Saving for school or university fees

It’s often said that the value of a good education is priceless, but in today’s money that means on average, for a university student, you’ll be looking at around £20,340 a year, including tuition fees.

When it comes to school fees, according to School Fees Checker, fees increased by 5.1% in September 2022, with an average annual cost of an independent day school likely to be £20,480 per annum and £34,790 per annum for boarders. So, if you’re a parent or grandparent looking to build up the cash needed for school or university fees, it certainly pays to start saving as soon as you can.

Ways to save for school or university fees

An Individual Savings Account (ISA) is a simple way to save or invest. The advantage of these types of accounts is that you don’t pay tax on the interest you earn, or the increase in value of your investments, so you don’t need to declare income and capital gains from ISA savings or investments on your tax return. They are flexible too; you can save or invest a lump sum or make regular monthly contributions.

Junior ISAs are a great way to build up savings tax-efficiently for a child aged under 18. Your child can have a Junior cash ISA, a Junior stocks and shares ISA or a mixture of both, and save up to a total of £9,000 pa for the tax year 2023/2024. When your child reaches 18, they can access the funds, making them a good way of saving for a university education. The great advantage of a Junior ISA is that once it’s been opened by the parent or guardian, anyone can make contributions, including grandparents, friends and family. For families looking to save for school fees, parents and grandparents can also put away up to £20,000 tax-free into their own ISAs during the 2023/2024 tax year.

You could also consider investing a lump sum into an investment bond. When the time comes, you can make withdrawals from the bond to pay the fees. You can also assign the bond to the child. As the beneficiary, the child would be liable to pay tax on any income and gains, however as most children don’t receive enough income or gains to exceed their annual allowances, this could be an attractive option, especially for parents who are higher or additional rate taxpayers.

Here to help

If you could do with some help and advice on saving for a child’s education, then do get it touch. We can help you put a plan in place to meet future education costs, helping you give your child the best possible start in life.

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.

 

ISAs 101: your guide to Individual Savings Accounts

ISA stands for individual savings account and is an investment vehicle that has great tax breaks. It allows you to earn interest on cash savings or dividends from investments without paying income tax or capital gains tax.

To ensure this tax break is not exploited, there is a restriction placed on how much you can pay into them each tax year.

How do they work?

Each tax year, which runs from 6 April to 5 April the following year, you have an ISA allowance. Currently the ISA allowance is £20,000 for this tax year. This means you have until 5 April to use your ISA allowance for this tax year.

Use it or lose it. If you miss the tax yearend deadline, you cannot back pay to catch up missed contributions. Any money you pay into an ISA will count towards your ISA allowance for the following year. This regularly catches people out with busy lives each year.

To be eligible to open an ISA, you need to:

  • Be 16 or older for a cash ISA
  • Be 18 for stocks and shares ISA
  • Be the parent or guardian of a child under 18 to open a Junior ISA
  • Be 18 to 39 to open a lifetime ISA
  • Be a resident in the UK (or a Crown employee if abroad)

An ISA can only be held in one person’s name. It’s not possible to have an ISA in joint names. Hence the title individual Savings Account.

There are two main types of ISA: cash ISAs and stocks and shares ISAs. There are also some specialist ISAs to choose from.

Cash ISAs

These are similar to regular bank / building society savings accounts with the advantage of a tax efficient wrapper. They should be used as short-term investments ie up to 5 years for maximum effect.  Beyond this time scale inflation has the potential to reduce the value of the funds. There are two basic types of cash ISA:

  • Instant access:  Allows you to withdraw and deposit funds in line with the provider’s terms.
  • Fixed term: Your money is wrapped up for set period of time during which you receive a fixed rate of interest but have no access.  As the interest rates rise there are some very good rates on offer.

Stocks and Shares ISAs

These are stocks and shares investment accounts that use your ISA allowance as a wrapper to make them tax efficient. There are a huge variety on offer covering several investment styles and client attitudes to risk. This can make it very hard to compare apples with apples. Care should be taken also to ensure that any charging is made clear from the start.

As with most investment-based products your money is at risk as the value of stocks and shares can fluctuate. However over the longer term (5 years plus) you have the potential to receive better returns than say with Cash ISAs. These tend to form the basis of most investors portfolios as the starting point due to their tax efficiency.

Specialist ISAs

  • Junior ISAs: for under 18s only, limited up to £9,000 per annum currently. Can be Cash or Stocks and Shares based.
  • Lifetime ISA: for adults under 40 saving for retirement or to buy their first home.   At a very high level they let you earn a 25% bonus on savings up to £4,000 a year. Care and advice should be taken because although you can access the funds whenever you like. You only get the bonus if you use the cash to either buy your first home or take it out after you turn 60. If you withdraw the money for any other reason, you will lose 25% of it as the government takes its money back plus a little extra.
  • Innovative finance ISA: Peer-to-peer investments which earn interest by lending money to individuals, businesses and property developers. These usually require financial advice to be taken to ensure suitability. 
  • Business Property Relief (BPR) based ISAs: ISAs are not totally tax free; they are liable to Inheritance Tax upon death.  Using an ISA that can take advantage of BPR can help ringfence funds from inheritance tax.  These tend to be higher risk options and should be discussed with an IFA before proceeding.

You can open a Cash ISA either in a bank/building society branch, online, by post or over the phone, depending on the type of account and provider you choose.

Investment ISAs are similar but best taken out via an Independent Financial Adviser who can source the right plan for your circumstances.  They should also ensure that the scheme is covered by the Financial Conduct Authority and the Financial Services Compensation Scheme. They will also explain the risk level and ensure that you do not over commit too much of your hard-earned funds in one go. For some Cash ISAs you can start with as little as £1. For investment ISAs this tends to be higher for lump sum investments. A regular premium amount typically start around £50 pm. There is no right amount to start with.  It will depend on your own situation.  Always ensure that you have enough hands on cash available to cover emergencies. As a guide this is typically 3 – 6 months of expenditure. You will also need to supply your National Insurance number. Always read the small print before signing to ensure that you understand what you are investing into.

How many ISAs can you have?

You can build up several ISAs over the years. You can consolidate your past ISAs by transferring them to your current ISAs if they offer better terms.

You can only pay into one cash ISA, one stocks and shares ISA, one lifetime ISA and one innovative finance ISA in each tax year, and the total you invest across the types of account must not exceed your ISA allowance – currently £20,000.

You can transfer to a new ISA within a tax year – but only if you take all the money you’ve already saved into the old ISA to your new one.

If you have opened a junior ISA for a child, this is not included in your £20,000 allowance (it’s the child’s allowance, which is £9,000 a year currently).

Can you withdraw money from your ISA and put the money back later?

This depends on the terms and conditions of your ISA, so ensure you find out before opening a new ISA whether:

Your ISA is flexible

  • You can withdraw money and pay it back in during the same tax year without it affecting your ISA allowance (eg if you deposit £10,000 then withdraw the same amount, you can still pay in a total of £20,000 this tax year)
  • You can also withdraw any ISA money you have from previous tax years, and have until the end of the tax year to pay it back into the same ISA.

Always, check the small print before doing anything as some ISAs may limit the number of transactions you can make in a year. Not all providers allow transfers either, you should also check the T&Cs before making a withdrawal.

Your ISA is not flexible

  • Any money you pay in then withdraw, still counts towards your remaining ISA allowance (eg if you pay in then withdraw £5,000, you can only deposit up to £15,000 for the rest of this tax year).
  • Deposits that exceed the allowance will be rejected

Once taken out of an ISA your money will lose its tax-free status if you pay it into a normal savings account.

Can you transfer an ISA to another ISA?

You may want to move holdings in a previous year’s ISA to a new one if the rate of return or fees are more competitive.

This is allowed under the rules; just don’t attempt a transfer until you’ve checked whether your new ISA allows transfers in.

To retain your tax advantages, you need to transfer your ISA directly from one provider to another.

However, if you try to move your ISA by withdrawing the funds, you will lose its ISA status, as it’s no longer within the tax-free wrapper.  You may find that a lifetime of tax efficient savings is lost by making this common mistake.

What happens to your ISA upon the death of the plan holder?

Upon death an ISA becomes part of your estate and loses its tax-free status, meaning it’s liable to income tax.

The exception is if you leave behind a spouse or civil partner. Then they would see an amount equivalent to your ISA added to their current year’s allowance, tax-free.

E.g. you pass on leaving £20,000, your spouse or civil partner would receive a one-off addition to their own ISA annual allowance of this sum, giving them a total allowance of £40,000 to invest.

Even if you leave your ISA to somebody else in your will, your spouse or civil partner will still gain the £20,000 additional ISA allowance.

What protection does your ISA have?

The Financial Services Compensation Scheme (FSCS) protects the first £85,000 of any cash or investments held in ISAs with each separately registered institution.

To qualify, your ISAs must be in a financial company, such as a bank or investment house, that’s regulated by the Financial Conduct Authority.

CARE, if you have more than £85,000 in savings with one institution, or two separate companies within the same group, you could end up out of pocket should the group go under as the FSCS only guarantees a payout of £85,000.

The above should be viewed as impartial guidance as to ISA options and what they might mean. The final decision to invest would be yours but as with any investment, if it’s not an area you are completely familiar with you should seek Independent Financial Advice.

 

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.

Why Choose SIPPs? The Advantages of Personal Pensions

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

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

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

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.
T
he 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

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

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

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

People with assets that qualify for business property relief (BPR) or agricultural property relief (APR) can often save significant amounts of inheritance tax with appropriately structured wills.

BPR and APR offer valuable inheritance tax relief for qualifying assets. In some cases, only one of the reliefs applies; in others, both may be available. What is less widely known is that the structure of your will can have a major impact on the total relief available and the inheritance tax due on your death.

What is business property relief?

Business property relief applies to “relevant business property” and can, depending on the circumstances, reduce its inheritance tax value by up to 100%. The criteria are complex, so professional advice is essential to determine eligibility and to structure your interests to maximise the relief.

What is agricultural property relief?

Agricultural property relief applies to “agricultural property”. Like BPR, it can reduce the inheritance tax value by up to 100%, but the conditions for relief are different. Again, professional advice is strongly recommended.

Clients with qualifying assets, such as a business or a farm, should also consider the risk that these reliefs may be withdrawn or limited in future due to legal changes or a change in personal circumstances. The current regime is relatively generous by historical standards, but this may not always be the case.

Using Discretionary Will Trust to maximise reliefs

An appropriately structured will can help preserve available reliefs and create opportunities to maximise them. For example, clients with relievable assets can protect those assets by placing them into a discretionary will trust.

This approach is often especially beneficial for married couples. Assets left to a UK-domiciled spouse are already exempt from inheritance tax due to the spouse exemption. However, this also means that any additional reliefs (like BPR or APR) are effectively wasted if those assets are left outright to the spouse. Using a discretionary trust can avoid this issue and also enable further inheritance tax planning.

A discretionary will trust allows trustees to decide how and when to distribute assets to a class of beneficiaries, which may include the surviving spouse. The spouse can also act as a trustee and may still benefit from the trust at the discretion of the trustees. Because the assets are held within the trust rather than the spouse’s estate, they do not form part of their taxable estate. While trusts can be subject to inheritance tax charges (typically lower than personal estate charges), the overall tax savings can be substantial.

Preserving reliefs

Using a discretionary will trust on the first death can preserve valuable reliefs that might otherwise be lost if circumstances change before the second death – for example, if assets are sold or if the relief rules are altered.

Example 1: No trust – relief lost
Margery and Jake own a successful furniture business equally. When Margery dies in 2012, she leaves her £1 million shareholding (qualifying for 100% BPR) to Jake. Jake later sells the business. At his death in 2021, the proceeds (now worth £1.5 million) are held in an investment portfolio, with no BPR available. His estate is subject to inheritance tax of £600,000 on these assets.

Example 2: Discretionary trust – relief preserved
Margery instead leaves her business shares to a discretionary trust, naming Jake and their sons Ben and Nigel as trustees. After Jake’s death, the trust assets (now an investment portfolio) are distributed to Ben and Nigel and their children. There is no inheritance tax on Jake’s death in relation to the portfolio, and while the trust may incur a smaller charge, a significant tax saving is achieved.

Maximising relief on the family home

The residence nil rate band (RNRB) is an additional inheritance tax relief when the home is passed to direct descendants. However, it begins to taper when an estate exceeds £2 million—including assets qualifying for BPR or APR.

A well-drafted will using a trust can reduce or eliminate this taper.

Example 3: No trust – RNRB lost
Richard owns a business (worth £2 million, qualifying for BPR) and other assets worth £800,000. Clare, his wife, has assets worth £400,000. They own a £600,000 home jointly. Richard leaves everything to Clare in 2016. When Clare dies in 2021, her estate exceeds £2 million, so no RNRB is available.

Example 4: Discretionary trust – RNRB preserved
If Richard had left the business shares to a discretionary trust and the rest to Clare, her estate on death would be worth £1.5 million (assuming £300,000 growth). This is below the taper threshold, so RNRB and transferable RNRB from Richard would apply—saving £140,000 in tax.

Planning opportunities after the first death

The right will structure can also allow further planning opportunities after the first death.

Example 5: No trust – Relief not reused
Paul and Jenny, in a farming partnership with their daughter Gill, have a joint estate of £7 million—£4 million of which qualifies for BPR and APR. Paul dies in 2015, leaving everything to Jenny. She later leaves the farm to Gill and other assets to Karen. The inheritance tax on Jenny’s death is £940,000.

Example 6: Trust structure – Relief reused
If Paul had left the relievable assets to a discretionary trust and the rest to a life interest trust for Jenny, the trustees could have transferred £1 million in relievable assets from the life interest trust to the discretionary trust shortly after his death.

Provided Jenny survives this transfer by two years, the reliefs apply again on her death, reducing her estate’s liability to £540,000—a saving of £400,000.

Complex tax and legal issues

Trusts are subject to potential inheritance tax charges at ten-year intervals and on termination. Some transactions may also trigger capital gains tax and stamp duty, which must be weighed against the potential tax savings. Income tax implications may also arise.

Moreover, using a discretionary trust requires confidence in your chosen trustees, as they control how and when assets are distributed. You must be comfortable with not leaving assets outright to beneficiaries.

This is a complex area of law, and expert advice is essential. However, with the right planning, significant tax savings can be achieved.

Do I need to register my Trust with HMRC?

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

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.