Making The Most Of Taxing Times

J: Jayne Constantinis, host
M: Malcolm Cuthbert, Killik & Co
H: Hannah Edwards, Killik & Co

J: Hello and welcome to the Personal Finance Show, I’m Jayne Constantinis. Now, with the end of the tax year fast approaching, this is the time to ensure that you’re taking best advantage of the tax benefits which are on offer. Whether you’re interested in savings, capital gains or protecting your children’s inheritance, we’re here today to look at the options, and to guide us through all things financial are experts Malcolm Cuthbert and Hannah Edwards of Killik & Co Financial Planning. Welcome to the show, thanks very much for coming in to talk to us. Could we begin, Malcolm, by putting this discussion in the context of what’s happening in the global financial arena because a lot of people are obviously feeling extremely nervous about their personal financial situation? Should they be looking at their tax planning specifically in a different way to how they might have looked at it say 3 years ago?

M: Yes I think they definitely should. I think they should be seeing if there are ways to do things more efficiently than they’ve done it before. That’s the key. If you can do better by doing things more efficiently, why wouldn’t you do so? And so absolutely, but I think the other thing I would say is that despite the turmoil, we see that at Killik & Co probably more than anyone else, we’re going to get out of this at some point or other, so it’s worth planning and thinking ahead beyond this turmoil we’re going through at the moment

J: So in some ways then looking at the very short term i.e. April 5^th –

M: Yes

J: But also thinking about the longer term future

H: Often when someone is going to maybe make their ISA contribution for the tax year or looking at pension funding it’s just a generally good opportunity, Jayne, to sort of lift up the bonnet and see what else is going on in maybe other investments that you already hold. And certainly what we see very much in our firm is that individuals who perhaps weren’t very proactive in recent years, arguably the ones who have maybe been most affected by what’s happened in the stock market, and indeed it’s trying to add value in when you sort of review your overall portfolio, and looking at other ideas, one doesn’t just have to be investing in equities, there are other investments out there that lots of people still don’t even know about. So time horizon is everything, and that’s something that you know we always try to talk to clients about. it really depends how long one has to retirement as an example or what one has as a financial goal as to why you might be looking at things like ISAs or other tax efficient investments

J: It feels almost like we should put a date in our diary to do your sort of tax health check

M: Yes

J: Like having the car MOT’d, to get all that paperwork out and have a look at what’s going on and how to plan more efficiently as you were saying

M: I think Jayne you’re right, it’s taking control. If there’s one message we’d like to get across in the show it’s taking control of your own affairs. And whether it’s doing things more efficiently from a tax point of view or looking at the investments, because Hannah’s absolutely right, it is being proactive about where you’re investing. If you look at pensions, there’s hundreds of billions of pounds in pensions but how many people out there watching the show, know how much, where their pension funds are invested? Most people, 99% don’t know and they need to take control

J: And I think there’s a great deal of fear. I got the financial annual statement through from my pension and I haven’t looked at it. I confess. I haven’t dared look at it so I’m doing the classic sort of head in the sand “it’ll be alright or I’ll have to deliver pizzas when I’m retired.” I don’t want to face it

H: Yes I think that’s the natural inclination, it’s almost don’t open the envelope and see the damage. But I think going back to what you’ve just mentioned about people almost putting it to one side, pensions aren’t generally seen as that attractive or even that interesting, but if you do have a trusted advisor, then they can do the hard work for you. They can set the diary notes, they can keep coming back to you to say ooh, you’ve got this much available for the rest of the tax year, so you know if there are people out there, you wouldn’t seek to look after your own physical health check without consulting a GP

J: Sure

H: So why not tap into a financial GP?

J: And if you haven’t’ got a regular financial advisor, where can you go to you know, quietly so nobody knows that you don’t actually know about it already, to get some general advice?

M: Well I think financeexplained.tv, the website we’re on now, is a good place to start. The website’s going to take questions and we will answer those questions, so it’s a very good place to be

J: Because people will have their very specific enquiries

H: Yes

M: They will do

J: Talking of which, let’s take the first of very many questions that have come in, and this is Thomas who says “”With the stock markets still relatively low and the housing market failing to move, is it a good time to start a pension plan? I’m in my late 20s.” That sounds to me quite early

H: Well if you consider Thomas’s time horizon, as probably being a good sort of 25-35 years plus, then actually Thomas is in a very favourable position because the sooner you start the more you have the ability to drip feed money into the market on perhaps a monthly basis, even if you start off small, long term it can make a real difference. You know we see a lot of people through our doors who maybe have got to their 40s, have taken pension holidays, and suddenly are in catch-up, and what we always try to say to people when you’re younger is just the £200, the £300 a month, it really will make a difference long term in terms of compound interest, pound cost averaging so you know Thomas has noted the fact that yes, stock markets are particularly low, that also therefore means that they could be considered quite good value. That’s not saying that you would necessarily want to say right, I’m going to go gung-ho into the FTSE, but being stock specific, and indeed that’s where often people like us come in, and really taking the long term view. The other thing I’ve also mentioned people that are in their 40s who haven’t contributed so much to pensions, also don’t feel so fearful. We’re not here really to talk about changes in the pension rules, but I can tell you that you can put in 100% of your net relevant earnings, so whichever end of the pension spectrum you are, don’t be too fearful because there’s so many options out there

J: And how will Thomas’s situation change? He’s in his 20s now, his life, his personal situation will change, you know maybe he’s going to get married, maybe he’s going to have children and so on. His income will grow. How will his planning change through that?

M: Well it will change, undoubtedly. But that’s absolutely fine, pensions are very flexible so they can change to match his own circumstances. I’ll just reiterate what Hannah was saying though, I think start now, don’t delay. Do whatever you can afford, even if it’s £50 a month, whatever you can afford, start having the discipline of doing a regular contribution to your plan, because that’s the way, that’s the real secret of pensions is the compound interest, and then the other thing which I mentioned before is take control of it, you know take control of where you’re investing, and take an interest in it. Far too many people start a pension and then say that’s it, I’ve done my pension, I don’t need to think about it. You can’t do that, I mean if there’s one message of today, there’s – no one’s going to rescue this, the government’s not going to do it, your employer’s not going to do it, it’s you yourself who has to take control

J: In the intro to this I talked about taking best advantage of what’s out there. Is that to say then that very many people are not taking advantage of the tax opportunities that are out there?

H: Undoubtedly. I think if we talk about pensions for a second, a lot of people sometimes don’t want to lock away the capital until that retirement date. From 6^th April next year it’s set to rise at 55 as being the earliest point in time that you can take pension income. Now for some people Jayne that’s a little bit of an obstacle because obviously if you are in your 20s you might need to realise the capital sooner, so what we would always say to clients from a financial planning point of view, lock away what you can afford to lock away, because the tax relief that you get is a no-brainer. And now that I’ve mentioned tax relief let’s talk about that – for every £80 let’s say that you wanted to put in a pension, if you’re a basic rate tax payer then the pension fund will claim back an additional 20% tax relief for you, so what has cost you £80 will gross up to £100 in the pension. But then if you’re a higher rate tax payer, you also have the ability to claim your higher rate relief of another 20p in the pound or £20 out of a hundred. So yes pensions are very tax efficient, but for clients who don’t feel comfortable in locking up the capital, then look at ISAs, because of course the big benefit about ISAs is you can realise that capital at any point in time. One thing that we should probably go through is that with ISAs it’s a slightly smaller amount, it’s £7200 each tax year. We have lots of clients who sometimes say that it seems almost small beer money but we always argue no because it’s good housekeeping, and long term it could be a very useful substitute income chance when you do now retire or when you do need the income

J: Great. I’m sure they’ll be more questions on ISAs. I just wanted to move off the pension topic for the minute and take William Johnson’s query. He says his wife has recently started a home business, “Are there tax efficiency opportunities for them to save on their home / office utility bills?” This will be an interesting one for a lot of people running small business from the kitchen table. What’s the position there?

M: Yes they can, they can offset a proportion of those bills against their tax, so they can reduce their tax bill by offsetting, but they have to be careful about this because of the value. If you’re working from home it becomes a home office, and that could have an impact on capital gains tax when you sell the property. So it’s not quite as straightforward as it may seem when you’re working from home. I think anyone whose going down a self-employed route really needs to think very carefully about it, and look at all the websites, including FinanceExplained.tv and ask questions directly about it. It’s not straightforward

J: Ok. And in fact just on that subject of small businesses sole traders, “Are there any new or little-known tax benefits that you can tell us about for sole traders?”

M: Ah – probably not – apart from off-setting against tax there’s not really too much which could be done. I mean from a personal finance point of view I’d go back to pensions again, because if you’re a higher rate tax payer, why don’t you reduce your tax bill by putting some of your profit into a pension? That’s probably – it’s the biggest benefit we get is the pension and it’s worth using.

H: I think when you’re – you know also going back to the previous lady’s question, all about you know eligibility of relief and so on – tax planning on that side of things is very complicated, and that comes down to things like rules of apportionment, the merits of sole trader over partnership, over whether you’re employed or self-employed – it’s a minefield and certainly our backgrounds, we’re financial planning experts rather than say accountants, what we do is we work very cohesively alongside accountants because it’s important that the two strategies dove-tail in with the other, and I think for someone whose toying with sole traders, I’d probably seek more of an accountancy route, and indeed again going via FinanceExplained.tv will also have the appropriate channels. As an example in our firm we have a dedicated tax team, so indeed any direct questions can always come through from our clients to the tax team, I’m sure it would be the same for anyone else as they’re looking round.

J: That came from ‘Nowletsgetstarted.co.uk’. And of course for them, their personal finance and their business finance are so interlinked

H: Absolutely

J: It is very important isn’t it to get the good, right advice, otherwise they could find themselves in trouble

M: There is just one thing I would add to that, it sometimes is possible to employ a spouse within a sole tradership, and that can be extremely tax efficient where you’re paying them below the national insurance threshold for example. But the catch is they do have to genuinely work for the business, they do have to do something for it

J: Yes

M: But that’s quite a useful one to do because it’s very tax efficient.

J: You hear about many high profile people getting into trouble for the old –

M: You do

J: Employing the wife – kind of thing

H: Yes. The only thing of course on a – not meaning to be too pessimistic, but in this current climate where you know a lot of business is struggling obviously with a sole trader you take on personal liability as well, right down to your very last penny. So always bear that in mind.

J: Ok. Let’s move on to inheritance. Sean has sent us this question – “I fear the government is taking a huge sum from my inheritance but it’s tricky to have the conversation with my grandparents who are still both of sound body and mind. What’s your advice?” Well yes that’s a difficult conversation to have. What’s his position?

H: Well I would probably say that Darling and Brown certainly aren’t on everybody’s Christmas list at the moment, however – without meaning to get too political – there was one change that came in not too long ago that is a very much a positive side on IHT planning, and that is that for Sean’s grandparents, even when the first grandparent dies, their own nil rate band that’s currently £300,000 and it’s rising to £312 from the 6^th April will not die with them – it will roll over. So that therefore means that when Sean’s grandparents do both eventually pass away, there will actually be up to £624,000 of that estate that won’t suffer inheritance tax. Now obviously the average values of people’s properties has taken quite a nose dive over the last 18 months, that’s one thing to be aware of, but what Sean might want to start approaching his grandparents with, might be making full use of their annual gifts. They can gift up to £3000 every tax year. If they haven’t done it before they can roll it over for two years, so they could actually write some cheques for £6000 initially. There’s unlimited gifts of £250 that you can make to anybody that they might want. In addition there’s something called normal out of income, so if let’s say Sean’s grandfather is in receipt of a very favourable pension, he may want to make regular, out-of-income gifts to fund – I’m not sure how old Sean is or if he’s a dad, or if his child’s in private education, then – so there’s various things that you can do. The other thing just to raise and Malcolm might have other stuff to add, that if Sean’s grandparents have invested in the stock market in the past and they’re quite speculative investors, then if you hold qualifying AIM shares, if you hold them for two or three years or more, then again they also fall out one’s estate for inheritance tax. Now not a lot of people know that. You wouldn’t want to create such a portfolio on your own, you’d want to seek professional advice, something that we do commonly for clients as part of our IHT planning process, but it’s really the combined effect of gifting, making sure that you access ideas such as AIM IHT and really taking it from there

J: Sounds like there’s a lot he can do

M: There is

H: There’s a lot you can do

M: Roy Jenkins famously said that inheritance tax is paid by those people who hated their relatives more than they hated the Chancellor of the Exchequer. And I think Sean’s question is about how does he go about raising it with his grandparents as well as how does he avoid it, and I think he has to have a very delicate conversation with them about whether they want to save tax and do things efficiently and that’s a sensitive conversation. I think that’s really what he’s hinting at

J: Oh yes. Oh for sure, yes

H: In case they don’t want to leave it all to a cat’s home and Sean’s struck off the list. Which we do see from time to time.

J: He might be simply for asking the question. Can we very briefly just answer Tom’s question, because we’re nearly out of time. Tom says he’s recently been buying shares in the banks, noticing their incredibly low prices – what are the tax implications of this? Will the government want him to declare his income from dividends and any capital growth when he comes to sell them? Very specific question, why don’t you deal with that?

M: He certainly will. He will want to – the government will want their pound of flesh if he makes any money out of it. Income tax is liable on the dividends, and if – lets say the banks all turn around and in 5 or 10 years time he sells those shares, there’s a potential liability to capital gains tax as well

J: Ok. So he needs to think carefully about it and not spend it all immediately.

H: Yes. And I think just so he knows in terms of the figures, if he’s a basic rate payer, it’s going to be at 10%. If he’s a higher rate tax payer it will be at 32 ½ %. There was a tax credit of 10% but that sadly is no longer reclaimable, which is another one of something that’s quite contentious

J: Ok. Can we end with just one final one-word piece of advice. You mentioned being proactive – Malcolm, what’s your advice to people watching who are nervous about their financial situation at the moment?

M: Well just take control. I think that’s the phrase I would use and you know have a look at what you’ve got and see if you can’t do it more efficiently. Look at investments you’ve got. The things we’ve been talking about – pensions and ISAs and all the rest of it, these are just wrappers. It’s what’s inside the wrapper which is critical. Have a look under the bonnet.

H: And I think just the third sort of line of attack is make full use of your capital gain’s tax allowance. £9600 ever tax year, we haven’t really touched on it today, but pensions, ISA, make full use of your CGT allowance – they’re the 3 basic tax plannings

J: Fantastic. I think that’s our tax health check for this year.

M: Ok

J: Excellent advice; thank you very much indeed for coming in to talk to us, and if you’d like more information then you can go to the website we’ve been talking about, financeexplained.tv. Thank you very much for watching, I hope it’s been helpful. See you again.