In times of crisis, many of us seek to take control. It is the act of planning that quells the fear of uncertainty and effectively takes us out of the present moment into the future. It allows us to see forward from the anxiety that COVID-19 may have inflicted on our lives. The act of planning, and indeed financial planning, can be a powerful force when coping in such times and where uncertainty is omnipresent.
Couple this with the fact that we are now in January, traditionally the month that brings personal resolve to improve certain areas of our lives with a perennial focus on improving our financial health. Being proactive and effecting change in a number of areas of personal finance could make a significant difference to one’s financial security in the long term.
With the Budget taking place on 3rd March 2021, now is an opportune time to take control. Many commentators are mooting there will be an increase in tax to reduce the Treasury deficit and debt resulting from the Government’s COVID-19 response.
We suggest that you review the action points below and act on any that are relevant to you now:
Tip 1 – Use your annual Capital Gains Tax (CGT) allowance and consider realising any gains
Up until the end of the tax year you can use your £12,300 CGT exemption (2020/21) to realise capital gains from investments tax free (to provide a tax efficient income slice, any capital required or where funds are not needed for other purposes to reinvest). It makes sense, where possible, to use this, and remember spouses/civil partners can transfer assets between themselves so that both can benefit from this individual exemption.
It seems unlikely this exemption will be withdrawn but more probable that the CGT tax rates may increase, and possibly in line with income tax, so if you have gains to realise, pre-budget may prove preferable. The current CGT rates for a higher or additional rate tax payer are 20% on gains from chargeable assets and 28% on your gains from residential property. If rates did rise to match income tax, as has been speculated, that could see some capital gains being charged at 45% tax. Evidently, realising capital gains at present could be advantageous.
Tip 2 – Make pension contributions
Tax relief on pensions is a subject that frequently raises its head pre-budget. Speculation is mounting that the Chancellor may be keen to favour a move towards lowering pension tax relief for higher earners, reducing the rate of pension tax relief to 20% for everyone. This would go some way towards minimising the government’s spending on this relief. At present, if you are a higher or additional rate taxpayer then you would receive tax relief on your contribution at your marginal rate.
Tip 3 – Maximise ISAs & JISAs
Whilst there is almost no speculation around the removal of the ISA allowance, it makes sense to maximise contributions of £20,000 per person where possible every year. In addition, making a contribution of up to £9,000 per child to a JISA (Junior ISA) will prove valuable over time as a tax efficient savings scheme.
Tip 4 – Consider Venture Capital Trusts (VCT) / Enterprise Investment Schemes (EIS)
For those with significant income and appetite for risk, consider the 30% Income Tax relief to be gained from investments in private equity through VCT and EIS. However, care should be taken due to the high-risk nature associated with investing in small businesses. Nonetheless, they do represent extremely tax efficient vehicles for those with the appropriate appetite for risk.
Tip 5 – Review your deposits
There are many valid reasons to hold cash – future income need if retiring, a rainy day reserve or saving for a major purchase in the future. However, with interest rates on cash deposits now close to 0%, inflation at 1.55% (and widely predicted to rise) and a FTSE 100 yield of around 3%, holding on to long-term capital in cash as a method of return is not one of them.
Naturally pandemics create fear, but it may be a time to review your strategy for cash not earmarked for income, a general reserve or capital expenditure. As financial advisers, we have access to many different types of investment to suit all risk appetites.
As part of your personal annual January review, the above areas may well have already been considered, discussed and implemented. If not, we suggest that you consider these action points with us now so that we can ensure that your tax planning allowances presently available have been fully used pre-budget.
If you would like to discuss any of the above, please contact your usual Partners Wealth Management adviser, or call us on 020 7444 4030 for an initial conversation.
The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information.