New Tax Year: The perfect time for a financial 'Spring clean'?
Henry Findlater, Partner and Senior Wealth Manager at MASECO, offers his thoughts on pensions, cash, children and gifting, for those planning on conducting a financial planning 'Spring clean' as we start a new UK tax year.
As we start a new UK tax year, I am reminded of the words attributed to Benjamin Franklin, “By failing to prepare, you are preparing to fail.” I do not believe for one second a founding father was talking about financial planning, but these words still ring true in the context of wealth and tax.
For those clients with a US UK nexus, any planning undertaken from 6th April 2021 through to the end of 2021 will be done in the same US UK tax year, avoiding a potentially complicated mismatch. With this in mind, I thought a brief Spring clean of some financial planning thoughts might be valuable for our readers.
Get your pension contributions in early
Depending on your circumstances, you may be contributing to a UK or a US pension. The earlier you fund a retirement pot, the longer the investments within have the opportunity to grow in a tax advantaged wrapper.
Unused UK pension allowance from prior 3 years?
Catch up contributions might be appropriate if your income levels allow. If you have not used your full allowance for the current year or the previous three, a top up contribution could be made.
Are you using your FTCs?
For US taxpayers funding UK pensions utilising your foreign tax credits will allow you to avoid double taxation if you end up retiring in the States.
Maximise employer contributions
It could be viewed as free money! It usually makes sense for an employee to contribute the amount that will maximise the employer’s matching contribution.
Should you be considering a UK pension distribution strategy?
Distributions from SIPPs take time, so plan ahead.
Think about your 25% tax free lump sum, it may be beneficial to take it all at once or stage it over time, depending on other income sources, FTCs or outstanding liabilities.
If you are a non-UK taxpayer, ensure you have your NT (No Tax) code in place with HMRC to avoid UK tax being withheld from your withdrawal.
You should assess any unused or expiring FTCs (they only live for 10 years) to ensure maximum tax efficiency of pension withdrawals.
Do you have any excess cash to invest in your portfolio, over and above your emergency pot?
Do you have any liquidity requirements that may require funds from your investment portfolio?
Planning ahead will allow your wealth manager to assess the best options for withdrawals to meet your needs.
Saving for a child’s future can help give them a leg up in life.
A 529 plan can be a tax efficient way to save for a child’s education…..especially if they want to study at an expensive US university.
Contributions into a 529 plan grow tax free and are tax exempt on distribution, as long as the funds are used for qualifying education spend such as tuition, books or board .
While not tax free from a US perspective a Junior ISA still may be appropriate. A JISA is tax exempt in the UK and an American child can have $2,000 of unearned income before they are subject to US Kiddie Tax rules.
4. Gifting / Inheritance
Gifting can be the simplest way to help your beneficiaries and reduce the size of your taxable estate.
Consider using your US gifting allowances early in the year to maximise their impact. In 2021 you can gift $15,000 without reducing your lifetime gifting allowance. If your spouse is not a US citizen, you can gift them $159,000.
If you are nearing the date of becoming deemed domicile in the UK, because you have been UK resident for 15 of the last 20 tax years, it may be wise to explore funding an Excluded Property Trust. Such trusts can be a great way to equalise the small UK inheritance tax threshold (£325,000) and the more generous US allowance ($11.7m).
From a UK perspective, gifted assets will be outside of your inheritance tax estate if you survive 7 years from the date of the gift.
The above ideas and prompts are not exhaustive and may not apply to all individuals. We would encourage our clients to contact their MASECO wealth manager to discuss these thoughts in greater detail to ensure any action taken is suitable for each unique client situation.
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