How Can I Reduce My Inheritance Tax Bill?

The Government’s 40pc levy on estates of the deceased may seem inevitable or even inescapable, but there are ways to cut or even avoid it, writes Rosemary Bigmore

The sentiment that “in this world nothing can be said to be certain, except death and taxes” is most often attributed to Benjamin Franklin. If so, then inheritance tax (IHT), the levy paid by those who inherit your estate upon your death, merits a place on the list of certainties. But it is possible to reduce or even avoid IHT with some astute planning. Here’s how…

1 Leave your money to a spouse

IHT is levied at 40pc but the first £325,000 of everyone’s estate is tax-free. Property and assets can pass between spouses and civil partners without incurring a liability (except when passing from a UK domicile to their non-domicile spouse), so you can structure your will to leave money to each other to help reduce the tax. You can also pass any unused portion of your allowance to a civil partner or spouse to reduce the bill later.

2 Pass your home to direct descendants

The residence nil-rate band (RNRB) is available if you leave a property you live in to a child or grandchild. The additional sum is £150,000 per person until April 2020, then £175,000, increasing with inflation. You can pass this unused allowance between couples. If you downsize or go into care, you can claim this part of the exemption only if you leave assets worth the same as the former residence to a direct descendant. The RNRB tapers down to zero on estates worth more than £2m, so those with very valuable estates end up paying a greater proportion of IHT.

3 Keep it in the family

Your pension is outside your estate for IHT purposes, so passing it to relatives is tax-efficient.

4 Make IHT-free gifts

Prevent your family paying IHT on your estate by giving it away while you are alive. Anything you give away more than seven years before death is exempt from IHT. You can also give away £3,000 each year IHT-free and small gifts.

5 Use a trust structure

Some trust structures let you leave money without it being subject to IHT. However, the rules around this vary widely for different structures, so talk to a professional first.

6 Talk to an expert

IHT is complex and can make a big difference to the legacy you leave. An expert financial adviser can help you to make a workable plan, and you may also need to amend your will.

Request a meeting in person or a telephone call with your local adviser. 

Book an appointment here.

 

What is the Cost of a Comfortable Retirement?

According to recent research1, anyone wishing to retire at age 65 with a pension income (including a full State Pension) equivalent to the average UK annual salary of about £28,000, would need to accumulate a pension pot of nearly £450,000 to fund their retirement until they reached 100 years old. Whilst that may seem unlikely for many of us, the Office for National Statistics calculates an increasing number of us will attain this age in the coming decades.

Start saving early

In addition to stating the amount required to fund a comfortable retirement, the analysis also highlights how investing regularly across a working life provides the best hope of reaching that target. Indeed, it shows that if you begin saving when you are 25, you would need to invest around £235 a month to accumulate a suitably sized retirement fund.

If you delay starting by 10 years, this figure rises to £428; while delaying until you are 45 would push the number to £859 a month. These projections are based on a defined contribution scheme entering a drawdown pension arrangement on retirement. Another option would be to buy an annuity that provides an income for life.

But better late than never. Although in an ideal world it is certainly best to start saving for retirement at the earliest opportunity, other financial commitments can inevitably make this difficult. And it’s important to remember it’s never too late to save for retirement. If you are fortunate enough to have your employer make contributions to your pension plan, along with favourable tax treatment and potential for investment growth, any pension contributions you make in later life can still have a big impact on your standard of living in retirement.

Tax advantages

All monies invested into a pension fund grow free of Capital Gains Tax and your contributions are enhanced by Income Tax relief at source. For example, if you invest £80, the government adds on tax relief (currently 20%) to enhance your contribution to £100. Higher rate taxpayers can claim additional relief through their PAYE coding. You may also need to consider the Lifetime Allowance, currently £1,073,100 and the Annual Allowance, which, for most people is £40,000. 

Prioritise pension saving

While saving for retirement can seem to be a daunting task, the sooner you engage with the topic the better the chances of you being able to afford the retirement you deserve. Although it may still seem to be a long way off, you can guarantee retirement will creep up much faster than you expect. And careful planning now will undoubtedly make a substantial difference to the amount of money ultimately available for you to enjoy in retirement.

Talk to an expert

Request a meeting in person or a telephone call with your local adviser. 

Book an appointment here.

*The initial consultation is designed to discover whether or not you would benefit from financial advice and there is no obligation on either side to proceed. Following the initial consultation, if you wish to appoint Lighthouse Financial Advice as your financial adviser they will explain and agree any charges with you before undertaking any work on your behalf.

The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.

Tax treatment varies according to individual circumstances and is subject to change.

1 AJ Bell, June 2019.

Stay vigilant and scam aware

Several institutions, including the Bank of England, the National Crime Agency and the Financial Conduct Authority (FCA) have warned consumers to be particularly vigilant about scams in the current climate of uncertainty. These warnings follow an increase in incidences in the last few months, with scammers often targeting the most vulnerable people, such as those under financial pressure, perhaps having lost jobs or been furloughed. 

Millions affected

Recent research1 found 5.2m people in the UK had fallen victim to, or knew someone who had been duped by, a financial scam, since the beginning of the pandemic.

The most common financial scam involved banking, accounting for 60% of victims. A further 35% had been targeted by an insurance scam and one in five consumers reported having been targeted by a pension scam, often through fraudsters offering free pension reviews. 

Scams can have a significant financial impact – according to the research, victims lost on average, £566 per scam.  Having been a victim is also likely to result in people suffering more than just a financial impact – more than half of respondents (55%) agreed that it had impacted their mental health.

Government guidance

The government has provided guidance detailing how consumers can protect themselves from fraud. This guidance includes checking the company’s credentials via a reliable source such as the FCA’s Financial Services Register, being wary of deals that sound too good to be true, not giving out personal details, not clicking on links from unknown senders and seeking professional financial advice before making any decisions. The official advice can be found here www.gov.uk/government/news/be-vigilant-against-coronavirus-scams

How to be a scam-smart investor

The FCA also has an online scam checker where you can check a pension or investment opportunity – this can be found here www.fca.org.uk/scamsmart   

Helping you to stay safe 

In times of uncertainty, when we may be under more financial pressure, we can be more stressed and anxious, making us more vulnerable to fall victim to scams. If you are unsure about any financial opportunities that come your way, please contact us before you act on any approaches. Rest assured, we are here to help you.   

1 Canada Life 

Working from home – changing the way we think about where we live

One effect of the pandemic has been the requirement for many people to find ways of working from home, aided by technology. Figures1 from the Office for National Statistics (ONS) at the end of May, show that 41% were working from home, for at least part of the week. The extent to which an employee can work from home obviously depends on a number of factors, such as whether a specific physical environment, tools, or proximity to other people are required for the role. 

New horizons

It appears likely that a significant number of these workers may continue to be wholly or partially home-based after lockdown measures ease and this could give them greater choice about where they choose to live. 

If a daily commute to a place of work isn’t required, other priorities such as schools, local facilities, value for money and a better quality of life may come to the fore.

Insurance – need-to-knows

The Association of British Insurers (ABI)2 has issued reassurance that, if you are an office-based worker, now working from home because of government advice or because you are self-isolating, your home insurance cover will not be affected. The ABI has stated: ‘You do not need to contact your insurer to update your documents or extend your cover.’

It is worth checking your policy document, but company property such as a mobile phone or laptop is not usually covered by a standard household insurance policy. Your employer should be able to confirm that the correct insurance is in place to cover these items outside of the usual place of work. 

What if I have an accident whilst working from home?

As you are in control your own home environment, you are responsible for your own safety. Therefore, if you were to suffer an accident whilst working at home, your employer would generally only be responsible if it was due to their negligence, meaning that they had failed to take reasonable care for your safety and the accident was due to that negligence.

If you have a protection policy such as Accident and Sickness or Income Protection, and you have an accident or suffer an illness that prevents you from working, you may be able to make a claim.

Do you have the right cover in place?

If you are unsure whether you have the right insurance cover in place, contact us for advice on your own individual circumstances.

1 ONS,2020

2 ABI, 2020

Sources

https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandwellbeing/bulletins/coronavirusandthesocialimpactsongreatbritain/5june2020

 

Protecting your loved ones

Losing a member of your family at any stage in life can be devastating, particularly when children are involved. 

Family life brings responsibilities such as ensuring your dependants are provided for in case you die, particularly if you have a mortgage or other debts. When you have young children there are additional practical and emotional problems connected to the loss of a parent. In addition to dealing with grief, the financial pressures of raising a family on just one wage can be overwhelming. The death of a non-working partner has its own financial impact, such as childcare provision. 

No need to be complicated 

Different types of protection policies are available but a simple level-term policy, where a pre-decided lump sum is paid out should you die within a stated period, is among the simplest to arrange and is typically very cost-effective. The amount payable on death (sum assured) should be enough to cover any outstanding debts, including mortgage, regular outgoings, potential university fees and so on. The period of cover (term) should reflect the needs of your dependants – children will probably need support until they finish education and a partner may need it until pensionable age.

Joint or single cover?

A joint policy will cover yourself and your partner, paying out on the first death within the term. Alternatively, you can have separate single-life policies, which can be a bit more expensive but means there could potentially be two pay outs. A young, fit individual should be able to easily find affordable life cover. Premiums with rise with age, health, lifestyle choices such as smoking and other factors that affect your life expectancy. Your adviser can help find a suitable policy for your circumstances as long as you are open about your lifestyle, especially if you have existing medical issues.

Keep under regular review

A review with your adviser will help to ensure that you have the right cover in place for your financial circumstances, giving you the peace of mind that you’ve got things covered.

As with all insurance policies, conditions and exclusions will apply

Your home may be repossessed if you do not keep up repayments on your mortgage

Maintaining your protection cover is vitally important

Since the pandemic outbreak many people are reassessing their finances to see which, if any, of their monthly expenditure can be cut and may be considering cancelling their protection policies, such as income protection. This could be a false economy and leave you unprotected in the future, at a time when you may need to make a claim.

Income protection explained 

Income protection policies provide a monthly payment (payable after a waiting period) to help replace your income if you are unable to work because of illness, an accident or sometimes on redundancy, income protection plans do not normally cover redundancy as standard. Short-term income protection policies will pay out for a fixed amount of time (six months or a year), whereas long-term income protection policies are designed to replace your income (up to a maximum of around 60% before tax) until retirement age or for a specified period of time.

Existing policies and COVID-19

Policyholders who took their policies out before the outbreak should be covered under the existing terms and conditions, for both short-term and long-term income protection.

Fortunately, most people who get the virus recover within a few weeks. You would therefore be unlikely to be able to claim under the sickness element of your income protection policy because these types of policy normally have a waiting period before money is paid out. Some plans may also have  a minimum claim period, such as  30 days. If you have been furloughed by your employer, and are still receiving most of your income, it is unlikely that you will be able to claim under your policy.

It is normal to have a waiting period for payments under income protection but there are plans available with day one cover.

If you are an existing policyholder who had unemployment cover included in the policy and you are made redundant, you should be able to make a claim for enforced redundancy.

Taking out a new policy

Policies are available for new customers who want accident and sickness cover, although you should be aware that pre-existing medical conditions will be excluded, as is always the case. In addition, insurers may have changed their terms for new customers. 

It’s important to note that insurers have stopped offering redundancy cover at the moment on new plans.

Managing existing policies

The good news is that you can renew your short-term and long-term income protection policies, although the terms may change at renewal.

Furthermore, if you are unable to pay your premiums at the moment, some insurers are offering three-month payment breaks.

Here to help

It’s important to remember that all protection cover should be bought for the short, medium and long term and should be tailor made to suit your own circumstances. When it comes to taking out protection cover, don’t just opt for the cheapest premium, it’s important to make sure the policy matches your individual circumstances. This will give you peace of mind, knowing that in the unfortunate event of having to make a claim, you will be covered.

If you need any advice on an existing income protection policy or you are looking to take out a new policy, contact us for expert advice.

 Some income protection products may have an investment element. The value of your investments can go down as well as up, so you could get back less than you invested.

Give your children a flying start in financial education

With the majority of children now being home-schooled during the pandemic, many parents are struggling to keep them engaged and interested, as well as being concerned about their education and development. One good way to help your children is by teaching them a skill which isn’t necessarily on the curriculum but is vital for everyday life – financial education. 

Schools and colleges

Many schools and colleges would like to increase the time spent on financial education but are hindered by the curriculum, a busy timetable and a lack of financial skills and knowledge. As a result, only four in 10 children and young adults currently receive formal financial education lessons. 

Start early 

According to The Financial Capability Strategy, part of the Money & Pensions Service, children’s attitudes to money are already well-developed by the age of seven, so it’s best to start early, ideally from pre-school years. Evidence shows that children and young adults who receive a financial education are more likely to be financially confident, save regularly, have a bank account and generally have the skills needed to make the most of their money in the future and avoid getting into problem debt.

Games can teach a life skill

Choosing what is on your home learning curriculum could give you the opportunity to try some financial education. It doesn’t have to be complicated, simple things like playing family board games together can help to promote financial literacy; games such as the ever popular ‘Monopoly’ and ‘Game of Life’ have junior versions and are a good starting point. 

Pocket money

Giving your children a small amount of pocket money on a regular basis can be a great way to teach them the real value of money, by encouraging them to save up only for the things that they really want. It can also show the value them of putting money into a savings account to earn a small amount of interest. 

Setting an example

Talk to your children about how much things cost and very importantly, set a good example; your financial behaviour will lead the way. A good life lesson is to understand that material goods are not necessarily the most important things in life and some of the most valuable things, like spending time together, are free.

Equity release – what are the options?

As retirement approaches, you may be considering accessing the value in your home. If downsizing isn’t an option and you are aged 55 or over, equity release could prove to be the right solution for you. 

What is equity release?

Equity release is a type of loan that is only available to homeowners over the age of 55. It is secured against the value of the borrower’s property and paid off by selling the property when they die or go into long-term care. 

Equity release has grown in popularity in recent years as more older homeowners seek to unlock the value in their properties. With interest rates remaining low, it’s proving to be an increasingly attractive option for many. 

How does equity release work?

There are two types of equity release: lifetime mortgages and home reversion schemes. 

  1. Lifetime mortgages

This is a type of mortgage that allows you to borrow money against the value of your home, just like a traditional mortgage, but you don’t have to make any repayments (although some products now allow you to do so). A percentage of your property’s value is released as a lump sum and interest builds up on the amount borrowed. On your death or when you move into care, the loan and any accrued interest will be paid off from the value of your home, reducing what your heirs receive (although it may also reduce any Inheritance Tax due on your estate). 

  1. Home reversion 

Home reversion involves selling all or a proportion of your home, in return for a tax-free lump sum, regular income or both, allowing you to stay in your property, rent-free, generally for the rest of your life. As home reversion plans are not loans, no interest accrues, but if the property rises in value, you will only benefit from growth in the proportion of the property you still own.

What other options are there? 

Equity release isn’t right for everyone. It can reduce your entitlement to means-tested state benefits and reduce the value of your estate, meaning you leave less behind for your loved ones.

Other options, such as retirement interest-only (ROI) mortgages, downsizing or taking an income from savings or investments, may be more suitable. 

ROI mortgages are only available to those who own their home outright or have an existing interest-only mortgage that they are looking to remortgage. The lender will undertake affordability checks to ensure you can afford the interest repayments, but this option means only the capital and not accrued interest will be owed. 

Meanwhile, downsizing can provide older homeowners with a cash lump sum attained through selling their current property and purchasing a cheaper one. 

Confused? Don’t worry – our expert advisers can help

Releasing equity from your home is a big decision and it’s important seek professional financial advice before proceeding with an equity-release plan. Our expert advisers can assess your personal circumstances and help you to decide which option (whether equity release or another avenue) will best suit you. Just get in touch. 

Equity release may not be right for everyone. It may affect your entitlement to state

benefits and will reduce the value of your estate. Tax advice with no investment element is not regulated by the Financial Conduct Authority.

Starting a family? Get your finances on track

There’s a lot to think about when you’re expecting a new baby. Exciting preparations for your little one’s arrival, such as decorating the nursery, buying prams and other necessities, and selecting new clothes and toys, can make for a long to-do list. Amid this whirlwind of activity, financial planning can easily get forgotten. However, while it might not feel like the most interesting of tasks, it’s definitely one of the most vital and certainly should not be put off.   

Assess your needs

Raising a child to the age of 18 is expensive and with young people now often living with their parents well into their 20s and even their 30s, it’s becoming an increasingly costly business. Take some time to consider what your outgoings will be, factoring in expenses such as childcare and school fees. You may also need to modify your plans to account for a reduced household income if, for example, one parent plans to be a stay-at-home parent. 

Save, save and save some more

Before starting your family, it’s wise to open a savings account to accumulate the funds you’ll need to cover your initial expenditure and provide you with extra funds during the months following the birth, when new parents typically take a hit to their income. Making a concerted effort to pay off any existing debts will also help to take the strain off your finances once your baby has arrived and will save you money in the long run. 

Think ahead

While it’s tempting to concentrate solely on raising funds to meet your short-term costs, there are a number of financial planning decisions you should also be considering that will make life easier in the long term. With a brand-new family member to look after, you may need to think about reviewing your protection policies, drafting a new Will, or opening a savings account (such as a Junior ISA) in your child’s name. You could even consider paying into a private pension on your child’s behalf, although they wouldn’t be able to access this until they are 55 under current legislation.

Here to guide you

Whether you’re considering parenthood or already have a new baby on the way, it’s a good time to take stock of your financial situation. We can review the current state of your finances and put plans in place that will help you towards a secure future for yourself and your growing family. 

The value of your investments, and the income you receive from them, can go down as well as up, so you could get back less than you put in. A pension is a long-term investment and inflation will reduce how much your income is worth over the years.  Tax advice with no investment element is not regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate Will Writing or taxation and trust advice

How Clive and Sarah were able to pay for a new kitchen and help their son onto the property ladder

Clive and Sarah are a retired couple with no savings. They asked us to see how they could find the money they needed for a new kitchen and to help their son get on the property ladder.

The couple are retired and in their early 70s. They live in a three-bedroom, semi-detached house in a beautiful, tree-lined street on the outskirts of York. After working hard for many years, Clive as a warehouse manager and Sarah as a supermarket cashier, they had managed to pay off their mortgage some years ago and are enjoying their retirement.

A lifetime home

The couple bought their home when they got married in their late 20s, at a cost of £8,600. Not a lot in today’s terms, but mortgage repayments were a stretch for them in 1977 and even more so when Sarah stopped work for a few years when their son, William, was born in 1978. Their property is now valued in the region of £300,000. They love their home and have no plans to move but would like to do some improvements to make things even more comfortable at home.

A helping hand for their son

Clive and Sarah dearly wanted to be able to help their only son and his young family onto the property ladder. William is 42, works as an NHS nurse in central York and has been renting for years. He hasn’t been able to save a deposit for a property and he and his family felt trapped in rented accommodation.

Equity release as a solution

Our specialist adviser discussed Clive and Sarah’s situation and recommended a lifetime mortgage, which allowed them to release a lump sum of £100,000 from their house. From this, Clive and Sarah spent £22,000 on their new dream kitchen and £13,000 on a climate-controlled conservatory. This left £65,000 to give to William. 

Benefits for Clive and Sarah

Taking £100,000 out of the value of their home enabled Clive and Sarah to have the home improvements they wanted. In addition, the value of their house is likely to have increased as a direct result of making the improvements. Their lifestyle in retirement remains the same as before, as the lifetime mortgage does not require repayments. The interest charged builds up and is repaid at the same time as the lifetime mortgage. This will happen when they eventually move into a care home or pass away.

A brighter future for William

They were able to give William a substantial deposit to put towards his own home. A larger deposit means he was able to get one of the best mortgage rates available and his monthly mortgage repayment is less than the monthly rent he was paying. This means he now has money for things like family holidays and savings.

As the lifetime mortgage has reduced the value of Clive and Sarah’s house, William is now likely to inherit less when they die, but he will still benefit from any growth in the value of his parents’ home.

Book a review of your finances

To book a no obligation initial consultation, which will take place by phone, call 08000 85 85 90 or email appointments@lighthousefa.co.uk or contact your usual Lighthouse Financial Adviser.

 

The initial consultation is designed to discover whether or not you would benefit from financial advice and there is no obligation on either side to proceed further. Any advice related fees will be clarified with you before any commitment to proceed.

* We have changed real names and other details to preserve anonymity. All financial details reflect the circumstances.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Equity release may involve a lifetime mortgage or a home reversion plan. To understand the features and risks, ask for a personalised illustration. Equity release may not be right for everyone. It may affect your entitlement to state benefits and will reduce the value of your estate.