What is sudden wealth? How to deal with an overnight windfall
Sudden wealth is a growing issue as older generations begin to pass on significant estates to their loved ones. The phrase “sudden wealth” is likely to conjure images of winning the lottery or inheriting a large sum from a mysterious great aunt.
However, more likely than not, it pertains to people whose parents have quietly squirreled away a nest egg through property, pensions and other assets over a lifetime. The crux is when these people pass away – they may have failed to put in place an inheritance plan, or even to properly explain to beneficiaries what the contents of a portfolio are and how much they’re worth. This can create huge issues for their beneficiaries as unmitigated tax liabilities can force people to sell assets they may not be prepared to deal with.
It can create other issues such as people becoming “accidental landlords” without really knowing what they’re taking on. There can also be issues where someone suddenly finds themselves with large sums in their bank accounts but has little idea of what the most responsible thing is to do with that money.
This is what makes intergenerational financial planning absolutely critical to protect those beneficiaries from a surprise inheritance.
Intergenerational financial planning
With older generations accruing larger amounts of wealth the potential for this wealth to pass on to their children - or even grandchildren - increases the risks associated with that wealth. It is therefore critical for a family to plan together for the outcomes of inheritance. A child is going to struggle if they inherit a substantial portfolio of assets from their parent with little clue of what those assets are, how they work and how to manage them. Dealing with an overnight windfall such as this can be emotionally extremely difficult and can lead to major mistakes that unravel years of sensible management.
While basic practices such as having a will in place are key, involving children in the decision-making process of how that estate planning is managed is really important, as is ensuring they understand what the assets are and how much they’re worth. How that wealth trickles down to younger generations will impact the tax that they pay, and how to structure that wealth over the long term. It can also colour decisions you make early in retirement in regard to which assets you draw upon to fund your retirement. For instance – gifting is an effective way to mitigate inheritance tax (IHT), but if your wealth is largely bound up in property this might not be the most effective way to pass on money – particularly if it leaves you cash poor.
Ensuring your loved ones fully understand your wealth portfolio will also prevent them from making mistakes once it passes to them. An adviser can help structure the process and talk to everyone involved in order to prepare them for what is to come. Intergenerational wealth planning takes care of the wider picture and how it can affect multiple generations, their future plans and their own wealth. It is an essential process for anyone with assets to pass on.
How to deal with sudden wealth
For those who have found themselves with a sudden windfall, be it through parents who didn’t communicate their plans, a lottery win, or a mysterious wealthy relative, the most important first step is to speak to a financial adviser.
An adviser will help you to understand the potential tax implications, the best way to structure what you have received in order to set it up successfully for life and mitigate any issues with your own wealth, and how to deal with the emotional implications of such a large windfall.
The temptation might be to go on a spending splurge. While buying that car you always wanted or taking the trip of a life time isn’t necessarily bad, it is essential to ensure that you can enjoy the fruits of some of that wealth while also making it work for you and last in the long term.
How to get the most out of your workplace pension
Pension provider Aviva has warned that workers are “sleepwalking” into retirement with one in three employees unaware of how many pensions they have.
Workplace pensions are very different in 2023 compared to past decades. Gone are the old final salary or ‘defined benefit’ (DB) pensions and in are defined contribution (DC) pots for our long-term savings. Making the most of your DC pension really matters – you really do get out what you put into it. There are a few really important aspects to consider with these workplace pensions, and ways to maximise the potential for growth.
Contributions
The first thing to note about DC pensions is there is a minimum contribution level which is set automatically by the Government. While there is always conjecture over what level it should be at, the basic requirements are:
- 5% from your gross income (including tax relief)
- 3% from your employer
Under auto enrolment you will be automatically given a workplace pension pot assuming you earn more than £10,000 a year. Opting out is essentially throwing away money. If you don’t have the workplace pot, then you’re essentially turning down income from your employers. The annual contribution limit to pensions is £60,000, which makes it more generous than an ISA in cash terms. It is a good idea then to contribute as much as you can to unlock valuable tax relief.
Pensions are arguably better than ISAs because of this tax relief. While you will have to figure out tax liabilities when withdrawing from a pension later in life, the extra upfront money from tax relief when compared to an ISA means you have more money to start with that can grow over time.
There is another thing to watch out for too – if you earn above £50,000 then automatic pension contributions are actually capped. For instance, if you earn £45,000 a year your total monthly contribution to a pension will be £161.50. If you earn £50,000 this will rise to £182.33. However, if your income rises to £55,000 the cap on contributions means your employer won’t contribute more, and your salary won’t adjust contributions higher, meaning you’ll be contributing less than 5%.
It is essential to check with your employer and consider asking them to increase your contributions above this level if you want to maximise your pension pot.
Consolidation
A very common issue, as Aviva alludes to in its research, is just how many pension pots we now accrue. Every time you switch jobs, you’ll start a new pot with whichever provider your employer uses. This can lead to a mess of small pots with a mixture of policies, charges and performance, and isn’t ideal. Some people choose to consolidate all those pots into one coherent SIPP. You can’t do this with your current workplace’s pot because this would mean forgoing those valuable employer contributions, but with old pots you might not be adding to, this can be a good way to manage the entire amount in one place.
There is a caveat to this, however.
The ‘small pot lump sum’ allows you to take a whole pot in one go when it is worth below £10,000, with 25% of it tax free. If the pot is in a workplace pension it’s unlimited how many times you can do this, but if it’s in a personal pension then you can only take three.
It is important to consider your options carefully here and is highly recommend to speak to an adviser who can help you plan the best course of action.
Investment
The final strand of workplace pensions is perhaps the most forgotten of all – investing. It’s easy to think of a pension as just a savings pot you accrue, but in fact that money is all invested in order to grow over time and maximise the size of the nest egg when you retire. The issue here is that workplace pension investment options can be a bit lacklustre.
The problem here is that investment options vary enormously by provider. Some offer hundreds of funds while others will offer maybe three to five. There’s nothing you can do about this as it is at the behest of your employer to pick the provider. However, if you think you might be in an underperforming “default” fund, it is essential to seek advice on ways in which to improve the growth potential of your pot.
The same goes for any personal pension you have, as picking the right kind of funds can set you up for long-term failure or success.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 18th July 2023.
The biggest mistakes to avoid when making out a will
Creating a will is a crucial part of a complete, long-term financial plan. Not having one can create major issues for your loved ones after you’re gone.
Of course, not having a will at all is the biggest mistake of the lot, but since you’re reading this article, we’ll assume you’ve made sure to get yours in order! Instead, we’re going to focus on major mistakes people can make when sorting theirs out.
Waiting too long to make one
You might be in the best shape of your life and not too worried about what happens to your estate when you’re gone. However, this is a big mistake. Like with anything in life we can never know what is around the corner. It’s uncommon but tragedies do happen, and when something happens to someone without a will, it just makes the situation worse for those left behind.
Waiting too long can also have implications when you’re older as unfortunately some people lose the capacity to make their own decisions. This can render a will redundant and can lead to familial disputes. Ensure yours is done when you’ve still got your wits about you.
Doing it DIY
Many people assume you can just write your wishes down on a piece of paper and sign it and, voila, you have a will. This is wrong. Wills should be arranged very carefully to meet legally binding criteria. This includes having non-related witnesses, naming executors, being unclear in explanations and other pitfalls that can lead to disputes.
It is essential to seek professional advice when formulating a will to avoid such issues arising.
Missing out assets
Another issue when creating a will is simply forgetting to add certain assets. Key things such as savings pots, your home and other significant assets will likely not go forgotten. However, what about that classic car in the garage, or the antique serving spoons you inherited from your grandmother? Everything needs to be accounted for, otherwise again this can lead to familial disputes.
In the modern age it is even worth having express wishes for what you would like to happen to things like social media accounts, computer files or other digital possessions. It might be more intangible, but it still matters.
Not updating
This is a huge mistake that can create major issues for your estate. Your will should be a living document, not just something you write once and stuff in a drawer (it should be somewhere under lock and key anyway!). If your financial situation or any other aspect of your wealth and possessions changes, then this needs to be accounted for in the will. In some cases, creating an amendment is sufficient, but if larger changes occur to your theoretical estate, then this can require a new draft entirely. It is important to consult with a professional either way to make sure.
Forgetting stepchildren
This is a quirky but very relevant problem in 2023. With modern blended families evermore common, if you’ve got stepchildren you need to specify them in the will, assuming you wish to leave them something. This is a curious problem in that you might just refer to all your kids as “my children” but in the complexities of legal interpretation, this can open up doubt about whether that just means your biological children.
It is better to expressly state “my children and stepchildren” where necessary to avoid all doubt.
Using the wrong witnesses
Witnessing the signing of the will is an essential part of what makes it valid. There are a few ways this can go wrong. The two witnesses must be over age 18. They must not be beneficiaries or married to someone who might be a beneficiary. They must not be related to you in anyway, either biologically or through your partner.
While some of these might seem like obvious errors, they happen all the time and lead to much worse outcomes for your estate. For even the most straightforward of wills it is important to consult with a professional who can guide you through the process to set you up for the best outcome possible.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 18th July 2023.
Should you pay your child’s student loans?
As the university year ends and a fresh crop of students graduate, should you look to help your child with their loans, or even the costs if they are yet to attend?
As a parent with young adult children, you’ll be acutely aware of how much it costs to go to university these days. Day-to-day living costs aside, the maximum fees for university now stand at £9,250 per year in England. This cost is compounded by interest rates, which have risen massively since the Bank of England began its rate hikes in December 2021. Those on Student Loan Plans 1 or 4 pay 5.5%, while Plan 2 and postgraduate loans pay an eye-watering 7.1% currently.
As a parent, if you have the means to help a child with the cost of tuition fees, you might wonder if it is a good idea to pitch in. However, there are some important aspects to consider before doing so, that will affect both your child and your wealth planning.
How student loans work
To get to grips with whether you should soften the blow of student loans for a child or grandchild, it is essential to understand how the system works. Student loans and student debt does not function like normal debt. It does not affect a student’s credit rating, other than for overall income considerations when applying for a mortgage. Payment for the loan is taken at source, meaning there’s no need to manage the loan like you would with a normal debt. In effect, student loans actually function as a form of income tax levy. Once someone earns above a certain threshold, the Government deducts a portion of their wages to pay back the loan.
Here are the various income thresholds depending on the plan the student is on:
| Plan type | Yearly threshold | Monthly threshold | Weekly threshold |
| Plan 1 | £22,015 | £1,834 | £423 |
| Plan 2 | £27,295 | £2,274 | £524 |
| Plan 4 | £27,660 | £2,305 | £532 |
| Plan 5 | £25,000 | £2,083 | £480 |
| Postgraduate Loan | £21,000 | £1,750 | £403 |
Source: Gov.uk student loans repayment
As for how much you pay, this is calculated as 9% of your income over the threshold for plans 1, 2, 4 and 5. For postgraduate loans it’s 6%. This interest rate, in effect, is the additional income tax levy that the student with the loans takes, once they earn enough money. The debt is cancelled after either 25 years from the first April they were due to pay, or by age 65, depending on the plan. What is really critical here is that, because of the payment threshold and time limit on repaying, it doesn’t really matter how much debt the student has. They could have £30,000 or £3 million – they will only ever pay 6-9% of their income above the threshold of earnings. This is all entirely contingent then on what kind of career and income the student ends up having. Someone earning a lower level of income will pay less overall, whereas someone who goes on to earn a much higher income will pay much more of their loan back, or even all of it.
Other ways to help
The big question to ask yourself then is whether you want to help your child or grandchild avoid having to pay what is in effect an income tax levy on their earnings. Of course, if you do help this will aid their month-to-month earnings potential, but this is by no means a given depending on their career choices. There are other really valuable ways to help your child instead that could help them to achieve other goals such as owning a home. Contributing toward a house deposit could lower their mortgage costs and improve the options available to them in terms of property.
Other ways to help include gifting, which if done carefully following IHT rules, can be an effective way to help your child with ongoing living costs in small bitesize chunks. Putting money into a pension for your child can be a great long-term solution too, as this is often one of the most difficult things for a young person starting out in their career to appreciate the importance of.
Finally, if your kids are still younger and you’re just thinking about the future then contributing to a junior ISA can be a great way to set them up for success in young adulthood.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 18th July 2023.
Why does the Bank of England hike rates to tame inflation?
Households have faced fierce price rises in the past 18 months, with the current rate of inflation (for April 2023) at 8.7% on the CPI measure by the Office for National Statistics (ONS).
However, with inflation so high, why does the Bank of England (BoE) respond with repeated rate hikes? Since inflation began to run away the BoE has been in a process of increasing interest rates. The Bank’s Monetary Policy Committee (MPC) meets most months to decide where it would like rates to be.
Since December 2021 the MPC has hiked the base rate 12 times, the largest hike by 0.75% in November 2022. The current base rate is now 4.5%, having risen from just 0.1% in December 2021.
Inflation game
In order to understand why interest rates are rising, first we have to understand inflation, its causes, and effects.
The government and national statistical authorities measure inflation in order to understand what is happening in the economy. A general goal of the Government is to help grow the economy as measured by gross domestic product (GDP). Although a fairly blunt measure, GDP is the best approximation economists have to tell whether, as a nation, we’re getting wealthier.
When an economy grows prices generally rise with it as people earn more money and spend more on goods and services. Inflation is not a ‘bad’ thing if controlled as it encourages spending, saving (when the interest rates are attractive) and investing. Inflation encourages saving and investing because doing this with your wealth is a good way to maintain or grow its value ahead of inflation.
However, problems can arise when inflation gets too high. This can be caused by an economy growing too quickly – people find themselves with more money and spend it quickly which leads to prices rising faster in response to the increasing demand.
It can also be caused by supply issues. If a company has less of something available to sell, but the same level of demand, it will typically hike the cost as a result – this is the kind of inflation we are largely suffering from now in the wake of the pandemic.
Where interest rates come in
This is where interest rates come into the picture. The UK economy during the 2010s generally lived with very low, stable levels of inflation. In the wake of the financial crisis the BoE cut interest rates to rock bottom in order to make borrowing cheap and encourage the financial system to function correctly. As inflation was so low, it saw little need to hike rates back up to historic levels. However, the inflation which started to rise in 2021 changed this thinking.
Hiking interest rates does two things to an economy.
Firstly, it makes debt more expensive. All debt-related products such as mortgages, loans and credit cards set a level of interest that is ultimately based upon calculations by financial providers who look to the BoE for guidance on a basic level of interest to set. When the BoE hikes its rates, so do these providers, such as banks and other financial institutions. For households, this means more expensive monthly payments on mortgages – if they have a tracker mortgage, more expensive debt servicing on credit cards, and more expensive loans. By doing this, the BoE effectively takes away households’ disposable income, forcing them to spend less on goods and services in the economy, and reining in demand and therefore ultimately, inflation.
The second effect of interest rate hikes is sort of the opposite – it makes saving more attractive. By increasing the base rate, the BoE encourages banks and savings providers to offer better savings rates to customers. By doing this, anyone with money saved up is encouraged not to spend it by better returns offered for leaving the money untouched. While easy-access savings accounts offer a good rate when this happens, the best rates are found in four- or five-year fixed savings accounts or ISAs.
However, this is only theoretical and there is a big issue at the moment which makes this situation look less attractive. With inflation at 8.7%, and the Bank of England base rate at 4.5% - savers, even on the best deals, still won’t find a rate of interest that beats inflation. This means ultimately that even if your money is locked away and earning interest, it is still losing value relative to inflation. As such, it still pays to look at different ways of using your hard-earned money, particularly by investing through the stock market, bonds, and other assets such as gold, property, and others.
In order to make the best decision it is important to consult with a financial adviser to ensure the best outcome and structure possible for your wealth.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th June 2023.
How to prepare for an active retirement
Retirement is no longer the sudden process it once was. Making sure you’re financially prepared for your golden years is essential to get the most of out of this time of life.
A few big trends have emerged among older workers in the past thirty years. According to Government data, the number of over 50s in work has increased significantly, from 57.2% in the mid-1990s to 72.5% in 2019.
The average age at which someone exits the labour market has also changed, rising to 65.3 years for men from 63.1 and 64.3 years for women, up from 60.6.
However, the statistics don’t illustrate how much the nature of retirement has changed in recent times. That is to say, people are now less likely to just down tools one day and decide “ok, finished, now what?”
Instead, it is becoming increasingly common for older workers to reduce hours, try new ideas or projects. Put simply, retirement isn’t quite what it used to be!
This has come from two directions, partly from pressure caused by State Pension age uplift, but also from those who have been able to plan effectively giving them more options in later years.
This flexibility allows people to pursue more options later in life and live a more active retirement.
So, what are the key things to consider when you’re looking to work less and enjoy life more? Here are some key considerations.
Income needs
The first point to begin with is looking at your current income, between yourself and your partner if you have one.
The ‘rule of thumb’ is you’ll need one third less income during retirement than working years. However, this is mostly predicated upon not needing to pay a mortgage any more so may or may not be the case depending on your situation.
You’ll also want to consider what kind of retirement you want to have. Do you want to travel the world? Or are you happy tending to your garden and taking care of grandchildren? Either choices are perfectly laudable but come with potentially different cost implications.
Debt reduction
Have you got any debts? While short-term debt such as credit cards should generally be avoided, personal loans for big purchases such as cars, or mortgages, are not uncommon. It is worth considering if you want to prioritise clearing some of these so as to remove them as an obstacle to beginning an assured retirement.
Cashflow planning
Cashflow planning is a critical aspect of looking at when and how you can retire comfortably. Wealth is often structured through key assets such as investments, but these are often distributed in pensions, ISAs, property, and other vehicles.
You might have a good amount in all three, but planning for accessing that cash takes some consideration, particularly when it comes to looking at how far it will go in the long term.
Cashflow modelling can help you to understand how much you’ll be left with depending on what age you stop earning a work income, and how much you can expect from your various funds. It will also incorporate other key income sources such as State Pension, which can prove valuable later in life.
Wealth structure
The structure of wealth is really important here too and will dictate how that cashflow is able to be managed. Pensions typically form the bedrock of a portfolio and come with certain tax implications that need careful attention.
The 25% tax-free lump sum can be an extraordinarily useful tool for example, but deciding if you should draw down on an ISA or pension first, or even continue to contribute more for longer, is difficult to get right.
The structure of your wealth will also have a big implication on future tax liabilities and needs to be carefully considered.
Investment glidepath
Finally, within that structure you’ll need to consider how much of your wealth is invested. Typically, when you’re in working years, you’ll be invested in assets that bring better long-term returns such as equities.
However, as you near retirement you’ll want to consider what is called a “glidepath”, whereby your asset mix moves to a more conservative footing in order to minimise portfolio volatility. This is to prevent a situation where you’re ready to retire, but owing to macroeconomic factors, your portfolio isn’t!
Ultimately, the best preparation for an active retirement is to plan well ahead and have a clear idea of what your goals are. However, it is also fine if you’re not 100% sure. We spend the best part of our adult lives in work, so leaving it can be a daunting prospect.
To make sure you’re on the right path, don’t hesitate to get in touch with us to discuss your options.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th June 2023.
HMRC hikes tax late payment charge to 7%
HMRC issued 540,000 late payment penalties in 2022 according to data from Thomson Reuters.
The total value of fines issued by the Government tax collector hit £187 million in the same year.
This comes as the Bank of England base rate continues to increase, sending late payment charges up with it. HMRC now charges 7% to those who fail to file their tax returns on time as it raises charges in lockstep with the central bank.
In 2022 interest charges were just 3.25%, less than half the current level. The changes came into effect from May for both quarterly and non-quarterly late payments.
Anyone in the UK who earns money being self-employed, is a partner in a business partnership, earns over £100,000 a year, or earns income from savings, pensions, investments, dividends or property rentals, is liable to fill out a self-assessment tax return for each year they earn in.
There are exceptions to these if the level of income is below the threshold for paying tax, or if money is sheltered in tax-efficient accounts such as ISAs.
Tax deadlines
Tax self-assessment is a foundational part of managing earnings. While minimising tax liabilities in the first place is key, just making sure those liabilities are met each year is essential too.
The tax return is relevant to the past tax year, so the current assessment deadlines pertain to the tax year 2022-23 which finished on 5 April 2023.
The current deadlines are as follows:
- 5 October 2023: register for self-assessment
- Midnight 31 October 2023: paper tax return deadline
- Midnight 31 January 2024: online tax return deadline
- Midnight 31 January 2024: pay the tax you owe
There are some caveats to this though. For example:
- There’s a second payment deadline on 31 July if you make advance payments, known as “payments on account.”
- You’ll need to submit an online tax return by 30 December if you want HMRC to collect tax from wages or pension automatically.
- If you have a company as a partner, with an accounting date between 1 February and 5 April, the online return deadline is 12 months from the accounting date while paper return is nine months.
Time to Pay
Those who find themselves behind on tax returns and facing penalties should get in touch with HMRC to discuss a ‘time to pay’ deal as quickly as possible to prevent further charges, or even prosecution, from arising.
Time to Pay plans soared during the pandemic years, with 21,000 taxpayers making the arrangement in 2021-22. These plans allow taxpayers to set up 12-month payment schedules for their tax liabilities. Taxpayers were given extra time to file during the pandemic, thanks to administrative delays.
With rigorous wealth management and support in place from financial advisers, this shouldn’t happen. However, it is essential to be aware of the deadlines, your potential liabilities, and how to prepare your wealth to meet those liabilities smoothly.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th June 2023.
The importance of generational financial planning
Families in the UK are set to transfer around £5.5 trillion worth of assets over the next 30 years, according to data from the Kings Court Trust.
Not only is this an extraordinary shift in the wealth of the nation, but it throws up a myriad of issues that can only be solved through careful financial planning.
There are many things to consider when it comes to your own generational financial planning. Not only is it about passing wealth on in the most efficient way, but it also matters that your children and even grandchildren are given the best head start possible.
Generational financial planning is an essential aspect of overall financial planning. You need to think about passing on money, and what questions to consider before you set a plan in motion.
Understanding how much of your wealth you’ll need while you’re alive is a critical starting point. Then thinking about which aspects you’d like to give away at death, and which you could begin to give earlier will help you to define your ultimate goals.
Gifting unpacked
Gifting is the biggest variable possibility when it comes to generational financial planning. There is a myriad of rules and allowances when it comes to gifting, pertaining exclusively to the mitigation of inheritance tax (IHT).
At a basic level, you’re allowed to gift money, household, and personal goods such as furniture or jewellery, property, stocks and shares or even unlisted shares. However, how much and when you gift them makes a significant difference to your potential IHT liability.
For cash gifts you can make £3,000-worth of gifts a year tax-free, known as the ‘annual exemption.’ You can give it all to one person or divide it between several. It is also possible to carry the allowance forward for one tax year.
The £3,000 annual allowance can be used to pay into a pension for your child or a junior ISA (JISA). While classed as a ‘potentially exempt transfer’ you’ll need to live for seven years (covered more below) to avoid liability if you go over this limit of contributions – not impossible when the annual JISA limit is £9,000.
Paying into these kinds of accounts has the benefit of extra long-term planning for your children’s future financial health and can mitigate your worries in older age as they grow, have careers and families of their own.
You can also make gifts of up to £250 per person each year with no overall limit, as long as that person hasn’t been included in the above £3,000 of gifting. This is called the ‘small gifts allowance.’
If your child is getting married, a £5,000 gift is permissible, or £2,500 for a grandchild. You can give up to £1,000 tax free to anyone else you know getting married.
Regular payments to others are also permissible with no limit. However, the caveat here is that you must be able to meet your regular living costs while making such payments and it must come from your regular monthly income. These are known as “normal expenditure out of income.”
You can give such regular payments to help a child pay their rent, pay into a savings account for a child under 18 or even give financial support to an elderly relative. These can be made over and above the £3,000 annual allowance. Trusts are also possible but can be subject to income tax on withdrawal.
Seven-year rule
Beyond this is a really important rule, known as the ‘seven-year rule.’ Essentially you can give away any part of your estate and not face IHT on the assets, but you have to live for seven years after making the transfer.
As the seven-year deadline approaches, the tax liability also reduces. Between three and four years it’s 32%, four to five years it’s 24%, five to six years it’s 16% and six to seven years it’s 8%.
What is really important with the seven-year rule is taking into consideration your health and life expectancy. If you’d like to give something major to a loved one, such as property or even a share portfolio, then the sooner you do it the better.
This might of course not be the right route to go down as a portion of your wealth can be inherited tax-free anyway. A financial adviser can help you make a decision around this on the best way forward.
Ultimately, when planning for intergenerational wealth there is much to consider. While the challenges that come with this might seem daunting, with planning it is possible to set yourself and your loved ones up for the most successful outcome possible.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th June 2023.
The World In A Week - Game, Set & Match for Inflation in US?
Written by Chris Ayton.
As a classic but relatively wet Wimbledon fortnight ended, with nearly 200,000 servings of strawberries having been eaten, global equity markets were in no mood to be dampened with the MSCI All Country World Index up +1.1% in Sterling terms. Asian equity markets led the charge with MSCI AC Asia Pacific ex-Japan Index up +3.7% for the week, closely followed by Continental Europe with MSCI Europe ex-UK up +3.6% for the week. Japan was the laggard, as MSCI Japan fell by -0.3% over the week in Sterling terms.
The UK FTSE All Share Index was up a healthy +2.6% over the same period, despite news that UK GDP had contracted 0.1% in May. This data was marginally better than expected and came alongside other data showing that UK wages grew faster than expected in the three months to May. The inflationary impact of these wage hikes fuelled further fears of more interest rate rises in the UK and helped push Sterling up to more than $1.31 against the US Dollar. It’s hard to believe this exchange rate was just $1.07 in September of last year.
Conversely, in the US we saw further signs that inflation there is coming under control. The annual inflation rate in the US fell to 3% in June, which was below expectations and the slowest increase since March 2021. This has sparked some speculation that the Federal Reserve could soon be done with its interest rate tightening cycle, although policy makers are saying they are open to further action.
The technology dominated Nasdaq Index in the US crept up another +1.2% over the week, taking its rise to an astonishing +31.1% for this year so far in Sterling terms (and +42.9% in US Dollar terms!). As discussed here previously, this rise has been driven by the six largest index constituents, namely Apple, Microsoft, Amazon, Alphabet, Tesla and NVIDIA. So dominant has their collective size become that Nasdaq announced last week that it would be undertaking a “special rebalance” to redistribute some of their index weightings to smaller constituents, cutting their combined weighting from over 50% of the Nasdaq Index to just 40%. Clearly, this will have implications for the hundreds of billions of Dollars that are invested in ETFs and index funds that track the Nasdaq Index, but it remains to be seen if this will have any impact on the relative performance of the Big Six going forward.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 17th July 2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - Interesting Developments in Asia
Written by Cormac Nevin.
Markets were rather muted in Europe and the US last week, with the FTSE All Share Index of UK Equities up +0.3%, the MSCI Europe Ex-UK Index of Continental European Equities up by the same amount, and the S&P 500 Index of US Equities up +0.9%, all in GBP terms. However, greater action was found in markets in the Far East, as the MSCI China Index of stocks listed in both mainland China and Hong Kong rallied +6.6% over the week.
The Chinese equity market has been in the doldrums since peaking in early 2021. Since then, a combination of government regulatory crackdowns, a broadly botched COVID response, and increased trading restrictions stemming from geopolitics have taken their toll and the index is now at levels witnessed in 2017. Chinese equities are now arguably at attractive valuations having been among the weakest global equity markets for the first half of 2023, although risks remain.
The Chinese economy failed to roar back to the degree that many market participants expected following its re-opening in January 2023 after the abandonment of their zero- COVID policy. The market staged a strong rally last week, following Monday’s meeting of the politburo of the Chinese Communist Party, whereby President Xi Jinping announced support for “countercyclical” measures from government as a form of stimulus to support the flagging economy. While property related stocks soared on this announcement, policymakers have a fine line to tread between supporting the economy and discouraging the sort of speculative frenzy that has gripped the nation’s property market recently.
Japan was also a source of interesting newsflow towards the end of last week as Kazuo Ueda, the relatively new Governor of Japan’s central bank, announced a policy tweak which would loosen the Bank of Japan’s control over the country’s bond market. This sent Japanese 10-year government bond yields sharply higher, although they are still far below yields in other markets.
Our team are following the policy developments in Asia with great interest and as a potential source of future returns within a globally diversified portfolio.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 31st July 2023.
© 2023 YOU Asset Management. All rights reserved.