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Insights Category: Tax Optimisation

Paying For Private School Fees: Start Planning Early And Optimise For Tax Efficiency

Introduction

More children than ever before are attending private schools for a higher quality education, smaller class sizes, more abundant resources, and specialised academic and vocational programmes. The number of pupils attending private school has steadily increased over the past decade, with a record 556,551 pupils now attending 1,411 Independent School Council (ISC) member schools across the UK, the highest level since records began in 1974.1

However, giving your children the best possible education comes at a cost, and the expense was already a barrier for many families – before Labour won 2024’s general election. Now, the new government intends to introduce VAT on school fees at 20%, as early as January 2025.

While the cost of tuition fees can vary widely depending on the school and location, sending your child to a private school as a day pupil currently costs, on average, £23,925 per year, rising to £42,459 for pupils who board.2 However, fees at some private schools can be considerably higher. The changes about to be enacted by Labour will bring the average day fee to £28,710, and the average boarding fee to £50,951, overnight.

1, 2 ISC Census and Annual Report, January 2024

At a glance

  • Parents could face around £460,000 in day pupil fees or £815,000 in boarding fees for each child.
  • ISAs and Investment Bonds can be used as tax wrappers to save towards school fees, potentially making tax-efficient or tax-deferred returns on your investment.
  • Unit Trusts and General Investment Accounts (GIAs) may also provide access to investing in various asset classes, with tax treatment dependent on individual circumstances.

Average boarding school fees to hit £50,000 per year

Taking a tax-efficient approach to saving towards private school fees…

Let’s assume that school fees increase by 3.5% a year. This would be the lowest increase seen over the course of a 14-year education, particularly in comparison to an 8% uplift from 2023 to 2024. Based on the average costs, parents could face around £460,000 in day pupil fees or £815,000 in boarding fees for each child.

However, while these figures are considerable, the sooner you start saving towards your child’s school fees, the better.

By starting early, saving regularly, and investing, parents could build up a substantial sum over time to help cover the costs of private education.

Taking a tax-efficient approach to school fees can help make private education much more accessible.

Key tax-efficient solutions

Individual Savings Accounts (ISAs)

An ISA is a tax-efficient investment vehicle that enables parents to put aside a certain amount each year, without incurring any income or capital gains tax (CGT) on the interest or investment returns earned on the savings.

If both parents make monthly contributions that fully utilise their ISA allowance (£20,000 per person in the 2024/25 tax year) from the child’s birth, this could accumulate to a sum of £585,000 by the time the child is 11 years old, based on 5% net annual growth after fees, compounding monthly.* Withdrawals from an ISA are tax efficient, so parents can extract funds as needed to pay for school fees without incurring any capital gains or income tax liability, or invest in other options, such as stocks and shares.

*These figures are examples only and they are not guaranteed – they are not minimum or maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment.

On- and Offshore Investment Bonds

An Investment Bond is a tax-efficient investment wrapper that allows parents to save and invest to pay for private school fees. An Investment Bond invests in a range of assets, such as stocks, shares, bonds, and funds. You can invest a lump sum or make regular contributions.

During the term of the investment, returns earned within the bond are not subject to income or capital gains tax (CGT), providing significant tax savings over the long term with the option to draw down up to 5% of your original investment per year on a tax-deferred basis. As the 5% allowance is cumulative, any unused allowance is carried forward for up to 20 years.**

**Please note that if the withdrawals taken exceed the growth of the bond, the capital will be eroded.

Unit Trusts and General Investment Accounts (GIAs)

Unit Trusts and General Investments Accounts (GIAs) pool capital from multiple investors into a single fund, which is then invested across various asset classes, such as stocks, bonds, and property. Investors benefit from an annual dividend allowance of £500 in the 2024/25 tax year, and an annual capital gains allowance of £3,000 in the 2024/25 tax year.

Howver, Unit Trusts and GIAs are subject to income tax on any dividends or interests earned, which can reduce the overall tax efficiency of the investment. The tax treatment of these investments can also vary depending on personal circumstances, such as income level and tax bracket.

Gifting Allowance

Under current UK tax law, individuals can give up to £3,000 per year to another person using their annual gifting exemption, including a child or grandchild attending a private school. If you are married or in a civil partnership, you can combine this with your partner’s allowance, resulting in a total annual gifting exemption of up to £6,000 per year.

This offers a tax-efficient way to pay for private school fees. However, financial gifts above £3,000 can be subject to inheritance tax (IHT) if the donor dies within seven years of making the gift. The current nil-rate band for inheritance tax is £325,000 per person.

If a parent has adequate disposable income, this may be utlisied to pay for education costs (including private school fees) under ‘Dispositions for the maintenance of the transferor’s children’ rules.*** A disposition is not a transfer of value for IHT purposes if it is made by one party to a marriage or civil partnership and is both:

– in favour of a child of either party and
– for that child’s maintenance, education or training for a period not ending later than the year ending 5 April in which the child attains the age of 18, or
– after attaining 18, ceases to undergo full-time education

***Further criteria applies within the HMRC IHT Manual IHTM04175 which is subject to change.

Scholarships and Bursaries

Many private schools offer means-tested bursaries to help with the cost of tuition. A third of pupils in private education receive means-tested bursaries,3 which can cover up to 100% of fees.

Bursaries are awarded based on financial need, and can be a valuable way for families who may not otherwise be able to afford private school, to access high-quality education for their children. The amount of the bursary awarded is based on a means test, which considers a family’s income, assets, and other relevant factors.

Scholarships are typically awarded based on merit, such as academic or athletic achievement, musical talent, or artistic ability. Scholarships may not cover the full cost of tuition. The proportion of fees covered will depend on the school and the type of scholarship offered.

3 ISC School Fee Assistance, April 2023

Paying in advance

Paying private school fees in advance can be a way to save money on the overall cost of tuition. Many private schools offer discounts to parents who pay tuition fees in advance, with the size of the discount increasing with the size of the advance payment.

However, parents considering paying fees in advance should carefully weigh the potential gains against the risks associated with tying up a significant amount of capital in pre-payment.

Depending on the investment chosen, there may be potential for higher returns than the discount offered for advance payment, but there is also a risk of capital loss.

Navigating a myriad of options

Private school education can provide children with a vital head-start and opportunities that help them to achieve their goals. However, it’s undoubtedly an expensive commitment, and navigating the options for paying private school fees can be complex and daunting.

Many options are available, including tax-efficient investments, bursaries and scholarships, pre-payment of tuition fees, and a range of capital drawdown routes. It’s important to carefully consider your options and obtain expert advice when planning and funding private school fees.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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New Tax Year Checklist

Overview

For the 2024/25 tax year year, Employee National Insurance contributions will see an additional 2% decrease, following a 2% cut in January. However, due to frozen tax thresholds, many individuals are being nudged into higher tax brackets, leading to increased tax liabilities.

Despite a somewhat improved economic forecast, it remains crucial to fully utilise all available allowances and exemptions.

It’s important to assess how recent adjustments in National Insurance, ISAs, or Capital Gains Tax may impact your finances.

Key changes

Income Tax and National Insurance

The tax-free personal allowance is unchanged at £12,570, meaning no income tax is due on earnings up to this amount. The basic income tax rate remains at 20%, with the threshold for entering the 40% higher-rate tax bracket set at £50,270. For incomes exceeding £125,140, the additional-rate tax of 45% still applies. These thresholds are set to remain constant until 2028.

Scottish taxpayers follow different income tax rates.

In a notable development, the Spring budget announced a further 2% reduction in the main Employee National Insurance contributions (NICs) rate, a change described as ‘permanent’ by Jeremy Hunt. As a result, most employed individuals will now contribute 8% of earnings between £12,570 and £50,270 (and 2% of earnings above £50,270) for Class 1 National Insurance, while self-employed individuals will make Class 4 contributions at a rate of 6%.

Class 2 NICs have been abolished.

Dividend and Savings Income

In the 2024/25 tax year, the Personal Savings Allowance permits basic-rate taxpayers to earn up to £1,000 in interest on their savings without incurring tax. Higher-rate taxpayers have an allowance of £500, whereas additional-rate taxpayers receive no allowance.

However, there are notable adjustments to Dividend Tax. The dividend allowance has been halved to £500 for the 2024/25 tax year. This reduction is significant for individuals who own company shares or receive dividends from funds or investment trusts, as it likely impacts their tax liabilities.

Given the alterations to the Dividend Tax, it may be beneficial to explore alternative strategies, particularly focusing on the more favourable tax allowances for pensions.

Pensions

From 6 April 2024, the Lifetime Allowance ceases to exist. The LTA previously set a cap on the total amount one could accumulate in their pension without incurring extra tax charges. There will no longer be a maximum limit on pension savings accumulation.

This is particularly positive news for those who are either saving for retirement or are in the process of drawing from their pension savings.

The annual allowance for pension contributions, which includes contributions from you, your employer, or any third party, as well as tax relief paid into the pension, remains at £60,000. This is the maximum amount that can be contributed in a year while still receiving full tax relief benefits. Additionally, tax relief on personal contributions is capped at either 100% of your earnings within the tax year, or £3,600 for individuals earning below this threshold. A higher earner’s annual allowance may however be tapered.

For individuals saving for retirement, this opens up a significant opportunity to increase annual contributions to their pension funds, benefiting from the substantial tax reliefs available for pensions. You could also consider carrying forward your unused annual allowances from previous tax years.

However, there is a notable caveat. The government has introduced a cap on the tax-free lump sum one can withdraw from their pension, of £268,275, or 25% of the total pension value, whichever is lower. This means the maximum amount that can be withdrawn tax-free is set at £268,275, with any further withdrawals subject to income tax at the individual’s marginal rate.

Given this limitation, it becomes increasingly crucial to maximise savings in tax-efficient vehicles like ISAs, alongside pension contributions, to ensure a robust financial foundation for retirement.

ISAs

For the 2024/25 tax year, your ISA (Individual Savings Account) allowance remains unchanged at £20,000, applicable to both Stocks & Shares ISAs and Cash ISAs. Individuals can now also contribute to several of the same type of ISA in a given year.

There’s also an exciting development on the horizon: the proposal of a new ISA variant, tentatively named the British or UK Stocks and Shares ISA. This proposal is under consultation until June 2024. The aim of this new ISA is to bolster investment in UK-based companies, offering an opportunity to invest an additional £5,000 annually in a tax-efficient manner, beyond the standard £20,000 ISA limit.

Despite the persistence of high interest rates, they are expected to continue trailing behind inflation for the majority of 2024. The Office for Budget Responsibility (OBR) forecasts that inflation will not retreat to 2% until the beginning of 2025. This inflationary trend diminishes the real value of savings held in Cash ISAs or traditional bank accounts, as their growth cannot keep pace with rising prices. In contrast, investing in Stocks and Shares ISAs has more potential to deliver superior long-term returns for your ISA contributions.

The annual contribution limit for Junior Individual Savings Accounts (JISAs) continues to be £9,000. Along with children’s pensions, Junior ISAs represent an excellent opportunity to provide your children or grandchildren with an early financial advantage. The funds in these accounts are inaccessible until the child reaches 18 years of age, allowing their savings ample time to potentially increase, particularly if you opt for a Junior Stocks and Shares ISA, which may offer higher growth opportunities over the long term.

St. James’s Place does not offer Cash ISAs.

Inheritance Tax

Somewhat surprisingly, no changes have been made yet to Inheritance Tax, with the Nil-Rate Band for 2024/25 remaining at £325,000, frozen until 2028, and the Residence Nil-Rate Band fixed at £175,000.

Capital Gains Tax

Over the past two tax years, the allowance for Capital Gains Tax (CGT) has been reduced from £12,300 to £6,000. Starting from April 2024, the CGT exemption threshold, which is the maximum profit you can realize without incurring tax, will further decrease to £3,000.

More positively, for those considering selling a second home or a buy-to-let property, the CGT rate on the sale of property assets not classified as your primary residence will see a reduction, from 28% to 24% for higher and additional rate taxpayers, in the 2024/25 tax year.

Still have questions?

The past year has presented challenges on various fronts, underscoring the importance of seeking financial advice to ensure your finances are well-prepared for the new tax year. It’s an opportune moment to evaluate your family’s financial situation and objectives.

We encourage you to contact us, to ensure you are fully utilising all available allowances this year.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.

Please note that Cash ISAs are not available through St. James’s Place and although anyone can contribute to an ISA for a child only the parent/legal guardian can open the ISA for them.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Drawing Income From Your Business Tax Efficiently

Introduction

There are three primary methods for a business owner to withdraw profits from their limited company: salary, dividends, and pension contributions (though the latter involves setting aside funds from the company for future use). Alternatively, profits can be retained within the company and later accessed through the sale proceeds.

The primary consideration in choosing among these methods is the net benefit to the owner in terms of payment structure. While nobody enjoys paying taxes or national insurance, optimising these payments to maximise benefits is prudent. Paying taxes isn’t necessarily negative if it results in more money in your pocket when you need it.

For instance, a basic rate taxpayer making a pension contribution provides a straightforward illustration of net benefit. By receiving tax relief on the contribution, they effectively turn an £80 net contribution into an £85 net benefit, taking into account tax relief, and future tax paid. Given this, one must decide whether to retain 100% of the £80 in their bank account or make a pension contribution to receive 85% of £100 at a future date.

However, for the owner of a limited company, the decision is more complex, considering various factors beyond simple tax implications.

Taxation applying to extracting profit

Corporation Tax

Corporation tax is a levy imposed on the profits of a registered business entity.

The primary corporation tax rate is now 25%, applicable to profits exceeding £250,000. Small businesses, defined as those with profits below £50,000, continue to be taxed at the small profits rate (SPR) of 19%.

For companies earning profits above £50,000 but below £250,000, the full main rate will apply, yet they will receive marginal rate relief. This means their actual corporation tax rate will gradually increase from 19% to a figure between the small profits rate and the main rate.

The SPR does not extend to close investment-holding companies, such as those controlled by a small group of individuals not primarily engaged in commercial trading or land investment for letting purposes. For instance, a Family Investment Company may not qualify for the SPR.

Before calculating profits, business expenses such as employee salaries (including those of business owners acting as employees), employers’ National Insurance contributions, and pension contributions (subject to the “wholly and exclusively” rule) are deductible.

Employers National Insurance Contributions

Employers are obligated to pay National Insurance contributions for their employees once their salary surpasses specific thresholds.

Be aware that the employment allowance, which provides up to £5,000 per year towards a company’s National Insurance contributions, may not be applicable to company owners unless they employ additional staff. You cannot utilise the employment allowance if you are the director and the sole employee earning above the Secondary Threshold, or if you operate as a service company subject to ‘IR35 rules’, and your sole income comes from the intermediary (e.g., your personal service company, limited company, or partnership). If you are part of a group, only one company or charity within the group is eligible to claim the allowance.

Income Tax and Employee NI

Income will be taxed in line with standard employee taxation. You’ll receive a personal allowance, which currently stands at £12,570 per annum. However, it’s important to note that there’s a reduction for individuals with adjusted net income exceeding £100,000.

Similar to employer contributions, the rates and amounts of employee National Insurance (NI) contributions can vary. However, for most employees, NI is charged on weekly income between £242 to £967 at 8%, and on income above £967 at 2%.

Dividends

Dividends represent payments made from company profits to its shareholders. They are subject to taxation in a consistent manner across dividends received from companies, unit trusts, and open-ended investment companies.

Since the 2016/17 tax year, the previous dividend taxation system underwent significant changes. The dividend tax credit was eliminated and replaced by the structure outlined below.

Each individual is entitled to an annual Dividend Allowance of £500. Subsequent dividends are taxed as follows:

  • Basic Rate: 8.75%
  • Higher Rate: 33.75%
  • Additional Rate: 39.35%

It’s crucial to note that the 0% rate serves as a starting point for dividend taxation and not a deduction from the dividend amount received. For instance, if an individual exhausts their personal allowance, falls £500 below the higher rate threshold, and receives £1,000 in dividends, £500 of those dividends would be subject to higher rate dividend tax.

Furthermore, it’s essential to understand that the entire dividend payment is considered in the tax calculation, not just the portion exceeding £500. While the initial £500 enjoys a 0% rate, any surplus is taxed according to the respective tax band. Dividends can offset any unused Personal Allowance before applying the £500 allowance. Consequently, an individual with no other income can receive dividends up to £13,070 before incurring tax liability.

What’s the most tax-efficient method for extracting profits from your business?

A straightforward solution to maximise tax efficiency is to make pension contributions. As previously explained, these contributions are not subject to corporation tax or National Insurance when made by the business. Moreover, upon benefiting from these contributions, 25% is typically tax-free, with subsequent amounts taxed at marginal rates and no National Insurance to pay.

However, while pension contributions may be the most tax-efficient option, they might not always be the most practical. Individuals under 55 require accessible income for day-to-day living expenses. Even for those over 55, immediately vesting pension contributions could technically cover living expenses. However, in reality, this may not be feasible due to potential complications with recycling rules.

Moreover, accessing pensions beyond any tax-free cash can trigger the Money Purchase Annual Allowance (MPAA), limiting the ability to fund a Defined Contribution pension beyond the MPAA threshold.

Given the favourable tax treatment of pensions, it’s worth considering whether pension funds should be utilised to meet retirement needs rather than immediate financial requirements. It’s then important to explore how you can withdraw funds from your business to cover day-to-day living expenses both presently and in the future.

Dividends often outperform salary when it comes to meeting immediate daily needs, especially when considering all available allowances. However, the interplay between allowances and National Insurance (NI) thresholds can significantly influence this comparison. For instance, while you can draw a salary up to the personal allowance of £12,570 without incurring income tax, employers’ NI contributions become payable from £9,100.

Ultimately, the business owner must extract sufficient profit for livelihood. Therefore, determining the “sweet spot” for taking a combination of salary and dividends becomes crucial. Could the optimal approach entail taking a salary of £12,570, with the remaining amount as dividends? Perhaps. However, given the intricate nuances of taxation rates, thresholds, and allowances, the answer may be more nuanced and dependent on individual circumstances.

Once the immediate income needs have been met and any remaining profit is surplus to the business’s requirements, considering pension contributions becomes prudent.

Indeed, while there are many options for extracting company profits, each carries its own tax and National Insurance implications for the business owner, considering both their employer and employee roles.

Despite the technical complexity involved, the planning approach can be fundamentally simple. The goal is to withdraw the minimum profit necessary to cover immediate needs, ensuring that the rest is directed towards the pension to optimise future financial security. An expert wealth adviser can help you determine the optimal strategy for your individual circumstances.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Taking Retirement Income: Tax in Retirement and Drawing Down

Introduction

There’s much greater flexibility when it comes to retirement incomes these days, but there are also a few traps waiting for the unwary.

It used to be that when you reached retirement, your journey as a pension investor effectively ended. That’s no longer the case, thanks to the 2015 reforms to Defined Contribution (DC) pensions, which have resulted in many people remaining invested during retirement. The process is now much more seamless, and in some cases very little really changes.

But some things do change, and it’s important to be aware of them. Perhaps the most obvious is the way in which you’re taxed once you begin to take an income in retirement. While there are more opportunities for tax-efficiency these days, there are also a few more pitfalls that need to be avoided.

What you need to know

A new tax regime

During your working life you generally didn’t have to think too much about which income would be taxed, because it would usually be your earnings. And you may well be aware that while you can still be charged Income Tax in retirement, you don’t pay National Insurance on investment income or on any earnings after hitting State Pension age.

But the tax situation is suddenly quite different in other ways too. From a tax perspective, you can now control much more about how you take your income and how much tax you pay. You could well have pensions, Cash ISAs, Stocks & Shares ISAs, property, earnings and so on. But how you extract money from that, and use it as income, is treated and taxed differently.

The best course of action won’t always be obvious. For many of those who are deciding where to take an income from once they’ve retired, the starting point will be their pension – but while the first quarter of your DC pension pot can be taken tax-free, people often forget that anything above that 25% will be taxed at your marginal rate. In other words, the way the pension is taxed makes it worth exploring other options.

For example, income from your ISA won’t be taxed, giving you flexibility to take your income from one place and not another, or to have a mix. A lot of people don’t necessarily realise this and they would rely heavily on a pension income that’s taxed, perhaps because they’re not aware of other ways of doing it. This is where an adviser can step in and help you, simply by knowing which levers to pull.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Steering clear of the traps

There’s one failsafe way to ensure you don’t end up paying more tax in retirement than you need to – get pension advice from someone who knows the costly mistakes to avoid.

When you’re approaching retirement, you should speak to an adviser to ensure you’re taking income in the most tax-efficient way, because it is quite different from how you’re taxed when you’re working. This applies to anyone leading up to and entering retirement. And it can be especially pertinent for those reaching retirement with both DC and Defined Benefit (DB, or final salary) pension pots.

That’s because the income from a DB pension will be paid to you whether you want it or not, and it will be taxed. So, it’s important to know which incomes you’re going to get anyway and which incomes you have more flexibility with.

An adviser can help you see the bigger picture and understand which of your assets are subject to which tax regime when you take money out. It’s a time of life when a lot of people want to take lump sums, and there are important decisions to make, so you don’t want to take your eye off the ball at the last minute.

Planning for your retirement can be overwhelming, but Apollo can help you begin the journey of budgeting for your later years. If you’re thinking of starting a pension or would like to review your existing pension plans, it’s a good idea to get advice.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is generally dependent on individual circumstances.

You can also access free impartial pensions guidance from the Pension Wise website, or you can book an appointment over the telephone: 0800 011 397.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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LTA Removed: Restart Your Pension Contributions and Carry Forward up to £200,000

Introduction

In spring 2023, the government took pension savers by surprise, by announcing the removal of the Lifetime Allowance (LTA) Charge. In the 2023-24 tax year, the tax charge for exceeding the Lifetime Allowance threshold of £1,073,100 (or a higher threshold where LTA protection applies) was effectively removed, and the Lifetime Allowance itself was abolished from 6 April 2024.

The removal of the Lifetime Allowance is particularly welcome news for those whose pensions were already above the value of the LTA, and who were nearing a benefit crystallisation event – including turning 75 years old, drawing down funds, purchasing an annuity, or indeed upon their death.

Pensions are also regarded as a tax-efficient way to pass on wealth, as they are generally not considered to be part of a person’s estate for inheritance tax purposes. The removal of the LTA charge further enhances this benefit.

Many who stopped making contributions to their pension, will now be considering restarting contributions. If you’ve been a member of a qualifying pension scheme, but haven’t used your annual allowances for 2023/24 (£60,000), 2022/23 (£40,000) or 2021/22 (£40,000), then together with this year’s annual allowance of £60,000, you could kickstart your pension by carrying forward these allowances to make a one-off contribution of up to £200,000.

How has the removal of the LTA changed retirement planning and saving?

Removing the LTA is designed to keep people in work, and attract people back to the workforce

In the UK, employers are required to contribute to their employees’ pensions at a minimum rate of 3% of qualifying earnings, subject to that employee contributing at least 5% of their qualifying earnings. Over time, it’s a considerable benefit of being employed in the workforce. Previously, as workers’ pension savings had approached the LTA, they were becoming disincentivised to continue working. Now, employees may work longer, and those who had already retired may consider re-joining the workforce, which could lead to greater macroeconomic performance in the UK economy, and potentially lessen the burden on the state to subsidise people’s retirements.

It’s also designed to further incentivise savers, to maximise their pensions before turning to other investment vehicles

While it’s important to note that the Lifetime Allowance Charge might be reintroduced in the future, its removal coincided with the government raising the annual allowance from £40,000 to £60,000 (or 100% of your UK Relevant Earnings, whichever is lowest) with effect from the 2023-24 tax year. The purpose of the LTA had been to cap the tax privileges of pensions. Additional rate taxpayers qualify for income tax relief on pension contributions at up to 45%. If an additional rate taxpayer had opted to use their entire annual allowance at the previous level of £40,000, they would have attracted up to £18,000 in tax relief. With the increased annual allowance of £60,000, they could gain up to £27,000 in tax relief; an additional £9,000 a year. This may incentivise a greater amount of pension saving, subject to the limits on tax relief on pension contributions, before savers turn to other investment vehicles such as ISAs.

The tapered annual allowance may still punish ‘late savers’

Despite the removal of the LTA charge benefitting many savers, the complex tapered annual allowance (TAA) remains for those with threshold income in excess of £200,000 and adjusted income in excess of £260,000 who will see their annual allowance (the maximum they may save into their pension that tax year and still benefit from tax relief) taper down (to a minimum of £10,000) by £1, for every £2 their adjusted income exceeds £260,000.

It doesn’t leave out those who took out fixed lifetime allowance protection

In 2012, 2014 and 2016, some pension savers had the opportunity to take out fixed protection against the falling Lifetime Allowance. Each form of fixed protection allows the claimant to retain the level of Lifetime Allowance that was available immediately before the reduction (£1.8 million, £1.5 million and £1.25 million respectively). As a result, those claimants have not made pension contributions for several years in order to preserve their protection.

With the removal of the Lifetime Allowance Charge, claimants are likely to want to restart pension contributions. This would previously have automatically resulted in the fixed protection being lost and would have resulted in their maximum tax-free cash dropping to the current level of £268,275.

However, HMRC has since confirmed that, as long as fixed protection had been registered before 15 March 2023, the protections cannot be lost. They can therefore restart their contributions without renouncing their bigger tax-free lump sums.

What next?

If over the last few years, you had elected to cease making pension contributions, as the value of your pension crept above £1 million; then the removal of the Lifetime Allowance may represent a unique and valuable opportunity to significantly boost your retirement savings.

Assuming, as a member of a qualifying pension scheme, you have not used any of your annual allowances from the tax years 2021/22, 2022/23, 2023/24, and the current tax year 2024/25, you could make contributions amounting to up to £200,000 before 6 April 2025 – provided you are not subject to tapering in any of those years.

The net cost of each £1,000 contribution could be as little as £550.

That’s because you’ll receive automatic basic rate tax relief of 20%, and an additional rate taxpayer may claim a further 25% tax relief via their tax return.

And, because of the gradual loss of your personal allowance for income between £100,000 and £125,140 resulting in an effective 60% tax trap, you could gain even more if restoring your full personal allowance.

There are a number of factors that may cause different results in individual circumstances, which is why it’s important to seek professional advice from an expert adviser, to help you maximise the amount you can contribute to your pension and benefit from tax relief on this year.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time.

The value of any tax relief is dependent on individual circumstances.

Any tax relief over the basic rate is claimed via your annual tax return.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Using a Life Cover Plan Written in Trust to Meet an Inheritance Tax (IHT) Liability

Introduction

Inheritance Tax (IHT) can be tricky to understand, but its impact can mean less money ends up in the pockets of your loved ones.

Tax allowances such as the residence nil-rate band (RNRB) begin to fall away for estates valued in excess of £2 million. In the case of the RNRB, this is tapered by £1 for every £2 an estate exceeds £2 million.

What is a Life Cover Plan?

Life insurance offers a tax-exempt payout to a chosen beneficiary upon your death.

This insurance comes in two forms; term assurance and whole of life assurance.

Term assurance covers you for a set duration. It is often chosen to safeguard against debts that will diminish or conclude over time, like a mortgage repayment, or to ensure there is a fund available for specific future expenses, such as your children’s education costs.

Whole of life assurance, on the other hand, guarantees a payout at the time of death, as long as the premiums have been consistently paid throughout the policy’s term.

Whole of life policies are generally aimed at addressing financial responsibilities that will arise at your death, regardless of its timing, like covering an inheritance tax bill or enhancing the inheritance you leave behind. These plans are suitable when the need for coverage is indefinite or unclear.

How can life cover help pay towards an IHT bill?

Over and above gifting sufficient assets to reduce your gross estate value to within £2 million, if you have excess income during your retirement, it might make sense to consider a life cover plan written in trust, to meet the eventual IHT liability, which could be as high as £400,000 on an estate valued at £2 million.

It is important that the life cover plan is written into trust, and that the premiums are paid using excess income, rather than from assets – otherwise, the premiums paid could be treated as a chargeable lifetime transfer (CLT).

Note that probate is required to release estate assets, and IHT needs to be paid before probate is granted. Therefore, an estate’s assets cannot be directly used to meet IHT liability, and an alternative solution such as life cover in trust provides the funds required.

How much might life cover cost?

As of February 2024, a guaranteed whole of life joint plan with a sum assured of £400,000 would cost £6,520 per annum, assuming a 65-year-old male non-smoker and 65-year-old female non-smoker insured through Legal & General, and not including ‘waiver of premium’ as an additional option. These figures are based on guaranteed premiums, meaning the provider cannot change the premium as you get older.

Guaranteed whole of life cover provides certainty; if the premiums are paid until death, then the sum assured will pay out. To put the figures in perspective, a 65 year old woman has a life expectancy of 24 years. By the time she is 89, she would have paid around £156,000 in premiums, but the payout from the plan would be £400,000 on second death. If the woman lives to 100, she will have paid £228,000 in premiums, and the payout from the plan would still be £400,000 on second death.

The value of financial advice and IHT planning

IHT is a highly complex area and very few people know every rule, exemption and allowance, or how to use them.

As your assets increase or decrease in value, your IHT liability will change and regular reviews of your financial position will therefore be important. It’s always a good idea to get in touch with a financial adviser whenever you buy or sell property too, or if you’re thinking of doing so. They can help make sure the choices you make will be tax-efficient for you – and those you leave behind.

Making confident decisions about Inheritance Tax planning while you’re still fit and healthy helps to create a better world for everyone you care about.

Appointing an expert wealth manager may enable you to capitalise on tax efficiencies such as these, mitigating paying unnecessary tax in your retirement and in the event of your death.

The levels and bases of taxation and reliefs from taxation can change at any time.

Tax relief is generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Landlords: Mitigating Inheritance Tax When Passing On Property And Personal Assets

Introduction

Inheritance Tax (IHT) can be tricky to understand, but its impact can mean less money ends up in the pockets of your loved ones.

Landlords face additional considerations and potential barriers when it comes to Inheritance Tax (IHT) planning. Whether you opt to retain, sell, or gift a property, tax liabilities can arise for buy-to-let landlords. Amidst various choices, it’s easy to overlook other methods to diminish the size of your overall estate as well.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

At a glance

  • You can reduce Inheritance Tax (IHT) or Capital Gains Tax (CGT) liabilities on your properties with careful planning and expert advice.
  • Starting your estate planning in your 60s and 70s can make a real difference to your IHT or CGT tax bills, and mean you leave more to your loved ones.
  • Bespoke trust solutions may help you reduce your estate for IHT purposes while retaining some form of access to your investments.

Simplifying a daunting process

What will be counted as part of my estate?

Upon your death, all your possessions, including savings, assets like property, ISAs, and shares, constitute your estate. Inheritance Tax is typically charged at 40% on assets outside of the Nil-Rate band of £325,000 per individual. When passing on your primary residence to your direct descendants, you may also benefit from the Residence Nil-Rate Band amounting to a further £175,000.

It’s evident how a property investor accumulating holdings over several years could surpass £2 million or more. Once your estate exceeds £2 million, some tax allowances are reduced or become unavailable for Inheritance Tax (IHT) purposes.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

How much does my estate need to be worth to be liable for IHT?

The first step in reducing your Inheritance Tax (IHT) liability is understanding how it operates. Everyone is entitled to a Nil Rate Band (NRB) threshold of £325,000. This threshold allows you to leave assets to ‘non-exempt’ beneficiaries, such as children, grandchildren, or other family members, without triggering IHT. However, if you leave more than this amount to non-exempt beneficiaries, IHT becomes payable on the excess.

If you pass away leaving your entire estate to a UK domiciled spouse or civil partner, it allows them to use any unused percentage of your NRB threshold upon their death. Consequently, they can leave assets up to 100% of the value of two unused NRB thresholds (currently £650,000) to non-exempt beneficiaries without incurring IHT.

Furthermore, if you leave your home to children or grandchildren, you may be eligible for an additional tax-free threshold called the Residence Nil Rate Band (RNRB), currently set at £175,000 for individuals. This threshold doubles to £350,000 upon the second death for married couples or civil partners who haven’t used any percentage of the RNRB on the first death.

Moreover, if you donate 10% or more of the net value of your estate to charity upon death, the rate of IHT applied to gifts exceeding the NRB to non-exempt beneficiaries is reduced from 40% to 36%.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

What will happen if I decide to keep a buy-to-let property, and pass it on?

If you pass away owning property, your beneficiaries will inherit the property without any historical capital gain, but it will still be considered part of your estate for Inheritance Tax (IHT) purposes. IHT is levied at a rate of 40%, so if you die with a property valued at £400,000, and the nil rate band has already been utilised, your beneficiaries may need to pay £160,000 to HMRC.

However, IHT becomes a more significant concern if the estate exceeds the nil rate band. In such cases, if you only own one or two buy-to-let properties along with few other assets, retaining the property may be advantageous.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

What will happen if I decide to sell any of my buy-to-let properties?

If you sell a property that you’ve never lived in, it becomes subject to Capital Gains Tax (CGT) if its current value exceeds the purchase price. CGT is imposed on the gain or profit you’ve realised. For residential property, CGT rates are 18% for basic rate taxpayers and 24% for higher rate taxpayers. The rate of CGT payable will depend on your other income.

However, there are avenues to potentially reduce your CGT liability. If the property was your main residence at one point, you may qualify for Main Residence Relief, which can lessen the amount of tax owed. Additionally, any expenditure on renovations can be deducted from the sale price to calculate your net gain. Selling a property offers the opportunity to reinvest the proceeds, potentially leading to further growth in a more tax-efficient environment, including one with reduced Inheritance Tax (IHT) implications.

It’s crucial to note that if you sell or gift a property just before your death, both CGT and IHT may apply, affecting you and your family financially.

While investing sale profits into an ISA can offer tax benefits concerning income and capital gains tax, they are still considered part of your estate for IHT purposes upon your death. Pension funds, however, are generally excluded from your estate.

Ultimately, the outcome will hinge on your individual circumstances, such as age, health, and other factors. These decisions are among the most significant financial choices you’ll make in your lifetime, underscoring the importance of consulting a financial adviser to explore your options thoroughly.

The value of an investment with SJP will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

Can I make gifts to mitigate IHT?

You have several options to gift money without it being included in the final calculation of your estate for Inheritance Tax (IHT) purposes.

Firstly, you can give away up to £3,000 each tax year, known as your ‘annual exemption’, in addition to the ‘small gifts exemption’ for making any number of small gifts up to £250 per person, to any number of individuals as long as you have not used another allowance on the same person. These gifts are exempt from IHT.

Furthermore, the £3,000 annual exemption can be carried forward for one tax year, allowing you to give away £6,000 in a single tax year if you made no gifts in the previous year.

Gifts exceeding the £3,000 allowance are still exempt from IHT as long as you survive for seven years after making the gift. However, gifts made within the seven years preceding your death will be added back into your estate, potentially using up some or all of your nil rate band. If the gift surpasses the nil rate band, some tax may be due. Nonetheless, if you survive the gift by at least three years, the amount of tax payable decreases on a sliding scale, meaning the longer you live, the less tax is owed. This approach not only supports your family during your lifetime but also reduces your IHT liability afterward.

Additionally, if one of your children or grandchildren is getting married, each parent or grandparent can gift up to £5,000 to the child or £2,500 to the grandchild. This gesture can provide a new marriage or civil partnership with a financial boost, aligning with your intentions.

Finally, gifts made regularly from surplus income are also exempt from tax, provided you can demonstrate that they do not impact your usual standard of living.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Can I gift my properties during my lifetime?

Many landlords consider gifting property during their lifetime as a strategy to reduce the size of their estate for Inheritance Tax (IHT) purposes.

If you don’t rely on the rental income from the property, an outright gift might be an option. This is known as a Potentially Exempt Transfer (PET). If you survive for seven years after making the gift, there will be no IHT to pay. However, once the property is gifted, you lose control and flexibility with no possibility of reversing the decision.

Gifting a property constitutes disposing of an asset, potentially triggering Capital Gains Tax (CGT) if the property has appreciated in value.

Alternatively, you could gift the property into a Discretionary Trust, offering more control. By transferring the property to such a trust, the transfer is a chargeable transfer for IHT, but you might qualify for a relief allowing you to defer CGT payment until the trustees sell the property. If you survive for seven years after making the gift, the property will not be considered part of your estate, resulting in no 40% IHT liability, similar to a Potentially Exempt Transfer.

Considering this option requires guidance from a financial adviser.

It’s important to note that when gifting any asset, you must survive for seven years. Failure to do so means the gift reverts to your estate, potentially leading to double taxation – CGT when making the gift and IHT upon death.

My properties are part of my retirement income – what happens if I give them away?

If you’re deriving income from your rental properties, or intend to do so in retirement, the situation becomes more intricate. If you gift the entire property – whether to your children or into a trust – while continuing to receive an income, it’s considered a Gift with Reservation. In this case, the property remains part of your estate despite the transfer.

However, there may be an option to gift only a portion of the property into a specialised trust, retaining the right to receive income without violating the gift with reservation rules. Seeking advice from a solicitor to determine whether a trust is suitable for your circumstances will ensure your financial plans align with your long-term goals.

There’s a limit of £325,000 that can be gifted into a lifetime trust within any consecutive seven-year period. Exceeding this threshold incurs a 20% IHT on the surplus. Additionally, if the property being gifted to the trust has appreciated in value since acquisition, you may also be subject to CGT.

Gifting and trusts can be highly advantageous and tax-efficient strategies for legacy planning. Trusts, in particular, offer versatility, but it’s essential to seek expert guidance and discuss your options with a financial adviser or solicitor before establishing a trust.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

How do I use a pension to help IHT planning?

Most defined contribution pension or Self-Invested Personal Pension (SIPP) schemes typically reside outside of your estate. Therefore, if you’re seeking a tax-efficient method to transfer wealth, pensions can be instrumental. If you possess multiple pension pots, you have the option to designate one or more to your children or grandchildren.

Should you pass away prior to reaching 75, your pension pot can be disbursed as either a lump sum or income to any beneficiary, free from taxation. However, if your demise occurs after the age of 75, your beneficiaries will be liable to pay tax at their applicable marginal rate on withdrawals.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

The value of financial advice and IHT planning

Inheritance Tax (IHT) is a highly intricate area, and very few individuals are familiar with every rule, exemption, and allowance, or how to leverage them effectively.

Given that your assets may fluctuate in value over time, regular reviews of your financial situation are crucial as they will impact your IHT liability. Additionally, it’s advisable to consult with a financial adviser whenever you engage in property transactions or contemplate doing so. They can offer guidance to ensure that your choices are tax-efficient for both you and your beneficiaries.

Taking proactive steps in Inheritance Tax planning while you’re in good health enables you to create a more secure financial future for those you care about.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Buy-To-Let and Tax: Protecting You and Your Estate

Introduction

Over the course of the last few years, major changes to taxation reliefs and rates have taken place for UK landlords. Explore the latest implications below.

Or, click here to explore specialist lending options including buy-to-let mortgages, residential and commercial mortgages, and investment-backed lending.

Tax considerations for buy-to-let landlords

Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT) is levied upon the acquisition of properties, including buy-to-let properties. The payable amount varies based on the consideration given in return for the property. This will usually be the same as the price paid.

In England, the current rates of SDLT for buy-to-let properties bought for £40,000 or more, applicable when the individual already owns at least one property, are as follows:

‹ 3% on the first £250,000

‹ 8% on the portion up to £925,000

‹ 13% on the portion up to £1.5 million

‹ 15% on everything over that.

This will encompass holiday lets, as well as purchasing a property for children if the parents leave their name on the title deeds or vice versa. SDLT must be settled within 14 days following the completion of the property purchase. However, the amount of SDLT paid is deductible from any capital gains realised when the property is sold or gifted.

Different rates (of Land and Buildings Transaction Tax and Land Transaction Tax respectively) apply in Scotland and Wales.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Capital Gains Tax (CGT)

The sale of property (other than your main residence) may result in a capital gain. Certain ‘allowable costs’ such as SDLT and estate agent/solicitor’s fees and money spent on renovation can be deducted from the gain. In addition, each individual owner has an annual allowance which can be offset against any gain if it has not been used elsewhere in the same tax year. This is known as the annual exempt amount and it amounts to £3,000 per individual in the 2024/25 tax year.

Although Capital Gains Tax (CGT) is levied on gains made on disposal of most chargeable assets at the rates of 10% and 20% (for basic and higher rate taxpayers respectively), property gains are taxed at higher rates. At the Spring Budget, the government reduced the higher rate of CGT payable on gains made on UK residential property disposals from 28% to 24%, effective from 6 April 2024. For property owners classified as basic rate taxpayers, the CGT rate remains at 18% on such proportion of the gain that sits within basic rate when added to other income.

Reducing CGT liability

There are legitimate strategies to reduce or defer the amount of Capital Gains Tax (CGT) payable, including offsetting any loss made on the sale of a buy-to-let property in the same or a previous tax year against the gain.

As mentioned above, you may also be able to deduct allowable expenditure, such as solicitor’s fees, costs of advertising the property for sale, any Stamp Duty Land Tax (SDLT) payable, and expenditure incurred on property renovations to arrive at the taxable gain.

Furthermore, it might be possible to mitigate or defer CGT liability by reinvesting an amount equivalent to any gain made into a suitable tax-efficient investment vehicle.

Any tax owed on gains from UK residential properties must be reported and settled within 60 days of selling the property. These deadlines apply to individuals, trustees, and personal representatives of deceased individuals who dispose of residential property. They are responsible for self-assessing the calculation of the amount payable, considering their annual exemption and any losses.

The rate of CGT payable is determined after making a reasonable estimate of taxable income for the year.

For disposals by UK residents, the reporting and payment requirements do not apply if the gain on the disposal (or the total gain if more than one property is sold) is not subject to CGT. This may occur if the gain is covered by private residence relief, unused losses, or the annual exempt amount.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Income tax on BTL income

Income received from letting out a BTL property is subject to taxation and must be declared as part of your Self Assessment tax return. The tax on this income is determined based on the investor’s Income Tax banding, which is currently 20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional rate taxpayers.

You can potentially reduce the tax payable by deducting certain ‘allowable expenses,’ which typically include: interest on buy-to-let mortgages and other finance charges (though only at the basic rate); council tax; insurance; ground rent; property repairs and maintenance; legal, management, and other professional fees, such as those for a letting agent; and other property expenses, including building insurance premiums.

However, substantial improvements like extensions are not deductible for Income Tax purposes. Instead, they can be deducted from any capital gain on sale of the property.

Historically, it was possible for buy-to-let landlords to claim a ‘wear and tear allowance’, which allowed them to deduct 10% of the net rent from the rental income subject to tax to represent the replacement of furnishings etc. and therefore reduce their Income Tax liability on an annual basis. From 2016/17 onwards, the ‘wear and tear allowance’ was scrapped and you can only deduct expenses genuinely incurred on the replacement of qualifying expenditure which is likely to increase the landlord’s tax liability each year.

Impact of tax changes introduced from 6 April 2017

As mentioned above, the Finance (No. 2) Act 2015 introduced provisions that altered the deductibility of interest when calculating profits from rental property. These changes have been in effect since 6 April 2017 and gradually transitioned allowable deductions for finance costs to zero, with full implementation taking place from the tax year 2020/21 onwards. As of 2020/21, all financing costs incurred are eligible for only a basic rate tax credit.

At first glance, it may seem that basic rate taxpayers won’t face any additional tax burden under these rule changes. However, this isn’t necessarily the case, as these rules have altered the way that taxable income is calculated. For instance, consider an individual with rental income of £45,000 and employment income of £27,000, with mortgage interest totalling £30,000. Under the previous rules, the taxpayer would be deemed to have net income of £42,000 making them a basic rate taxpayer.  However, under the current rules, beginning in 2020, total income for tax purposes would be £72,000, which even after accounting for the personal allowance, would push the taxpayer into the higher rate tax bracket.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Owning properties in a Limited Company

When deciding whether it would be tax-advantageous to hold your properties within a limited company, various factors come into play, including the number of property holdings, rental income levels and the need for access to that income, leveraging on properties and the extent to which capital gains might need to be paid if a disposal of the properties was made.

Holding properties within a company structure may be tax-efficient where the portfolio is highly geared due to the fact that limited companies are unaffected by the mortgage interest relief restrictions discussed above. Instead, finance costs are considered a business expense and remain fully deductible against rental income before corporation tax. Rental profit accruing to a limited company (after deduction of finance costs and other allowable expenses) is subject to Corporation Tax, at a rate of 25% for profits exceeding £250,000. However, small companies with profits up to £50,000 are taxed at a rate of just 19%, while profits falling between these thresholds are subject to a tapered rate. This makes the tax rate considerably appealing compared to the rates of 40% and 45% for higher and additional rate taxpayers, respectively where rental income can be accumulated within the company or extracted tax-efficiently.

However, if the property investor is reliant on the property rental income, it’s essential to consider how it will be extracted from the company. If the profit needs to be extracted in the form of dividends, over and above the annual dividend allowance of £500, rates of 8.75%, 33.75%, and 39.35% for basic, higher, and additional rate taxpayers, respectively, will apply at shareholder level i.e. after Corporation Tax has been paid – giving rise to an element of double taxation If the property works in the business, taking money as a salary will avoid this issue (as salary is a deductible expense for Corporation Tax purposes) but paying salary entails operating PAYE and paying employers’ National Insurance contributions, which may result in higher overall costs.

Furthermore, transferring an existing buy-to-let property into a limited company can pose practical challenges, especially if there’s an existing mortgage. Many lenders ask for a personal guarantee for a mortgage – in which case, the shareholder(s) who give the guarantee will be personally liable for the debt, if the mortgage repayments are not maintained. Alternatively, the property may need to be remortgaged with the company taking a corporate mortgage. Transferring existing buy-to-let property to a company can also trigger Stamp Duty Land Tax and Capital Gains Tax charges at the time of transfer. While planning can mitigate such liabilities in certain circumstances, seeking professional advice before pursuing the limited company route is imperative to determine whether these mitigation opportunities will be viable in any specific case.

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

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

If a guarantor is needed we recommend they get legal advice to ensure they fully understand their obligations regarding the mortgage.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Giving Your Children and Grandchildren a Head Start

Introduction

While money isn’t the be all and end all, it undeniably offers children a significant advantage. A nest egg can contribute towards their education, grant access to diverse opportunities, and give them a head start in their adult lives.

Saving now provides them with greater flexibility to pursue their desired paths when the time comes. It’s another avenue through which you can afford them the best possible start in life.

The cost of growing up

Raising children can be financially challenging. While families may cover many of the costs of raising young children through their income, having a financial reserve as adulthood nears can be invaluable.

As young adults approach major milestones such as purchasing their first car, attending university, or buying their initial home, significant expenses arise.

By providing support, you can assist them in pursuing their aspirations. Starting to save early ensures they’ll have greater opportunities as they grow older.

01

£45,800

The average debt of student leaving university
Source: House of Commons Library, Research Briefing, Student loan statistics, December 2022
02

£61,000

The average house deposit of a first-time buyer
Source: Money.co.uk, First-time Buyer Statistics and Facts 2023, March 2023.
01

£45,800

The average debt of student leaving university
Source: House of Commons Library, Research Briefing, Student loan statistics, December 2022

02

£61,000

The average house deposit of a first-time buyer
Source: Money.co.uk, First-time Buyer Statistics and Facts 2023, March 2023.

Start early

You don’t have to allocate a substantial sum each month to establish a solid nest egg for a child. The crucial step is to commence saving as early as possible.

Beginning to save when children are young offers the advantage of time. It’s remarkable how even modest amounts saved consistently can accumulate over time. The power of compounding, combined with prudent investment decisions, has the potential to substantially enhance the value of your fund as children mature.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

Savings that work for everyone

You might choose to save a modest sum monthly, or invest lump sums as it fits your circumstances.

Your choice may be grant the funds to the child/granchild at age 18, or you might prefer to maintain control for a longer period of time.

Regardless of your preferences, selecting an investment solution that provides a suitable balance of flexibility, tax efficiency, and accessibility is crucial.

Invest in a Junior ISA

Junior ISAs represent an opportunity for saving towards a child’s future. The funds are inaccessible until the child reaches their 18th birthday.

These accounts can be set up by a parent or legal guardian, however further contributions can be accepted from anyone once the account has been set up. Regular deposits or one-time payments up to the annual limit (currently £9,000) are permitted, with all income and gains being exempt from Income Tax and Capital Gains Tax.

Upon reaching the age of 18, the Junior ISA automatically turns into an adult ISA which offers further flexibility to invest or withdraw funds as desired.

Junior ISAs offer the choice between cash or stocks and shares options. While cash is perceived as lower risk, considering the potentially lengthy investment term of up to 18 years, stocks and shares Junior ISAs typically offer superior returns over time. Although it is possible to spread the risk by subscribing to both a cash Junior ISA and a stocks and shares Junior ISA – provided the annual limit is not exceeded.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

An investment in a Stocks and Shares ISA does not provide the security of capital associated with a Cash ISA.

The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.

Please note that St. James’s Place does not offer Cash ISAs.

Set up a trust

Another frequently overlooked option is establishing a bare trust or designated investment account for a grandchild. Typically, the funds are invested in a portfolio of unit trusts, offering the benefits of professional management, risk reduction through diversification, and tax efficiency.

This straightforward legal arrangement of setting up a bare trust is an excellent solution for grandparents seeking to invest money for a grandchild. Until the beneficiary turns 18 and assumes ownership of the investment, the grandparents retain control over the funds. Subsequently, the grandchild can independently make decisions about the plan.

Unlike a Junior ISA, there are no limits to how much you can invest in a bare trust. The assets are held by a trustee, usually the parent or grandparent, for the child’s benefit until they reach 18 (or 16 in Scotland).

As long as the investment is made by someone other than the parents, the assets are taxed as if they belong to the child, which usually means there is little or no tax to pay on any income or gains.

This information applies for bare trusts in England. Bare trusts work differently in other regions.

Payments into bare trusts are considered to be gifts for inheritance tax purposes.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

Start a pension

While initiating a pension for a child might initially appear unusual, for certain families, it can be a highly astute decision.

These pensions can be established by a parent or legal guardian, with contributions welcomed from anyone once they’re set up.

The blend of tax efficiency and an investment horizon potentially spanning over 60 years presents an exceptional opportunity for wealth growth. Even a single lump sum payment into a child’s pension could significantly enhance their retirement savings and alleviate some financial burdens in adulthood.

Moreover, if concerns arise regarding how a child might utilise the saved funds, there’s the added advantage that the money will remain beyond temptation’s reach until they reach retirement age.

You can put a maximum of £2,880 into a pension for a child each year. Tax relief will boost it to £3,600.

Investing the maximum £3,600 each year into a pension fund from birth until a child turns 18 could create a pot worth £1,030,000 by age 65.*

*Assumes an annual growth rate of 5% net of charges.

These figures are examples only and are not guaranteed. What you get back will depend on your investment performance and the tax treatment of your savings. You could get back more or less than this.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Pensions: Explaining The Tapered Annual Allowance

Introduction

For those earning a high income, it’s essential to understand the implications of the Tapered Annual Allowance on making pension contributions. This guide offers an overview of the tapered annual allowance and its operational mechanism.

Understanding when the Annual Allowance is Tapered

Pension tapering regulates the amount high-earning individuals can contribute to their pensions annually while still receiving the full benefits of tax relief.

For the 2024/25 tax year, the standard annual allowance is set at £60,000. Nonetheless, those earning a higher income may see their allowance reduced to as low as £10,000, based on their total yearly income.

Individuals with a ‘threshold income’ over £200,000 and an ‘adjusted income’ over £260,000 are subject to the tapered annual allowance. The reduction in allowance halts when ‘adjusted income’ exceeds £360,000, setting the annual allowance to a minimal £10,000 for pension savings that receive the full benefit of tax relief.

Broadly, ‘Threshold Income’ includes all taxable income received in the tax year, including rental income, bonuses, dividend, and other taxable benefits.  From this you deduct any personal pension contributions to personal pension scheme.

‘Adjusted income’ includes all taxable income plus any employer pension contributions and most personal contributions to an occupational pension scheme.

Mechanics of the Tapered Annual Allowance

Individuals exceeding both a ‘threshold income’ of £200,000 and ‘adjusted income’ of £260,000 will experience a reduction in their annual allowance by £1 for every £2 exceeding £260,000 in adjusted income.

For instance, an ‘adjusted income’ of £280,000 reduces the annual allowance by £10,000, resulting in a £50,000 allowance instead of £60,000.

Tapered Annual Allowance and Carry Forward

The tapered annual allowance does not prohibit the use of carry forward rules, which permit the transfer of unused annual allowance from the previous three tax years. The tapered allowance for each year determines the amount that can be carried forward.

Employer Contributions and Exceeding the Tapered Annual Allowance

The tapered annual allowance applies to all pension contributions, including those made by employers. Exceeding your annual pension allowance incurs an annual allowance charge at your highest marginal income tax rate.

Calculating Your Tapered Annual Allowance

Determining your adjusted and threshold income can be complex. Additional information on calculating your tapered annual allowance is available on the Government’s website, and consulting an expert Adviser or tax specialist is advisable for tailored planning.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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