AIM shares, ISAs and Inheritance Tax

AIM shares, ISAs and Inheritance Tax

Following recent changes in the taxation benefits of ISAs and Inheritance Tax, we wanted to expand on certain AIM shares which benefit from Business Property Relief or BPR and can now be held within an ISA account. Qualifying AIM shares benefit from BRP once they have been held by an investor for a minimum of two years, after this period they are exempt from inheritance tax. This mean for investors holding these shares in their ISA account for the two-year qualifying period should benefit from virtually no taxes while they hold the share, and no potential inheritance tax liability, which is currently charged at 40%.

Please remember the value of tax shelters will depend on individual circumstances, and tax rules can change over time.

Following the introduction of new ISA rules many investors are now looking to transfer their AIM shares into an ISA account, typically using a Bed & ISA service. The good news is that this doesn’t affect the qualifying period so, for example, if you transfer AIM shares you have already held for two years this inheritance tax benefit will be retained within the ISA, without them needing to be held for a further two years.

So which AIM stocks qualify?

There is no definitive list of which AIM stocks qualify for business property relief. This is largely because the qualification status of a company or businesses can change over time. The latest HMRC guidance is available at http://www.hmrc.gov.uk/cto/customerguide/page16.htm.

Please bear in mind AIM stocks typically involve taking greater investment risk, make sure you understand all the consequences. We always recommend you seek professional advice. Your portfolio could fall in value and be worth less than your originally invested.

Inheritance Tax: main residence nil-rate band

Inheritance Tax: main residence nil-rate band

A quick recap thanks to HMRC…

Who is likely to be affected

Individuals with direct descendants who have an estate (including a main residence) with total assets above the Inheritance Tax (IHT) threshold (or nil-rate band) of £325,000 and personal representatives of deceased persons.

General description of the measure

This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.

This will be:

  • £100,000 in 2017 to 2018
  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2021

It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.

The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.

HMRC Allowable Gifts for Inheritance Tax

HMRC Allowable Gifts for Inheritance Tax

There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.  There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime – as long as they live in the UK permanently. Other gifts count towards the value of your estate. There may be Inheritance Tax to pay if you’ve given away more than £325,000, but only if you die within 7 years.

What counts as a gift

A gift can be:

  • Anything that has a value, such as money, property, possessions
  • A loss in value when something’s transferred, for example if you sell your house to your child for less than it is worth, the difference in value counts as a gift.

Exempted gifts

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year – but only for one year.

Each tax year, you can also give away:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great grandchild, £5,000 for a child)
  • normal gifts out of your income, for example Christmas or birthday presents – you must still be able to maintain your standard of living after making the gift
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • gifts to charities and political parties

Small gifts up to £250

You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.

The 7 year rule

If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

IHT

Remember – Gifts are not counted towards the value of your estate after 7 years.

Please note this article is for information purposes only.

End of Tax Year Checklist

End of Tax Year Checklist

Make the most of the tax year end with these helpful tax allowance tips. Please note tax rules are subject to change over time and the benefits of these tax wrappers depend on individual circumstances.

  • Open an ISA (Individual Savings Account) – You can shelter upto £15,240 from income and capital gains tax this year. Remember if you dont lose your ISA allowance for the tax year, you lose it!
  • Open a Junior ISA – The junior ISA allowance is currently £4,080 and offer similar tax benefits to adult ISAs. All children are now eligible for these new tax wrappers.
  • Use your Personal Allowance – Reports are suggested that the Chancellor is considering cutting tax relief in an effort to reduce costs, this could mean higher rate and additional rate tax payers lose out.
  • Use your Capital Gains Tax Allowance (CGT) – This tax year you can realise £11,100 without paying tax, if you hold shares or funds outside of a tax wrapper it could be a good time to sell some.
  • Reduce your Inheritance Tax (IHT) – Make gifts of upto £3,000 from capital each tax year, which will be exempt from inheritance tax. You can also carry forward any unused allowance from last tax year.
  • Seek advice – if you need help in making the most of your tax shelters and allowances, speak to an Independent Financial Adviser who can assist you.
Family Home Allowance

Family Home Allowance

Inheritance Tax what’s changing?

Everyone is currently entitled to pass on £325,000 of wealth tax free (allowance is transferable for married couples to the survivor), regardless of whether or not they own a residence. Commonly known as the tax-free threshold, or “nil-rate band”. Any assets in an estate above this amount incur an IHT charge of 40%.

However, from April 2017 the Government is introducing a new, additional tax-free allowance for people who own a home. This is going to be called the “family home allowance”. It will eventually be worth an additional £175,000 per person. Added to the existing allowance of £325,000 that everyone gets, resulting in a new allowance for property owners of £500,000 – or £1m for couples.

This additional IHT perk will also be transferable between married couples and civil partners, even if one partner dies before its introduction in 2017.

Family Home Allowance

The Family Home Allowance will be introduced gradually over four years, with the allowance worth £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2020-21. Estates that are worth more than £2m will lose some or all of the family home allowance, which will be tapered at a rate of £1 for every £2 over the £2m threshold, resulting in more Inheritance Tax to pay.

The family home allowance and the taper threshold will increase in line with inflation as measured by the consumer prices index (CPI) from 2021-22. The existing £325,000 nil-rate IHT band will remain frozen until at least the end of 2020-21.

To qualify for the family home allowance, the property must have been the main home at some point and must be left to one or more direct descendants. This includes children, stepchildren, adopted children and foster children, and grandchildren, but not other relatives such as a nieces and nephews. If there is more than one property in the estate, only one will qualify for the family home allowance.

If a home is sold or downsized on or after July 8 2015, the family home allowance will still be available as long as assets of an equivalent value are passed to direct descendants.

In a valuable quirk, if one partner dies before April 2017 the survivor will be able to use both of their family home allowances when he or she dies to help offset Inheritance Tax. This is regardless of other factors such as whether the first spouse owned a share in the property or had already passed a share to children.

Please note this article is intended for information purposes only and should not be taken as advice. Always seek professional help with your Inheritance tax (IHT) planning needs

Pension Reforms in April 2015

Pension Reforms in April 2015

PENSION REFORMS – It’s All Changing

As many of you may already know the Government have recently proposed the biggest changes surrounding pensions that have been seen for many decades. These changes aim to provide people with the freedom and flexibility to choose how they access their pensions from April 2015.

Previously, the Government attempted to steer most people to purchase annuities (income for life contracts) with their retirement pots however, historically annuities often provide a low annual income and the pension pot is potentially lost after an individual dies. Therefore, the changes supply people with more choice with the money they have worked hard to save.

Prior to the Transition Rules the pension pot options were:

Pension unlocking in AprilSource: gov.co.uk

The Government in March 2014 announced some transitional rules until the new pension rules are launched in April 2015, which allowed the following:

  • Trivia Commutation increased to £30k from age 55.
  • Capped drawdown increased to 150% of GAD
  • Flexible drawdown only required a secure income of £12,000.
  • Small pension pot increased from £2k to £10k

PENSIONS UNLOCKED

With these changes, the Government is determined to offer individuals more flexibility in regards to how they take their pension. Irrelevant of the size of your pension pot, individuals aged 55 or over in April 2015, will have absolute freedom in regards to how much they can draw out of their pension, and when they choose. There are no limits or restrictions set by the Government and individuals will only pay their marginal rate of income tax, whilst still benefiting from taking up to 25% of your pension pot tax free.

INHERITANCE TAX SAVINGS (IHT)

These changes will generate several benefits including Inheritance Tax. Previously, once you started taking money from a pension pot it became part of your estate, consequently beneficiaries could end up paying 40% IHT tax. Now, if an individual dies before reaching age 75, their pension pot can be passed on completely tax free and therefore, does not fall into your estate.

TAX CONSIDERATIONS – it’s not all free

However, there are tax implications that need to be considered. If you take out your pension pot as a lump sum, or empty your pension pot in the first few years, although you will receive 25% tax free, you will have to pay a marginal rate of income tax on it depending on the amount, either 0%, 20%, 40% or 45% which could amount to more tax paid than if you gradually paid yourself an income over 20 years.

Therefore, it is essential that you obtain professional advice from a financial adviser to establish the most appropriate method of obtaining your retirement income; as it will help you to take an income that doesn’t drain your pension pot whilst also determining the best route to take in regards to tax planning.

Although the flexibility and freedom these changes are bringing to pensions can benefit you, it is also important to be aware that if you spend all your pension pot too quickly and find that you are then living off the state pension, you may have to contemplate going back to work. Therefore, it is necessary to plan ahead with your retirement income as with life expectancy rising, you may find that you are working or going back to work for much longer than anticipated.

STATE PENSIONS – A Flat rate Credit

Seeking help from a financial adviser is crucial with helping with your financial planning. If you have reached your state pension age and are still currently working or are not in desperate need of it, you could benefit in the long term from deferring it.

Currently, if you were to defer your state pension for just one year, your pension would increase by 10%, and after this year, you could request that any deferred pension is given as a lump sum. Therefore, if you are in good health or want to continue working for a little longer, you would benefit considerably from deferring your state pension. However, with the new flat-rate state pension being introduced in 2016, deferring your state pension will only increase by 5.8%. In order to qualify for this new flat-rate state pension, you must have contributed 35 years’ worth of National Insurance contributions, which would provide you with £152 per week.

According to Government figures, only 45% of new pensioners will be entitled to the new flat-rate state pension. Therefore, it seems the majority might benefit greatly from deferring their state pension.

To find out more or to speak to a financial adviser call Heritage Financial Solutions Ltd on 01352 770 845, or email us at info@heritagefs.co.uk.

Understand the New NISA Rules

On 1 July 2014 ISAs changed. The New ISA, or “NISA” (New Individual Savings Account) changes allow ISAs to be used as a home for even more money by increasing the yearly contribution limit, and improve flexibility by allowing money to be transferred from stocks and shares ISAs into cash ISAs.

NISA qualification

Different NISAs have varying degrees of qualification. You must be:

  • Aged 16 or over to open a cash NISA
  • Aged 18 or over to open a stocks and shares NISA
  • There are separate NISAs for children under the age of 16 – these are called junior NISAs

NISA allowance

The allowance is the amount the government permits you to invest in your NISA accounts during each tax year. At the start of each new tax year (6 April) you’ll receive a new allowance. If you don’t use it, you lose it – the allowance can’t be rolled over to the next tax year. By using your NISA allowance each year it’s possible to accumulate a significant amount of tax-efficient savings.

In the 2014-15 tax year, individuals can invest up to £15,000 a year in cash NISA accounts, stocks and shares NISAs, or any mixture of the two – you can save the entire £15,000 in cash if you so wish. In the 2015-16 tax year this limit will increase to £15,240.

Remember that you’re only able to open a maximum of one cash NISA and one stocks and shares NISA each year. Once open you can transfer money between these different types of NISAs freely, subject to your provider’s terms.

This differs to the old Individual Savings Account (Isa) rule where you could transfer money from cash ISAs to stocks and shares ISAs, but not vice versa.

Transferring NISAs

You can easily switch your NISA provider without losing your tax-free allowance, but it’s vital that you transfer the NISA rather than withdrawing the money to open a new account.

Under the old Isa rules, cash ISAs could be transferred into stocks and shares ISAs, but not vice versa. NISAs allow transfers either way – from stocks and shares to cash and vice versa.

As with ISAs, it is also still possible to transfer each type of NISA to another product of the same type. You can, for example, transfer one cash NISA to another, something you may want to consider to obtain a better interest rate.

Within a tax year you’re only able to transfer the whole of your annual NISA to a new provider. Amounts from previous years may be transferred as a whole or in parts as you wish, but you should be aware that not all NISA providers will allow part transfers.

Pension Advisory Service

Free Retirement Planning Assessment

Heritage Financial Solutions Ltd offers a free initial pension advisory service for anyone who is concerned about retirement planning. Heritage are experts in pension planning and can help you calculate when and how you can retire. Whether your pension pot is £25,000 or £750,000 we can apply our experience and expertise to create a tailored retirement plan for you.

Our Pension Advisory Service includes:

  • Pension Calculator and Forecaster
  • Workplace pensions advice including Auto Enrolment and in many cases how NEST works
  • State Pension provision
  • State Pension Age
  • Data Collection of your existing provision

All of the above elements are designed to pool your existing provision together so we can help identify any gaps in your provision and provide you with a realistic snapshot of where you are now, and where you want to be at retirement. To benefit from this service, contact us today.

 

Enterprise Investment Schemes

Enterprise Investment Schemes

Enterprise Investment Schemes (EISs)

These schemes were launched with the idea of helping smaller companies who carry higher risks to enhance their growth. The main objective was to attempt to inject more finance into these companies to try and further their development.

In order to raise this finance, EISs offers tax advantages to investors when purchasing new shares within these smaller companies. These schemes offer more tax relief than other investment opportunities as they often hold a considerable amount of risk due to investing within one specific company, rather than spreading the risk over several smaller companies such as within a VCT Scheme.

These schemes are usually aimed at individuals who can afford to tie up their money for a longer period of time and individuals who would feel the benefit a considerable amount of tax relief.

Main Benefits

  • Individuals can claim up to 30% relief for income tax amounting to a maximum investment of £1,000,000 (up to £300,000 relief).

This tax relief can only be claimed if you have held the shares usually for at least 3 years (from the date of issue) and if you are not connected to the company.

  • Exemption from Capital Gains Tax

This scheme enables you to have relief on the gains you make from your investment and may even enable you to defer your capital gains tax depending on your circumstances.

  • Relief of 100% can be claimed from inheritance tax

This relief applies as long as you have held these shares for at least 2 years and still own them at death.

  • Loss relief of up to 45% can be claimed

If shares are sold at a loss, this amount, less any relief from income tax allowable, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.

The information provided should be treated solely as a guide and you should seek professional advice regarding your own personal circumstances and objectives.  

The Basics of Business Property Relief

The Basics of Business Property Relief

The Basics of Business Property Relief (BPR)

Business Property Relief or BPR is an area of tax planning that has become increasingly popular in recent years in the mitigation of inheritance tax (IHT) liabilities. Originally designed for entrepreneurs passing on family firms, BPR gives full relief from IHT on assets held for a minimum of two years. But of possibly greater significance is the fact that investors in assets such as portfolios of Alternative Investment Market (AIM) stocks retain access to their investments.

Investments that qualify for BPR include agricultural land, plant, machinery, forestry and suitably qualifying companies listed on AIM and the Enterprise Investment Scheme (EIS). Specifically, AIM stocks must be ‘trading companies’ to qualify for BPR, so things like resources stocks and most property companies do not qualify. Importantly AIM shares can now be held within an ISA wrapper, further sheltering the investment from Income Tax and Capital Gains Tax.

It is also worth noting that investments that use BPR are generally regarding by tax planners as the final stop, after the basic IHT reliefs and trust options have been used, or where the need to retain control of assets is paramount. BPR schemes are typically high risk.

This table summarises what qualifies for business relief & the rate of relief that can be obtained.

Type Rate of relief
A business or an interest in a business. 100%
Unquoted securities which on their own or combined with other unquoted shares or securities give control of an unquoted company 100%
Unquoted shares 100%
Quoted shares which give control of the company 50%
Land or buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership 50%
Land or buildings, machinery or plant available under a life interest and used in a business carried on by the individual 50%

The investment within property/shares must be kept for 2 years in order to qualify for relief.

It is important to be aware that there are many situations where relief is not achievable, for example when:

  • the business mainly deals with stocks, shares or securities, land/buildings or in the making or holding investments;
  • the business is subject to a contract for sale or being wound up;
  • the business is a not-for-profit organisation;
  • the business generates investment income only;
  • the business asset is already qualifying for agricultural relief;
  • the business asset was not used for mainly business purpose within the immediate 2 years from passing it on from wills/gifts;
  • the business asset is not intended for future use within the business and;
  • Loans are made to a business.

It is possible to acquire some relief if a part of a non-qualifying asset is used within your business. 

Important also seek professional advice before considering any tax schemes.

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