Residential Nil Rate Band – Planning actions for estates worth more than £325,000 but less than £500,000 (unmarried) or more than £650,000 but less than £1,000,000 (married couple)

Posted on November 20, 2015 by - Estate Planning, Taxation

People in this bracket are well placed to make full use of the new Residential Nil Rate Band, so long as the correct planning is put in place.

In effect, people in this category who own a residential home worth at least £175,000 (unmarried) or £350,000 (married couple) and who have children, should be in a position to pass their estate down to their direct descendants with no inheritance tax to pay.

There are however, a number of potential pitfalls to look out for as follows:

Some wills created historically contained what is known as a ‘nil rate band’ trust. The use of this type of trust has the potential to cause the Residential Nil Rate Band to be lost, as the transfer of the assets would be to the trust and not to direct descendants. It would be good practice to review you will for the presence of a nil rate band trust.

Your direct descendants (i.e children or grandchildren) will need to be the ones who inherit the residential home to qualify for the new relief. Does your current will meet these criteria?

We are running a series of free estate planning seminars where you can learn more about the new Residential Nil Rate Band and how to avoid some common mistakes.

Residential Nil Rate Band – Planning Actions for Estates Worth Less Than £325,000 (unmarried) or £650,000 (married couple)

Posted on November 20, 2015 by - Estate Planning, Taxation

The introduction of the new Residential Nil Rate Band is unlikely to effect people in this bracket, so long as the estate is forecast to remain below these limits (which have now been frozen again until at least 2021) for the foreseeable future.

For those who are expecting their estate to increase over and above these limits, additional planning may be required. We would suggest that you attend one of our free estate planning seminars to learn more about the Residential Nil Rate Band and how to avoid some common mistakes.

As a matter of course, it is good practice to review your will every 5 years or so to ensure that it fully reflects your wishes and remains up to date with current legislation.

People in this category may still wish to consider the use of trusts to protect their family assets, despite the absence of large tax advantages.

The Insanity of ‘Predicting’ Markets

Posted on November 9, 2015 by - Investments, News

I have followed the recent commentary on the decision by the Bank of England to hold interest rates at their current lows yet again with some interest. Of particular note was not the decision to hold interest rates for the month of November (which was widely expected), but more the ‘forward guidance’ that we should not be expecting an interest rate rise for even longer than the markets had been expecting (perhaps as far as late 2016, or, dare I say it, early 2017).

As usual, various media outlets jumped on the story, commenting that even the Monetary Policy Committee or MPC (the people who actually make the decisions to change rates) actually had no idea when rates were going to rise. This came as no surprise to me at all. The MPC will make their decisions each month based on the information that they have available to them at the time. This information is constantly changing and evolving as world events, new economic reports and various geopolitical developments unfold. As such, it should come as no surprise that the people in charge of setting rates often change their minds because the information on which they base their decisions is changing constantly too.

Which brings me onto the topic of trying to predict markets. There are numerous industry ‘experts’ that voice their views on the future direction of markets and how the economy will evolve over time. Given that interest rates are such a key component of the economic activity of a country, they tend to feature quite heavily in the ‘experts’ analysis.

This begs an interesting question to me … If the people who actually have full control over setting rates have no idea when they are going to change, how do the rest of us have any hope and more importantly, how accurate can any ‘prediction’ ever be.

I recently reviewed an academic study on this topic and the results were fairly unsurprising. When we look back on previous predictions made by ‘experts’ in the financial field and see if they came true, you could just as well flip a coin. Approximately 50% of them were correct and 50% incorrect.

So which will it be, heads or tails?

We feel that a far better approach is to design a strong long-term asset allocation and stick to it, rather than trying to ‘time’ or ‘beat’ the markets because, surely if the insiders don’t know what’s going to happen, the rest of us have no hope at all.

The New Property IHT Allowance

Posted on July 15, 2015 by - Budget, News, Taxation

One of the more predictable elements of the summer Budget was the introduction of a new ‘Property Nil Rate Band’, which will mean that eventually individuals can pass on a further £175,000 tax free to their direct dependents, in addition to the current £325,000 nil rate band that exists at present.

As with all new legislation however, there are some things to be aware of.

First of all, the new allowance will be introduced in tranches as follows:

  • 2017/18 – £100,000
  • 2018/19 – £125,000
  • 2019/20 – £150,000
  • 2020/21 – £175,000

These amounts are given with reference to the date of death of the deceased.

In addition, the new Nil Rate Band will only apply to a family home (i.e your main residence), passed onto direct descendants, which in the legislation are taken to mean children and grandchildren. There is some further consultation on where the property could be left to certain types of trust.

As with all new legislation, it is important to review you current plans to make sure you get the full benefit. Any older will that include gifts into trust, may not be eligible to claim the new nil rate band, and this could also be true for those who do not own a home, or who choose to leave their home to people not considered to be direct descendants.

We will be covering the new changes in detail during our updated Estate Planning Seminars, running from September onwards. You find out more information here.

Summer Budget Summary

Posted on July 10, 2015 by - Budget, News

The Summer Budget contained little in the way of surprises (nice ones anyway), however the rate of change seems to be building, creating a more dynamic and fluid financial planning world. There are already hundreds of budget summaries online, so I will cover here some of the key points that might impact on Buckingham Gate Clients:

 

1. Dividend Tax Changes

From 2016, dividends will no longer come with their 10% tax credit, which used to satisfy the basic rate tax liability for those in the 20% tax band. From 6th April 2016 dividend income will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers, once income from dividends exceeds a £5000 tax free allowance. This news will be unwelcome for business owners who receive large amounts of dividends as part of their remuneration and those with large share portfolios outside of a tax wrapper such as an ISA.

Business owners especially, may wish to review how they are remunerated from their companies.

 

2. New IHT Property Nil Rate Band

I have written a more detailed article about this change here.

 

3. Removal of Higher Rate Tax Relief on Buy to Let Investment

I have written before about the potential pitfalls of using pension assets to fund buy to let purchases, however the case has just become even less compelling. The Chancellor has announced that over the coming years, tax relief on buy to let mortgages will be restricted to just 20%. This will have the effect of reducing the net returns from buy to let investments for higher rate taxpayers. While buy to let property is undoubtedly a success story for many, there are risks and pitfalls.

Lifestyle Funds That Put Your Lifestyle At Risk

Posted on June 26, 2015 by - News, Pensions

People with their pension savings invested in lifestyle funds have suffered losses of 9% since February, says the Telegraph.
It criticises the insurance companies running these funds for not changing their methods since the pension reforms were introduced in April. The losses have occurred because the lifestyle funds progressively switch money from shares to fixed interest as you near retirement age and in recent months bond prices have dropped sharply. Experts say these lifestyle funds were designed for people intending to buy annuities at retirement, but many people will now use the pension reforms to keep their fund invested and make regular or occasional withdrawals, so a lifestyle approach will not be appropriate.

As you approach retirement, it is essential to review the investments within your pension fund and make sure they match the way you plan to use your fund in later years.

If you would like a professional view on your retirement investments, please contact us for a no-obligation Discovery Meeting, provided at our expense.

To Buy (To Let) Or Not To Buy (To Let)

Posted on June 22, 2015 by - Uncategorized

With the announcement of the new pensions freedoms, many people have considered the option of taking money out of their pension funds with a view to investing in a buy to let property. I have written a previous article about this here, however Prudential have now created a far more detailed case study on this very topic.

Buy to let property can be a fantastic source of income and capital gains, and can certainly form a part of any well diversified investment portfolio, however the tax consequences may mean that it is less attractive than it seems to use pension funds for this purpose.

The conclusion of this case study is that a very attractive yield of 6% on a buy to let property, could be effectively reduced to as little as 2.7% if the property if funded from a large pension withdrawal.

 

Beware Of Temptation

Posted on June 19, 2015 by - Budget, News, Pensions

A majority of pensioners who were asked if they would sell their annuity – a reform the government is currently consulting on – said they would not sell, reported the Financial Times. Almost half said they thought they would get a poor deal. But almost one in five said they would sell either to pass on an inheritance or to fund healthcare costs in old age.

The sale of existing annuities is likely to be tricky and even if the government does go ahead with its proposals, many annuitants can only expect to get back a much smaller sum than they paid originally.

What needs to be remembered here, is that it is likely to be the same insurance companies who offer the annuities that will be offering to buy them back, and the cynic inside me says that they will want to take some profit along the way.

Pushing Through The ‘Comfort Zone’

Posted on June 11, 2015 by - News

For some time now I have been a keen runner, typically covering 5-6 miles at a time, 3-4 times a week. Hardly marathon distances, but enough to pose a challenge to those like me who enjoy moderate fitness. Around 18 months ago when we moved home, I had to find a new running route, which was quite enjoyable given the surroundings of the Suffolk countryside. I settled on my route and continued to increase my distance along said route sightly each day until I came to a t-junction.

Now this T-junction seemed like a sensible place to stop and turn around whenI first reached it, so that is exactly what I did. I then proceeded to run this same route (and stop at the same t-junction) for the next 12 months. While I always set out with good intentions to go further, by the time I reached the t-junction, my mind would say “right, we have made it, time to go home”.

You see the human brain is designed to find solutions to problems. When it finds a solution to a problem, it remembers this solution and this information can be re-called whenever the same problem is encountered. Before too long, this solution has become a habit. It is this same function that makes it very difficult to push past our ‘comfort zone’, whether in business, sport or life. The problem is that while the solution you came up with before might have solved the problem, it may not have done so in the best or most efficient way. For this reason it is important to push past these mental barriers and carry on.

I did just that this morning. After weeks of trying, I finally turned right at the t-junction, and carried on my run for another 1/2 mile. It turns out, it wasn’t so bad after all!

 

What Does The Conservative Election Victory Mean For You?

Posted on May 14, 2015 by - Budget, News, Pensions

With the Conservatives surprising just about every pollster, media outlet and individual in the country with their majority election win, people may now start to wonder what might change from a financial planning point of view. Here we summarise some of the key Conservative manifesto pledges (a word of warning – these changes are yet to be implemented in law yet):

The conservatives have pledged to increase the tax free personal allowance to £12,500, while at the same time raising the higher rate tax threshold to £50,000.

Introduction of a new help-to-buy ISA, which will offer a bonus from the government for those who are saving for their first home.

The addition of a new Inheritance Tax allowance that can be used to pass on the family home. The proposal here is to give each individual a further £175,000 allowance to use for a family property, on top of the current £325,000 allowance.

Protecting various pensioner benefits such as the free bus pass and winter fuel payments.

Reduce tax relief on pensions for those earning over £150,000.

The key thing to remember here is that these are currently just manifesto pledges. These changes have not become law, nor has draft legislation been published. As with many things the devil will be in the detail so we will have to wait and see just how many of these proposals will become a reality.