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“UK Tax system is unfair,” say small businesses

Archive for the ‘Tax planning’ Category

“UK Tax system is unfair,” say small businesses

Wednesday, May 15th, 2019

The British Chamber of Commerce (BCC) conducted a tax survey throughout January and February of 2019 that produced some interesting findings. The survey covered more than 1,000 businesses across the UK, 96 per cent of which were SMEs with fewer than 250 employees; 68 per cent of the businesses were in the service sector and 32 per cent in manufacturing.

Undertaken to discover how fair respondents believed the UK tax system to be in a number of different situations, the results show that faith in the integrity of the system aren’t exactly high. 58 per cent of respondents felt that businesses like theirs were not treated fairly by the tax regime. 6 per cent of respondents did not believe that tax rules are applied fairly across all sizes of business by HMRC. Smaller businesses are more likely to hold that view, at 70 per cent, but it’s still the view held by the majority of medium and large businesses, at 59 per cent.

When asked whether they agree that HMRC applies tax rules fairly regardless of where a business is based geographically, 64 per cent of respondents did not agree. The trend of smaller businesses being more likely to feel this way continues, with 67 per cent of small businesses believing this, as opposed to 59 per cent of medium and large.

It isn’t just how fairly the rules were applied that come under fire in the results of this survey, however. The quality of service that the HMRC provides, and the support they offer to ensure that businesses remain compliant, is considered insufficient by 51 per cent of small businesses. This figure still sits at 42 per cent for medium and larger companies, with an overall average of 49 per cent of respondents finding it unsatisfactory.

As the tax system becomes ever more complex, firms are suggesting that sufficient support needs to be provided to ensure that they can keep up with regulations and remain compliant. The BCC are taking this call one step further, and pushing for the HMRC to take action by providing the same level of investment into support and tax advice for businesses as it puts into tax avoidance work.

Head of Economics at the BCC, Suren Thiru, sees it like this; “HMRC must step up efforts to provide better support to smaller businesses to get their tax right, rather than simply pursuing and enforcing penalties. This should include matching investment in frontline HMRC help towards SMEs, with their work on non-compliance and tax evasion. More also needs to be done to address the escalating burden of upfront costs and taxes to provide firms with much-needed headroom to get on and invest, train their staff, and compete on the global stage.”

6 bad habits to avoid during retirement

Wednesday, May 8th, 2019

Planning for retirement can be complicated, as anyone approaching the end of their working life will tell you. However, navigating the myriad of choices, both financially and socially, doesn’t have to be such an enigma. Here are a few tips to help you avoid common bad habits that retirees often fall into:

1. Spending your pension fund money

Yes, that’s right. If you delay spending your pension and spend other available cash and investments first, you could keep your money safe from the taxman. Not spending your pension fund money until you have to may also help the beneficiaries of your estate avoid a large inheritance tax bill.

2. Taking the full brunt of inheritance tax

Inheritance tax can cost your loved ones vast sums if you were to pass away. There are plenty of ways to protect them from losing a large portion of your estate. Strategies such as making gifts or leaving assets to your spouse are an effective way to avoid the tax, among other valuable strategies.

3. Failing to have a plan

Many retirees have multiple avenues of income to provide for them during retirement. Making the most out of those streams of revenue is key to a stress free retirement, as unwise investment or poor planning can lead to unnecessary worries. We recommend contacting a financial adviser in order to set out a plan that’ll let you focus less on worrying about income and more on enjoying your well-earned retirement.

4. Not taking advantage of the discounts

There is an absolute boatload of price slashes available to retirees over a certain age. This ranges from discounts on train fares to reduced prices of cinema tickets. We recommend that all pensioners takes full advantage of these discounts as every penny saved provides more financial security for yourself and your loved ones.

5. Thinking property is the only asset worth having

Property can be a valuable source of retirement revenue, but it’s not the only way to create more income. Property can often incur maintenance expenses for landlords and take up time to resolve that could be spent making the most out of your retirement (though there are many pros and cons to the pension vs property discussion).

6. Buying into scams

When you retire, it seems that all kinds of people come crawling out of the woodwork to give you a “great” investment opportunity or insurance policy. Tactics can include contact out of the blue with promises of high / guaranteed returns and pressure to act quickly. The pensions regulator has a comprehensive pensions scam guide that’s definitely worth a read.

Alleviating your inheritance tax bill

Wednesday, April 10th, 2019

Inheritance tax (IHT) can be an incredibly punitive tax on your estate. However, by making the right choices, you can vastly reduce the amount of your estate liable for IHT.

While other tax free allowances, such as the ISA allowance, have risen in recent years, the IHT threshold has remained stagnant. Since April 2009, the individual allowance has remained at £325,000. Anything above this is taxed at 40%. Research from Hargreaves Lansdown suggests that had the threshold kept pace with inflation since 2009, it would now stand at £436,566. Here are some ways you can mitigate the amount of your estate the taxman takes when you die.

Spend

This is the simplest way to reduce the size of your estate. If you spend money on yourself, it’s not considered part of your estate for IHT purposes when you die. However, things you gift to members of your family or friends can become liable for IHT.

Gifts

As we previously mentioned, in some cases gifts can be liable to IHT. Gifts made to an individual become exempt from IHT only if they are made seven years before you die.

If you die within seven years of making the gift, the value of any gift that lies outside of your £325,000 tax free allowance is taxed according to a sliding scale. Gifts made less than three years before you die are taxed at 40%. This reduces to 8% within six to seven years after your death.

The annual gifting allowance is £3,000, while you can also make small gifts of £250 per person. Gifts between spouses and civil partners are always exempt from inheritance tax, providing that they were born in the UK. If they weren’t, there may be limits.

Trusts are sometimes used to control how the gift is spent by the recipient. This means you can choose what the money goes towards, as well as when they can access it. Other common ways of gifting are contributing towards a Junior ISA, helping with education fees or contributing towards a deposit on a property.

Investing

Investing in certain types of stocks can be a good way of reducing your liability.

AIM stocks – invested in smaller companies – count as part of your estate, but are taxed at only 0% after a period of time. These assets become exempt from IHT after they have been held for two years rather than seven. If you’re interested in investing in AIM stocks it’s worth doing your research to make sure they’re the right financial decision for you.

If you’d like to know how you can begin to reduce your IHT liability, it’s worth seeking independent financial advice. This will enable you to tailor an estate plan right for you.

The perks of saving into a Junior ISA

Wednesday, March 20th, 2019

There are so many factors for a parent to consider in doing their best to make sure their children are prepared for the world when they reach adulthood. A lot of those things will be out of your control, but one thing you can consider that could make a real difference is investing into a Junior ISA. If you start early you could accumulate a pot of over £40,000; that’s a birthday present that no 18 year old would be disappointed with.

Entering adulthood with that level of finances comes with life changing opportunities and great freedom of choice. Depending on their priorities, your child could put down a deposit on a property, start a business, pay for training or tuition fees, or even travel the world to their heart’s content.

On April 6th 2019, the amount that can be saved annually into a Junior ISA or Child Trust Fund account will increase from £4,260 to £4,368. Just like an adult ISA, your contributions are free from both income and capital gains tax and often come with relatively high interest rates. For example, Coventry Building Society offer an adult ISA with an interest rate of 2.3% per annum, whereas their equivalent Junior Cash ISA comes with a 3.6% per annum interest rate. Junior ISAs are easy to set up and easy to manage: as long as the child lives in the UK and is under the age of 18, their parent or legal guardian can open the ISA on their behalf. On their 18th birthday, the account will become an adult ISA and the child will gain access to the funds.

Both Junior Cash ISAs and Junior Stocks and Shares ISAs are available, and you can even opt for both, but your annual limit will remain the same across both ISAs. When making that decision there are a few considerations to make; cash investments over a long period of time are unlikely to overtake the cost of inflation but come at a lower risk than their stocks and shares equivalent. With a Junior ISA, however, you can benefit from a long term investment horizon. Although the stock market comes with a level of volatility, you can ride out some of the dips and peaks over a long period. Combined with good diversification, it’s possible to mitigate a fair amount of risk.

Taking a look at potential gains, had you invested £100 a month into the stock market for the last 18 years, figures from investment platform Charles Stanley suggests that a basic UK tracker fund would have built you a pot worth £39,313. In comparison, had you saved the same amount into cash accounts, you’d be closer to £24,000, a considerable difference of nearly £16,000.

With this latest hike in the saving allowance, it’s time to make the most of Junior ISAs and prepare to swap bedtime reading from Peter Rabbit and Hungry Caterpillar to stories of how a stocks and shares portfolio can secure your child’s future.

4 Key takeaways from the Spring Statement

Wednesday, March 20th, 2019

The Spring Statement is an opportunity to hear the latest updates on the state of the UK economy and what to expect of its growth over the coming months and years. With most people setting their focus firmly on the amorphous hokey-cokey of Brexit negotiations, it’s something of a breath of fresh air to take a moment to look at concrete upcoming strategies and measurable realities.

With that in mind, here are 4 key points you can hang your hat on while what’s on or off the table continues to be debated in the background.

1) Taxes, Taxes, Taxes

Employment is up and that means more tax receipts for the Government’s coffers. 2018 ended with 440,000 more people in work than 12 months prior, with 60,000 fewer people relying solely on zero-hours contracts. Government borrowing fell in January to the lowest we’ve seen since 2001 and £21bn of income and corporation tax was raised, leaving a healthy monthly surplus of £14.9bn.

2) Even more taxes

The Making Tax Digital scheme is set to come into effect on April 1st 2019. Looking at it broadly, it’s an effort to modernise the tax system. The first step comes in the form of mandatory digital record keeping for VAT, for those businesses which find themselves above the VAT threshold. It’s undoubtedly a strong example of intent for the future.

3) You guessed it… taxes

No Safe Havens is an initiative that was introduced in 2013 to crack down on those who seek to evade their tax through hiding their income and assets overseas, and those who advise them on how to do so. The Spring Statement brought with it a declaration of further commitment to this cause by investing in the latest technology and enforcing tough new penalties while, at the same time, making sure it’s easy for law abiding taxpayers to handle their tax correctly.

4) Growth is good

Okay, it’s not all about taxes. The Office for National Statistics’ January figures demonstrate the UK Economy has grown to the tune of 0.5%, blowing the economists’ predictions of 0.2% out of the water with the biggest monthly increase we’ve seen since 2016. Construction saw notable growth of 2.8%, with the service sector up 0.3% and manufacturing up 0.8%. We saw inflation fall to 1.8% in January and the general consensus is that we can expect to see UK growth of between 1.3% and 1.4% this year.

That’s your breath of fresh air over. You can get back to talking about Brexit now. If you have any questions surrounding any of these topics or the Spring Statement in general, please feel free to get in touch with us directly.

Converting a Help to Buy ISA to a Lifetime ISA

Wednesday, January 16th, 2019

With help-to-buy ISAs being phased out on 30th November 2019, many people are considering transferring their funds into a Lifetime ISA. You’ll still be able to access existing help-to-buy accounts until 30th November 2029, but it’s worth knowing which option is right for you.

Help-to-buy ISAs have been around since before the Lifetime ISA was introduced – each have different conditions. With a help-to-buy ISA, you can use your savings and the government bonus to purchase a home that costs up to £250,000 outside of London, or £450,000 in London. With a Lifetime ISA, the property price limit is £450,000 whether the home is inside or outside of London. With a help-to-buy ISA, your government bonus is paid upon completion, whereas with a Lifetime ISA you can use that bonus towards your deposit when you exchange contracts. You may have previously set up a help-to-buy ISA but are now looking at properties outside of London that exceed that £250,000 limit – so what can you do?

You are free to transfer the savings in your help-to-buy ISA over to a Lifetime ISA, increasing your property price limit outside of London by £200,000; however, you must wait 12 months to access those savings and the associated bonus. The 12 month countdown begins from the date of the first payment, and that includes transferring money from a different type of ISA. If you were to transfer savings from one Lifetime ISA to another, however, the 12 month countdown would not be reset.

Converting to a Lifetime ISA can be a savvy move, but it may not be the right one for you. The help-to-buy ISA is still an option at the moment, and although the Lifetime ISA bonus is added regularly, rather than at the point of purchase, it comes with its own caveats. If the saver decides to use their funds for a different purpose (for long term savings for later in life, for example), there can be penalties.

Both options are helpful for encouraging first time buyers to build their savings, but your personal situation will be unique. If you have any questions around this topic, please feel free to get in touch with us directly.

How will equity release affect my family?

Thursday, January 3rd, 2019

The choice of whether or not to release equity from your home ultimately rests with you. However, the decision will have wide reaching consequences for your family. It’s sensible, before releasing equity, to see a financial adviser who will explain the ramifications.

There are two main forms of equity release – lifetime mortgages and home reversion plans.

Most commonly, people choose lifetime mortgage schemes. These mean that you take out a mortgage secured against your house which lets you release some of the wealth tied up in it.

Home reversion plans mean you sell a portion or all of your house at less than market value, in return for a tax-free lump sum.

If you’re married or in a civil partnership, you can take out a policy with your partner. In the event of one of you dying or going into residential care, the other can stay in the home under the terms of the policy.

Your spouse aside, equity release can affect your children and other relatives in a variety of ways.

In the short term, equity release could help your family, provided you spend the money on them. Parents and grandparents are sometimes releasing equity on their home so they can lend it to their children or grandchildren, helping them get on the property ladder. This is sometimes referred to as a ‘living inheritance’.

This said, it will diminish the value of your home, which your children might see as part of their inheritance. Because of regulatory requirements, all equity release products have a ‘no negative equity’ guarantee, as long as they are sold by a member of the Equity Release Council. As a result, you’ll never owe a lender more than the value of your house.

Some equity release products could lead to you repaying a huge amount, leaving your children with a far smaller inheritance than they may have expected. With some plans it’s possible to protect an element of equity as an inheritance plan. Otherwise, you could decide on an interest payment plan, preventing the loan from building up.

It’s best to keep your children in the loop if you decide to release equity. This will avoid any sudden shocks down the line and give them a chance to understand the process. In addition, you should consult an expert to make sure you take out an equity release plan that’s right for you and your family.

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.