Life Focus February 2015

Published byIan Macdonald

9th February 2015

• Contact the Team
• Land and Buildings Transaction Tax: Your future residential property transactions
• ISA Simply Can’t Believe It! – The Benefits of an ISA
• Asset protection and IHT reduction from beyond the grave – the potential advantages of a Nil Rate Band Trust in your Will
• “It’s complicated”: How trusts can help when your family isn’t average
• STOP THE STRIPPING (of pension funds for inheritance tax considerations)

Welcome to our first Life Focus of 2015

What will 2015 bring for investors and savers? Some radical measures (pension reform) are already in the pipeline but with a General Election fast approaching, it’s anyone’s guess as to what will, and will not, carry forward after May. We’ll be keeping an eye on all the pre and post-election rhetoric and promise to keep you informed.

We’ve rounded up the most significant recent changes and summarised them for you. As ever, if you have any questions or points for discussion, please get in touch.

Contact the Team

If you have a savings, tax,pension or investment issue you'd like to chat about, please contact the team:

Ian Macdonald: im@wjm.co.uk 0141 248 3434
Grant Johnston: wgj@wjm.co.uk 0141 248 3434
Susan Hoyle: sjh@wjm.co.uk 0141 248 3434

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Land and Buildings Transaction Tax: Your future residential property transactions

Are you thinking of selling your house or buying a new one this year? If so, you should know that from 1st April 2015, the way in which the government charges tax on land transactions in Scotland will change. The current regime, Stamp Duty Land Tax (SDLT), will be replaced by a new tax, the Land and Buildings Transaction Tax (LBTT). 

Deputy First Minister, John Swinney, recently announced revised rates for LBTT on residential property transactions. The announcement came in response to criticism that the original residential rates (announced in October 2014) were too onerous. 

The new rates are as follows:

What will this mean for future residential transactions?

In short, houses with purchase prices of less than £333,000 will not pay more tax under LBTT than SDLT. Above £333,000, the differences will be considerable. For example, a £600,000 residential sale which completed at the time of writing incurred an SDLT liability of £20,000. Under LBTT, the same transaction would see a tax bill of £33,350- a difference of £13,350. 

If you are thinking of selling and are in a position where you will be worse off under LLBT, the sale will need to complete before 1st April 2015 to ‘beat’ the tax. 

WJM’s Private Client team has a great deal of experience in residential transactions. If you would like more information on the proposed changes, your normal WJM contact will be able to assist. 

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ISA Simply Can’t Believe It! – The Benefits of an ISA

With so many different types of bank account and investment available, it’s easy to forget about this simple way of saving money and tax. Have you saved any tax this year? 

Are you an Individual? Do you have (or want) a Savings Account? Put the two together and you have the Individual Savings Account (ISA), the UK’s tax-efficient savings ‘wrapper’. Like a sweetie wrapper that contains delicious guilt-free chocolate, the ISA wrapper contains deliciously favourable tax treatment. By that, we mean that the investments within the wrapper are exempt from UK income tax and capital gains tax. 

If you don’t currently pay tax, if you are a basic rate tax payer or if you are a higher/additional rate tax payer, the ISA wrapper offers a simple and tax-efficient way to hold cash or investments. You can deposit/invest up to £15,000 in an ISA wrapper in the current tax year (which runs until 5th April 2015).  This is known as ‘utilising your ISA allowance’. 

The ISA wrapper has been around since 1999 and, for those of us old enough to remember, replaced the PEP (Personal Equity Plan) and TESSA (Tax Exempt Special Savings Account). If you have been ‘utilising your ISA allowance’ since then, you could have built up a sizeable tax free fund which you might be relying on for tax-free income or tax-efficient savings for a rainy day. 

In addition, if you are married or in a civil partnership, there are even more advantages to holding an ISA. The Chancellor’s 2014 Autumn Statement announced that ISAs can now effectively be passed on death to a surviving spouse or civil partner, thus making the ISA tax-wrapper more valuable: the surviving spouse will be given an additional, one-off ISA allowance, equal to the value of the deceased's ISA holdings, which will enable them to re-shelter assets which were in a spouse's ISA into an ISA in their own name. Final legislation in this regard is awaited. 

In short, this means that if you are not utilising your ISA allowance, you probably should be. Why not give WJM’s Wealth Planning team a call and share with us your hopes and dreams of a tax-free retirement income or savings nest egg? We will help get you started on an amazing journey of tax efficiency.

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Asset protection and IHT reduction from beyond the grave – the potential advantages of a Nil Rate Band Trust in your Will

Multi-tasking for the future– how including a nil rate band trust in your Will could extend your influence beyond your death to provide ongoing security for your loved ones and reduce inheritance tax. 

Many of us have a clear idea of what we would like to happen to our assets and to know that our family and friends will be cared for in the way we’ve planned, although most people are resigned to the fact that you can’t exercise your autonomy after you’ve gone.  

This can be a difficult concept to deal with, especially if you have the additional uncertainty of providing for a young family member, dealing with feuding relatives, are remarried or wish to shield assets from potential events such as divorce or a hefty tax bill.   

Nevertheless, assets can be controlled to a certain extent from beyond the grave and it is reassuring to know that a particular relative or group of people will benefit from the arrangements you’ve put in place. 

One such arrangement is a nil rate band (NRB) trust.  This transfers an amount of your estate up to the value of the NRB (currently £325,000) into trust, to be held for the beneficiaries you choose.  Those beneficiaries can receive the benefit of the trust under the terms you prescribe in the trust deed.  However, the beneficiary won’t have to pay inheritance tax on the trust funds and the trust assets will not form part of divorce proceedings or a claim on the estate. 

Since the introduction of the transferrable NRB in 2007, married or civil partnership couples have been able to rely on this to reduce inheritance tax.  Nonetheless, many people (such as siblings, cohabitants or family members) who wish to leave everything to each other but don’t have the benefit of a transferrable NRB can take advantage of this trust for tax purposes, as well as an asset protection tool.   

Trusts can be a very complex area so we aim to tailor our advice to your personal needs.  For more information, please speak to your main WJM contact or email privateclient@wjm.co.uk

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“It’s complicated”: How trusts can help when your family isn’t average

Even relatively minor family complications can make it difficult to know how to protect your loved ones.  Could a trust be the answer? 

Families can be complicated and recent Christmas and New Year gatherings will have served as an excellent reminder of that for many of us!  Passing assets to family members during your lifetime can save on Inheritance Tax and most people want to provide for their loved ones in their Will, but if your family doesn’t quite match the perfect template which formed the basis of all those Christmas adverts it can be difficult to know how best to protect them. 

Giving cash or assets outright to your children and grandchildren is not always the best option.  They might have difficulty dealing with large sums; they could be at risk of financial difficulties or their personal relationships might not be entirely stable; and ownership of assets might affect their entitlement to benefits or other payments.  Blended families i.e. a family that includes children from previous relationships can also pose complications. 

Trusts (where funds are held for the benefit of your family without actually being owned by any of them) are often assumed to be just a tax saving measure, but while they certainly can help to save tax, that is not always the main motivation for having them.  Here are some examples of the flexibility a trust offers, which outright gifting simply can’t: 

• In cases of financial difficulty or family breakup, funds within a trust can be protected from claims by creditors or spouses.
• Where beneficiaries are financially inexperienced, Trustees can deal with the general management of funds and control the beneficiaries’ access to them.
• Where some beneficiaries need more financial assistance than others, Trustees can determine which beneficiaries should get which funds and at what times.
• Trustees can determine whether each beneficiary would benefit more from a large one-off payment (perhaps to purchase property) or a steady, regular income (perhaps to fund a period of study) and make appropriate arrangements. 

If you think a trust might help you make plans for your family’s future, we’d be delighted to speak to you.

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STOP THE STRIPPING (of pension funds for inheritance tax considerations)

In the past the worlds of pension and inheritance tax planning have not always seen eye to eye, however with the proposed ‘pension liberation’ rules coming into force from 6th April 2015, things are about to change!

 When your primary concern is to maximise what can be passed on, the previous wisdom of stripping out funds and gifting the surplus income to minimise the impact of the 55% lump sum tax charge on death, has given way to retaining funds within the pension as a more tax efficient solution thanks to the latest amendments to the Taxation of Pensions Bill. 

Tax relief on contributions without the seven year wait for them to be outside the estate, and tax free investment returns, were already good reasons to engage in pension funding. Now combine these with the new rules where a flexible pension, such as a Self-Invested Personal Pension (SIPP), allows pension wealth to cascade down the generations within the pension wrapper and it creates a truly tax-efficient wealth management and inheritance plan with few peers. 

The new rules will allow defined contribution scheme members (non-final salary) to nominate an individual to inherit the remaining pension fund. This can be anyone at any age and is no longer restricted to your ‘dependants’. Adult children who have long since flown the nest can now benefit and do not have to wait until 55 to access it. 

If the original scheme member dies after age 75, any withdrawals will be taxed at the beneficiary’s marginal rate. But if death occurs before age 75, the nominated beneficiary has a pot of money they can access at any time completely tax free. In either case, the funds are outside the beneficiary’s estate for inheritance tax. 

There are of course further technicalities that have to be taken into consideration, such as potential lifetime allowance charges, making the relevant beneficiary nomination, bypass trusts and ensuring your current pension provider can actually facilitate these new found pension ‘freedoms’. Therefore it is imperative that you seek independent financial advice to enable you to make the correct decision with regards to your hard earned pension provision.

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