Are you ready for 5th April 2015?
The end of the tax year is fast approaching. The good news is that there’s still time to make use of your 2014-2015 tax concessions.
Tax-efficient savings and investments
From July 2014, the allowance for New Individual Savings Accounts (NISAs) for the 2014-15 tax year has been a generous £15,000. So, it pays to save as much as possible in order to benefit from the tax breaks available. You can save into a cash NISA, or a stocks and shares NISA or a combination of the two.
You pay no tax on interest earned in a cash NISA. With a stocks and shares NISA, you pay no capital gains tax on profits. Income arising from share investments is taxed at source at 10%. So while basic-rate taxpayers would pay the same outside a NISA, this is a significant saving for higher and additional-rate taxpayers who would otherwise pay 32.5% and 37.5% respectively (tax year 2014-2015).
For parents wanting to save tax-efficiently for children, those operating a Child Trust Fund (CTF) or Junior ISA can, between them and any other donors, contribute up to £4,000 per child this tax year.
Anybody who is employed should think about saving as much as possible into their pension, especially if they intend to retire at 55 and take advantage of the new pension freedoms announced by the government in 2014 for implementation in April 2015.
Pensions offer generous tax breaks to encourage us all to provide adequately for retirement. If you are a basic-rate taxpayer making a pension contribution of £5,000, this will in effect only cost you £4,000 once income tax relief has been applied. If you are a higherrate taxpayer, contributing £10,000, the net cost to you would be just £6,000.
(There are thresholds for both annual and lifetime allowances within which contributions attract tax relief. Over the years, these limits have been reducing. From 6 April 2014, the annual limit is £40,000 and the lifetime limit is £1.25 million.)
If you belong to a company scheme, check whether you can make an additional contribution before the end of the tax year. If you can’t do that, you could open a Self-Invested Personal Pension Plan (SIPP). Basic-rate tax relief will be claimed by the SIPP provider and automatically added to your pension. If you’re entitled to higherrate tax relief, you can claim this by completing a tax return.
As house prices rise, more estates are passing the Inheritance Tax (IHT) threshold (£325,000 in 2014-2015, an effective £650,000 for many married couples) so it makes sense to make use of the annual allowances available. In addition to small gifts up to £250 per recipient, you can gift up to £3,000 in total per annum. You can carry the £3,000 allowance forward for one year, so if a couple didn’t make any gifts during the last tax year, they could use this tax allowance to give away £12,000 this year. If you are in the fortunate position of having income spare each year, you may want to use what’s called the ‘surplus income exemption’ to make regular annual gifts, reducing your estate free of any potential IHT charge upon the amounts involved.
Capital Gains Tax
Your annual exemption for capital gains is £11,000 (tax year 2014-2015). You may want to think about selling an investment that has performed particularly well and crystallise the gain. If you already have gains of more than £11,000 you may want to dispose of a poor-performing investment and set off the loss against the gain. As assets can be transferred tax-free between spouses, you could transfer investments to ensure that both annual tax exemptions are fully utilised.
Tax planning can be a complicated matter; everyone’s circumstances are unique and you should seek professional advice.
Giving your children a financial flying start
Increasingly, parents are stepping in to give their children a financial helping hand, not just paying for their education, but also helping them onto the housing ladder. A new study by lending service Zopa revealed that that those aged between 18 and 30 are costing the Bank of Mum and Dad an average of £32,664.
According to figures from the Council of Mortgage Lenders, a firsttime buyer’s typical loan was around £120,000 last year. Finding a deposit can mean a substantial outlay; at 15% the figure would be £18,000.
Thinking Longer Term
If you have sufficient time in hand, you can save tax-efficiently in a Junior Individual Savings Account (JISA). Designed to help parents save for their children’s future tax free, the 2014-15 allowance is £4,000 (£4,080 in 2015-16). Withdrawals can’t be made from a JISA, so they should be regarded as a long-term investment. Children can gain control of the fund at age 16 and have access at 18, when the account turns into an adult ISA.
Alternatively, you can save through your own ISA and pass the funds onto your child. This route also lets you save more per year than under the JISA rules; the allowance for the 2014-15 tax year is a generous £15,000 (£15,240 in 2015-16). Alternatively, you could invest a lump sum in shares, bonds or funds. There are many options currently available in the market, so you should consult your adviser for guidance. Writing these investments in trust for the child means that tax on any gains is payable by the child and not the parent. If the gain falls within their personal allowance, it would be tax free.
Other ways to pass on wealth
Using your pension pot could be a taxefficient way of raising funds. Parents may be able to take up to a quarter of their pension fund as a lump sum when they reach fifty-five. Whilst few will retire this young, it’s possible to take the lump sum and continue working. You could increase your mortgage to enable you to make a gift, with a view to withdrawing your tax-free pension lump sum at some future point and using it to pay off the loan.
Make sure giving isn’t taxing
Many parents are concerned that if they give money away, their children will face an inheritance tax bill should they die. The first £325,000 of your assets escapes Inheritance Tax (IHT) as it falls within what’s called the nil-rate band. Any amount over this, unless passing to a surviving spouse along with any unused nil-rate band, is taxed at 40%.
You can of course give away substantial sums to your children, but if you die within seven years of making the gift, your estate may be liable to IHT on the gift or a proportion of it. You can, however, take out a life policy to cover the amount of tax that could be payable if you were to die before the expiry of the seven-year period.
So, if you’re planning to give money to your children, it pays to get good advice, start as early as possible and make sure your gift doesn’t result in a hefty tax bill.
Critical Illness Cover – FAQs
It’s easy to think that the only insurance cover you need for your family is life assurance. However, a major illness can strike at any time. In the UK, every 2 minutes someone is diagnosed with cancer, and every 5 minutes someone has a heart attack*.
Critical illness cover means that if you were to be diagnosed with a serious medical condition, you would receive a tax-free lump sum payment. No-one would want to be worrying about their finances when seriously ill, so having this type of cover in place could provide valuable reassurance for you and your family.
*Source: NHS Choices and the Stroke Association
What conditions are covered?
Typically there are seven conditions that most policies cover. These are cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. Permanent disability caused as a result of an illness or injury is usually included too. There’s a wide variety of policies on the market covering various medical conditions, so taking expert advice will help you make the right choice.
What can the payment be used for?
There are no restrictions as to how you use the money. So, you could use it to pay off your mortgage or other debts, pay for nursing care or use it to make alterations to your home such as wheelchair access.
When would the lump sum be paid?
Generally, you will receive your tax-free lump-sum payment around 30 days from making a successful claim.
Can partial payments be made?
Some policies include what is called ‘severity-based cover’. This is where the policy pays out a proportion of the sum assured, depending on the severity of the diagnosis, and continues to provide cover for the more serious conditions.
Would I need a medical?
Some insurers do require you to undergo a medical examination before they will quote for providing cover. You will need to provide detailed information about your medical history. Premiums are based on an assessment of your state of health. If you have existing health problems, then they won’t be covered under your policy.
Can I combine critical illness andlife cover?
Many people buy a combined life and critical illness policy, and it can make sense to do so. In this case, a payment would be made on either diagnosis of a critical illness as defined in the policy, or death, whichever is the sooner. If the cover is combined in this way, the policy premium is usually cheaper than it would be for separate policies, as there is only ever one lump sum paid out by the insurance company.
When should I take a policy out?
Many people buy a policy when they take on a major financial commitment such as a mortgage. It certainly pays to start a policy at a young age, rather than leaving it until later in life when the cost of cover starts to rise, as does the risk of developing a critical illness. If you’re single and don’t have dependants, you may not feel you need life assurance. However, if you don’t have anyone who could take care of you financially if you were diagnosed with a serious disease, you might want the security of critical illness cover.
What should I look for in a policy?
As is often the case when choosing insurance, it’s advisable not to buy on price alone, as doing so may not provide the level of cover you need. Your adviser will be able to help you assess the policies available to you and find the most appropriate cover for your needs.
Over 50 with an intrest-only mortgage? It’s time to act!
Currently, more than 6 million over 50s have an interest-only mortgage and many of them are likely to experience problems paying it off. Some are contemplating selling up in order to make up an average shortfall of more than £42,000, according to research carried out by Saga.
In addition, more than 900,000 in their 70s still have an average mortgage bill of £38,000. Carrying debt into your later years is far from ideal, and can restrict the amount of money available to fund a comfortable retirement.
What can be done?
This research highlights the need for proper financial planning and advice. Clearly, it’s important to focus on repaying your mortgage as early as possible. However, if you find yourself with a problem there are various actions you can consider to improve your situation.
Paying off the debt from savings and investments
If you have spare cash, you can make a capital repayment to reduce the amount of mortgage outstanding. With the new freedoms available under the pension legislation from April 2015, you could consider using your 25% tax-free lump sum payment to pay off the debt. However, it’s important to consider your needs in retirement too, and maintain the right balance between debt and savings.
You could switch to a repayment mortgage instead. It would mean an increase in monthly payments, but you would be paying off the capital outstanding. Your adviser will be able to tell you what deals might work for you.
Taking out a lifetime mortgage
Lenders are increasingly aware that some of their borrowers face difficulties and are developing lifetime mortgage products to avoid the risk of borrowers defaulting and the need for homes to be sold to repay the debt. Under this type of mortgage, on death the property would be sold to repay the outstanding loan.
Selling up and downsizing
Selling your home could release enough to pay off your mortgage. Some people find this an acceptable answer, especially if they can readily find alternative accommodation that they’re happy with and able to afford.
Moving house can be an expensive and stressful process at any age. There is alternative way of raising cash against the value of your property that means you continue to live in it. Called Equity Release, it allows you to access and benefit from the ‘equity’ or value tied up in your home.
Equity release is a complicated financial arrangement, and expert guidance is essential in making the right choice to suit your needs and those of your family.
The Financial Conduct Authority has referred to interest-only mortgages as a ‘ticking time bomb’ so if this issue affects you, the best advice is to speak to your financial adviser as soon as possible.
Financial advice you can count on
We provide services to help you improve your financial plans. We are experts in the field and aim to deliver information, advice and solutions which are clear and easy to understand.
We will help you throughout your lifetime and pride ourselves on our long standing client relationships. With Charles Derby, your plans will be kept under review so you can rest assured in the knowledge that expert assistance is always on hand.
Visit www.charlesderby.com or www.charlesderbywm.com
or contact your local Charles Derby Financial Adviser