Financial planning is often an area that takes a back seat in busy lives. When there is no specific deadline to make a financial decision, it is very easy to say that you will address it in the future when life becomes less hectic. Taking the time to review your financial position, your personal wealth goals and objectives and consider the implications of whether your strategy will appropriately meet those goals can be an important exercise. Ensuring that you have an effective and appropriate strategy will likely afford you future flexibility and peace of mind. Below we discuss the areas that are beneficial to consider and review. A few easy steps can ensure optimal wealth planning strategies.
UK pensions have traditionally offered a great opportunity for UK and US persons alike to save towards retirement. From a UK perspective, pension contributions have typically allowed individuals to receive tax relief in the year of contribution, tax-deferred growth whilst funds remain within the tax wrapper, a tax-free pension commencement lump sum of up to 25%, and distributions from the pension at marginal tax rates. Additionally, UK pensions remain entirely outside of the pension-holder’s estate for UK inheritance tax purposes, providing a powerful planning tool for many families given the differential of estate tax thresholds between the UK and the UK. From a US perspective, to the extent that tax relief is limited, UK pensions have often provided a good opportunity to use excess foreign tax credits and establish cost basis in the account. This can be especially powerful if the individual anticipates living in the US during retirement where the US will generally have primary taxing rights on the UK pension under the US-UK tax treaty.
With the UK tax year end approaching, bonus season for UK firms is upon us. For many individuals the size of an individual bonus will vary from year to year depending on various metrics and parameters. But, even though the size might vary, for many this is a lump sum of money that is often used and allocated to help meet various savings goals.
The 2016/17 UK tax year will come to a close on 5 April 2017. As the year end quickly approaches, we outline five questions that US people living in the UK may want to give planning consideration to:
Many Americans living in the UK are considered to be non-domiciled for UK inheritance tax purposes. Under new rules set to take effect in April this year, a non-domiciled individual becomes deemed domicile for inheritance tax purposes when they have been resident in the UK for more than 15 out of the last 20 years. When an individual is deemed domicile for UK inheritance tax purposes, the UK will generally apply its inheritance tax rules on an individual’s worldwide assets.
Almost everyone worries about money, what the future may hold, and the decisions and choices that they will face along the way; yet few realise that wealth planning is the key to sorting it all out. Everybody needs it, but only a few have unlocked its true value.
For those who have, the equation between the value that they receive from their wealth manager and the fees that they pay needs to make sense. Yet, because the benefits of good advice are often received in the far-off future, it is sometimes easy to miss, or dismiss, the value received along the way. Market noise, emotions and periods of what may seem like inactivity on a wealth manager’s behalf, can also impact on the perception of value. It is often easy to appreciate the value received in the first year, and easy to forget or appreciate the value on an ongoing basis. The wealth planning relationship can be broken down into three key phases of value.
Many people, at one point or another, think about leaving the ranks of conventional employment to start their own business. Sometimes the proposed business venture will be within the same industry and sometimes it will be a complete departure from their career to date. Taking the plunge into the world of self-employment can be scary but also incredibly rewarding. After all, being your own boss allows you to build something meaningful and should provide you with some flexibility that is often difficult to find when working for someone else. Giving credence to some of the important financial considerations can help you properly prepare for the transition.
There can be some great planning advantages in the case of a bi-national couple where one spouse is American. Opportunities often abound for example in choosing to own certain assets in either spouse name to optimise the tax implications for either US or UK purposes. For instance, the non-US spouse could take advantage of some of the UK tax-advantaged accounts and asset ownership structures in the UK that are generally not beneficial for a US person, whilst the US spouse could focus on utilising US tax-efficient vehicles.
Estate and inheritance tax planning for a US person living in the UK is an important area of your financial life to address. This is probably even more so due to the large differential in the nil rate inheritance tax bands available in the UK as compared to the US (£325,000 versus a current $5.45 million in 2016). A lack of understanding about how inheritance tax works can end up costing families hundreds of thousands if not millions of dollars. However, proper planning can help minimise the amount of inheritance tax payable and help ensure that families are left with an estate that will provide for their needs after death. Proper strategies will largely depend on the individual circumstances of the decedent.
Considerations need to be given to the following:
• Whether you are deemed to be UK domicile or non-UK domicile
• Location and situs of assets
• What would be ideal versus acceptable
• Size and composition of assets
• Citizenship of spouse, if applicable
• Citizenship and relationship of estate beneficiaries
• Whether any lifetime wealth transfer is feasible
There is significant personal thought and planning that goes into what strategies will best meet your specific individual preferences. Sometimes it’s difficult to know where to start or how to think about the eventual distribution of your assets. It is often beneficial to have a solid idea ahead of sitting down with a solicitor so that you can have more productive conversations. Taking the time to frame your thinking on who you might want to pass assets to will begin the process of developing a strategy based around your own needs and requirements.
Estate Planning is a dynamic process. As your life develops your beneficiaries and charities will change. This should not be an excuse to not plan but instead to amend and tweak existing structures.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The value of investments can fall as well as rise. You may not get back what you invest.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.
The photograph above this blog article is of my Springer Spaniel, Bear. This shot was taken last weekend at “dog boarding school” where he is spending 6 weeks in training. Here he will be fashioned into a dog capable of working in the field. What he is really being taught is discipline – without discipline he becomes a liability and his positive impact on a day’s hunting would swiftly become a negative.
It is not just dogs that need discipline, investors need it in spades too. Benjamin Graham wrote in The Intelligent Investor that “the investor’s chief problem – and even his worst enemy – is likely to be himself.” When people follow their natural instincts they often apply faulty reasoning to investing. Some struggle to separate emotion from their investment decisions, falling foul of excessive optimism or becoming unnecessarily fearful. By giving in to such emotions and not having discipline may lead to making poor investment decisions at the worst times.
Having a disciplined investment philosophy and strategy differentiates a sophisticated investor from the average investor. Your strategy and philosophy does not have to be complicated. Warren Buffet’s investment approach could be described as “buy a good business at a good price and hold it forever.” A disciplined strategy helps keep our behavioural biases in check, provides focus and may be more likely to deliver a successful investment experience.
Unfortunately there is no training camp for investors! Nevertheless by finding the right wealth manager you too can create a disciplined plan and focus on actions and outcomes that add value.
By Henry Findlater