Independent Financial Advice

Financial Focus Newsletter - Spring 2017

Independent Financial Advice

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ISAs have traditionally been seen as a foundation for good financial planning because of their general tax efficiency.

However, they have had a negative effect on estate planning because they form part of the deceased’s estate for inheritance tax (IHT) purposes. Two recent changes could make ISAs more useful for estate planning.

A spouse or civil partner can now effectively inherit the deceased’s ISA savings. This is helpful for general tax planning, but on its own it will not save IHT, because this tax would normally only be charged when the survivor eventually dies.

More important, ISAs can benefit from business property relief (BPR) to the extent that they are invested in qualifying AIM (Alternative Investment Market) stocks. Once you have owned BPR-qualifying shares for at least two years, you can pass them on death free from IHT. AIM stocks are generally much higher risk than a typical stocks and shares ISA portfolio. But the higher risk needs to be considered against a potential loss of 40% IHT (for those with larger estates).

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

April will mark the start of another measure designed to increase tax for buy-to-let (BTL) investors.

The BTL sector is about to experience the start of a third adverse tax change in April. Last year saw an increase in stamp duty across all of the UK and at the end of 10% wear and tear allowance, both of which have already started to alter the economics of BTL investment.

From 6 April 2017, only three quarters of interest on any BTL mortgage can be against rent for tax purposes, with a 20% tax credit given for the remaining quarter. By 2020/21 there will be no offset and in its place will be a 20% tax credit for all interest paid, equivalent to basic rate relief.

If you are a higher or additional rate taxpayer, this will mean a drop in net income. A typical example based on rental income of £10,000 and interest of £6,000 paid by a higher rate taxpayer is shown below.

The fact that by 2020/21 your full rental income (less expenses) will be taxable means an increase in your total taxable income. This could mean you cross an income threshold triggering extra tax or you are pushed into a different tax band.
And before you think “I’ll sell up”, remember that the capital gains tax (CGT) rates were not cut for residential property: they remain 18% within the basic rate band and 28% above. Worse still, from April 2019, CGT on residential property will be payable within 30 days of sale.

All these tax changes have significantly reduced the appeal of BTL for many, even before you consider the possibility that interest rates could start rising in the future.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Think carefully before securing other debts against your home. Business buy to let and commercial mortgages are not regulated by the FCA. Think carefully before securing other debts against your home.

The Financial Services Compensation Scheme protection limit for deposits with banks and building societies returned to £85,000 on 30 January 2017. The £10,000 increase, which has been subject to regulatory consultations, is the result of the recent decline in the value of the pound against the euro. Under EU law, deposit protection is set at €100,000 or its currency equivalent. If you are holding such high levels of cash, you should first review how much money you need on deposit. At best, instant access accounts offer a sub-inflation 1%, but many pay considerably less.

Retirement Planning

The cuts and adjustments made to the two main pension allowances since 2011 have made retirement planning all the more complex.


The lifetime allowance, which sets an effective tax-efficient ceiling on the total value of pension benefits, was £1,800,000 in 2010/11. Back then, the corresponding annual allowance, which sets an effective tax-efficient ceiling on annual pension contributions, was £255,000. Dividing the lifetime allowance by the annual allowance suggests it would have taken about seven years of contributions at the rate of the annual allowance to reach the lifetime allowance. In theory at least, you could have deferred pension planning until less than a decade before retirement.

In 2016/17 the lifetime allowance is £1,000,000 while the annual allowance has shrunk to a £40,000 maximum for most people. So now it would take 25 years to reach the maximum, based on dividing the current lifetime allowance of £1 million by the annual allowance of £40,000 - and ignoring any investment growth. The lifetime allowance will start increasing from 2018/19, but only in line with the CPI inflation index. There is no corresponding adjustment planned for the annual allowance.

These two calculations underline how important it has become to start pension planning as soon as practical and keep making contributions each year. There is scope to carry forward unused annual allowances, but only from the previous three tax years. For example, you have until 5 April 2017 to mop up any of your unused £50,000 annual allowance for 2013/14. However, you can only take advantage of the carry forward provisions once you have exhausted the current tax year’s allowance.

To complicate matters further, the private sector final salary schemes and HMRC use different valuation bases, so a transfer could push you over the lifetime allowance, even with no fresh contributions.

The constraints now applying to both the lifetime and annual allowance make regular reviews of your retirement strategy all the more important, particularly if you are considering large contributions as the tax year end approaches.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Occupational pension schemes are regulated by The Pensions Regulator.

Financial Planning

Philip Hammond’s first - and last - spring Budget on Wednesday 8 March could make early tax year end planning all the more important in 2017.

The one major surprise in Mr Hammond’s Autumn Statement last November was that he would be reverting to autumn Budgets, last seen under Ken Clarke in the 1990s. So the 2017 spring Budget will be the last of its type and it will be the first of two Budgets this year. It will be Mr Hammond’s first Budget set piece and, in the light of the government’s finances, it looks unlikely to offer many giveaways. As ever, your year end tax planning is best completed before the Chancellor reaches the despatch box.

The 2016/17 tax year end checklist starts with pensions, but there are several other areas which also need examination:


In a paper published alongside the 2016 Autumn Statement, the Treasury noted that, “the cost of tax and National Insurance contributions relief on pension savings is one of the most expensive sets of relief offered by the government. In 2014 to 2015 this cost around £48 billion, with around two thirds of the tax relief going to higher and additional rate taxpayers.” The Treasury paper then remarked “…it is important that resources focus where there is most need.”

Mr Hammond’s predecessor came close to ending higher (and additional) rate tax relief on pension contributions in 2016. Given that £48bn cost and the Treasury’s need for additional tax income, Mr Hammond may be tempted to venture where Mr Osborne held back.

Individual Savings Accounts (ISAs)

The current ISA contribution limit is £15,240, which will rise to £20,000 in 2017/18. Maximising your ISA contributions remains important if you are a higher or additional rate taxpayer or pay capital gains tax (CGT), even though this tax year’s savings and dividend tax changes may have cut some of your investment tax bill:

•    All income within ISAs is free of personal UK tax and does not count towards the dividend allowance or personal savings allowances.
•    An ISA and all its tax benefits can effectively be inherited by a surviving spouse or civil partner.
•    Gains made within ISAs are free of CGT.
•    There is nothing to enter on your tax return.

CGT annual exemption

UK investors saw some useful gains in many of the major stock markets in 2016, partly because of Sterling’s post-referendum fall. If you have profits from your investments, as a broad rule you should consider whether it’s worth realising some of your gains to use your annual CGT exemption. In 2016/17 you can realise gains of up to £11,100 without any liability to tax – a potential tax saving of up to £2,220 (£3,108 for residential property which doesn’t benefit from another tax relief such as principle private residence relief). Crystallising gains could provide you with cash to make a pension or ISA contribution.

Inheritance tax (IHT)

The main IHT nil rate band of £325,000 has been frozen since 6 April 2009 and will remain so until April 2021 – making it all the more important that you use your annual inheritance tax exemptions. These include the £3,000 annual exemption, both for 2016/17 and any unused amount from 2015/16, and also the often forgotten normal expenditure out of income exemption. The tax year end is also a sensible time to review the impact on your estate planning of the main residence nil rate band, which starts life at a maximum of £100,000 in 2017/18. Get in touch with us if you have any questions on this new relief.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The 2016 Autumn Statement in November last year was the new Chancellor’s first set piece, but it did not contain much good news.

£122,000,000,000 (£122 billion)

That is the increase in the government’s projected total borrowing to 2020/21 between George Osborne’s last spring Budget and Philip Hammond’s first autumn statement. Faced with such a deterioration in government finances, the “fiscal reset” which Mr Hammond talked of when becoming Chancellor evaporated. Instead, there was a range of measures which marginally raised projected tax income accompanied by a much larger increase in spending. The tax changes included:

Salary sacrifice schemes
The income tax and national insurance advantages of salary sacrifice schemes, such as exchanging salary for a tax-free mobile phone, will largely disappear from April. This will reduce the benefits of pick-and-mix remuneration packages, although there will be transitional protections for arrangements in place before 2017/18. Most importantly, the use of salary sacrifice to boost pension contributions will not be affected.

Money purchase annual allowance
This reduced pensions annual allowance was introduced last April to limit the scope for recycling flexible pension income as fresh, tax relieved pension contributions. It was initially set at £10,000, but from 2017/18 it will be just £4,000. If you are planning to phase your retirement, this reduction could complicate matters.

Foreign pensions
Several largely technical revisions affected foreign pensions. One side effect has been to reduce the attractions of transferring UK pension arrangements overseas.

VAT flat rate scheme
A change to the VAT flat rate scheme will mean that many one person businesses, such a consultants, will see their VAT bills increase, with a corresponding drop in earnings.

Tax evasion and avoidance
The usual raft of measures were aimed at increasing tax revenue, some of which had already been trailed by Mr Osborne. One important new rule will be a legal “requirement to correct” by 30 September 2018 any “offshore tax non-compliance” existing on 6 April 2017. The 2018 deadline reflects the full implementation of a new automatic information exchange between tax authorities around the globe.

If any of these measures could affect you, please contact us for further information and advice.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

This newsletter is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The Financial Conduct Authority does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme. The newsletter represents our understanding of law and HM Revenue & Customs practice as at 1 June 2015. © Copyright June 2015. All rights reserved.

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