SBA Financial - Solving the financial puzzle... ...piece by piece

Monthly Update - June 2010

How to cut your inheritance tax bill under the new coalition:

Many people were hanging their hopes that the Tories would win the election and raise the limits. Even if they had won with a majority I don’t believe that they would have raised the limit to £1,000,000 the hard facts are we cannot afford the bill now or in the medium to long term no matter who is in power.

Now that any possible increase in the IHT threshold to £1m has been shelved by the Tory-Lib Dem Coalition Government so the current exemption of £325,000 per person or £650,000 for couples will remain for the life of the current Parliament – which means, given the coalition's commitment to a fixed term of office, that the threshold will remain unchanged until at least May 2015 how do you save some inheritance tax?.

Here are some simple and basic ways to ensure you don't pay more inheritance tax than you need to but always take professional advice about your personal circumstances first and if you are considerably over the limits then you are likely to need more than just these basics.

1. MAKE A WILL
This is the first step toward avoiding IHT. If you die intestate you will have no control over how your assets are distributed and you may end up paying IHT unnecessarily. There is little point in passing your estate to a family member who is already over the IHT limit themselves especially if they are unlikely to spend it in their own lifetime.

2. BE GENEROUS SOONER RATHER THAN LATER
Assuming that you are sure you can afford it all gifts made more than seven years before you die are free of IHT. However, if you keep or reserve any benefit from a gift for example such as continuing to live in a house you have given away – then HMRC may apply the "gift with reservation" rules to apply tax as if the gift had never taken place..

3. MAKE USE OF YOUR ANNUAL ALLOWENCES
Again assuming you can afford to then you don't need to survive seven years for some gifts to become IHT-free, so if you cannot afford to give big money away, it makes sense to use the
Smaller allowances such as the £3,000 per person annual allowance for gifts to anybody and the ability for parents to give up to £5,000 to their children when they marry – and that could be £5,000 from each parent to each adult child.

4. KEEP IT IN THE FAMILY
Discretionary trusts can be set up from around £675 and enable assets up to the nil rate band of IHT of currently £325,000 per person or £650,000 for a married couple or civil partnership to be sheltered from IHT, so long as the donor survives seven years. Unlike outright gifts, these trusts let you retain control of the assets.

5. MAKE REGULAR GIFTS FROM INCOME
People with substantial income who make a habit of distributing some of it can cut their tax bills as well, "For gifts to be IHT-free, they must satisfy three key tests: they must be made out of income
– as opposed to selling assets to fund them; they must be regular – or at least the intention must be for them to be regular; and they must not reduce your standard of living."

6. MAKE USE OF BPR (Business Property Relief)
Complex rules govern business property and agricultural land reliefs, so professional advice should be taken – not least about the risk of losing your capital while trying to avoid tax. There many different ways to achieving this 2 year rule instead of the 7 year rule but be careful and take professional independent advice first.

7. REMEMBER TO MENTION THE WAR
Where injuries suffered during military service are a contributory factor in anybody's death, then that person's estate may become IHT-free. Not many people know about this exemption but it enabled a Duke of Westminster to avoid IHT when he died many years after injuries sustained during World War II and it may now be relevant to more people, following our military intervention in Iraq and Afghanistan.

8. UNLOCK WEALTH TIED UP IN BRICKS AND MORTAR
Now that it is no longer possible to shelter the family home from IHT and remain living in it, another solution could be to spend some of the wealth tied up in the home before it can be taken into account for tax. Equity release schemes that are marketed by members of the Safe Home Income Plans (Ship) trade body promise borrowers they will never be in negative equity.

9. BEWARE THE PITFALLS OF PEPS AND ISAS
Individual Savings Accounts (ISA’s) are popular ways of avoiding tax on income and capital gains from a wide variety of savings and investments – but they confer no protection against IHT. Seek expert advice that can take all your assets into account. Don’t save on one type of tax only to give more than you saved away in another.

Capital Gains Tax What A Whopper!

There may only be (a few weeks left at 18%)

Capital Gains Tax (CGT) is currently levied at 18% except when entrepreneur’s relief applies. The Conservative/Liberal Democrat Coalition Negotiation Agreements reached on 11 May 2010 at Item 3 Tax Measures include the following statement:

“We further agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.”

The statement contains no detail; however one may feel that it is reasonable to assume that CGT rates will rise to 40% (or conceivably even 50%) given that historically gains have been added to income to find the appropriate rate. Also the Conservative Party promised a budget within 50 days of coming into power.

Potentially that means a budget on or before 1 July 2010 the statement does not say that the changes will be effective from the expected budget but there must be a distinct prospect of the changes coming in force from that budget and therefore conceivably there are only a few weeks left with CGT rates at 18%. If you feel that this is the case then you may wish to sell or lock in the gains at current rates before the anticipated changes.

For Example:

Assume a taxpayer with a buy to let or other commercial property acquired for £200,000 and currently worth £400,000. The potential gain is £200,000 which, ignoring personal allowances or brought forward losses, would result in a tax bill as follows:

At 18% = £36,000
At 40% = £80,000
At 50% = £100,000

The tax on any gain triggered in the current 2010/11 tax year will be payable by 31 January 2012 i.e. one year and eight months hence. If the property were transferred into a trust the taxpayer would trigger a gain at 18%. Significantly though, the tax would not be payable until 31 January 2012. That would give the owner one year and eight months in which to sell the property. On sale, the trust proceeds could be distributed to the taxpayer so that the tax could be paid, the trust brought to an end and the taxpayer retains the net proceeds.

Of course there are a number of other strategies which could be adopted to protect against anticipated changes but be warned they will need to raise the money they need somehow.

What investment would you recommend right now?

This is the single most frequent question I am asked on a regular basis and this year more than ever. No surprise there especially when you consider the roller coaster ride that most investors have had to endure during the last 18 months or so. In fact every time I meet a new investment client it is all that is on their minds.

Most people would feel that the question is not an unreasonable one after all if you see an Independent Financial Advisor isn’t that what they are supposed to tell you?

Actually yes it is what they are supposed to tell you but not before they find out the much more important questions about you. Like what is important to you right now, what are your concerns and worries and what you need and want to achieve?

These are far more important questions and they need to be asked and answered in detail before any recommendations or advice can be given, so I always despair when I get this question at the start of any meeting because it reminds me of just how much poor advice people have been given for far too long.

Yes products are important but only as a means to an end to get you what you want and need but before product must come people. Remember the scene from Alice in Wonderland by Lewis Carroll when Alice is lost and talking to the cat.

"Would you tell me please, which way I ought to go from here?" said Alice "That depends a good deal on where you want to get to" said the Cheshire cat. "I don't much care where..." said Alice. "Then it doesn't matter which way you go," said the cat.

All financial planning including investment planning is the same; you must first establish where you want to be? The next step is to consider where you are right now? And then and only then can you begin to plan a route to get you from A to B.

Don’t forget though that there are many ways to get you from A to B so it is just as important to decide on the best route for you and then regularly review the progress you are making and if there needs to be any changes made along the way.

A word of warning!
One thing that I would recommend right now is to be very careful indeed about any direct mail offers from investment houses or banks offering you guaranteed returns of fixed interest rates for the next 1-5 years or so. These people are not stupid (unless you include the mess they got the world into) no far from it, they know that interest rates are very low right now, they know as well that many people are worried about the markets and they also know that rates will have to start to rise in the next 12 months or so.

It is for these reasons only that they are now all offering a raft of these types of products feeding on peoples natural concerns and getting them to tie up their money into low fixed interest bearing bonds so they can make a fortune again on the back of your money.

Please also be very wary of that “very nice man or woman at the bank” you know the one I mean we all meet them all of the time and they are very nice people I am sure and also well meaning but they are feed rubbish from their paymasters the bankers and in turn they in good faith feed this nonsense onto you the unsuspecting customer.

Take independent professional investment advice and when you meet if they don’t seem more interested in what you want and need rather than how much you have to invest or just want to jump straight in and tell you about the latest great investment then I suggest that you walk away and meet another one until you find the right one for you.

If you would like to keep abreast of the what is out there and best ways to keep your investments on track and how to manage them properly then please do contact one of the team at SBA or come along to our “The Truth About Money” seminar on the 27th of July 2010 at Cams Hall, Fareham. Places are limited and offered on a first come, first serve basis. To find out full details and to reserve your place(s) either visit our website. www.sba-financial.co.uk or call our office on 02392 325720.

Business Coaches: The Good, The Bad & The Ugly?

Please forgive the pun & reference to the old Clint Eastwood classic but I could not resist it.

I meet many business owners and most have come across several of these guys, in fact they tell me that there seems to be more and more of them out there, promising the earth and often delivering far less than that (all for a very large fee)

Now before I get myself into trouble with all the business coaches out there who may be reading this newsletter let’s have a balanced view of each category, because I am actually a big fan of business coaches I have had one for over 7 years now and would not be without one.

The Good:
These are very few and far between in my experience in fact I would go so far as to say that they are as rare as hen’s teeth!

When you find one then I would say that they are worth every penny the problem is sorting the good from the bad and other then personal recommendations you just have to put the work in and see a large number of them until you find the one that is right for you.

There is not much point in me promoting my own personal Business Coach here because he is very bespoke and only coaches top IFA’s in the country and I find that most IFA’s don’t like to read my newsletters because I upset them by telling people the truth.

Maybe one day he will agree to coach other business owners and not just IFA’s but just in case there is a rare top notch IFA out there like me and is reading this give me a call if you would like the details of my man.

For other non IFA business owners the only one I have come across so far in the local area that I have found to be worth listing in the good is Gary Mullins of Action Coach, please don’t get me wrong I am not advocating Action Coach itself at all. In fact I have met some really poor coaches linked to them and many other poor ones not linked to them.

But this guy seems to me to be at least focused on the things I expect a good IFA to be focused on, such as he wants to know all about you first and what you want, then what is important to you and in the future as well as what your worries and concerns are before he begins to formulate plans and advice.

The Bad:
There are bucket loads of these ones they mostly seem to be people who could not make it in the business world themselves having failed in their own careers they seem to think that this somehow makes them ideal to tell the rest of us what we should do?

I would have thought that the only thing it qualifies them to do is tell us what we should not do which is I guess at least in part what you want from a Business coach, but I would also like one that is a success themselves as well.

The Ugly:
In immortal words from “Gone with the wind” Frankly my dear I don’t give a dam.

Apart from showing my age this line is so very true. I don’t care what they look like so long as they deliver the goods. So I would suggest a Google search for Gary at the moment but if there are any other business coaches out there s out there that think they should be on my good list then do get in touch with me for a chat. I am always open to see who out there may be good for my business clients.

If you would like to find out more about the topics covered in this month’s newsletter, please contact us or come along to one of our regular seminars all of the details can be found on our Seminar Calendar.

The information contained within, including references to taxation, legislation, regulation, or any other issues are correct at time of going to print.

Regards
Steve

Previous articles

Monthly Update - June 2010

How to cut your inheritance tax bill under the new coalition:

Capital Gains Tax What A Whopper!

What investment would you recommend right now?

Business Coaches: The Good, The Bad & The Ugly?