Transcript

SUMMARY KEYWORDS

tax planning, personal allowance, higher earners, child benefit charge, pension contributions, charitable donations, income splitting, delaying income, growth income, investment shelters, capital gains tax, inheritance tax, ISAs, business relief, tax strategies

SPEAKERS

Scott Gallacher, Martin Stanley

 

Martin Stanley 

Good evening everybody. My name is Martin Stanley, and I am pleased to welcome you to the latest in a series of informative webinars put on by Rowley Turton. Many of you will know Rowley Turton already, but for those of you who don’t, we are a firm of Chartered Financial Planners based in Leicester. We’ve been around for 28 years, and we are proudly independent. At Rowley Turton, we emphasise more than anything the benefits of really getting to know our clients and long term overall financial planning, rather than just the mechanics of plans and policies. But in the run up to the end of the tax year, one thing is always on people’s minds, our minds turn to one thing, which is tax planning. So that’s the subject of today. It’ll be presented by my colleague, Scott, who is a Chartered Financial Planner here at Rowley Turton and afterwards, he will be happy to take questions. There is quite a lot to go through today, so as you will see from the agenda, it will be a whistle-stop tour of some of the key areas of tax planning that might be appropriate for you. Most of the points that Scott is covering today will be appropriate for almost everybody. But as well as that, there’s a focus in particular on tax affecting parents of young children and also high earners, people earning £100,000 and more. In terms of housekeeping, your microphones will automatically be muted and your camera is turned off, so don’t worry about that. And after the webinar, we’ll be pleased to send to everybody who is registered a copy of the slides and also a video of this webinar to watch again. Also, there are a couple of caveats on the next page or two. The obvious thing is that nothing we say today is a recommendation as to what you should do individually. It’s information for you, and we hope that you might like to discuss it with us or with your own accountant. Before I hand you over to Scott, I want to show you the next slide. This is a picture of a man struggling under the burden of taxation, and you’ll see a quote there from Lord Clyde. This is a very, very famous quotation by a judge in court, Lord Clyde, and to paraphrase his very elegant language, what he’s basically saying there is that everyone is entitled to take steps as long as they’re honest and legal, to minimize the amount we pay over to the tax man. There is nothing wrong with trying to pay less tax. Scott will now take you through some of the ways in which you might be able to do that. At the end, we’ll be taking questions, and you’ll see on the Zoom app, there is a place for you to type those in, and we’ll look at those a little later. So without further ado, welcome Scott.

 

Scott Gallacher 

Hello Martin. Many thanks for the introduction. As Martin says, if you have any questions during the presentation, if you can type them into the Q&A box on Zoom, we will deal with them at the end. So the first thing is primarily about tax, obviously income tax is the main tax that people have to worry about. First thing to say is that we have personal allowance of £12,570 which is generally tax free unless you’re a higher earner, and we will come on to that in a minute. Thereafter, there’s a basic rate of income tax at 20% currently, we will wait and see what the budget says shortly. That may change. And there is the higher rate of tax at 40% and at 45% tax for people earning over £125,140. There are different tax rates if you have dividendincome. For the purposes of simplicity, I have assumed that income in this seminar is just simple earned income or interest, and the same principles apply for what we’re talking about today for dividends. It is just that the tax rates are slightly different, and therefore the numbers would be slightly different. But if your earnings are primarily by way of dividends, then obviously, just give us a call, and we can go through that with you or check it with your accountant. But just to caveat that. One of the things that we particularly notice in dealing with clients is what we call red line income levels. Now, as I say, it’s when you go from your personal allowance into your basic rate tax band that people start to notice that, especially if you are on a pension or something like that. Certainly, when you get into high rates of tax a lot of people will try to keep their earnings below higher rates of tax. And also, additional rates. But there are a couple of additional red line taxes which are different to the standard tax rate. So these are two fold. There is the £100,000 – £125,140 effective band, where people are in effectively a 60% tax band, or tax rate, due to their loss of personal allowance. And I will explain in a moment how that works. And equally, if you have younger children, and you are, or certainly previously were entitled to Child Benefit, there’s a higher income Child Benefits charge for people who earn over £50,000 up to £60,000. It still stays if you earn more than £60,000 but you’re fully into that realm, shall we say, after that point. So 60% income tax band, let’s say it’s for people who earn more than £100,000, and essentially for every two pounds that they earn over £100,000, they lose one pound of their personal allowance. So the personal allowance can go down from the £12,570 standard allowance, all the way down to nil. What that effectively does, is put you into a 60% tax band, so that is your 40% normal tax, but then the effect of losing the personal allowance, on this one pound for every two pound of income you earn over the £100,000 figure, and that money is then being taxed at 40%. So that two pound affecting one pound of personal allowance, combined with the normal 40% tax puts you into a 60% tax band, and that’s particularly stingy, the fact that the tax man is getting three fifths of your money, and that’s before we mention things likeNational Insurance and stuff like that. The second issue I mentioned is this higher income child benefit tax charge. It was introduced in 2013 but I think it’s fair to say a lot of people didn’t realize it had been introduced,like with a lot of tax measures. You do not get a letter from the tax man necessarily, telling you about this, and for people who were primarily employees, who perhaps didn’t need to do a tax return before, they’ve certainly been caught out by this quite a bit. And the press picked up on this about a year ago, with The Timesin particular running a lot of stories saying that people were getting effectively backdated tax bills, and people were getting £6,000, £8,000, £10,000 pound tax bills because they hadn’t been aware of this tax, so it’s important to consider. So it affects those with earnings of over £50,000 and obviously younger children where they are claiming child benefit. It applies to the individual’s income rather than joint income. So again, if you have the traditional family model where one person earns more, so one person may be earning £60,000 and they want to stay at home, looking after the kids, the family income is only £60,000, but the individual’s income is £60,000 which is over £50,000 so they are caught. If that income was shared equally, so they both worked and both earned £30,000 they would not be caught by this. And this is one of the unfairnesses, because you could have a couple, with both of them earning £50,000 pound each, they are not affected by this, but one wage earner earning £60,000 is fully caught by this. It is a very unfair tax. How it works is that for every £100 that you earn over that £50,000 pound earnings level, you lose 1% of your child benefit. So for simplicity, we’ll look at £60,000 earning level. You lose 100% of your child benefit. The impact of that, if you have one child, because of the combination of the income tax you’ll pay on that £10,000 band between £50k to £60k, and the loss of your child benefit is effectively a 52% tax band. For two children, it’s around about 61%, for three children it is 69% and it keeps going up, so if you have enough children,you can effectively be in a 100% tax band. I have now mentioned the key tax bands, and these couple of particularly bad red lineincome levels. And so what can you do to address these? These are some of the things we’re going to run through today. So pension contributions, charitable gifts, in particular gift aid, alternative remuneration strategies, taking your income in the form of benefits or in different ways, income splitting. I mentioned earlier that if there’s a couple where they both earn £30,000 or even £50,000 they are not infected by the higher income Child Benefit charge, compared to one person earning £60,000, splitting income can be very beneficial from that. Delaying income in order to push the problem down to future years, or for years when you might earn less, so that you avoid these red line income levels. Growth as income, is basically just looking at how you structure your investments, I will cover that. Incorporation, if you are self employed or in a partnership, where you have property holdings, there may be an argument for wrapping them in a limited company structure in order to give yourself a greater degree of control over your income and the tax that you pay. And investments shelters, from the fairly standard, ISAs and Premium Bonds and even investment bonds, to the more specialist and high risk, PIS, BCTs and SEIS, and I’ll explain briefly what those are later. So pension contributions, it’s probably not surprising that, as a financial advisor, we like pension contributions. When I first started this job pensions were less liked by our clients. I think it’s fair to say that pensions had a bad rep at that time. Certainly over time pensions have become cleaner, cheaper and better, and the tax treatment has made them even more attractive. Now, clients are generally looking at pension contributions anyway, but there are key advantages. You receive basic rates tax relief at source, generally, it depends on how long you have made your contribution, but generally you’re paying in £80, it is becoming 100 pound with the pension company. If you are higher rate tax payer or an additional tax rate payer, you get more tax relief by way of adjustment in your coding or tax straight back from the revenue. It can be used to avoid the tapering of personal allowances, that red line income of £100,000 and above, and also to avoid incurring the higher income Child Benefit charge, and that’s £50,000 to £60,000. You can also do something called salary sacrifice if you’re an employee, and that’s a way of saving National Insurance for both you and the employer, and that makes pensions even more tax efficient. From the employer’s perspective, the good news is it’s not a taxable benefit in kind on the employee, which is both a benefit to the employer and employee. There is Corperation Tax relief to the employer/limited company. Tax relief is different if you’re self employed or in a partnership, and can be used in lieu of bonus or salary to effectively reduce your taxable income. So this is, if you own your own business and you were going to take the money out in dividends or salary or bonus, you can basically rejig your remuneration package as it were, and you can put it through the business as a pension contribution. So again, I will just run through an example about how pensions may help some people in these red line income levels. So Sam has an income of £60,000 with two young children. I mentioned that £60,000 is particularly bad, because at that level, you’ve lost all of your child benefit effectively, and you can lose it in one of two ways. You can either elect not to receive it, and then you just don’t receive it, or you can elect to receive it, but you can pay a tax charge equivalent to that money. You can argue that they are both the same, there are some mechanical differences. Some people, even if they can’t receive the child benefit or theyhave to pay the tax on it, and therefore effectively get it back, are still wise to register for it because it leads to things like National Insurance credits for non-working parents and things like that. So it is still important to make sure you’re claiming it, even though you don’t necessarily receive it. In this particular case, Sam’s tax bill is £11,432, and he’s lost £2,074 pound of child benefit. You will get a copy of the slides so you can run through the calculation yourself. The key thing is, in terms of the higher income Child Benefit charge, is a thing called adjusted net income, and this is where pension contributions come into play. So if he makes a £10,000 gross contribution, that is effectively a check for £8000 of the pension company for Sam, that’s with the tax relief at source. Then his adjusted net income comes down to £50,000. You run through the tax calculation on a £50,000 adjusted net income, and effectively his tax bill comes down to just under £9,500, so that’s a tax saving of just over £4000 just for making a pension contribution. Essentially, for an £8000 net contribution, Sam gains a £10,000 gross pension fund, saves nearly £2000 in higher rate tax, keeps over £2000 in Child Benefit, equivalent to 60% tax relief. So incredibly great value for Sam, better money in his pension, rather than in the Chancellor’s coffers. A similar thing happens with the 60% band tapered annual allowance. So here we have Rachel, she’s a successful business lady. She has total earnings of just over £125,000 so she’s firmly in that 60% band. Now her total tax, again I will ignore National Insurance just to keep things simple, but her total tax is just over £42,500. Again, adjusting net income is the important thing here. So, if she makes a pension contribution of just over £25,000 gross, which is £20,000 net, that adjusts her net income down to £100,000 for the purposes of this. And how this falls is that she takes her out of that 60% band, effectively. Her total tax bill falls to just under £32,500. That is a tax saving of over £10,000 solely by making a pension contribution. To recap, she is paid just over £20,000 net into a pension, she has a pension fund of just over £25,000, and as a result she saves just over £10,000 in higher rate tax. Essentially, for a net cost of just over £10,000, she has £25,000 in a pension, which is 60% tax relief. These are powerful things that you can do. And as we approach the end of the tax year, your time is running out, because the pension contribution has tobe made in this tax year. So we have a month to look at your income, see whether you’re in one of these red line income levels, and then to look at whether pension contributions might be appropriate. Charitable donations. So obviously I mentioned pensions. That’s a lot of what we do, but charitable donationswork in a similar way, by adjusting your net income. So like when I used the example of making a pension contribution, Sam or Rachel could have made a charitable donation to achieve the same kind of benefit. The difference then, of course, is that money is then going to the charity rather than into that pension scheme. Butif you are going to make charitable donations anyway, there is a very good tax reason for doing that. Some things to consider, it needs to be Gift Aid rather than other forms of charitable giving, in order for you to get the tax advantages. You want to consider donations generally to be made by higher earners. So if you’re in a couple in that scenario, you want to look at that as a way of doing it. Otherwise you just don’t get the same tax advantages. So you want to work out your income, your partner’s income, and where the tax lies, and how if you sre making charitable gifts and you are in a couple, then it makes sense to have the person with the worst tax position, shall we say, or to get the most tax advantage, to do that. You might want to consider making lifetime gifts rather than bequests through your will. We have done this with some clients, some clientsthat are wealthy who are going to leave bequests for their particular charity in the will. But they might be better to do it during their lifetime. There’s an immediate benefit for the charity, they get the money sooner, and there can be an income tax advantage for the client. Finally, you might want to make donations in the same tax year, if you are around red line income level. So again, you might want to move your donations around in terms of when you make them, if you have a red line income this year or possibly next year. Alternative remuneration. This is one of the things I like. I have a picture of a Tesla. I actually drive a Tesla because it’s extremely tax efficient, and I should be on commission from Tesla because I think I have sold about four or five to my clients, following this. The basic principle is you consider foregoing salary, pay rises or bonuses, especially if you own your own business, so it’s a limited company, so you have a degree of control ofthat, and especially if you are around a red line area, and then you basically exchange that for something of equivalent value, company cars, employer pension contributions, etc. I would say with all of these things, it is probably best to check with us and your accountant to make sure you don’t fall foul of any anti avoidance legislation, and we do things in the right order, but generally, these things are not controversial at all. So if we go back to Rachel, who’s earning £125,000 she’s firmly in that 60% tax band, and she does not get a company car. In that scenario, she might want to look at her earnings position and look at whether there is something she can do. What she could do, especially if it was her own business, she could reduce her salary down by about £12,000 a year, and instead have that go towards a car lease. I looked this morning and you could get a BMW i5, the new BMW, fully electric, and the company car tax on electric vehicles is particularly low at the moment, particularly attractive. The lease amounts to about £1000 per month. So the two roughly balance out, the salary she gives up for the for the least cost. The effective cost to the company would be broadly the same, and you would assume that they manage it so that there was no cost to the company, just providing benefits in a separate, different way. To Rachel in that scenario, she would lose about £400 in net salary, because she’s in this 60% band, and she would have a benefit £50 to £60 or £70, maybe a bit more, on the car, so it’s very low. She would effectively, for a net cost of £450 to £500 a month, be driving around in a car with a list price of about £75,000, so she would be paying less than £6000 pound a year to have a 75,000 pound car through work, and that’s incredible value, especially if she was already leasing a carherself, personally, she effectively could get a free upgrade, for essentially money, or even a saving, in some scenarios. Income splitting is the next thing that people need to look at. I mentioned earlier about the unfairness of the higher income Child Benefit charge in particular, about how it’s based on effectively one person’s income, andnot the income of the family. So in a scenario where two people earn £50,000 each 100,000 as a couple with children, they’re not caught by this, but if one of them earns £60,000 then they’re fully caught, and that is obviously particularly unfair, particularly in situations where people move in together and are caught by this. They might be a step parent, and that again, causes issues, to put it mildly. So things that you might want to split. You could split buy-to-let holdings,it is complicated if there’s mortgages on there, maybe stamp duty, maybe mortgage issues. But if they are owned cleanly and you are married, you will probably find, if you are unmarried, there are other issues, and I’ll come on to that in a minute. Savings accounts, you should be puttingthem into an ISA anyway, but if you cannot put any more into an ISA and you’re married and you’re quite happy with your partner that it is our money together, it is not such an issue. Investments, because of the dividend income and businesses’ dividends. For salary maybe you can employ your spouse, as long as they are doing a legitimate job, or if self employed, bring them on as a partner, to effectively split the ownership or split the income, more importantly. You need to be a bit careful on this and check with your accountant to make sure that we’re not crossing the line, but it’s fairly mainstream planning, I would argue. You have tobe aware of capital gains tax issues if you’re passing things like property or share portfolios to an unmarried spouse, in particular. Husband or wife are generally fine due to inter-spouse exemption. It is also about loss of ownership and also divorce risks, because even if you’re married, there is an argument about whether assets are marital assets or not, and moving those assets between each other can mean that in the event of a divorce, you those assets are not returned, and may end up with effectively losing more on divorce than you might have done. So as with everything, take Professional Accountancy and legal advice on these things, but it’s very powerful. We will look at a scenario, we have Hassan, who is a professional landlord. He owns a portfolio of mortgage free properties generating £60,000 a year of rent, he is married with 2 children, and his wife does not work. Currently, all the properties are in Hassan’s sole name, consequently it is subject to this hiring income child benefit tax charge, and he also is a higher rate tax payer. However, if he splits those properties with the wife and the properties being mortgage free makes it easier, so there should be no stamp duty issues and no issues with a vendor. There should be no capital gains tax issues either. Then essentially that rent is suddenly £30,000 each, and he benefits from her personal allowance, her basic rate tax band, andavoids incurring the higher income Child Benefit charge. The maths on that, in very simple terms, is a £6,500 tax saving, by essentially gifting half of the portfolios to his wife. That is equivalent to an extra property in terms of rental income each year, maybe even a bit more, so is very valuable. The next option you might wantto consider is delaying income, if you are in these red line income levels, you might want to defer your bonus. So if you earn £50,000 a year and you have children and you have this and your boss offers you a bonus, if it’sgoing to be a £10,000 per year bonus, you might be better to effectively stick two bonuses in one year, if you can do that, if you can manipulate your salary, so that you keep your child benefit, for one year. I refer to that as a yo-yo strategy, and I’ll come on to that in a moment. Again, If it is your own business, you might want to defer dividends. It’s your money. You might just want to keep it in your business for a time, until it is more tax efficient to take out. You might want to bring forward or put off work into a different financial year. You have to be careful, obviously, of the HMRC rules regarding this, it cannot be work in progress, and again, check carefully with your accountant. But if somebody rings you up and says, “I want you to do a job for me” and you are self employed, you might want to look at your earnings position and think, do I need to bring that work forward, or am I better to be passing on some work or delaying doing that work until later in the tax year, or until the next tax year. So again, it manipulates my income around the red line Income levels. Use fixed term savings accounts, particularly those accounts that pay interest on maturity. If you have a tax problem now, perhaps you have children, perhaps you have savings, perhaps the interest is giving you this problem with your child benefit? Well, you could look at something like a five year fixed rate savings account that pays on maturity, in addition to ISAs and Premium Bonds, which we will cover later. And essentially, that might take some of the interest, that might currently be causing you problems, in terms of the child benefit, and push them out for the next five years. You might have four or five years where you do not have this income problem, if you just do it at the start of the new tax year. So there are things you can do. I mentioned there a yo-yo strategy, and this is what I have run through with clients before. Particularly with people affected by the higher income Child Benefit charge or possibly the personal allowance, what you might want to do is yo-yo your income, so rather than taking £60,000 a year and losing your child benefit every year, you might want to earn £50,000 in one year and £70,000 in the following year. If you look at this example, standard income is the blue line, £60,000 throughout, yo-yo income is £50,000 one year, £70,000 the next. If you do that, there is a £1000 per year effective saving. It is essentially £2000 saved in terms of child benefit every year. But it is incredibly powerful when you think about it in that way, in terms of the benefits to you justfor manipulating your income. You have to do it legitimately. It cannot just be falsely part figures, obviously. But if you can shift your working pattern around, work a bit harder one year and a bit less the next, then it’s quite feasible. Growth as income. An alternative strategy, we as individuals are guilty of thinking income is income. It’s rent, it’s dividends, it’s interest. But it doesn’t have to be really in that sense, in terms of spending money, it doesn’t really matter where it comes from. And there’s a lot of talk at the moment about tax, and people saying that millionaires are paying less tax because their money is from capital gains. There was a story on Rishi Sunak paying a very low rate of tax because a lot of his wealth was through capital gainsrather than traditional income. Now there is no reason to not take advantage of this, necessarily. I was chatting with a client about one of our portfolios, which actually had a very low income yield, and he was concerned about that because what was he going to spend? Well, we can spend the capital instead, So this is a simplified example, but it works. We have a £200,000 income portfolio, and at a 5% return in the first year itproduces £10,000 of taxable income. We will assume for simplicity that there is no growth, it is purely income. On the other hand if you have a £20,000 growth portfolio. Again, no income or growth in this scenario, we can make the same £10,000 return. But one is £10,000 of income, which is taxable if it’s not in an ISA or something. So if you are a higher rate tax payer and it’s interest, that is a £4000 tax bill. The other is a £10,000 pound gain. But actually, unless we do anything about the gains, if we just leave it there, there are no immediate tax issues. But even if we needed that £10,000 out because we needed to use that as our spending, as income, as it were, if we take a £10,000 withdrawal from a typical growth portfolio, all of that withdrawal is not gains, the gain will only be about £500, because most of it would be the original capital we put in, so the tax bill would be much lower, just by how we structured the break down of the investments. I mentioned some of these earlier. So investment shelters, ISAs, EISs, SEISs, venture capital trusts, Premium Bonds, investment bonds, and most of these are investment linked, but not all. So your capital may be risk and you may get back less than you invested. EISs, SEISs and venture capital trusts are even higher risk, but all of these investment vehicles or products can be used either to give you an immediate tax saving or to shelter money from tax in the future, normally income tax and sometimes capital gains tax. What you can do by that is reduce your taxable income, not so much this tax year necessarily, albeit with the EISs SEISs, VCTs and things like that, they do have the immediate benefit of a tax relief at day one. But with the other ones you are effectively putting your assets out of reach of the taxman, or certainly delaying when they can take tax. And that can be good, because a lot of people are waking up today and are suddenly being caught, particularly on savings and the rising interest rates, a lot of people are having tax issues that they didn’t before. We have had very low interest rates for a very long time. For somebody with £100,000 in savings, a couple of years ago he was probably receiving £1,000 per year in interest with no tax problems, because it would be part of your savings allowance. Now, at 5% return, that is £5,000 of interest, you are going to have a tax problem. If they put £20,000 a year into an ISA for the last five years, it would all be sheltered, so there would be no income tax problem. The issue was, of course, for cash ISAs in particular, that banks tend topay a better interest rate on non ISA moneys. People might have looked at it and said, “there’s no point putting it in an ISA Scott because I haven’t got a tax bill anyway”. But you never know how they are going to change the tax rules. At Rowley Turton we have been very proactive for a very long time in trying to put as many barriers between you as the client and the taxman as possible, legitimately, just because you never know what the tax rules will be in the future. Incorporation, I mentioned this earlier. Rent, profits, etc, taxthem on a limited company rather than yourself. Again, you need advice, and there can be taxconsequences of putting money or assets into a limited company, so you don’t want to make your tax position worse. But a lot of our clients are using this to defer the tax problem until their tax position is better or the taxrates are better, certainly if they don’t need the money. So you and your dividends are still taxable. Generally, the company makes a profit, and then it pays that money to you by way of dividends or salary. Now, dividends are still taxable, but you have control over whether you do pay a dividend or not, and how much you pay as a dividend and when you pay it, and for that you can, especially if you are around these red line income levels, you can manipulate your income legitimately in order to save tax. If you are a buy-to-let investor, and we have covered this in a previous webinar, the mortgage interest tax position is generally horrible if you own those properties directly, and certainly is if you are a higher rate taxpayer, or if you would potentially be. Whereas if these properties are owned via a limited company, effectively you get full offset for the mortgage interest, so it is much more tax efficient. Getting mortgage properties into a limited company is problematic, to put it mildly, and you can create much worse tax problems doing it, but you at least need to consider that option and work out whether that would work for you or not, again professional advice is needed. Limited companies generally allow higher employer pension contributions and personal contributions because they’re not limited qualifying earnings. And as I said earlier, they can provide tax efficient benefit of kinds,  like EV company cars. So one of my clients has a property business, he does a lot of these things. He benefits from the mortgage things, he runs anelectric vehicle through the company, and he makes pension contributions, and he can adjust his income accordingly via the business and it’s very tax efficient. Capital gains tax allowance is a big thing that people overlook, really. Now we have a £6000 annual capital gains tax allowance, it was £12,300 but has been slashed, I would say, and it’s being slashed further next year, to £3000. If you have an investment portfolio, then when you start to take money out of that investment portfolio, unless it’s in an ISA or something, you’repotentially going to pay capital gains tax on the profit of the portfolio that you realise, and that is for shares, or a buy-to-let property, or something like that. And when the allowance was £12,300 that wasn’t such an issue, because it was fairly generous. But as those allowances are coming down, when you actually want to start taking money out of your investment portfolio or selling properties, you’re probably going to have a capital gains tax bill. Now it’s harder to take advantage of this with an investment property, or even a portfolio of investment properties, but with a share portfolio, what we do for clients often is we look at the current value of your portfolio, what the base cost is, so what you pay for those investments, and what we try to do very often is move assets around. So we sell ABC fund and buy XYZ funds in order to realise gains in the portfolio to utilise your capital gains tax allowance. And that way essentially every year you’re rebasing the base cost of that investment and increasing it so that when you do want money out, you do not have a tax bill. For people that don’t do that, their portfolios become pregnant again. And then when you do want money out, they have a huge tax bill. The other thing is, you can report losses. This is a thing that’s overlooked. So if you have an investment portfolio and you’ve bought an investment that has  not performed well. A lot of our clients like to do their own little thing on the side, normally little business ventures and things like that. And you’ll often speak to them and ask, “how did that thing go?” “Oh, not so good”, and they lost£10,000 or £20,000, it’s not significant for their wealth, but noticeable. Now, you can report those lossesI believe it’s within four years, and then those losses can be effectively logged on your account, and if you make gains in the future you can offset those gains against that reported loss, but if you don’t report the loss effectively you don’t get that benefit. And you have four years to do it, so if you had a loss three and a bit years ago, you might want to think about reporting it this year or maybe next year, if it is still within the relevant window. As with a lot of these things, it is a case of use it or lose it, both the allowances and the losses. If you miss either using the allowance on an annual year, you have another one next year but you  do not get this year’s. And with losses, if you go past that four year window, you lose that ability to use those losses to offset future gains. Inheritance tax is a big issue for a lot of our clients. Now, hopefully people know the big numbers, a million pound for a married couple, generally, unless your assets are worth over £2,000,000, the 7 year clock, etc. What people are always a little bit less up to date with or less aware of normally, are things like annual allowances exemptions. The first thing is, everybody has an annual exemptionof £3,000 per tax year. And if you didn’t do it last year, you can do that year’s as well, effectively, so you can do £6000 this tax year. So a married couple, or even an unmarried couple, £6000each, £12,000 if we get moving before the end of the tax year. If you have two children, Mum and Dad can give them two checks for £6,000, £12,000 in total, a £4,800 pound tax saving, assuming you have an inheritance tax problem. University is not doing anything. And again, you can make a £3000 pound check on the sixth of April each to get another £2,400 tax saving. Small gifts exemption. Now you cannot combine this with the £3000 so you cannot give somebody £3,250 but you can make small gifts up to £250 per person, and that’s per recipient, rather than you as a donor, and that’s essentially tax free. So if we have two kids, maybe we have a big family, we have maybe 10 grandchildren, excessive with two children, but some people do havelots of kids. Well that is then from Mum 10x£250=£2,500. same thing from Dad, that is £5,000 of cash tax free.Well, maybe these kids are a bit older, maybe they have partners, maybe we can give them £250 as well. So maybe that is a total of £10,000 for grandma and grandad to effectively to give down. So that is £10,000 or you could say it’s a £4,000 tax saving. So that and the other one is good savings. And the other one which is missed, is a thing called normal expenditure out of income. Again, a lot of our clients as they get a bit older, will spend a bit less. They don’t necessarily have less money coming in. If things have gone well, they have decent pensions, investment income, buy-to-let income, etc. A lot of people find that their inheritance tax situation just gets worse. They have more money coming in every year then they can spend. And what the revenue says is, where that extra is income, they essentially allow you to do a calculation to say, “my net income is this” £60,000 for the sake of argument. “My expenditure is £30,000 so I have £30,000 a year extra that I am not spending”. And provided you do that on a regular basis, and you can clearly demonstrate it, then that £30,000 excess income, as it were, can be gifted without an inheritance tax bill at all, provided that it is done on a regular basis. So what you do is, in the next month, you work out your incomefor this tax year, your expenditure for this tax year, and if there’s an excess, you might want to write a check to your kids or grandchildren, and the point is to say that this is a regular gift, it’s going to be annually. That’s the point. But as long as you do a one-off and you say that it’s going to be annually, then you’re fine. Obviously, you would expect to be doing it next year as well, but the main principle is about doing it, again, use it or lose it, really. ISAs, mentioned them earlier. Hopefully we all know what those are, essentially there are different allowances depending on the type of ISA, broadly £20,000 maximum. You cannot do a cash ISA of £20k and the stocks and shares and an innovative finance ISA to do £60k, it’s £20k, kind of regardless of where you put it. Younger people’s limits are a bit less, £9,000 for a junior ISA, generally income tax and capital gains tax free, so it can be used to shelter income and gains from future tax, which again is just about getting less income on your tax return. So you save tax compared to before, especially if you’re in these red line income areas. Stocks and shares ISAs in particular can also be used to save inheritance tax via business relievable assets. It is a bit complicated for today, but you can put investment ISAs, buy assets that qualify for business relief, and then two years later, those assets are exempt from inheritance tax, so it can be used to save inheritance tax as well. Again, use it or lose it. There is a month until the end of the tax year. Bed and ISA. So again, not enough people take full advantage of this. We have an investment portfolio. It is subject to income tax and capital gains tax, and given this problem  what we basically do is sell non ISA assets, hopefully utilising capital gains tax allowances as well, and then reinvest that money into your ISA. So Ilike buckets in my work, so we have a non ISA investment bucket, and then two ISA buckets of £20,000 a year that Mr. And Mrs. can use. So we take money out the non ISA into Mr’s. Isa, into Mrs’. Isa, and that has the effect of reducing the value of the non ISAs. We have less money that is taxed or taxable, shall we say? And we have more money that is tax rate, it’s a no brainer for us. You probably have to make sure you understand the capital gains tax implications of selling assets to do this, but you definitely should be doing it.Pension contributions. I mentioned earlier about how powerful pension contributions are. Essentially, there’s an annual allowance up to £60,000 or 100% of your earnings, whichever is lower, but employer contributions do not have the qualifying earnings restriction just to £60,000. Those with really high incomes, like £260,000 and above will get a lower allowance, but we can discuss that with anyone who has that issue. And also this reduction allowance if you have previously taken flexible benefits and been hit by what’s called the money purchase annual allowance, if you have been affected by that I would hope that you know about it,.Different contribution calculations for defined benefit schemes, we can chat to people about that if needed, but you can carry forward allowances from the immediate past three tax years. So again, like I say, a light book hits. We have the current tax year on the right, then the three previous tax years. And how this works is essentially like a conveyor belt. So the old generation game, if anyone is old enough to remember that. And essentially the buckets are going along, and they fall off the end of this conveyor belt. So if you do nothing, the bucket atthe end falls off, and you cannot use it. So that allowance is gone, gets replaced by the 24/25 tax year, which is good, but you’ve lost the 20/21 tax year, assuming that you were member of a pension scheme previously, so that you could make use of this. Now the idea is, you want to make use of that previous 20/21 bucket. If you have significant money and you want to make serious pension contributions, and how that works is that you have to fill in the current tax years bucket first, which is essentially £60,000 for most people in that scenario. Then you start to make a contribution that would fill in the 20/21 bucket. So £40,000 at a time, then you do that for the tax year after, then the year after, in terms of the contributions, they are all actually made into this tax year, into whatever the pension scheme is. But the calculation is through use of allowances is this tax year first, then three years ago, then two years ago, and then last year. And if you don’t do it in the right amounts, as it were, you can potentially lose allowances from that perspective. In conclusion, back to Lord Clyde again, this principle which Martin mentioned, fundamentally, is that the tax man has all the power in the world through parliament to essentially put his hands in your pocket and take out what he thinks he is entitled to. But then equally, within the law of the land, and as long as you are not doing anything that breaches the law, you do actually have a lot of power, and morally, you are perfectly fine, Lord Clyde argues, to structure your personal tax affairs in such a way that minimizes the tax bill, that keeps as much in your pocket as possible, essentially, and that is where we finish. We think you should keep more money in yourpocket, as long as you are doing it fairly, shall we say? I will now pass you over to my colleague, Martin. I thinkyou just need to turn your camera back on Martin.

 

Martin Stanley 

There is no camera on me, which is a shame, but nevertheless, I hope you are still seeing Scott. Scott, thank you very much for all of that. Just one thing which I’d like to add is that we have been given a whistle-stop tour through the world of tax planning. Some of it might seem a bit complex, and some of it is. The first thing to say is that we are here to answer any questions you might have on that. Secondly it is important to realise that complex is one thing, but nothing you have heard today from Scott has anything to do with controversial or aggressive tax planning strategies, the sort of thing the tax man would frown at. Those sort ofthings do exist, and some of you might have come across them in the wild. If something is too good to be true,it normally is, and if you ever do see something too good to be true, Let us know, and we will help you navigate that and make sure you know what is the best thing to do. Before we go on to some questions and answers, I mentioned earlier that Rowley Turton, although we have spoken today just about tax planning, we emphasize long term planning relationship with the client. It is all about the long term journey and financial health and welfare really, part of that is that we have a free book which we’d like to send to you if you would like a copy, and that explains a little bit about the way we work. So if you are interested, please drop me an email. My email is there on the screen, martin@rowleyturton.com. I’ll be happy to send you a book. And who knows, that might start off something in your mind and you might come to see us, which we would be very happy about. So some questions and answers, some of you have sent through some questions, and some of these might be real zingers, hopefully Scott is up to it. First one I think is fairly easy for Scott, is about income tax on interest. Somebody here says that with the interest rates having gone up a lot over the last year, they are now getting more interest on their bank accounts than they were before. But they don’t normally fill tax return. So if they want to be a good, upstanding citizen and pay tax on it, how do they do that?

 

Scott Gallacher 

It is a great question. You do have to do a tax return, or, I think, Martin which is the form that you have to do to report just taxable income. Is there a first shortened tax return, from memory.

 

Martin Stanley 

Yes, what Scott is talking about there is something called a shortened tax return, which you can enter if you have tax, dividends and things which you think are not getting caught up by the tax man. However, if it’s just interest on the bank account, which for many people, it will be, the quick answer is you don’t need to worry about it, because the tax man knows how much interest you are getting. Sometimes that surprises people, even frightens people. But if you are getting interest more than what will be taxable. You have used your personal allowance, which Scott explained earlier, perhaps on a state pension. Any interest you get, the tax and will know about it and he will adjust your tax coding in order to take that into account. So it’s only if you have a very small, narrow window of income where that will not work, so that shouldn’t make any difference. So the answer to that one is that if it is just the income, there’s the interest, you do not need to worry about that. Scott, there is another question here from Stephen, I won’t give his second name just in casehe wouldn’t like me to. He says, “my wife is director of our investment business. As an investment business”, that’s interesting, “is she able to take a pension contribution if she isn’t paid a salary?” Does it come under thewholly and exclusively ruling?

 

Scott Gallacher 

That is a great question.

 

Martin Stanley 

He has clarified, that is an employer pension contribution. Thank you, Stephen. Thank you, Stephen, for that question. And something else to say is that if you would like to follow that up at all, please let us know, and we can either help you further on that, or we can certainly put you in touch with somebody who can. Scott, another good question here, he says, “if I put my property in my adult child’s name, can they pass the income back to me?” He says, “I do not want to cheat the revenue. I am not cheating, but I’m effectively using their allowances as well as my own”.

 

Scott Gallacher 

Great question. I think that you should be able to, I would want to check with the accountant very carefully. I think it comes down to whether she is effectively an employee of the business, and as director, I would argue that she almost certainly is. There is no requirement for her to be paid a salary as such, there are minimum wage issues maybe, but I think it would be fine. I think you should be okay, but I would want to check with the accountant. The wholly and exclusively ruling, essentially for business expenses to qualify for corporation tax relief, they have to be what is called wholly and exclusively for the purposes of trade. I have never had an issue with it in the 28 years that Rowley Turton has been trading. I have never seen a client have an issue, I don’t think I have ever spoke to an accountant who has ever seen anyone have an issue with it. But again, I would probably want to run it past your accountant, and I think you are probably okay. And again, there is also the reasonableness of it, but I think you should be okay. I certainly think you should be looking at it, but I think you will be alright. I think that would be very great to put it mildly, I believe there are a number of issues on there. There would be an issue of whether that was outright tax avoidance, which I fear it might be. The other, I think that would be a stretch too far to put it Marley, I would be extremely cautious about that, because essentially, normally you have the other issue actually, where people want to gift the property, but they want to retain the income.And they go, “well, I’ll give the property to the kids, but I’ll keep the rent”. Bizarrely, you can actually do that, albeit that then effectively means that the gift isn’t effective for inheritance tax purposes, but it does not give you the income tax issue in the same way, because at least you are declaring to the person who is receiving it.Yes, I would put that above and beyond the non controversial things that I think we have covered today.

 

Martin Stanley 

Okay, another question here, Scott, which is perhaps not as uncommon as it used to be. This chap Michael says, “I used to live in Spain, and I still have a bank account and some investments over there. If I transfer the money back to my UK bank account, do I have to pay any tax?”

 

Scott Gallacher 

I cannot see how you would pay any tax on moving money back to the UK. I cannot imagine there is any Spanish tax, but obviously you would need to check in Spain. Generally the UK to Spanish arrangements are that you kind of pay tax the highest of a dual taxation move. So generally you pay the highest tax in the relevant jurisdiction. So you generally pay Spanish tax on Spanish money, and then if the UK tax is any more, you would have to pay a bit more UK tax, if the Spanish tax was higher than UK tax, well you have paid the Spanish tax and you do not pay any extra UK tax, which is generally how it works. So I do not see on moving money back how you would necessarily incur a taxing, especially not on cash accounts. Maybe if you are selling an asset, maybe there is capital gains tax either in Spain or in the UK. But I cannot imagine just bringing the money over itself would create a real tax issue. So do we have another question?

 

Martin Stanley 

Yes, we have another question here, Scott, a good one here. This is from Edward. He says, “many thanks for the presentation”, so that’s nice, thank you for that. Okay, the question Scott is, “if you elect a pension exchange, a bonus, normally paid at the end of the UK tax year i.e. end of March into a pension contribution,but then, due to the paperwork processing by the employer and pension provider, the pension contribution doesn’t land into the pension until mid April i.e. in the next tax year, does that effectively move some income into a new tax year, as it does not appear on the P60 as the pension bonus exchange is done via salary sacrifice”.

 

Scott Gallacher 

Okay,so provided the salary sacrifice is all done above board. Generally, I have never had an issue with it, but technically you are supposed to go through a number of steps, so I would just err on the side of caution ever so slightly. Yes, I think there are two things, if you have foregone the bonus in favour of the pension contribution, and we assume that that does not create any issues with the revenue, terms of salary sacrifice, generally you’re fine but occasionally they get a bit funny on this, so they keep shouting it as an issue but I have never seen it actually be an issue. Then that income, effectively has never been earned, so it is not really shifted in that sense. I suppose it is an alternative remuneration strategy as I mentioned before, so you have gone from having salary or bonus in this case, so effectively you get the tax advantage of that in the tax year that you gave up the bonus, in a sense, so it did not push you into higher rates of tax or one of these red line income areas, the fact that the pension contribution has been made in another tax year, from an income perspective does not necessarily matter. It is just whether that would create a problem in terms of your earnings and pension contributions in that year, that would be my concern, but provided that you haven’t got a maximum funding issue, it should not create much of an issue, I would have thought. I cannot see it being an issue, it is more to do with the pension contribution limits than anything else, and the income tax.

 

Martin Stanley 

Thank you Scott and again, Edward, if you would like any further information on that, if you want to just clarify that, then just give us a call tomorrow, or get in touch whenever you would like. Scott, another question here, and this one made me chuckle, because as financial advisers, we have come across this question all the time, not necessarily by dishonest people, but curious people. And the question is from Sid here, it says, “if I sell an investment property, buy-to-let property, I think I need to make capital gain tax on it.” And yes, that is probably right, and the question is, “how would the tax man, know that I have sold it”. The “but how would the tax man know” question comes up now and then. So Scott, what is your answer to that, please?

 

Scott Gallacher 

Well, I wouldn’t say that I’ve never had the “how would they know” question. I think it is a standard response for everyone to say, “how would they know”? I think historically people did sell properties and did not necessarily report them. For the whole buy-to-let market, I think the revenue is fully aware that not everyone has dotted the I’s and crossed the T’s in terms of their tax affairs to date. They will go through these things, they do effectively check the records, your solicitor to be honest should really not let you not pay it, in a sense.So the rules on that keep changing, but I think it would get picked up via land registry. Obviously, it is not something that we would be party to, non disclosure is effectively tax evasion, but I think you would get foundout. In my experience, dodging the tax is not worth it. You hear stories of people who for years had two sets of books, and then they send in the correct book, shall we say, and then they get a tax bill, and they go, “oh shit,well, it wasn’t much dearer, I haven’t slept for the last 10 years worrying about the tax man knocking in my door”, and so my view is, yes, there are plenty of legitimate things you can do  tostructure tax affairs very tax efficiently, and we all hate paying tax, let’s be honest. But there is a certain degree of what you can do and what you can’t do. I think most people have got reasonable scope to reduce their tax bills legitimately anyway.

 

Martin Stanley 

Okay, thank you for that, Scott. Another question here, which is “what is the best way to invest money to avoid inheritance tax”? A simple question, is there a simple answer?

 

Scott Gallacher 

Well, it depends. The first thing you would say is, most people do not, unless people have an inheritance tax problem then they think, because the allowances are somewhat generous for the average person, not so much for the wealthy person. If you are really concerned about inheritance tax, the first thing to say is, what we would do through a planning angle is, do you actually need the money yourself? If you have more than enough as per our book, then you might want to just pass it down to next generation for them to invest anyway. If you do have an inheritance tax problem and you want to keep the money and it needs to be accessible, there are a couple of specialist trust arrangements you could use. But generally, what you would be looking at is assets that are exempt from inheritance tax via the business relief exemption. So that is things like business relief schemes, aim portfolios, things like that, and whereby, if you hold those assets for two years, they are exempt from inheritance tax. Different risks apply, they are generally high risk, but there are ways and means so that you can keep the money and invest it and potentially not pay any inheritance tax.

 

Martin Stanley 

Okay, thank you very much for that. I think that is all the questions we have at the moment, so it only concludes then for me to say, thank you very much everyone for joining us today. Thank you for your questions. And it doesn’t finish here, because if you would like to then we would like very much to see you at the office or to hear from you, please email us or get in touch. If you would like a copy of the free book that I mentioned about our approach to investment planning and wealth planning, then we would be very glad to hear from you. So please get in touch. Scott, thank you very much for all the information today, hopefully it hasn’t bamboozled too many people. Last thing is that we will be sending all of you a copy of the slides and a recording of this so you can watch again at your leisure, and we hope to hear from you. Thank you and good night.