New Year resolutions are many but should include some to get our finances into shape. Here are a few reminders of planning ideas to consider to do just that:-
Up to £40,000 may be inputted per annum with carry forward relief available from the previous three tax years. A lower figure of just £4,000 applies if you have already taken pension benefits flexibly and the allowance will not apply for clients who have lifetime allowance protection. With tax relief, this will give you an immediate effective return of 19% from company contributions and 20 / 40 / 45% for personal contributions depending on the tax status of the individual. With stockmarkets plunging and returns from non-pension cash deposits negligible, pension contributions should not be ignored. Don’t forget that, if you still want to avoid investment risk, you may still invest in cash within your pension to ride out current volatility.
Individual Savings Accounts (ISAs)
Up to £20,000 for adults and £4,260 in Junior ISAs may be invested on a cash or equity basis. You are allowed to put money into more than one ISA each year but they have to be different types i.e. not two equity ISAs. Growth within an equity ISA is tax free as is interest on deposit based ISAs.
No carry forward applies as for pensions so it’s use it or lose it.
You are able to transfer your ISAs from previous tax years to a new provider, for example, to switch to better savings rates or just consolidate equity ISAs. A much under-used ISA feature in my opinion.
The junior version is available to any child under 18 who lives in the UK and who does not have a Child Trust Fund account. Money must remain in the account until the child reaches the age of 18 when the account will convert to an ISA.
Capital Gains Tax (CGT)
Some lucky investors will still be sitting on capital gains and for them the CGT allowance of £11,700 may prove useful. This will allow them to crystallise gains up to this limit tax free and may do so again from 6th April 2019 when the new exemption allowance of £12,500 will apply for 2019 / 2020 tax year.
Inheritance Tax (IHT)
- Annual Exemption – An amount of up to £3,000 can be given away each tax year and, if unused in a year, that amount can be carried forward for one year and utilised in that later year.
- Small Gifts Exemption – You can give up to £250 to as many people as you wish each tax year.
- Gifts out of Income – If your income regularly exceeds your expenditure, you can give away the excess every year. You do need to record the intention to make these gifts and you do need records of your income and expenditure.
- Lifetime Giving – A person may also consider making lifetime gifts in excess of the above exemptions. A person must survive such a gift by seven years for it to fall out of their estate entirely and the donor must not benefit from the assets once they are gifted. Gifts might be absolute to family members or they could be gifts into trust. Trusts can be very beneficial but specialist advice is needed.
- A very effective way of providing for an IHT liability is to effect a life policy, often on a joint life basis with both spouses, where the sum assured is payable outside the estate on death (second death in the case of a joint policy) when the tax would become due. This strategy does not reduce the tax liability but provides for it’s payment with the cost of such being the monthly or annual premium paid for the life policy.
- IHT Efficient Investments – Another alternative can be to place funds into IHT efficient investments, as such investments can pass free of Inheritance Tax after they have been owned for two years. Appropriate investment advice would be needed when considering such planning.
Dry January may have lapsed but take the opportunity to make another resolution this time relating to your wealth and not your health.