CANADA LIFE LIMITED – TEXT FOR CLIENT NEWSLETTER
SUMMER 2016
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Summer 2016
Client News
Issued by name, role, IFA
Hello again and I trust that you are enjoying the sunny weather...let’s hope it lasts a little bit
longer!
Since the last edition, we have seen the Brexit vote and whole change of personnel at the
head of the Conservative party.
It will be interesting to see if the new Chancellor, Philip Hammond, makes any major
changes to the plans of his predecessor, George Osborne.
Given that they are in the same party with the same political philosophy, you wouldn’t expect
it to be so; but sometimes a ‘new broom’ does abandon some plans or introduce new ideas.
We will find out if that is so when Philip Hammond delivers his Autumn Statement. We do not
know the date of this yet but, as an indication, last year it was on 25 November.
In the meantime, we continue to plan using the known facts. If you need any help with any if
the measures listed in this edition, or are unsure how it will apply to your personal situation,
just get in touch and I’ll explain it.
In this edition:
1. Where can you invest, now that base rate is 0.25%?
2. Higher rate taxpayers hit record levels
3. Inheritance tax rockets to record levels
4. Inheritance tax: what can you do about it?
5. Were you part of the June investment exodus?
Where can you invest, now that base rate is 0.25%?
When the Bank of England cut interest rates on 4 August, although mortgage holders might
have been pleased, those with savings on deposit must be wondering where to go to get a
decent return on their money.
You might get 1% a year interest if you’re lucky, and I suppose we should be grateful that
inflation is still very low because you are still getting a real return on your savings...but for
how long?
And the newly-introduced Personal Savings Allowance of £1,000 of interest tax-free (for
basic rate taxpayers) means that the advantages of Cash ISAs are sometimes no longer as
relevant.
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To get a decent return on your savings, you would need to ditch the secure (but low-paying)
deposit account and turn to investment funds. You could invest in individual shares, fixed
income stock and other assets, but that would increase the risk.
Admittedly, the higher the risk, the bigger the potential return...but it may be at a low just
when you want to cash in.
But the three golden rules of investment are: spread, spread and spread again.
By using a collective investment fund, your investment will be spread between many
different investments, reducing the impact of any bad investments affecting your overall
returns.
And we would normally recommend that you invest in several different assets, again
reducing the risk.
You can invest just a modest amount to begin with, if you wish, so you can see if it suits you.
Any investment you make through us will be monitored on a regular basis, to make sure that
it is still worthwhile.
Higher rate taxpayers hit record levels
According to Her Majesty’s Revenue & Customs (HMRC) and the Institute of Fiscal Studies,
the number of Britons paying income tax at the higher or additional rate is estimated to have
reached a record 5 million people last year.
HMRC data show that increasing numbers of people are being swept into higher and
additional rate tax bands, where they pay income tax of 40 per cent and 45 per cent
respectively.
However, the statistics also show that more than a million fewer people will pay income tax
this year than they did when the coalition government came to power, although many lowpaid workers are still caught in the net of national insurance contributions.
Income tax revenues of £182 billion are expected to be collected in 2016-17, meaning that
each income taxpayer will pay an average of just over £6,000.
But what can you do about it, if you want to reduce your tax burden? There are many
legitimate ways to go about it.
Making charitable donations using Gift Aid, making pension contributions and sheltering your
investments in an ISA are some of them – but the solution will depend on your personal
circumstances.
Let me know if you would be interested in discussing what you can do about reducing tax
liabilities.
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Source: HMRC
Inheritance tax rockets to record levels
HMRC have just released details of how much inheritance tax (IHT) they have taken from
the estates of deceased UK individuals and the total last year soared by 22%, to an all-time
record level of £4.6 billion.
Since 2009-10, the amount taken in IHT has increased on average by 12% each year and is
now at the highest level since IHT was introduced in 1986.
A lot of this increase is due not only to house prices (8.4% last year, according to the Halifax
House Price Index), but also to the fact that the amount someone can leave without IHT
being payable has been unchanged since 2009 – and will continue to be frozen until 2021.
Facts about IHT
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It is payable when someone dies and they leave their assets (their ‘estate’) to someone
other than their spouse or registered civil partner.
The first £325,000 of their estate is taxed at 0%.
If they had a spouse or registered civil partner die before them, their £325,000 might also
be carried forward so the first £650,000 of the estate when the survivor dies would be
taxed at 0%.
Above those thresholds, everything is taxed at 40% (or 36% if you leave substantial
amounts to charity).
For example, a widow leaving £1 million could have £140,000 taken from her estate to
pay IHT (based on a £650,000 threshold).
From April 2017, the 0% IHT band could be increased if you have a residential property.
The rules about IHT and how to avoid it are complicated; please ask for guidance on
how inheritance tax will affect you and your family.
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Inheritance tax
5.0
4.5
4.0
£ billion
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Source: HMRC
Inheritance tax: what can you do about it?
IHT is affecting more and more families nowadays and I’m often asked what can be done to
avoid the taxman receiving thousands of pounds, rather than the family.
There are several things you can do to reduce the impact of IHT and here is a list of some of
them.
By its very nature, it is simply a brief overview, so make sure you understand what is
involved before you take any action. Let me know if you need further explanation.
1. Make a will
Who you leave your estate to makes a major difference in the IHT bill. (An ‘estate’ is all your
worldly wealth.) For example, anything you leave to a spouse or registered civil partner is
free from IHT.
So a professionally drafted will is the first step in your estate planning.
2. Use your gift allowances
Each year, you can give away up to £3,000 free of IHT, but there are also other allowances
that you can use too – such as when someone gets married. Making sure that you use your
allowances can reduce tax liabilities, because it reduces the size of your estate.
3. Give away your surplus income
Do you get a regular income, such as a pension, and find that you don’t spend it all? If so,
you can give away more than the £3,000 each year (free from IHT) because a regular gift of
‘surplus income’ is exempt from IHT.
4. Put money into your pension plan
If you have a pension fund and die before the age of 75, the death benefit can be paid to
your heirs free of IHT and free of income tax.
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So a fringe benefit of funding for your retirement could be that you also protect the fund from
IHT.
5. Make gifts to charities
Any money that you give to charities, during your lifetime and through your will, is exempt
from IHT.
In addition, lifetime gifts can usually be enhanced by Gift Aid and a large amount of
charitable legacies could mean the rest of your estate qualifies for a reduced 36% rate of
IHT (from 40%).
6. Qualify for business property relief /agricultural property relief
If you run a business or own a farm, that asset could qualify for 100% relief from IHT,
depending on the circumstances.
You could also buy certain small company shares or business interest as an investment or
through your ISA and get the 100% relief – but this is a specialist area and needs careful
consideration beforehand.
7. Put money in trust
Making gifts of substantial amounts can reduce your estate and the IHT bill, but to qualify
you have to live for a further seven years.
You can just simply give the money away to the family, of course, but do you trust them not
to simply spend it all straight away? That’s why many people gift money to trusts, a legal
arrangement of ownership, rather than just hand the money over.
You can also put money into certain trusts that will allow you to receive regular payments
from the trust fund, if you need that.
8. Take out life insurance
If you do not want to give money away, or put it in trust, then you could consider taking out a
life assurance policy and putting in trust.
When the policy pays out on your death, the proceeds can then be used to mitigate the tax
bill.
This doesn’t actually save any IHT of course, it simply means that you will pay a regular
monthly or yearly amount to an insurance company and an amount equal to the tax due on
your estate can pass in its entirety to your heirs.
9. Ask for advice!
Estate planning is a complex area and doing the wrong thing could be costly. Make sure you
contact a professional adviser before you sign anything or part with any money. And of
course, I’m more than happy to guide you in estate planning!
Were you part of the June investment exodus?
The Investment Association has just published its monthly sales statistics for June 2016, the
month that incorporated Brexit – and they do not make pretty reading.
It shows that a lot of people panicked after the result was announced and sold or switched
investments. Which in hindsight, might not have been the best thing to do.
Unless you got out of property funds of course, because they suffered unit price cuts and
restricted access. (This could just be a temporary situation, but let me know if you need to
discuss a property fund holding.)
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But for fund managers, there was a £3.5 billion net outflow in the month from retail collective
investment funds, such as unit trusts and OEICS.
This month's highlights – or is that lowlights? – include:
•
Total funds under management actually rose across the month of June, because of
the fall of Sterling (meaning foreign funds are worth more) and the bounce in FTSE
100 stocks after the vote.
•
The most popular sector in terms of net retail sales was ‘Global Bonds’ followed by
‘Targeted Absolute Return’. Predictably, property funds were the least popular sector.
•
The only equity funds to see a net inflow were in the Japanese Smaller Companies
and US Smaller Companies sectors.
•
The net retail outflow from the property sector was £1.4 billion. That shows why the
gates were slammed shut. However, some funds are now reporting inflows because
common sense has begun to prevail.
•
The total value of tracker funds jumped by 13%, meaning that they now account for
12.0% of the total. These funds are designed to simply track the performance of a
stock market index, such as FTSE 100, – in May the corresponding figure was
10.8%.
The information regarding taxation is based on our understanding of law, HM Revenue & Customs
practice and current legislation, which may be altered and depends on the individual financial
circumstances of the investor.
If you no longer wish to receive this newsletter, please simply reply to the e-mail with “unsubscribe” in
the subject line.
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For professional advisers’ use only – sources of information
In case you need evidence for your compliance department to support the content in this
newsletter, a link is below.
Where can you invest, now that base rate is 0.25%?
CPI: Consumer Prices Index
https://www.ons.gov.uk/economy/inflationandpriceindices
Higher rate taxpayers hit record levels
Number of individual income taxpayers by marginal rate
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/523707/Table
_2.1.pdf
Inheritance tax rockets to record levels
Inheritance tax statistics: tax year 2013 to 2014. (Note: this is the most recent year for which
full data is available, because some estates take years to finalise.)
https://www.gov.uk/government/statistics/inheritance-tax-statistics-commentary
Inheritance tax: what can you do about it?
Inheritance tax exemptions: please ask your account manager for a copy of our hand-out
reference MKT309 for a list of these.
Were you part of the June investment exodus?
Investment Association monthly statistics.
http://www.theinvestmentassociation.org/media-centre/press-releases/2016/press-releasestatistics0616.html
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