if your pension has a guaranteed annuity rate,
you may be better off using your entire fund to
buy an annuity. If you are in a final-salary scheme
you could choose to take extra tax-free cash
and a reduced pension, although take care as
the income you would give up is guaranteed, is
inflation-proofed and has a widow’s or widower’s
benefit. However, in other cases it may be
worth crystallising benefits. Equally, it may be
worthwhile if you want to free up cash to make
gifts for Inheritance Tax planning or make other
tax-efficient investments. n
This arTicle does noT consTiTuTe advice and you should seek professional financial advice wiTh regards To The mosT appropriaTe ways of sTrucTuring your affairs To maximise Tax efficiency. for furTher informaTion or To discuss your requiremenTs, please conTacT us and we’ll provide you wiTh a compleTe financial wealTh check.
WEALTH PROTECTION
tax factsWhat you need to know
11
An increase in the top rate of personal income
tax for all income above £150,000 was
announced in the 2009 Budget. The new 50
per cent rate will come into force from 6 April
2010. This is a significant increase (and an
increase in the original figure announced in the
Pre-Budget Report in November 2008, which
stated that the rate would be 45 per cent as
of April 2011) and also represents a structural
change to the tax planning landscape.
The 50 per cent income tax rate (42.5 per cent
on dividends) requires a structural change to
tax planning to ensure that robust, practical and
sensible planning is put in place, sooner rather
than later, to ensure maximum tax-efficiency.
The new rate, and other changes
announced in the 2009 Budget, mean that it
is paramount that employees and investors
carefully consider their tax position to explore
what planning can be effectively put in place
now to help mitigate or defer the upcoming
increased income tax liabilities.
There is a range of sensible and effective
options that will mitigate the impact of the
forthcoming rate increase. Planning now rather
than later is, as ever, the best approach and
planning for both employment and investment
income is essential. A bespoke approach
will typically provide the best solution, since
planning should always be appropriate to your
particular tax and personal profile. Key factors
will include your long-term residence plans,
your various sources of income and your
anticipated expenditure. Tax planning should
be perfectly integrated with your commercial
objectives, so your succession planning and
business strategies will be relevant.
In addition, the gradual withdrawal of the
personal allowance for those with incomes
of £100,000 or more, and the restriction
of higher rate tax relief for pension
contributions for those with incomes of
more than £150,000 (from April 2011) will
increase the tax burden on higher income
earners, giving a marginal rate of tax for
some of 60 per cent. The transitional
provisions on pension relief have immediate
effect, particularly for those who usually
pay significant annual contributions,
such as senior executives and partners in
professional partnerships.
Now is an appropriate time to review
strategies to ensure they are consistent with
your personal objectives.
One approach could be to maximise income
so that it is subject to the current top rate of 40
per cent (32.5 per cent for dividends). Bonus
payments, realisation of gains on unapproved
share schemes, dividend payments or
remittances of income, for those not domiciled
in the UK, might be brought forward so that the
income falls to be taxed before 6 April 2010.
Where a company is planning to purchase
its own shares, with the shareholders taxed
on the proceeds as income rather than
gains, the value to shareholders would be
increased by completing the exercise before
the change in tax rates.
Of course, the timing cost of any action that
accelerates the date for the payment of tax
should be borne in mind.
For the self-employed and those in
partnership, strategies to maximise profits
taxable at 40 per cent rather than 50 per cent,
for example, by changing the accounting date,
could be considered.
Given the current differential of 32 per cent
between the income tax and capital gains tax
rates, from 6 April 2010 onwards capital returns
will have a significant tax advantage over
income returns. Various investment vehicles for
trading, property holding or wider investment
activities alongside tax-efficient profit extraction
techniques could be considered.
Changing an investment structure could
also be explored at a time when asset values
are relatively low, so that any future returns
deliver your longer-term objectives. How
investments are held across the family should
be reviewed to ensure holdings are efficient.
Another approach could be to plan to minimise
exposure to the 50 per cent rate before it arrives.
Strategies that allow income to accumulate in
tax-efficient ways should be considered. n
TAXATION
50 per cent tax rate Mitigating the impact of the forthcoming rate increase
This arTicle does noT consTiTuTe advice and you should seek professional financial advice. if you would like To discuss how we could help you wiTh your financial planning requiremenTs, please conTacT us for furTher informaTion.