Inheritance Tax and care fees planning do not mix

The focus on my appointments over the past couple of weeks has been on Inheritance Tax planning and care fees. The following article from the  latest edition of the Generation Newsletter provides some useful food for thought.

Inheritance Tax and care fees planning do not mix

Or can they? Many of our clients have expressed a desire to make gifts to reduce their liability to Inheritance Tax but are worried about potential care costs. They feel they have more than enough to live on now, provided nothing happens requiring them to pay for care in the future; whether in their own home, or a residential or nursing home. If this were to happen, their expenses could rise dramatically. This understandable and realistic concern led to the development of the Later Life Planning Scheme, specifically designed to address this problem.

The scheme allows you to make a gift of capital in order to reduce the value of your estate for Inheritance Tax purposes whilst, at the same time, providing you with a predetermined ‘income’ to help meet the expenses of your care in later life, but only if required. As you are unlikely to know when a need for care will arise, it is possible to arrange for the ‘income’ that you retain to increase by a fixed percentage each year. This increase will apply from the date of the gift and will continue while the ‘income’ is in payment.

How does the arrangement work?
• The scheme combines an investment with a specifically worded discretionary trust*.
• At the outset, you select the amount of ‘income’ you wish to receive should you need care, and how you would like this ‘income’ to increase, if at all. Once selected, the ‘income’ cannot be changed and, if it becomes payable, it will be paid for the rest of your life or until earlier fund exhaustion.
• We suggest that no more than the current limit of the nil-rate band (£325,000) is invested, assuming you have not used any of your Inheritance Tax nil-rate band elsewhere in the previous seven years.
• The original amount invested will fall outside of your estate if you survive for seven years from the date of the gift. It is possible, in limited circumstances, that tax at a maximum rate of 6% may be payable every ten years and/or
when capital payments are made from the trust.
• On your death, the investment remains in the trust and is held for a selected beneficiary or beneficiaries.
• While alive, you retain complete freedom to change the beneficiary/ies, the amounts they receive and when they benefit.
• After your death, your chosen trustees can decide whether the trust fund should be distributed to your selected beneficiary/ies or retained within the trust for their future benefit. You can give your trustees guidance via a letter of wishes.

In summary, investing in this type of arrangement would mean:

• any growth in the investment is outside your estate for Inheritance Tax purposes, and
• you can have peace of mind that, should you need additional income to meet care costs, you are able to access it without losing any of the valuable Inheritance Tax benefits that may have accrued.
This plan will not be suitable for everybody and it is important to take advice from your St. James’s Place Partner if this is of interest to you.

For more information about Inheritance tax, please visit my website.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You (or your beneficiaries) may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

*Trusts are not regulated by the Financial Conduct Authority.

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Funding residential or nursing care fees

Funding residential or nursing care fees

Funding care fees, fully or even partially, can be an expensive business. Understanding, therefore, what the state provides plus being clear about costs and affordability
is essential. This article seeks to outline information which any self-funders
should know.

About the 12-week property disregard

Where, excluding your property, your capital is below the threshold – in England and Northern Ireland, £23,250; in Wales, £24,000; and in Scotland, £26,000 (2014/15) – and your income is insufficient to meet the care fees, the local authority can assist with the costs for the first 12 weeks of permanent care. Any financial help beyond that period, however, will be a loan against the value of your property and recovered from the eventual proceeds of its sale.

About deferred payments agreements

If social services has assessed you as needing care and your capital is below the threshold, they can lend you the funds to pay for care, to be repaid from the proceeds of your property when it is ultimately sold. There is, however, a limit to the amount they will lend you. Plus it could also adversely affect your means-tested benefit entitlements.
About Council Tax exemption Should you move into care and leave your property unoccupied, you should be entitled to a full exemption from Council Tax until it’s sold.
About Pension Credit and Severe Disability Addition If you are entitled to Attendance Allowance, then subject to your savings and income, you may be entitled to claim Pension Credit with a Severe Disability Addition, but only where your property is on the market. If it is not on the market, it will almost certainly be treated as capital and affect your entitlement to this benefit.

About Attendance Allowance

Attendance Allowance is a non-means-tested, non-taxable allowance paid at the lower rate of £54.45 per week to those needing care by day or night, and at a higher rate of £81.30 per week for those needing care both by day and night.

About Registered Nursing Care Contributions

Irrespective of whether your stay in care is temporary or permanent, if the care home provides nursing care, the NHS makes a Registered Nursing Care Contribution.
This currently amounts to weekly contributions of £110.89 in England, £120.55 in Wales, £100.00 in Northern Ireland and £75.00 (plus £166.00 for personal care) in Scotland and is paid directly to the care home.

About the National Framework for NHS Continuing Healthcare

Where your needs are primarily healthcare-related, you may be entitled to full care fees funding from your local Primary Care Trust following an assessment under the National Framework for NHS Continuing Healthcare. You can request a review of eligibility at any time.

About local authority funding if your money runs out

Once your capital reduces to the threshold, you can seek local authority assistance. If there is any possibility that you will not be able to meet the full cost of your care in the long term, arrange an assessment of your care needs to ensure they will step in to help with the funding when required.

About financial products to meet care costs

It is perhaps surprising that there exists only one dedicated financial product that has been specifically designed to meet care costs: the immediate needs annuity. This can provide a regular increasing income for as long as you need care, which should cap the cost of care from the outset. It is important, however, to seek advice and not to try to do it alone, as such annuities do not suit all circumstances.

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When we have to sell or let a parent’s property

In recent months, I have visited several clients who have expressed concerns about the challenges and decisions to be faced as  their elderly parents find independent living increasingly difficult to cope with. The following insert from the last Generation newsletter by Robert Dolbear, Director at Bridgefast Property Services, provides some useful advice and guidance.

There comes a time in our lives when we have to start thinking seriously about whether our parents can cope independently in their home. This can be a stressful time and involve some difficult conversations to try to agree what is for the best.

This can be all the more challenging when living remotely from our parents, an ever more common occurrence, either within the UK or overseas.

The options available when independent living becomes too difficult are many, but once a decision has been made the challenges change. If it is a planned move while health is relatively good, it tends to be easier than if health is deteriorating making the move more urgent. The issue of dealing with a parent’s property sadly also arises on the death of a parent.

However the position arises, the options are simple: either sell the property or rent it. There are a number of aspects to think about under either option and this article highlights the considerations.

Selling

The initial marketing period is crucial; incorrect decisions at this stage are difficult to recover. Things to address and think about are as follows:

• You will need to obtain at least two appraisals from estate agents. If you don’t know the local market very well, selecting those agents can be difficult.
– Have a look at the types of property they are currently selling and obtain information on the size of their portfolio and the percentage they have under offer
– Check how properties are advertised; both the quality of presentation and where – which websites, papers etc
– Check that the agent’s branch is open 7 days a week
– Ensure the commission charge is reasonable

• Selection of the agent to market the property will depend on the factors above as well as:
– The quality of service
– The quality of information provided to substantiate their recommendations on asking price, achievable sale price and probable timescales

• Don’t be seduced by the highest valuation; you are looking for the optimum valuation, as a property that is overpriced for the initial marketing period can ultimately be difficult to sell for its fair value.

• An Energy Performance Certificate (EPC) will be required for the property.

• What arrangements will need to be made with respect to key access?

• Obtain an independent assessment of whether any remedial work is required to achieve a satisfactory sale. In general we would say this is not necessary as buyers like to make their own mark on a property; but if there are obvious issues which are affecting the initial appeal of a property then they should be considered.

• You will need to monitor the activity of the agent to ensure satisfactory progress. This can be time-consuming, but an agent should be accountable for activity on a weekly basis and be able to provide qualitative feedback. It is so important to build up momentum, starting from when a property is first marketed, through to a fair and satisfactory sale.

• Negotiating on offers is a skill in its own right.
– Are you comfortable doing this yourself or confident the agent can act in your best interests?
– Potential buyers may try to exploit circumstances if they know a move is urgent or if the property is already empty.

• Potential buyers need to be assessed to ensure their ability to complete on the purchase. A lower offer from a cash buyer may be better than a higher offer from a buyer in a chain.

• Appointing and dealing with solicitors who will do the conveyancing: they too will need to be monitored to ensure sale completion is achieved as quickly as possible.

• Remember: if a property is left vacant, most policies will lapse or reduce cover after, typically, 30 or 60 days; so separate vacant property insurance is required. Care needs to be taken with the selection of the policy because of these costs and minimum period conditions that may apply.

• An empty property will need care and maintenance, particularly over the winter when a ‘drain down’ is likely to be required. You may consider it appropriate to change the locks.

• Dealing with removals. This is often a combination of taking certain items to the new home, arranging for some items to go to family and friends, obtaining auction appraisals for more valuable items and arranging house clearance and collection by charities for what is left. Selecting the right service providers to help with this is important.

You will need to identify the utility suppliers and contact them to close accounts when the property is sold.

Letting

The option to rent out a property has the obvious attraction of generating some income (notwithstanding tax implications) but do your parents, or you on their behalf, want to become landlords?

Tenants can be demanding, requiring requests and repairs to be dealt with promptly. Do you let the property furnished or unfurnished? Furnishings need to meet a certain standard as well as the requirements of health and safety legislation. If you opt for unfurnished, who is going to deal with the sale/disposal/storage of belongings? If you budget for a certain amount of rent, what happens if there is a gap between tenants or market rents fall?

If the property is tenanted, the homeowner is effectively exposed to the vagaries of the property market with, as recent history shows, no guarantee of an upward trend.

So whilst renting can be appropriate for some, you need to be aware of the issues before embarking on this course of action.

Funding

If the sale of a property is associated with a move in to care, it is frequently the case that funding is required to pay for care, often in advance of the sale of the property. Professional, specialised, financial advice should be sought in these circumstances to ensure the right solution is put in place.

Conclusion

Dealing with property is invariably stressful, particularly so when this involves a parent’s property with additional concerns and emotions such as a move into care or, most difficult of all, the death of a parent. One’s own location, work and family situation can add to these stresses. It is important to go into it with your eyes open, which I hope this article has helped to address, and to know what you can achieve on your own and when professional support is required.

If you require any assistance or have any queries on this or any other issue, please do not hesitate to contact me.

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Budget 2014 – Brave new world

Spring Budgets have had little to promise or offer UK savers and investors in recent years, apart from setting out the depth of the economic challenge ahead for the coalition government.

Only last year, the mood was subdued, with talk of a potential triple dip into recession and a long and bumpy road to recovery. The UK’s economy, twelve months on, is undergoing a regeneration and a rate of growth that is now the fastest in the Western world. As Britain looks towards a general election in May 2015, the Budget contained far-reaching changes for its savers and investors.

Chancellor George Osborne, in his address on 19 March, said the Budget rewarded “the makers, the doers and the savers” in Britain. And the new pension and tax-efficient saving arrangements certainly offer radical reform of the UK’s personal finance landscape and welcome breaks for savers and investors after four years of austerity. A significant change in pension arrangements has lifted restrictions on access to pension pots and made it more attractive for individuals to invest for their retirement through pensions. And the reform of Individual Savings Accounts (ISAs) brings a very welcome increase in the annual allowance to £15,000 from July this year.

The boost that the 2014 Budget has given to investors, however, comes amid continued austerity, with the government only halfway through the fiscal consolidation it embarked on in 2010. Public borrowing levels still remain at £108 billion for 2014 (www.parliament.uk, 21/3/14). When the coalition came to power in 2010, Osborne had planned to balance the budget by 2016. Instead, the aim is 2019 (www.gov.uk, 19/3/14). The recovery also remains prone to wider global risks, whether from China’s economy or Russian military action. Meanwhile, there are widespread concerns that the recovery has been driven by consumers running down their savings, while households are squeezed by living costs as prices rise faster than earnings.

But the good news for business, markets and households is that the UK economic recovery has entrenched. In March, the Office for Budget Responsibility (OBR) revised up its forecast for the pace of the recovery in 2014 to 2.7%, from 1.8% a year ago (when its estimate for 2013 growth was a mere 0.6%). The OBR also expects earnings will grow by 2.5% this year, and inflation by 1.9%. Osborne, in these more secure conditions, packed his Budget with a broad range of pre-election giveaways, including a reduction in the savings tax rate and an increase in the personal tax-free allowance to £10,500 for 2015/16. The Budget also restated that the Inheritance Tax threshold will remain at £325,000 until April 2018.

For more information on the budget, please visit my website.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested. The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief is generally dependent on individual circumstances.

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Tax year-end checklist

The end of the tax year provides a deadline for some important and valuable investment and tax planning opportunities which are often overlooked, but can help build wealth and also help keep it in your family.

Your plans may be specific – investing this year’s ISA allowance, topping up your pension, tax efficient savings for children or grandchildren, or making use of your Inheritance Tax gifting allowances – or you may feel that now is the time to complete a comprehensive review of your circumstances.

Whatever your plans, you must act by 5 April to avoid missing out on the opportunities provided by tax year-end. The below questions identify planning ideas to consider before the end of the 2013/14 tax year.

Q: Have you fully used your 2013/14 ISA allowance?
Q: Have you considered contributions to a Junior ISA for children and grandchildren?
Q: Have you utilised your annual Capital Gains Tax exemption of £10,900?
Q: Have you fully funded your pension for the 2013/14 tax year?
Q: Have you taken full advantage of any unused annual pension allowances since 2010?
Q: Have you reviewed the tax position of any death in service or pension benefits?
Q: Have you considered your small gifts exemptions or instigating regular gifts from income to reduce your Inheritance Tax liability?
Q: If you will be affected by the reduction in the personal pension allowance, have you considered where to redirect excess contributions?
Q:Have you used your annual Inheritance Tax gifting exemption for 2013/14 and 2012/13?
Q: Have you discussed the possibility of tax efficient investment schemes?

To find out more tax year-end planning opportunities, please visit my website.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels an bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances. The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

 

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The 2014 Budget

The 2014 Budget – how does it affect you?

Since the start of the New Year I have seen several clients who wished to maximise their pension contributions before the reduction of both the Annual Allowance, from £50,000 per annum to £40,000 per annum, and also the reduction of the Lifetime Allowance, from £1.5 million to £1.25 million, both from 6th April 2014.

As you will undoubtedly be aware, the Chancellor delivered his Budget Statement on 19 March, and surprised many with some far-reaching – and much welcome – reforms of pensions and savings.

Pronouncing it a Budget for “makers, doers and savers”, George Osborne put the interests of savers and pensioners at the heart of his measures.

For more information about the Budget and how it might affect you, please visit my website.

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Seize the day – opportunities to build and protect capital before the end of the tax year

From pension savings to estate planning, the end of the tax year offers an array of opportunities to build and protect capital.

The last few weeks have been incredibly busy as clients look to maximise the opportunities to save more tax efficiently for this lengthier retirement.

The ageing population is perhaps the biggest challenge facing governments, financial institutions and savers today. People are living longer – many of us could spend a third of our lives in retirement, and we will therefore require more savings to match our longevity. The cost of this demographic time bomb has already pushed Britain’s government to raise the state retirement age. As politicians look to contain pension budgets, individuals will need more than ever to take advantage of investment and tax-saving opportunities provided by pensions.

Despite the wider picture of falling levels of savings and rising numbers of people heading towards retirement, there is an array of initiatives in place for individuals to pursue an income for retirement. And, with the government keen to encourage us all to save, significant tax advantages are in place for those contributing to a pension scheme.

A carefully drawn-up plan can help realise the twin objectives of reducing tax liability and saving for retirement. However, the new tax year will bring an extra pressure. The government has reduced the amount of pension benefits that can accrue, known as the ‘lifetime allowance’, to £1.25 million from £1.5 million. It is estimated that this will affect as many as 360,000 wealthier individuals, who could help to mitigate a 55% tax penalty by taking action before the end of the tax year (www.gov.uk, 11/12/12).

The new tax year will also bring a reduction in the annual amount that can be contributed to a pension. The allowance will fall from £50,000 to £40,000, which makes it even more important to maximise the current year’s contribution. Individuals who have not fully funded their pension in the previous three years also have the opportunity to make those contributions before 6 April. (The end of the tax year is the last opportunity to use the 2010/11 allowance and offers a potential tax saving of £22,500.)

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and dependent on individual circumstances.

To read more about opportunities to build and protect capital before the end of the tax year, please visit my website.

If you require any assistance or have any queries on this or any other issue, please do not hesitate to contact me.

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Keeping the faith – What does 2014 hold for investors?

Keeping the faith – What does 2014 hold for investors?

After a strong run for equity markets, investors will be hoping that 2014 sees a transition to a sustained economic recovery.

More than five years after the financial crash, many investors and savers remain cautious despite a growing sense of hope emanating from Britain’s households and businesses. Although there are sound reasons for this wariness as the world slowly emerges from its economic difficulties, the recent strong returns from equity markets reflect increased optimism and confidence that the foundations of recovery are in place.

And 2013 will go down as an outstanding year for global equities, and developed markets in particular, supported in part by monetary policies on either side of the Atlantic that have propped up asset prices and investor confidence as global economic recovery gathers pace.

Despite the economic and financial challenges since 2007, many investors who retained faith in equities have achieved good returns in the intervening years. In these times of easy money, underpinned by the economic policy of financial repression – where interest rates and bond yields are kept low to reduce the cost of government debt and stimulate economic growth – savers understandably feel that they are suffering for the benefit of those who borrowed too much in the past. And, despite an outlook of lower inflation, it seems likely that cash savers will continue to struggle to find real returns from bank or building society deposits.

So what can we expect in 2014 and beyond? 

The prevailing economic conditions of the last few years – slow growth, low interest rates and low inflation – look set to persist, but it is an environment that should support further gains from equity markets. The pace of the US Federal Reserve’s exit from its third Quantitative Easing (QE3) programme, which it announced at its final meeting for 2013, will continue to preoccupy markets. However, the US central bank has signalled that it intends to reduce gradually the monthly asset purchases with the view to an eventual end by late 2014.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. Equities do not provide the security of capital associated with a deposit account with a bank or building society.

To read more, please visit my website.

Should you have any queries, please do not hesitate to contact me.

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Facing the future

Facing the future

Searching questions about our saving and investment habits need to be answered as the gap between needs and reality widens.

These days we are likely to live longer, healthier lives. The Office for National Statistics predicts that by the mid-century more than 7% of the UK population will be over 85 years old. Longevity is undoubtedly a blessing, but it comes at a cost. The reality is that we are not saving enough or spending enough time planning for our future.

Successive governments have urged us to save more as the cost of living rises, but the combination of falling real wages, low interest rates and steady inflation is chipping away at our attempts to put in place the foundations for future wealth. Clearly, there is a disparity between our expectations of future lifestyle and the reality of what we are doing to realise those designs.

But, although the gap is acute, the solution and action is not beyond the means of individuals and households.

The government make available a range of allowances which permit you to save far more tax efficiently, thereby ensuring that more of your money is allocated to your savings pots, whether in the form of cash, investments or pensions. The allowances are available to you on a tax year basis and therefore it would be advisable to discuss the opportunities before the middle of March, to permit sufficient time to make the appropriate arrangements.

To read more on facing the future of our savings and investment habits please visit my website.

Should you have any queries, please do not hesitate to contact me.

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Profit extraction for new businesses

Profit extraction for new businesses

Given the current economic climate, many clients are investigating the opportunities of working for themselves. It is therefore absolutely imperative that, if you are considering such a move, you are fully briefed on the most efficient way of recompensing you and your staff.

As most shareholding directors will be well aware, irrespective of prevailing Corporation Tax rates, personal Income Tax rates and National Insurance (NI) rates, one of the most tax-efficient way to take profit (or income) from a company is via dividends. However, dividends can only be paid out of a profit; meaning that for a recently established business they will not be an option. The question is what are the alternatives for profit extraction?

Dividends

Much has and will continue to be written about the attraction of dividends as a method of extracting profits for directors and shareholders. There are however a number of situations in which paying dividends is simply not an option:

• For new companies

• For companies without retained profit

• For companies with accumulated losses

• Where there is a desire to make a distribution of available profit favouring one shareholder over, or more than, another.

Salary or bonuses

The most clear and simple alternative to adopting a dividend strategy is the provision of a salary and/or bonus. However this comes with personal Income Tax and NI for both the individual recipient and the company, payable through the PAYE system.

Benefits in kind

Although a package of benefits in kind will broadly result in the same liability to Income Tax, it can result in a delay of the payment to HMRC and, more significantly, can reduce NI. As stated above, tax on salary or bonuses is paid under the PAYE system, ordinarily on a month-by-month basis. The tax liability in respect of benefits in kind, initially at least, is not assessed monthly and can be delayed for up to 20 months.

Important note

In order to secure the advantages outlined, it will be necessary for the company to contract directly with the supplier in respect of the goods or services provided. For example, where the company is meeting utility bills, the invoice should be addressed to the company and not the individual. Further, HMRC will adjust the recipient’s PAYE codes so that the tax on benefits in kind is ultimately collected via their salary. This, of course, will take a number of years by which time, hopefully, XYZ Ltd will have sufficient ongoing or retained profits to move from benefits in kind to dividends.

Example

Dave and Julia start XYZ Ltd in April 2013. They elect to pay themselves a modest salary of £20,000 per annum each plus a tailored benefits in kind package including covering the cost of a variety of household bills and school fees. If we assume the total value of this package was £20,000 a year for each of them, both Dave and Julia would be obliged to declare their benefits in kind to HMRC when they submit their 2013/14 Self Assessment returns. Importantly the £4,000 each has due (£20,000 x 20%) will not be payable until 31 January 2015.

The NI advantages of benefits in kind come in two forms. Firstly, the absence of employee’s NI means Dave and Julia would each save up to £2,400 (£20,000 x 12%) compared to salary or bonus. Secondly, NI on the benefits in kind in respect of the employer liability is deferred. So, if XYZ Ltd pays a benefit in May 2013, any resulting employer NI wouldn’t be due for payment until 19 June 2014.

If you have any further queries about profit extraction for new businesses, or wish to discuss the financial planning opportunities available to you upon becoming self employed, please do not hesitate to get in touch.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

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