Tax

Introduction on tax planning

Most of us don’t enjoy thinking about tax. We may grit our teeth when we see the shrunken figure which Government deductions leave at the bottom of our pay-slips, but there seems little point complaining about this. Tax, we assume, is just a fact of life.

And yet, when it comes to your savings and investments, a few easy tax-planning measures can dramatically cut the tax you pay. Whether we are talking about the money you earn or the money your savings earn for you, the taxman takes as much as £4 in every £10. If you can reduce – or even eliminate – that tax charge, you guarantee a big boost for the returns you and your family get.

Sometimes this can be as simple as buying a tax-sheltered plan instead of an ordinary investment product. You don’t need to be a financial genius to understand the basic principles that make tax-sheltered plans work. But it’s important to choose a strategy that suits your own unique circumstances.

Life Insurance

i) Life policy payouts

The payouts from the majority of life insurance policies are free of personal tax. But that doesn’t mean you can forget about the issue of tax altogether where your life cover is concerned.

When you die, the proceeds of your life insurance policy are paid to your beneficiaries, and may be subject to inheritance tax (IHT). This tax is charged at 40% on estate value over the nil rate band and includes the value of your home – and could land your heirs with a big bill. Every £250,000 of taxable assets you leave behind could create an IHT bill of £100,000 for your heirs to pay.

Transfers between spouses are free of IHT, and so IHT will not be due if you leave your assets to your husband or wife. Of course, this may merely postpone the problem until the last surviving partner dies, leaving behind a hefty IHT bill due on his or her estate for the couple’s beneficiaries to pay.

There are a whole host of ways in which we can help you minimise the amount of IHT your heirs will face. For example, it may be possible to arrange your life insurance in such a way that the proceeds remain outside your estate, and can be used to meet the IHT liability arising from other assets.

ii) Tax Advantages

Life insurance is not only a way of protecting your family, but can also be a tax-efficient way to save for the future.

Some life policies are structured as bonds, which allow you to fund the policy with a single lump-sum investment and if you want you can draw a regular income. Within certain limits this income is free of immediate tax and if you are a basic rate payer, may remain free of all tax.

Offshore life insurance bonds, based in tax havens like Jersey or the Isle of Man, can be used to defer UK residents’ income tax until the investor falls to a lower tax bracket. Although not suitable for everyone, these products can be used by investors with as little as £5,000 to invest.

Due to the additional complexities of offshore taxation, should you decide to use offshore bonds like these, it is vital that you get all the details of the arrangement right, so be sure to seek appropriate advice

Pensions

Pensions are a particularly good product for tax-conscious investors, because they boost the value of every £1 you invest – as you receive tax relief of at least 20%. Many other products make you wait until your first income payment – or even until the plan matures – before you see any tax benefits.

Pension contributions give you tax relief at the highest rate you pay. For a 40% taxpayer, that means for every £100 invested the Inland Revenue pays in £40, so the net cost to you is only £60. As ever, though, there is a catch. Because of this generous tax break, the taxman strictly limits the proportion of earnings you can put into various types of private pension plans, such as Occupational pension schemes, Stakeholder and Personal Pensions, each year.

Savings

i) Existing PEPs and TESSAs

If you already have money in a PEP or a TESSA, there is no need to close that account before you buy an ISA.

PEP money can continue to grow tax efficiently and you can also move money from one PEP manager to another without losing your investment’s PEP status.

ii) Individual Savings Accounts (ISAs)

Everyone who is over 18 and UK resident should consider taking out one of the Government’s tax-efficient Individual Savings Accounts (ISAs). ISAs replaced new investment in PEPs and TESSAs in April 1999 and allow you to save without you having to pay tax on either the income that investment generates or its capital growth. your investment amount is limited however.

Here are some simple ways to save tax:

1 Consider making the most of your ISA allowance.

2 Consider funding your pension as fully as you can.

3 Make sure your PEPs are still working hard by keeping an eye on fund performance.

4 Remember that tax-free saving is for everyone. Even the most cautious can save tax-free with a cash ISA for £1.

5 Use your tax allowances every year.

6 By planning for IHT now, you could save your heirs as much as £40 for every £100 you leave them.

7 Use your IHT exemptions.

8 Think of the future. You may be a higher-rate taxpayer now, but what about when you retire? Some tax-planning

strategies let you defer tax until you fall to a lower-rate band.

9 Consult Holyoakes Group Ltd or one of our advisers for expert advice.

This information has been approved by a person regulated by the Financial Services Authority (FSA) and is based on Holyoakes Group Ltd's understanding of current legislation and the tax/pension contribution regime that is liable to change in the future. The value of tax benefits will depend on your personal circumstances. Past performance is no guarantee of future performance. The price of units and shares can fall as well as rise and you may not get back the amount you invested.