What Financial Planning should I be doing now?

People have been asking us ‘What financial planning should I be doing now?

A regular review of your financial plan and investments is essential to stay on track. And now, in lockdown, it’s more important than ever.

What opportunities are there for tax and other planning in these current low stock markets?

To get you started, here are four things to consider:

1. Bed and ISA

It’s smart tax and financial planning to use your annual ISA subscription (up to £20,000 in this tax year).

But you might not want to use your cash reserves. So instead you could take advantage of the rather obscurely named ‘Bed and ISA’ system.

Bed and ISA is a way of transferring your existing investments into your ISA without leaving the market. It involves selling and then immediately buying them back in the ISA.

Not so well known, the same process can be used for personal pension contributions (depending on your platform provider). This is known as, not surprisingly ‘Bed and Pension’.

The sale crystallises any gain or loss made for Capital Gains Tax (CGT) purposes. For the current tax year (2020/21) you will pay CGT if the total of all your gains is greater than £12,300.

2. Drip Feed or Phased Investing

Whilst some people are rushing to get into what they see as ‘bargain basement’ investments, others are more fearful. There’s nothing wrong with being cautious at the moment. Nobody has seen this before.

But if you have cash that you’d earmarked for long term investing before COVID-19 took hold how do you decide when to commit to the market?

Consider drip feed or phased investing. This makes the most of another obscure term: pound cost averaging.

Rather than investing a lump sum immediately you put smaller sums into your chosen funds on a regular basis. You buy on the market ups and downs, meaning you’re spreading, or averaging, your base cost.

Using this system we’re finding our clients are feeling more confident about using their ISA and pension allowances for the current 2020/21 tax year.

There are two options:

  1. Either set up a regular monthly payment into their account which is invested when received; or
  2. Put the earmarked cash sum into the account and it’s then scheduled for investment over an agreed period.

3. Give Assets Away

Giving assets away to adult children or grandchildren is a common way to save future inheritance tax (IHT) whilst still keeping the assets in the family.

The gift is treated as a potentially exempt transfer for IHT purposes. So if you survive seven years after making the gift, the value will be excluded from your estate for IHT purposes.

Gifts between spouses are free of capital gains tax (CGT), however, any investments you give to children or grandchildren are taxed as though you sold them at market value.

The taxable gain is the difference between the market value and their original cost.

So if you’ve made total gains in excess of the CGT exemption (£12,300 for 2020/21) you might have to pay CGT on proceeds you didn’t actually get!

Of course, even with the falls in the markets, if you’ve held investments for a while, you’re still likely to have made gains on your original purchase.

However, now might be a good time to gift investments whilst the value is lower. You’ll be liable for CGT on a smaller gain. Or if the value has dropped below what you paid, no gain at all.

4. IHT Savings

When someone dies, inheritance tax is worked out on the value of the estate on the date of death. If this includes shares or funds and their value falls it can mean the IHT charge is unfairly high.

The good news is that a special tax relief is available. If within a year of death, a sale of shares is made for less than the probate value, IHT can be recalculated using the lower value. The shares must be sold for the relief to apply.

Example: Judith died on the 1 October 2019. Her estate included shares worth £70,000. The IHT on these was £28,000 (£70,000 x 40%). In April 2020 they are worth £60,000. The executors can claim a £4,000 reduction in the IHT bill. (£70,000 – £60,000 x 40%)

Note: there are a few traps to be aware of with this so don’t take it at face value.

We strongly recommend you speak to a suitably qualified professional about your financial planning before you make any decisions or take any action.

Risk Warnings: As with all investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you invest.


Photo by Sheri Hooley on Unsplash

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Risk Warnings

This article and the information on this website is not personal advice. It’s only intended to give you a brief summary or highlight a particular issue for you to investigate further. It is based on our current understanding of legislation and HMRC guidance which can change and is correct as of the date of the post.

If you’re in any doubt whether a particular course of action is suitable for your circumstances, you should seek professional advice. Tax rules can change and any benefits depend on individual circumstances. And, if you are unsure any reliefs are applicable to you, you should consult your accountant or HMRC.

The value of investments and any income from them can fall as well as rise, so you could get back less that you put in. Past performance is not a guide to the future. It cannot provide a guarantee of the future returns of a fund.

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