New Year Resolutions?
By Alexandra Hewazy, Nick Bearne and Louise Towers
Please note: This article does not constitute advice and is written with a UK audience in mind. Barclays Private Bank does not provide tax advice and you should always seek independent tax advice. Your tax circumstances are unique to you and subject to change.
It’s common to approach January with good intentions, following the exuberance and dare we say, over-indulgence, of the festive celebrations.
Typically, the focus is on making health pledges, but for some people it’s also a welcome opportunity to reflect on future financial plans.
As you look ahead, are you confident your plans reflect your circumstances and goals? Have aspects of your work or home life changed since last year? Or might they change imminently? Do you have any personal events coming up, such as a marriage or even a divorce?
To bring these themes to life, here are five thought-provoking topics that hopefully provide timely context and clarity for the year ahead.
Not a cheery topic to start with, but an essential one.
It is estimated that as many as two thirds of the UK population doesn’t have a Will1, leaving the majority of estates exposed and rudderless.
Meanwhile, for those people who do have a Will, there are often a number of misconceptions at play. For example, did you know that simply getting divorced changes nothing? The terms of a Will remain intact until they are re-written.
Likewise, marriage doesn’t give a spouse automatic entitlement to an estate. If someone dies without a Will, known as dying ‘intestate’, and if they have children with their spouse, then the estate is divided up between them: 50% to the spouse, 50% to the children (who can’t access their assets until they’re 18 – a young age that might sit uncomfortably for some).
With a little bit of foresight and maintenance, these misconceptions and hurdles can be remedied relatively easily.
Read ‘Where there’s a will, there’s a way’ to find out more.
Again, not an easy topic to address but another vital one.
Why? Because life is unpredictable, and things can change in the blink of an eye. As an example, it’s estimated that 18,000 people a year in the UK are diagnosed with Parkinson’s2. In parallel, 5,000 Brits are living with Motor Neurone Disease at any one time3.
One of the options available is a Lasting Power of Attorney (LPA), giving the ‘donor’ a say in who controls their assets and makes decisions on their behalf, in the event of becoming incapacitated.
While setting up an LPA is a relatively straightforward quick process, it has long-lasting implications – once formally in place, the LPA is a legally binding document. Trust between the donor and the attorney is therefore vital.
Efficiency: Part 1 – preservation
Each country has its own tax rules, with some jurisdictions more stringent than others.
Knowing how the rules work and how they impact wealth is an important way of ensuring efficiency. Or rather, it’s an important way of avoiding inefficiency.
In the UK, the available tax allowances are becoming less generous. For example, at the time of writing, Capital Gains Tax (CGT) is exempt on gains at, or below, £6,000 per tax year. And in the next tax year (2024/25), it will halve again to £3,000. Less than two years ago, this allowance was over £12,000.
Likewise, the tax-free dividend allowance recently fell from £2,000 to £1,000. The new tax year in April 2024 will see it shrink to £500.
With this in mind, let’s consider an Individual Savings Account (ISA) – a simple and efficient financial planning tool that’s widely available in the UK to individuals aged 16 and over. There are cash ISAs and Investment ISAs.
Within an ISA, the gains are tax-free and the current rules allow an individual to fund up to £20,000 per tax year. As of 6 April 2024, the law has changed to allow you to hold this annual sum across more than one ISA.
Are there any disadvantages? As with all investing, an Investment ISA comes with a risk of loss and you may get back less than you put in. The best rates are often, but not always, offered hand-in-hand with the agreement not to touch the funds for a year.
Efficiency: Part 2 – retirement
Similar to Wills, pensions can be an overlooked area because people either don’t want to contemplate the latter stages of their life, or are too preoccupied with the present day.
And like ISAs, they are a tax-efficient financial planning option – both when funding the pot, and when transferring the pot on death.
From 6 April 2024, the lifetime allowance of £1,073,100, is being fully removed. And the amount that a pension can be funded by has already risen to a maximum of £60,000 a year (up from £40,000), subject to the allowance not being tapered down if annual income is above £260,000.
While employer pension schemes might have beneficial charging arrangements, it’s not uncommon for the default funds on offer to be incompatible with an individual’s investment objectives. Private pensions, or Self-Invested Pensions (SIPPs) may therefore offer a viable alternative or a complementary strategy.
Pensions are not included within the scope of a Will and it’s up to the contributor to pre-inform the pension fund about whom to pass their pot to once they’re deceased. This is done via a ‘letter of wishes’, which can be regularly reviewed and amended to keep up with life’s changes. The money in that pot will then be considered as sitting outside of the estate, making it exempt from inheritance tax.
Efficiency: Part 3 – high-earners
If you’ve heard of Venture Capital Trusts (VCTs) but aren’t sure what they are, here’s a brief summary.
A VCT is a company that an individual can buy shares in, and the money pooled (by the VCT manager) is used to invest in young, innovative, private UK companies.
They can appeal to higher-earners due to the income tax relief on offer – at the time of writing, investors are eligible for up to 30% on investments up to £200,000. There’s no CGT on share disposals up to £200,000, and there’s no tax on dividends.
On the flip side, the private and relatively junior nature of the companies held in VCTs, mean an investor is accepting a higher level of risk than if, for example, they were to invest in a portfolio of well-established publicly traded companies. The fact those companies are also UK-only firms, means there’s less diversification on offer (compared to a global investment solution), which can potentially limit opportunity and increase risk.
Meanwhile, an Enterprise Investment Scheme (EIS) allows for a higher potential investment of up to £2 million while still gaining the 30% income tax relief. However, these investments carry even more risk by virtue of the fact of being invested directly into the underlying companies, rather than a pooled approach offered by a VCT. They come with potentially greater growth prospects, but also greater prospect of loss, for which HMRC compensates investors with further additional tax reliefs.
A few final words
This article doesn’t constitute investment advice and is an attempt to share insights regarding some common financial planning topics.
As with many things in life, a little bit of organisation goes a long way. Preserving and growing wealth takes skill and expertise, particularly when large sums of money are involved and/or spread over multiple jurisdictions. It also requires flexibility and agility, as tax rules change over time.
That said, there are some basic building blocks worth knowing. Understanding available allowances, and being mindful of potential inefficiencies impacting your wealth, can be a useful place to start.
After all, what have you got to lose? If the answer to that question is ‘a lot’, then hopefully these insights have offered food-for-thought as you reflect on the year ahead.
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