Autumn Newsletter

In The Autumn Edition Of Our Newsletter, We Are Pleased To Include The Following Commentaries On:

Tax Returns; Inheritance Tax & Capital Gains Tax on Property; Employing Family Members
by Dominic Charles, Fellow Chartered Accountant at Vor Accounting Limited

Specialised Will-Writing Companies
by Emily Hecker, Legal Assistant at Rohan Solicitors

Inheritance Tax Abolition; Consumer Duty; Investment Markets
by Gianni Campopiano, Managing Director & Chartered Financial Planner of Independent, Advanced &
Clear Ltd t/a Foundation Financial Planning

Vale Farm, Warrs Hill Road
North Chailey
East Sussex
BN8 4JE
TEL: 01444 63503
EMAIL: dominic@voraccounting.co.uk 

In this newsletter I am covering a number of areas that may be of interest to anyone who:

• Has to complete tax returns (income tax or inheritance tax) and doesn’t want to pay penalties for late or incorrect submission.
• Is thinking of giving their home to their children – the tax implications.
• Thinking of employing family members in their business.

Penalties For Failing To Comply With HMRC Deadline For Self-Assessment, CGT and Inheritance Tax

Ignore submitting and making any tax payments to HMRC by the due date and you will likely receive a penalty and also be charged interest on any overdue amounts.  Note that if you fail to notify the HMRC of any taxable income you can also face additional penalties which are driven by “behaviour” …i.e. was it deliberate or not.  The simple answer is; be on time and be honest!

Here are two of the key ones to be aware of (and all taxes have their own rules):

 Giving Your Home To Your Children

Capital Gains Tax

• A formal transfer of property will be a valid gift for CGT purposes.
• The donor would be subject to CGT based on the market value of the property.
• The gift will qualify for Private Residence Relief (PRR) subject to meeting the usual conditions.
• Any value not relieved from CGT, for example by PRR, will be subject to CGT at 18% and/or 28%, depending on income levels. 
• Where there is a tax liability, the disposal will need to be reported to HMRC within 60 days of completion.

Inheritance Tax (IHT)

• If the gift is effective for IHT, it will only fall out of the estate completely after seven years.
• Taper reliefis available after three years, but only to the extent that any value remains after the nil-rate band (currently £325,000, and frozen to 2027-28) is deducted.
• Gift With Reservation (GWR):
  • If the parents continue to live in the property following the gift, the gift will be caught by the Gift With Reservation(GWR) rules.
  • As a consequence, the property will remain part of the IHT estate of the parents unless “full consideration” is paid to the children for the parents’ continued occupation (i.e. rent that would be payable if the property was let under a standard lease).
  • You may still be eligible to claim the Residence Nil Rate Band under the downsizing rules.
  • There is no requirement that you own a home on death for these rules to apply.
  • The amount which can be claimed will be equal to the downsizing addition for the home you have given away.

Other issues to consider:

• The receipt of rental income is taxable property incomefor the children. There is no corresponding tax deduction for the parents for the cost of the rent.
• The parents would no longer be the legal owners of the property they live in. This is an unacceptable risk for some, especially if there are concerns around children divorcing/remarrying or other issues e.g. bankruptcy.
• The gift of property might be considered by local councils as deliberate deprivation of capital when considering whether any care or nursing home fees are payable. 
• Minor children (those under 18) cannot legally own real estate in their own name. Property may need to be held on bare trust, or under a more formal Trust structure. 

Employing Family Members in Your Business
(Sole Trader, Limited Company or Partnership)

This is often used as a tax efficient approach to extracting money from a business.  However, it needs to be carefully thought through and implemented (there are many payroll requirements that cannot  be overlooked!)

Overview:

• You can employ your spouse, civil partner or other family members whether you operate as a sole trader or partnership business or via your company.
• Wages must equal to or be above the current National Minimum Wage (NMW), or National Living Wage (NLW).
• HMRC may challenge the rate of remuneration paid to family members if they consider that the expense is not ‘Wholly and Exclusively incurred’ for the purposes of the business (ensure clear job / role, contract of employment, wages paid into the person’s personal account and not a joint account, and remuneration is reasonable for the work undertaken on the ‘arm’s length principle’)
• Employers’ National Insurance Contributions (NICs) stand at 13.8%. It may be better to bring the spouse into the business as a partner so that profits can be shared.

Tax planning:

• Consider first whether a spouse should be an employee or whether the business should become a partnership and the spouse a partner. This can save Employers National Insurance (unless the Employment Allowance applies) and may remove any taxable employee benefit charges on cars.
• Work out the tax cost of the wages proposed, depending on the tax year.

As ever the above is a snapshot of key aspects.  The above is to make you aware of some of the considerations.  Please talk to your accountant or financial adviser.

Dominic P Charles, BSc
Fellow Chartered Accountant
Vör is a member practice of the ICAEW and is supervised by them for anti-money laundering regulation.

   
We are happy to assist you.
Whatever legal need, please contact us. We deliver concise, constructive advice in plain English and are fully focused on achieving a solution that’s right for you.
Office Hours: 8.30am – 5.30pm Monday to Friday

Rohan Solicitors LLP
Aberdeen House, South Road, Haywards Heath, West Sussex, RH16 4NG
T: +44(0) 1444 450901 / F:+44(0) 1444 440437
DX: 300314 Haywards Heath E: partners@rohansolicitors.co.uk

Specialised Will-Writing Companies: Are the “Savings” Worth it?

Although solicitors remain the dominant force when providing will writing services, the use of specialist will-writing companies is on the rise, with nearly one in four people using companies who promise quick turnarounds for “rock bottom” prices.

However, the success of these specialist companies has been met with an influx of clients requiring solicitors to correct their will; either because it doesn’t reflect their wishes, or because they simply don’t understand it. In the worst circumstances, executors are left with wills that are so unnecessarily complicated that estate administration is nearly impossible. Of course, specialist will-writing companies have not gained popularity without merit, but it is important to know the difference between them and other legal professionals when instructing someone to prepare your will.

Many people are not aware that anybody can be a Will Writer irrespective of their qualifications or expertise. These companies are also not subject to compulsory regulation, although some do choose to be members of a regulated body. It is therefore difficult to ensure will-writing companies provide all customers with a satisfactory standard of service.  Legal professionals are regulated and have the qualified expertise to give in-depth legal advice that considers all of a clients domestic and financial circumstances.

This may not seem an issue for those who know what they want in their will, but complications could arise if the will is challenged later. Family units have become more complex, and it is not uncommon to exclude people from your will. Solicitors can advise clients of the likelihood of their will being challenged and are legally required to keep detailed records of client meetings, offering greater protection should a dispute arise.

Another aspect to consider is costs. Many people are reluctant to instruct solicitors due to the general assumption that doing so is costly. It is therefore not surprising that will writers offering their services for as little as £19.99 are gaining popularity. However, to recuperate their costs, many companies only offer very basic wills at these prices and charge for “extra” clauses required. We know that in one instance a client was charged £250 for a simple exclusion clause alone.

We’ve experienced many cases where clients have inadvertently named the will-writing company as their executor or have included lengthy and complex Trust clauses with the company as Trustee. Not only does this significantly increase the cost of a will, but it can also lead to huge estate administration costs further down the line. In one case, we prepared a Deed of Variation removing a Trust from a will that did not reflect the wishes of the deceased. As joint executor, the will-writing company signed the Deed and charged £350 for doing so, highlighting the significant fees they could charge for estate administration.

Finally, strict rules relating to the succession of legal practices means your will won’t disappear if a firm stops operating. Most firms also don’t charge will storage fees. We are aware that wills are frequently lost when will-writing companies close down, leaving clients, and executors, without any guidance as to where they can obtain these documents.

As Solicitors, we always recommend using legal professionals for the reasons outlined above and more. Not only do solicitors have the expertise to ensure your will reflects your wishes, but we are able to provide in-depth advice which caters to your personal circumstances. And, although a professionally drafted will may seem like a luxury, solicitor’s fees are often far less than people think. In the long run, solicitor clients will likely save money, without having to pay to rectify their will in the future.

If you would like any help drafting a will, or updating an existing one, please do not hesitate to contact us here at Rohan Solicitors.

Emily Hecker
Litigation Partner

 Contact us by email
  01444 410 276
 1st & 2nd Floor Front Office Suites, 38-42a South Road, Haywards Heath, RH16 4LA

Inheritance Tax Abolition?

Over the past week, there has been much speculation in the financial and mainstream press that changes to Inheritance Tax (IHT) may be on the horizon.

In January 2018, the then Chancellor, Philip Hammond, asked the Office of Tax Simplification (OTS) – an oxymoron if ever there was one – to review a wide range of administrative and technical aspects of IHT.  It was reported that IHT simplification was to be rolled out in 2020, but as we all know, the world turned upside down in 2020 and as such, nothing has changed on the IHT landscape.

What is now being reported is that government is exploring major changes to IHT in a bid to appeal to voters ahead of the general election in 2024.  These could include scrapping IHT in entirety or cutting the rate of tax from 40%.

You may recall the now Chancellor, Jeremy Hunt, stating in November 2022 that tax cuts would be virtually impossible and it could be argued that the removal of the pensions lifetime allowance and corresponding tax charge has made inroads into assisting those who are in IHT territory, as leaving capital inside pension arrangements means this capital is outside of the estate for the purposes of IHT.

Of the 722,000 deaths on record in 2020-21, just 27,000 estates paid IHT, representing a charge for less than 4% of deaths (source: Financial Times).  Again, IHT revenues make up less than 1% of total tax revenues.

IHT is a highly divisive tax and is also referred to in our industry as the avoidable tax, so whatever changes (if anything), we will be well placed to ensure client circumstances and objectives are optimised.

Consumer Duty

Whilst I sent communication about this new initiative in August, for those who may have missed this, I thought it worth reposting for those who may have missed this communication given its significance to our industry.

Consumer Duty is the biggest change from a regulatory perspective in our industry since the launch of The Retail Distribution Review in December 2012.

The FCA states: “Our Duty sets higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first.”

This new initiative covers four areas of retail financial services: Price & Value, Understanding, Support and Products & Services. 

Furthermore, the FCA expect firms to act in good faith, avoid foreseeable harm and be instrumental in helping their clients achieve their financial objectives. All of which make sense and is what we have always adhered to, even before this new FCA initiative.

We have posted four guides on our website explaining our approach to the four areas referred to above and hope you will find them informative and useful.

You will note that the FCA expects us to monitor our approach to these four areas so we can adjust the way we work to provide a better service for you, so I hope you can help us out by providing feedback from time to time.

Investment Markets

Andrew Bailey, who runs the Bank of England, has just confirmed interest rates will not rise. This is after 14 times in the last two or so years when he has said that interest rates will rise. This news is a relief to individuals and to businesses. I think we all realise this pause in interest rate increases does not mean interest rates will now come down or that they will not go up again in the future.

Jay Powell, who does the same job as Andrew Bailey, has also decided to pause any interest rate rises in the US and this is good too.

We all know interest rates have been rising for some time and what goes up comes down, right? I am afraid not. The outlook for interest rates whilst slightly downwards in direction in the shorter term, this downward direction seems to be levelling out at around 4.25%. Interest rates are currently at 5.25%. 

Interest rates at 4.25% is a very new financial environment. Interest rates have been around 1% since 2009 through to June 2022.  Investment markets have coined the phrase “higher for longer” meaning the cost of capital is likely to stay high for at least the medium term (up to 5 years) and this will have consequences:

• Individuals will borrow less or not at all.
• Individuals and businesses may struggle to service their loan repayments.
• Because money will be more expensive to borrow (restricted) there will be less liquidity.
• Investors will be more risk averse because the margin for error will be restricted in the financing of ventures or capital investment. 
• Because the servicing of loans is costing more there is less to spend in other areas (this goes for individuals and businesses).

Higher interest rate rises started in June 22 as mentioned above, that is only 15 months ago, a relatively short period and most people can absorb that. If someone wanted a new kitchen in June 22, they were unlikely to reverse that decision if interest rates increased by half a percent in that month. However, in the light of 13 interest rate rises since June 22, they may decide to defer a decision now to buy a new bathroom. There are others but this is an example of how it takes time for interest rate rises to change consumer behaviour.

The other factor to bear in mind is how much prices have risen. Marmite for example, as reported in the Financial Times by Simon Edelsten, has risen by 23% in the last year. Much more than inflation and this is an example of why equities can be a good hedge against inflation. The Grocer magazine reported recently that Dove soap is being made 10% smaller. This is called shrinkflation, as you may be aware. I think both of these products are manufactured by Unilever and Unilever is in most of our client portfolios.

From a client portfolio perspective this has been a difficult time. Portfolio values have been under pressure but it’s important to note that until losses are crystallised, i.e., investments that have made losses are sold, these are paper losses only. When we do sell investments that have lost value, i.e., at a low, with the proceeds of these investments we look to buy into areas that are also at a low but in different sectors or different geographies with good prospects for growth because of the change in economic conditions.

Foundation Financial Planning survey the investment market continually giving us the best chance to ensure our client portfolios are positioned to take advantage where possible.

Please remember to confirm receipt of your investment recommendations and confirm we can proceed so we can execute the changes we recommend at annual review or where you invest new capital which is even more important because of the above. Just because you give us consent to proceed this does not mean you take responsibility for the investment advice; the responsibility lies with us.

Copies of this newsletter and past newsletters are on our new website together with copies of the monthly commentary we attach to client annual reviews.

Thank you.

Gianni Campopiano
Managing Director & Chartered Financial Planner

Independent, Advanced & Clear Ltd, T/A Foundation Financial Planning is authorised and regulated by the Financial Conduct Authority. FCA Number: 917076