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Making sense of Capital Gains Tax and your Property 2017 – 2018

Capital Gains Tax (CGT) is a complex area to dip into, so here I’ve tried to give a brief
explanation for the normal situations that many of us face, broken down into the following
sections:

When you don’t have to pay Capital Gains Tax
When you are eligible to pay Capital Gains Tax
How much you will have to pay?
What if you have a second residential property?
Letting relief and Capital Gains Tax
Capital Gains Tax on inherited homes
Capital Gains Tax on gifted homes
Capital Gains Tax Liabilities for UK Non-Residents
Capital Gains Tax on investments
Claiming Entrepreneurs’ Relief against Capital Gains Tax

As always, our advice is to seek clarification on any issues from your Financial Adviser.

When you don’t have to pay Capital Gains Tax.

If you are selling your own home (main place of residence) then the good news is, that it’s
very unlikely that you will need to pay CGT as you will benefit from 'Private Residence Relief'.
If however you are selling a home that you currently rent out, or you are selling a second
home, then CGT may become applicable. That said, there are a number of ways you may be
able to reduce your CGT bill through letting relief or by nominating which of your homes you
wish to be viewed as tax-free.

When you are eligible to pay Capital Gains Tax.

Although not an exclusive list, below are the most common scenarios that activate CGT on a
property sale:

• It is not your main place of residence
• You have developed your home. For example you may have converted part of it into flats
• You have sold part of your garden, where your total plot, including the area you are selling,
is more than half a hectare (1.2 acres)
• You exclusively make use of part of your home for business
• You let out all or part of your home. This doesn’t include having a lodger. To count someone
as a lodger you need to be living in the property too, or they are classed as a tenant
• You moved out of your property 18 months ago
• You bought the property for the purpose of renovating it and selling it on

How much you will have to pay?

The CGT rates for 2017 – 2018 state that when you sell a property, you are allowed to keep a
proportion of the profits tax-free. This is called your Capital Gains Tax Allowance.
In the 2017 – 2018 tax year, you can make a profit of £11,300 before you have to pay CGT.

With basic rate taxpayers paying 18% CGT on property sales over this profit allowance.
Whilst higher-rate and additional-rate taxpayers will have to pay 28%.

What if you have a second residential property?

As long as you haven’t bought your second home with the sole intention of selling it in order
to make a profit, and you use it, then you can nominate which of your two homes will be tax-
free. Just make sure you make the nomination before the two-year deadline from the time you
acquire your new home.

It’s worth noting that the property you nominate doesn’t have to be the one where you live
most of the time. So it makes sense to pick the one you expect to make the largest gain on
when you come to sell.

Civil partners and married couples can only nominate one main home between them, but
unmarried couples can each nominate different homes.

Letting relief and Capital Gains Tax.

Providing the property has been your main home at some point, and you have let out either
all or a part of your home, then you can claim tax relief in the form of Private Residence Relief
for the time it was your main residence, along with the last 18 months of ownership. You can
even claim if you weren't living in the property during those 18 months.

You may also be able to further reduce your capital gains tax bill by claiming Letting Relief.
However, you can't claim Private Residence Relief and Letting Relief for the same period.
The amount of letting relief you can claim will be the lowest of these three:

• £40,000
• The total you receive from the letting proportion of the home
• The total Private Residence Relief you get

Capital Gains Tax on inherited homes.

When someone leaves you their home in their will, you inherit the property at the market
value at the time of their death.

As there is no CGT payable on death, the value of the home is included in the estate and
inheritance tax may be payable instead.

If you sell the property without nominating it as your own home, you won’t be able to claim
Private Residence Relief, so there will be CGT to pay if the value has increase between the
date of death and the date of the sale.

Capital Gains Tax on gifted homes.

If the property is gifted to you during the owner’s lifetime (while they are still living there), this
is termed as a ‘gift with reservation’ and essentially means it still counts for inheritance tax
when the gift giver passes away.

So there will be CGT to pay when you sell the home if the value has increase between the
date of the gift and the date of the sale.

Capital Gains Tax Liabilities for UK Non-Residents.

Unfortunately, being an expat or non-resident in the UK no longer avoids CGT duties. Since
April 2015 British expats and non-residents are required to report the sale or disposal of
properties to HMRC. With the CGT being payable on gains made after 5 April 2015.

Please be aware that you must inform HMRC within 30 days after the ownership transfer
date, even if there is zero tax to pay.

Capital Gains Tax on investments.

Making regular investments is often seen as the smartest way to get into the stock market.
However it can present some challenges if you decide to partially sell your investments. If you
are completely liquidating your portfolio, then the CGT is straightforward – being the total
amount paid into the fund deducted from the proceeds of the final sale gives you the size of
your capital gain. With anything exceeding the £11,100 CGT limit becoming liable at your tax
rate.

It’s when you only liquidate part of your investments that things can become complicated. As
a rule of thumb, if you have bought units at a variety of prices over a period of time, then you
will need to work out the average price per share. You can then calculate your investment
against your gain. Again your financial adviser can help you with this.

Liquidating funds often allows investors to ‘Bed and ISA’. Where investments that are held
outside an ISA are sold and then the same investments are bought back within an ISA
avoiding CGT in the future.

Claiming Entrepreneurs’ Relief against Capital Gains Tax.

Business owners who are selling all or part of their business can claim Entrepreneurs’ Relief
(ER) on the sale and reduce their tax liability to 10% on all qualifying gains.

The main qualifications for ER, are if you dispose of any of the following:

• All or part of your business, including the business’s assets, once it has been closed
– either as a sole trader or business partner
• Shares or securities in a company where you have at least 5% of shares and voting
rights
• Shares you got through an Enterprise Management Incentive (EMI) scheme after 5
April 2013
• Assets you lent to your business or personal company
Once again, this is not an exclusive list and further information can be found here

If you have any questions regarding Capital Gains Tax

As always, if you are in any doubts as to your current situation, or potential CGT obligations,
then you should consult a financial adviser. You are welcome to contact us where we
will be happy to help answer any questions you may have.

Do you know the current position of your Defined Benefit Pension?

I only ask because things have changed quite dramatically recently. In fact, according to PwC, the combined deficit of defined benefit pension funds in the UK is currently standing at a whopping £460bn.

It doesn’t seem to be calming down either, with PwC chief actuary Steven Dicker stating:
“The deficit calculation is based on a ‘gilts+’ approach and is sensitive to even modest market movements. Compounding with the uncertain economic and political climate, the deficits calculated on this basis are likely to remain volatile.”

According to their firm’s Skyval index (which tracks 5,800 DB pension funds), in July and August this year we saw a continued increase in the deficits by a further £40bn.

As always, politics has a role to play

Skyval also tracked the impact of political events and policy decisions on DB deficits in 2016. Unsurprisingly the Brexit vote had the biggest short-term impact on DB pension deficits in 2016 and has an £80bn increase from 23 June to 24 June attributed to it.

PwC’s global pensions head Raj Mody predicts that 2017 will see pension fund trustees and sponsors having to reach much more informed conclusions about how to tackle their pension deficit and to put robust strategies in place.

Mody goes onto suggest “Those involved are increasingly realising the importance of transparency in order to decide appropriate strategy. DB pensions are long-term commitments stretching out over several decades and so there is limited value in pension funds making decisions based on simplified information.”

Time for a plan!

Schemes affected by the deficit have to have a recovery plan in action. So it might be worth looking into what your scheme has mapped out in terms of a action.

What if your sponsoring employer goes bust?

If the sponsoring employer goes bust, the scheme will automatically go into the Pension Protection Fund (PPF).

Unfortunately the likelihood of a sponsoring employer going bust is on the increase, with big names like BHS famously included on the growing list.

Not only that, but with Brexit just around the corner, you can pretty much guarantee that economic uncertainty is here for a while longer.

So what will the PPF do to protect your current pension?

If you’ve already retired, the good news is that things shouldn’t change much at all. If you were over the scheme’s normal retirement age when your employer went bust, the PPF usually pays the full 100% level of compensation.
If you retired early, and you did so before you reached your scheme’s normal pension age (before your employer went bust), then the PPF usually pays up to a 90% level of compensation. However the compensation is capped. The cap at age 65 is, from 1 April 2017, £38,505.61 (this equates to £34,655.05 when the 90 per cent level is applied) per year. With this cap being set by DWP.
There is also a Long Service Cap for members who have 21 or more years’ service in their scheme. Which increases the cap by 3% for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.
If you haven’t retired just yet, when you do reach your scheme’s normal retirement age, the PPF should pay compensation based on a 90% level subject to a cap, as described above.

So who’s most affected by this?

The very simple answer is, that this immediately affects people on high salaries who are approaching retirement.
Which is why it’s important that you have a good understanding of what the impact of this deficit might have on your retirement. That way you will be aware of any difference to what you expected to receive from your pension and can plan accordingly.

Finally, the most important question… what can YOU do about this today?

If your scheme is showing increased deficits, combined with higher transfer values, then now is an opportune time to carry out a full review. Especially as things may have dramatically changed since you started on the scheme and your expectations may no longer be on course to be achieved and delivered.

The MPAA (Money Purchase Annual Allowance) and what it means for you

One pre-election promise that’s here to stay

Despite dropping the clause reducing the MPAA from £10,000 to £4,000 on 25 April 2017, in order to help get the Finance Bill 2017 to come into force before Parliament dissolves on 3 May, the Government did promise that it would re-introduce the dropped clauses after the general election (assuming they got re-elected). Although it may not have made campaign headlines at the time, it’s certainly worth looking at now.

As we stand right now, the clause has been re-introduced with retrospective effect back to 6 April 2017. With a reduction in the MPAA from £10,000 to £4,000. Although the current Annual Allowance rules are not replaced by the MPAA, nor does it reduce the normal annual allowance.

So what do the changes mean?

Ever since 6th April 2015, it has been possible to access all of your Money Purchase Pension Savings, following the reforms known as ‘Freedom & Choice’.

However there is a catch, as accessing your entire fund will result in those monies (with the exception of the tax-free cash) becoming subject to income tax; with this possibly being charged at a rate that could be higher than you usually pay.

What triggers the changes to the MPAA?

The MPAA applies when your pensions flexibility has been accessed. However this will only be significant where there is £4,000 or more total contributions to a money purchase arrangement in a Pension Input Period.

This accessing flexibility is referred to as a ‘Trigger Event’ and can be defined in the following examples:

  • Uncrystallised Fund Pension Lump Sum (UFPLS)

    This occurs when you access your pension fund via an UFPLS.

  • Flexi-access Drawdown Income

    Any designation of funds for flexi-access drawdown doesn’t necessarily trigger the MPAA, nor does the payment of a PCLS. Having said that, once any income (or any lump sums from the designated pot) is taken from the funds designated to a flexi-access drawdown plan, the MPAA applies.
    It’s important to note that, should the income be taken from assets that can be wholly attributable to a Disqualifying Pension Credit, then the MPAA is not triggered. Just to clarify disqualifying pension credits are pension credits from divorce pension splitting orders.

  • Capped Drawdown Income Above Cap

    If you were in “capped drawdown” on 5 April 2015 you can then continue in capped drawdown. The existing system for reviewing and calculating the cap is expected to remain in place. It is only if you then choose to take an income in excess of your cap that the MPAA will apply.

  • Existing Flexible Drawdown

    If you had flexible drawdown fund before 6 April 2015, then that is treated as having accessed flexibility on 6 April 2015 as your drawdown became flexi-access on this date.

  • Stand-Alone Lump

    In some circumstances where a stand-alone lump sum is paid out from 6 April 2015 the MPAA will also apply.

What happens when the trigger is pulled?

Once the trigger occurs, then the MPAA applies from the day after the trigger event. The only exception to this is any pre-6th April 2015 flexible drawdowns, which invoked the restricted allowance immediately from 6th April 2015.

So What’s The Tax Implication To You?

With the new annual allowance at £4,000 there are bound to be many more scheme members having to pay an excess tax charge. With these extra charges being paid direct to HM Revenue & Customs after the end of the tax year.

Don’t make a Snap Decision as a result of the Snap Election!

number 10 downing street

Have you settled down after the election yet?

I think it’s fair to say that the shock General Election returned a huge shock of a result, no matter what you political affiliations.

The political correspondents are really earning their money at the moment and the TV satirists are having a field day with the fresh new material they’ve all been supplied with.

If your head is still in a spin with regard to the outcome and it’s implications on the economy and Brexit, just imagine how the markets must feel. Not just here in the UK, but in Europe as well as the rest of the world.

I’m not sure uncertainty quite sums it up.

Will Teresa May be able to hang on in a hung parliament?

The implications of a hung parliament are huge. There’s a great deal of horse-trading going on behind the door of Number 10, with alliances being formed in order to ensure that the Queen’s Speech passes smoothly. However all of these deals come with a cost, in both financial and political credibility terms.

On top of all of that are the noises coming from the more vocal dissatisfied conservatives, as well as telling silences from very senior members of the party. So all things point to a leadership challenge looming large on the horizon.

Not the most ideal way to launch into Brexit negotiations. But we are where we are. We live in the greatest democracy on the planet and the British people have spoken to the Mother of Parliaments – and she must listen.

Who would be brave enough to predict the next six months?

Well none of the political or economic experts feel that they are in a position to comfortably give an opinion of what the next six months might look like. To say that we face a period of instability and choppy waters is about the only thing they can say, with a degree of certainly.

So what do the market’s think?

We know that the one thing that the markets love more than anything else is stability. We also know that that is something that will return at some point; but seems to be a little way of at the moment.

With that in mind, from an investment perspective now might be the time to sit tight, ride things out and see how the markets look when things settle down. We are a few days into this period of turmoil and a wise captain never plots a new course from within the eye of the storm. Far better to let the turmoil play out and re-asses things once the maelstrom has dissipated. And dissipate it will. It always does.

Political and economic history shows us that things calm down. Politicians will do deals, or elections will be called. Either way, a new normality returns; and from the new status quo, the markets settle and return to the long-term trends of growth.

So what are the smart investors doing right now?

Well sometimes the best course of action is no action at all. Leaving your investments alone and waiting for the markets to settle back to a steady state is a proven a strategy that has worked in the past when the markets face ‘interesting times’.

Consider the medium to long-term performance of the markets. They are robust and they unrelentingly move forward, despite what the politicians across the world try to do to stop them.

So, unless you need to liquidate your portfolio because your circumstances have changed, the consensus of opinion seems to be to hang on and let things settle.

Inheritance Tax Planning and the New Main Residence Nil-Rate Band

Effective from 6 April 2017, a new main residence nil-rate band (RNRB) will be available on top of the existing inheritance tax (IHT) threshold. It can potentially save tens of thousands in IHT, but at the same time, compared to the existing IHT threshold it is subject to stricter conditions. Let’s have a look at the key points.

Summary of Existing IHT Rules

First let’s start with the basic rules which are already in place and will continue to apply:

  • IHT is due when passing assets to your children, or generally to anyone other than your spouse, civil partner, a charity or a community amateur sports club.
  • The headline IHT rate is 40%, reduced to 36% if at least 10% of the estate is given to charity.
  • The first £325,000 of your estate is free of IHT. This is called the IHT threshold or nil-rate band. Unused portion can be transferred to your spouse, which effectively makes the IHT threshold £650,000 for couples.
  • Besides the IHT threshold, there are various reliefs applying to different kinds of assets and subject to different conditions, which can further reduce the IHT liability. The Business Relief is a common example.

The New Main Residence Nil-Rate Band

The new RNRB will be available on top of the existing IHT threshold. It will be phased in gradually over the next four tax years, from £100,000 in 2017-18 to £175,000 in 2020-21. From 2021 on it should continue to grow in line with inflation. The full RNRB will be available only for estates worth under £2 million. It will be reduced by £1 for every £2 above the £2 million taper threshold.

Like the existing IHT nil-rate band, the new RNRB will be transferable between spouses or civil partners. Transfers will be possible even when the first partner died before 6 April 2017, even though the RNRB wasn’t available at that time (the unused portion of the RNRB is transferred as percentage rather than amount).

Importantly, while the existing IHT threshold has no restrictions in terms of how many items or which kinds of assets are included or who the beneficiaries are, the new RNRB only applies to one residential property being passed to children or direct descendants.

Who Qualifies As Direct Descendant

The new RNRB can be used only when passing your property (or a part of it) to the following:

  • Your children and their lineal descendants (e.g. your grandchildren). There are no age restrictions – the beneficiary can be under or over 18 at the time when you die.
  • Spouses or civil partners of the above, also including widows/widowers.
  • Your step-children, adopted children or foster children.

On the contrary, your siblings, nephews, nieces and other relatives do not qualify.

What Qualifies as Main Residence?

The RNRB has been designed to reduce the tax burden for families when passing on the family home to the next generation. Therefore, it can only be used for one property where the deceased has lived at some stage. A holiday home may qualify. A buy-to-let property won’t. When the estate includes multiple properties where the deceased has lived, the beneficiaries or personal representatives can choose one (but only one).

If you downsize or cease to own your home prior to your death and lose access to the RNRB as a result, your personal representatives may be able to make a claim for the so called downsizing addition to compensate for the lost RNRB. Conditions apply and the claim must be made within 2 years after the end of month when you die.

What It Means for Inheritance Tax Planning

The new RNRB is a welcome tax saving opportunity, making the total potential allowance £500,000 for individuals or £1 million for couples. When used to its maximum potential, the RNRB can save a couple as much as £140,000 of IHT (2 x £175,000 x 40%, using the 2020-21 RNRB). A good understanding of the rules and careful advance planning are essential for minimising future tax liability.

Recent FCA Asset Management Study: A Case for Passive Funds

The Financial Conduct Authority (FCA) has recently published a comprehensive study examining the British asset management industry. While the report is over 200 pages long and most of it is of little interest to the end customer, there are a few points worth noting – and some reasons for concern. We will discuss the key findings below, as well as implications for your investment strategy.

You can find the full report here (interim report; the final is due in the second quarter of 2017).

6 Key Findings

  • The FCA has found weak price competition in the UK’s asset management industry, with negative effects on clients’ net returns. Generally, fund managers are unwilling to reduce their charges, as they don’t believe a resulting gain in volume would offset the fall in margins.
  • Not surprisingly, the cost for the client of actively managed funds is significantly (often as much as four or five times) higher than the cost of passive funds. The difference has actually increased in the recent period. While charges for passively managed funds have fallen in the last five years, actively managed funds have maintained their fees at broadly the same level.
  • When a fund is marketed as active (and priced accordingly), it does not necessarily mean that its investment exposures are significantly different from its benchmark, or from passively managed funds tracking the same market. In other words, clients often pay for active management which they don’t really get. This affects as much as £109bn of assets invested.
  • Overall, the FCA has found that actively managed funds (even when they do invest actively) do not outperform their benchmarks after fees. In other words, you are unlikely to get better performance by choosing an active fund over a passive fund – quite the opposite.
  • While some investors may want to invest in funds with higher charges, expecting these to deliver better investment management skills and higher returns, there is no evidence of this being the case. In general, more expensive funds do not perform better than cheaper funds.
  • While many investors consider past performance when choosing funds, it is not a good indicator of future performance. A vast majority of active managers are unable to outperform their peers for longer periods of time.

What It Means for the Investor

If you could summarise the report’s key message in one sentence, it would be the following:
Paying more for active management is usually not worth it.

This is nothing new. There have been many reports by various academics and research institutions, working with data from different markets and time periods, and most have come to the same conclusion. It is also in line with the Efficient Market Theory, which became popular in the 1960’s, but research with similar ideas occurred as early as the first half of the 20th century.

Beating the market is extremely hard, especially after the higher costs which inevitably come with active management. Even when a manager is able to beat a broad market index in one or two years, sustaining outperformance over a longer period, in different phases of the economic cycle and in different market conditions, is close to impossible. The massive growth of index tracking and passive funds in the last two decades is an evidence that investors all over the world have noticed.

Asset Allocation and Passive Management

The above does not mean everybody should just buy a FTSE 100 tracker and sit back. Different investors have different needs, time horizons and risk profiles, and therefore should have different market exposures. For instance, an investor in his 60’s and about to retire would most likely want to have a portfolio structured differently (perhaps more conservatively) than someone in his 30’s. This should be addressed in the asset allocation phase, where the approach should be highly individual. Passive management only applies once asset allocation (i.e. the weights of factors such as equities vs. bonds, developed vs. emerging markets, large vs. small cap stocks, or growth vs. value) has been decided.

At Bridgewater, we have sophisticated models in place to find the best asset allocation for the particular investor’s needs. Once portfolio structure is determined, we invest in passively managed funds, which deliver appropriate exposures to the individual factors at the lowest possible cost. You can find more detailed explanation of our investment approach here.

Decumulation Planning: Risks and Key Questions to Ask

Most retirement planning advice focuses on the accumulation phase – how big a pension pot you need, where and how to invest, or how much you should save each month. However, there is also the decumulation phase, when you start to rely on your savings to finance part or all of your living costs. Savers (and advisers) often underestimate its importance and complexity.

Clear Objectives But Many Unknowns

There are two main objectives in the decumulation phase:

  • Make sure you don’t outlive your savings.
  • Enjoy the best quality of life possible.

Although these sound fairly simple, there are many uncertainties complicating your decisions.

Firstly, you don’t know how long you will live. This is called longevity risk.

Secondly, you don’t know how much income you will need in future years due to unpredictable inflation and lifestyle changes. For instance, you will probably spend less on travel or hobbies in older age, but the cost of healthcare may go up.

Last but not least, the remaining part of your savings will continue to be invested and therefore subject to market risk (and don’t forget currency risk, especially if you plan to retire overseas).

Key Questions to Ask (Yourself or Your Adviser)

With the above mentioned objectives and risks in mind, decumulation planning involves particularly the following decisions.

How much can you draw from your savings every month or every year?

The popular rule of thumb says that if you withdraw no more than 4% of your retirement savings in any individual year, you won’t run out of money before you die. Unfortunately, this rule ignores all the above listed risks (longevity, inflation and investment risk) and comes with assumptions which may be questionable in today’s world, when an increasing number of people live well into their 90’s, when interest rates are near zero and your portfolio is far from guaranteed to beat inflation, regardless of your investment strategy. Simple universal rules like this one can be taken as rough guidance or starting point, but you should never rely on them blindly and always consider your personal situation.

If you have multiple assets or accounts, which ones should you use first and which ones should you leave for further growth?

Most people retire with a number of different assets or savings vehicles, such as pensions, ISAs, stocks, mutual funds, savings accounts or property. Besides different risk and return profiles, these assets are also subject to different tax treatment or different rules with respect to inheritance. When deciding which ones to use for income now, consider not only the taxes payable in the current tax year, but also your future tax liabilities. Remember that tax allowances such as the Personal Allowance or the CGT Allowance can still be used in retirement.

What is the optimum asset allocation and investment strategy?

While the general recommendation is to make your portfolio more conservative than during your working life (due to shorter time horizon), there are no universal rules. Keep at least a portion of your wealth in very conservative instruments like short-term government bonds and even cash. These should cover at least your basic income needs for the next few years. At the same time, a part of your portfolio should remain invested in assets like stocks or high-yield bonds to allow further growth. Within your equity subportfolio, you may want to increase the weights of low beta or high dividend stocks to keep risk under control and boost income.

The exact weights and securities to choose depend on market situation as well as your personal circumstances – particularly your wealth and other assets you hold. In general, the poorer you are, the more conservative you should be, and vice-versa – if you have other assets to possibly use for income if some of your investments go wrong, you can afford more risk in your portfolio.

Should you buy an annuity?

Even with the new pension freedoms, buying an annuity is still an attractive option to many. When making the decision, treat it as a very conservative component of your portfolio. Its main purpose is to cover your essential income needs and to protect you from the already mentioned risks (longevity, market risk and – with some annuity types – inflation risk). Of course, this protection comes at a cost. Again, if you are wealthier and have other assets to use as potential reserves, you may not need an annuity at all.

Conclusion

One important thing to keep in mind is that decumulation planning does not start on the day when you retire. The two phases – accumulation and decumulation – are not isolated. Decisions made and actions taken during your working life can make your options wider and generally better in retirement.

Have You Worked Overseas? You May Qualify for LTA Enhancement

If you’ve been working abroad, then you might qualify for the benefits of the LTA Enhancement

That’s because the Lifetime Allowance (LTA) is available to anyone who has contributed to their UK pension whilst they’ve been working overseas.
If you think you may qualify then please read on. As we’ll explain how the LTA works, if it applies to you and, if it does, what you need to do next to take advantage of any tax savings that could be available.

The LTA Enhancement and UK Non-residents

Governments aren’t generally known for their generosity to tax payers. However in this case the LTA Enhancement specifically helps compensate individual taxpayers who have suffered as the result of unexpected and unfavourable changes in legislation.

In short, the LTA Enhancement is great news for UK non-residents. As all those tax payers who have been contributing to a UK pension scheme whilst working abroad (and being tax resident overseas) have not had access to the UK’s tax relief on their pension contributions, as they have been paying their income tax in a different country’s tax system.

Which is possibly why it was felt that it has been unfair to apply the British LTA and the corresponding tax charges to this part of an individuals pension saving, if they are paying income tax overseas. So the non-residence based LTA enhancement provision (sections 221-223 of the Finance Act 2004) now compensates these taxpayers by increasing their LTA.

So, the important question – Do you qualify?

If you’ve spent time working abroad and were not resident in the UK for tax purposes, but you were contributing to a UK pension scheme, then you could qualify.
If you have been working for a British company (or subsidiary or related organisation) outside of the UK and, at the time you made your pension contributions, you were deemed to have been a “Relevant Overseas Individual”, then that would apply for the tax year as a whole and you would qualify.

However, you would only qualify if your were not residing in the UK and had no income subject to UK income tax and that you were not employed by a UK tax resident entity in any part of the given tax year.

It can sound complicated, so lets look at an example. If you were to have left the UK on 15 November 2010, you would have only become a “Relevant Overseas Individual” from the start of the next tax year. Which means that any contributions you made prior to 6 April 2011 (including all those from 15 November 2010 to 5 April 2011) would not qualify for LTA. In the same way that, if you returned to the UK in the middle of the tax year, you wouldn’t qualify for the entirety of that tax year.

The other important factor for qualification for LTA, is that your employer must not have been a tax resident entity in the UK. This would disqualify anyone sent overseas by a British employer, if you performed duties for, and were paid by, that British employer.
However, if your British based employer sent you overseas to work for another non-UK company, you would qualify. What’s more, you would qualify even if you formally had that contract with your original British based employer and was a member of their pension scheme.

If you qualify, then you must tell HMRC.

Despite the fact that you may well qualify for LTA, your entitlement will not be picked-up and acted upon by HMRC.
It is your responsibility to inform HMRC and to claim what could be a considerable saving. So if you have spent any substantial time working outside of the UK and you contributed to your UK pension, then you really should get in touch with HMRC.

You can notify HMRC by using form APSS 202; deadlines apply (generally 5 years from the 31 January following the date when you either stopped contributing or returned to the UK). More details are available on HMRC website (link out Google loves them for SEO), or you can contact us and we’ll be happy to provide you with assistance or advice.

You may well be able to significantly increase your LTA and save a great deal of money on the related tax charges.
As with most things, timing is critical – and there is a time limit applicable here! So if you do qualify you should act soon, as failure to do so could result in hundreds of thousands of pounds being unnecessarily deducted from your pension fund.

As it’s such a complicated area, you may wish to get some help and advice with your personal circumstances. So please ensure that whomever you speak to is UK based and a regulated IFA who holds a specialist qualification and whose firm is authorised by the FCA to provide advice on pension transfers.

Using Your Pension to Buy Business Premises

Using Your Pension to Buy Business Premises

You might have heard that you can save tax if you buy your business premises using your pension. This topic has received increased attention in light of the recent pension reform and the Government’s tapering of annual allowance for high earners. If you are a self-employed professional, work in a partnership or have a company, using your pension to buy your premises can bring numerous benefits, which are not limited to tax savings.

How It Works

Your pension plan, which is legally a different entity from you and from your business, is the owner of your business premises, such as your office or shop. Your business is the tenant and pays rent into your pension.

Benefits

  • The rent is of course a cost for your business, lowering its taxable income. At the same time, a pension plan can receive rental income tax-free. Once paid into your pension, it can be reinvested for further tax-free growth. These tax savings can compound over the years.
  • Besides no tax on rental income, there is no Capital Gains Tax within your pension if you sell the property later.
  • The rent is not considered a pension contribution; therefore it does not use your annual pension contribution allowance and is an effective way to grow your pension pot faster if annual allowance is a problem (particularly for high earners).
  • If you have registered for protection against the Lifetime Allowance (LTA) decrease, or planning to do so, one of the conditions is to stop making further contributions. Because rental income is not considered a pension contribution, this restriction does not apply.
  • There is of course the significant benefit of being your own landlord, having complete control over the premises and avoiding the common pitfalls of landlord-tenant relationships.
  • At the same time, when your property is owned by your pension rather than your company, it is protected against creditors in case your business gets in trouble.
  • If you or your business already own the property, transferring (i.e. selling) it to your pension can free up cash, which can then be used to finance further business activities or personal needs, or even to make additional contributions into the pension plan to attract further tax relief.

Joint Purchases and Partnerships

Your own pension does not need to be the sole owner of the property. If you work in a partnership, like a firm of solicitors or consultants, individual partners can use their pension plans to buy the premises together. Your pension can also buy property in conjunction with yourself or your company.

Types of Property Which Qualify

You can use a pension plan to buy various kinds of commercial property, including office space, retail shops, hotels, industrial premises and even farmland. On the contrary, residential property does not qualify – you can’t buy your house or holiday home via your pension (not even if you work from home).

Risks, Costs and Limitations

Buying property with your pension is a big decision which must not be taken without careful consideration of all risks (commercial property prices are highly sensitive to the state of the economy) and costs (such as stamp duty, valuation, administration and legal fees). You must also understand the tax implications and compliance issues for all parties – yourself, your business and your pension plan.

Not all pension schemes can hold property. In some cases you may need to transfer your pension to a more modern and flexible scheme. Besides universal legal requirements, individual pension providers often have their own rules and restrictions in place. For instance, they may insist that you use their own solicitor or mortgage provider. Make sure to check all these rules (and all charges) before making any decision.

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Brexit …

Brexit becomes reality and the markets react with heavy selling of risk assets, particularly British and European stocks and the pound. The fears have materialised and the issue is taking its toll on investment portfolios. That said, the worst thing an investor can do at the moment is acting based on emotions rather than careful analysis of the situation. With the extreme levels of volatility that we are seeing now, a bad decision can have very costly consequences.

Market Volatility

The markets’ reaction can be best observed on the pound’s exchange rate against the dollar. In the last days before the referendum, it appreciated from 1.40 to 1.50 (7%), as polls started to predict a narrow Remain victory. This morning after the actual outcome it dropped to 1.32 (12% down), but at the time of writing this article it is trading around 1.39 (5% up from the morning low). Similar volatility can be observed on stock prices (British, European and worldwide), commodities and other assets.

The Market’s Reaction Is Not Unusual

While the fact of Britain leaving the EU is unprecedented and extraordinary, the way the markets react to the decision is not unusual. It is similar to the way markets react to other surprising outcomes of scheduled events, such as central bank interest rate decisions or (on the individual stock level) company results. We see a sharp initial move triggered by the surprising outcome (this morning’s lows), followed by corrections and swings to both sides, as the market tries to digest further information that is gradually coming in and establish a new equilibrium level. These swings (although perhaps less extreme than today) will most likely continue for the next days and weeks.

What We Know and What We Don’t

At the moment the actual effects of Brexit on the economy are impossible to predict – we will only know several years from now. Even the timeline of next steps is unclear. The only thing we know is that David Cameron is stepping down as PM (that means succession talks and some internal political uncertainty in the coming months) and that the process of negotiations of the actual EU exit terms will be started in the next days or weeks.

We don’t know what the new UK-EU treaties will look like. There are some possible models, like Switzerland or Norway, but Britain’s situation is unique in many ways. We can also expect the British vote to trigger substantial changes within the EU, as the first reactions of EU representatives have indicated; therefore we don’t know who exactly we will be negotiating with. In any case, this is not the end of trade between the UK and EU countries. The EU can’t afford to not trade with the UK or apply punitive protectionist measures against us.

Where Will the Markets Go Now?

Under these circumstances, no one can predict where stocks or the pound will be one month from now or one year from now. Nevertheless, for a long-term investor, such as someone saving for their pension, these short time horizons don’t really matter. If you invest for 10 years or longer, our view is that you don’t need to fear the impact of yesterday’s vote. Leaving the EU might take a few percentage points from the UK’s GDP and from stock returns, but in the long run it won’t change the trend of economic growth, which has been in place for centuries.

The greatest risk that the Brexit decision represents for a long-term investor is not what the market will do. In any case, it will recover sooner or later. The main risk is the investor acting on emotions, under pressure and without careful analysis of all consequences. The investors who lost the most money in past market crashes such as in 1987, 1997 or 2008 were those who panicked and sold at the worst moment, when it seemed like the economy and the financial system was going to collapse. Those who were able to take a long-term perspective and stayed invested have seen their investments recover and even surpass previous levels.

Our Recommendation

We recognise that this is a momentous event and it will take time to fully digest the implications. For now, it is important that investors maintain their disciplined approach and do not act in haste to sell off their investments. This would only serve to crystallise losses which currently only exist on paper. We recommend that they sit tight unless their goals have materially changed. We also ask them to note that we are not taking this lightly and will be maintaining our portfolio structures under review in accordance with our overall investment philosophy. If we judge that changes need to be made we will provide advice as appropriate and this will be dealt with as part of our normal review process.