Please click the link below for our latest monthly figures for the five model portfolios. The figures show the performance of our model portfolios versus various indices over the month of July.
A recent report by the Office for Tax Simplification (OTS) proposing a series of changes in connection with the Inheritance Tax (IHT) system was on the whole welcomed and well received.
The report looked at making the administration around this deeply unpopular tax less complicated and published a series of proposals with the aim of simplifying IHT and in particular:
• Helping executors who administer a deceased person’s estate
• Helping us as individuals distribute our assets during our lifetime.
I took some time recently to review the report. Whilst some of these changes will be appreciated and positive, I feel that if these proposals are enacted by Government, this will inevitably result in a more complex system and potentially a higher IHT burden for many estates. It will also be interesting to see how the proposals will interact or interrupt any existing planning.
I detail below some of the OTS proposals and suggest you speak to your Financial Planner, so you can put the proposed changes into context and understand your personal position.
The main changes proposed are as follows:
• Currently, many gifts which are not exempt from IHT tend to be subject to a 7 year rule. In summary, the gift will not form part of your estate for IHT purposes after a period of 7 years. In addition, after the third anniversary and subsequent anniversaries thereafter, the IHT payable on the gift may reduce on a sliding scale. This will happen for larger gifts in excess of £325,000.
The OTS report suggests reducing this period from 7 to 5 years, but simultaneously also proposes to remove the taper relief benefit. Therefore, the tax on the gift will be charged in full for the entire 5 year period as opposed to potentially reducing after 3 years. This presents a “cliff edge” scenario whereby on death, after 4 years and 364 days, tax would be payable on the full amount, but if the donor lives one more day, the gift would become entirely tax-free.
On the whole, I believe that this is a positive change as it will ease administration and encourage gifting. However, it’s important to consider the health of the Donor before advising on such a gift.
• When making gifts, there are a number of allowances which can be utilised in order to make the gift immediately exempt from IHT. The new OTS proposals include removing many of these allowances and just giving everyone one higher allowance per year. From a simplification perspective, I personally welcome this change and believe it would ultimately encourage better utilisation of the IHT exemptions.
However, one current exemption enables individuals to annually gift a limited amount of money. This is referred to as ‘the normal expenditure out of income exemption’ but the OTS is recommending its removal. A number of our clients who have significant excess income utilise this exemption and this is an important part of their IHT planning, so these arrangements will require review if the proposals are enacted.
• The OTS also suggest changes to Capital Gains Tax (CGT) and how it interacts with IHT. Currently, if you inherit an asset, no CGT is payable until you dispose of the asset when CGT is then payable on the increase in value from the date of inheritance to disposal, ie the base cost is uplifted to the value on death.
The OTS proposes changing the base cost to when the original owner acquired it rather than the inherited value, which is likely to bring a significant increase in capital gains tax bills. In my view, it is very important to keep a close eye on this proposal and if the legislation is passed, suitable action should be taken.
• The Residence Nil Rate Band (RNRB) was introduced recently and many of our clients will be familiar with this new exemption as it is often discussed during our regular meetings in order to maximise its potential benefit. However, the RNRB conditions have been branded as unfair as an estate would only qualify for it, providing the main property is left to children, grandchildren and step children / step grandchildren. The OTS have acknowledged this and suggested it requires review in the future.
• At the moment, holdings in many AIM shares are free from IHT liabilities, due to them qualifying for Business Property Relief (BPR). The BPR rules were introduced to prevent family farms and businesses being split up to pay IHT bills but the report raises a question about whether it is within the policy intent of BPR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.
• Currently, term life insurance policies which are not written into trust form part of one’s estate when one dies, meaning they can be liable for IHT. Policies written into trust do not form part of the estate. The report said it would be ‘desirable’ for there to be a standard rule that term life insurance policies fall outside of a deceased person’s estate for IHT purposes, whether or not the policies are written into a trust. We welcome this proposed change.
• From a pensions perspective, no major changes have been proposed. However, the OTS has indicated that in the future, it may be appropriate for the Government to consider a wider review of the tax system and pensions.
The above summary only touches the surface on these potential changes and so it is important to discuss your own particular circumstances in regard to estate planning with your financial planner. We offer IHT guidance and advice as part of our service and part of our initial review, so please do not hesitate to contact us if you wish to discuss this further.
Sunday 14th July was history in the making when England won the Cricket World Cup against New Zealand, at the iconic Lord’s cricket ground, known as the Home of Cricket.
Leading the team was England Captain Eoin Morgan, who plays county cricket for Middlesex where NLP Financial Management (NLPFM) sponsor his 2019 One Day Middlesex CCC shirt. The atmosphere in the cricket ground was electric with a massive audience watching it on TV, online and radio with the win resulting in a fantastic platform from which the sport can build.
With the England team having previously endured a number of embarrassing defeats on the world stage, Morgan has led a transformation of England’s One Day team since the last World Cup in 2015, and has successfully developed a new way of playing without fear, backing the players he wanted and leading the team to thrive in a positive environment. This is the atmosphere we have hopefully also created with the team here at NLPFM without of course taking any undue risks in regard to our investment selection and we are proud to be associated with Eoin Morgan as a leader.
The England victory can only be good for the quintessentially perceived British sport, which could now see a surge in interest, investment and participation from within schools and clubs throughout the UK. For the England and Wales Cricket Board and cricket fans across the country, Morgan and his team could not have done anything more!
(Photo – NLPFM Consultant Elliot Gothold and Eoin Morgan)
Please click the link below for our latest monthly figures for the five model portfolios. The figures show the performance of our model portfolios versus various indices over the month of June.
Please click the link below for our latest monthly figures for the five model portfolios. The figures show the performance of our model portfolios versus various indices over the month of May.
A number of our clients have contacted us for reassurance that they are not affected by the suspension of the high profile Fund Manager’s flagship fund, and we are pleased to be able to confirm that this fund is not included in any of our model portfolios.
The fund was suspended on 3 June following a raft of redemptions as investors lost patience with the fund’s under-performance and the managers found it difficult to sell enough of their holdings to repurchase units from clients.
Neil Woodford had built a reputation as a star manager when he ran a number of income funds for Invesco Perpetual in the early 2000s and earned further praise for how he guided his clients through the financial crisis in 2008, so that both retail and institutional investors followed him in large numbers when he left Invesco Perpetual to set up his own management company in 2014.
Despite his reputation for always being on the right side of markets, our biggest concern was the unlisted part of his portfolios. These are companies that are not listed on any major stock exchange and therefore can prove difficult to obtain accurate valuations on, as well as the possibility of it proving difficult to sell them when you wish to do so. His initial allocation to these companies was 5% but we became increasingly concerned when it grew to around 10% of the portfolio towards the end of 2015. Further concerns were raised when it became clear that the valuations of these holdings had not been reduced when the markets experienced a significant dip around that time.
Since early 2016 the Woodford fund has fallen in value by almost 15% whilst the UK Equity Income sector is up 28% over the same period. In terms of funds under management, Woodford had £10 billion of assets two years ago but had fallen to £3.7 billion today. This was clearly unsustainable and the inevitable has now happened.
Whilst we are pleased that our due diligence on the funds we hold in our portfolios means that we have avoided the direct problems with the Woodford funds, their announcement that they were suspending dealings raised concerns about liquidity across the market with the prices of some of the Woodford holdings being heavily marked down. This could impact the performance of other funds and we are closely monitoring any potential issues that could arise as a result.
Please click the link below for our latest monthly figures for the five model portfolios. The figures show the performance of our model portfolios versus various indices over the month of April.
Current pension rules limit the amount of tax relievable pension inputs that can be made into a pension scheme in each tax year. This is known as the Annual Allowance. Exceed this Allowance and you are likely to face a tax liability, known as the Annual Allowance Excess Charge.
Pension inputs can take the form of monetary contributions in money purchase schemes or the ‘deemed’ contribution, in the case of a defined benefit scheme. The Annual Allowance is made up of all pension inputs you, your employer and/or a third party make to your pension.
If your threshold income remains at £110,000 or lower, then you retain an Annual Allowance of £40,000 for that tax year.
Where threshold income is in excess of £110,000 and adjusted income rises above £150,000 in a tax year, you lose £1 of your Annual Allowance for every £2 of adjusted income. By the time your adjusted income reaches £210,000, your annual allowance will be tapered down to the minimum level of £10,000.
The Annual Allowance Excess Charge will only apply if, in addition to using all of your Annual Allowance in the current tax year, you have also exhausted your unused annual allowances from the previous three years. This is known as carry forward. If, however, having accounted for all carry forward, you still have an excess tax charge and it arises on a money purchase pension, then you have the option to ask the Scheme to pay some or all of the tax on your behalf, out of your accumulated fund. Simple. There are some restrictions around this, which may differ on a scheme by scheme basis. But what is the position for Defined Benefit schemes, where there is no fund to pay from?
If you are a member of a Defined Benefit pension, such as a “final salary scheme”, again you have the option to ask the Scheme to settle this tax charge via “Scheme Pays”. This gives you an alternative to paying the tax due from your already taxed income, but the trade-off is that your eventual pension is reduced in retirement. The Scheme has paid the tax on your behalf after all.
The way it works is complicated, but think of it as similar to a loan that sits alongside your pension. It will likely attract interest at a rate equivalent to the Consumer Price Index (CPI) or higher. This interest is accumulated year on year. It has no impact on the accruing pension, until you choose to retire and crystallise the pension. At that point, the initial loan – equivalent to the amount of tax paid by the scheme – plus the accrued interest, crystallises. The Scheme actuary will then apply a “Scheme Pays” commutation factor to this sum and reduce your pension accordingly. This can often be advantageous, particularly for larger pension pots, where there are likely to be dependents.
The calculations to determine whether the scheme pays option is good value are complicated and naturally we would recommend you seek our advice about whether it may be appropriate for you. Everyone’s situation is different and therefore we review your pension on an individual basis.
Threshold Income is defined as an individual’s total income minus allowable deductions such as member pension contributions.
Adjusted Income is defined as an individual’s total income, less allowable deductions, but plus the total pension inputs arising in the tax year.
Please click the link below for our latest monthly figures for the five model portfolios. The figures show the performance of our model portfolios versus various indices over the month of March.