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Should the Bank of Mum and Dad start charging interest?

Archive for the ‘Tax planning’ Category

Should the Bank of Mum and Dad start charging interest?

Thursday, October 18th, 2018

If you’ve lent money to your children to help them with university fees, a deposit on their first home or even just to support them with the rising cost of living, then you’re not alone. Statistics suggest that around a quarter of all mortgages are now partially funded by the ‘Bank of Mum and Dad’.

But have you ever thought about whether you should charge your offspring interest when they pay the loan back? It’s a consideration that’s likely to make many parents feel like Dickens’ famous miser, Ebeneezer Scrooge. However, there are arguments to be made for adding on interest which might help to prevent you from donning a Victorian style top hat and uttering ‘Bah, humbug!’

If you’re concerned that any money provided to help out your children might end up becoming a ‘permanent loan’ that you might never see again, interest can be a good way to ensure this doesn’t happen. Whether you put an interest rate in place from the start, or make it clear that interest will start to be charged if the money isn’t paid back by a certain point, the idea of having to repay more than the initial amount can help the borrower take the loan seriously and ensure regular payments are made.

It’s also worth considering what adding interest could help teach your children about ‘real world’ loans, especially if they are still relatively young. Another way of achieving this is to refuse multiple loans – a bank wouldn’t agree to an endless stream of applications for further credit, so if you do want to see your money again you should ensure that your offspring don’t see you as an unlimited supply of funds.

Of course, the Bank of Mum and Dad isn’t really a bank at all, which is what makes it attractive for all involved. Young people will likely feel more secure borrowing from their family than risking being turned down by a bank and damaging their financial status; whilst parents who can afford to loan their children money know it might offer some protection from the difficulties of struggling to pay off credit. Charging interest might be something you’re completely comfortable with, or it might be an idea you would never entertain; ultimately, however, the choice is entirely yours.

Funding care home costs with a care home ISA

Wednesday, September 19th, 2018

If you’re under 60, funding your future care might not be top of your agenda. Garden improvements, good restaurants and holidays probably rank slightly higher, as well as saving for your pension if you’ve not yet retired.

However, the government could be proposing a new ISA in order to encourage people to start saving for their later life care. Recent leaked government documents suggest that the government is considering a Care ISA as part of its forthcoming green paper on social care.

The Care ISA would have a tax free allowance of its own that reflects the cost of care. Any leftover savings from this ring-fenced amount would be safe from inheritance tax when you die.

The high cost of later life care is something that looms for many of us.

Currently, those in England and Northern Ireland who have assets of more than £23,250 will be expected to self-fund their care completely. This can mean selling the family home and spending a chunk of your savings on funding care.

Councils are becoming increasingly ruthless in cracking down on people who deliberately deprive themselves of assets by giving them away. There is no time limit on how far a council can go back when claiming deliberate deprivation.

A Care ISA would mean that, if a saver comes to need later life care, more of their assets would be protected.

However, the Care ISA has been widely criticised by both providers and financial commentators.

At the moment, people can leave £325,000 and, from April 2020, couples with children and property will be able to leave £1 million jointly. Much of the population dies with less assets than these. So, for many people, an inheritance tax break isn’t relevant, which could limit the Care ISA’s uptake, making it unattractive for providers to offer it. They may prefer to take advantage of other products, such as a pension, because they offer immediate tax relief.

Additionally, financial services firm Hargreaves Lansdown suggest that only one in four people ends up paying for long term care costs, making the Care ISA even more unattractive.

This means that providers are unlikely to see the Care ISA as a significant business opportunity. The upfront costs of implementing the niche ISA could make it unprofitable.

What’s more, it is unclear how the government would clamp down on the tax loophole that will emerge if savers pay for their care from funds outside of the Care ISA and use the ISA as an inheritance tax exempt savings fund.

The abundance of negative feedback means that the Care ISA may well remain the stuff of fantasy for the treasury.

Financial planning in your forties

Thursday, August 16th, 2018

It’s well known life begins at forty. Doesn’t it?

It should be an exciting decade, full of plans and aspirations. It’s also likely to be a time of optimum earning potential.

What’s more, it’s a crucial decade to take a step back and make sure your finances are on track to meet your goals.

There’ll be some decisions you’ll already have taken in your twenties or thirties, which will have had an impact. You may have bought your own home, for example, or put some savings away in cash, investments or pensions.

If things don’t look quite as rosy as you’d hoped, though, your forties are a good time to take stock, as there’s still time to make adjustments and give your investments time to grow.

Don’t forget, whatever savings you can make now will enable you to pursue your dreams later on.

Here are four key tips for shrewd financial planning at this important time of life.

Budget ruthlessly

Just because life may feel comfortable with regular pay rises and bonuses don’t fall into the temptation of spending more than you need. Do you really need that Costa coffee or M&S lunch every day?

Apps like Money Dashboard or Moneyhub can be helpful in showing you where your money’s going. Simple steps like cancelling subscriptions or switching bill providers can make a significant difference.

Historic studies show that investments usually outperform cash savings so any disposable income you can invest will be beneficial. If you can put money aside in a pension you’ll also be taking advantage of the tax relief available. Make sure you use your ISA allowance too for more accessible funds.

Carry out a protection audit

Think about what if the unexpected happened. Your forties are a time of life where you may find yourself part of what’s known as ‘the sandwich generation’ i.e. caring for elderly parents at the same time as looking after young children. This can put extra pressure on you. Make sure you’re protected should the worst happen by ensuring you have a good emergency fund in place. Also think about critical illness cover and life insurance.

Property plans

Your home will be a fundamental part of your financial planning at this time of life. If you feel you need a larger property, these are likely to be your peak earning years so now is the time to secure the best mortgage you can and find your dream home. On the other hand, if you’re quite happy where you are, it may be a good time to remortgage to get a better deal.

Family spending

Everyone’s situation is different. You may have children at university or you may still be having to pay for nursery fees. Whatever your position, make sure you budget accordingly and allow for inflation, especially if you’re paying private school fees. Work out the priorities for your family – the best education now or a house deposit in the future. It’s important not to derail your own life savings for the sake of your children as no one will benefit in the long run.

By doing some sound financial planning now, you’ll have more hope of continuing in the style you want to live, well beyond your forties.

The end of LISA?

Thursday, August 16th, 2018

The new girl on the block, in terms of saving products, seems like she may not actually be around for much longer. LISA, or the lifetime ISA, is being threatened with abolition by a Treasury committee, having only been on the market for 16 months.

The LISA allows those aged between 18 and 50 to save up to £4,000 a year towards a pension or a first home tax free, with the promise of a 25% government bonus capped at £1,000 a year.

However, a panel of MPs have highlighted significant drawbacks with the scheme. Some of the negative feedback has centred around the scheme’s complexity and that is confusing to customers.

The LISA has always seemed a somewhat odd product in that it has two very different target audiences; those saving for a house and those saving for a pension. It’s difficult to see how one product could hold the same appeal for both.

In fact, it has worked better as a vehicle for those saving for a deposit on a house than those using it as a pension allowance. After all, what first time buyer wouldn’t want an extra 25% from the government? It hasn’t been as appealing to those looking for a pension replacement.

The main problem is the 25% exit penalty imposed if you withdraw money from the scheme for any purpose other than retiring or buying a house. This is viewed as exceptionally high, especially as many savers do not realise the penalty is 25% of the entire pot. Those who have had to withdraw money earlier, for whatever reason, have lost more money than they expected.

It’s true that demand for the LISA not been strong and there has been relatively little take-up. What’s more, very few advisers have been keen to offer them.

To some extent, though, it seems a shame to talk about scrapping the scheme when it has only really just got started. If you or a family member fall into the age range and do qualify for a LISA, it could be worth investigating one now and make the most of the government bonus before time runs out.

How best to help your grandchildren financially

Wednesday, July 25th, 2018

Being a grandparent is an exciting time of life. You get all the enjoyment of doing fun activities with your grandchildren but can hand them back at the end of the day. Part of that pleasure is knowing that you can help them financially. Often you’re at a stage of your life where you’re comfortably off and in a position where you want to give a helping hand to the next generation.

The plus side of this is that you get the opportunity to make a real difference to your grandchildren’s lives. The downside is that the regulations around inheritance tax (IHT) can be confusing and the red tape overwhelming at times. By taking steps to find out what the rules are though, you can make life easier for family members and still be confident that you have enough money for your own retirement dreams.

One important consideration is the timing of your gift. If there’s a new arrival in the family, the financial needs will be very different than if it is to help older children. For example, the priority may be to help the newborn’s family move to a more spacious home or to help with private school fees for a primary school-aged child. Later on, it may be to help with driving lessons, pay for school or university fees or enable them to get on the housing ladder. You may decide you want to leave your money to your grandchildren in your will, in which case it is vital to plan your giving in advance in a tax efficient way.

IHT will be levied on your estate at 40% when you die, so if you’re giving money away now that will have an impact later. The nil-rate band is a threshold of £325,000 for the value of your estate. Anything above that will be taxed. Making monetary gifts can take the money out of the ‘IHT net‘ but remember this only applies for the seven years after you made the gift. It’s worth exploring some extra allowances such as being able to give £3,000 of gifts per tax year (your annual exemption) as well as an allowance for small gifts and wedding/birthday gifts.

There are a number of alternatives to make your gift. If the money is needed before age 18, a trust structure is a tax-efficient way to give money, while still giving you some control on how it is used. A Junior ISA can also be a good option as it grows tax-free, building up a fund for driving lessons or university fees. You can’t open the JISA on your grandchild’s behalf but you can pay into it up to their annual limit, currently £4,260. If they’re older, you might want to consider a lifetime ISA for a housing deposit. Again, you can’t open it for them as a Lifetime ISA can only be opened by someone between the ages of 18-39 but if your grandchild opens one, it’s a way for them to save up to £4,000 a year and get a 25 per cent government bonus on top.

Whatever you opt for, you’ll have the feel-good factor of helping the next generation in a way that is right for both you and them.

Can we make inheritance tax simpler?

Monday, July 16th, 2018

Inheritance tax (IHT) has existed in the UK for over 300 years. In its current form, it was brought in to replace the old Capital Transfer Tax; a measure that was brought in itself as a form of wealth distribution in order to regulate disparity between rich and poor.

Although in concept the idea is quite simple, in reality, the caveats and bureaucracy surrounding it in its present form can make it difficult to get your head around. In fact, this January, Chancellor Philip Hammond called the current system “particularly complex” and appealed to the Office for Tax Simplification (OTS) to hold a review of it. In his communication with them he stated: “I would be most interested to hear any proposals you may have for simplification, to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.”

As it stands, in 2018 the IHT allowance remains at £325,000, as it has done since 2010, with no plans to increase it. For those who qualify however, the Residence Nil Rate Band Allowance (RNRB) raises the threshold by £125,000 – this is planned to increase by £25,000 a year for the next two tax years, meaning that in 2020/21 the RNRB will stand at £175,000. The IHT rate itself is firmly at 40% for anything above the £325,000 threshold, however if 10% of an estate is left to charity, the rate is adjusted to 36%. Even with these limited examples, the complexity of the issue is abundantly clear.

The possibility of simplifying IHT is definitely there – it all comes down to the will of the treasury. In fact, in April of 2018, the OTS declared that it would “identify simplification opportunities” and made a request for feedback from those with personal experience of IHT. We can be confident that there will at least be a review of things such as the taxation of trusts, the RNRB allowance and exemptions and reliefs for things such as business and agricultural property.

Simplification could ultimately lead to the system being replaced entirely, but reforms leading to increased taxes would likely prove politically unpopular under the current government. Only time will tell whether or not we see changes in the near future, but the changes are certainly feasible.

What is Making Tax Digital (MTD)?

Monday, July 16th, 2018

HMRC is striving to revolutionise the UK tax system and plans to do that through the Making Tax Digital (MTD) initiative. HMRC wants to be the most efficient tax authority in the world, and embracing the use of digital data appears to be the path towards that. The current system can be scrutinised for not being effective enough, efficient enough or straightforward enough for taxpayers. By bringing in a completely digitalised tax system by 2020, HMRC aims to make those problems a thing of the past whilst also bringing down the overheads involved in managing UK tax affairs.

The changes will effectively bring an end to self-assessment, providing a new experience for a wide range of taxpayers. Most businesses, the self-employed and landlords will be covered by the changes, with the system requiring the majority of business owners to keep a digital record of their accounts and transactions.

Announced for the first time in the Spring 2015 budget, MTD for VAT reporting comes into play starting April 2019. With it comes the introduction of a set of rules for submitting returns with three main requirements. Firstly, digital record keeping will be introduced, meaning that all VAT registered companies will have to store all transactions in electronic form. Secondly, digital links; there will be a digital link between the final numbers and their source data. Thirdly, digital submissions; each and every submission will be made using approved software through HMRC’s new and improved gateway.

It’s important to note that digital quarterly reporting will only be made mandatory for businesses with a turnover above the VAT registration threshold of £85,000. For businesses, including landlords, with a turnover below the threshold, quarterly reporting will remain optional. There are definitely benefits to choosing to keep your records digitally, making them more robust and enabling an efficient transfer of data between clients, agents and HMRC. Agents will also be able to react to live data, meaning they can proactively offer advice.

If you have any questions surrounding this topic, please feel free to get in touch with us directly.

Can a lack of knowledge of tax rules ever save you?

Monday, July 16th, 2018

Staying on top of the latest tax legislation probably isn’t at the top of the to-do list of the majority of UK citizens, and that’s understandable. If you were to miss something though, would you be let off? Or would your ignorance turn out to be not so blissful, after all?

HMRC agrees that a reasonable excuse can stand as a valid defence for an appellant of a tax penalty. However, what falls under the definition of a reasonable excuse? Documents being lost through theft, fire or flood – that’s acceptable. Serious illness or bereavement (at relevant times), check. Computer or electrical faults, you’re covered. If you need to get hold of a document from a third party then HMRC concedes that it’s reasonable to expect a delay, as long as you can prove you requested the document in reasonable time.

However, under most normal circumstances there are things that will not be considered as a reasonable excuse. Pressure of work, difficulty in complying, lack of reminders from HMRC, and yes, ignorance of tax law. Officially, not being aware of the law to which you have failed to comply will not get you out of paying your penalty. There have been isolated cases, however, where the opposite is true.

For example, in April 2015, the way in which UK citizens living abroad filed Capital Gains Tax (CGT) returns on any UK properties they sold, changed. Where before they would report their capital gains on the annual tax return, now they must file a special Non-Resident Capital Gains Tax (NRCGT) return within 30 days of the property’s disposal. Plenty of UK citizens living abroad missed the memo, and appealed their penalties when they discovered the news.

Judges rulings on these cases were inconsistent, but in the McGreevy v HMRC [2017] case, the appellant was successful, with the judge stating that, “it is preposterous to expect that a document on HMRC’s website which is not easy to find for a tax judge makes invalid all possible excuses about not knowing of the NRCGT return deadlines,” also saying that, “only a small coterie of people obsessed by tax” would expect anybody to even consider checking the Autumn Statement. Each appeal will be looked at on a case by case basis, but officially, it’s up to you to stay informed.

What will leaving the Customs Union mean for my business?

Thursday, May 24th, 2018

When we leave the European Union we will also leave the EU customs union. The question we all want to know the answer to is ‘what does that mean for me?’ Well first, let’s have a quick reminder of what the customs union is. In short, it’s an agreement between European member states that there will be no internal tariffs on goods that move between them. Once goods are within the EU, they can also travel freely. This means that administrative and financial barriers to trade within the EU are massively reduced.

So why would we want to leave? The important factor of the customs union in the Brexit debate has been that while you’re in it, you don’t have the freedom to negotiate your own trade deals on goods from other parts of the world. The government insists that such freedom is integral to the success of Brexit.

There are alternative options to a customs union that are being considered, firstly a customs partnership in which the UK collects the EU’s tariffs on goods from other countries on behalf of the EU. If the UK tariffs were lower, and those goods stayed within the UK, then companies would be able to claim back the difference. This would potentially lead to greater bureaucracy and added costs.

Secondly, the idea of a ‘highly streamlined customs arrangement’ has been proposed. The suggestion is that rather than getting rid of checks altogether, they would be minimised. Trusted trader schemes and new technologies would be used to ensure companies make bulk payments for the duties, rather than each time goods cross a border. Of course we also have the issue of Ireland to address. All involved parties have made a firm commitment to keeping an open border between the Republic of Ireland and Northern Ireland. We’re yet to see a suggestion that offers the perfect solution to this delicate issue.

Leaving the customs union could mean increased border checks and supply chains within industry would be heavily affected. Businesses operating ‘just-in-time’ production, such as those in the automotive industry, have multiple goods coming into the UK from mainland Europe every day. Honda, for example, relies on 350 trucks arriving daily; a 15 minute delay to their factory in Swindon would lead to an estimated cost of £850,000.

We are likely looking at higher tariffs. Switzerland and Norway do experience tariff-free access to the EU from outside the customs union but in return, they allow free movement of works and contribute to the EU budget. With immigration being such a large factor of the Brexit negotiations and the UK looking to restrict the free movement of people, it’s unlikely that we will negotiate a similar agreement.

The financial advantages of saying ‘I do’

Thursday, May 17th, 2018

A marriage or civil partnership can be a beautiful union of minds and hearts, but there’s no reason why it should end there. There can also be financial benefits to being with your partner, and one of these is the Marriage Allowance. In the 2018-19 tax year, the Marriage Allowance lets you transfer up to £1,190 of your Personal Allowance to your partner, meaning a tax reduction of up to £238, as long as you meet a few requirements.

For the couple to benefit, they must be married or in a civil partnership. The lower earner must have an income of £11,850 or less, and the higher earner must sit in the basic rate tax bracket of between £11,850 and £46,350. It’s worth noting that in Scotland, the higher earner’s salary must be less than £43,430 as the thresholds for basic rate payers differ.

Lower earners can transfer their unused tax-free allowances to their spouse, with the higher earning partner receiving a tax credit equal to the amount of Personal Allowance that has been transferred. The good news doesn’t end there either as the Marriage Allowance can be backdated as far as 5th April 2015. This means that, if you are eligible, you could claim 2015-16’s £212 allowance and 2016-17’s allowance of £220 in this tax year, leaving you with some free cash for you and your partner to treat yourselves.

If you’re currently receiving a pension or you live abroad, your application for the Marriage Allowance will not be affected, as long as you receive a Personal Allowance. However, if you or your partner were born before 6 April 1935, applying for the Married Couple’s Allowance might be more beneficial to you (you can’t claim both at once!).