Revisiting your Inheritance Tax strategy

The latest data from HMRC revealed IHT receipts for April 2021 to March 2022 were £6.1bn, 14% (0.7bn) higher than in the same period 12 months earlier.

Receipts have increased partly due to higher death rates during the pandemic, as well as due to the rise in property prices which has seen more families coming into scope for IHT. With thresholds frozen at current levels, the nil-rate band of up to £500,000 – IHT is effectively a stealth tax.

Below are a few IHT top tips:

• Gifts – use your £3,000 annual allowance before the end of each tax year, or you can make gifts of up to £250 per person per tax year.
• Make a Will – and keep it up to date
• Leave money to charity – if you leave at least 10% of your net estate to charity, the IHT rate reduces from 40% to 36%
• Take out life assurance – this won’t reduce your estate but instead provides a lump sum to your beneficiaries to help pay the IHT bill. The policy should be written in trust.
• Trusts – for example, putting money into a trust to pay for a grandchild’s education or to support a range of potential beneficiaries.
• Pension nomination – minor tweaks to where to direct the potential death benefits can prevent large IHT issues on the estate of the second spouse on death.
• Take advice – sensible IHT planning can help to reduce the amount of you IHT your beneficiaries will have to pay and safeguard your wealth.

By Philip Harper  |  October 2022

A case for natural income

Whilst capital values have been bouncing about in recent years, the natural income distributions from FM’s income portfolio have stayed incredibly consistent. ‘Natural Income’ is the phrase we use to describe the process of producing income without disturbing the underlying investment holding. Many clients were very surprised they didn’t see a drop in income and in fact the underlying income performance during the worst COVID months, helped to encourage and remind us that pure income funds do have their place for those looking for regular investment earnings. The charts below confirm this fact.

FM Income Portfolio showing historical income payments

Each quarter we review the portfolio to check that it’s doing what we expect it to and for five years or so, we have not needed to make any significant changes. In addition, we will periodically meet with the fund management groups to get some deep dive information from those who make day-to-day investment decisions.

Our Income Portfolio is primarily used inside ISAs, however it’s also available as a General Investment Account (GIA) and although any income generated, isn’t as tax efficient as an ISA, many clients still use this route as a method to squeeze the maximise returns from their savings. If you would like details on the underlying funds or to discuss whether this is an appropriate option for you, please do call us.

By Philip Harper  |  October 2022

Don’t let caution get the better of you.
“A ship is safe in harbour, but that is not what ships are for”

Until relatively recently, inflation wasn’t a serious concern. The UK hadn’t seen persistent price rises since the 1970s. Today, there are reasons to be more concerned. Supply shortages and bottlenecks, higher energy costs, increases in wages to attract staff in sectors finding it difficult to recruit and the government unwinding covid support schemes are pushing up prices. While central banks continue to suggest that the rises are “transitory”, many economists are assuming inflation will settle at a higher level than it has over the past few decades.

When inflation rises quickly, the Bank of England will tackle it by raising interest rates. They work on the principle that when borrowing is more expensive, people will have less to spend, and prices will go down in response. However, if inflation is caused by external forces – such as the global squeeze on energy prices, then raising interest rates may not solve the problem.

This may be an issue for investors. Even if inflation stays in line with the Bank of England’s targets, long-term investors need their savings to grow by around 2% a year just to ensure it maintains its purchasing power.

The most important rule for any long-term investor is to avoid “reckless caution”. Investors often don’t recognise that there is a risk associated with keeping their long-term savings in cash because their capital value stays the same, but their buying power will be progressively less and less. One of fm’s 7 principles of investing is – don’t just invest in cash. Every investor does need emergency funds but for longer term investment plans, other asset classes will offer better prospects for capital growth and potentially beat the perils of inflation.

By Philip Harper  |  June 2022

Retirement options for high income earners

In this world of ours very little stands still. The same can be said for the pensions landscape, as rule changes over the years have made retirement options for high income earners harder and harder to navigate.

High earners are faced with even more restrictions and potential pitfalls, making it vital to understand the rules and seek specialist wealth planning advice. Calculating your ‘adjusted income’ for example, can be complicated but your wealth adviser can do this for you. You could also be affected by the lifetime allowance (currently capped at £1,073,100), the annual allowance (currently capped at £40,000) and the tapered annual allowance (which can reduce to just £4,000 for individuals with ‘adjusted income’ over £312,000).

Luckily, there are tax-efficient options available to high earners wanting to save for retirement.

ISAs
Since their launch, ISAs have been a phenomenal success story. A few years ago, research identified more than 1,000 ISA millionaires in the UK, and this number has certainly expanded since. ISAs allow you to place £20,000 each year in a tax-free wrapper, and the compounding effect plus a supportive market over time can make a real difference.

Spreading investments between spouses
Putting a portion of your investment capital in your spouse’s name makes a lot of sense. It allows each of you to take advantage of your respective tax positions and allowances and could boost your net position.

Offshore bonds
An ‘offshore bond’ is a tax-efficient investment wrapper set up by a life insurance company in a jurisdiction with a favourable tax regime, such as the Isle of Man or Dublin. Because any growth in the investments held within the bond is not subject to UK tax, it can be a useful way to top up retirement savings, although foreign taxes may be deducted at source. 

It is possible to withdraw up to 5% of your original investment each year for 20 years without incurring an immediate income tax liability. If the 5% allowance is not used in a given policy year, the unused allowance carries forward to the next policy year on a cumulative basis. This enables you to select the most opportune time to incur a tax charge.

If you have a higher income, multiple or large pension pots or more complex requirements, retirement planning can be complicated – and there are many rules just waiting to trip you up. If you’d like to ensure you are making the most of pension allowances and consider alternative ways to save for your future, our wealth planning team is here to help.

By Philip Harper  |  October 2021

Don’t experiment with your investments

Product providers may lure investors with the promise of glittering returns and market outperformance. In reality, only a few achieve this. We believe investors are better served aiming for realistic and consistent long-term investment returns.

 What is a reasonable goal for your investments?
The answer for many investors is market returns aligned with their risk profile. Understanding your risk profile is the cornerstone of constructing a suitable long-term investment portfolio. Conversely numerous academic studies have shown that aggressive strategies chasing returns and the latest ‘hot stocks’ very rarely beat the market.

These mistakes can reduce investment growth. Aiming for market returns is a good starting point when building wealth. Deciding which markets to invest in is also essential and stick to your investment strategy. Many investors take inappropriate risks, investing in products they do not fully understand, make hasty decisions when stocks experience sharp swings, and they pay too much in fees.

You can be more successful with your investments by avoiding common pitfalls, we recommend:

 Have an investment plan for the long term and stick to it. Your strategy must be tailored to your goals and objectives, risk profile and time horizons. Start investing as soon as possible.

Diversify and always consider your investment as a whole: Know what you are buying and understand it thoroughly. Select high-quality funds for your portfolio while being mindful of costs. Indexed tracking funds may offer transparency, low costs and close to market performance for the index they aim to replicate.

Review regularly: Review your risk profile at least annually or whenever there is a change in your financial or personal circumstances. You may need to rebalance your portfolio to adjust different asset class weightings back to your long-term strategy possibly with expert help.

The best investment is advice: If you would like to potentially boost your long-term investment success, please contact us to conduct a review of your portfolio.

By Philip Harper  |  July 2021