Personal Finance Questions – April 2009

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In this new feature we will answer some of the many questions we have been receiving from visitors to shrewdcookie.com. It is often said that if you ask a question chances are that many other people also want to ask that very same question.

Although we receive a large number of personal questions we have to remind you that we do not give financial advice on this website – we encourage you to visit an independent financial adviser, solicitor or accountant if you wish to discuss any particular course of action which may be prompted by an article you read on our site.

1. What are the new ISA allowances announced in the recent Budget?

The ISA limit is increasing from £7,200 to £10,200. The change comes into effect for the over 50’s from 6th October 2009 and from 6th April 2010 for the rest of the population. Of the new £10,200 limit, upto £5,100 will be allowed for Cash ISA investment, with any surplus between the amount you place in a Cash ISA up to £10,200 being available to invest in a stocks and shares ISA.

2. Inheritance Tax – who pays?

The liability for paying inheritance tax lies in the hands of the executors/administrators of the deceased’s estate. Inheritance tax is payable within 6 months after the end of the month in which the person passed away. It is possible to pay Inheritance Tax in instalments over up to 10 years – this is the case in circumstances where say the estate includes a house. There is an interest charge if you pursue this method of paying Inheritance Tax – http://www.hmrc.gov.uk/ for more details.

3. I am married to someone who was not born in this country – how does this affect our Inheritance Tax position.

Where a spouse is deemed to be non-Uk domciled then the Interspousal transfer is limited to £55,000, there in no limit to the Interspousal transfer where both partners are UK domiciled – no liability to inheritance tax on first death if you leave all your assets to your marital partner. Consult a solicitor or accountant about your own particular situation.

4. How do I get a State Pension Forecast?

To obtain a forecast of your state pension entitlement, based on your national insurance record you need to fill out and submit a form BR19 – this article – “How Much State Pension will YOU get” gives more details.

5. If I invest a lump sum now how can I easily calculate how it will grow between now and retirement?

Using the Rule of 72 – by assuming an interest rate and dividing this into 72 will tell you how long that money will take to double in value. For example, at 6% your money will double in value every (72/6) 12 years. If you had say 36 years to retirement, at 6% growth your money would effectively double 3 times. See this article for more details.

6. Can I back-date my ISA investment to use last years allowance?

No – your money needs to be invested by midnight between 5th and 6th April each year to use the ISA allowance for that tax year – there is no way to backdate an ISA investment. A case of “use it or lose it”!

7. I am a female born in 1954 – when do I get my State pension?

State retirement age for men and women is being equalised to 65 for both sexes. See this article . There is also a State Pension Age calculator provided by The Pension Service – enter some basic details and it will tell you exactly when you qualify for your State Pension.

8. Can I hold Cash in a Stocks and Shares ISA? What is the tax liability?

Yes – many providers offer a “cash park” facility whereby you can invest temporarily in cash and then switch into stocks/funds over the short term. There is the facility to receive interest on this cash held but the interest is subject to tax and a non-taxpayer cannot reclaim this tax either. See this article for more details.

9. What is the minimum deposit on a mortgage for first-time buyers?

There is no legal minimum deposit, the minimum is set by market forces – we are currently suffering from the “credit crunch” whereby lenders are being cautious about lending to people particularly with the housing market currently falling. Therefore, more and more people are being expected to make a deposit when buying their first homes – typically 10% or more is required to obtain a good interest rate product – see “5 tips for first-time buyers” for more details.

10. What is the “deferred period” on my income protection plan for?

The deferred period is the time between notifying the claim to the life office and the benefit being paid out. The plan is designed to provider a replacement income in the event of long-term absense due to illness or accident. The longer the deferred period, the lower the risk to the insurance company of having to meet a claim which therefore means a lower premium. See these article on “income protection” for more information – “Income Protection – an introduction” and “Critical Illness Cover versus Income Protection”.

These are just some of the areas we have received enquiries on in the past month. Although we cannot reply directly please ask a question and we will try to feature it in the next FAQ article next month. Add a comment below or complete this short form to contact us.

Simon

10 Great Reasons to Write a Will

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In our previous article we considered the basics of will writing, setting out the key people involved in the writing and execution of a Will.

In this article we will consider the REAL benefits to be enjoyed from ensuring you have a properly written Will.

10 Great Reasons Why You Should Write a Will

1. To allocate assets between different people.

You may wish to leave jewellery to a niece, or promised a grandson your war medals. A Will can formalise all these gifts and help prevent family arguments – remember this – family and money rarely mixes!

2. If you’re not married then you need to make Wills.

There is no automatic transfer of assets between couples who are cohabiting. Other than jointly owned asset which would pass to the surviving owner on first death, in law, all other assets could pass back to the deceased’s family under intestacy rules. In practicality though it is unrealistic to expect your deceased partners family to come asking for his/her DVD collection but a Will formally arranges your affairs after death and avoids problems later.

3. Leave assets to an ex-partner.

It could be that you have now remarried or are living with someone else. A Will could be used to leave assets to an ex-partner, for example, they may have made a large gift to you during your relationship which you would like to return to them in the event of your death.

4. Reduce the amount of Inheritance Tax you pay.

In the current tax year we can each leave an estate of up to £325,000 (2009/2010 tax year) with immediate liability to inheritance tax. Anything we own, over and above this £325,000 Nil Rate Band is chargeable to Inheritance Tax at a rate of 40%. A Will could be written to leave up to £325,000 to be split equally between children or held in Trust for their benefit. Under a normal “British” Will it is usual for all assets to pass between husband and wife. It might be prudent to still include a will trust to hold £325,000 for the benefit of your children – leaving all your assets to your spouse could see that money all eaten up in care home fees – it is vitally important that you take legal advice in this respect.

5. A Will can be used to make assets skip a generation.

It may be that your own children are financially successful in their own right. Passing assets to them on your death may be of no benefit and could simply compound their own Inheritance Tax problems later by artificially expanding their Estates. If this is the situation then why not leave your Estate to benefit your grandchildre, or even great-grandchildren if that is the case.

6. A Will can be used to set up a Trust.

If you are fortunate to have a very large Estate you may choose to set up a Trust to benefit a local charity or support group in terms of providing them with a regular income. Seek legal advice if you are considering this course of action.

7. To avoid Intestacy.

If you don’t make a Will then the Government have already made one for you. These are known as the rules of Intestacy – you are said to have died “intestate” if there is no valid will at the time of your death. For example, if you are married and die with a spouse and children then your spouse doesn’t automatically get eveything – if your Estate is less than £250,000 everything goes to the surviving spouse. If the estate is over £250,000 the surviving spouse gets £250,000 and all personal possessions.

Half of the remaining estate is split equally between the children with the spouse retaining a “life interest” e.g an income from the remaining 50% with this 50% ultimately being split between the children on second death.

As you can see – assets being allocated in this manner can and does cause problems after death.

More information on intestacy rules can be found here – HMRC – Intestacy Rules

8. You need to appoint Guardians for your children – this is vitally important.

In the absense of a Will it would be the Courts/Social Services who decide where your children are best placed – and it might not be with the people you thought would look after and raise your children. By making a Will with Guardians named for your children you can avoid this uncertainty. You should also consider putting in place life insurance to provide for your children in the event of your death – consider this – it could be very difficult if one day two children turned up on your doorstep expecting to be looked after until they are 18 and there is no money there to fund them!

9. If you are separated but not yet divorced.

You should write a will with the will written in view of the divorde going ahead as there is a possibility in law that, in the event of your death, your asset could pass back to your ex-partner. Although you are separated, in the eyes of the law your ex-partner might be entitled to your Estate after your death!

10. If you have been married previously or you don’t trust/like your spouses family.

You might care to write your Will so that in the event of you both dying together your assets don’t end up passing to your spouse’s family. For example, if you were killed in a car crash, in the eyes of the law, the eldest person is deemed to have died first. It is possible that their Wills leave all their assets to their families – you could see your assets momentarily pass to your spouse before passing straight to her family. Is this what you want to happen?!

We hope this article was of some benefit in sparking an interest in writing your own will.

Will Writing – an introduction

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Why you need a Will

There are many reasons why it is prudent from a personal, as well family perspective, to ensure you have a suitably worded Will in place – and Will Planning is not just for old people either!

What is a Will?

A Will is your written instruction which formalises what is to happen with your estate, and your children, after death. It can be a shrewd tax and estate planning instrument when used correctly and there are also a number of reasons why you should write a will sooner rather than later. We will cover these further in our next article in this series. This article is an introduction to Will Writing.

There are several ways in which a Will can be written – you could use the services of a Solicitor, a Will Practitioner/Specialist, a financial adviser or even a “DIY” Will purchased from a stationers.

In order to make a Will you need to be of sound mind and over the age of 18.

What is contained in a Will?

A Will sets out the administration of your estate in the event of your death. In it you can state your funeral preferences together with details of any gifts to charity or the National Trust.

Individual items can also be named, for example, leaving jewellery to a daughter or military medals to a grandson.

The Will for the most part will deal with the distribution of your estate – these are all your worldly goods and possessions. It is common for married couples to leave everything to each other and then shared equally between children on second death – this is generally known as the “Great British” Will – and may or may not be the most efficient and effective way of administering your Estate.

Who is involved in the Writing of a Will?

As the person making the Will you are known as the Testator (Testatrix if female) and the Will will be witnessed by two individuals who are not to benefit under the terms of the will – these are the Witnesses.

In the Will you nominate a person or people to administer your Estate after your death – these people are known as the Executors and it is their legal obligation to ensure that your wishes are carried out to the best of their ability.

I have an existing Will – does it need changing?

It is important to ensure you review your Will on a regular basis as people’s circumstances do change and the Will previously written may no longer match your wishes.

In addition to this, on several occasions, during my time as a financial adviser, I came across situations where people simply do NOT have a valid Will – in one case for example, the person had received their copy of the Will back from the Solicitors office and had simply filed it away without signing and witnessing the Will – remember – you need to ensure you sign your Will and that this signature is witnessed by two independent witnesses for it to be valid.

Is it feasible to make my own Will?

Although it is possible to write your own Will it is always advisable to have your Will written by an expert, such as a Solicitor or STEP practitioner.

A word of caution – in many cases the person writing the Will may wish to add themselves to the Will as an executor – I would always err on the side of caution at this suggestion. This person would be acting in a professional capacity and therefore the level of charges which might be incurred could be an unknown. You could in effect be writing a “blank cheque” on your estate by including a professional to act as an Executor on your Will. Remember – the other people acting as Executors (e.g. family) can always bring in professionals to act, at an hourly rate or agreed cost basis, should the need arise.

Next article – 10 GREAT reasons for Writing a Will

Inheritance Tax – an introduction

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In the first of a three part series we will consider Inheritance Tax – a tax previously deemed to be paid by “those who trust their heirs less than they trust the government”!

In part one we will consider what the tax is, how much is payable and the situation facing married couples.

What is Inheritance Tax?

Inheritance Tax is a tax payable on the value of your estate following death, and some gifts made within the 7 year period prior to your death – the tax is payable on the value of your net estate – all assets less all liabilities after certain reliefs and allowances have been made.

On what Assets is it Payable?

When considering Inheritance Tax we need to consider the domicile of the individual who has died. Domicile is a legal concept which explains a person’s true home and there are various factors affecting it. It is a complex legal subject which is beyond the scope of this article.

Generally, if you were born to UK parents, then that is your domicile and the liability to inheritance tax is payable on the value of ALL your assets, regardless of where in the world they are situated.

If you are non-UK domiciled, i.e. you moved to the UK recently, then liability to inheritance tax is calculated with reference to your UK assets only.

The tax is payable within 6 months of death and it is the duty of the Executors of your Estate to complete and file a probate form. If the tax is not paid within the 6 month window then interest will start to be charged on the amount outstanding.

How much is Payable?

Inheritance Tax is payable at the rate of 0% on the first £325,000 in the current 2009/10 tax year, with tax at a rate of 40% payable on the value of your estate in excess of this “nil rate band”.

So for example, if your net estate is valued at say £500,000 the liability to Inheritance Tax after your death would be £70,000 (£500,000 minus £325,000 at 40% taxation).

What about for Married Couples? Didn’t the rules change for them recently?

Fortunately, the law as it stands allows for all transfers between spouses to be made with no immediate liability to inheritance tax. In these circumstances Inheritance Tax is payable on second death.

There is an exception to this rule though, and that considers the situation where a domiciled individual is married to a non-domiciled individual. If the domiciled individual dies first, the transfer to the non-domiciled widow(er) is tax-free up to £55,000. Over £55,000 inheritance tax is payable.

Since October 2007, both married couples and registered civil partners have been able to raise the threshold on their joint estates on second death by effectively transferring any unused nil rate band (personal allowance) from the estate on first death to the estate on second death.

It is important to remember that on first death, the transfer of estate from the deceased to the widow(er) is exempt from Inheritance Tax, so 100% of their personal “nil rate band” allowance can be passed along for use on second death.

Also remember, it is the percentage of unused allowance, not the value of unused allowance that is passed on to the second estate.

For example, say John dies in 2008 leaving £500,000 to his wife, but also leaving £156,000 to his son. The transfer to his wife would be free of Inheritance Tax as it is an inter-spousal transfer, and the amount left to his son would also be free of Inheritance Tax as it falls within John’s nil rate band, which is £312,000 in that tax year.

In this example, John has used 50% of his nil rate band allowance and therefore, on second death, the estate can be reduced by applying 100% of John’s widows’ nil rate band PLUS 50% passed along following John’s death. So in effect, on second death, the estate benefits from 150% of whatever the Nil Rate band is at that time!

Inheritance Tax is a complicated subject and every person’s circumstances are different – it is vitally important that you take advice from a suitable qualified solicitor or accountant before putting in place any plans to reduce your inheritance tax liability.

In the next section, we will consider the various rates and allowances which can be used to reduce the Inheritance Tax bill. The final section will outline the various methods by which the Inheritance Tax liability can be mitigated.