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Author: Sophie Soraf

Why Choose SIPPs? The Advantages of Personal Pensions

Posted on by Sophie Soraf
If you want a flexible and straightforward way to save for your retirement that puts you in the driving seat, a self-invested personal pension, or SIPP, might be appropriate. Here, we explain how a SIPP works so that you can consider whether it could be the right pension plan for you.

What is a SIPP?

A SIPP (Self Invested Personal Pension) is a type of personal pension that gives you the freedom to choose and manage your own investments, allowing you to make decisions that determine how your pension pot performs. A SIPP acts as a wrapper that can hold a number of different investments and is invested until you want to make withdrawals when you retire.

You can also choose to transfer in existing pensions, but it’s important to check whether you will be charged transfer fees for doing so. If the fees are high, it’s generally best to leave your existing pensions where they are.

What are the tax benefits?

SIPPs work in a similar way to other types of pension in that you can pay into them whenever you want and they enjoy the same generous tax perks. This means that for every contribution you make, the government will give you 20% tax relief. So, if you paid in £100, this would effectively be topped up to £125. This basic-rate tax relief is added to your pension automatically as your provider will claim it for you from the government.

Higher-rate taxpayers (40%) can claim up to a further 20% in tax relief through their tax return, while additional-rate taxpayers (45%) can claim up to a further 25%.

Are there any limits on SIPP contributions?

You can pay as much as you like into your pension, but there is a limit on the amount of tax relief you can claim. Most people get tax relief on pension contributions up to 100% of their salary each tax year, capped at the Annual Allowance of £60,000 (for the 2023/24 tax year). This limit includes the total value of all contributions, including those from your employer and the addition of basic-rate tax relief.

If you do not earn enough to pay Income Tax, you can pay a maximum of £2,880 a year into your pension and still benefit from basic-rate tax relief, which boosts your total contribution to £3,600 per tax year.

Once you have used up the current year’s Annual Allowance, you may be able to carry over unused allowances from the past three years, providing you were a pension scheme member during those years and your total contribution does not exceed 100% of your current year’s earnings.

A Tapered Annual Allowance was introduced in 2016-17 which currently applies for individuals with a ‘threshold income’ of over £200,000 and ‘adjusted income’ of over £260,000.

Why should I choose a SIPP over other pension arrangements?

The biggest benefit of a SIPP is that, unlike other pension plans, you can choose from a much wider range of investments, which could have significant growth potential. You can also have complete flexibility and control over your investment portfolio.

In addition, SIPPs are portable, so if you change your job or stop working you can continue to contribute to your pension. If you have a new employer, they can decide to make contributions too.

However, with this flexibility comes responsibility so it’s important to research your options carefully and make sure you are comfortable making your own retirement decisions. The value of your investments can go down as well as up which means you could get back less than you put in.

What types of investment can I have?

With a SIPP, you can invest in a wide range of assets, such as:

  • Stocks and shares
  • Unit trusts
  • Open ended investment companies (OEICs)
  • UK government bonds
  • Gilts and bonds
  • Exchange traded funds (ETFs)
  • Offshore funds
  • Commercial property
  • Cash

SIPPs allow you to pick your own individual investments or choose a ready-made portfolio based on your investment goals and attitude to risk. By picking your own investments, it’s important to ensure you spread risk by choosing a variety of investments across a range of assets, regions and sectors.

How can I take money out of my SIPP?

You can usually start to take money from your pension from the age of 55 (rising to 57 in 2028). You can take up to 25% of your pension pot tax-free and you’ll be taxed on the remainder as if it were income. You can choose to receive your tax-free cash as a single lump sum or in stages.

You can take money from a SIPP in three main ways and you can choose just one option or a combination:

  • An annuity: This pays a guaranteed income for life and you can choose whether your income remains the same throughout your retirement, increases by a fixed percentage each year or increases with inflation.
  • Drawdown: This enables you to take your tax-free cash and leave the rest of your pension invested. You can make further withdrawals as and when you need to.
  • Lump sum: Known as Uncrystallised Funds Pension Lumps Sums (UFPLS), this allows you to take money directly from your SIPP without choosing drawdown. Every time you do so, 25% is usually tax-free and the rest is taxed as income.

How we can help

SIPPs give you much greater flexibility than other types of pension, but they won’t be suitable for everyone. If you’re not sure whether a SIPP is right for you, our expert pension advisers are on hand to discuss your options and help you make the right investment choices.

They will assess important factors such as your attitude to risk, investment perspective and tax position to help you make the best retirement decisions for you. Why not get in touch today?


This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks including the risk of possible loss of capital. Some information quoted was obtained from external sources we consider to be reliable.

Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.

Spotlight on EIS vs VCT and AIM investing

Posted on by Sophie Soraf
If you’re an investor looking to diversify your portfolio and maximise tax efficiency, you could consider more complex investments such as an Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT) or shares in Alternative Investment Market (AIM) listed companies, providing you are comfortable holding high-risk investments.

EIS vs VCTs explained

Enterprise Investment Schemes and Venture Capital Trusts are investments made into small, unquoted trading companies which are trying to raise capital in their early stages of development.

The rationale behind both EIS and VCT schemes is that they benefit the economy by promoting innovation amongst the small higher-risk business community which in turn drives productivity, creates jobs and boosts economic growth.

EIS and VCT schemes are appealing to investors who are typically seeking greater diversity across their portfolio as the investments held have a low correlation to more mainstream holdings in pensions and Individual Savings Accounts (ISAs).

What tax benefits do these schemes offer?

Since their launch in the 1990s, EIS and VCT schemes have become increasingly popular, in large part due to the tax benefits they enjoy. Schemes such as these have been particularly important to investors who may be struggling to find ways to invest tax-efficiently, for example those who are close to breaching pension allowances, but who still want to save for retirement in a tax-efficient way.

There are a number of generous tax breaks. For example, when you invest in an EIS or a VCT, you get income tax relief of 30%: invest £100,000 and you could get up to £30,000 back. In order to qualify for these benefits an EIS investment must be held for at least three years and a VCT for five years, but investors would normally expect to hold the investments for longer.

For EIS schemes there is also ‘deferral relief’ which effectively allows you to defer capital gains tax payable on profit earned from an investment by reinvesting it in an EIS. So you only have to pay the CGT due on your initial investment once you exit from your EIS, but you could carry on deferring the tax bill by reinvesting your gain indefinitely.

There are also ways of using an EIS to minimise your inheritance tax bill. After two years from when you buy the EIS-qualifying shares, as long as you still hold the shares on death, your investment should be free of inheritance tax liability. There is no inheritance tax advantage with VCTs however, as when you invest you acquire shares in the trust, rather than in the underlying companies.

How do EIS and VCT schemes differ?

In the case of an EIS, investors typically purchase shares directly in firms, while VCTs are listed companies and follow a similar approach to that of investment trusts, allowing investors to spread the investment risk over a number of companies by subscribing for shares in the VCT itself.

For the 2023-24 tax year, the following limits apply:

In the case of an EIS, investors typically purchase shares directly in firms, while VCTs are listed companies and follow a similar approach to that of investment trusts, allowing investors to spread the investment risk over a number of companies by subscribing for shares in the VCT itself.

For the 2023-24 tax year the following limits apply:

For an EIS, the maximum annual investment you can claim tax relief on is £1m. This is increased to £2m, as long as at least £1m of this is invested in ‘knowledge-intensive’ companies.

Investments in an EIS can be carried back to the previous tax year.

For a VCT, the maximum annual investment you can claim tax relief on is £200,000. New investments in VCTs cannot be carried back to previous tax years.

VCTs may pay out tax free dividends to investors, although early-stage companies may not be able to afford this, without affecting growth, so investors certainly shouldn’t rely on receiving dividends. Dividends payable from EIS are taxable.

What are the risks of EIS and VCT schemes?

Despite the attractive tax benefits of these schemes, they are only suitable for people who are comfortable holding high-risk investments. This is because EIS and VCTs invest in smaller, fledgling companies that are inherently likely to be more fragile enterprises and could fail.

Another risk to consider is the illiquid nature of the investments as they are harder to sell than mainstream investments such as listed shares or unit trusts. As a result, such schemes are considered to be high risk and will normally only be suitable for a relatively small proportion of your overall portfolio.

If you are considering a long-term investment and want to maximise tax efficiency and diversify your portfolio, our independent financial advisers can provide you with expert guidance on such schemes, advising on the full range of investments and ensuring that the associated risks are fully understood.

Alternative Investment Market (AIM) investing

The Alternative Investment Market was launched 25 years ago (in 1995) with the aim of helping smaller companies that needed capital to grow but couldn’t afford the costs associated with listing on the London Stock Exchange, or were unable to meet the stringent requirements needed to float. As at Feb 2023 there were around 727 companies listed on AIM, with a combined market value of over £90bn.

Not all AIM-listed companies are start-up companies, but they tend to be smaller and potentially higher risk than those listed on the FTSE. The main investors in AIM shares will therefore normally be institutions and wealthy individuals.

What are the tax advantages of investing in AIM-listed shares?

Since 2014 investors have been able to include AIM-listed shares in their stocks and shares ISAs, meaning there is no Capital Gains Tax to pay on disposal and no Income Tax payable on dividends. More and more people, therefore, have considered including AIM-listed shares within their ISA portfolios in recent years.

Furthermore, most AIM stocks qualify for Business Property Relief and are exempt from IHT if held for more than two years, making this type of investment one for consideration when planning for inheritance tax.

As described earlier in this article, AIM shareholders are also able to benefit from Income Tax relief and Capital Gains Tax relief when the investments are held via an Enterprise Investment Scheme or Venture Capital Trust.

Considering EIS, VCT and AIM investments? Talk to us

These types of investments have grown in popularity over recent years, as they are now among the few remaining tax-efficient investment avenues still available to wealthier investors.

If you are unsure as to whether investing in tax-efficient vehicles such as EIS, VCT or AIM is suitable for you or you need professional advice on any other area of saving and investing, we are only a phone call away.

Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment, and you are unlikely to be protected if something goes wrong – two-minute read IMPORTANT information about key risks.

Tax rules can change, and tax benefits depend on individual circumstances. The value of investments can go down as well as up and you may not get back the amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Some information quoted was obtained from external sources we consider to be reliable.

Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.

Pension planning during times of uncertainty

Posted on by Sophie Soraf
There have been various difficulties in recent years, affecting the UK economy that have had an impact on pension savers.  These include Brexit, the COVID-19 pandemic, the conflict between Russia and Ukraine as well as political instability in Westminster.  These events have caused turbulence in the markets, leading to a decline in share prices and other investments. If you have a workplace pension or a personal pension you may have noticed that its value has decreased as a result.  While this can be concerning, it is important to remember that it is a temporary setback and there are ways to weather the storm.

What should I do about my pension if I see the value dropping?

Even though these are unprecedented times, as an investor, it’s useful to put any short-term volatility into historical context, to get the bigger picture, rather than focusing too intently on short-term events and market fluctuations.

Market analysts and investors aren’t infallible, they become nervous in uncertain times. This is because the loss of trade and tourism can pose a threat to companies of any size. So, it’s little wonder that stock markets have fallen and you are likely to have seen a drop in the value of your pension pot over the course of the last few years.

However, it’s worth remembering that the recent falls have come after some very strong rises in recent years. Also, your pension pot is unlikely to be invested solely in equities, so a 5% fall in the market does not necessarily equate to a 5% fall in the total value of your pension fund. In fact, the typical pension pot will contain a broad range of assets, which have been identified to fit in line with your attitude to risk, personal objectives and time frames.

A typical pension fund contains around 60%-65% in shares, with the rest in government and corporate bonds, property and cash. In contrast to equities, government bonds have actually increased in value during the crisis.

Will my pension pot ever recover?

Investment requires a disciplined approach and a degree of holding your nerve if markets fall. Experienced long-term investors know that the worst investment strategy you can adopt is to jump in and out of the stock market, to panic when prices fall and to sell investments at the bottom of the market.

The importance of keeping to your long-term plan is evident by studying the performance of the FTSE 100 over the last 20 years or so. Back in the autumn of 1998, the FTSE 100 fell by 1,000 points, amidst an environment of high-interest rates and other threats to UK economic growth. However, it had almost fully recovered by the end of 1998 and the index soared close to 7,000 in 1999. A global slowdown brought it back down to around 3,600 in the spring of 2003, before taking another five years to climb back to around 6,500. Then, the global financial crisis happened and the index was back at 3,500 in March 2009. After a long haul back, the index was at over 7,000 in January 2020 before the pandemic affected global markets.

Over the last 20 years, despite a variety of market shocks and rebounds, the index still has a long-term growth trend. It’s important to remember that some market volatility is inevitable. Markets will always move up and down, but it’s important to stick to your long-term plan.

Is now a good time to top up my pension?

Providing you are investing for the long term, you may wish to consider investing more into your pension pot. Even a small increase in contributions could make a difference to your final pension pot if it benefits from an upturn in the market and makes up for recent losses.

Remember that whatever type of pension plan you hold, you get tax relief at the highest rate of Income Tax you pay, on all contributions you make, subject to annual and lifetime allowances. This effectively means that some of your earnings which would have gone to the Government as tax are diverted to boost your pension pot instead.

You receive ‘relief at source’ if you pay money into your personal pension yourself or if your workplace pension contributions are taken directly from your pay packet. In both circumstances, you automatically receive 20% tax back from the Government in the form of an additional deposit into your pension pot. So, for instance, if you’re a basic-rate taxpayer investing £800 of your take-home pay into your pension, the tax relief would amount to £200. Effectively the taxman tops up your £800 contribution to £1,000.

How do I make sure my pension is protected?

As well as taking a long-term view of your pension, regular reviews are essential to ensure you remain on track with your well-defined plan, in accordance with your objectives and attitude to risk. If there have been any changes in your objectives or circumstances, it is particularly important to review and make any adjustments where needed.

When investing, you have to decide how much risk is right for you. Successfully achieving your long-term goals requires a balance between risk and reward, so you can construct a diversified portfolio with the potential to improve returns that matches your elected level of risk. While a diversified portfolio should incorporate strategies to help reduce risk, it cannot be eliminated altogether. The process of building such a portfolio is very difficult to achieve without professional advice.

Can I get advice about my pension?

In these uncertain times, more than ever, it’s important to take professional independent financial advice, from someone who will help you to make the right financial decisions and identify and meet your goals and aspirations. Research shows that those who take advice are likely to accumulate more wealth, supported by increased savings and investments in equities. Also, those in retirement are likely to have more income, particularly at older ages.

We’re here to help

Planning is a continual process of anticipating and adapting to changes in your personal circumstances over the long term. When you work with us you benefit from informed, professional advice, reinforced by up-to-date market intelligence and years of experience. Tees Financial Ltd is the independent financial advice and wealth management arm of Tees.  It has been awarded the Pension Transfer Gold Standard as well as Corporate Chartered Financial Planner status.

 

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks. Some information quoted was obtained from external sources we consider to be reliable.

Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.

Investing for the long term – lessons from the past

Posted on by Sophie Soraf
The emergence of COVID-19 brought a rapid end to the drawn-out recovery of major stock markets from the share price lows associated with the financial crisis a decade ago. When the scale of the threat to lives and livelihoods became apparent, market analysts and investors reassessed the global economic outlook and corporate prospects; they didn’t like what they saw and a wave of selling followed, with inevitable consequences. Most share prices, and thus stock indices, were impacted, with market volatility continuing throughout 2020.

Market analysts and investors aren’t infallible, but when something like COVID-19 strikes they get nervous because closed borders, flight bans and lockdowns can pose a threat even to large companies, especially in exposed sectors. Axed dividends and distressed rights issues are anathema to the jittery; and the largest blue-chip companies aren’t immune. Little wonder then that the 100 shares comprising the UK’s blue-chip share index, the FTSE 100, rapidly lost about one-third of their combined value in late Februaryv and March 2020.

Lessons from history

Created in 1984 with a starting level of 1,000 points to provide a wider index of leading shares quoted in London, the FTSE 100 largely superseded the narrower Financial Times 30-share index launched in 1935. As a barometer of economic outlook and corporate prospects, the FTSE 100 has gauged a few storms over the past 36 years. A chart of its progress reveals a plethora of spikes and dips, the starkest of which can be associated with key events in recent financial history.

graph2

Chart: FTSE 100 since inception to 1 September 2021, source Yahoo and Trading Economics

Not the first FTSE 100 dip

After its launch on 3 January 1984, the FT’s new share index only slipped very briefly below 1,000 points that year. It then made progress, sometimes faltering, to hit 2,000 points by March 1987, by then buoyed by the effect of the previous October’s ‘Big Bang’ modernisation of the London Stock Exchange’s trading structure. Six months of further upticks followed and the index broke through 2,350 in early October 1987. It would be two years before that level was attained again.

On 19 October 1987, the Monday after The Great Storm ravaged Southern England, global stock markets suffered a crash so severe that the day became known as Black Monday. A tsunami of selling, much of it blamed on new-fangled computer-program trading, rapidly took the FTSE 100 down to around 1,600, starting with an 11% drop on the Monday and 12% the next day.

A 1,000-point drop

High interest rates and other threats to UK economic growth and even talk of an impending recession brought a 1,000-point drop in the FTSE 100 in the autumn of 1998, almost all of it recovered by the year-end. General bullishness continued through 1999, which ended with the index nudging 7,000. As the year 2000 unfolded, a combination of overvaluation, epitomised by the rapidly inflating ‘dotcom bubble’, and a global economic slowdown brought further investor jitters.

The bull market had marched the FTSE 100 up the hill; the ensuing three-year bear market marched it back down again to around 3,600 in the spring of 2003. The index would take another five years to climb back above 6,500, where it was delicately poised for the next big shock: the 2008 collapse of US investment bank Lehman Brothers and the cascade of failures prompting what became known simply as ‘the global financial crisis’. By March 2009, the index was down around 3,500 again.

Long term trend

It was a long haul back from there for the FTSE 100 but, after gyrations associated with various stages of the Brexit process, the start of 2020 saw it comfortably above 7,000. News of a new virus outbreak in an unfamiliar Chinese city seemed at first like a distant threat. As the outbreak turned into a pandemic, global markets faltered again and the FTSE 100 headed below 5,000 before recovering some of the loss. COVID-19 has brought a reset of the blue- chip barometer, the FTSE 100 index.

Despite a variety of market shocks and rebounds, the index still has a long term growth trend. It is important to remember that some market volatility is inevitable; markets will always move up and down. As an investor, putting any short-term market volatility into historical context is useful.

Financial advice and regular reviews are essential to help position your portfolio in line with your objectives and attitude to risk, and to develop a well-defined investment plan, tailored to your objectives and risk profile.

The ascent of the 1990s

Share-price recovery was slow, hampered by a short UK recession in 1991-92 caused in part by high interest rates and an over-valued pound associated with efforts to keep sterling within Europe’s exchange rate mechanism. After Chancellor Norman Lamont took sterling out of the ERM in September 1992, having spent billions and upped base rate to 15% trying to stay in, the index gained about 14% in six months.

As 1994 dawned, a decade on from its launch, the FTSE 100 stood at around 3,400; although then, as now, changes had been made to its constituent shares as companies’ respective market capitalisations waxed and waned. Concerns about the economy and tax plans dampened sentiment and the index fell below 3,000 during the first half of 1994 before starting a five-year ascent to break the 6,000 barrier in the summer of 1998. After a 500% rise in 14 years, what came next for the FTSE 100?

 

The value of investments can go down as well as up and you may not get back the full amount you invested.
The past is not a guide to future performance and past performance may not necessarily be repeated.

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks. Some information quoted was obtained from external sources we consider to be reliable.

Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.

How inflation impacts your finances

Posted on by Sophie Soraf
Following a sustained period of historically low inflation, the recent upsurge in price pressures has vividly highlighted the impact inflation can wreak on people’s finances. A sharp rise in the cost of living effectively takes a large chunk out of the purchasing power of money and thereby erodes the real value of cash savings. It is therefore important to understand the concept of inflation and the impact it has on your wealth. Here, we consider these issues and look at the potential benefits of longer-term investment as a way of protecting your money from the effects of inflation.

Inflation is a term used to describe the increase in the general level of prices for goods and services over time, with the rate of inflation quantifying how quickly prices are rising. There is no single approach to measuring inflation, partly as figures differ depending upon which specific bundle of goods and services are included in the calculations. However, the Office for National Statistics (ONS) publishes a number of consumer price indices each month which provide its latest estimate of inflationary trends. The UK’s official headline measure is the Consumer Prices Index (CPI) 12-month rate which compares prices in the current month with the same period a year earlier.

Measure inflation

A good way of understanding how a price index works is to think of an extremely large shopping basket containing a mix of the various goods and services a typical household buys – the price index basically shows changes to the overall cost of that basket over time. For the CPI, prices for around 700 things people regularly buy are recorded each month. These cover a variety of items including a loaf of bread and ready-meals, the cost of a cinema ticket and a pint at the local pub, as well as larger items such as a holiday and a car. To calculate the index, ONS compares the current cost of the basket with what it was a year ago – the change in price level is the annual rate of inflation.

The impact of high inflation

A healthy economy generally requires inflation to be low and stable. While a small amount of inflation is considered helpful, high and unstable rates can cause extreme economic difficulties as it erodes the purchasing power of household finances and makes it difficult for people to plan how much they can spend, save or invest. In the UK, the government has a 2% target for how much prices should go up each year with the Bank of England tasked with keeping the figure around that level. The Bank’s principal tool for maintaining a low and stable inflation rate is to raise or lower interest rates.

What is “bank rate”?

Bank Rate is the most important interest rate in the UK and has a significant impact across many aspects of the economy. It is sometimes referred to as the Bank of England Base Rate and is set by the central bank’s nine-member Monetary Policy Committee. The rate directly influences other interest rates, including the lending and savings rates high street banks and building societies offer their customers. The level of the Bank Rate therefore ultimately determines both the cost of mortgages and loans, and how much people can expect to receive on savings held in deposit-based accounts.

Interest rates and inflation

Economic theory shows there is an ‘inverse’ relationship between inflation and interest rates: in other words, when interest rates are low inflation tends to rise, and when rates are high inflation tends to fall. This is because high interest rates make it more expensive for people to borrow money and encourages them to save, which means they typically spend less on goods and services, and this results in prices rising more slowly; and vice versa. So if prices are deemed to be increasing too rapidly, the Bank of England will typically raise interest rates in order to try to slow inflation down.

Purchasing power

When the rate of inflation is low, its impact can seem relatively modest, but when inflation is high it can drastically erode the purchasing power of money. For example, if the rate of inflation is 1%, then the price of a loaf of bread that cost £1 a year ago would now be £1.01. However, if inflation is running at 10%, the price of the same loaf would rise to £1.10. In other words, households can buy less for the same amount of money or, to put it another way, money has effectively lost value.

shopping carts

Inflation makes things more expensive over time.

Impact on savings

Inflation has a similar devaluing effect on deposit-based savings balances. For instance, a saver who held £10,000 in a building society account a year ago earning a rate of 1%, would receive £100 in interest and thereby see their total balance rise to £10,100. However, if inflation was running at 10% then the same £10,000 worth of goods and services that could have been bought a year earlier would now cost £11,000. So, although the saver may feel they have earned £100, when factoring in the effects of inflation, the value of their cash savings has actually declined by £900 in real terms.

Investment potential

While cash savings will always be important, particularly as a source of rainy-day funds, in the current economic climate people holding a large proportion of their assets in cash look set to lose money in real terms. For anyone planning to put money aside for a number of years, it may therefore be worth considering investments as a potential way to protect capital from the effects of inflation. Although past performance is no guarantee of future profits, stock market investments have tended to produce returns that could potentially inflation-proof money over the longer term, providing savers are prepared to take some degree of risk.

Tax-efficient investments

As well as potentially offering protection from inflation, some investment products also enjoy significant tax advantages that make them particularly attractive investment propositions. Both pensions and stocks and shares ISAs fall within this category.

Pensions

Investing via a pension is one of the most tax-efficient methods of saving for the long term as investors receive tax relief at their highest marginal rate of Income Tax on all contributions made subject to annual and lifetime allowances. This means that some of your earnings which would have gone to the government as tax are instead diverted to boost your pension pot. This effectively results in it costing you less to save more in a pension plan.

Stocks and shares ISAs

Individual Savings Accounts (ISAs) are another tax-efficient investment option and provide greater flexibility than a pension as they allow access to your money before the age of 55. Investors can save up to £20,000 each tax year in a stocks and shares ISA with the money having the potential to grow free of UK Income Tax and Capital Gains Tax. These products can be a particularly good way to save for medium or long-term financial goals, such as a wedding or new car.

real growth

This graph shows the effect of a 2% inflation rate on £100 over a 40-year period with cash assumed to earn no interest – maybe kept under your mattress! A growth rate of 7% per annum is assumed for equities but is for illustrative purposes only and not an indication of future performance. After 40 years, the initial £100 can only buy goods that would be worth just under £45 at today’s prices, compared to an equity investment which would have the purchasing power of £704.

growth of 1 pound

Obviously, very few of us would keep cash under the mattress, but even with cash deposits earning 1% a year, £1 would only be worth £1.49 after 40 years if held in cash, or over 10 times that amount if invested in equities, assuming a growth rate of 7% p.a.

 

 

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks. Some information quoted was obtained from external sources we consider to be reliable.

Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.

Use your will to save inheritance tax

Posted on by Sophie Soraf
The question of how to structure your will is a complex one involving consideration of a range of different factors.  Married couples with significant assets should consider the option of using an appropriate will trust on first death due to the tax planning opportunities available.

What is the inheritance tax nil rate band?

The inheritance tax “nil rate band” is the threshold below which no inheritance tax is payable. In recent years the nil rate band rules have become ever more complex with the introduction of three new elements alongside the standard nil rate band; they are:

  • transferable nil rate band
  • residence nil rate band
  • downsizing relief.

The complexity and quirks of the legislation offer many opportunities to save inheritance tax through (amongst other things) an appropriately structured will.

Please note: references to spouses and married couples include civil partners and it’s   assumed that all the persons in the examples are UK domiciled. Depending on your circumstances there may be other tax and/or legal issues to consider so it’s always important to take advice.

Married couples where one or both of the couple have previously been widowed

Married couples where one or both of the couple have previously been widowed may be able to save significant inheritance tax by maximising their ability to transfer the unused nil rate bands of their late spouses (known as the “transferable nil rate band”).

Example 1:

Bob and Mavis, a married couple, have both previously been widowed. Bob’s late wife, Gill, died in 2008 and Mavis’s late husband, Jim, died in 2009. Both Gill and Jim left their estates to their respective surviving spouses.

Bob and Mavis each have assets worth £650,000 (which they own separately). Unusually, they do not own and have never owned their own homes (so residence nil rate band does not apply to them, more on which below).

They would like the survivor of them to inherit the assets of the first to die and on the second death for the total estate to be divided equally between Bob’s son and Mavis’ daughter. In the circumstances the full standard nil rate band applies to both of them and to their late spouses’ estates.

Bob dies in 2019 and leaves his entire estate to Mavis. Mavis dies in 2021, leaving everything to her daughter and Bob’s son in equal shares. For simplicity, assume no changes in asset values between their deaths.

The inheritance tax position: On Bob’s death there will be no liability for inheritance tax because of the spouse exemption. On Mavis’ death her executors will be able to use her nil rate band (£325,000) and claim a transferable nil rate band (also £325,000). However, even though she has now been widowed twice, she can only claim one transferable nil rate band.

Therefore, the  inheritance tax liability on Mavis’ death will be £1.3 million – £650,000 x 40% = £260,000.

Example 2:

The facts are the same as in Example 1, except that Bob and Mavis make wills leaving the available nil rate band of the first to die and any transferable nil rate band from that person’s late spouse to a nil rate band discretionary trust.

On Bob’s death his entire estate (£650,000) will pass to the nil rate band trust. Mavis is included as a beneficiary of the trust so can benefit from funds if required at the discretion of the trustees. There is no inheritance tax liability on Bob’s death because of the nil rate band and transferable nil rate band available to his estate (his own nil rate band and the transferable nil rate band from his late wife, Gill.)

On Mavis’s death her estate of £650,000 will also be free from inheritance tax because her executors can claim her own nil rate band and the transferable nil rate band from her late husband, Jim. Hence there would be no inheritance tax on the death of either Bob or Mavis.

Mavis’s estate is left to the two children and the trustees of the discretionary trust could then decide to wind up that trust and appoint the assets to the two children.

Please note: There would be a small inheritance tax charge on the discretionary trust, which will vary depending on how long the trust runs for. In the example, if the trust was wound up shortly after Mavis’s death this charge would be approximately £4000. This would still mean an overall inheritance tax saving of approximately £256,000!

It should also be noted that this approach could have saved significant tax even if only one of them had previously been widowed (whichever one of them died first).

It is also the case that there are other reasons why the first of them to die might want to leave some or all of their assets to some form of will trust, e.g. to protect the intended inheritance of their own child. These issues are not considered here for simplicity but you can contact us to discuss any of these issues.

Standard nil rate band has been frozen until at least April 2026

The amount of the standard nil rate band has been frozen at its current level (£325,000) since 6 April 2009 and the government has announced that it will remain at that level until at least 5 April 2026.

Many married couples do not use the nil rate band on the death of the first of them to die, taking advantage of the transferable nil rate band. However, the freezing of the nil rate band means that the benefit of the transferable nil rate band can often be eroded by inflation. A nil rate band trust can avoid this erosion so could save tax on second death (assuming the nil rate band does not increase significantly in future).

Example 3:

Tony dies in 2021 leaving his entire estate to his wife, Georgina. This includes an investment portfolio worth £325,000 (which Tony was advised had strong growth potential). Neither of them has previously been widowed and their full nil rate bands of £325,000 are available.

Georgina dies in 2025 leaving a chargeable estate of £1.5 million, which is inherited by their children. This includes the investment portfolio she inherited from Tony, which is now worth £425,000.

While the investment portfolio has grown by £100,000 since Tony’s death (and so will increase the inheritance tax charge on Georgina’s death), the nil rate band remains unchanged.

Example 4:

The facts are as per Example 3 except that Tony leaves a nil rate band discretionary trust in his will. After his death the decision is taken to fund the trust by transferring the investment portfolio to it. Under the terms of the trust, Georgina can benefit if required at the discretion of the trustees. The portfolio is left in the trust.

The £100,000 growth on the investment portfolio is now held in the trust and is outside of Georgina’s estate for inheritance tax. This will achieve an inheritance tax saving of £40,000 compare to example 3. There would be some capital gains tax issues to consider.

Clawback rules

In 2017 the Government introduced an additional nil rate band for people who leave an interest in their home to certain qualifying beneficiaries (including children). This is known as the residence nil rate band. The rules for residence nil rate band are very complex so specialist advice should always be taken.

One point to note is that the residence nil rate band starts to be clawed back once your estate exceeds £2 million. The clawback rules are very complicated, but will eliminate residence nil rate band altogether, once the estate reaches a maximum of £2.7 million (depending on your circumstances, residence nil rate band could be eliminated before that level). Assets that qualify for business property relief or agricultural property relief are included when working out whether clawback applies.

Some married couples can reduce or even eliminate the impact of the clawback by using a nil rate band discretionary trust.

Example 5:

Martha and Henry are married and have a combined estate of £2.7 million, divided equally between them. Neither of them has previously been widowed and both have their full nil rate band of £325,000 available. Their estate includes their home worth £900,000. On Marta’s death in 2018 she leaves her entire estate to Henry. Henry dies in 2021, leaving his estate to their two children.

Because Henry’s estate (including the assets inherited from Martha) is at the maximum clawback threshold, no residence nil rate band applies.

Example 6:

The facts are the same as example 5 except that Marta leaves her available nil rate band to a discretionary trust. Henry’s estate is now worth £2.375 million, meaning that only a partial clawback of the  residence nil rate band applies. Henry’s executors will be able to claim a residence nil rate band of £187,500, saving inheritance tax of £75,000.

Please note: The impact of the residence nil rate band clawback rules will become more widely felt over the next few years following the government’s decision to freeze the clawback threshold at £2 million until at least 6 April 2026. Many estates will become subject to a full or partial reduction in the residence nil rate band assuming asset values rise in the interim. Again, a nil rate band discretionary trust can mitigate this in appropriate circumstances by keeping down the value of the survivor’s estate.

Downsizing relief

Residence nil rate band may not be available (or fully available) where you sell your home. A common example is where elderly clients sell their home and leave the property market altogether or downsize late in life to funds care needs.

Where you sell your home or downsize on or after 8 July 2015, there is an alternative relief called downsizing relief which may be available instead of or alongside any remaining residence nil rate band. However, the rules for this are extremely complex and you should take advice to make sure it will be available. The £2million clawback threshold mentioned above, also applies to any downsizing relief so, again, there are opportunities to reduce or eliminate the impact of clawback in appropriate cases.

Impact of equity release on nil rate band

Decisions about equity release or other borrowing secured on your home can impact on the amount of residence nil rate band available. It’s important to take both legal and wealth management advice when making decisions about your home, where your estate is or may be subject to inheritance tax.

Will trusts can help you protect your loved ones

Posted on by Sophie Soraf
Trusts often get bad press, being portrayed by some as vehicles to help the super-rich to avoid tax. While trusts can legitimately save tax for many people (most of whom are not super-rich!) their purpose is often to protect the position of loved ones.

Making a will involves consideration of many different factors and you should always consider, not only who you would like to benefit but how they should benefit. While the simplicity of outright giving will be appropriate in some circumstances, there are situations in which it may be more appropriate to protect the beneficiaries with some form of will trust.

What is a will trust?

A will trust can be thought of as a gift ‘with rules attached’. If you leave your assets to someone absolutely, you give total benefit and control of the assets given to them. They will own the assets and have the right to do with them as they wish. In contrast, where you leave assets to a will trust, you transfer ownership to trustees, who are charged with managing the assets for the benefit of beneficiaries. The will sets out who the trustees and beneficiaries are and the rules the trustees have to follow.

Some will trusts can be very simple, for example, if you leave assets to your trustees to hold for the benefit of your child when they reach age 18. It’s also possible to create more flexible trusts that give trustees discretion to decide who should benefit from capital or income and when that should be. You can also give different beneficiaries different rights, for example giving one person the right to benefit from the income generated by an asset, or to occupy a property for a set period, and giving other beneficiaries the benefit of the asset at the end of that period.

When you die, you give away all the assets in your estate under the terms of your will (assuming you make one, which you should!). For many people, this involves a significant transfer of wealth. It’s a good idea to consider whether you’re comfortable transferring that wealth absolutely or if you would prefer to use a trust.

Who are the trustees and what do they do?

The role of a trustee is to manage the assets in the trust and to exercise any discretions they are given. Depending on the wording of the trust, beneficiaries can act as trustees. You could also appoint outsiders such as trusted family members or friends or professional trustees.

The role of trustee is very important, and (as the name suggests) you should certainly choose people you trust! It is always sensible to take professional advice on the options and the factors to consider when deciding who to appoint.

You choose the initial trustees of a will trust under the terms of your will. You can either appoint the executors named in your will or separate trustees.

How does a will trust protect my family?

There are many different forms of will trust for different purposes. The protections offered and tax consequences will depend on the type of will trust chosen and you should always take professional advice on the different options.

Here are some of the many situations where an appropriately worded ill trust can protect your beneficiaries:

Where there is more than one family

If you, or your partner, have been married before or have children from a previous relationship, you might be concerned to ensure that your assets ultimately pass to your own children or family, while also looking after your spouse, if they survive you. A will trust can help to achieve this.

Where the surviving spouse may remarry or form a new relationship

Many people worry that if they leave their assets to their surviving spouse, their children may not inherit if the survivor remarries or forms a new relationship. Even if the survivor does not give away or leave the assets to their new partner, problems can still arise. For example, the new spouse might have a claim on assets if the new marriage ends in divorce, or they might make a claim for financial provision from the estate of the surviving spouse. Again, a will trust can reduce the risk of such problems.

Where the intended beneficiaries may be at financial risk

There are many situations where wealth left to a beneficiary may not end up going where intended, or may do them more harm than good, for example:

where the beneficiary is getting divorced or going through marital difficulties, there’s a risk that the inheritance may be included or taken into account in any divorce settlement.
where the beneficiary (or their partner) is immature, reckless, bad with money or at higher than usual risk of bankruptcy (for instance if they are engaged in risky business enterprises).
For young or otherwise vulnerable beneficiaries.

A will trust can reduce the risk of such problems arising.

Where an inheritance might affect the beneficiaries’ means tested benefits

Will trusts can often prevent the loss of a beneficiary’s means tested benefits, or reduce the impact of the inheritance on the benefits available.

Where an inheritance might complicate the beneficiaries’ tax position

An outright inheritance might complicate the beneficiary’s tax affairs if, for instance, they pay income tax at a high rate or their estate will be liable to inheritance tax on their death. While this is a complex area, the flexibility of will trusts can alleviate such problems, giving scope for some of the wealth to be used in a more tax efficient manner. For example, a child with significant wealth might prefer some of the trust funds to be used for their own children instead of them. A will trust can give the flexibility to focus the estate in the most tax efficient manner, depending on the circumstances at the time.

Where substantial wealth is involved

Substantial wealth (particularly when acquired suddenly) can cause its own problems. For example, it can affect a beneficiary’s outlook on life or the attitudes of those around them or increase their tax exposure. So it’s sensible to consider using a trust when passing down substantial wealth, even where the beneficiaries do not otherwise seem in need of protection.

How are will trusts taxed?

There are important tax issues to consider with will trusts including capital gains tax and income tax.  The rules are extremely complex so it’s vital that you get specialist tax advice.

Will trust case studies

We’ve set out a couple of illustrative case studies of situations where a will trust might be useful.

Will trust case study 1

Gill, aged 70, has an estate worth £800,000 including her home (which is in her sole name), which she occupies with her second husband, Brian. She has two adult children (Simon and) Beth) from her first marriage, which ended in divorce. Brian does not have significant assets and is largely dependent on Gill. Brian also has two children from a previous relationship.

Gill would like to look after Brian if he survives her, but also wants to make sure that her assets pass to her children, after his death.

If Gill leaves the assets outright to Brian, then he will decide what to do with them during the rest of his lifetime and who to leave them to after his death. If Gill is uncomfortable with this, then she could use a will trust to control what happens to her estate after her death.

Will trust case study 2

Jake is a widower with an estate worth approximately £ 5 million. He wants to provide for his three adult children, Karen, John and Steven and their children after his death. However, he knows that Karen’s marriage is in difficulty and Steven has had money problems in the past. John has a significant wealth of his own and has mentioned that a large inheritance might cause tax problems.

Again, a will trust could be used to protect the shares of Karen and Steven and give flexibility for John’s children to receive some of the trust fund instead of John, if this is more tax efficient.

Use your will to protect your business from inheritance tax

Posted on by Sophie Soraf
People  with assets that qualify for business property relief or agricultural property relief can often save significant amounts of inheritance tax through appropriately structured wills.

Business property relief and agricultural property relief provide valuable relief from inheritance tax for qualifying assets. In some circumstances only one of the reliefs applies, in others they can apply in tandem. What is less well known is that, where relief applies, the structure of your will can make a significant difference to the total relief available and the inheritance tax liability on your death.

What is business property relief?

Business property relief provides relief from inheritance tax for “relevant business property”. Depending on the circumstances, the entire value of the relevant business property may be shielded from inheritance tax or the rate of relief may be lower. The criteria for business property relief are very complex. You will need to take professional advice on whether you qualify and how best to structure your interests so as to maximise the available reliefs.

What is agricultural property relief?

Agricultural property relief provides tax relief for “agricultural property”.  The conditions for relief are different to business property relief, but again it can either shield the entire value from inheritance tax or a lesser value. Again, the conditions for relief are very complex and you should take professional advice.

Clients with relievable assets such as a business or a farm, also need to consider the risk of the reliefs being withdrawn or curtailed in the future if there is a change in the law or in their circumstances. The current business property relief and agricultural property relief regime is relatively generous compared with the recent past. It cannot be assumed that the reliefs will always remain in their present form.

Discretionary Will Trust to maximise reliefs

An appropriately structured will can help protect reliefs, as well as opening up opportunities to maximise the available reliefs. For example, clients with relievable assets may be able to protect the reliefs by leaving those assets to a discretionary will trust. These will often be particularly useful for married clients because any assets they leave to their spouse will be fully protected from inheritance tax anyway, due to the spouse exemption. This assumes the spouse is UK domiciled: the rules are more complex for non UK-domiciled clients. This means the other available reliefs on assets they leave to their spouse will effectively be wasted. The trust avoids this, as well as opening up opportunities for ongoing inheritance tax planning.

A discretionary will trust is an arrangement whereby trustees are appointed with discretion to decide who, from the specified class of beneficiaries, should benefit and when. The surviving spouse can be included in the class of beneficiaries and can also act as one of the trustees. Hence the spouse can still benefit from the assets if required at the discretion of the trustees, but the assets are kept outside of their estate for inheritance tax. Depending on the circumstances, there may be inheritance tax charges within the trust, however these will generally be much lower than the equivalent charges that would arise, if the assets were in the estate of the surviving spouse.

The examples below show some of the situations in which significant inheritance tax can be saved. Please note: references to married couples include civil partners. It is assumed that all clients in the examples are UK domiciled. For non-UK domiciles there are some additional issues to consider. The article considers will planning, however there are also lifetime planning issues that clients should consider with a specialist adviser.

Preserving reliefs

Using a discretionary will trust on the death of the first spouse to die, can prevent valuable reliefs from being lost, if there is a subsequent change in circumstances, before the death of the survivor, for example, if the eligibility rules for the reliefs  change or if the relievable assets are sold.

Preserving reliefs – example 1: Margery and her husband, Jake, ran a successful furniture business, which they owned in equal shares. Neither of them made any lifetime gifts. On Margery’s death in 2012, she left all her shares in the business (then worth £1 million and which would qualify for 100% business property relief) to Jake. Shortly after Margery’s death, Jake decides to sell the business and retire. By the time of Jake’s death in 2021, the shares he inherited from Margery are held in an investment portfolio and are worth £1.5 million. His other assets exceed all the available inheritance tax nil rate bands, and he leaves everything to their children, Ben and Nigel.

The investment portfolio increases the inheritance tax exposure on Jake’s death by 40% of £1.5 million = £600,000.

Preserving reliefs – example 2: The facts are the same as in example 1 except that Margery leaves her shares in the business to a discretionary will trust and appoints Jake, Ben and Nigel as trustees. Shortly after Jake’s death, the surviving trustees (Ben and Nigel) decide to wind up the trust and appoint the trust fund (comprising the investment portfolio mentioned above) between themselves and their respective children: this appointment takes place later in 2021.  There will now be no inheritance tax on the investment portfolio on Jake’s death. There would be a much lower inheritance tax charge on the trust when it is wound up and some capital gains tax issues to consider. However, a very considerable tax saving would have been achieved.

Maximising relief on your home

The residence nil rate band is an additional relief from inheritance tax where the home is left to qualifying beneficiaries. However, this relief starts to be reduced when your estate exceeds £2 million and assets qualifying for business property relief and agricultural property relief are included in working out whether this reduction applies.  For some clients, using an appropriately worded trust on the first death can reduce or even eliminate this clawback.

Maximising relief on your home – example 3: Richard owns shares in a limited company business worth £2 million, the entire value of which qualifies for business property relief and other assets worth £800,000. His wife Clare is retired and has an estate worth £400,000, none of which qualifies for either business property relief or agricultural property relief. The estate values above include their home worth £600,000, which they own in equal shares. Neither of them has made any lifetime gifts.

On Richard’s death in 2016 he leaves all his assets to Clare. Clare dies in 2021 and still owns the business shares (which still qualify for business property relief). Clare’s estate is above the threshold at which the residence nil rate band is reduced to zero, so this will not be available to her executors.

Maximising relief on your home – example 4: The facts are the same as example 3 except that Richard leaves the shares to a discretionary will trust and the rest of his estate to Clare. The shares remain in the will trust at her death.

Clare’s estate (including the assets inherited from Richard) is now worth £1.5 million (assuming growth of £300,000 in the period between Richard and Clare’s deaths).  As this is below the £2million clawback threshold, Clare’s executors will be able to claim residence nil rate band (including a transferable residence nil rate band from Richard’s estate). The total residence nil rate band will be £350,000, saving inheritance tax of £140,000!

Further tax planning opportunities after the death of first spouse

Using an appropriate will structure on the first death, can create opportunities for further inheritance tax planning after the death of the first spouse, in appropriate circumstances.

Example 5:  Paul and Jenny are married and in a farming partnership along with their daughter, Gill.  Their combined estate (which is divided evenly between them) is worth approx. £7 million and comprises their partnership share (worth £4 million), which attracts 100% business property relief and agricultural property relief and other non-relievable assets worth £3 million.

Paul dies in 2015 and leaves his entire estate to Jenny. Jenny dies in 2021 and leaves the farm to Gill and the non-farming assets to their other daughter Karen. For ease of reference assume no change in asset values between Paul and Jenny’s deaths. Neither of them has made any lifetime gifts. The inheritance tax liability on Jenny’s death will be approximately £940,000.

Example 6: The facts are the same as example 5 except that Paul leaves his assets qualifying for business property relief and agricultural property relief to a discretionary will trust and the rest of his assets on a life interest trust, under which Jenny has a right to the income.

This will structure opens up the possibility of making further use of the business property relief and agricultural property relief available to Paul’s estate. For example, the trustees of the life interest trust might agree with the trustees of the discretionary trust to purchase some of the assets qualifying for business reliefs. This would have potential capital gains tax and stamp duty consequences which would need to be considered.

Assume for the example that, shortly after Paul’s death, the discretionary will trust acquired assets attracting business property relief and agricultural property relief from the life interest trust totalling £1million, in exchange for non-relievable assets of the same value. Effectively the business property relief and agricultural property relief on these assets would then be used twice (on Paul’s death and again on Jenny’s death, providing Jenny survives the exchange of assets by at least two years). This would reduce the inheritance tax liability on Jenny’s death to approximately £540,000 saving approximately £400,000.

Complex tax and legal issues

Trusts are themselves potentially subject to inheritance tax charges at ten yearly intervals and on winding up. There would also be capital gains tax and stamp duty consequences of some of the actions above, which would need to be considered in advance. These would need to be balanced against the tax savings, although in many circumstances they will be much lower than the tax savings achieved. There are also income tax issues to consider. You also need to be comfortable giving the trustees’ discretion about what to do, rather than leaving assets to the intended beneficiaries outright and for this reason your choice of trustees is very important. This is a complex area of law and expert legal and tax advice should always be sought. However, significant tax savings can be achieved in the right circumstances.

Do I need to register my Trust with HMRC?

Posted on by Sophie Soraf
Changes to the law have significantly expanded the scope of trusts that need to be registered on the HMRC Trust Register. Trusts affected by the new changes must register with TRS by 1 September 2022.

Following the Fourth Money Laundering Directive, a Register of Trusts, maintained by HMRC was introduced, which is known as the Trust Registration Service or “TRS”. This imposed requirements on various trusts, including requirements to provide certain details about the trust for inclusion on the Trust Register and to keep those details up to date. The information to be provided includes details of the trustees and certain beneficiaries and certain information about trust assets.

The rules as to which trusts were required to register with the TRS are complex but, broadly, registration is generally required (with certain exceptions) where the trust has a liability to UK tax.

As a result of the Fifth Money Laundering Directive, the scope of trusts that need to register with TRS has been significantly expanded and now includes most UK trusts (even if they don’t pay UK tax) and non-UK trusts with certain UK connections. There are some exceptions, but these are limited. Trusts affected by the new requirements must register with TRS by 1 September 2022.

It should be noted that the definition of a “trust” for the purposes of these requirements is very wide: for example, the registration requirements apply to most fixed trusts (trusts fixed for the absolute benefit of certain individuals) and to properties where not all the beneficial owners are registered as owners at the Land Registry (subject to certain exemptions).

Example:
Cathy’s late husband, Derek, died in 2001. In his Will he left a gift of his available Inheritance Tax “nil rate band” to a discretionary trust and the rest of his estate to Cathy. The trust, which is still in existence, was funded by a charge over Cathy and Derek’s home. No income has been generated from the trust fund and the trust has never triggered any liability to UK tax.

The trust is now required to register with TRS and should do so by 1 September 2022.

Financial and other penalties may be applied against trustees who fail to register on time, and, in extreme cases, criminal sanctions may apply.

Further information about the trust registration requirements can be found on the gov.uk website.

What should I do?
Trustees of trusts not already registered with TRS should review the new rules and consider whether they need to register.

If you would like us to advise you on the new rules or assist with registration of the trust, please contact our Trust Team on the details shown below.

Call our specialist solicitors on 0800 013  1165

Capital Gains Tax on property

Posted on by Sophie Soraf
Latest update following the budget announcement

In the Autumn Budget 2021 the chancellor avoided making increases to capital gains tax on property.

Instead he offered some good news by extending the reporting and payment deadline for UK residents disposing of UK residential property that results in a CGT liability. You now have 60 days from completion of the disposal to deliver a CGT return and pay any tax due. The deadline has also been extended to 60 days for non-UK residents required to report a direct or indirect disposal of UK land and make a payment of tax.

The change takes effect for disposals that completed on or after 27 October 2021.

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax on the profit you make when you sell or ‘dispose of’ an asset that has increased in value since you purchased it. To clarify, you are not taxed on the full amount you make from the sale, only the profit or ‘gain’.

What does it mean to ‘dispose of’ an asset?
Disposing of an asset refers to more than just selling it, and can include:

Gifting or transferring it to somebody else
Exchanging it for another asset
Receiving compensation (e.g. an insurance payout) due to the loss or damage of the asset.

If you are organising your finances, it can be a good idea to talk things through with a wealth management expert. Tees has independent financial advisers you can ask for advice.
When do I have to pay Capital Gains Tax on the property?
You will usually be taxed on the sale of a property if it is a second home or buy-to-let property, or if you have let out part of your main residence. CGT also applies to the sale of commercial premises, land and inherited property. Certain costs, such as legal and estate agency fees, stamp duty or surveying costs, are deductible when calculating your ‘gain’.

However, under most circumstances, you won’t usually be taxed on the sale of your main home due to a tax relief called Private Residence Relief (PRR).

Call our specialist solicitors on 0808 231 1320

What is Private Residence Relief and how do I know if I qualify?
PRR will exempt the gain from CGT when you’re selling a home you have lived in as your main residence for the entire period of ownership. You must meet this and all other PRR criteria to be eligible for the relief. There are a number of scenarios that may limit your entitlement to PRR, including;

Letting out all or part of your main residence (not including having a lodger who shares the house with you)
Using part of your main residence for business purposes only
Generally, the grounds must not exceed 5,000 square metres
You must not have bought the property simply to sell it on for profit.
What are the Capital Gains Tax rules for second homeowners, and what has changed?
People selling a second home or buy-to-let property must pay CGT on any profit they make from the sale after the deduction of any allowable expenses and allowances. The taxable gain is treated as the “top slice” of your income and basic rate taxpayers will be taxed at a rate of 18%, while higher and additional rate taxpayers will be taxed at 28%. As the gain is the top slice of your income it is possible for some of the gain to be taxed at 18% with the rest a 28%.

From 6 April 2020, UK residents selling a home that is not their main residence will have 30 calendar days from the date of completion to notify HMRC of the gain on a new CGT return and pay any CGT owed. This is a significant shortening of the previous deadline; those selling a property liable to CGT prior to the start of the 2020 tax year had until the self-assessment tax return deadline of 31 January following the end of the tax year of sale to notify HMRC and pay any tax due. To highlight the magnitude of the change, taxpayers could have had up to 22 months to make their payment under the old system against just one month now.

As an example, if a property was sold on 5 April 2020, the taxpayer wouldn’t need to notify HMRC and pay CGT until the date their 2019/20 tax return was due, i.e. 31 January 2021. However, if that same property was sold on 6 April 2020, the taxpayer would only have until 6 May 2020 to complete the necessary paperwork and make their payment – a reduction of nearly nine months.

What changes have there been to Private Residence Relief?
There are special rules governing the sale of a home the taxpayer has not always lived in. In circumstances such as these, you may not qualify for full Private Residence Relief, but there may be certain periods that will qualify.

Prior to the 2020/21 tax year, provided the property had been your home at some point in your period of ownership the last 18 months before the property is sold were always eligible for the relief (whether or not the property was your main residence at that time). For sales on or after 6 April 2020, however, this relief period reduced to nine months. For people purchasing a home prior to selling their old one, this effectively halves the grace period within which you can live in your new property without paying CGT on your former home. In practice, this means taxpayers must ensure their old property is sold within nine months to avoid a potential CGT charge. This final period is extended to 36 months in certain limited circumstances, most typically where the taxpayer moves directly from the property in to a care home.

You may also get relief for any periods of absence adding up to three years, or four years if you had to live away from home in the UK for work. You’ll get relief for any period of time you were living outside of the UK for work. You must have lived in your home before and after your absence to qualify, unless work prevented you from doing so.

What about Lettings Relief?
Another important change from 6 April 2020 is the loss of lettings relief in all but extremely limited circumstances. Where a taxpayer previously qualified, this relief previously exempted up to a maximum of £40,000 of a gain from CGT in instances where a former main residence had been subsequently let out. The loss of this relief could cost some taxpayers up to an additional £11,200 in tax. Unfortunately this previously generous relief is now unavailable in most circumstances.

What qualifies as my ‘main residence’ for Capital Gains Tax purposes?
What makes a main residence is a complicated issue in tax law, very simply put it is your home. Home is of course, much, much more than simply where you live and will be relatively easy to identify in most circumstances.

If you own more than one home, you are able to nominate which property you would like to be your main, tax-free residence. This doesn’t have to be the one you live in all, or even most, of the time. You may wish to nominate the property you expect to make the most profit on when you sell it. Once you have purchased a second home, you have two years within which to nominate your main, tax-free residence.

It should be noted that if you are married or in a civil partnership, you can only nominate one property between you.

What will I need to do?
If you sell a UK residential property and a chargeable gain arises you’ll need to report the gain to HMRC on a CGT return and pay the tax within 30 days of completion. HMRC will issue penalties and charge interest if you needed to report a gain/pay tax and failed to do so.

With such a tight deadline, you’ll need to make preparations in advance to ensure compliance with the new 30-day deadline. Unless you are classed under certain categories for whom the use of digital technology cannot reasonably be expected, you are expected to make your CGT return and payment online via HMRC’s government gateway. If you don’t have a government gateway account, you’ll need to apply for one – a process which can take up to 10 working days, so this will need to be factored in. You’ll also need certain details to hand to fill in the required paperwork – these should also be gathered in advance to prevent delays and any potential penalties. The information you’ll need includes:

The date the property was acquired
Costs of purchase and disposal e.g. purchase price, legal, surveying or estate agency fees (these can normally be found on the completion statement from your solicitor)
Costs of eligible home improvements
Earnings in the applicable tax year.
To calculate your taxable gain you will need to deduct the allowable costs (be careful, not all costs are allowable) from the sale proceeds. You can then deduct any allowances calculated such as PRR. Finally, if you haven’t already used it, you can deduct your annual CGT tax-free allowance of £12,300 (2020/21).

It is this “taxable gain” that will be added to your estimated income in order to calculate the tax payable. You’ll pay CGT of 18%, 28% or a combination of the two on the remainder, depending on your tax band.

If you complete a tax return you will also need to include details of the disposal on the return as normal, paying any tax adjustment through self-assessment as normal.

Tees has a dedicated team of tax accountants that can assist you with your rental and capital gains tax reporting requirements. Please do not hesitate to contact us if you would like assistance with your tax reporting obligations.

Do I have to sell my home to pay for care?

Posted on by Sophie Soraf
The Government’s proposed reforms to health and social care will still leave many people having to pay large amounts in care home fees. However, these costs can often be reduced or even avoided altogether with appropriate planning. This article looks at the rules in England; the rules in different parts of the UK may be different.

The government has announced proposals to change the rules around how much people have to contribute towards care costs and at what stage, funded by a proposed new Health and Social Care Levy.

What are the proposed changes to health and social care funding?

If you need local authority care, the means testing rules are applied to decide how much you must pay towards the care; currently the rules are as follows:

  • if your capital is above £23,250 (the “upper limit”) you have to pay the care fees in full
  • you do not have to make a capital contribution to care costs where your capital is less than £14,250 (the “lower limit”) – although you may still have to contribute from your income
  • between £14,250 and £23,250 you have to make a partial capital contribution (as well as an income contribution, where appropriate)
  • there is no cap on the maximum care costs you may have to pay over the course of your lifetime.

Under the new proposals:

  • the lower and upper limits will be increased to £20,000 and £100,000 respectively from October 2023. This means that anyone with capital of less than £100,000 may receive some support towards their care costs (albeit limited) and those with capital of less than £20,000 will not have to make a capital contribution (although may still have to make a contribution from their income)
  • a lifetime cap of £86,000 on care costs will be introduced from October 2023. This means that you should not have to contribute more than that amount towards your care costs (although the cap isn’t being backdated).

However, it’s important to note that the cap only applies to the cost of actual care and not to other costs such as accommodation, energy, food or water. These costs, particularly the costs of accommodation, can often far outweigh the costs of care, so many people will still face the prospect of very large care bills which will erode their families’ inheritance.

Will I lose my home if I need to pay for care?

The value of your home is included in the assessment of what capital you possess, for means testing in many circumstances. For example, it will be included in the assessment where you no longer occupy your home (e.g. if you are moving into residential care permanently) and none of the other exemptions applies. This may lead to your home having to be sold to fund care fees.

It may be possible to avoid selling your home during your lifetime by entering into a deferred payment arrangement (broadly whereby the fees are repaid from sale of the home after your death). However, interest and fees apply and such arrangements will still reduce your families’ inheritance.

Example where home inherited absolutely

John and Betty jointly own their home, worth £300,000, free of mortgage. They have owned it equally as joint tenants (see below) since acquiring it. The home is their only major asset. No-one else occupies it apart from them.

On John’s death in November 2023, his share in the home passes to Betty as the surviving joint tenant. Unfortunately, Betty’s health declines rapidly after John’s death and she has to move into permanent residential care 12 months later.

The entire value of the home will be included in the means assessment for Betty. Her capital will be above the £100,000 threshold, meaning that she will be liable to pay the fees in full without any local authority funding. The amount she has to pay for care will be capped at £86,000, however her other costs (e.g. accommodation, energy and food) will not be capped.

Can I avoid paying care home fees by making a lifetime gift?

Some people might consider giving their home away during their lifetime to try to get it outside the scope of the means testing rules. There are rules aimed at preventing people from doing this known as the “deprivation of assets” rules. Where these rules apply, the local authority can include the value of the gifted asset when they carry out the means assessment. The “deprivation of assets” rules are complex and specialist legal advice should always be taken on whether or not they will apply.

Those considering gifting their home must also consider the possible significant impact of the gift on their future financial security and independence. With careful drafting of the document, a trust can address some of these concerns. However, the deprivation of assets rules can still apply.

The tax consequences of a gift (whether outright or to trust) must also be carefully considered. Such a gift can in some circumstances trigger immediate tax charges and/or increase your future tax exposure and/or that of your estate. You should always take professional advice before deciding to give away your home or a share in it, both as to whether the gift will achieve the intended objectives and what the legal and tax consequences will be.

Can I use my Will to protect my home from being sold to pay care home fees?

For married couples who do not wish to give away their home, one alternative is to leave the share in the home of the first spouse to die, to an appropriately worded trust under their Wills. While this won’t offer full protection, it will, in many circumstances, significantly reduce (and sometimes eliminate) the exposure to means assessment. Meanwhile, provided the trust is worded appropriately, the survivor can continue to occupy the property for the remainder of their life.

For the trust to work, the couple will need to hold the property as “tenants in common”, rather than as “joint tenants”. Where joint owners hold a property as joint tenants this means that the share in the property of the first to die automatically passes to the survivor. If they hold the property as tenants in common, each joint owner’s share passes under their respective Wills. Where a property is owned as joint tenants, it’s simple for a legal specialist to convert this to a tenancy in common, but you need to get it organised before the first death.

Example where share of home left to appropriate Will trust

The facts are the same as in the previous example above, except that John and Betty convert their ownership of the property, so they hold it as “tenants in common” in equal shares and John leaves his half share in the home to a trust under his Will. Under the terms of the trust, Betty has the right to occupy the home rent free for the rest of her life and John’s half share passes to their children after Betty’s death.

When Betty goes into care, her assets for means assessment purposes will include her own share of the home, but not the share held in John’s Will trust (because that doesn’t belong to her). Hence the share in the Will trust will be protected for the children. Also, the value of Betty’s share of the home for means assessment, is likely to be significantly lower than 50% of the total property value, because it’s the market value of the share that is assessed. The market value of a half share is likely to be much lower than 50% of the whole value, because a half share on its own will be much less marketable.

The Will trust approach also avoids many of the potential downsides of a lifetime trust. The deprivation of assets rules will not generally apply assuming (as will often be the case) that there has been no reduction in the value of anyone’s estate. The trust can be worded in such a way that the inheritance tax and capital gains tax consequences will be broadly similar to those that would apply if the property had been left outright. However, careful drafting and implementation is needed, or the tax consequences could be different. Before the death of the first spouse to die, the trust has no effect, so you can deal with the property as you wish.

One relevant consideration is that, by using a Will trust, the survivor will not be entitled to the capital of the share of the first to die. This will deter people who want absolute control over the home after the first death. Ways to mitigate this include:

  • the trust can include powers to advance capital at the discretion of the trustees if desired
  • the survivor can be appointed as one of the trustees so that they are involved in decisions while they have capacity
  • the terms of the trust can also give the survivor the right to require the trustees to join in the sale and purchase of a replacement property if they wish to move.

Please be aware that the Will trust route will not provide protection if both spouses have to go into care during their joint lifetimes (because the trust does not apply until first death). However, if only one spouse has to go into care during their joint lifetimes, the home would not generally be taken into account for means assessment, provided the other spouse is still living there.

Can I use a Deed of Variation to protect my home from care home fees?

You may have heard that beneficiaries of a Will can vary the terms of the Will (or the destination of a property inherited as surviving joint tenant) within two years of death, by making a Deed of Variation. However, Deeds of Variation can be subject to the “deprivation of assets” rules. So, if you decide to change your Wills, it’s better to do so during your joint lifetimes rather than relying on Deeds of Variation.

Ensuring your business is protected during uncertain times

Posted on by Sophie Soraf
Businesses across many different sectors are slowly getting back on their feet as the economy continues to improve following the pandemic. This crisis has shown that in times of great challenge, your employees – their skills, knowledge and understanding of how your business ticks – are essential to keeping your business running.

So looking after your employees and your business go hand in hand. In a recent survey, 35% of businesses said one of the top three risks to their business would be an owner becoming critically ill and being unable to work. 52% said they would cease trading within one year were they to lose such a key person, and yet, surprisingly, only 18% had considered cover for the illness or death of a key person. (Source: Legal & General’s State of the Nation Report 2021). That’s very curious but the message of this article is: don’t be that business! There are two key groups of insurance that can help protect your business and employees from financial losses resulting from illness and death.

  • Policies that protect your business against financial losses resulting from the death or illness of a key staff member or business partner, and
  • Insurance that provides financial assistance to employees and their families in the event of their death or inability to work.

Protecting your business

When might I need shareholder/partnership protection insurance? 

Shareholder or partnership protection cover insures a business against the loss of a shareholder or key business partner, which would likely leave the remaining business owners in a precarious position. With limited companies or partnerships, the main risk is that the deceased owner’s share in the business will be passed on to a family member, who may have little interest in taking over their role.

Essentially, shareholder or partnership protection insurance is a life insurance policy that pays out to the surviving business owners, based on an agreement that they will use the money to purchase the deceased’s outstanding shares in the business.

The cover you take out will depend on your business structure: 

Shareholder protection is designed for limited companies, with the life insurance taken out on the lives of the company’s shareholders.

Partnership protection is designed for partnerships and limited liability partnerships, with the life insurance taken out on the lives of the business partners.

The policy might also include critical illness cover, in the event that a partner or shareholder does not wish to continue their involvement in running the business following their treatment or recovery from a serious illness.

Is key person insurance appropriate for my business?

Key person insurance protects businesses against the financial losses incurred if a ‘key’ employee becomes ill or dies while working for the company. This could be a CEO, business partner or senior employee considered essential to the successful running of the business. A payout from this kind of insurance can keep a business trading while recruiting for a replacement or undergoing reorganisation.

Some types of business insurance, such as employers’ liability, are legally required to run a business.  Key person insurance is not one of them, but the loss of a key employee could affect the business in many ways.

Clients may react negatively or lose confidence in the business, shareholder confidence could plummet, and the skill, knowledge and experience of the key employee may be difficult, or even impossible, to replace.

Particularly for small businesses, losing a director or head of department could result in the company’s collapse, which is why the financial assistance provided by key person insurance could prove to be a lifeline.

Protecting your employees

How do my employees benefit from death in service insurance?

Also known as relevant life assurance, death in service is a type of insurance that pays out a tax-free lump sum to an employee’s beneficiaries if they die whilst working for your company. They don’t have to be at work or performing a work-related activity to receive the benefit; they simply have to be on the payroll of your company when they die or are diagnosed with a terminal illness.

This type of insurance is the second most valued employment benefit after private medical insurance, as can help your employee’s beneficiaries with costs such as funeral arrangements and living expenses at a very difficult time. The lump sum paid out is usually between two and four times the employee’s basic salary.

How will group private medical insurance benefit my business? 

As mentioned above, group private medical insurance is one of the most popular employee benefits a business can offer, and provides your employees (and often their families) with access to private healthcare services.

While it is one of the more expensive employee benefits, private healthcare can offer immeasurable advantages –not only to your employees, but to you as a business. Employees will not be forced to take days off to access healthcare appointments, as private facilities usually offer appointments out of hours. They won’t face lengthy waits for appointments or treatment, so they can get better sooner and return to work more quickly.

The Coronavirus crisis has made us all too aware of the strain and pressure under which the NHS has been placed – there is now a huge backlog of patients waiting for treatments and routine surgical procedures. Offering your employees access to private healthcare is therefore a bigger draw than ever and could greatly help you to attract and retain the best talent.

Is permanent health insurance a good option to protect my employees?

Arranging permanent health insurance (or PHI) on behalf of your employees provides protection for them in the event of an injury or long-term illness that renders them unable to work.

PHI is another name for income protection insurance, but the premiums are paid by the business rather than the individual. The usual payout is between 50% and 75% of an employee’s full salary, potentially until they retire, and it can help your employees continue to pay for key outgoings such as mortgage and childcare costs until they are able to return to work. As such it is often considered by employees to be a more valuable benefit than private medical insurance.

The benefits usually start after a ‘waiting period’ of up to 52 weeks, typically after work-related sickness pay comes to an end.

The wording of PHI polices from different providers can vary greatly in terms of what exactly they cover, so it’s always best to check the fine print. As an employer, they can benefit you by incentivising your employee to return to work as soon as they are ready, in order to regain 100% of their salary.

What benefits your employees, benefits your business

Insuring your business and employees against financial loss, illness and death may be an added expense, but it could be the move that helps your business stay afloat during uncertain times. At Tees, we’re here to discuss your business insurance needs and advise you on which type of policy could deliver the greatest benefits to your organisation.

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Tees is a trading name of Tees Financial Limited which is regulated and authorised by the Financial Conduct Authority. Registered number 211314.

Tees Financial Limited is registered in England and Wales. Registered number 4342506.

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All legal services provided by Tees are regulated by the Solicitors Regulation Authority. Tees is a trading name of Stanley Tee LLP is authorised and regulated by the Solicitors Regulation Authority (SRA Number 464615) and is registered in England and Wales number OC327874.

All financial services provided by Tees are regulated by the Financial Conduct Authority. Tees and Tees Wealth are trading names of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales number 4342506. Registered office address Tees House, 95 London Road, Bishop’s Stortford CM23 3GW.

Copyright © 2025 Tees Law. All rights reserved.

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All legal services provided by Tees are regulated by the Solicitors Regulation Authority. Tees is a trading name of Stanley Tee LLP is authorised and regulated by the Solicitors Regulation Authority (SRA Number 464615) and is registered in England and Wales number OC327874.

All financial services provided by Tees are regulated by the Financial Conduct Authority. Tees and Tees Wealth are trading names of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales number 4342506. Registered office address Tees House, 95 London Road, Bishop’s Stortford CM23 3GW.

Copyright © 2025 Tees Law. All rights reserved.

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