31 October 2009

Liberate your Wealth – Equity Release

What we are talking about here is raising some money by using the value in your house. Why might you want to do that? Well, you may want to do some home improvements, or to help your family out, or simply increase your income. All these are possible.

In the right circumstances it seems to me to be a great solution. There really is no point living in poverty in an expensive house which you own but cannot benefit from.

In the past, Equity Release has had a bad name, let’s admit it. But these days it is fully regulated; advice has to be given by advisers with a specialist qualification, and companies who operate in this market are mostly members of the trade organisation – SHIP – who have their own requirements to be followed by members.

It shouldn’t be the first thing to consider – moving into a smaller house may give a better result, and leave your family with more of a legacy, for example. And you have to bear in mind that raising a sum of money may have an impact on state benefits.

There are two basic approaches – with Home Reversion Plans you sell your house but have the right to live there for as long as you want. While Lifetime Mortgages are just that – a loan secured against your house. You do not have to pay interest each month, because it gets rolled up, thereby increasing the loan. It is paid back after you die or move out when the house must be sold. This reduces the value of what you would otherwise pass on to family.

Depending on your age, with a Lifetime Mortgage, for instance, you may be able to borrow between 20% and 50% of the value of your house. If you want an income, you would take it a bit at a time rather than as a lump sum, so that the outstanding loan doesn’t grow so fast.

Reminder: This is not personal advice - you should take your own advice from a qualified financial adviser before making any decisions. Information given is my personal opinion and not that of any organisation I am connected with.

28 October 2009

6 Simple Ways to Reduce Inheritance Tax

Of course, you may not expect to have an Inheritance Tax (IHT) bill at all. But if you think you might have, and if you don’t want to rely on the Conservatives (a) being elected, (b) doing what they say they will (increasing the IHT allowance), and (c) doing it before the end of your life(!), then here are some ways to reduce a future liability.

The tax is a hefty 40% so is worth avoiding if possible (yes, tax avoidance is legal – it’s tax evasion which isn’t!). And the big problem on this (arguably immoral) tax is that it applies to gifts made up to 7 years (or even 14 years in some cases) before you die. So if you receive a gift from someone who subsequently died, the tax man may may come to you and ask you to pay 40% tax on that gift – even if you’ve now spent it. Not good! But getting off my soapbox …

  1. Nil Rate Band – this is currently (in 2009/10) £325,000 per person. Up to this level of assets you have no IHT worries. What’s more, if you are widowed, you will probably be able to use your late spouse’s Nil Rate Band as well.
  2. Annual allowance – You can give away up to £3,000 per year (reducing your estate’s value) without paying IHT.
  3. Small gift allowance – In addition, you can give as many small gifts up to £250 as you like, provided they are to different people, and they don’t overlap with the Annual Allowance.
  4. Gifts on marriage – allowances if you are related in certain ways to someone getting married.
  5. Regular gifts out of income – If it can be shown that you have been making a regular gift which is (a) part of your normal expenditure (is “habitual”), (b) is made out of your income (not out of capital), (c) allows you to maintain your normal standard of living, then it would not be liable to IHT.
  6. Gifts to charities, or in “the national interest” – not liable … simple; as is the case if you die on active service (yes, IHT applies to the young as well as the old).
Those are the simple things you can do to reduce an IHT liability. Beyond that it starts to get a little more complicated, with various sorts of trusts, for example, and/or loans which create a debt on your estate, including Equity Release plans. They are certainly worth looking at if you need to, but that’s for another day.

Reminder: This is not personal advice. It is my personal opinion and not that of any organisation I am connected with. So there.

12 October 2009

Limited Offer by HM Government? – Buy Now!!

There’s no doubt that UK finances are under pressure. With all the support given for banks, and with falling tax revenues due to the recession, public finances will be in a right state for years to come.

Politicians will continue to debate cuts without doing what’s needed soon enough (as usual). But undoubtedly the pressure is to increase taxes.

While it is always possible that legislation will apply retrospectively, it is certainly best to take full advantage of any tax breaks which are available here and now. So here’s a few which you should be considering before they (maybe) disappear:

  • Use your ISA allowance – while you pay into an ISA out of taxed income, income is free of income tax, and growth is free of capital gains tax (but watch out for Inheritance Tax). I haven’t heard any hint that this tax break is going to be removed, but it is wise to use it up to your annual allowance anyway. The only exception might be for older people (life expectancy less than, perhaps, five years); since ISAs have to be sold on your demise (they cannot be transferred to anyone else) and the markets might be down when your executors are forced to sell, alternatives may be better.

  • No more Tax Free Cash? – when you start taking a pension income, you are typically entitled to a tax free sum (25% of your pension pot in a money purchase scheme, different for final salary). This is now called a “Pension Commencement Lump Sum”, and while it is still tax free at present, does that change of name herald the removal of its tax free status?

  • Pension contributions – these currently qualify for basic rate tax relief, with HMRC “returning” the basic rate tax you have paid to the pension provider to add to your investment. Even if you are not an earner or are already receiving a pension but are under 75 you can make a contribution and take advantage of this. Higher rate relief is also currently available, making pension contributions particularly tax-effective for higher rate taxpayers. There are, though, limitations on relief from April 2011; is that the start of withdrawing this tax break? It has been suggested that it is: Telegraph. Within the limitations, it is best to make pension contributions sooner rather than later, particularly for higher rate taxpayers.

  • Gift Aid donations – these work similarly to pension contributions (believe it or not). The charity reclaims the basic rate tax, the giver can reclaim any higher rate tax. Use it while it’s still there!

  • Capital gains tax increases? – CGT was reduced in 2006 to a flat 18% (in most circumstances). This means that investments (including property) that are subject to CGT can be better than those subject to income tax. That looks to me like an opportunity for a cash-strapped Chancellor to claw back a bit of tax. Realising capital gains sooner rather than later looks like a good plan – and preferably within the annual CGT allowance.
Of course, there are always ways of being tax-efficient in your affairs, but these are some of the ones which may be particularly vulnerable to taxation changes in future.

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