Experts say 2018 is likely to be a challenging year for investors with many headwinds and uncertainties.
Volatile market conditions are expected and deciding what to do with your earnings, what to invest in and how to avoid tax pitfalls will be as important as ever.
Mike Pole runs Pole Arnold, an independent financial advisors based in Narborough Wood Business Park, Enderby, and Phil Bott is a partner at accountancy practice Mark J Rees , in Leicester.
Here are their top tips for readers:
Mike says: “These are really, really important points for all individuals to be aware of and if they do not act on anything else covered in this article then they must act on this.
“I have seen many problems caused for family members on death when these aren’t done properly.
“It’s bad enough to have to deal with the loss of someone and the added stress of trying to resolve the problem of not having an up-to-date will can tip people over the edge.”
• Ensure your wills are up-to-date
• Make sure lasting powers of attorneys are in place so that in the event of your incapacity a trusted family member or friend can look after your financial affairs and make decisions with regards to your health
• If you have a pension fund, ensure that you have nominated who you would like to receive your pension fund in the event of your death.
Mike Pole knows a thing or two about investing
• A Discretionary Trust can be a very useful vehicle for wealthy families with a high exposure to Inheritance Tax and who want to set aside funds for the benefit of children.
Although gifts into a Discretionary Trust attract inheritance tax, the nil-rate band of £325,000 can be used by an individual so that no inheritance tax may be payable on the setting-up of the trust.
There is a 10 year inheritance tax charge of about 6% of the amount in excess of the nil-rate band but this will normally only arise if there is growth in the value of the underlying investments.
• A Discounted Gift Trust is a variation on the above but provides a regular payment and is suitable if you are in reasonable health, want regular payments and want the potential for immediate and future inheritance tax reduction.
• Save money by reviewing your credit card provider and where possible consolidate to a provider with a zero rate of interest on balance transfer/new purchases.
• Aim to repay the balance before the zero interest rate expires.
Sainsburys currently have a no fee balance transfer card.
Don’t get in a spin over credit card repayments
• As sterling continues to struggle against the euro and dollar, it is important to get the best exchange rate available at all times.
Take the stress out of exchanging cash (especially at the airport where rates are often the lowest) or paying unnecessarily high fees with your bank/credit card provider and consider a focused ‘travellers’ credit card for low fees and the best available exchange rate.
For example, the Halifax Clarity Card or the app savvy solution offered by provider ‘Revolut’.
CHECK YOUR TAX CODES
• Check your P60 and tax code each year to make sure you are paying the correct amount of tax. Contact the HMRC to query any items that do not look right on your tax calculation.
For example, if you have moved employers, it is important to check that any deductions or increases that are made against your personal allowance are still applicable (for example, if you no longer receive private medical insurance, you may be paying too much tax).
REVIEW YOUR PREMIUM BONDS
• Premium bonds have been the ‘go to’ for savers for many years but what are the odds that you will achieve a better rate of annual return, compared to investing in a short-term fixed rate cash ISA?
If you are a basic rate tax payer and have £20,000 invested in a cash ISA paying 1.3 per cent per year there is a 0 per cent chance that premium bond will beat this (based on the luck of an average person).
KEEP ON TOP OF YOUR CASH AND SAVINGS
• With the recent interest rate increase (albeit a small one!), it is wise to review any fixed rate bonds that have matured or monies that you have sitting in low paying savings accounts. As at December 2017, Investec are offering a rate of 1.85 per cent on a one year fixed rate bond and your savings will be protected up to £85,000 (this compensation applies per person per institution you save with).
Make use of comparison websites, for example, Moneyfacts as a guide to keep up-to-date with the wide range of savings vehicles available and the latest competitive rates.
• With a little help from HRMC you should make use of your pension annual allowances but don’t forget to claim the additional 20 per cent tax relief if you are a higher rate tax payer.
• Consider making personal pension contributions, especially if you are a higher rate taxpayer. Pension schemes are now much more flexible and can make a considerable difference to planning your optimum future income and the marginal tax-rates applicable. Unused contribution allowances from previous years could be available, which could be attractive to higher rate taxpayers.
• You can contribute £3,600 gross to a pension if you have no earned income and with basic rate tax relief of 20 per cent provided by HMRC this will only cost you £2,880.
• For those with earned income, you (and your employer) can contribute up to 100 per cent of your salary (up to a maximum of £40,000 gross) and for very £1,000 paid to your pension it will effectively cost you £800.
• For higher rate tax payers, a £1,000 contribution will effectively only cost you £600 as 20 per cent tax relief is added by HMRC directly to the scheme and the additional 20 per cent higher rate relief can be claimed via your tax return (or by writing to the HMRC). If you haven’t been claiming higher rate relief on your pension contributions it is possible to do this retrospectively for four tax years.
• Get a State Pension forecast by visiting www.gov.uk – you should receive your expected figures within 10 working days. You will then be able to include these figures within your financial plans and you may be able to improve your entitlement by making additional contributions.
• Transfer your unused personal allowance to your tax paying spouse/civil partner: This is simple and quick to do and you can get a cheque for over £600 to pay off those January credit cards.
• You are able to transfer £1,150 of your personal allowance to your spouse/civil partner if they earn more than you.
• In order to be eligible you must have income of £11,500 or less and your spouse/civil partner must be a basic rate taxpayer (i.e. have an income between £11,501 and £45,000)
• This will reduce their tax bill by £230 in the tax year and it is possible to backdate this 3 years and claim over £600 as a cash rebate
• Capital gains: Each side of a marriage or civil partnership has an annual capital gains tax allowance of £11,300 a year.
If this isn’t used in the tax year it is lost. If you own shares or property in your own name and are planning to sell the asset – and it has a gain greater than £11,300 – before disposing of the asset it would be very efficient to make a tax exempt transfer of half of the asset to your spouse/civil partner. This will then double the tax free exemption to £22,600 (assuming no other gains in the tax year).
• Income tax saving: If one spouse is a higher rate tax payer and another is a basic rate or non tax payer, it is important to review which assets (investments/cash) are held between the higher rate tax payer and the lower rate tax payer.
• Dividend allowance: The tax free dividend allowance is reducing to £2,500 per person next tax year and it is important for both spouses/civil partners to make use of this allowance. This can be simply be achieved by jointly holding a share/investment portfolio.
Expert Phil Bott of Mark J Rees, Leicester
• Consider using your annual ISA allowance of up to £20,000 before 5 April 2018. The additional tax-charge of 7.5% on dividends has made this way forward more attractive for some taxpayers. ISA investments are free from income tax and capital gains tax.
• If you are in business or are a landlord plan to ensure that you maximise your borrowings attracting tax relief on interest paid.
• Consider investing in Venture Capital Trusts if you are comfortable in investing in small unlisted companies. VCTs attract income tax relief at 30% and there is no income tax on dividends or capital gains tax on gains.
• Before you sell an investment or property, prepare a draft capital gains tax calculation so that you may consider the tax rates, the timing of liabilities and the tax planning opportunities.
• Plan to use your annual allowance (£11,300) on a regular basis by spreading the sale of investments.