Your Wealth - how to hang on to it in recessionary times
When money becomes tight, for whatever the reason, it is important to preserve the income and savings that you do have. A reduction in income can occur for a number of reasons:
- - job insecurity or redundancy
- - the rising cost of living
- - trade or income from your business reducing
- - income from investments reducing
- - taxes and other government charges rising
How can you protect your existing income and savings? There are still things that you can do to ensure your money and property is safeguarded for you and your family. Set out below are some tips:
•1. Lifetime taxation
It seems sensible to ensure that you are paying the correct amount of tax and are not overpaying in any area. Points to consider are:
- review your tax code;
- - look carefully at tax position if you are considering disposing of any assets, for example, you could plan to dispose of a second property or even sell part of your garden for development but before doing so you should take advice to make sure you do not pay too much Capital Gains Tax;
- - take advice from your Accountant or a specialist lawyer about payments into your pension - the rules are changing and you need to act;
- - consider salary sacrifice to get the most out of your pension payments;
- - move as many of your assets as you can into a tax free environment by taking up your ISA allowance each year;
- - if circumstances allow, make gifts to utilise the £3,000 a year allowance for gifts free from inheritance tax on death;
- - consider making gifts out of income which are free from inheritance tax on death, as long as accurate records are kept;
- - consider contributing to the pensions of children and grandchildren to assist them should similar economic circumstances arise in their future.
•2. Your family
You may wish to pass assets on to your family during your lifetime. In some circumstances, this is good tax planning and can reduce the Inheritance Tax liability the deaths of you and your spouse. But you may have concerns about making an absolute gift such as
- - the money may be used for a purpose other than for which the gift is made
- - the money may be used as part of a divorce or matrimonial settlement of the recipient
- - the assets may be lost if the recipient gets into financial troubles.
It is imperative to consider these matters before making gifts to family members as once assets are given away you will not have any control over what happens to them and cannot get them back. It is possible to protect assets that you wish to transfer for the benefit of other members of the family by utilising a trust. By transferring assets into a trust, you and the other Trustee(s) that you appoint retain control of the assets but the value of the assets will fall out of your estate 7 years from making the gift, provided you do not retain any benefit. Depending on the amount of assets transferred into a trust it may raise a charge to Inheritance Tax during your lifetime but the rate payable is half that payable on your estate after your death and if you take specialist legal advice can often be avoided altogether.
Pre-nuptial and co-habitation agreements
Again, for parents who wish to make gifts to children or grandchildren who are married, are in registered civil partnerships or who cohabit, another safety mechanism to consider before making a gift is to request your child or grandchild put in place a pre-nuptial or co-habitation agreement. With a large percentage of marriages and civil partnerships ending in divorce or separation, you may have valid concerns your gift could form part of a financial settlement if your child's relationship ends.
Pre-nuptial agreements are becoming increasingly common and can be a useful tool for setting out the wealth of each party on entering a marriage or civil partnership and can clarify that your gift is to your child only. The existence of the pre-nuptial is one of the decisive factors to be taken into account by the courts when determining a financial settlement .
Similarly, co-habitation agreements are extremely useful for setting out the financial position of each party before they begin to co-habit and can address such issues as the amount of money that each party puts into the purchase of a property and whether any subsequent contributions to renovations or mortgage payments are intended to increase a person's share of the house or not.
When any gift is made to an adult child for the purchase of a jointly owned property, the question of how the property should be owned and who put in what proportion of the deposit and purchase monies must be addressed at the outset. If you do not take advice and a property is purchased as joint tenants by default, the equity in that property will always be split 50/50 between the joint owners unless there are exceptional circumstances. Not an ideal situation if you have provided funds for your child to contribute more than 50% of the purchase price.
Planning is the key. Whether you are disposing of your business, an interest in your business or retiring from employment, you can make a significant difference to the taxation of your assets by getting advice on the timing of the disposal and the way in which your assets are structured before and after such a disposal. When to start drawing from your pension pot needs careful consideration.
If you own a business or a share in a business, your executors can claim up to 100% relief from Inheritance Tax in the event of your death but you must check that your business qualifies for Business Property Relief. A small change in the structure of the business could make the difference. After carefully setting up a business, it is easy to overlook putting in place the correct documentation to ensure that your business will survive in the event of your death or incapacity. You should take specialist legal advice to ensure that your estate benefits from the value you have built up in that business.
There are similar provisions for agricultural property. However, due to the complex nature of the farming and estate industry, this relief needs careful consideration to ensure it applies. Once again it is 100% and therefore very valuable. A few small changes in the organisation of the business can make the difference of paying tax at 40% of the value or none.
•4. Key documents
Getting the basics in place is a worthwhile investment at anytime but particularly in the current economic climate. As a minimum we recommend that you put in place:
- - Wills incorporating current Inheritance Tax minimising provisions;
- - Lasting Powers of Attorney, for property and affairs and also for health and welfare in case you lose mental capacity in the future;
- - Trusts to receive any payments due on your death, such as lump sums from pensions, life insurance and death in service. Such trusts will ensure that payment is received as quickly and easily as possible and can reduce unnecessary Inheritance Tax on your death;
- - Agreement with business partners or shareholders on what happens on your death or incapacity together with insurance to fund the transfer of business and a trust to protect those funds from tax.
Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.