Tag Archives: Tax

Niki Patel, Financial Planning Week tip: Death and taxes! Have your clients written a will?

A reminder of some of the reasons as to why clients should not only write a will, but also review it if their circumstances change

Research conducted by various professional bodies shows that a large proportion of the UK population have not written a will, regardless of owning property or other assets. While a will is often used for tax planning reasons and to protect assets, there are many other reasons as to why clients ought to write a will.

Ensure the will is valid and executors are appointed

The starting point is to always ensure that clients have a valid will in place. Broadly, for a will to be valid, it must be written by an adult, so aged 18 or over, who is of sound mind. It must be in writing and signed and dated in the presence of two adult independent witnesses. This means that it cannot be witnessed by anyone who can benefit under the terms of the will.

Naming who should act as executors is vital. The executors are responsible for dealing with the administration of the estate. This means that they must complete the inheritance tax account, pay any inheritance tax that may be due and apply for probate, if required. Once grant of probate has been received, the executors then have the legal right to deal with the estate – so they would be required to pay any debts, taxes, expenses, etc., and then pass the assets on to those who are entitled to benefit under the terms of the will.

Provide funeral instructions

A will can include funeral details so, for example, the type of service the individual would like. In addition, some people may have strong feelings about whether they wish to be cremated or buried, whether they would like certain songs played or readings read. All of this can be specified in the will, thereby providing guidance on the client’s overall wishes and reducing the burden for loved ones. It is also worth checking with your clients if they have taken out a pre-paid funeral plan to cover the cost of the funeral.

Appointing guardians and deciding what should happen to any pets

Clients who have minor children need to consider who should act as a guardian to look after the children upon their death, otherwise the family courts will decide where the children should go. It is also advisable to consider the ages of such children and what provision is likely to be needed for them. A will can ensure that children will be properly looked after, because funds can be set aside for their benefit – usually by including a trust to that effect in the will.

In cases where there are pets, it is also advisable to consider whether a family member or friend would be prepared to look after them and what provision is needed for them. Again, funds could be set aside within the will for that person to use to look after any pets.

Protecting assets and ensuring the right people benefit  

Where a client dies having not written a will, they are deemed to have died intestate. This means that, in England, their assets are distributed in accordance with the Administration of Estates Act 1925 – so the law will decide who should inherit their assets. Even though the intestacy rules are designed to protect the individual’s family, this can still cause several problems, especially for those in a long-standing relationship who are not married or in a civil partnership. This is because partners have no automatic rights under English law. Equally, for those who are separated but not divorced, their spouse or civil partner would inherit part of their estate on intestacy. Further, if there are no close relatives, assets could pass to distant relatives whom the deceased had no intention of leaving assets to, or, if there are no relatives, assets could pass to the Crown.

Following on, one of the most important reasons for writing a will is to ensure that assets pass to your client’s intended beneficiaries on death. It is possible to specify who should benefit, and whether certain individuals should inherit specific assets – so, for example, particular items of jewellery, paintings, other personal possessions, collections, etc.

Dealing with digital assets

Social media has become ever more prolific. Therefore it is advisable to include provision for what should happen to any digital assets within the will. It is possible to name a digital executor to manage these assets on death and it is advisable to include information on how such digital assets should be handled, for example, whether an account should be closed or not and what should happen to any photos and videos.  

Tax planning

It is also advisable to ensure that the will is written in a way to maximise tax savings. Prior to the introduction of the transferable nil rate band, in many cases, the nil rate band was often wasted on first death by leaving assets to a surviving spouse/civil partner which would otherwise pass exempt. Many couples now rely on the transferable nil rate band rules to ensure use of the nil rate band on second death. That said, given that the nil rate band has remained at £325,000 since 2009/10 and is expected to do so until 2025/26, for some, making use of the nil rate band on first death ought to be considered. This reduces the value of the estate on second death, which can be beneficial for the purposes of making use of the residence nil rate band and also any growth will be outside of the estate of the second person to die.

The will can therefore be drafted to maximise inheritance tax savings. And, for those who wish to leave assets to charity, if 10% or more of the net chargeable estate is left to charity, the rate of inheritance tax payable on the taxable estate is reduced to 36% instead of 40%.

Powers of attorney

Even in cases where a power of attorney has been appointed, while they are able to deal with financial affairs as well as decisions relating to health and welfare, they can’t write a will on behalf of the donor for whom they are acting. This means that, for those who do not have a will in place, if they lose capacity, the process of putting a will in place can be both complicated and lengthy.

Finally, let’s not forget the need to update/review a will

For many, even if they have written a will, ideally it should be reviewed whenever their circumstances change, for example, if the individual gets married, divorced, becomes a parent or receives an inheritance.

If they already have a will in place and get married or enter into a civil partnership, the will is automatically revoked and so a new will would need to be made. The same rule, however, does not apply if they get divorced or their civil partnership is dissolved. In that case, anything left to the ex-spouse/ex-civil partner in the will would be dealt with as if they had died on the date that the marriage/civil partnership legally ended. This means that any gifts/assets which may have been left to the ex-spouse/ex-civil partner will no longer pass to them, although the provisions in the rest of the will would usually be valid and so could cause unintended consequences where their circumstances have changed and they wish to redirect assets to other people. Whatever the ex-spouse/ex-civil partner was set to inherit would then be passed on to the next beneficiary who is entitled to it, in line with the terms of the will. If everything had been left to the ex-spouse/ex-civil partner, with no other beneficiaries named, then the estate would be dealt with under the intestacy rules. So, if a will is not updated to reflect a divorce or the dissolution of a civil partnership, the estate might not pass to the intended beneficiaries. This could also mean that new partners or dependants aren’t provided for.

Comment

Hopefully this sets out some important aspects that can be discussed with your clients in terms of what they should consider in relation to writing and reviewing their will. In addition, clients also ought to be reminded that writing a will can save time and stress for loved ones as it makes it easier for them to sort everything out on death.

Tony Wickenden, Financial Planning Week tip: Considerations around tax wrapper choice

The impact of the announced Growth Plan changes on the taxation (and thus potential attraction or otherwise) of UK (onshore) and international (offshore) investment bonds

The Growth Plan (AKA “mini budget”, AKA “Fiscal Event”) fulfilled many expectations in relation to tax change. It also delivered some surprises. The resulting market reaction and the very real and current impact on the currency and potential interest rates and inflation have all been very well documented.

In the context of tax change, this bulletin considers the impact of the announced Growth Plan changes on the taxation (and thus potential attraction or otherwise) of UK (onshore) and international (offshore) bonds.

So, what are the changes that could/will have an impact on decision making about where to place new and potentially existing investments. Tax is by no means the most important in that decision making, but it is a material contributor. A strategy done “tax well” will deliver some Alpha over one done just “well”. A statement of the obvious if ever there was one.

Here are the announced changes to factor into decision making:

The basic rate of tax will fall to 19% on 6 April 2023.

The additional 1.25% on dividend taxation will be removed on 6 April 2023. The dividend additional rate will also be removed. This will apply for dividends received by individuals and trusts. The highest dividend rate will be 32.5% from 6 April 2023.

The proposed abolition of the additional rate of tax (45%) from 6 April 2023 has now been reversed so the additional rate remains for individuals and trustees, for non-dividend income. Note, however, that no announcement has been made about the abolition of the additional dividend tax rate (currently 39.35%), at the time of writing. If that abolition is also reversed (as one would expect it would), the highest dividend tax rate will be 38.1% from 6 April 2023.

No changes to top slicing relief or the 5% withdrawal rules.

No changes to capital taxation (inheritance tax (IHT) and capital gains tax (CGT)) were (or have been) announced.

So, why are these particular changes material? Well….

  1. The rate of taxation charged on gains and income arising inside a UK life fund on policyholder funds is anchored to the basic rate of tax – that’s 19% from 6 April 2023 – not the 19% corporation tax rate, and its set to stay this way. It does not therefore increase, or decrease, aligned to the rate of corporation tax.
  2. With the basic rate falling to 19% from 6 April 2023, the rate of tax payable by higher rate taxpayers on chargeable gains made on UK investment bonds from 2023/24 will effectively be 21% (not the current 20%). The effective rate represents the difference between the higher rate of tax and the basic rate.
  3. A lower basic rate (19%) charge will apply to gains falling within this band made under offshore bonds. Chargeable gains made under UK bonds remain free from basic rate tax of course.
  4. The reversal of the abolition of the additional rate of tax (45%) will mean that the maximum tax rate that can be paid on a gain made under a UK bond will be 26% and 45% under an offshore bond.
  5. The removal of the 1.25 % dividend charge – from 6 April 2023 – will improve slightly the relative position of collective investments. However, it must be remembered that dividends received will not suffer tax at any level inside a UK or offshore bond at life fund level. And with a UK bond, the policyholder will also have a basic rate tax credit to set against any gain.
  6. No changes to top slicing relief or the 5% withdrawal rules (both very long standing by the way) delivers important stability in tax planning with bonds.
  7. No changes to capital taxation – that’s CGT and IHT.

So, what conclusions can we draw from all of this?

  1. The basic principles of wrapper decision making (bonds v collectives and UK bond v offshore bond) haven’t changed, but the “nuancing “(reflected in those rate changes noted above) has.
  2. As for before the changes described above take effect, each case must be decided on its own facts – with the benefit of advice. There are a number of “moving parts” to take into account.

         But, subject to all of the forgoing:

  1. To the extent that an individual can use the CGT exemption and the dividend allowance then there is no obvious tax deferment benefit to enjoy from bond investment.
  2. Once an individual has exceeded the CGT exemption and dividend allowance and especially if they are a higher rate taxpayer and can defer taking gains until they are a basic rate or non-taxpayer, then potentially material tax benefit can be secured by investing in UK or offshore bonds – as appropriate in the circumstances. Keep an eye on respective charges though before making a decision.
  3. The lowering of the basic rate (and thus the UK life fund rate on policyholder funds) will, over time, have a beneficial impact on UK life fund growth to the extent that the growth comes from other than dividend income – all other things being equal.
  4. For investors in offshore bonds, who can minimise other income in the year of encashment, they will be able to secure zero tax on build up and a potentially reduced basic rate tax on gains beyond the personal and savings allowance.
  5. Investors in UK bonds will need to factor into their encashment/withdrawal strategy that post 5 April 2023 bond gains, net of the basic rate credit, will be taxed at 21% (higher rate taxpayers) and 26% (additional rate taxpayers) and not 20% and 25% respectively.
  6. For bonds held over the long term the value of top slicing relief and potentially undrawn/unused 5% withdrawals continues to be really high.
  7. If an individual is looking to use a trust with a financial product, then considering a bond first – given its unique and powerful tax status in relation to tax deferment and potential to make a tax effective encashment – can make sense on tax grounds.
  8. And remember, assignment of a UK or offshore bond to any (adult) individual (from an individual or a trust), is entirely possible (and usually income tax and CGT free) if this fits with your client’s financial plan and will reduce the tax on final encashment by the assignee (transferee).

Helen O’Hagan, Financial Planning Week tip: Should your clients defer cashing in their investment bond until after 5 April 2023?

The recent Growth Plan issued by the Chancellor detailed a cut in the basic rate of income tax to 19%. This change takes place from the next tax year and will have an impact on individuals who are thinking of cashing in their investment bonds

Basic rate taxpayer

For those of your clients that are basic rate taxpayers the basic rate of income tax is reducing to 19%. Where clients hold onshore bonds, they will still be given a credit equivalent to the basic rate of tax (i.e. 19% from 6 April 2022) against gains realised on the surrender of investment bonds. This means, therefore, there will be no change to their tax position either before or after the new tax year.

If your clients hold international (offshore) bonds, it is worth considering delaying the surrender until the new tax year to take advantage of the lower basic rate of income tax of 19%.

Higher rate taxpayer

If your clients are higher rate taxpayers the position is different, in that, for onshore bonds, they will still receive a tax credit but, as this will reduce to 19%, it will leave them paying the difference between basic and higher rate which becomes 21% after 5 April 2023.

In this case, a higher rate taxpayer may not want to delay the surrender of their onshore nd as he will pay less in the current tax year compared to the new tax year.

In respect of international bonds, its neutral, as the client will still pay 40% on any chargeable event gains before or after the change.

Additional rate taxpayer

If your clients are additional rate taxpayers, for onshore bonds, they will have to pay an additional 26% due to the reduction in the basic rate tax credit to 19%.

In this case, an additional rate taxpayer may not want to delay the surrender of their onshore bond as they will pay less in the current tax year compared to the new tax year.

In respect of international bonds, its neutral, as the client will still pay 45% on any gains before or after the change.

Comment

Due to the reduction in the basic rate of tax, some clients will be better off delaying the surrender of their bonds until the new rates come into force. You can see from the table below a summary of the position for your clients:

 Onshore bondsInternational bonds
Non-taxpayerno change, basic rate tax credit will reduce to 19%no change
Basic rate taxpayerno change, basic rate tax credit will reduce to 19%consider delaying encashment to utilise lower basic rate of tax
Higher rate taxpayerdon’t delay, as basic rate tax credit is reducing, thus tax due will increase to 21%neutral, i.e. 40% before and after the tax year end
Additional rate taxpayerdon’t delay, as basic rate tax credit is reducing, thus tax due will increase to 26%neutral, i.e. 45% before and after the tax year end

However, as always, you should do a comparison calculation using the rates before and after the new tax year changes to make sure which regime gives your client the best tax outcome.

Also, note that the above is covering the timing of a chargeable event gain where a bond or segments of a bond are surrendered in full. It’s important to remember that a chargeable event gain on full surrender of an investment bond, or segments of a bond, occurs on the date of surrender, whilst a chargeable event gain on a partial withdrawal, i.e. where a bond continues with all the segments intact, usually occurs on the next policy anniversary.

Chris Jones, Financial Planning Week tip: Pensions tax relief where clients have dividend or investment income

A reminder of how higher rate tax relief is applied and how, in some cases, the total tax relief can be more than 40%

Tax relief on personal pension contributions is limited to a maximum of 100% of the individual’s relevant UK earnings in the tax year the contributions are paid (and a minimum of £3,600). Essentially, this means the money the client has earned from their employment or the taxable profits from their self-employment.

Key investment income sources such as rental profits (other than those from qualifying furnished holiday lets), dividend income or savings income are excluded. However, this doesn’t mean that higher rate tax relief is not available on these types of income. This is because of the way in which the tax relief is applied.

With a relief at source scheme, the contribution is paid net and the provider will add the basic rate tax relief and reclaim this from HMRC. The individual’s basic rate tax band is then extended by the gross value of the pension contribution. This means the income that would otherwise fall into the higher rate tax band may now fall into the basic rate tax band. It doesn’t matter what form of income that is, i.e. the tax relief can be obtained against earned income, rental profits, savings income or dividend income. Where it is the latter, the rate of tax relief is higher than 40%.

Example

A client has £12,000 of earnings and also receives £60,000 of dividend income. The maximum tax relievable personal contribution they could make is limited to £12,000 in the tax year. They pay the pension provider £9,600 net and the provider adds the £2,400 of tax relief.

The client’s basic rate tax band is then extended by £12,000 from £37,700 to £49,700. This means that £12,000 more of the dividend income is now taxed at the basic dividend rate of 8.75%, rather than the higher rate of 33.75% – a 25% saving or £3,000. This means the total tax relief is 45% (£2,400 + £3,000 = £5,400. £5,400/£12,000 = 45%).

Where individuals make contributions to a net pay scheme, i.e. an occupational scheme, the rate of tax relief is, currently*, exactly the same (aside from the anomaly for those with total taxable income below the personal allowance) as the taxable income is reduced by the gross contribution.

Note that although the dividend tax rates are reducing from tax year 2023/24, the tax saving in this example will still be the same as the rate will reduce down from 32.5% to 7.5%, i.e. 25%. And, although the basic rate of income tax is set to reduce to 19% from 6 April 2023, there will be a one-year transitional period for Relief at Source (RAS) pension schemes to permit them to continue to claim tax relief at 20%. Individuals can only receive higher rate tax relief to the extent they would otherwise have paid higher rate tax if they hadn’t made the pension contribution. For example, someone with taxable income of £60,270 and a full personal allowance, could only benefit from higher rate tax relief on contributions of up to £10,000. Any further contributions would only benefit from basic rate tax relief. (£60,270 – £37,700 basic rate tax band – £12,570 personal allowance = £10,000 in the higher rate tax band.)

It is also important that higher rate tax payers in relief at source schemes ensure they make a claim for the higher rate tax relief they are entitled to either on their self-assessment tax return, or if they do not fill in a self-assessment tax return, they can call or write to HMRC to claim.

*The basic rate of income tax is set to reduce to 19% from 6 April 2023. Where individuals make contributions to a net pay scheme, i.e. an occupational scheme, from 6 April 2023, the rate of basic rate relief they will receive will be at 19%.

Tax, benefits and electricity bills

The impact of rising electricity bills has seen two important responses.

The latest projections from Cornwall Insights are that the utility price cap (which is actually a rate cap) will rise from the current £1,971 to £3,582 in October 2022 and then £4,266 in January 2023, when the Ofgem recalculation moves to a quarterly basis. At the time of Rishi Sunak’s May statement on utility price cap support the October figure was projected to be £2,800 and expected to last through until April 2023.

If you consider the utility cap cost for 2022/23, then in May, crudely, it looked to total £2,389 ([£1,971 + £2,800]/2). It is now – equally crudely – £2,948. That crude calculation, while not uncommon, understates the true difference as energy consumption in April-September is much less than in October-March. It also hides the fact that, within the cap, the gas cost (more heavily used in October-March) is projected to rise faster than electricity in October.

The Labour Party recently announced its support for a freeze in the cap until April 2023, a move already proposed by the Liberal Democrats and the Scottish Nationalists. The cost of the measure would be £29 billion for the six months according to Labour. Its funding of the proposal is not fully clear, but Keir Starmer, the Labour leader, told the Today programme on Radio 4 that he would backdate the current Government’s North Sea oil & gas windfall tax to January and remove the associated investment allowances. The planned £400 subsidy for all energy bills, announced in May would fall away as unnecessary. The cap freeze would also reduce inflation, thereby reducing the revaluation cost on £550 billion of index-linked gilts, although the suggested cut of 4% in inflation would only be a deferral unless the freeze were continued into 2023/24.

Coincidentally, on the same day as Labour’s announcement, the Institute for Fiscal Studies (IFS) issued an observation on the utility price cap. It noted that the May package, in overall terms, would have covered about 75% of the increase in the cap, assuming a £2,800 level, at a cost of £24 billion. To maintain the same proportion of support based on the latest projections would need an additional £12 billion. The IFS suggests several ways of distributing this extra sum, including increasing the £400 subsidy to £660 as a starting point before addressing low-income and vulnerable groups.

The IFS also highlights the issue of the timing of the benefit increase calculations. These use the September CPI, so, for the increases that will apply from April 2023, will miss both the October 2022 and January 2023 utility cap rises. The Bank of England projects a little over 13% as the inflation rate in 2022 Q4, while Goldman Sachs, using more recent price cap figures, sees 14.4% as a peak at the start of 2023. After abandoning the Triple Lock for this April’s increase, the optics for next April’s benefit price protection look set to be similarly bad.

Comment

Current rumours focus on an Emergency Budget announcement on 21 September, a little over a fortnight after the new Prime Minister is named and the day before the House of Commons rises for its Conference Recess. Whoever gets the job, she (or he) faces a rapid first test in squaring campaign rhetoric with economic and fiscal reality.

taxation

synopsis

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Taxation of Pensions Income

This video blog looks at the how flexible pension income is taxed and how you can reclaim tax back from HMRC.

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Post Referendum Tax and Financial Planning

A look at the political and economic drivers to tax policy and its impact on financial planning ahead of the Autumn Statement

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Life Policy Taxation Changes

Proposals for new rules on the taxation of part surrenders and part assignments of investment bonds.

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The Future of Pensions Tax Relief

Change seems inevitable, the direction of travel seems clear – what can we expect when we get more detail at the next Budget?

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