To Gift or not to Gift.

Having more money than you need can sometimes leave you with a difficult quandary – should you gift it or not?  This is a question I have been asked numerous times over the past few months.

In a previous blog, http://carpenter-rees.co.uk/blog/the-kids-are-alright/ I talked about this and the fact that people often delayed making gifts due to fears such as giving the kids too much to young, treating the family fairly, or whether they might squander your hard-earned money (and believe me when you grew up in the 60’s in a culture of ‘watching the pennies’, the thought of someone else being reckless with ‘your’ money is certainly not an easy thought).

On the flip side of the coin, delaying making gifts can mean that you could die with ‘too much’ and therefore potentially incur IHT liabilities on your estate. Whilst there are thresholds to ensure that some of the value of your estate is excluded, anything above these thresholds is taxed at 40%. Not only could this result in a significant reduction in the inheritance you leave behind, but the tax due must be paid by the end of the sixth month after an individual has died …. not always an easy task and particularly where a proportion of wealth is tied up in property.

So, if making the decision to gift isn’t difficult enough, as with many things in life, once you’ve made that decision the next steps are not straightforward either; and I’m not just talking about deciding who to gift to, how much, what they will do with it, what happens in the event of a future marriage breakdown, have you left yourself with enough funds, etc. etc. … I’m talking about the HMRC rules which govern Gifts.

HMRC rules

There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.

There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently.

Other gifts count towards the value of your estate.

What counts as a gift

A gift can be:

  • anything that has a value, such as money, property, possessions
  • a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift

Exempted gifts

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can carry any unused annual exemption forward to the next year – but only for one year.

Each tax year, you can also give away:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • normal gifts out of your income, for example Christmas or birthday presents – but, you must be able to maintain your standard of living after making the gift
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • gifts to charities and political parties

You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

Small gifts up to £250

You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.

The 7-year rule

Any gifts made in excess of the exemptions count as part of your estate for 7 years.  Therefore, death within this period may result in inheritance tax to pay.  To make this fairer, HMRC introduced a sliding scale known as ‘taper relief’, which sets out the amount of tax due.  Gifts given in the 3 years before you die would be charged at 40%, whilst gifts made 3 to 7 years before your death would be charged as follows: –

Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

 

Gifts are not counted towards the value of your estate after 7 complete years have passed from the date of the gift.

Conclusion

As with all financial decisions, gifting is something which requires careful thought. Of course, gifting is not the only option.  Another option is to spend more money, or save less.  Often clients can be so preoccupied with accumulating wealth and ensuring that they can fund the lifestyle that they require, that they forget to consider the impact of ‘too much’ money.  In my previous blog  http://carpenter-rees.co.uk/blog/sometimes-spending-brings-a-bigger-return-than-saving/, I talked about how spending money and particularly on ‘life experiences’ can be hugely rewarding.  These are all things that we discuss when going through a client’s financial plan.

As I’ve said previously, there is no perfect solution and one of our roles as financial planners is to help clients think through major life decisions. Our experience in dealing with many families and family businesses stands us in good stead. Carpenter Rees will help make sure that the decision you reach is sensible, balanced and meets your personal values & preferences, family circumstances and concerns over inheritance tax.  Involving family and helping educate them in financial matters is an area where our involvement makes a difference.

Reasons to be cheerful

If you are like me, you will often listen to the news or read the papers and think the world is going to the dogs! The depressing headlines appear to be endless, but if you look beyond the media, there are a lot of things that are going right.

The world faces many challenges – but then it always will. The legacy of the financial crisis is still with us, the UK’s exit from the EU is likely to be a constant source of speculation for a considerable period, terrorist attacks continue to cause carnage, and we cannot ignore the entertainment that the US President is providing!

So, it’s no wonder that its’ easy to forget the good things, but they are worth keeping in mind when you are overwhelmed by the grim headlines.

Here are several reasons to be cheerful: –

  1. Over the last 25 years, 2 billion people globally have moved out of extreme poverty according to the latest UN Human Development Report.
  2. Over that same period, mortality rates among children under the age of 5 have fallen by 53% from 91 deaths per 1000 to 43 deaths per 1000.
  3. The UK economy continues to grow and will continue to do so.
  4. According to the Office for National Statistics (ONS), happiness levels in Britain have climbed to their highest rate since 2011 (when they first started measuring it)! Okay, so the Government measuring happiness levels is a little concerning, but apparently, we are a happier nation.
  5. We have the highest level of employment in the UK since records began in 1971.
  6. Renewable energy sources are now accounting for 23% of global electricity generation and are expected to rise to 26% by 2020.
  7. We live in a world of rapid innovation and one report estimates the digital economy accounts for 22.5% of global economic output and this will continue to grow.
  8. Mortgage repayments continue to be cheap and despite the likelihood of an increase in interest rates are likely to remain so for some time due to fierce competition amongst lenders.
  9. It is unlikely that we will have an election next year, but as we love nothing more than entertaining the world with a good old British comedy farce, maybe we shouldn’t bet against it!
  10. Early form would suggest that the premier league is likely to be won by a side from Manchester; but one half of the city will clearly be disappointed at the season end.
  11. Christmas is on its way!

The world is far from perfect and it faces many challenges, but just as it is important to be realistic and aware of the downsides, we must also recognise the advances we are making. Where there is reason for caution, there is always reason for hope.

Keep the good things in mind when you feel overwhelmed by the bad – there will always be reasons to be cheerful …. In the words of Monty Python ‘Always look on the bright side of life’!

Lifetime Allowance – Clearing up some of the Myths

During many of our annual planning meetings with clients, we often cover the effects of the pension lifetime allowance, as this now impacts upon more and more people. The pension lifetime allowance is the maximum value you can build up in all pensions without incurring an additional tax charge.

The current level of the Lifetime allowance is £1m and this is scheduled to increase in line with CPI (a measure of inflation) from April 2018. It is estimated that 4% of retirees will exceed this allowance – as there are 11.5 million people approaching retirement age this means 460,000 could be subject to the tax charge by the time they come to draw their pension benefits.

Government figures suggest that tax revenues of £126 million were collected from individuals whose pension pots exceeded the lifetime allowance in 2015/16 and this represented an increase of 62% on the previous year. Importantly, the standard Lifetime Allowance was £1.25m at that time!

It is an allowance not a limit

We prefer our clients not to view the lifetime allowance as a limit but more a point at which the tax treatment changes, so it is no different to other allowances such as the personal income tax allowance or annual capital gains tax allowance.

When your pension fund value is more than £1m you may have to pay tax on the excess slice of your money. It is important to note that you only pay the tax when you start to take pension savings over the £1 million allowance. It is not something you automatically pay when your pension savings reach that figure.

So how much is the tax?

There is a myth around the tax being 55% in all cases; but this is only the case if you take the excess over the lifetime allowance as a lump sum. If you draw the excess as your savings over the allowance as income the tax charge is 25% this being a tax charge on top of the income tax you pay on your pension. So, if you are a 40% tax payer you would pay total tax of 55% on this excess income. This is because for every £1,000 of excess, a £250 lifetime allowance charge is deducted, leaving £750. After 40% income tax that leaves £450, resulting in the same figure as the 55% charge. This is therefore the same rate of tax so it the comes down to bird in the hand or in the bush if you have a choice.

Those in a final salary scheme who have breached the allowance will have no choice other than to pay the 25% lifetime allowance tax charge, and income tax on their pension payments.

It is important that you get advice as to how you are best to take this excess income and using your tax allowances can help to reduce the total tax you pay.

Work out if you are likely to reach the figure

It is important to get to know about all your pensions so you can keep track of what you have. We, as your financial adviser, will review your pensions annually and are able to project whether you are likely to breach the limit.

If you reach the figure are you better off saving elsewhere?

This very much depends on circumstances and we have covered this in a previous blog.

A further check is made at 75.

We also spend some time looking at this when putting together financial models for our clients as there are instances where the lifetime allowance must be paid on any remaining funds. This is once again where a good financial planner will work with you to ensure this is minimised / planned for.

In short, it pays to talk and discuss this issue with your financial adviser who can assist in ensuring your pension fits in with your goals and lifestyle aspirations but trying to ensure taxation is minimised.

The Pension Scheme Saviour for the Family Business….

We have a great deal of experience in dealing with family businesses a lot of which comes because we administer the ultimate family business pension vehicle, the Small Self- Administered Pension Scheme (SSAS).

These schemes are the made to measure Family Business Pension! The family are trustees as well as members and have the facility to use the funds in the scheme to invest into the family business by way of a loan to the company (now referred to as Pension Led Funding but we still call it ‘Loan back’) or using the funds to purchase commercial property for the business. The key here is that the family has control over the investment strategy, the membership (family members only) and the level of contributions (within limits set out by HMRC).

We have been involved in a couple of recent interesting cases involving the use of the Family Business Pension:

The first was for a family business looking to reduce their debt to the bank but at the same time secure the assets owned by the family business for the current and future generations. The solution was for the company to sell its main site to the Family Business Pension, whose members are the generation currently running the business; the proceeds received by the company were then used to reduce the bank borrowing. The asset remains in the control of the family as trustees of the scheme and the company has achieved its goal at the same time.

The second involved the pension fund helping the family business buy a competing business out of Administration. A collection of 4 Family Business Pensions, from within the group of companies acquiring the business, purchased the business property as part of this transaction – thereby improving the scale of the business group and preserving over 100 jobs.

In our dealing with Family Business Pension Schemes we often get involved in interesting projects such as those outlined above. It is not always about the money it is often about where to have the assets (i.e. in the Company or the Pension) or sometimes it is simply about where there is access to funds and all too often in the latter case, the Pension can be the ideal solution. 

I am probably preaching to the converted in many cases but please feel free to pass the word on to other family businesses that could benefit from a bespoke, made to measure pension scheme or who simply have a scheme, but are not receiving any proactive advice on what they can do.

 

 

Show me the money?

Where will the money come from? This is a question often asked by our clients as they think about working less or stopping work (you will note from previous blogs that I do not like the term retirement!).

It is certainly an understandable concern as most of us are used to getting a monthly salary or drawings, so it is vital to know what happens when that stops.
This is where the financial planning process comes in, especially if the hard task of saving and investing has been done along the way and we can prove using our financial modelling that you have enough!

If properly planned during the saving and investment period, it is probable that we as financial planners will have suggested you invest across a broad range of tax efficient investments to help achieve a tax efficient and sustainable income stream. These investments are likely to include ISA’s, Pensions, General Investment accounts, Life Assurance Bonds and sometimes a buy to let investment or two.

The tax allowances available are likely to include: –

  • Income tax personal allowance
  • Dividend Allowance
  • Savings allowance
  • Capital Gains Tax allowance

When working with a couple, then we have two lots of tax efficient investments and exemptions available. It is best to illustrate what can be done by way of an example; let me introduce you to Harry and Rachel.

Harry has just sold his publishing business and Rachel recently retired from her own separate business earlier this year. The children have all left home. Over the years we have helped them build a pot large enough to let them stop working for money and follow their dreams of travelling combined with their interest in art.

When they both worked they paid a lot of tax at higher rates however post retirement we can structure their income and their savings and investment to get them to a position where they have all the income they need whilst paying minimal tax, which is a massive boost as it ensures their pot can last for longer and they feel great about paying minimal tax after all those years.

Their income and tax position looks something like this:

Income Source Harry Rachel
Pension £30,000 £0
Interest £1,500 £1,500
Dividend Income £3,000 £3,000
Rental Income £0 £26000
Total Taxable Income £34,500 £30,500
ISA Dividends £5,000 £5,000
Pension Tax free cash £10,000 £0
Capital withdrawal within

CGT allowance

£5,000 £5,000
Total Tax-free Income £20,000 £10,000
Total Income £54,500 £40,500
Tax paid (£4,700) (£3,000)
Net Spendable income £49,800 £37,500
Overall tax rate 8.62% 7.41%

The above figures are based on 2017/18 tax allowances and exemptions which are subject to change, but as the financial plan should be reviewed annually, then we can adjust where funds come from to minimise tax and meet requirements from year to year.

So, the answer to the question is that the money post work is likely to come from a multiple of sources. This can take a bit of getting used to when you are used to one monthly salary payment but that is where working with a Financial Planner really helps in creating the income you need, saving tax and taking care of the administration surrounding your plan. This then allows you to get along with having the life you want, happy in the knowledge that your finances are in good hands.

Ongoing governance of the investment process

At Carpenter Rees, our investment philosophy adopts a systematic buy-hold-rebalance approach to investing.  This approach could prompt some of our clients to question why their portfolio seems to be largely unchanged from one period to the next and what the firm is doing for its fee. That would be unfair.

Wear a risk manager’s hat, not a performance manager’s hat

A good place to start is to look at the investment process, not from a performance perspective – as most stock brokers and investment managers tend to do – but from a risk perspective. Performance-focused managers inevitably look busy as they regularly change portfolio allocations and fund holdings; yet more activity does not equate to better outcomes.  Plenty of evidence exists to back this up.  Those who focus on chasing returns are at susceptible to taking unknown or poorly understood risks and getting it wrong.  They also incur higher costs. On the other hand, focusing on taking risks that are fully understood and adequately rewarded offers an investor every chance of a successful outcome.

Your portfolio, as it stands today, should provide you with the comfort that it is robust under the wide range of testing scenarios that could be thrown at it by the markets. Let’s consider some of the key risk decisions that have been made when establishing it.

  • Key decision 1: own a highly diversified pool of global companies to avoid concentration risks and capture the broad returns of capitalism.
  • Key decision 2: tilt the portfolio toward higher risks, such as value (less financially healthy) and smaller companies to pick up incrementally higher returns
  • Key decision 3: own shorter-dated, higher quality bonds to balance equity downside risk. Chasing higher yields in bonds simply dilutes their defensive qualities. The lower the credit quality the more these bonds act like equities.
  • Key decision 4: use systematic rather than judgemental fund managers. Although picking a manager who promises to beat the market sounds appealing, the stark reality is that true skill is hard to discern from luck, it is extremely rare, and it is almost impossible to identify in advance. Employing managers who capture the returns delivered by taking on specific market risks makes good sense.
  • Key decision 5: avoid owning an increasingly risky portfolio by rebalancing. Over time, the riskier assets (equities) in a portfolio tend to rise in value and begin to overpower the more defensive assets (bonds) in the portfolio. Periodically realigning – or rebalancing – a portfolios back to its original structure avoids this risk.

The role of the Investment Committee

The firm’s Investment Committee is responsible for the oversight of these risks in client portfolios and the wider investment process. Meetings are held regularly and minutes are taken, which include all action points to be followed up on.  Third-party inputs and guest members provide valuable independent insight, where necessary.  Its responsibilities include:

  • Responsibility 1: ongoing challenge to the process. If new evidence suggests that doing things differently would be in clients’ best interests, then the firm will revise its approach. The investment process is evolutionary, but change is most likely to be rare and incremental.
  • Responsibility 2: review of the best-in-class funds recommended. Each fund has a role to play in a portfolio and its ability to deliver against this objective is regularly reviewed. Any fund-related issues are raised and resolved, although this is pretty rare.
  • Responsibility 3: review the portfolio structure. Risks (asset class exposures) and their allocations within a portfolio are evaluated and from time to time these may change as the firm’s thinking evolves, given the latest evidence.
  • Responsibility 4: screen for new funds. New, potential best-in-class funds face detailed due diligence and approval, before they are recommended to clients. It would take a material improvement to knock an incumbent fund off its perch, but it can and does happen from time to time.
  • Responsibility 5: reaffirm or revise the investment process. Risk (asset) allocations and fund changes are approved by the Investment Committee. Any actions arising from portfolio revisions will be undertaken, after discussion with, and agreement by, clients.

Conclusion

It is entirely possible, and likely, that your portfolio will look much the same between one time period and the next with little activity, except for rebalancing. That most definitely does not mean that nothing is happening.  In fact, it takes quite a lot of work to keep our portfolios the same!

New State Pension Age (SPA) – How will it affect your retirement plans?

In July this year, David Gauke the Secretary of State for Work and Pensions announced new plans meaning that the rise in the SPA to 68 will now be phased in between 2037 and 2039 rather than from 2044 as was originally proposed. The changes were announced after the Government accepted the recommendation of ex-Confederation of British Industry boss John Cridland, who carried out an official review of future state pension age increases.

 Those affected by the changes are those born between 6 April 1970 and 5 April 1978 and currently between the ages of 39 and 47, but the exact date that individuals can expect to receive their State Pension will depend upon the year and month of birth.

Why is it changing?

The changes to the SPA are aimed at bringing women’s SPA into line with men’s, and taking account of everyone living longer.

When the State Pension was introduced in 1948, a 65-year-old could expect to spend

Planning a business exit: Eight ways to maximise value and attract buyers

As a business owner, you will have a passion for what you do but when it comes down to it, the reason most people go into business is to make money. They focus on maximising the value of the business for the point when they come to sell it. Despite this, we come across many examples where business owners fail to either maximise or extract their business’ value, because they simply don’t have the strategy to do so.

Your business may be your pride and joy but when it comes to the time that you want to exit from it, you need to be able to convince someone else of its value too.

So we thought it would be helpful to draw up this handy checklist:

  1. ‘Size does matter’ – you need to have developed your business to a level of turnover that will maximise value.
  2. Your business model needs to be reflected in the day to day business operations – is it delivering consistently, in terms of customer service; online presence; the workforce; pricing strategy; materials and suppliers?.
  3. Repeat business is crucial – do you have clients on long-term retainers, extended contracts or some type of residual income trail? We all know it’s easier to keep an existing client than to find a new one.
  4. Is your business able to generate new business leads, enquiries and sales without relying entirely on you or one key person’s skills and sales ability?
  5. Businesses that are centred around systems are simpler to run, less stressful and generally less risky. This makes them more attractive to a potential buyer and, usually, more valuable.
  6. How are your employees incentivised? How is their performance measured and rewarded? If you have a profit share-based plan or an employee share ownership plan, this substantially reduces one of the key risks for buyers – that your employees will exit when you do.
  7. Effective corporate governance and compliance can also add considerable exit value because they are seen as reducing risk.
  8. The business must be able to operate independently of your personal involvement. To put it simply, will your business survive when you’re no longer a part of it?
planning a business exit

Three types of financial management in business owners

types of financial management

Every business owner is different with their own unique style. But they all have one thing in common – the finances will be fundamental to the success of their business.

Depending on their personality, however, they will all have a different way of approaching financial management.

From our experience of working with various business owners, we have identified three key types. Do you see yourself in any of these?

The fantasist – is great at coming up with the next Big Idea and is full of creativity and vision. While this may be good news for the business, it might not be the best approach for the finances. This type of person will tend to make decisions based on gut instinct and intuition rather than looking at the hard data or evidence. The danger can be that, without a sound grasp of the figures, those brilliant ideas may never stand a chance of becoming reality.

If the fantasist sounds a bit like you, it’s a good idea to make sure you have someone else in the business who can provide some balance and rein you in from time to time. Enjoy being a visionary by all means but make sure you have a ‘detail merchant’ on board as your financial director or accountant too!

The gambler – loves an opportunity and is to be applauded for their spontaneity. On the positive side, this entrepreneurial business type can make the most of their circumstances at the right time and get ahead of the competition. However, their impulsive nature can also lead them to jumping in without thinking and taking the business in a direction that may not be the best financially.

If you’re someone who is always spotting the next ‘golden opportunity’, make sure you have someone who can manage your financial data accurately and can present the figures to you right away so you can make informed decisions.

The disorganiser – we’ve no doubt all come across business owners like this. Their office is the hub of the operation but it’s often a veritable Aladdin’s cave, piled high with stacks of paper. Financial management is not a priority for them but rather something that gets in the way of the operational side. It’s only when they need to find that all-important receipt that they will turn their attention to the neglected paperwork, panicking over every other invoice and bill they come across as they search.

It doesn’t mean they’re not a good business owner, just someone who needs a good accountant to keep things in order.

So which are you most like?

If you recognise certain traits of any of these in you, are there things you could do to change your approach? Or could you get others in the business who are of a different temperament to provide some balance?

types of financial management

Eight ways to improve your relationship with your financial adviser

Who would you say is the most important person you have a relationship with, when running your own business? Your bank manager, accountant or lawyer? Maybe your best client, your preferred supplier or your spouse and family? No doubt all of them, to varying degrees. But the one we’re going to focus on here is the one with your financial adviser.

We’ve identified eight key ways you can be a good client:

  1. Be honest – share your goals, objectives, setbacks, triumphs and successes with your adviser so they can best help you achieve your aims – and keep them informed if your circumstances change.
  2. Don’t keep shopping around just based on the lowest fee but look for competitive and reasonable rates in light of what is being offered. Yes, the fee structure should be fair and and transparent but good advice deserves appropriate compensation.
  3. Don’t judge investment results based on just one year’s return – three or five years is a much more realistic timeframe – what is more relevant is whether your investments are on track to meet your goals.
  4. Don’t expect the impossible – in the current climate you’re not going to get 10% returns so don’t expect them – also accept that there will inevitably be some ‘down’ years.
  5. Make sure you compare like with like and understand the different types of advice being offered: for example, an adviser can offer both financial planning and investment advice; DIY advice doesn’t carry a fee but means you are entirely on your own in terms of investments, portfolio building, taxes and estate planning. Online tools can help with investments but usually do not provide financial planning.
  6. Be aware that small portfolios may get less attention – ask an adviser what level of service a portfolio like yours would get. If you only have a small amount to invest, for example, less than £75,0000, it may be that online advice would be more appropriate.
  7. Try not to chop and change adviser too frequently – it cancels out all the preparatory work done in getting to know you and your requirements. As a result, an adviser may be reluctant to take someone on who moves around a lot as it suggests it is very difficult to meet their long term goals and expectations.
  8. Prepare for any meeting with your adviser as you would for a business meeting – review your investments before the meeting and jot down anything you want to ask.
running your own business