Financial Planning is About Making Your Life Plan a Reality

Often, clients who have just begun working with us are surprised by how our planning process starts. We don’t begin by talking about Pensions, ISA’s, or how much you’re saving. Instead, we begin by talking about you, not your money.

Putting your life before your financial plan.

As Life-Centred Financial Planners, our process begins with understanding your life plan. We start by asking you about your family, your work, your home, your goals, and the things that you value the most.

Our job is to work with you to build a financial plan that will help you make your life plan a reality.

Of course, building wealth that will provide for your family and keep you comfortable today and in retirement is a part of that plan. So is monitoring your investments and assets and doing what we can to maximise your return on investment. But we also believe that maximising your Return on Life is just as important, if not more so. Some people feel like they will never have enough money whilst others, who have learnt to view money as a tool, start to see a whole new world of possibilities open in front of them.

Feeling free.

One of the most important things your money can do for you is provide a sense of freedom. If you don’t feel locked into chasing after the next pound, you’ll start exploring what more you can get out of life rather than just more money.

Feeling free to use your money in ways that fulfil you is going to become extremely important once you retire. After all, you’re going to have to do something with the 40 hours every week you used to spend working! But you’re also going to have to allow yourself to stop focusing on saving and start enjoying the life that your assets can provide.

So, having money and building wealth is a part of the plan. But it’s not THE plan.

The earlier you start thinking about how you can use your money to balance your vocation with vacation, your sense of personal and professional progress with recreation and pleasure, and the demands of supporting your family with achieving your individual goals, the freer you’re going to feel.

And achieving that kind of freedom with your money isn’t just going to help you sleep soundly at night – it’s going to make you feel excited to get out of bed the next morning.

What’s coming next?

So, when does the planning process end?

If you’re like most of the people we work with, never.

Life-Centred Planning isn’t about hitting some number with your savings, investments, and assets. We’re much more concerned about how your life is going than how the markets are performing.

Instead, the kinds of adjustments we’re going to make throughout the life of your plan will be in response to major transitions in your life.

Some transitions we’ll be able to anticipate, like a child going to University, a big family holiday you’ve been planning for, and, for many of you, the actual date of your retirement. Other transitions, like a sudden illness or a big move for work, we’ll help you adjust for as necessary.

In some cases, your life plan might change simply because you want something different out of life. You might start contemplating a career change. You might decide home doesn’t feel like home anymore and start looking for a new house. You might lose yourself in a new hobby and decide to invest some time and money in perfecting it. You might decide it’s time to be your own boss and start your own company.

Planning for and reacting to these moments where your life and your money intersect is what we do best. Come in and talk to us about how Life-Centred Planning can help you get the best life possible with the money you have.

 

Spring Statement 2019

Philip Hammond, the Chancellor of the Exchequer, delivered his Spring Statement 2019 to Parliament on 13 March. Set against continuing uncertainty over Brexit and just hours before MPs were due to vote on whether to exit the EU without a deal, Mr Hammond devoted much of his speech to the possible effects that leaving the European Union could have on the UK’s finances.

The Chancellor announced that the UK economy continues to grow, with wages increasing and unemployment at historic lows, providing a solid foundation on which to build Britain’s economic future.

With borrowing and debt both forecast to be lower in every year than at last year’s Budget, the Chancellor set out further investments in infrastructure, technology, housing, skills and clean growth, so that the UK can capitalise on the post-EU exit opportunities that lie ahead.

The Chancellor also confirmed that the government will hold a Spending Review which will conclude alongside the Budget. This will set departmental budgets, including three-year budgets for resource spending, if an EU exit deal is agreed. Ahead of that, the Chancellor announced extra funding to tackle serious violence and knife crime, with £100 million available to police forces in the worst affected areas in England and Wales.

Keeping your financial plans on track

In our ‘Guide to Spring Statement 2019’ we reveal the key announcements made by the Chancellor. If you would like to review what action you may need to take to keep you, your family and your business on track – or if you have any further questions – please contact us. We look forward to hearing from you.

Brexit – The potential impact on your investments

As we fast approach the date of the UK’s impending withdrawal from the EU and due to the continued uncertainty around the terms of this withdrawal, we have been contacted by several of our clients asking us about the possible impact on their investments.

Therefore, this week I thought it might be useful to share with you the basis of those discussions.

What effect could Brexit have on my investments?

The actual impact will be dependent on the terms under which the UK leaves the EU. But it is important to remember that all investments can go up and down in value over time and returns are not guaranteed.

Most investments are designed to be held over the medium to long term and we would caution against making any decisions on whether to encash or retain particular investments based on the potential impacts of Brexit alone or any short-term fluctuations in the value of your investments.

In short, no-one can accurately predict how investment markets will be affected by Brexit or what the precise implications will be.

What about investments that I hold that are provided by non-UK companies?

If you hold money in funds/investments that are provided by a non-UK company that is based within the European Economic Area (EEA) then you should still be able to continue holding these investments even in the event of a ‘no deal’ Brexit. This is because the Government and the Financial Conduct Authority (which is responsible for regulating the conduct of all UK authorised financial services firms) have put in place special measures that will enable these companies to continue offering services to you.

Will Brexit affect the consumer protection I receive on my investments?

There will be no changes to consumer protection for most individuals.

The Financial Services Compensation Scheme (FSCS) will remain available to UK consumers post Brexit. It is designed to deal with claims from (and in the event of a successful claim, provide compensation to) consumers who have previously dealt with a UK financial services firm that has since gone out of business. The compensation limits are per person, per institution and currently set at £85,000 (deposit accounts), £50,000 (investments) and 100% of a claim with no upper limit (pensions and life assurance.)

EEA based firms doing business in the UK are not typically covered by the FSCS and instead the compensation scheme in their country of origin will usually deal with any claims against the firm. Brexit could result in a loss of access to these EEA compensation schemes if no deal is reached. This loss of access is dependent on the terms of withdrawal and at this stage, is far from certain.

In the event of an issue with the provider, or advisory business the Financial Ombudsman Service settles disputes between consumers and UK financial services firms where these arise. This service will continue to be available post Brexit, meaning that if you have a dispute with a UK based financial services firm that is authorised by the Financial Conduct Authority, you will continue to be able to refer a complaint to the Financial Ombudsman Service (FOS) if a dispute arises. It is also proposed that you will be covered by the FOS for the activities of EEA based firms that provide services into the UK.

Will product providers with whom I hold investments be updating me in relation to any potential impacts Brexit may have?

You may also receive communications from providers updating you with regards to the impacts of Brexit, although again given that the position is still unclear, they may not be able to provide definitive information. We are more than happy to discuss any questions you may have received from correspondence with any providers and to assist where we can.

What next?

For our existing clients, we will, of course, be happy to discuss the performance of your investments with you during your next ongoing review with us and we can also discuss any concerns you may have on issues that could affect your investments, such as the impact of Brexit. Where necessary, we will of course adjust your portfolio, based on your circumstances, preferences and risk appetite.  Of course, if you want to speak to us beforehand, please do give us a call.

Whilst we are always happy to chat to you, we should stress that at this stage, we cannot accurately predict nor give you any definitive answers in terms of what the impact of Brexit will be, or even if Brexit will happen; but then, if we could …….

notes and risk warnings

Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Errors and omissions excepted.

 

 

Déjà vu all over again!

Investment fads come and go. Letting short-term trends influence your approach may be counterproductive to pursuing your financial goals.

Investment fads are nothing new. When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities. Over the years, these approaches have sought to capitalise on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short-term trends influence their investment approach may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.”

What’s Hot Becomes What’s Not

Looking back at some investment fads over recent decades can illustrate how often trendy investment themes come and go. In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Similarly, funds targeting hot industries or trends have come into and fallen out of vogue. In the 1950s, the “Nifty Fifty” were all the rage. In the 1960s, “go-go” stocks and funds piqued investor interest. Later in the 20th century, growing belief in the emergence of a “new economy” led to the creation of funds poised to make the most of the rising importance of information technology and telecommunication services. During the 2000s, 130/30 funds, which used leverage to sell short certain stocks while going long others, became increasingly popular. In the wake of the 2008 financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded. As investors reached for yield in a low interest-rate environment in the following years, other funds sprang up that claimed to offer increased income generation, and new strategies like unconstrained bond funds proliferated. More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable. In this environment, so-called “FAANG” stocks and concentrated exchange-traded funds with catchy ticker symbols have also garnered attention among investors.

The Fund Graveyard

Unsurprisingly, however, numerous funds across the investment landscape were launched over the years only to subsequently close and fade from investor memory. While economic, demographic, technological, and environmental trends shape the world we live in, public markets aggregate a vast amount of dispersed information and drive it into security prices. Any individual trying to outguess the market by constantly trading in and out of what’s hot is competing against the extraordinary collective wisdom of millions of buyers and sellers around the world.

With the benefit of hindsight, it is easy to point out the fortune one could have amassed by making the right call on a specific industry, region, or individual security over a specific period. While these anecdotes can be entertaining, there is a wealth of compelling evidence that highlights the futility of attempting to identify mispricing in advance and profit from it.

It is important to remember that many investing fads, and indeed, most mutual funds, do not stand the test of time. A large proportion of funds fail to survive over the longer term. Of the 1,622 fixed income mutual funds in existence at the beginning of 2004, only 55% still existed at the end of 2018. Similarly, among equity mutual funds, only 51% of the 2,786 funds available to US-based investors at the beginning of 2004 endured.

What Am I Really Getting?

When confronted with choices about whether to add additional types of assets or strategies to a portfolio, it may be helpful to ask the following questions:

  1. What is this strategy claiming to provide that is not already in my portfolio?
  2. If it is not in my portfolio, can I reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help me achieve my investment goal?
  3. Am I comfortable with the range of potential outcomes?

If investors are left with doubts after asking any of these questions, it may be wise to use caution before proceeding. Within equities, for example, a market portfolio offers the benefit of exposure to thousands of companies doing business around the world and broad diversification across industries, sectors, and countries. While there can be good reasons to deviate from a market portfolio, investors should understand the potential benefits and risks of doing so.

In addition, there is no shortage of things investors can do to help contribute to a better investment experience. Working closely with a financial advisor can help individual investors create a plan that fits their needs and risk tolerance. Pursuing a globally diversified approach; managing expenses, turnover, and taxes; and staying disciplined through market volatility can help improve investors’ chances of achieving their long-term financial goals.

Conclusion Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on robust research and implementation may be the most reliable path to success in the global capital markets.

 

notes and risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice.  Past performance is not indicative of future results and no representation is made that any stated results will be replicated. The value of investments can go down as well as up.

Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Errors and omissions excepted.

 

How to Phase into Retirement and Take It for a Test Drive

There are many reasons why people who could retire are hesitant to do so. Some people think they need to wait until they’re 65 or older. Some are worried about running out of money. Many parents want to keep supporting their children through some major life transition, like university, marriage, or buying a first home.

Maybe the most common reason we see for a retirement delay is people who just can’t imagine their lives without work. That’s understandable. A routine that’s sustained you and your family for 30 or 40 years can be a hard routine to shake.

But retirement doesn’t have to be all or nothing right away. If just thinking about retiring makes you jittery, use these tips to ease into retirement a little at a time.

  1. Talk to your family

Clear, open communication is an essential first step to approaching retirement. Be as honest as possible about what you’re feeling. What worries you about retirement? What excites you? What do you envision your days being like? Where do you want to live? What does your spouse want retirement life to be like?

  1. Talk to your employer

Many companies have established programs to help employees transition into retirement. You might be able to trim back your hours gradually to get an idea of what days without working will be like. You’re also going to want to double-check how any retirement benefits you may have are going to work. Discuss any large outstanding projects with your supervisor. Make a plan to finish what’s important to you so that you can leave your job feeling accomplished.

Self-employed? Give your favourite employee (you) less hours and fewer clients! Update your succession plan and start giving the soon-to-be CEO more of your responsibilities. Make sure you have the absolute best people working for you in key leadership positions so that your company can keep prospering without your daily involvement.

  1. Make a “rough draft” of your retirement schedule 

What are you passionate about? What are some hobbies you’d like to develop into a skilled craft? Do you want to get serious about working the kinks out of your golf swing? Are there household projects, repairs, or upgrades you want to tend to? A crazy idea you kicked around at work you’d like to build into a new company? A part-time job or volunteer position you’d like to take at an organisation that’s important to you? New things you want to try? New places you want to visit? Grandkids you want to see more often?

Try filling out a calendar with some of your answers to these questions. As you start to scale back your work hours, take a few lessons take on some voluntary work. Sign up for a class. Go away for a long weekend. See what appeals to you and what doesn’t.

Remember, you don’t have to get your schedule right the first time! A successful retirement will involve some trial and error. Learn from things you don’t like and make a point to spend more time doing the things you do like.

  1. Review your finances.

This is where we come in!

Once you and your spouse have settled on a shared vision for retirement, we can help you create a financial plan to help ensure you are financially fit for (semi)-retirement. We’ll go through all your sources of income, pensions, savings, and other investments to set out a projection of where your money is coming from and where it’s going.

We can coordinate all aspects of your situation and collaborate with you on the best course of action. You don’t have to face retirement alone and make big decisions without expert guidance.

Coming in and talking to us about your retirement is a great “Step 1” option as well. So, if you are dreaming of those days when work is optional, give us a call and we can help you through this phase of life.

Managing Time

As a family we enjoy holidaying in Spain, and I am always struck by the difference in perspectives on how we live in the UK and how the Spanish live. The fact that that most Spanish shops close between 2p.m. and 5 p.m. so that people can have lunch and recharge, rather than staying open and making money is very much different to our own culture.

The towns and cities slowly come to life as couples, families and friends emerge onto the streets for their evening paseo; the daily ritual of catching up by taking a stroll, having some snacks or perhaps doing a little shopping. These routines appear to make little sense amid the bustle of our modern world, but it is nonetheless an interesting lens from which to view how we help clients live their best lives.

Allocating time is as important as allocating money.  Besides money, time is another major limited resource in life, yet very few of us approach managing this aspect of our lives using the same discipline with which we manage our money.

As financial advisers we take great pride in helping clients allocate their investments as efficiently as possible but, imagine if we helped people think about how their money could get them to use their time better.

There’s scientific evidence that using money to give people more time can make them happier too. In August 2017, researchers at Harvard published a paper after studying the spending habits of more than 6,000 people in the US, Canada, Denmark and the Netherlands.[1]

They found that: “Despite rising incomes, people around the world are feeling increasingly pressed for time, undermining well-being. We show that the time famine of modern life can be reduced by using money to buy time. Surveys of large, diverse samples from four countries reveal that spending money on time-saving services is linked to greater life satisfaction. To establish causality, we show that working adults report greater happiness after spending money on a time-saving purchase than on a material purchase. This research reveals a previously unexamined route from wealth to well-being: spending money to buy free time.”

None of us dispute that one of the cornerstones to living richly is spending our limited time on the things we really care about. However, many of our discussions with clients focus on the wrong goals. So, what can we do about it?

  1. Helping people prudently spend is as valuable as helping them prudently save. Of course, as advisors we are rightly focused on ensuring that people don’t run out of money. However, there is usually a trade-off between time and money. Focusing too much on building the biggest nest egg possible sets the wrong goal for clients. Every pound saved might build more security, but it just as surely takes away from their life today. More money does nothing to improve your life if you don’t use it to improve your life along the way. Preventing clients from over-sacrificing today is as much a part of a great planner’s job as ensuring a financial plan works in the future.
  2. Priorities exist today that are as important as those in the future. Planners spend most of their time with working clients discussing their future and retirement, yet clients worry the most about prioritising all the trade-offs they have today. They want to be there for their families, find time and money for holidays, or make time in their schedules to exercise. We can help people make decisions to improve their lives immediately.   Rather than focusing solely on the longer term and sacrificing as much as possible for the future, it is important not to lose the opportunity to make trade-offs and add immediate value to people’s lives today.
  3. Discussing what really matters engages everybody. The biggest cost to our industry on spending so much time on maths and money is that it disengages the non-financial person.  Where we work with couples, that can often mean that one spouse is not involved in something that they should be making an integral part of their financial lives. By discussing time and how the money will support each person’s priorities, you connect to the universal truths we all care about.

Money might not grow on trees, but time doesn’t grow at all. One of the consequences of having a country that encourages siestas and two-hour lunches is that Spain is one of the least financially successful economies in Europe. Yet you can’t help but notice that their focus on living and enjoying their time, instead of working and making more money, has a meaningful impact on the quality of their lives.

For each of us and our clients, the balance lies somewhere in between. Our job is to help our clients live at their ideal place on that spectrum of trade-offs.

[1] https://www.pnas.org/content/114/32/8523

 

With Compliments to Marie Kondo …

This blog is based on one that I read recently from a US blog site Sightings Over 60 which is always an interesting read.

The Netflix show “Tidying Up with Marie Kondo” has become a phenomenon. Kondo has been around for a while. Her book The Life Changing Magic of Tidying Up was released in 2014 and climbed the bestseller lists. She followed that book with Spark Joy, which tells us, according to the New York Times, that “you can own as much or as little as you like, as long as every possession brings you true joy.”

To be honest, I have not read her books, nor have I seen her show, but having had the opportunity to declutter when moving to a new house, one thing I do know is that decluttering is not a one-time event; it’s an ongoing process.

If you are retired and the kids have left home it is highly likely that you no longer need all that stuff filling up the garage, loft and wardrobes.  Yet decluttering can be a big job with one rule of thumb suggesting that you allow an eight-hour day of decluttering for each year you’ve lived in your house!  But unless you want a bad back and sore knees, you probably shouldn’t try to do it all at once.

So, here are some steps you can take to declutter … with a nod to Marie Kondo for making cleaning up cool.

  1. Warn your children. If the children have left home, invite them to look through your house and take what they want. Then insist that they remove any and all of their own materials – the boxes of old school items, the stuffed animals, trophies from sports tournaments, souvenirs from holidays, etc..
  2. Have a heart-to-heart with your spouse. Most relationships, it seems, consist of one hoarder and one simplifier. To avoid working at cross purposes, you need to sit down and talk things through – so one person isn’t throwing something away while the other is retrieving things out of the bin. The hoarder must realise that many things — VHS tapes, a record player, old sports equipment — are outdated or can be easily replaced. The simplifier must admit that some things have sentimental value and can’t be replaced. So, let’s not be like the dysfunctional politicians. We need to realise that there can be emotional issues involved in the process … and be ready to compromise
  3. Sort one space at a time. It’s easy to get bogged down if you do a little of this, and a little of that. So start small. Clean out a wardrobe, then a bathroom, then one of the kid’s bedrooms. The hardest jobs will be your own bedroom, the loft, and the kitchen.
  4. Touch something once; make a decision. As you go through your old clothes, old books, or old furniture, for each item decide whether you need to keep it or get rid of it. The key to making progress is to make the decision. If you need one suit, then decide which one to keep and get rid of the others. Try not to hmm and ah, change your mind, or postpone the decision – or that one day per year could turn out to be two or three days per year. Or, the decluttering may never get done.
  5. Make five piles. Keep. Sell. Gift. Recycle. Bin. Decide what you want to keep and put that in one pile. The rest goes into one of the other four piles. But try to decide right away – you can give it to someone; you can sell it, recycle it or throw it away. But don’t waste too much time deciding – just choose a pile. If you make a “mistake” and throw away something that maybe you could sell or give to charity – be realistic, you probably wouldn’t have sold it for much money anyway, and the charity wouldn’t have either.
  6. Take pictures. The hardest decision are the emotional ones. But if you can’t bear to get rid of something you need to get rid of, then take a picture. The special dress? Put it on, take a picture, then give it away. The shelf of trophies, the wonderful old oriental rug that will never fit into your new place – take a picture and keep it with you always.  Then make sure to send copies of those photos to your kids.
  7. Books. Marie Kondo has caught some flak for suggesting we keep no more than 30 books in our homes. My own opinion is that books are like albums and CDs, or tapes and DVDs. Keep them around, if they bring you “joy.” But it’s not the books themselves that are important. It’s what’s inside — the information, the characters, the stories and those are all readily available from the library or the internet.
  8. Hire a professional. For most people, decluttering is a do-it-yourself project – and they would have it no other way – perhaps with some help from kids or a best friend. But sometimes the job might just be too big; or you’re too overwhelmed by the prospect. There are professionals who will help you.

So, here’s to many ‘happy hours’ decluttering … or at least planning to.

Markets fell in 2018 – but keep this in perspective

This latest blog is brought to you by our Investment Consultant – Tim Hale of Albion Consulting.

2018 may have been a disappointing year for equities, but this shouldn’t have been a surprise.

December 2018 dished up a rather distasteful present for the holiday period.  Many lines were written in the broadsheets about the global equity market falls, but were they really anything out of the ordinary?

‘Stock market slide in 2018 leaves investors bruised and wary’ The Financial Times’ (31st December 2018)

Since 2009 (the bottom of the market during the Credit Crisis) global markets have delivered positive returns in eight out of the ten calendar years. The last negative year for equities was back in 2011, when the markets were down around 7%. Over the history we have available to us – on average – one in three years deliver negative returns. Investors have, of late, been extremely lucky.
Since 2008, in every single year, investors have suffered a fall from a previous market high and many of these falls were larger than 10%. However, even investing at the start of 2008 and suffering the 35% peak-to-trough fall in 2008, an equity investor would have turned £100 into £230, i.e. 8% compounded over 11 years, if they had been disciplined and patient (two known areas of human weakness!).

As humans, we tend to have a strange view of what invested wealth represents and how we feel about it at any point in time. We tend to be happy as wealth – at least on paper – goes up to some value at a specific point in time and unhappy when we reach that value again, if it is achieved after a market correction.

Remember, the true meaning of wealth is having the appropriate level of assets that you require, when you require them, to meet your financial and lifestyle goals. In the interim, movements in value are noise, somewhat meaningless and part and parcel of investing. When you invest in equities, you should try to avoid mentally banking the money you (appear to) make on the undulating, and sometimes precipitous, road you are on. Remember too that the headline equity market numbers are unlikely to be your portfolio outcome, as most investors own some sort of a balance between bonds and equities.

Keeping things in perspective

Investing in equities is always going to be a game of two steps forward and one step back. What equities deliver from one year to another is of little consequence to the long-term investor, who does not need all of their money back today.

As far as 2019 is concerned, no one who is honest knows what will happen in the markets. The global economy is still set to grow by 3.5% above inflation this year, according to the IMF, which is not that bad. Today market prices reflect the aggregate view of all investors based on the information to hand. If new information comes out tomorrow, prices will adjust to reflect the impact this has on company valuations. As the release of new information is – by definition – random, so too must price movements be random, at least in the short-term. Over the longer-term they reflect the real growth in earnings that companies deliver through their hard work, executing the delivery of their business strategies. In the longer-term, investing in the stock market is a game worth playing, at least with part of your portfolio.

As Benjamin Graham – a legendary investor in the early 20th Century once said:

“In the short run, the market is a voting machine but in the long run it is a weighing machine”
We could not agree more.

notes and risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Errors and omissions excepted.

 

Is there a better alternative to Inheritance Tax?

Inheritance Tax is enormously unpopular to say the least. A YouGov poll found that 59% of the public deemed it unfair, making it the least popular of Britain’s 11 major taxes. What’s more, the tax has a limited revenue raising ability, with the ‘well advised’ often using gifts, trusts, business property relief and agricultural relief to avoid paying so much.

As it stands, the tax affects just 4% of British estates and contributes only 77p of every £100 of total taxation. This puts the tax in the awkward position of being both highly unpopular and raising very little revenue. Currently the inheritance tax threshold stands at £325,000 per person. Anything above this is subject to a 40% tax (unless you leave everything above the threshold to your spouse, civil partner or charity).

If you own your own home and are leaving it your children (including adopted, foster or stepchildren) or grandchildren and your estate is worth less than £2 million, this can lift the threshold by an additional £125,000 in the 2018-19 tax year (the nil-rate band), to £450,000.

Inheritance Tax is seen as unfair for several reasons, the main one being because it is a tax on giving (while normal taxes apply to earnings) and it is a ‘double tax’ on people who have already earned – and been taxed on – their wealth.

In its report¹ dated May 2018 , The Resolution Foundation; a prominent independent think tank, set out an alternative. They proposed abolishing Inheritance Tax and replacing it with a Lifetime Receipts Tax.

This would see individuals given a Lifetime Receipts Allowance which would allow them to receive tax free gifts through their lifetime up to a set threshold. They would then have to pay tax on any gifts they received that exceeded this threshold. The thinktank suggests that by setting a lifetime limit of £125,000 and then applying tax at 20% up to £500,000 and 30% after that, this would be both a fairer system and harder to avoid. It would also encourage individuals to spread their wealth wider.

They predict that a lifetime receipts tax would raise an extra £5 billion by 2021, bringing in £11 billion rather than the £6 billion inheritance tax currently raises. In a time of mounting pressure on public services like the NHS, this additional revenue would be welcomed by many.

The Lifetime Receipts Allowance would also remove many of the current ways of managing the amount of assets an individual is taxed on upon death. For instance, people would not be able to reduce the size of their taxable estate by giving away liquid assets seven years prior to their death.

The Resolution Foundation also suggests tightening up on existing reliefs such as Business Property Relief, Agricultural Relief, the treatment of inherited pensions and the forgiveness of Capital Gains Tax at death to reduce the scope for tax avoidance.

The Lifetime Receipts Tax is only a think tank recommendation and is not being considered by the government but for the reasons stated … it could have legs.

¹https://www.resolutionfoundation.org/app/uploads/2018/05/IC-inheritance-tax.pdf 

Warning
The information provided is based upon the authors understanding of taxation and legislation at the time of writing.  Any level and bases of, and reliefs from taxation are subject to change.

Gifting to Charity

Charities greatly appreciate people’s generosity, as it is vital to the continuance of their works.

During your lifetime you can support your chosen Charities through volunteering your time, donating items for them to sell or, gifting them money. Any gift of money is usually eligible for gift aid in the hands of the charity (essentially the Government adds 20p for every 80p you donate) and income tax relief for the donor at their highest marginal tax rate.

Gifts on death tend to be of a more substantial nature. These gifts, known as a ‘legacy’ are not counted in your estate for inheritance tax (IHT) –reducing the amount of IHT due. If the amount left to Charities is at least 10% of the net estate at the date of death, the IHT rate applying to the residual estate also reduces from 40% to 36%.

This all sounds simple doesn’t it; but in leaving a legacy to Charity, you should be aware that a Charity has a different legal status to a private individual, thus is subject to stringent legislation.

Each charity is the responsibility of its Trustees who have duties to the Charity’s work. In addition to complying with numerous rules and regulations, trustee duties also include ensuring that any funds left are used for the purpose for which they have been given (if applicable) and ensuring that the charity receives full benefit from the donor (i.e. maximum value for estate assets). However, if the legacies have not been carefully thought out, these two responsibilities can cause distress for executors at a difficult emotional time.

Below are two example scenarios that on the face of it seem reasonable, but could cause some distress to executors:

Scenario 1 – “I leave an amount equal to 10% of my net estate to ABC Charity”
Scenario 2 – “I leave £10,000 to DEF Charity to perform XYZ purpose”

Scenario 1 Issue – The Charity Trustees, upon reviewing the Will and estate account feel that certain assets have been undervalued and as such the Charity has not received the full amount as dictated in the Will. This could result in having to obtain further valuations of major assets and distribute further money to the charity instead of the other beneficiaries.

Scenario 2 Issue – DEF Charity do not perform XYZ purpose. In this instance they may not be able to accept the legacy and additional guidance may be required from their regulator, or even the courts – this could be time consuming and / or costly.

When updating your Will, your solicitor should be able to help with solutions to any potential issues like those highlighted above (for example, gifting a set amount and not stating a particular purpose for the money) – thereby allowing your chosen charities to receive the legacies you wish, whilst not causing your executors any additional issues.

Simplicity is the key here.

Warning
This material is provided for information purposes only and does not constitute advice. The information is based upon the authors understanding of the taxation, legislation and regulations at the time of writing. Any level and bases of, and reliefs from taxation are subject to change.