Don’t be caught in last-minute rush, sort out tax affairs now
NEXT THURSDAY is the anniversary in 1722 when Tsar Peter the Great ended the tax on men with beards. It is also the start of our new tax year albeit with rather different changes.
Start by deciding if a helping hand would be a good idea. If you are unsure whether your investment opportunities and allowances are being maximised, consult an experienced independent financial adviser. If matters are likely to be complex, such as inheritance tax planning, ask if the firm has a specialist in that field.
“There are a whole host of changes taking place next year including an increase in the personal income tax allowance to £11,500, in the higher rate threshold to £45,000, the annual ISA allowance increasing from £15,240 to £20,000 and the launch of the Lifetime ISA for those aged 18 to 40,” says Garry Ibison, chartered financial planner at Chase de Vere in Leeds.
A residence nil rate band is also to be introduced which means people can pass their main residence to direct descendants as part of an increased inheritance tax exemption.
This is therefore a great time to make some financial new year resolutions to get affairs in order and so as not to be caught out in a last minute rush next March. Darius McDermott, of Chelsea Financial Services, makes two key suggestions: review your portfolio and think about using some of the tax allowances early.
His firm recommends investors check their portfolio at least once or twice a year for balance and to see no unintentional biases have crept in. “Take time to review goals, risk attitude, asset allocation and overall performance to see if anything needs changing,” says McDermott.
If this involves securing a variety of statements from different providers, consider consolidating your investments in one place so that next time the review is quicker and easier.
Too many leave their tax breaks until almost the end of the year but if the funds are available from April 6, then use them or even set up a regular monthly savings plan.
Many who wished to buy into a Venture Capital Trust this year left it too late as other investors had filled up the allocation.
Often insufficient provision is made for retirement. Whether using an ISA or a pension, as a rule of thumb, halve your age to work out the percentage that should be contributed, such as 25 per cent if aged 50. All taxpayers can receive a one-fifth boost to their pension and if you have not maximised your pension allowance, HMRC permits contributions to go back up to three years.
However, from April 6, there will be a reduction in the ‘money purchase annual allowance’, which means the amount that can be invested tax-efficiently into a defined contribution pension, falls from £10,000 to £4,000 for those who have previously flexibly accessed any of their pensions.
Each tax year there is an Individual Savings Account (ISA). If the full sum is not used, it cannot be held over. The new level jumps to £20,000 per adult but children also have an allowance with the Junior ISA increasing from £4,080 to £4,128. Even a baby has this concession which is often overlooked.
This means a couple can shield up to £40,000 with the investment exempt from both capital gains and income taxes.
Far too much capital lies in cash ISAs that are not even keeping pace with inflation. If yield is the criteria, switch the money into an equity income fund which will pay handsomely above the average one year rate of just 0.86 per cent. Over the past year 4.3 per cent could have been earned with JO Hambro UK Equity Income or 4.05 per cent with Artemis Income.
As a dramatic example of the benefit of a stock market investment over a deposit account, if £15,000 was invested for 20 years, it would have grown to over £52,960 in the FTSE All-Share Index but only £19,916 in a typical savings account, according to Fidelity International.
One of the best ways to secure a regular income is to opt for an investment trust as they can retain up to 15 per cent of earnings for lean years. One of the 27 which is over 100 years old is the Bankers Investment Trust and has raised its dividend every year for the past half century. It has seven sub-funds with some 200 investments for diversity overall. It should appeal to the cautious investor.
Before committing to a new ISA, look at the fact sheet for a collective or recent report for a company. The Tilney Group calculates that a staggering £8.6bn is languishing in poorperforming ‘dog’ funds. Its regular report not only reveals their names but gives helpful ‘pedigree picks’.
If, for instance, considering UK equities, investing £100 over three years would have returned just £2 with Legal & General UK Alpha but £37 with Evenlode Income fund.
For the more adventurous saver, look at three sectors: smaller firms (such as Franklin UK Smaller Companies), bricks and mortar (Legal & General UK Commercial Property) and emerging markets (Newton Global Emerging Markets and JP Morgan Emerging Markets).
There will be volatility but, a decade forward, the growth should be stellar. Currently shares in continental Europe look cheap and the US expensive.
The new Lifetime ISA allows those aged 18-40 years to save up to £4,000 each year and gain a 25 per cent Government bonus on their contributions.
The proceeds can be used to buy a first home or can be kept tax-free with access when the holder reaches 60.
Those with an existing Help to Buy ISA can transfer it into the Lifetime one or continue both variants although only one bonus can be used to purchase a property.
There are now so-called Innovative Finance ISAs, most of which involve peer-to-peer lending. Avoid at all costs. This is the next financial scam in the making.
Almost all such crowdfunding has no protection from the Financial Services Compensation Scheme.
No reputable adviser would recommend such plans.
With the stock market rising so markedly in recent months, consider using your capital gains allowance of £11,300 for shares, bonds and other stock market savings that are outside a tax wrapper. Such investments can be sold and repurchased as the CGT allowance cannot be carried forward to another year.
For estate planning, remember to use the £3,000 annual exemption for a gift. If unused, the sum can be carried forward for just one year.
Those with spare accommodation might like to consider the £7,500 tax-free allowance against earnings from lodgers. This is the rent-a-room concession.