The end of tax year is near. creative. wealth management. spring quarterly newsletter

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1 creative wealth management quarterly newsletter spring 2015 The end of tax year is near

2 6 th April Approaches Fast When the final whistle is blown there is no time for further kicks or headers on a football pitch. Whatever the protests of the players, the end is the end! The end of the tax year is similar with many allowances coming to a full stop. So, while it makes sense to plan your financial affairs on a regular basis, with deadlines such as the end of the tax year, it is important to carry out a review to ensure that valuable planning opportunities are not lost. In addition to routine changes such as adjustments to thresholds and allowances, e.g. the personal allowance and pension rates, there can also be changes to the tax rules themselves. In this case, the end of this tax year heralds the introduction of new pension tax rules. These changes will give more freedom of choice and they are to be broadly welcomed but there are tax implications and new planning issues to be considered. One major point is the new inheritability of pensions, with the scrapping of tax on passing assets before age 75. Articles in this issue: How to reduce your income tax Pension tips ISA Allowances, including Junior ISAs Capital Gains Tax reminders Inheritance tax forward planning ideas This newsletter covers a number of key planning points to help you consider your own position. If you would like advice about any of the planning points covered or indeed something not covered in this newsletter, please do get in touch. Craig Harrison FPFS IMC Head of Creative Wealth Management PS I m pleased to announce that we have re-designed our website with a view to providing more informative content and useful planning tools. Please visit at where you ll find refreshed content and an archive news service. In addition to this newsletter, the website also has the following articles which may be of relevance to your end of tax year planning: One Man Block Transfer: Sheltering Valuable Protected Benefits (Whilst Benefiting From The New Flexibility And Choice) Pensions Unlocked - Good News for Pension Death Benefits

3 How to reduce your income tax Andrew Clark Wealth Management Consultant Making the most of our income has become commonplace since the beginning of the credit crunch in Making sure we have as much income as possible by ensuring we are not over-paying income tax should be just as commonplace. With careful planning it is possible to minimise the amount of income tax you might otherwise have to pay. Key Issues: Reduce or eliminate the amount of child benefit charge you pay, by keeping your adjusted net income below 50,000 per year. Preserve your age-related personal allowance if you are aged 65 and over, by keeping your adjusted net income below 27,000 for the 2014/15 tax year. Preserve your personal allowance where adjusted net income is in excess of 100,000 per year. Reduce the amount of higher and additional rate tax you pay. Maximise Your Yearly Individual Savings Account (ISA) Allowance ISAs With no income or capital gains taxes on investment growth and income from ISAs, they are very appealing investment vehicles and provide even greater value if you are paying higher and additional rates of income tax. For the 2014/15 tax year, the ISA allowance is 15,000, so a couple could invest 30,000 between them. For the 2015/16 tax year, this allowance will be increasing to 15,240, giving a maximum of 30,480 per couple. By maximizing ISA allowances, investment holdings which would otherwise suffer the dragging effect of tax, can grow completely tax-free. As an added benefit of holding money in ISAs, the rules on inheritance have improved. When an ISA holder dies, it is now possible for their surviving spouse or civil partner to be able to inherit the tax benefits of their ISA. This will work by taking the value of the deceased s ISA at death and adding it to the survivor s own ISA allowance. For example, if your spouse dies in March 2015, leaving an ISA valued at 22,000, you will be entitled to an ISA allowance of 37,240 in tax year 2015/16. Spouse s will be able to claim this additional allowance from 6th April This is a new change to ISAs as a result of the budget in Invest For Growth Through Unit Trusts or OEICs Income on Unit Trusts and OEICs (Open Ended Investment Companies) whether paid in the form of dividends, interest or a combination of both is taxable. This is the case whether the income is distributed or accumulated. However, you can reduce this tax by limiting the income. If the collective investment scheme focuses on investing for capital growth, you won t have to pay tax on the gains built up. Investing like this also lets you use your yearly capital gains tax (CGT) exemption if and when you choose to cash-in your investment. The CGT exemption for the 2014/15 tax year is 11,000 and it will be increased to 11,100 for the 2015/16 tax year. Only gains above the threshold are subject to tax.

4 The amount of capital gains tax you pay will depend on your total taxable income for the year. Where gains fall below the higher rate income tax threshold, then the rate of CGT is 18%. Where gains exceed this threshold, the rate is 28%. But, even at 28%, the higher rate of capital gains tax compares favourably to the higher rates of income tax of 40% and 45% (higher rate and additional rate respectively). By default, it therefore makes sense to invest for capital growth rather than income. For married couples it also makes sense to consider using both of your CGT allowances when it comes to cashing-in investments. Similar to ISAs, you each have your own individual CGT allowance which would otherwise be lost. This is very much a case of use it or lose it. Avoiding Income-Producing Investments With investment bonds you won t have the potential for any extra taxable income until a chargeable event occurs. The lower capital gains tax rate may make a collective investment seem like a better option than an investment bond, however, investment bonds may represent a more attractive tax home for reinvested income. Whenever you cash-in an onshore investment bond, you get a 20% tax credit for the tax paid within the life fund. Consequently, a basic rate taxpayer would not be required to pay any further tax as a basic rate of tax has already been paid within the bond. In contrast, if you are a higher rate or additional rate taxpayer, you would have to pay further income tax on any chargeable gain after claiming top slicing (a technique to help mitigate this for some individuals). Investment bonds can also be used to provide a top-up to your income, as you can make tax effective withdrawals using your yearly 5%pa allowance. Such withdrawals do not trigger any immediate tax charge nor do they affect your entitlement to age or personal allowances. Individuals Earnings Over 100,000 If you earn over 100,000 there may be little you can do to help protect your personal allowance. However, if you receive investment income which tips you over the 100,000 threshold, then you could consider reinvesting into capital growth oriented investments, investments that defer tax (for example, investment bonds), or investments that produce taxfree income (e.g. ISAs). You could also consider making a pension contribution. This can be done up to the current annual allowance of 40,000. In addition, you can also take advantage of Carry Forward which can help mop-up unused annual allowances for the three previous tax years. Maximise Allowances For Couples If you are married or have a civil partner, you could consider splitting your investments between both of you. This helps make maximum use of your allowances and could also lower your individual tax rates. If you own your own business, you could also consider paying an income for both partners through salary, dividends or profit share. Both dividends and profit share are still legitimate options as the Government decided not to legislate against this form of income shifting. However, you must still take into account rules on appropriate commercial arrangements. You can also make gifts to a registered charity or a pension contribution to reduce your adjusted net income. The table below highlights the key thresholds for reducing adjusted net income in order to preserve valuable benefits: Avoid Child Benefit Charge 50,000 Preserve Your Age Allowance 27,000 Preserve Your Personal Allowance 100,000 One of the best ways of reducing tax is to make a contribution into a registered pension scheme or to a registered charity. When you do this, you are able to extend your basic rate and high rate threshold. How You Can Put Yourself Into A Lower Tax Bracket One of the best ways of reducing tax is to make a contribution into a registered pension scheme or to a registered charity. When you do this, you are able to extend your basic rate and high rate threshold. The example below illustrates how this would work. Keep Your Adjusted Net Income Below

5 Example: Reducing income tax for a higher rate taxpayer Edward has taxable income of 120,000 in the current tax year and so would normally lose his personal allowance. After discussing the matter with his adviser, Edward decides to make a pension contribution of 20,000. The table below demonstrates the before and after position of this: No Pension Contribution A saving of 12,000 With the current tax rules, individuals who earn over 100,000 lose their personal allowance at a rate of 1 for every 2 they earn over 100,000. Income Assessable For Tax 120, ,000 Pension Contribution 0 20,000 Personal Allowance 0* 10,000 Taxable Income 120,000 90,000 Pension Contribution Basic Rate 6,373 ( 31,865 x 20%) 6,373 ( 31,865 x 20%) Higher Rate 35,254 ( 88,135 x 40%) 23,254 ( 58,135 x 40%) Summary Checklist 4 Avoid a child benefit charge by using pension contributions where your net adjusted income exceeds 50,000 per year. 4 Preserve your personal allowance by making a pension contribution where your net adjusted income exceeds 100,000 per year. 4 Maximise your tax savings by making use of your ISA allowance in full every year. 4 Try to invest for growth and look for investments which don t generate income. 4 If you are married, consider splitting your investments in order to minimise tax. 4 Upon death, remember that you can now use your late spouse s ISA value towards your own ISA allowance. Total Tax 41,627 29,627

6 Pension tips Joe Kennedy Wealth Management Consultant Use your annual allowance and carry forward amounts A limit is set on the amount that can be paid into a tax relievable pension each tax year. This limit is called the annual allowance and it is currently 40,000. But, carry forward allowances up to and including the 2013/14 tax year remain at 50,000. This gives you the opportunity to maximise your pension contributions using these higher amounts. For example, if you earn 90,000 in this tax year and paid no pension contributions during the last tax year, you would be able to carry forward an allowance of 50,000 from last year and add that to this year s allowance of 40,000, allowing you to gain tax relief on the full 90,000 contribution. This scenario stretches the point for most, but, carry forward reliefs can be useful in years when you have money to invest, and of course, they boost your retirement prospects whilst also reducing tax. You cannot contribute more to a pension than your earnings (without paying tax), so, if your combined carry forward and current year s allowances exceed your earnings, it would only make sense to pay in up the level of your earnings. It is important to note however, that this restriction doesn t apply to employer contributions. This means employers can pay contributions which far exceed a single year s taxable income, allowing the best opportunity to take full advantage of the carry forward opportunities. Naturally, this strategy is attractive for ownermanaged businesses with surplus retained profit to invest. Example: Joanna and Wendy set up their business 10 years ago. Since then, the company has paid a modest contribution of 10,000 a year into personal pension arrangements on their behalf. With the business now well established and making good profits, they want to maximise their pension contributions. Before using their allowances 2011/ / / /15 Paid in 10,000 10,000 10,000 10,000 Allowance 50,000 50,000 50,000 40,000 Balance 40,000 40,000 40,000 30,000 The solution Their adviser recommends they both set up a new arrangement to mop up their unused annual allowances. Each new arrangement has a default pension input period set to maximise the available tax relief, and, with the company making payment, both of them benefit from a one-off pension contribution of 150,000. Points to Note 1. Always use the current year s allowance first, 2. You can carry forward unused allowance from the previous three tax years, 3. You must use the unused allowance from the earliest year first. 4. You must be a member of a registered pension scheme during the carry forward year to benefit from carry forward of unused annual allowance for that year. 5. Companies making a large pension contribution to gain corporation tax relief must be able to show the expenditure is wholly and exclusively for business purposes. Transfer pension benefits with protected elements before 6 April 2015 If you have a protected pension age (a specially allowed retirement age), a scheme-specific lump sum protection of more than 25% (an entitlement to more than a quarter of your pension fund as a tax-free lump sum), or both, there is often only a choice of: Taking benefits from the existing scheme with limited income options, or Transferring to a pension offering drawdown and losing protected tax-free cash. This means that one or other benefit is lost. However, due to a temporary HMRC extension, it is possible to transfer with protection providing the transfer is done before 5th April This applies to transfers up to and including 5 April 2015 where a provider treats a single member

7 transfer as a block transfer. The protections apply to the transferred rights. Conditions apply and time is running out so please enquire immediately if this is of interest. Maximising pension saving before flexi-access drawdown arrives in April 2015 Available from 6 April 2015, flexi-access drawdown allows you to take up to 25% tax-free cash with unrestricted access to income. Also from then, the new money purchase annual allowance of 10,000 applies to anyone taking an income from flexi access drawdown. This is a lower annual allowance capping pension contributions at a lower rate in order to cap tax benefits for those already drawing down on their pensions. With this reduced cap in mind, it s worth considering maximising contributions before taking benefits flexibly from 6 April Maximising the tax position for a small business owner With the introduction of flexible access drawdown pensions from 6 April 2015, the option of taking profits by paying them into a pension, becomes considerably more attractive for a small business owner. Example: George, aged 60, owns a small business. He is planning to sell it in the summer of 2015 and retire. After a successful year for his business, George has 100,000 profit to take by the end of March He can take this as a salary, dividend or a pension contribution. Method of taking profit Amount after tax Overall tax rate Dividend 60,000 40% Salary 50,967 49% Pension 100,000 0% This example is based upon: a company with 100,000 available before tax; corporation tax at 20%; George s salary for 2014/15 is 45,000; The company pays National Insurance on George s salary at 13.8%; George pays National Insurance at 2% on his salary above the Upper Earnings Limit ( 41,865). George will be able to take his pension on or after 6 April 2015 through flexiaccess drawdown, so he doesn t have any restrictions on accessing the benefits. If George chooses to take the whole fund and paid 20% income tax in that year, the effective rate of deduction would be only 15% ( 25,000 tax-free plus 75,000 net of 20% = 85,000). If tax on the income was at 40% instead, the effective rate of deduction would still only be 30%. This clearly compares favourably with both dividend and salary. It is also worth noting: Taking 100,000 as a dividend or salary would lead to George losing his personal allowance as his total income will be well over 120,000. This is a cost of 2,000 (20% of 10,000). The pension fund is exempt from UK taxes on investment income and capital gains (some investment income is received with tax credits or after tax deductions which cannot be reclaimed e.g. 10% tax credit on UK dividends). If George dies before the age of 75, his pension fund can pass to a beneficiary free of tax up to the lifetime allowance (after age 75 and tax applies at the beneficiaries marginal rate). If George takes the money as a dividend or salary, it will normally be part of his estate when he dies unless he has spent or gifted the money. His estate may have to pay inheritance tax at 40% on this money. Taking advantage of new pension flexibility before 6 April 2015 If you are currently using Capped drawdown, your provider may or may not accept further contributions after April If they will this is good news as you can designate funds into the same account after 5 April 2015 and the reduced money purchase annual allowance won t apply. It may also be worth starting a Capped Drawdown plan before April. This would need careful, and urgent, consideration but in the right circumstances, it could enable flexible retirement without the reduced annual allowance of 10,000pa. Example: Helen is aged 60 and still working full time. She pays 5,000 a year into her employer s money purchase pension scheme. Helen s employer contributes 10,000 a year on her behalf and she also pays 2,000 a year into a personal pension, which has a current value of 250,000. Helen is planning to cut her working hours when she turns 62 before finally retiring at age 66. To do this, she will need to replace some of her income by drawing an income from her personal pension. Helen wants to make the most of the new flexibility and doesn t want to consider buying an annuity until she is in her seventies. The solution Helen could designate a minimum amount - say 10,000 - to a capped drawdown arrangement before 6 April She can then take the tax-free cash without drawing an income. By establishing the capped drawdown, she can take a higher level of income (within the capped drawdown limits) through additional fund designation when she s 62 without triggering the reduced money purchase annual allowance. This means she and her employer can continue contributing 15,000 a year to the money purchase pension scheme without any annual allowance charge. Helen can also continue paying 2,000 a year into her personal pension.

8 ISA allowances, including Junior ISAs Mike Greely Wealth Management Consultant Individual Savings Accounts or ISAs are simply tax-free or tax-efficient products for your savings and or investments. You cannot carry ISA allowances from one tax year to another so the first point of order is making sure you use your allowances. Each tax year, you get an ISA allowance which sets the maximum that can be saved within the tax-free wrapper from April to April. The old ISA system used to limit how much you could put into each pot - you d either get half your allowance in cash and half in shares, or you could choose to put it all in shares. But, from 1 July 2014, the rules were relaxed and although you still have a limit to the amount you can save ( 15,000 for 2014/15 and 15,240 from 6 April 2015), you now get to choose how you split this between stocks & shares and cash holdings. You can use the whole amount for stocks & shares, the whole amount for cash or a mixture. You must save or invest by 5 April, the end of the tax year, for it to count for that year. It can take a while to process applications so don t leave it until the last minute! Any money which stays within the taxfree ISA environment will continue to earn interest and continue to benefit from the tax-free environment until you withdraw the money. The gains (interest or investment returns) made in each year are also tax-free. This means ISAs can build into a very useful and substantial element of a portfolio. Previous and Current Allowances:

9 7,000 from 1999 to ,200 until 2010, 10,200 for 2010/11, 10,680 in 2011/12, 11,280 for 2012/13, 11,520 for 2013/14 15,000 for 2014/15 15,240 for 2015/16 plus ISAs for your Children There s a Junior ISA (JISA) which is just like the adult version, but with a lower limit of currently 4,000. JISAs allow you to save tax-free on behalf of a child or children. You can save or invest in stocks & shares, in cash any mix of the two and the same tax benefits apply. Your child can t touch the money until they turn 18. Until that time, the account is held in the child s name but is opened and managed by you. The child can take control at 16, but won t be able to access the money until aged 18. At this age, the money is theirs and no one else will be entitled to any amounts invested or any growth. JISAs replaced Child Trust Funds when they were scrapped for new savers on 3 January This means JISAs are only available to children born on or after that date, or children aged under 18 but born before 1 September 2002, when the CTF was introduced, and so never had the chance to contribute to a CTF. Capital gains tax How ISAs Can Help You may have to pay capital gains tax on any capital gains realised from your investment in collective investment schemes, such as Unit Trusts. The current annual exemption for capital gains tax is 11,000. For gains over that amount, you need to take into account your taxable income: If your taxable income plus capital gains falls below the higher rate tax threshold you will pay tax on the gain at 18%. If your taxable income plus capital gains is more than the higher rate tax threshold you will pay tax on the gain at 28% If you are fortunate enough to have a large portfolio of investments, which are loaded with potential capital gains tax then there is a solution to utilise your capital gains tax allowance each year (currently 11,000 for tax year 2014/15) to reduce this liability. You can use bed and ISA planning to cash in an investment and reinvest in an ISA. This could benefit you by slowly and taxefficiently reducing the gain and moving it into an ISA, which is free of any future capital gains tax. Some ISA FAQs Who can open an ISA? You need to be a UK resident aged 16 or over to open a cash ISA, or aged 18 or over to open a stocks & shares ISA. You can t open an account together with someone else, or on behalf of someone else. But couples can and should consider maximizing both of their allowances. How can you withdraw money? A common mistake is to think an ISA needs to be held for a set length of time in order to reap the tax-free benefits. That is not the case. However, it is worth watching out for policy or account restrictions. Cash ISAs often offer improved rates but only for fixed periods, which if not exhausted will usually mean a penalty is imposed. Otherwise, money can be taken out taxfree at any time. It is also worth noting that once ISA money is withdrawn, it can t be returned, i.e. without using your current year s allowance. Can you change provider? Yes. You can change provider. This may be beneficial for a better cash rate or to change to a different type of investment holding. But, your existing ISA provider may offer a choice so you may be able to switch accounts without necessarily changing provider. Transferring between approved ISA products does not count as a withdrawal. There may be exit or set up costs to bear.

10 Capital Gains Tax reminders Jason Coppard Wealth Management Consultant For individuals with un-realised or potential future gains, it s worth considering an endof-year capital gains tax planning exercise. This will help your long-term tax efficiency. Maximising the annual exemption You have an annual exemption for capital gains tax. For the 2014/15 tax year this is 11,000. You cannot carry forward the capital gains tax exemption. So, if you don t use it, you lose it. With that in mind, you should consider cashing in investments with potential gains before the end of the tax year. That way, any gains may be covered entirely or to some extent by the annual exemption. Maximising tax opportunities for married couples and civil partners Married couples and civil partners pay tax separately on their capital gains. Each partner has their own capital gains tax exemption. This lets you realise gains of up to 22,000. To maximise tax planning opportunities, married couple or civil partners should consider transferring assets from one spouse or civil partner to the other. By doing this, they can transfer any un-realised capital gain in the transferred asset to the other partner without triggering a chargeable gain. Please note that this tax neutral no gain/no loss disposal is only available between spouses and civil partners who live together. It gives you the chance to use the capital gains tax exemptions and basic rate tax bands for both partners. Example: Using both partners allowances John is a higher rate taxpayer and his wife Jenny pays tax at the basic rate. John is planning to cash in his investment portfolio. The potential gain of 30,000 will be taxable like this: John s liability as a higher rate taxpayer Gain 30,000 Less annual exemption 11,000 Taxable at 28% 19,000 Capital gains tax payable 5,320 However, with careful planning, John s adviser helps him substantially reduce this liability. John keeps enough of his portfolio to use up his annual exemption. He then makes an outright gift of the balance to Jenny. By doing this, they can reduce their tax bill like this: John s liability as a higher rate taxpayer Adopting this strategy saves John and Jenny 3,880 in tax payments. However, to be effective, David must unconditionally gift his portfolio to Jenny. With such planning, you need to be careful you don t fall foul of capital gains tax anti- avoidance rules. These apply if the recipient returns any of the gifted investment portfolio to the original owner. To make sure John realises the gains properly, he must not personally reacquire the same investment within 30 days of disposing of it (known as bed and breakfast ). To maximise tax planning opportunities, married couple or civil partners should consider transferring assets from one spouse or civil partner to the other. Jenny s liability as a basic rate taxpayer 11,000 Gain 19,000 11,000 Less annual exemption 11,000 0 Taxable at 28% for David Taxable at 18% for Jenny 8,000 0 Capital gains payable 1,440

11 Reducing a tax bill using pension contributions If you have total income close to the higher rate tax threshold ( 41,865 for 2014/15) and face paying capital gains tax at 28% on a significant part of any taxable capital gain, you should consider making a personal pension contribution. This will increase the basic rate tax band and could mean that tax is paid on the gain at a lower rate. Example: Adam has total income of 41,865, which in the current tax year is the starting point for paying higher rate tax. After deducting the 11,000 annual exemption, he has a taxable capital gain of 10,000. As a higher rate taxpayer, Adam will pay tax at 28% on his taxable capital gain of 1 0,000. Adam s liability as a higher rate taxpayer Gain 21,000 Less annual exemption 11,000 Taxable at 28% 10,000 Capital gains tax payable 2,800 The solution Adam can extend his basic rate band to 51,865 by making a 10,000 gross contribution to his personal pension. This is made up of an 8,000 net contribution by Adam and 2,000 in tax relief from the government. By doing this, his taxable capital gain plus his income remains within his extended basic rate tax band ( 41, ,000 = 51,865). This means he will pay capital gains tax at the lower rate of 18%. Adam s liability as a basic rate taxpayer Gain 21,000 Less annual exemption 11,000 Taxable at 18% 10,000 Capital gains tax payable 1,800 By making a personal pension contribution of 8,000 (worth 10,000 gross), Adam has reduced his tax bill by 1,000. Using investment losses to advantage If you have made losses on investments, you could look into using the losses to offset capital gains. For example you can carry forward losses and use them to reduce the current year capital gains to the current annual allowance of 11,000. You can still carry forward the balance of losses to be used in future years. Example: Jason has capital gains above the annual exemption and wants to reduce the capital gains tax due. This is his situation without offsetting it with losses: Jason s capital gains Capital gain 16,000 Less annual exemption 11,000 5,000 The solution Jason has both current year losses and losses carried forward from previous years he can use to offset this year s gains. Jason s offset capital gains Capital gain (2014/15) 16,000 Less losses (2014/15) 4,000 Net gain (2014/15) 12,000 Less annual exemption 11,000 Gain after exemption 1,000 Brought forwards losses 10,000 Losses carried forward to 2015/16 9,000 You must use the annual exemption against the net gains for 2014/15 before using any carried forward losses. In this example, Jason will only use 1,000 of the 10,000 losses carried forward. This leaves 9,000 to carry forward to the next tax year and beyond. Capital gains tax planning can be quite holistic and requires a number of factors to be considered. If you are considering action for this tax year please get in touch as soon as possible.

12 Inheritance tax - forward planning ideas to reduce your bill David Bull Wealth Management Consultant Inheritance Tax (IHT) is an issue concerning more than just the very wealthy. Simply with the increase in property values over the last few decades, many of us now fall into the IHT bracket. Add to that, the freezing of the nil rate threshold held at 325,000 and it is clear many will continue to be affected. Upon your death the value of your estate will be assessed by HMRC. All your assets i.e.property, savings, investments, businesses and so on will be totalled up. Any debts you have will be deducted and the balance determines if your estate has to pay IHT. At present, the nil rate threshold (the amount you can leave behind without being liable for tax) is 325,000. Anything over this is taxed at 40%. If you leave 10% or more of your estate to charity, this rate drops to 36%. The nil threshold rate of 325,000 has been frozen until 2017 at which stage the Government will decide if it should be changed. A married couple or civil partnership can combine their nil rate threshold meaning they can leave 650,000 tax-free, see below on allowances for more details. If your estate is AND WILL STAY under 325,000 (or 650,000 between yourself and your spouse) in value, after any debts are deducted, then you don t need to worry about IHT in the first place. Of course, it is worth thinking about the growth in value that could occur before you die before discounting taking any action. But if, for example, you die and leave behind assets valued at 750,000, your estate pays nothing on the first 325,000. The remaining 425,000 is taxed at 40%, giving HMRC a total of 170,000 in tax. Inheritance Tax is one of the easier taxes to reduce through basic planning, yet few people take the time to deal with it. More often than not we leave it too late, gifting HMRC our assets instead of our loved ones. Making a few simple changes now can save your estate, and your loved ones, thousands. Why spend your life being savvy about your finances only to pay thousands in taxes upon your death because you don t want to think about what is unavoidable? Read on for some simple tips to save thousands. 1. Make a Will Making a will is the only way to control what happens to your assets after you are gone. The mere process of making a will gets you thinking about the best way to pass on your estate. Creative Wealth Management can recommend a will writer if you do not have one of your own. 2. Leaving your estate to your partner When you die, any amount you leave to your spouse or civil partner is exempt from inheritance tax, as long as they reside in the UK. It also worth noting that your nil allowance of 325,000 is transferable between you and your partner upon your death. This means that if you have left an estate valued below the 325,000 threshold, the balance of what you have not used is transferred to your partner. So as a couple, you jointly have an inheritance tax free threshold of 650, Make use of Allowances This is quite simply giving money away tax-free. Using up your allowances each year is a simple, tax efficient method of reducing your estate s IHT bill. Annual Tax Free Allowances Everyone has an annual tax free gift exemption of 3,000. This means you can give away up to 3,000 each year, tax free. You can carry forward your unused allowance by one year, meaning you can use this year s allowance in the next tax year. Or you can use up last year s allowance this year, if you did not use it last year. Doing this means it is possible to give away 6,000 tax free in a single tax year. Small gifts Allowance. You can also give up to 250 to any individual each tax year, without being liable for IHT. You can repeat this gifting for as many different individuals as you want. So, for example, you can give each of your children/ grandchildren 250 a year tax free. These gifts do not count towards your annual allowance of 3,000.

13 Gifts from Income. Inheritance tax is a tax on what you own, your assets. It does not apply to your income. If you have earnings from work or a pension, giving money away from this should be tax free. As long as the amounts you give away do not reduce your standard of living, these gifts should have no bearing on your IHT exemption or your nil threshold. You will need to keep detailed records in order to prove that these gifts have, firstly, come from your income, and secondly, that they have not negatively affected your lifestyle. Marriage Gifts. Gifts on the occasion of marriage can be given tax free. 5,000 by parents; 3,000 by grandparents and 1,000 by anyone else. Gifts to dependents. You can make tax free gifts to your spouse and other family members who rely on you for support, such as ex- wives/ husbands/civil partners; children under 18 or in full time education; other family members who are dependent on you. If you make gifts in order to reduce your IHT bill, then you need to keep records of all gifts- when you gave them; to whom and for how much. Your executor will need these in order to work out you estate s tax bill. Be sure to keep these records with your other important accounts so your executor can find them. It is also worth noting that for something to be deemed a gift, you have to give it freely and you can not benefit from it. So, for example, you can not give away half of your home as a gift while you continue to live in it. 4. Potentially Exempt Transfers (PETs). This is where forward planning can really make a huge impact. Any money/ asset you give away greater than the annual allowance will remain viewed as part of your estate for 7 years. If you die within those 7 years, the asset/money will be counted against your nil rate threshold and the recipient may have to pay IHT. However, if you survive for longer than 7 years after the transfer, IHT is not payable. These situations are called Potentially Exempt Transfers (PETs). If you transfer a substantial gift to an individual, it is possible for them to take out an insurance policy to cover the IHT that would be owing if you died within 7 years of the transfer. 5. Donations to registered UK charities and political parties are IHT exempt. Donating to your favourite charity is tax free, both while you are alive, or through your will. It can actually reduce the rate of IHT your estate pays after your death. If you will 10% or more of your estate to charity, IHT will be applied to your estate at a rate of 36% instead of 40%. 6. Trusts. Using trusts to reduce your IHT bill and provide for your loved ones can be extremely tax efficient. Trusts are especially helpful at providing for more vulnerable dependants; mitigating against careless spending by recipients and protecting assets in the event of divorce, bankruptcy, etc. Setting up trusts is quite complicated- this is one area which you should not D.I.Y. Get advice from qualified professionals. For more information please contact us. 7. Enjoy Life! With Creative Wealth Management helping to protect and grow your wealth we do hope you enjoy retirement. Inheritance tax is avoidable with forward planning and we highly encourage action. Of course, we also wish you a long and happy life of your own. All the information in this document is for general guidance only and does not constitute specific investment advice. Any regulated advisory services will be provided by suitably qualified advisers. Creative Wealth Management is a trading style of Creative Benefit Wealth Management Limited (company no ), which is authorised and regulated by the Financial Conduct Authority, reference number Both companies are registered in England and Wales. Their registered office is 125 London Wall, London, EC2Y 5AL. London: 2 Cherry Orchard Road, Croydon, Surrey, CR0 6BA. Tel: Fax: Bristol: 1 Friary, Temple Quay, Bristol, BS1 6EA. Tel: Fax: Edinburgh: 152 Morrison Street, Edinburgh, EH3 8EB. Tel: Fax: Leeds: Princes Exchange, Leeds, LS1 4HY. Tel: Fax: Manchester: 53 Fountain Street, Manchester, M2 2AN. Tel: Fax: Online: info@creativewm.co.uk

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