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Clarke Nicklin Financial Planning

'protecting your wealth and helping your investments grow'

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April 2016

Understanding Tax-efficient investments

Options to minimise how much tax you pay

By understanding which investments are the most tax-efficient, you can make the most of your options to minimise how much tax you pay. As well as deciding what to invest in, you need to think about how you’re going to hold your investments. Choosing tax-efficient investments will often mean you’re able to keep a higher proportion of any returns you make.

You should always bear in mind that tax rules can change in future. What’s more, the benefit to you of favourable tax treatment (such as that given to Individual Savings Accounts) will depend on your individual circumstances.

Maximise your ISA allowance

UK residents aged 18 and over can invest up to £15,240 each in an Individual Savings Account (16 and over for a Cash ISA), and parents can fund a Junior ISA or child trust fund with up to £4,080 per child – making a total of £38,640 for a family of four before 6 April 2016.

If you have adult children who are planning to buy a home, it would make sense to gift funds to them so that they can invest in the new help-to-buy ISA. This became available for a four-year period from 1 December 2015 to help first-time buyers. Individuals aged 16 or over can save up to £200 per month (up to £1,200 in the first month), to which the Government will add a 25% tax-free bonus, from a minimum bonus of £400 up to a maximum amount of £3,000 on £12,000 of savings. Income and capital gains from ISAs are tax-free, and withdrawals from adult ISAs do not affect tax relief.

Insurance backed bonds

Provided by major insurance companies, life insurance backed bonds offer relatively secure returns to investors (depending on the underlying investments). They have the added tax advantage that up to 5% of the original capital invested can be withdrawn each year with no immediate tax liability. After such withdrawals reach 100% of the original capital, Income Tax is payable on further withdrawals or on surrender of the policy. Individuals whose level of income means that they will lose their personal allowance and/or pay 45% Income Tax may now find the 5% tax-free withdrawals facility particularly attractive.

Some friendly societies offer regular premium policies which run for ten years or more and can qualify for full Income Tax exemption on the gains accrued. However, since 6 April 2013, investment into such qualifying policies has been limited to £3,600 a year for all arrangements set up after 21 March 2012. Any amounts invested in new policies that are in excess of the annual limit will not qualify for the favourable tax treatment. Increases to existing policy premiums will be classed as creating a new non-qualifying policy, but if you have a pre-21 March 2012 policy it should be advantageous to keep the policy going until the existing maturity date.

Offshore bonds

Offshore life assurance bonds allow income to accumulate virtually tax-free until they are disposed of, at which point they are taxed in full at your marginal rate. As with UK bonds, up to 5% of the original capital invested can be withdrawn each year until the original capital has been withdrawn in full with no immediate tax liability.

While the maximum rate of Capital Gains Tax remains at 28%, alternative collective investments may be more attractive for short-term investment. However, offshore life assurance bonds offer the flexibility to defer tax into a year when other income is lower, or until a year when income losses are available to offset the profits, or a year when you are not tax-resident in the UK.

Deposit based accounts

The new personal savings allowance (PSA) has come into effect from 6 April 2016 meaning the tax rules have changed for 16/7 and beyond. Basic rate tax payers (20%) can now enjoy £1000 per annum interest tax free, £500 for tax payers on a higher rate (40%).

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

 

ISA know how

One of the most valuable tools available to investors focused on wealth creation for the long term

Individual Savings Accounts (ISAs) are one of the most valuable tools available to investors focused on wealth creation for the long term. There is no tax on interest payments, no higher-rate tax on dividend payments from 6 April 2016, no tax on capital gains to pay and no need to declare ISAs on a tax return.

Investment wrapper

An ISA is a tax-efficient investment wrapper in which you can hold a range of investments, including bonds, equities, property shares, multi-asset funds and even cash, giving you control over where your money is invested. It is important to remember that an ISA is just a way of sheltering your money from tax – it’s not an investment in its own right.

ISA limits

You can put money into one Cash ISA and one Stocks & Shares ISA each tax year. The tax year runs from 6 April to 5 April. Currently, you can save up to £15,240 in one type of account or split the allowance across both types. Your ISAs won’t close when the tax year finishes. You’ll keep your savings on a tax-efficient basis for as long as you keep the money in your ISA accounts.

Junior ISA limits

With a Junior ISA, you are free to invest up to £4,080 in the current tax year. You can switch from a Cash Junior ISA to a Stocks & Shares Junior ISA and back again.

What you need to know

Generate a tax-efficient income

When you invest through an ISA, your money is protected from HM Revenue & Customs, so you don’t have to pay personal Income Tax on any interest you receive from your investments. In a Stocks & Shares ISA, interest is generated by bond funds, which many investors choose because they offer the potential for a regular lower-risk income compared with equities.

This feature of an ISA is particularly useful in retirement, as it means you can hold your money in bond funds and generate a tax-efficient income on top of the payments you receive from your pension. It is also very beneficial if you want to generate long-term capital growth from your funds but prefer to take a cautious approach to investing.

Managing a potential tax burden

When your investments are held in ISAs, you don’t have to pay any Capital Gains Tax (CGT) on their growth. Of course, this may seem like a minimal benefit if your profits are well within the threshold for CGT, but it’s worth remembering that stocks and shares investments are for the long term. If your funds perform particularly well for several years, holding them in ISAs will mean you have full access to your money at all times without having to worry about managing a potential tax burden.

Freedom from CGT within an ISA can also be useful if you need to take an income from a portfolio of equity investments. Retirement tends to last longer these days, so it may be worth retaining your portfolio’s exposure to the stock market for a longer period.

Simplifying your financial administration

You don’t have to declare any investments held in ISAs on your tax return. This may not seem like much, but if you have to file an annual tax return you’ll know that any way of simplifying your financial administration can be very helpful.

More growth potential

One lesser-known fact about ISA investing is that you can choose to include some equities in your ISA investment and still have your income taxed as an interest payment. All you need to do is ensure that the funds you invest in within your ISA hold at least 60% of their portfolio in bonds. Although the rest is normally in equities, these investments are treated as bond funds for tax purposes. This means that your income from them is tax-efficient and your portfolio has more growth potential that could help lessen the effects of inflation on your portfolio.

Flexible and instant access

Unlike a pension or fixed-term investment vehicle, most Stocks & Shares ISA providers offer you flexible and instant access to your money when it suits you, without losing the tax benefits on the rest of your savings held within the wrapper. You can choose to withdraw some or all of your money at your convenience. However, it is worth remembering that once withdrawn, it cannot be returned.

Consolidating investments under one roof

If you feel that your existing ISA provider is no longer appropriate for your needs or you are looking to consolidate your investments under one roof, with an ISA you are free to transfer your investment between providers to suit your individual needs.

Please note: your current provider may apply a charge when you transfer your investment. While your investment is being transferred, it will be out of the market for a short period of time and will not lose or gain in value.

If you withdraw your ISA, you will automatically lose all of its associated tax benefits. So unless you need to liquidate your cash to spend yourself or to gift to someone else, you should always transfer it between providers to retain its tax-efficient status.

Junior ISAs – A straightforward way to save for a child’s future

Junior ISAs offer investors a straightforward way to save for a child’s future. No one knows what the economic situation will be like when your children or grandchildren have grown up, but the earlier you start the greater the service you are doing them.

Junior ISAs offer similar tax advantages to ‘adult’ ISAs but with a lock-in, making the child’s investment inaccessible until they turn 18. Like an ISA, Junior ISAs can invest in bonds, equities, cash, property and even multi-asset funds, giving you even more flexibility over the future of your child’s long-term savings.

Since April 2015, it is possible for existing Child Trust Funds (CTFs) to be transferred into Junior ISA accounts.

Embracing diverse viewpoints

No matter what your investment goals, we can work with you to develop the right portfolio for you. It’s important to know about the potential risks of your investments as well as the returns, and by embracing diverse viewpoints, better investment decisions can be made. To talk to us about the different investment opportunities that could be right for you, please contact us for further information.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.*

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.*

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.*

*only applies to Stocks & Shares ISAs

 

Future gazing – Will you be able to afford the retirement lifestyle you want?

One of the key challenges some people face is imagining a retirement which may be decades away. As individuals take on more responsibility for their retirement, a clear idea of what they can expect from the State Pension and their own savings becomes ever more important.

Britons are living longer than ever before. However, this also presents many challenges – not least, how will we survive financially in old age given that our retirement may last much longer than we might have expected?

Many people don’t know the answer – not because they aren’t saving for old age or don’t have the means to finance their retirement, but because they haven’t thought carefully about exactly what their needs will be.

The big question everyone should think about when it comes to pension saving is: ‘How much will I need to pay for my retirement?’

retirement.pngSource data

BlackRock Investor Pulse was conducted in association with Cicero Group between July and September 2015. A nationally representative sample of over 31,000 people in 20 countries was surveyed. They were aged between 25 and 74 years old. 4,000 were UK residents and, of this 4,000, 750 met the criteria for investors – having investable assets of more than £100,000 or an income greater than £100,000 as an individual, or £150,000 as a household.

The results of this survey are provided for information purposes only. The conclusions are intended to provide an indication of the current attitude of a sample of ‘wealthy investors’ in the UK to saving and investing and should not be relied upon for any other purposes.

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