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Morfitt & Turnbull

Issue 45   

Apologies for the delay in the issue of this newsletter, which was due to unforeseen circumstances.
Top 10 tax-efficient investing vehicles
Tax-efficient investing has become more of a challenge in recent years, when some perfectly legitimate schemes have been heavily criticised, and become unavailable to many people, fearful of the taxman, despite the arrangements being considered tax avoidance, rather than evasion.
Nonetheless, a number of vehicles are available that come completely without controversy, that are useful to investors especially at this time of year.

Pensions are “as good as it gets” when it comes to tax planning. This is because of the “EET” concept; that is the money is exempt from tax on the way in, exempt when it is invested and taxed on the way out.  

Income tax payers get tax relief upon their contributions. On top of this, you have access to a tax-free lump sum at the age of 55 of 25% of the pension pot value. There are a lot of incentives to contribute to a pension.
If you’re a basic-rate taxpayer you get basic-rate relief, so you don’t have to pay tax on that income that you’ve earned. After paying tax, the government will then put that tax into your pension.

For example, if you pay £8,000 into a pension product, you will have paid £2,000 in income tax on that money. What the government will do is put that £2,000 you’ve paid back into your pension. On top of this, if you are a higher-rate taxpayer, you are getting even more from the government, as you get tax relief at the higher rate, but get taxed at the lower rate when you draw an income normally.
Investment Bonds

All gains and income earned within an investment bond are treated as meeting basic rate tax.

However, withdrawals of up to 5% a year are allowed for up to 20 years without incurring an additional tax charge. If you don’t use your 5% allowance in a given year, the allowance is carried over to the following year i.e. if you make no withdrawals in year one, you could draw up to 10% the following year without incurring a tax liability.

So if you’re a higher rate or additional rate taxpayer, paying 40% or 45% tax on income in the current tax year, an investment bond can minimise your income tax bill. However, your tax bill does not disappear entirely. Instead, the tax is deferred and any additional tax due could be payable at the time you cash in the bond, or when it matures.

All gains are treated as income at this point. Although tax at 20% has already been deducted, you might have an additional income tax bill if your gains push your income over the higher or additional rate tax threshold in the year they mature.

You might be able to avoid this by using a method known as ‘top slicing’. Top slicing works by dividing your profit over the lifetime of your bond (including withdrawals) by the number of years the bond has been held. If the resulting figure, when added to your other income for the tax year, is below the higher-rate tax threshold, there is no extra tax to pay.

However, if the top-sliced profits still push you over the higher rate tax threshold for the year, then additional tax must be paid on the entire gain.
Venture Capital Trusts (VCT's)

VCTs are becoming more and more popular, and are a means by which the government brings in money to young companies needing capital. Not all of them will necessarily be successful, but the VCT is run by a professional manager, who selects the companies to invest into.

A client will invest a certain amount of money into the VCT, and can claim tax relief at 30 per cent. This means that if you invest £20,000 in a VCT, you will get £6,000 of that back to offset against tax paid. This will only work if enough tax has been paid to start with, if only £6,000 has been paid in tax that year, you cannot claim more than £6,000 through the VCT.

The investor has to hold the investment for five years, and you access it by buying shares in a new issue, while cashing in by selling the shares. Clearly this does not work with people who pay no tax as they will not get any benefit, and for high-net worth taxpayers who are paying 40 per cent, there will be a 10 percentage point disparity.
This tax incentive is popular, not least because of changes to the pension allowance rules brought in a few years ago. As it is very easy to go over the allowances, in which case you would get fined by HM Revenue & Customs, and to pay that fine, you cannot resort to taking your money out of your pension in most circumstances. VCTs are the next best area to consider investing in. But it’s high risk, so don’t let the tax tail wag the investment dog.     Venture Capital

This is another, more risky way of mitigating tax, and work on similar principles to VCTs in that the government is trying to encourage investment into early stage companies. Investors can invest as much as £1m a year into a qualifying company, for which they receive 30% income tax relief. Once held beyond three years, the investment gains are free of capital gains tax and exempt from inheritance tax as well.

These are a good tool for clients who have had a particularly successful year and are looking for a way to mitigate a painfully high income-tax bill or defer a CGT liability. The EIS is considered to be highly risky as the chance of losing an investment is relatively high, compared to mainstream schemes, so it is not for the unsophisticated investor.
Cash, stocks and shares ISA’s

ISA’s are the original tax-efficient vehicle. They started out offering a stocks and shares, cash and life insurance ISA, where all the gains or interest are received tax-free. Now we have cash, stocks and shares, innovative finance, and lifetime.

The maximum amount you can put into your ISA in the 2018-19 tax year is £20,000, which can be put in its entirety into one type of ISA or spread across different types of ISA’s. Historically, the initial route into saving was through a PEP from 1987 and then ISA's from 1999. Cash ISA's were popular when banks and building societies were paying a decent rate of return. But with interest rates still at historic lows, Cash ISA’s are barely paying 1% in most cases.
Stocks and shares ISA’s are more complicated and are offered by a range of investment houses and is the entry point for many getting involved in the stock market. They are incredibly popular as investors are normally prepared to invest to get a better return in a stocks and shares ISA rather than Cash. However, it’s better to have some money sitting in useable cash for a short-term emergency, but longer-term, cash isn’t usually the best option. Stocks and shares ISA’s should be viewed as a medium to long term investment, certainly at least five years.   Growth
Lifetime ISA (LISA)

The LISA is a form of savings vehicle, either for buying a home or building up a pension. You must open one before the age of 40, and the maximum you can put in it is £4,000 a year, as part of the annual ISA allowance.

You can keep adding money to it until the age of 50, after which point the account stays open until you want to access it. The government puts in a 25% bonus each year, up to a maximum of £1,000. You can take money out if you are is buying a home, or withdrawing for a pension after age 60. The focus for most Lisa investors will be on saving to buy a property.
National Savings and Investments prize bonds

A lesser known form of tax-efficient savings are NS&I prize bonds. While some might consider it a form of gambling, premium bonds allow people to invest up to £50,000 into the ‘prize draw’ and then hope to get a prize – which can vary from £25 to £1m, all of which is paid tax-free.

Each £1 is counted as a unit that goes towards being entered into the draw and NS&I says that each £1 has a 24,500-to-one chance of winning some ‘interest’. So it therefore means that the bonds work completely differently to conventional savings accounts. For many investors it’s a nice, straightforward savings account to use. Some people may argue that as interest rates are historically low, the gamble is less.
Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme is similar to the EIS, but the companies being invested in are at an even earlier stage of development. This means the tax benefits are greater, so that you get 50% income tax relief, as opposed to 30% and this can be received in the tax year the investment is made.

An investor can only put in a maximum of £100,000 a year, which can be spread over a number of companies. However, these investments are very risky and so should only be used by sophisticated investors – the company must be no more than two years old.
AIM Shares

Anyone wanting to mitigate their IHT bill can invest in AIM shares. These will be exempt from IHT if held for more than two years, as they qualify for Business Property Relief. However, they are considered to be mostly risky investments, and are not suitable for the majority of people, as the risks can outweigh the tax advantages.

There is an argument for including smaller company shares in an investment portfolio through, as they are usually more dynamic and have greater growth potential than larger firms. However, there are greater risks involved with smaller companies. Not only are they usually less secure than larger firms with less financial backing, but their shares are more illiquid with fewer people willing to buy them when times are difficult. This means it can be difficult to sell when you want and at the price you want.

Profits from woodlands run on a commercial basis are free from income tax and exempt from CGT. There can also be some IHT benefits. However, these investments are only suitable for very wealthy individuals because of the high costs involved.
If you’d like any further information regarding any of the above investment vehicles before the end of the tax year please do not hesitate to contact us.



Adam's Technical...  Estate Administration
On an individual’s death the Executor(s) is placed in charge of dealing with the administration of the estate and must follow the deceased’s wishes.
Part of this process involves applying for probate which incurs a fee. This Probate fee is currently fixed at £215 or reduced to £155 if done through a solicitor (plus their fee). Estates under £5,000 do not have to pay a fee.

From this April the above fee will no longer exist. It is being replaced by a fee based on the size of the estate, split into seven bands.
The new fee model will be as follows:
Estate Band Fee Payable
Under £50,000* Nil
£50,000 up to £300,000 £250
£300,000 up to £500,000 £750
£500,000 up to £1 million £2,500
£1 million up to £1.6 million £4,000
£1.6 million up to £2 million £5,000
£2 million and over £6,000
             *an increase from the current £5,000
The Ministry of Justice has said that the current fee model does not raise sufficient revenue to fund the court system. This new structure will mean it can be properly funded.

If you wish to discuss, please contact your Morfitt & Turnbull adviser.

Gareth Says... 

Is it time for Infrastructure?

What is Infrastructure?

Infrastructure invests in projects such as roads, railways, ports, airports, telecoms, electricity, gas, water supply & sewerage, hospitals, renewable energy, education etc.
Why would it do well at present?

Most equity funds struggled in 2018. Infrastructure has a low correlation to equity markets, low volatility and defensive properties. Infrastructure is also a hedge against rising inflation with many companies having inflation linked contracts, meaning returns and income should hold up well when inflation occurs.

Is it risky?

We only rate infrastructure as risk grade 4 on our usual scale of 1-10 (10 is high) the funds we have identified have an income of 3.4% p.a. for 1st State Global Listed Infrastructure and 2.2% p.a. for the M&G Global Listed Infrastructure fund. The funds geographically are invested diversely, but both have a bias towards America so currency will come “into play”.

ISA season

Many of you have invested into the 1st State fund previously – we are getting close to new ISA’s in April. If this is of interest please contact your usual consultant to see if it is appropriate for you.

Staff Matters
With Brexit constantly being in the News these days we did an office survey to find out where we would holiday if we remained in the UK.
Gareth –   North West Scotland
Pauline –   Cornwall and Devon.
Craig –   Windermere
Martin –   Tudweliog in Wales
Adam –   Wiseman’s Bridge, Near Tenby, South Wales.
Stuart –   Grasmere, Lake District
Lisa –   Cotswolds and the Lake District
Annie –   Cornwall
Zara –   Cornwall
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