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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?

Wednesday, January 4th, 2017

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 festive 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.

The Autumn Statement: What it means for you and for the country

Wednesday, December 7th, 2016

The Autumn Statement delivered by chancellor Philip Hammond on 23rd November offers the first major insight into the government’s financial plans both in the lead up to Brexit and in the period immediately following the UK’s departure from the EU. But whilst the country’s economic future was clearly a major factor within Mr Hammond’s first statement as Chancellor, there are also numerous implications for the day-to-day finances of people across the country.

A key announcement within the Autumn Statement was a change to salary sacrifice schemes, which enable employees to receive goods or services in place of part of their salary, which in turn lowers both their national insurance and income tax payments. Whilst the most popular options – childcare vouchers, pension contributions and bicycles as part of the ‘cycle to work’ scheme – will stay as they are, others, such as gym memberships and computer equipment, will be taxed from April next year. Company cars with ultra-low emissions, however, will continue to be exempt from tax.

Motorists received both good and bad news within the statement. Fuel duty remains frozen for the seventh year in a row, which Mr Hammond claims will save car drivers an average of £130 per year, with van drivers set to save around £350. However, as Insurance Premium Tax is set to rise from 10% to 12% in June 2017 – the third rise of this tax in 18 months – this is likely to cancel out the benefits for many. Other insurance products such as home insurance and pet insurance will also see an increase.

There are some benefits for earners as the income tax threshold is set to increase slightly from the current figure of £11,000 to £11,500 in April 2017. The National Living Wage will also increase from £7.20 to £7.50 an hour at the same point.

Former chancellor George Osborne’s plan to balance the books by 2020 is clearly now a distant memory as the national debt is set to rise from last year’s figure of 84.2% to 87.3% this year and again to 90.2% in the 2017-18 financial year. The forecast for the period until 2021 has also worsened, with the government predicted to be £122 billion worse off than in the previous forecast given in the Budget in March. Mr Hammond has already been accused of offering a particularly pessimistic outlook – particularly by ‘Brexiteers’ – with the Chancellor’s response being that the view laid out is only one of several potential possibilities for the UK’s economic future.

The importance of having a Will

Wednesday, July 20th, 2016

Despite the fact that having a Will in place is commonly accepted as the most effective way to leave details about your inheritance, the number of people who don’t have one is remarkably high. Charity will-writing scheme, Will Aid, has found that 53% of people in the UK don’t have a Will in place. The reasons for this are varied: some view making a Will as something to do when they get older, others simply don’t understand why having a Will in place is so essential.

Even if you have discussed with your family how you would like your estate to be administered following your death, putting it down in writing ensures clarity and reassurance for your loved ones both whilst you are still living and after your death. Not only does a will allow you to say what you would like to go to whom, as well as any charities or other causes to which you would like to make donations, but it is also your chance to make it clear who you want to act as the executors of your estate after you’re gone. Making this clear can minimise confusion and ensure the people who you trust are those in control following your death.

If you don’t have a Will in place when you die, it can cause a number of problems. The estates of those who die without a will are administered following the Law of Intestate Succession. In these circumstances, spouses and civil partners have specific rights but do not automatically inherit the entire estate of their other half. Any children have inheritance rights, but more distant family members, friends and cohabitants do not. Without a will, you cannot choose who your executors will be either, losing control over how things are handled.

Simply having a Will is also not enough: you need to ensure it’s both a legal document and kept up to date. Writing your own will might seem like a good way to ensure matters unfold exactly as you wish after you die, but can actually trigger legal disputes that go on for months or even years following your death. A Will that hasn’t been updated for some time can also cause similar problems if it doesn’t reflect the position of both you and your family at the time of your passing. The best way to ensure this doesn’t happen is to hire a solicitor with the expertise in this field to ensure your will is both up to date and completely legal.

Inheritance tax: the changes you need to know about

Wednesday, July 20th, 2016

The changes to inheritance tax that were introduced in the 2015 Budget will soon come into effect, with some becoming the law as early as April 2017. With less than a year to prepare for these changes, it’s important to ensure you know what to expect and that you’re doing everything you need to in order to ensure you aren’t caught out.

The biggest shift is an increase in the value of estates that can be passed on before any inheritance tax is paid. At the moment, the limit is £325,000 per person, but from April next year that figure is set to go up thanks to a new “family home allowance”. This will be worth £100,000 for the first year, £125,000 in the 2018-19 financial year, £150,000 in 2019-20, before finally reaching £175,000 in 2020-21. Any further increases from 2021 onwards will be in line with the Consumer Price Index.

From April 2020, up to £500,000 of assets can therefore be passed on without any inheritance tax levied upon them. As the limit is applied to individuals, married couples and civil partners will be able to pass on up to £1 million of assets including property tax-free. Extra peace of mind comes from the fact that this combined amount will be upheld even if one partner dies before the new limit is introduced in 2017.

In addition to these changes, from July last year those downsizing their property are eligible for an “inheritance tax credit”. This means that you will still qualify for the increased threshold even if you sell an expensive property, as long as the majority of your estate is being left to your direct descendants.

It’s also worth remembering that the new total must include a property which is deemed a “family home” – the main property in which the owner or owners and their family live. Any additional properties, including buy-to-let, will still be added to the total size of the estate. Whilst the changes will bring down the cost of inheritance tax for anyone owning a family home, it has also been confirmed that the allowance will be gradually withdrawn for properties worth £2 million or more.

All of these changes mean that your financial planning should also change to keep up with the developments coming down the pipeline. If you’re unsure of how you need to alter your plans, or when you need to do so, the best course of action is to speak with us.

How will Brexit affect your finances?

Wednesday, July 6th, 2016

At this very early stage, the full impact of Brexit on our personal finances remains unclear, but we can already observe the following points.

The Pound and Prices

If the pound continues to fall then importing goods from other countries will be more expensive. This will push prices up and lead to a rise in inflation: but it’s good news for exporters as their goods become cheaper to buy.

Petrol

An early example of prices going up will be seen on the petrol forecourts. Wholesale petrol prices are quoted in dollars, so as the pound falls against the dollar, petrol prices will rise. The Petrol Retailers Association are already talking of a rise of 2-3p per litre.

Savings and Investments

Without question, the biggest threat to the stock market and your savings and investments is a prolonged period of uncertainty – the one thing markets hate above everything else. Assuming everything is worked out relatively quickly then the stock market should return to a normal pattern of trading – and as George Osborne has said at several points over the last week or so, the fundamentals of the UK economy are relatively strong. We certainly cannot assume that Brexit would be bad for shares: in the long run the stock market will be affected by events around the world – China’s economy, growth in the Eurozone, the outlook for the US – as much as it will be affected by Brexit.

Clearly any rise in interest rates (see below) would be good news for savers.

Interest rates and Mortgages

Before the Referendum vote, Remain were saying that a vote to Leave would push up borrowing costs, leading to higher mortgage payments and increasing renting costs. But if Brexit were to lead to a period of low growth then interest rates could be cut in a bid to stimulate the economy. David Tinsley, UK economist at UBS, has said that he expects two interest rate cuts from the Bank of England over the next six months, taking rates from the current 0.5% to zero.

House Prices

There appears to be some consensus that Brexit could lead to a fall in house prices, especially in London and the South East. The Treasury has spoken of a fall of 10-18% over the next two years. Clearly not good news for existing homeowners, but anyone with children struggling to get a foot on the housing ladder may take a different view.

Tax

During the campaign, George Osborne gave dire warnings of tax rises in the event of a victory for Leave. This would be directly contrary to the Conservative’s election pledge and would be difficult to implement. On the face of it, you could have said that an extension of ‘austerity’ for a further two years beyond 2020 was much more likely, but the Chancellor and Theresa May appear to be uniting behind an approach which abandons the fiscal charter and effectively loosens austerity. A further cut in corporation tax, to encourage businesses to remain in the City, has already been announced by Mr Osborne.

The Leave campaign did give a pledge to remove the 5% VAT on domestic fuel required by EU law – but there were so many pledges flying about that it is perhaps best to not build this into your household budget just yet.

Pensions

David Cameron did claim that a vote to Leave would threaten the ‘triple lock’ on pensions, but this presumes a poorer economy and a lower national income. If economic performance did deteriorate after Brexit, then the Bank of England might opt for a return to Quantitative Easing (QE) and/or lower interest rates. More QE would push down bond yields and with them annuity rates – so anyone buying a pension annuity would get less income for their money.

Help To Buy v Lifetime: Which ISA is best?

Wednesday, May 11th, 2016

Set to be introduced in April 2017, the Lifetime ISA essentially offers an alternative to the Help To Buy ISA. With two competing options on the table, it’s important to know which is best for you and your needs, as whilst they have some similarities, there are also key differences between the two.

The Help To Buy ISA allows you to save up to £200 each month to save for a deposit on your first home. The government then boosts your savings further to the tune of 25% up to a total limit of £3,000, as long as you’re a first time buyer purchasing a property priced up to £450,000 in London and up to £250,000 everywhere else in the UK. There is no minimum deposit each month, and you’re also able to pay in £1,000 when the account is opened that doesn’t count towards your monthly savings.

Available up to Autumn 2019, anyone aged sixteen or over is entitled to open a Help To Buy ISA. The accounts are limited to one per person, which means both people in a couple can have an account and benefit from the bonus.

The new Lifetime ISA is based on similar principles but has several important differences, with the most important being that it can be used either to save for purchasing your first home or as money put away as a pension for later in life. There’s no limit on how much you can save each month as long as you don’t go over the yearly cap of £4,000.

Again, the government offers a 25% bonus, but this is paid whether you use the money to purchase your first home up to a price of £450,000 anywhere in the country, or keep it for later in your life. Any money that’s taken out before your 60th birthday and not used for purchasing your first home will forfeit the government bonus plus any growth or interest earned from it, as well as incurring a 5% charge. If you wait until after you’re 60, you can take out everything tax-free.

As you will be allowed to have both a Lifetime ISA and a Help To Buy ISA, you can choose to do this, but you will only be able to use the bonus from one of the two accounts to buy a home. As the Lifetime ISA is essentially replacing the Help To Buy ISA, it makes sense to opt for the newer style of account after they are introduced next April. If you want to set up an ISA for your child, however, you could consider opening a Help To Buy ISA on their 16th birthday then transferring the savings to a Lifetime ISA two years later which will allow you to take full advantage of the government bonuses.

Scale tipped in favour of small firms?

Wednesday, March 30th, 2016

Chancellors presenting their Budgets often attempt to redistribute wealth from one group in society to another, stated a recent post-Budget Accountancy Age article, suggesting that this was the implicit rationale behind many of the corporate tax measures announced in the March 2016 Budget.

The business tax roadmap, published on March 16th, provided detail of how current and future business taxes would impact over the remainder of this parliament. Large companies, not necessarily all multinationals, saw an eventual reduction in the headline rate of corporation tax to 17% by 2020. We also saw that a concession to payments of corporation tax on account, for the two thousand or so very largest companies with profits over £20m, is to be deferred.

In addition, the chancellor announced the implementation of Base Erosion and Profit Shifting (BEPS) related actions in the restrictions on royalty payment deductions, and an effective interest relief restriction, to 30% of net interest expense, albeit with some exceptions and concessions. These moves to curb tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax areas by businesses, were expected.

There were changes on loss relief. Some will benefit from more flexibility but others will see restrictions to 50% of losses, for companies with profits in excess of £5m. According to AccountancyAge, hidden in the roadmap was also a reference to a review of the substantial shareholdings exemption – a valuable relief which shouldn’t be under threat.

Where is the ‘new cash’ going? Much is directed to small and micro businesses, who benefit from the reduction in the main rate of corporation tax too in due course. Permanently doubling the small business rate relief costs a whopping £1.5bn and with other changes to business rates, around 600,000 firms will benefit. Another change was around commercial stamp duty, although there’s a catch. Duty was cut in respect of purchases up to £150,000 to zero, with a 2% charge on the next £100,000 of value. But the charge has been increased over this threshold to a higher 5% charge.

These changes should help smaller businesses significantly, yet the concern is that as both of these reductions apply to landlords (if the landlord pays the business rates), there’s a risk these ‘benefits’ aren’t passed on through reduced rents.

And what about the ‘sofapreneurs’? A new £1,000 a year allowance for trading income generated by micro entrepreneurs, and a further £1,000 a year allowance for property income, will take away much complexity for those selling or renting via digital platforms, such as Airbnb. Overall, AccountancyAge believes that there is a shift from big to small, a signal perhaps to those who want to start out in business, to now get up and try.

Lifetime ISA announced

Thursday, March 17th, 2016

Under a new Lifetime ISA announced in the Budget millions of adults under 40 will receive a 25% bonus from the government. From April 2017 they will be able to put in up to £4,000 a year, with the annual bonus of up to £1,000 paid until the age of 50. The Chancellor said that savers would be able to withdraw money from a Lifetime ISA at any time, and would not pay any tax on it. He also revealed that from April 2017 all savers will be able to put up to £20,000 a year into ISAs, up from £15,240 at the moment.

CGT rates cut

Thursday, March 17th, 2016

The higher rate of Capital Gains Tax (CGT) will be cut from 28% to 20% this April. In addition, the basic rate of CGT will be cut from the current 18% rate to 10% at the start of the new tax year on 6 April. Budget documents show that the government estimates the changes to CGT will cost it more than £600m a year from 2017-18 onwards. However, the old higher rates will still apply to gains on the sale of a residential property that is not a main home (such as a second home or a buy-to-let property), and also to “carried interest”.

Stamp duty overhaul announced

Thursday, March 17th, 2016

Commercial stamp duty will be overhauled with the introduction of a 0% rate on purchases up to £150,000, a 2% rate on the next £100,000 and a 5% top rate above £250,000. A new 2% rate for high-value leases with net present value above £5m will also take effect from today. The overhaul introduces a “slice” system, in which stamp duty is payable on the portion of each transaction that falls within the relevant price band. Large-scale professional landlords will also face a three percentage point stamp duty surcharge when buying rental properties, after George Osborne rejected proposals for an exemption for bigger investors.