Savings & Investments

Wealth transfer and the next generation

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How to secure your family’s financial future.

We spend a lifetime generating wealth and assets but not many of us ensure that it will be passed to the next generation – our children, grandchildren, nieces, nephews, and so on. Intergenerational wealth transfer is the passage of wealth from one family generation to the next.

It’s becoming increasingly important for more people to consider succession planning and intergenerational wealth transfer as part of their financial planning strategy. As the baby boomer generation reaches retirement age, we’re on the brink of a vast shift in assets, unlike any that we have seen before.

Wealth transfers

By 2027, it is expected that wealth transfers will nearly double from the current level of £69 billion, to £115 billion[1], coined as ‘the Great Wealth Transfer’ of the 21st century.

Intergenerational wealth transfer can be a huge issue for all family members concerned. If done well and executed properly, it can make a real difference to the financial position of the recipients. If misjudged or poorly handled, it can cause enormous issues, conflicts and resentments that are never forgotten nor forgiven.

Financial implications

One aspect that hasn’t been widely considered is the impact on other family members, and in particular children, as their parents think about selling their business or retiring from their career, perhaps selling their family home, and starting life in retirement.

It is important that children are prepared to deal with this process, not least so they are aware of the financial implications and how they may be affected. For instance, children may be expecting to receive a certain amount of money from their parents – particularly those who are selling a business – and end up disappointed. Conversely, they may not be expecting to receive anything, and are therefore not equipped to deal with a windfall.

Contributory factors

According to the King’s Court Trust, £5.5 trillion will move hands in the United Kingdom between now and 2055, with this move set to peak in 2035[2]. Why? Well, there are a number of contributory factors that account for this. The two main reasons are increased net worth and rising mortality rates.

For those approaching, or in, retirement, it’s important to have frank and open conversations with children about expectations and also whether children have the knowledge and understanding to manage financial matters.

Approaching retirement

This is not an easy exercise, as you may not want to discuss your financial affairs with your children. You may find your children’s eyes are opened when they see what their parents have been able to achieve financially. They may even want to know how they can do that themselves and change their own habits.

Everyone works hard to provide for their family, and perhaps even leave them a legacy. However, parents approaching retirement shouldn’t feel that their family is solely reliant on them, or that they need to be responsible for their children’s financial situation.

Expressing wishes

A good approach is to help your children establish their own strong financial footing and be ready for intergenerational wealth transfer. For instance, introducing them to your professional advisers can provide comfort that there is someone they can go to for advice.

Having open conversations with your children and expressing wishes and goals will also ensure that your family are all on the same page, which can help reduce potential conflict later when managing intergenerational wealth transfer. These are some questions you should answer as part of your intergenerational wealth transfer plans:

  • When did wealth enter my life and how do I think this timing influences my values and family relationships?
  • What impact does affluence have on my life and the lives of my next generation?
  • What was the key to my success in creating wealth and how might telling this story to my future generation be helpful?
  • What is my biggest concern in raising my children or grandchildren with affluence?
  • What conversations (if any) did I have with my own parents about money and wealth growing up?
  • How did my parents prepare me to receive wealth?
  • What lessons did I learn from my parents about money and finance that I would like to pass on to my heirs?
  • What family values would I like to pass down to the next generation and how do I plan on communicating this family legacy?
  • What concerns do I have about my adult children when it comes to inheriting and managing the family wealth?
  • How can I help prepare my beneficiaries to receive wealth and carry on our family legacy?

Between generations

Despite the vast amount of wealth likely to be passed down between generations, those in line for inheritance could end up being over-reliant on their expected windfall. The key will be to ensure younger generations are able to get involved and understand how to handle the wealth they will be inheriting, as well as being able to make good decisions about the wealth that they generate themselves.

You need to consider who will receive what and whether you want to pass your wealth during your lifetime or on death. These decisions then need to be balanced by the tax implications of any proposed planning. This is especially important at what can be a highly stressful time. By making advanced preparations, the burden of filing complicated Inheritance Tax returns can be reduced. It’s worth noting that UK Inheritance Tax receipts exceed £3bn from 17,900 estates[3].

Source data:
 [1] Kings Court trust, ‘Passing on the Pounds – The rise of the UK’s inheritance economy’.
[2] Resolution Foundation, Intergenerational Commission. ‘The Million dollar be-question’.
[3] Prudential 2019.

Estate Protection

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Preserving your wealth and transferring it effectively.

Estate planning is an important part of wealth management, no matter how much wealth you have built up. It’s the process of making a plan for how your assets will be distributed upon your death or incapacitation.

As a nation, we are reluctant to talk about inheritance. Through estate planning, however, you can ensure your assets are given to the people and organisations you care about, and you can also take steps to minimise the impact of taxes and other costs on your estate.

In order to establish the value of your estate, it is first necessary to calculate the total worth of all your assets. No matter how large or how modest, your estate is comprised of everything you own, including your home, cars, other properties, savings and investments, life insurance (if not written in an appropriate trust), furniture, jewellery, works of art, and any other personal possessions.

Having an effective estate plan in place will not only help to ensure that those you care about the most will be taken care of when you’re no longer around, but it can also help minimise Inheritance Tax (IHT) liabilities and ensure that assets are transferred in an orderly manner.

Write a Will

The reason to make a Will is to control how your estate is divided – but it isn’t just about money. Your Will is also the document in which you appoint guardians to look after your children or your dependents. Almost half (44%) of over-55s have not made a Will[1], and as such, they will not have any say in what happens to their assets when they die.

Should you die without a valid Will, you will have died intestate. In these cases, your assets are distributed according to the Intestacy Rules in a set order laid down by law. This order may not reflect your wishes.

Even for those who are married or in a registered civil partnership, dying without leaving a Will may mean that your spouse or registered civil partner does not inherit the whole of your estate. Remember: life and circumstances change over time, and your Will should reflect those changes – so keep it updated.

Make a Lasting Power of Attorney

Increasingly, more people in the UK are using legal instruments that ensure their affairs are looked after when they become incapable of looking after their finances or making decisions about their health and welfare.

By arranging a Lasting Power of Attorney, you are officially naming someone to have the power to take care of your property, your financial affairs, and your health and welfare if you suffer an incapacitating illness or injury.

Plan for Inheritance Tax

IHT is calculated based on the value of the property, money and possessions of someone who has died if the total value of their assets exceeds £325,000, or £650,000 if they’re married or widowed. If you plan ahead, it is usually possible to pass on more of your wealth to your chosen beneficiaries and to pay less IHT.

Since April 2017, an additional main residence nil-rate band allowance was phased in. It is currently worth £150,000, but it will rise to £175,000 per person by April this year. However, not everyone will be able to benefit from the new allowance, as you can only use it if you are passing your home to your children, grandchildren or any other lineal descendant. If you don’t have any direct descendants, you won’t qualify for the allowance.

The headline rate of IHT is 40%, though there are various exemptions, allowances and reliefs that mean that the effective rate paid on estates is usually lower. Those leaving some of their estate to registered charities can qualify for a reduced headline rate of 36% on the part of the estate they leave to family and friends.

Gift Assets while you’re Alive

One thing that’s important to remember when developing an estate plan is that the process isn’t just about passing on your assets when you die. It’s also about analysing your finances now and potentially making the most of your assets while you are still alive. By gifting assets to younger generations while you’re still around, you could enjoy seeing the assets put to good use, while simultaneously reducing your IHT bill.

Make use of Gift Allowances

One way to pass on wealth tax-efficiently is to take advantage of gift allowances that are in place. Every person is allowed to make an IHT-free gift of up to £3,000 in any tax year, and this allowance can be carried forward one year if you don’t use up all your allowance.

This means you and your partner could gift your children or grandchildren £6,000 this year (or £12,000 if your previous year’s allowances weren’t used up) and that gift won’t incur IHT. You can continue to make this gift annually.

You are able to make small gifts of up to £250 per year to anyone you like. There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free provided you have made no other gifts to that person during the tax year.

A Potentially Exempt Transfer (PET) enables you to make gifts of unlimited value which will become exempt from Inheritance Tax if you survive for a period of seven years.

Gifts that are made out of surplus income can also be free of IHT, as long as detailed records are maintained.

IHT-Exempt Assets

There are a number of specialist asset classes that are exempt to IHT. Several of these exemptions stem from government efforts over the years to protect farms and businesses from large Inheritance Tax bills that could result in assets having to be sold off when they were passed down to the next generation. Business relief (BR) acts to protect business owners from IHT on their business assets. It extends to include the ownership of shares in any unlisted company. It also offers partial relief for those who own majority rights in listed companies, land, buildings or business machinery, or have such assets held in a trust.

Life Insurance within a Trust

A life insurance policy in trust is a legal arrangement that keeps a life insurance pay-out separate from the valuation of your estate after you die. By ring-fencing the proceeds from a life insurance policy by putting it in an appropriate trust, you could protect it from IHT. The proceeds of a trust are typically overseen by a trustee(s) whom you appoint. These proceeds go to the people you’ve chosen, known as your ‘beneficiaries’. It’s the responsibility of the trustee(s) to make sure the money you’ve set aside goes to whom you want it to after you pass away.

Keep Wealth within a Pension

When you die, your pension funds may be inherited by your loved ones. But who inherits, and how much, is governed by complex rules. Money left in your pensions can be passed on to anyone you choose more tax-efficiently than ever, depending on the type of pension you have, by you nominating to whom you would like to leave your pension savings (your Will won’t do this for you) and your age when you die, before or after the age of 75.

Your pension is normally free of IHT, unlike many other investments. It is not part of your taxable estate. Keeping your pension wealth within your pension fund and passing it down to future generations can be very tax-efficient estate planning.

It combines IHT-free investment returns and potentially, for some beneficiaries, tax-free withdrawals. Remember that any money you take out of your pension becomes part of your estate and could be subject to IHT. This includes any of your tax-free cash allowance which you might not have spent. Also, older style pensions may be inside your estate for IHT.

Make Sure Wealth Stays in the Right Hands

Estate planning is a complex area that is subject to regular regulatory change. Whatever you wish for your wealth, we can tailor a plan that reflects your priorities and particular circumstances. To find out more, or if you have any questions relating to estate planning, don’t hesitate to contact us.

Source data: [1] Brewin Dolphin research: Opinium surveyed 5,000 UK adults online between 30 August and 5 September 2018.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from. Taxation are subject to change. The rules around trusts are complicated, so you should always obtain professional advice. The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

Tax-wise

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Make the most of your valuable allowances, reliefs and exemptions

Once we enter January, the end of the 2019/20 tax year will be just over three months away on 5 April. As this date approaches, the window of opportunity reduces if you want to make the most of valuable allowances, reliefs and exemptions that could help reduce your tax bill and make sure your finances stay tax-efficient.

Some of these allowances will be lost forever if they are not used before the tax year end – and the sooner you claim them the better. Every year, some people leave end-of-year tax planning until the last minute. But leaving planning until the eleventh hour increases the risk that you will discover you have left it too late and missed out on the chance to improve your financial position.

Acting well before the tax year end means you can also be sure that you are maximising your opportunities and minimising your stress. The list we’ve provided below isn’t exhaustive, but it highlights some of the main areas to consider if appropriate to your particular situation. If you would like to discuss your own financial position, please contact us.

Income Tax

Consider making use of lower-rate tax bands. It’s important to review the tax implications of transferring income-producing assets and taking note of anti-avoidance and settlements legislation.

The way you receive an income, and the rates and allowances that apply, should be at the front of your mind. How much you pay depends on where you live in the UK, with Scotland and Wales in receipt of devolved powers to set their own Income Tax bands on top of the personal allowance.

The annual dividend allowance remains at £2,000 for 2019/20 after reducing from £5,000 this time last year. With the new personal allowance of £12,500 added to the frozen dividend allowance, the maximum tax-free income you can receive through dividends is £14,500 in 2019/20.

Some smaller amounts of income are tax-free up to annual limits. Under the Government’s renta-room scheme, you can continue to earn taxfree income of up to £7,500 a year from letting out a furnished room in your home.

Individual Savings Account (ISA) Allowance

With a Cash ISA or a Stocks & Shares ISA (or a combination of the two), you can save or invest up to £20,000 a year tax-efficiently.

If you are in a position to, it makes sense for you and your spouse to take advantage of each other’s ISA allowance, particularly if one of you has more financial resources than the other. That way, combined, you can save (in the case of Cash ISAs) or invest (in the case of Stocks & Shares ISAs) up to £40,000 tax-efficiently in 2019/20.

Currently, 16 and 17-year-olds actually get two ISA allowances, as they’re able to open a Junior ISA (which for 2019/20 has a limit of £4,368) and an adult Cash ISA. This means that you can put away up to £24,368 in your child’s name tax efficiently this tax year.

People aged 18–39 can open a Lifetime ISA, which entitles them to save up to £4,000 a year until they’re 50. The Government will top up the savings by 25%, up to a maximum of
£1,000 a year.

Pension Contributions

The annual pensions allowance enables you to contribute up to £40,000 in 2019/20. If your adjusted income exceeds £150,000 in 2019/20, your annual allowance will be reduced by £1 for every £2 that exceeds this threshold down to a limit of £10,000.

Any unused pensions annual allowance can be carried forward for three tax years, providing you were a member of a registered pension schemeduring that period. This unused allowance can be added to your 2019/20 annual allowance, giving a maximum pension contribution of £160,000, all of which will attract personal tax relief if you have the required level of relevant earnings.

You can also increase your basic State Pension by paying voluntary Class 3 National Insurance Contributions (NICs).

Consider contributing up to £2,880 towards a pension for your non-earning spouse or children. Tax relief is added to your contribution, so if you contribute £2,880, a total of £3,600 a year will be paid into the pension scheme, even if you earn less than this or have no income at all.

You begin to lose your personal allowance once your adjusted net income exceeds £100,000, such that the allowance reduces to £0 when adjusted net income reaches £125,000.

Inheritance Tax

You can act at any time to help reduce a potential Inheritance Tax (IHT) bill when you’re no longer around.

Gifts of up to £3,000 per year can be made on an IHT-free basis. The limit increases to £6,000 if the previous year’s annual exemption was not used.

A married couple can therefore make IHT exempt gifts totalling £12,000 – if unused, the annual allowance can be carried forward to the next tax year only. This simple technique could save a possible IHT bill of £4,800 in the event of your untimely death.

You should also consider using other annual gifts such as gifts in consideration of marriage or £250 small gifts.

Business Relief (BR) is a valuable IHT relief, with business property potentially receiving up to 100% relief if certain criteria are met. BR is an important part of succession planning, but due to the complexity of the BR rules, the relief may not be due even though you expect to meet the conditions.

It is important to regularly review your BR position to ensure that it continues to apply and that your business activities do not jeopardise your BR position.

Capital Gain Tax Allowance

Capital Gains Tax (CGT) is a tax on the gains and profits you make when you sell something, such as an investment portfolio or second home.

Everyone has an annual allowance of £12,000 (in 2019/20) before CGT applies. Like the ISA allowance, it doesn’t roll over – so if you don’t use it, you’ll lose out. And you may have to pay more CGT in the future.

Also, it’s worth remembering the allowance is for individuals, so couples have a joint allowance for 2019/20 of £24,000. In some situations, it may be appropriate to transfer assets into your joint names so you both stay within your individual allowances. However, this is only effective if the gift is a genuine gift of beneficial ownership, and the transferor does not continue to benefit from the asset following the transfer.

Not every investment portfolio is subject to CGT. If you’re looking for a tax-efficient way to invest, a Stocks & Shares ISA could be for you. Just like any investment, it carries risk – meaning you could lose some or all of your money – but if you do make a profit due to share price increases, you won’t be required to pay CGT on it.

A Bed & ISA will allow you to utilise the current year’s ISA allowance by moving investments from an unwrapped environment to the ISA tax-efficient wrapper. This is achieved by disposing of the unwrapped investment and repurchasing it via an ISA. The disposal of the unwrapped investments may be liable to CGT, but once inside the ISA, the investments are sheltered from CGT in the future.

Don’t lose it, use it

As we make our way towards the end of the tax year, now is the ideal time to review your tax affairs to ensure that you have taken advantage of all the valuable allowances, reliefs and exemptions available to you. To discuss the planning opportunities available to help you, your family and business to reduce your tax bill, please contact us.

Inheritance Tax

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How do you leave a legacy which serves your family’s best interests?

Will you be one of the thousands of households in Britain that will have to pay Inheritance Tax? What’s the best way to avoid it? If you’re administering an estate because someone has died, how do you obtain probate? Is it ever possible to retrospectively minimise an estate’s tax liabilities?

Inheritance Tax receipts reached a record high of £5.2 billion in the 2017/18 tax year according to figures published by HM Revenue & Customs[1], despite the introduction of a new residence nil-rate band (RNRB).

Families are becoming increasingly complex entities, often shaped by divorces, remarriages and children from previous relationships. This can make estate and trust planning a challenge to navigate if an individual has strong feelings about those they would like to inherit their assets and those they wouldn’t.

If applicable to your situation, effective estate and trust planning could save your family a potential Inheritance Tax bill amounting to hundreds of thousands of pounds. Inheritance Tax planning has become more important
than ever following the Government’s decision to freeze the £325,000 lifetime exemption, with inflation eroding its value every year and subjecting more families to Inheritance Tax.

Reducing the amount of money beneficiaries have to pay

Inheritance Tax is usually payable on death. When a person dies, their assets form their estate. Any part of an estate that is left to a spouse or registered civil partner will be exempt from Inheritance Tax. The exception is if a spouse or registered civil partner is domiciled outside the UK. The maximum a person can give them before Inheritance Tax may need to be paid is £325,000. Unmarried partners, no matter how long-standing, have no automatic rights under the Inheritance Tax rules.

However, there are steps people can take to reduce the amount of money their beneficiaries have to pay if Inheritance Tax affects them. Where a person’s estate is left to someone other than a spouse or registered civil partner (i.e. to a non-exempt beneficiary), Inheritance Tax will be payable on the amount that exceeds the £325,000 nil-rate threshold. The threshold is currently frozen at £325,000 until the tax year 2020/21.

IHT is payable at 40% on the amount exceeding the threshold

Every individual is entitled to a nil-rate band (NRB) – that is, every individual is entitled to leave an amount of their estate up to the value of the nil-rate threshold to a non-exempt beneficiary without incurring Inheritance Tax. If a widow or widower of the deceased spouse has not used their entire NRB, the NRB applicable at the time of death can be increased by the percentage of the NRB unused on the death of the deceased spouse, provided the executors make the necessary elections within two years of your death.

To calculate the total amount of Inheritance Tax payable on a person’s death, gifts made during their lifetime that are not exempt transfers must also be taken into account. Where the total amount of non-exempt gifts made
within seven years of death – plus the value of the element of the estate left to non-exempt beneficiaries – exceeds the nil-rate threshold, Inheritance Tax is payable at 40% on the amount exceeding the threshold.

Certain gifts made could qualify for taper relief

This percentage reduces to 36% if the estate qualifies for a reduced rate as a result of a charity bequest. In some circumstances, Inheritance Tax can also become payable on the lifetime gifts themselves – although gifts made between three and seven years before death could qualify for taper relief, which reduces the amount of Inheritance Tax payable.

From 6 April 2017, an Inheritance Tax RNRB was introduced in addition to the standard NRB. It’s worth up to £150,000 for the 2019/20 tax year and increases to £175,000 for 2020/21. In order to qualify, you must own a property or a share in a property, which you have lived in at some stage and which you leave to your direct descendants (including children, grandchildren or stepchildren). For estates over £2 million, the RNRB is reduced at the rate of £1 for every £2 over £2 million. In addition, it only applies on death and not on gifts or any other lifetime transfers.

Property, land or certain types of shares where IHT is due

It might also apply if the person sold their home or downsized from 8 July 2015 onwards. If spouses or registered civil partners don’t use the RNRB on first death – even if this was before 6 April 2017 – there are transferability
options on the second death. Executors or legal personal representatives typically have six months from the end of the month of death to pay any Inheritance Tax due. The estate can’t pay out to the beneficiaries until this is done. The exception is any property, land or certain types of shares where the Inheritance Tax can be paid in instalments. Beneficiaries then have up to ten years to pay the tax owing, plus interest.

Source data: [1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ attachment_data/file/730110/Table_12_1.pdf

Retirement Resilience

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Taking the reins and having more control over your pension pot.

Saving for retirement is one of our greatest financial priorities, especially as life expectancy is growing and retirements are likely to last longer. It may be the case that you’d prefer to take the reins and have more control over your pension pot. For appropriate investors, one option to consider is a Self-Invested Personal Pension (SIPP).

Please note that a SIPP is a type of Personal Pension, and the rules as to how much you can contribute to a SIPP are the same as a Personal Pension. Also, when it comes to taking the pension, the same rules apply to both a SIPP and a Personal Pension.

Saving Discipline

A SIPP is a tax-efficient wrapper for your pension investments and gives you control of your pension, whereas most members of a company pension scheme have very little control and almost no idea where their pension money is invested. SIPPs enforce saving discipline until retirement since you cannot withdraw your money early.

Also, with many of the UK’s largest companies closing their final salary schemes to all members, many members now have to look at taking their pensions into their own hands. You can make both regular and one-off payments into your SIPP, and even putting a small amount away early will make a difference to how much you will eventually have to fund your retirement.

Extra Flexibility

Once you reach 55, you can access your whole pension pot. You decide how and when to use the fund built up in your SIPP to provide you with an income. You can take up to 25% of your fund as a tax-free lump sum and use the balance to provide you with a pension through income withdrawal from your SIPP, or through the purchase of an annuity. You can also take a series of lump sums from your SIPP – it’s flexible.

SIPPs can be opened by almost anyone under the age of 75 living in the UK. You can open a SIPP for yourself or for someone else, such as a child or grandchild. Even if you’ve already retired, you can still open a SIPP and take advantage of the extra flexibility that it gives you over your pension savings in retirement – but you may be limited by how much you can pay into it.

Investment Control

SIPPs offer a wider investment choice than most traditional pensions based on investments approved by HM Revenue & Customs (HMRC). They give you the chance to pick exactly where you want your money to go and enable you to choose and change your investments when you want, giving you control of your pension and how it is organised.

Most SIPPs allow you to select from a range of assets, including:

  • Unit trusts
  • Investment trusts
  • Government securities
  • Insurance company funds
  • Traded endowment policies
  • Some National Savings & Investment products
  • Deposit accounts with banks and building societies
  • Commercial property (such as offices, shops or factory premises)
  • Individual stocks and shares quoted on a recognised UK or overseas stock exchange

Time to Take Control of your Retirement Plans for the Future?

A SIPP is not right for everyone, but the freedom it offers you compared to a traditional pension could far outweigh the extra time taken to run your own pension. To find out more about setting up a SIPP, please contact us and we’ll arrange a meeting to discuss your requirements – we look forward to hearing from you.

Please note: you must pay sufficient tax at the higher and additional rates to claim the full higher-rate tax relief via your tax return.

The value of investments and income from them may go down. You may not get back the original amount invested. Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.

Wealth Preservation

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The 6 things you need to consider to help preserve your wealth.

Whether you have earned your wealth, inherited it or made shrewd investments, you will want to ensure that as little of it as possible ends up in the hands of HM Revenue & Customs. With careful planning and professional financial advice, it is possible to take preventative action to either reduce or mitigate a person’s beneficiaries’ Inheritance Tax bill – or mitigate it altogether. These are some of the main areas to consider.

1. Make a Will

A vital element of effective estate preservation is to make a Will. According to a YouGov survey, almost 60% of all UK adults do not have a Will. This is mainly due to apathy but also a result of the fact that many people feel uncomfortable talking about issues surrounding death. Making a Will ensures an individual’s assets are distributed in accordance with their wishes.
This is particularly important if the person has a spouse or registered civil partner. Even though there is no Inheritance Tax payable between both parties, there could be tax payable if one person dies intestate without a Will.
Without a Will in place, an estate falls under the laws of intestacy – and this means the estate may not be divided up in the way the deceased person wanted it to be.

2. Make allowable gifts

A person can give cash or gifts worth up to £3,000 in total each tax year, and these will be exempt from Inheritance Tax when they die. They can carry forward any unused part of the £3,000 exemption to the following year, but they must use it or it will be lost.
Parents can give cash or gifts worth up to £5,000 when a child gets married, grandparents up to £2,500, and anyone else up to £1,000. Small gifts of up to £250 a year can also be made to as many people as an individual likes.

3. Give away assets

Parents are increasingly providing children with funds to help them buy their own home. This can be done through a gift, and provided the parents survive for seven years after making it, the money automatically moves outside of their estate for Inheritance Tax calculations, irrespective of size.

4. Make use of trusts

Assets can be put in an appropriate trust, thereby no longer forming part of the estate. There are many types of trust available that, if appropriate, usually involve parents (settlors) investing a sum of money into a trust. The trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the death of the settlers, the investment is paid out according to the settlors’ wishes. In most cases, this will be to children or grandchildren.
The most widely used trust is a discretionary trust and can be set up in a way that the settlors (parents) still have access to income or parts of the capital. It can seem daunting to put money away in a trust, but they can be unwound in the event of a family crisis and monies returned to the settlors via the beneficiaries.

5. The income over expenditure rule

As well as putting lump sums into an appropriate trust, people can also make monthly contributions into certain savings or insurance policies and put them into an appropriate trust. The monthly contributions are potentially subject to Inheritance Tax, but if the person can prove that these payments are not compromising their standard of living, they are exempt.

6. Provide for the tax

If a person is not in a position to take avoiding action, an alternative approach is to make provision for paying Inheritance Tax when it is due. The tax has to be paid within six months of death (interest is added after this time). Because probate must be granted before any money can be released from an estate, the executor may have to borrow money or use their own funds to pay the Inheritance Tax bill.
This is where life assurance policies written in an appropriate trust come into their own. A life assurance policy is taken out on both a husband’s and wife’s life, with the proceeds payable only on second death. The amount of cover should be equal to the expected Inheritance Tax liability. By putting the policy in an appropriate trust, it means it does not form part of the estate. The proceeds can then be used to pay any Inheritance Tax bill straightaway without the need for the executors to borrow.

Choppy waters, not full-on gale

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Wait for the bad weather to pass and stay the course. Volatility fluctuates based on where we are in the economic cycle, but it is a normal feature of markets that investors should expect. When stock markets start correcting, daily injections of bad news may sound as though it will never end. This can spark anxiety, fuel uncertainty and trigger radical decisions in even the most seasoned investors.

From the unfathomable Brexit playbook and the continued prominence of populist ideology, to unconventional US foreign policy and the retirement of Draghi, the highly respected European Central Bank president, uncertainty prevails. But it’s essential not to panic and to keep perspective when markets are turbulent. Whether it’s rough seas or a volatile stock market, the same rules apply. When storms rock the boat, don’t jump ship. Wait for the bad weather to pass and stay the course. Here are some strategies to consider when volatility strikes.

Keep calm – short-term volatility is part and parcel of the investment journey

Markets can fluctuate depending on the news flow or expectations on valuations and corporate earnings. It is important to remember that volatility is to be expected from time to time in financial markets.

Short-term volatility can occur at any time. Historically, significant recoveries occur following major setbacks, including economic downturns and geopolitical events.

While headline-grabbing news can affect short-term market sentiment and lead to reductions in asset valuations, share prices should ultimately be driven by fundamentals over the long run. Therefore, investors should avoid panic-selling during volatile periods so that they don’t miss out on any potential market recovery.

Remain invested – long-term investing increases the chance of positive returns

When markets get rocky, it is tempting to exit the market to avoid further losses. However, those who focus on short-term market volatility may end up buying high and selling low. History has shown that financial markets go up in the long run despite short-term fluctuations.

Though markets do not always follow the same recovery paths, periods after corrections are often critical times to be exposed to the markets. Staying invested for longer periods tends to offer higher return potential.

By combining assets with different characteristics, the risks and performance of different investments are combined, thus lowering the overall portfolio risk. That means a lower return in one type of asset may be compensated by a gain in another.

Stay diversified – diversification can help achieve a smooth ride

Diversification basically means ‘don’t put all your eggs in one basket’. Different asset classes often perform differently under various market conditions.

By combining assets with different characteristics, the risks and performance of different investments are combined, thus lowering overall portfolio risk. That means a lower return in one type of asset may be compensated by a gain in another.

Stay alert – market downturns may create opportunities

Don’t be passive in the face of market declines. When market sentiment is low, valuations tend to be driven down, which provides investment opportunities. In rising markets, people tend to invest as they chase returns, while in declining markets people tend to sell. When investors overreact to market conditions, they may miss out on some of the best-performing days.

Although no one can predict market movements, the times when everyone is overwhelmingly negative often turn out to be the best times to invest.

Invest regularly – despite volatility

Investing regularly means continuous investment regardless of what is happening in the markets.

When investors make fixed regular investments, they buy more units when prices are low and fewer when prices are high. This will smooth out the investment journey and average out the price at which units are bought. It thus reduces the risk of investing a lump sum at the wrong time, particularly amid market volatility.

The longer the time frame for investment, the better, because it allows more time for investments to grow, known as the ‘compounding effect’.

Organising your wealth to support your needs and goals

We take a personalised approach to assessing your needs, which allows us to provide you with long-term, bespoke solutions. To discuss your future investment plans, goals and dreams, please contact us.

The value of investments and income from them may go down. You may not get back the original amount invested. Investment should be regarded as long term and fit in with your overall attitude to investment risk and financial circumstances. This content is for your general information and use only and is not intended to address your particular requirements or constitute advice.

Life Insurance Protection

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Welcome to our Guide to Life Insurance Protection. It’s not easy to think about how you would secure your family’s future if you were no longer around. Understandably, we would rather not think of the time when we’re no longer around. But it’s important to protect the things that really matter – like our loved ones, home and lifestyle – in case the unexpected happens.

Full replacement value

For many of us, projecting ourselves into the future to see what‘s around the next bend is not an easy thing to do. But, without thinking, we insure our cars, homes and even our mobile phones – so it goes without saying that you should also be insured for your full replacement value to ensure that your loved ones are financially catered for in the event of your unexpected death. Making sure that you have the correct type and level of life insurance in place will help you to financially protect your family.

Life insurance provides a safety net for your family and loved ones, helping them cope financially during an otherwise difficult time. Ultimately, it offers reassurance that your family would be protected financially should the worst happen.

We never know what life has in store for us, so it’s important to get the right life insurance policy. A good place to start is asking yourself three questions: What do I need to protect? How much cover do I need? How long will I need the cover for?

Financial safety net

It may be the case that not everyone needs life insurance. But if your spouse and children, partner or other relatives depend on your income to cover the mortgage or other living and lifestyle expenses, then it will be something you should consider. Life insurance will make sure they’re taken care of financially.

So whether you’re looking to provide a financial safety net for your loved ones, moving house or you’re a first-time buyer looking to arrange your mortgage life insurance – or simply wanting to add some cover to what you’ve already put in place – you’ll want to make sure you choose the right type of cover. That’s why obtaining the right professional advice and knowing which products to choose – including the most suitable sum assured, premium, terms and payment provisions – is essential.

Seriously under-insured

The appropriate level of life insurance will enable your dependents to cope financially in the event of your premature death. When you take out life insurance, you set the amount you want the policy to pay out should you die – this is called the ‘sum assured’.

Even if you consider that currently you have sufficient life assurance, you’ll probably need more later on if your circumstances change. If you don’t update your policy as key events happen throughout your life, you may risk being seriously under-insured.

Protection will inevitably change

As you reach different stages in your life, the need for protection will inevitably change. How much life insurance you need really depends on your circumstances – for example, whether you have a mortgage, and whether you’re single or have children. Before you compare life insurance, it’s worth bearing in mind that the amount of cover you need will very much depend on your own personal circumstances, such as the needs of your family and dependents.

Ask yourself:

  • Who are your financial dependents: your husband or wife, registered civil partner, children, brother, sister or parents?
  • What kind of financial support does your family have now?
  • What kind of financial support will your family need in the future?
  • What kind of costs will need to be covered, such as household bills, living expenses, mortgage payments, educational costs, debts or loans, or funeral costs?

There is no one-size-fits-all solution, and the amount of cover – as well as how long it lasts for – will vary from person to person.

These are some events when you should consider reviewing your life insurance requirements:

  • Buying your first home with a partner
  • Covering loans
  • Getting married or entering into a registered civil partnership
  • Starting a family
  • Becoming a stay-at-home parent
  • Having more children
  • Moving to a bigger property
  • Salary increases
  • Changing your job
  • Reaching retirement
  • Relying on someone else to support you
  • Personal guarantee for business loans

Current standard of living

The premiums you pay for a life insurance policy depends on a number of things. These include the amount of money you want to cover and the length of the policy, but also your age, your health, your lifestyle and whether you smoke.

If you have a spouse, partner or children, you should have sufficient protection to pay off your mortgage and any other liabilities. After that, you may need life insurance to replace at least some of your income. How much money a family needs will vary from household to household, so ultimately it’s up to you to decide how much money you would like to leave your family that would enable them to maintain their current standard of living.

Two basic life insurance types

There are two basic types of life insurance: ‘term life’ and ‘whole-of-life’. But within those categories, there are different variations. The cheapest, simplest form of life insurance is term life insurance. It is straightforward protection – there is no investment element, and it pays out a lump sum if you die within a specified period. There are several types of term insurance.

The other type of protection available is a whole-of-life insurance policy, designed to provide you with cover throughout your entire lifetime. The policy only pays out once the policyholder dies, providing the policyholder’s dependents with a lump sum, usually taxfree. Depending on the individual policy, policyholders may have to continue contributing right up until they die, or they may be able to stop paying in once they reach a stated age, even though the cover continues until they die.

Remove the burden of any debts

Generally speaking, the amount of life insurance you may need should provide a lump sum that is sufficient to remove the burden of any debts and, ideally, leave enough over to invest in order to provide an income to support your dependents for the required period of time.

The first consideration is to clarify what you want the life insurance to protect. If you simply want to cover your mortgage, then an amount equal to the outstanding mortgage debt can achieve that.

To prevent your family from being financially disadvantaged by your unexpected death, and to provide enough financial support to maintain their current lifestyle, there are a few more variables you should consider:

  • What are your family expenses, and how would they change if you died?
  • How much would the family expenditure increase on requirements such as childcare if you were to die?
  • How much would your family income drop if you were to die?
  • How much cover do you receive from your employer or company pension scheme, and for how long?
  • What existing policies do you have already and how far do they go to meeting your needs?
  • How long would your existing savings last?
  • What state benefits are there that could provide extra support to meet your family’s needs?
  • How would the return of inflation to the economy affect the amount of your cover over time?

Collective Investments

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Pooling money in one or more types of asset class

Collective investment schemes – also known as ‘pooled investment funds’ – are a way of combining sums of money from many people into a large fund spread across many investments and managed by a professional fund manager. There are a diverse range of funds that invest in different things, with different strategies – high income, capital growth, income and growth, and so on.

Different types of collective investment schemes

Unit Trusts and Open-Ended Investment Companies

Unit trusts and Open-Ended Investment Companies (OEICs) are professionally managed collective investment funds. Managers pool money from many investors and buy shares, bonds, property or cash assets, and other investments.

Underlying assets

You buy shares (in an OEIC) or units (in a unit trust). The fund manager combines your money together with money from other investors and uses it to invest in the fund’s underlying assets. Every fund invests in a different mix of investments. Some only buy shares in British companies, while others invest in bonds or in shares of foreign companies, or other types of investments.

Buy or sell

You own a share of the overall unit trust or OEIC – if the value of the underlying assets in the fund rises, the value of your units or shares will rise. Similarly, if the value of the underlying assets of the fund falls, the value of your units or shares falls. The overall fund size will grow and shrink as investors buy or sell. Some funds give you the choice between ‘income units’ or ‘income shares’ that make regular payouts of any dividends or interest the fund earns, or ‘accumulation units’ or ‘accumulation shares’ which are automatically reinvested in the fund.

Higher returns

The value of your investments can go down as well as up, and you might get back less than you invested. Some assets are riskier than others, but higher risk also gives you the potential to earn higher returns. Before investing, make sure you understand what kind of assets the fund invests in and whether that’s a good fit for your investment goals, financial situation and attitude to risk.

Spreading risk

Unit trusts and OEICs help you to spread your risk across lots of investments without having to spend a lot of money. Most unit trusts and OEICs allow you to sell your shares or units at any time – although some funds will only deal on a monthly, quarterly or twice-yearly basis. This might be the case if they invest in assets such as property, which can take a longer time to sell.

Investment length

Bear in mind that the length of time you should invest for depends on your financial goals and what your fund invests in. If it invests in shares, bonds or property, you should plan to invest for five years or more. Money market funds can be suitable for shorter time frames. If you own shares, you might get income in the form of dividends. Dividends are a portion of the profits made by the company that issued the shares you’ve invested in.

Taxed dividends

If you have an investment fund that is invested in shares, then you might get distributions that are taxed in the same way as dividends. The tax-free Dividend Allowance is currently £2,000 a year (2018/19).

Dividends above this level are currently taxed at:

  • 5% (for basic rate taxpayers)
  • 5% (for higher rate taxpayers)
  • 1% (for additional rate taxpayers)

Any dividends received within a pension or Individual Savings Account (ISA) will remain effectively tax-efficient. Basic-rate payers who receive dividends of more than £2,000 need to complete a self-assessment return.

Why do you want to Invest?

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Reaching Specific Life Goals Requires Planning

If you don’t know where you want to go, you’ll find it tricky getting there! Investment goals cover everything from the old adage of saving for a rainy day to planning for a comfortable retirement.

Goal-based investing emphasises investing with the objective of reaching specific life goals – such as buying a house, saving for your child’s education or building a nest egg for retirement – instead of comparing returns to a benchmark. Whatever your personal investment goals may be, it is important to consider the time horizon at the outset, as this will impact the type of investments you should consider to help achieve your goals. It also makes sense to revisit your goals at regular intervals to account for any changes to your personal circumstances, for example, the arrival of a new member to the family or salary increases. Investment strategies should often include a combination of various fund types in order to obtain a balanced approach to investment risk. And maintaining a balanced approach is usually key to the chances of achieving your investment goals, while bearing in mind that at some point you will want access to your money.

Short Term Lifestyle Planning

 Knowing you’re prepared for life’s surprises can take a burden of your mind – and your bank balance. An emergency fund is a pot of money set aside to help you cover the financial surprises that life throws at you – surprises such as losing your job, needing to make unexpected home repairs, replacing your car or unplanned emergency travel. These events can be stressful and costly, but preparing in advance can be a big help.

Medium Term School And University Fees Planning 

School and university fees planning may involve the same idea of buying a mix of equities, bonds and other investments in order to build enough capital to pay for future fees. Most are geared to begin paying out after a fixed-term horizon, usually ten years, with withdrawals allowed incrementally after that to meet the fees. In this way, they need to be more flexible than pension plans that pay out on retirement. For this reason, many parents and grandparents often start planning when a baby is born, which provides a better way to pay fees in monthly payments, making the cost of an independent education or university education more manageable.

Long Term Retirement Planning

The importance of shifting goals can be seen in pension plans, where it is quite common for funds to be more geared towards equities in their early stages to try to build capital growth. As the individual grows closer to retirement age, the pension plan will tend to lean more towards bonds to reduce volatility. Exposure to other riskier sectors may also be gradually reduced as the individual ages.

Factors To Help You Develop Your Investment Goals Your Goal 

What are you investing for, and how much are you hoping to get back?

Your Attitude To Risk

How comfortable are you with taking risk with your money, as you may get back less than you invested? 

Your Time Horizon

How long are you prepared to put your money away for?

 Income, Growth Or Both 

Do you want to look at funds that aim to make regular payments through dividends or interest (like an income), or at those that aim to increase in value over time?

The Important Thing Is To Do Something 

Setting goals makes it more likely that you’ll save for – and achieve – every goal. You’ll also be more motivated to reach a goal since you can gauge its progress. To discuss your future plans and discover how to achieve them, please speak to us.