Individual Savings Accounts (ISA)
With historically low interest rates on deposits, inflation and taxation present very tangible risks to the value of savings in real terms.
ISAs are a tax efficient investment vehicle as an individual pays no tax on the income received from ISA savings and investments (including dividends), nor does the individual pay tax on capital gains arising on ISA investments.
The table below highlights the strength of ISAs in shielding wealth from the impact of tax and inflation.
The individual allowance for the current tax year is £15,240 – increasing to £20,000 next tax year. The Junior ISA allowance is currently £4,080 and available for anyone under the age of 18. An interesting quirk in the current legislation is that 16 and 17 year old children currently have access to two ISA allowances: £4,080 for a Junior ISA as well as £15,240 for an adult cash ISA. Consideration may also be given to converting a Child Trust Fund into a Junior ISA, permitted since April 2015.
If appropriate, take up all ISA allowances, remembering they are not carried forward to the next tax year. Given how low interest rates are, consider investing monies currently held on deposit.
Capital Gains Tax
Regular and proactive capital gains tax management will serve to reduce the impact of taxation on wealth accumulation/preservation.
The individual tax-free capital gains allowance, known as the ‘annual exempt amount’, is £11,100 for the current tax year. Where sensible, the annual capital gains allowance should be fully utilised each tax year. Failure to do so will result in the bene t being lost. Effective use of the allowance could reduce your tax liability by up to £2,220.1
Consideration may also be given to realising gains on assets and transferring them to a lower or non- taxpayer or tax effective investment, such as an ISA. Losses on capital assets may be realised in order to offset any taxable capital gains that were realised in the current tax year.
The tax incentives offered by pensions make them a very attractive means of accumulating wealth for retirement. The new pension freedom rules have provided investors with greater access, flexibility and control over their pension savings.
The current annual allowance for pension contributions is the lower of £40,000 or 100% of your earnings. Restrictions apply to individuals earning more than £150,0002. The key benefits of making additional pension savings before the end of the tax year:
- Boost retirement savings within a highly tax efficient investment vehicle.
- Access pension tax relief at source of 20%. For example, if you contribute £32,000 (subject to allowances), the government will top up the contribution by a further £8,000 (making your total contribution £40,000).
- Reduce your tax liability: contributions made by higher rate (HRT) and additional rate (ART) taxpayers may attract additional tax relief of 20% and 25% respectively.
- Reclaim allowances: the standard tax free personal income allowance of £11,000 is reduced for incomes over £100,000 (cutting out altogether at £122,000). Pension contributions can be used to reduce an individual’s taxable income and reinstate the personal allowance, providing tax relief of up to 60% on the contributions made.
- Contributions can also be made for non-working family members, such as a spouse, child or grandchild. If a contribution of up to £2,880 is made, the government will contribute a further £720, by way of pension tax relief.
Don’t miss the opportunity to carry forward previous pension allowances: the current rules may allow you to make use of unused pension allowances from the previous three tax years. This can be a particularly useful tax planning strategy for those with high tax liabilities and a great way to utilise unexpected windfalls. But don’t act without seeking professional advice.
Inheritance Tax Planning
Inheritance tax (IHT) is a pervasive influence on the intergenerational transfer of wealth. IHT is payable at a flat rate of 40% on estate assets in excess of £325,000 (known as the nil rate band) for a single person or £650,000 for a couple. From 2017/18 the nil-rate band will increase to include an additional main residence allowance of £100,000 when the residence is passed on to direct descendants. Small gifts made out of normal income do not generally attract IHT, proving a useful IHT mitigation strategy. This is known as ‘exempted gifts’. Whilst the ‘exempted gift’ threshold is considered by many as insignificant, it can be used as an effective means of investing for grandchildren via contributions to Junior ISAs.
You can give away £3,000 worth of gifts before 6 April 2017 without them being added to the value of your estate. If you haven’t used your annual exemption of £3,000 from last tax year, you can also carry it forward and use it this year.
Whilst many of the above-mentioned approaches to managing your financial affairs efficiently are fairly straightforward, many investors often don’t connect all the dots and consider wealth planning alongside their investment portfolio.
The points made in this article are for illustrative purposes only and if you require any assistance with any of the above opportunities in relation to your personal circumstances, contact your Investment Manager who can make an introduction to our specialist wealth planning team.
It is important to note that JM Finn & Co is a not registered tax adviser and where tax advice is required, we would look to work with your existing advisers or refer you to a trusted external tax specialist.
1 Based on £11,100 of assessable gains at rates of up to 20% (applicable to higher or additional rate taxpayers).
2 For individuals with 'threshold income' in excess of £11,000 and 'adjusted income' in excess of £150,000, your annual allowance will be reduced by £1 for every £2 above £150,000. The maximum reduction is limited to £30,000.