Turbulent times can bring financial gain

APRIL 6TH, 2010 By DOMINIC
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Necessary evils are the bane of our lives and tax planning must be right at the top of many ‘to do lists’. Today, is the first day of the new tax year, so why not buck the trend and do your tax planning NOW rather than later.

With today’s announcement of a General Election set for 6 May, it’s an important time to get your financial house in order. Whoever secures power, changes in tax legislation are likely and speculation will fuel volatility in the markets. There has been much debate of late over Individual Saving Accounts (ISAs) which no doubt further confuse the layman on how to maximise and protect savings.

Talk of market volatility will make risk averse savers shudder at the thought of stocks and shares ISAs but there are low risk options and with some proactive management of your ISA funds you can really bolster your finances.

The annual limit has been increased to £10,200 and you can either commit the full amount from the outset or drip feed into the ISA throughout the year. By taking the latter approach you can benefit from ‘pound cost averaging’. This is a useful tactic in a volatile market as when prices are high your monthly contribution may buy fewer shares or fund units but when prices are low your investment buys more shares or fund units.

Volatility can bring real rewards for canny investors and this year our team will be working hard for our clients to ensure they benefit from the peaks and troughs.

Tax Year end fast approaching – ponder the opportunities

MARCH 3RD, 2010 By DAVID
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With a General Election fast approaching, the economy in a mess and no credible plan in place to tackle the budget deficit for fear of losing votes, I thought that now would be an appropriate time to mention some tax year end planning opportunities that you may wish to consider.

Individual Savings Accounts (ISAs)

The tax advantages, wide investment choice and flexibility of ISAs make them very suitable for building up capital and/or generating income.  The maximum that can be invested each year is £7,200 but since 6 October 2009, those aged 50 and over (or who will be 50 on or before 5 April 2010) can invest up to £10,200. 

If you have not paid into an ISA in the current tax year or have only partially funded your ISA, then you may wish to consider paying the maximum amount into an ISA (provided you have the means to do so), as unused allowances cannot be carried forward.

Pensions

Despite the changes announced in the 2009 Budget and 2009 Pre-Budget Report pensions still remain a tax efficient way to save for retirement (especially for those not caught by the £130,000 relevant income threshold).

Higher rate taxpayers whose total relevant income is greater than the income threshold of £130,000 (in the current tax year or in either of the previous two tax years) should seek independent financial advice to ensure that any future contributions they make do not fall foul of the anti-forestalling legislation.

Please note that if you are a higher rate taxpayer and you pay into a stakeholder pension, personal pension or self invested personal pension, then it is your responsibility to claim the higher rate tax relief from HM Revenue & Customs.  It is possible to claim higher rate tax relief on contributions made in previous tax years but you need to be quick, as from 6 April 2010 the time limit on claiming higher rate tax relief is due to be reduced from six to four years.

Capital Gains Tax

Every individual can make capital gains up to their annual exemption (£10,100 for 2009/10) without paying any capital gains tax.  Although capital gains are currently taxed at 18%, which is lower than the top rates of tax for income and dividends, there is no guarantee that capital gains tax will stay at 18%.

As the annual exemption cannot be carried forward it may be appropriate to dispose of chargeable assets before 5 April 2010 and thus crystallise gains up to the value of the annual exemption.

Capital losses can only be offset against capital gains, but capital losses can be carried forward indefinitely.  In may also be appropriate to crystallise losses before the end of the tax year or register undeclared losses from previous tax years.  Please note that capital losses must be registered with HM Revenue & Customs within five years and ten months of the end of the tax year in which they were made.

Inheritance Tax

Individuals seeking to minimise their inheritance tax liability should not overlook the main gifting exemptions e.g. gifts between spouses/civil partners, annual gifts up to £3,000, small gifts up to £250 per person per tax year, gifts that form part of normal expenditure out of income, gifts on marriage/civil partnership and gifts to charity.

A day in the life of a financial planner

JANUARY 20TH, 2010 By ADAM
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As my role as financial planner within Xentum I thought it would be interesting to give you a brief insight into some of my current projects:

Researching existing investments

One of the first jobs we do for new clients is to analyse their existing investments (or pensions).  It has not been unknown to spend a day simply trawling through what we call ‘a box of tricks’, in other words, a box full of financial paperwork.  Now this may seem an unenviable task to most, but I actually quite enjoy it.  The investments that have been collected over the years often tell a story of their own. 

I am currently working on a ‘box of tricks’ for a married couple who hold a number of investment bonds and unit trusts with various investment companies. In the past week I have been contacting these companies (a laborious but necessary part of my job).  Once I have all the required information I will start to research these investments and then provide the clients with a concise analysis of their overall portfolio.  This document provides a good starting point for any advice we give and is the first step to taking on any new client with existing investments.

Arranging life cover

One client currently has a significant IHT (inheritance tax) liability and along with their solicitor, we have been instructed to look at potential options to cover this liability.  One of the simplest and most cost efficient ways of doing this is through life protection.  I am therefore currently researching the different types of life cover available and the best premiums on the market for these options.  Once I have collated all this research, we will then sit down with the client and advise on the most sensible option going forward.

Finding a solution for a client’s windfall

One of our longstanding clients recently received a windfall.  The shares that had been passed on by the client’s deceased husband had suddenly become worth a considerable amount.  This is because the company with which she held a large number of shares became subject to a management buy out (MBO).  David, our head of technical is currently working on the tax implications of this windfall.  Once we have these, we will then sit down as a team and talk about suitable strategies for the client before agreeing a course of action.  The solution that we decide on in this case will need to balance a number of factors including; income, security, tax implications (particularly IHT) and capital growth. For a complex issue such as this it’s important we work in collaboration with the client’s solicitor and accountant to create the best outcome.

Xentum website

Finally, I’m in the process of overseeing changes to the website making it more interactive and educational for everybody.  So please keep an eye out over the next couple of weeks for any changes and feel free to make any comments or suggestions as to how we can improve the website for you.

Pre-Budget Report 09

DECEMBER 16TH, 2009 By DOMINIC
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As the dust settles following last week’s greatly anticipated Pre-Budget Report, I cannot help but feel a little disappointed.  The expectation was that Alistair Darling would take this Pre-Budget as an opportunity to show some real steps towards reducing our ever increasing national deficit.  Unfortunately, the reality was that Messrs Darling and Brown tried to use this Pre-Budget as a political swipe rather than an economic one. 

Many of the policies announced such as boiler schemes and bingo tax do not merit serious discussion, therefore I will not bother with the vast majority of the Pre-Budget Report. There were some interesting things detailed in the small print that I thought would be useful to point out:

Pensions

The Government announced in the Budget 2009 its intention, with effect from 6 April 2011, to restrict tax relief on pension contributions for individuals with incomes of £150,000 or over.  The Government has since announced in the Pre-Budget Report that the income definition for the £150,000 threshold will include the value of employer pension contributions and that tax relief for those with incomes below £130,000, before the inclusion of employer contributions, will not be affected by the amendment.

To reflect this change, the anti-forestalling rules that were introduced in the Budget 2009, to prevent individuals from making large contributions to their pensions before 6 April 2011, have been extended to those with incomes of £130,000 or over from 9 December 2009.  This change will increase the number of individuals caught by the anti-forestalling rules.

State Pensions

The Basic State Pension will be increased by 2.5% from April 2010.  This increase will not apply to the State Earnings Related Pension Scheme (SERPS) or State Second Pension (S2P), which means that some pensioners will not experience the full benefit of the increase.

Income Tax

The personal allowance and higher rate threshold for the tax year 2010/11 will be frozen at the 2009/10 levels, which means that some non-taxpayers and basic rate taxpayers, who receive a pay rise, could find themselves paying 20% or 40% income tax for the first time.

National Insurance

With just two exceptions, all National Insurance contribution rates and thresholds will be frozen at the 2009/10 levels.  National Insurance is set to rise by 0.5% from 6 April 2011 and this is on top of the 0.5% increase that was announced in the Budget 2009.  In other words, National Insurance for employees, employers and the self employed will all increase by 1%.  The primary threshold and lower profits limit will be increased to compensate the lowest earners.

National Insurance is a soft target for politicians seeking to raise revenue because of the popular misconception that it is not a tax.  A rise in National Insurance for employers will increase the cost of employing staff, which makes the timing of the decision a little strange, given that the UK is still in recession and unemployment is rising. 

Inheritance Tax

The nil rate band for the tax year 2010/11 will be frozen at the 2009/10 level.  With house prices starting to rise again, this will result in more individuals having to pay inheritance tax.

Summary

With the main political parties not prepared to explain their policies for addressing the public deficit, for fear of alienating potential voters, the UK is now in economic limbo.  Whoever wins the general election will face the stark economic reality, and consequently tough decisions will have to be made regarding taxation and public expenditure.  It is therefore vitally important that individuals take responsibility for their own finances and seek independent financial advice.

Tax relief comments and advice

JULY 15TH, 2009 By DAVID
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As a chartered financial planner at Xentum, I’m happy to give technical comment and advice on topical personal finance issues. It will give you chance to ask any questions you may have which I can respond back to.

In this year’s Budget, the Chancellor, Alistair Darling, announced radical changes to the tax relief available on pension savings for high earners.  The Government has made this change because it is unhappy that 25% of all the money it spends on pensions tax relief goes to the top 1.5% of pension savers.

The Government intends from 6 April 2011 to restrict tax relief for individuals with an annual income of £150,000 or more.  This restriction will apply to all pension schemes and to all contributions, including contributions made by an employer or a third party.

In anticipation of the new restriction, the Government is introducing new rules with effect from 22 April 2009 to restrict higher rate tax relief on pension contributions for individuals:

• Whose annual income (earnings, savings interest, dividends etc) is £150,000 or higher in any of the tax years from 2007/08 onwards,
• Who increase their normal ongoing regular pension savings, including those made by their employer, above their normal regular savings pattern and
• Whose total pension savings, including those made by their employer, exceed £20,000 (the special annual allowance).

The aim of this restriction is to prevent individuals gaining an advantage by increasing their pension savings in the interim period.  Tax relief on additional pension savings above the special annual allowance or the normal ongoing regular pension savings will be subject to a special annual allowance charge.  The aim of which is to effectively reduce the tax relief on the additional savings to the basic rate of tax only.

Whilst I can understand the Government’s concern that the current system of tax relief is skewed towards high earners, the current position is in no small part a direct result of the Government’s reform of pension legislation in 2006.

The proposed change in its current form will introduce unnecessary complexity to an already complex matter.  I would have thought that a far simpler solution would have been to reduce the annual allowance (currently £245,000) to a more acceptable level, but I guess that would have been far too simple.

If you have any queries or questions I’d be happy to help.