FINANCE
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IS CASH ALWAYS KING ?
CRIPPS PARTNER SIMON LENEY LOOKS AT WHAT TO DO WITH SURPLUS CASH
Simon Leney
In our post-Brexit ( or should that be post-referendum , pre-Brexit ?) world we are seeing ever-lower interest rates , even the prospect of negative rates . Add to that the uncertainty about the strength of some banks and it is hardly a surprise the stock market is doing well as savers seek a home for their cash .
Sources of cash are varied but substantial amounts are becoming available . In prosperous areas such as west Kent , downsizers often unlock between £ 100,000 and £ 200,000 . Inheritances also often produce six-figure sums in cash . And for some , a sale of , or retirement from , their business results in significant cash in the bank , even after tax on the sale .
All of these are an opportunity to take stock of your situation , ideally with the benefit of some unbiased advice . It ' s an unfortunate fact , but no surprise , that banks , investment managers , IFAs and the like , will be expert in the types of investments with which they deal , but less enthusiastic about anything outside that range .
Of course , downsizers will probably want to spend some money on new decorations , possibly even more substantial improvements , but however your cash comes about , tax-sheltered investments can be an attractive option .
The first of those is to use your available ISA allowances (£ 15,240 per person in the current tax year , £ 20,000 next ). When invested in equities , this provides an opportunity for capital gains tax-free growth and tax-free income . Cash ISAs have lost their attraction due to the falls in interest rates , but a stocks and shares ISA is a central plank of any personal investment strategy .
For those who are working , the next step would be to use pension contribution allowances ( currently up to £ 40,000 pa ). These will provide income tax relief at the time of investment as well as tax-free growth on income until a pension is drawn . Income tax will however be chargeable on income being drawn from a pension .
Once these two investment vehicles have been used , consider venture capital trusts ( VCTs ), which offer further useful tax benefits . Up to 30 per cent of the initial investment can be claimed against any income , earned or otherwise , and dividends are tax-free . After five years a VCT can be sold free of tax , regardless of value . However they do have a higher risk profile than quoted stocks and shares , which should be kept in mind .
Of course , if you can afford to do so , giving away cash to help the next generation with housing costs and to reduce inheritance tax liabilities is a great idea .
Giving away a lump sum and then living for seven years means the value of the gift will be disregarded in calculating inheritance tax . This can be a double benefit for children , who enjoy an accelerated receipt of their inheritance together with a saving of the 40 per cent tax that may otherwise have applied . Some people misunderstand the discounting rules and think
that if they survive their gift by less than seven years , there will be a discount of the taxable value of their estate . The rule is that if there is tax payable due to death before a complete seven years have passed , the tax ( not the gift ) is discounted . But there can never be tax payable unless the gift exceeds the tax allowance ( currently £ 325,000 ) and even then it is only the excess that is taxed . So the reality is that this discount does not often get used , and even when it does , we find that not much tax is saved .
You may be cautious about giving away too much in the way of capital , feeling the need to keep it for care costs perhaps . By investing your cash in a tax-efficient way you may find you have more income than you need . In that case a useful exemption for inheritance tax is available . If you give away that surplus income then the seven-year rule does not apply . The rules must be carefully followed but a series of such payments can gradually build up a nest egg for the next generation .
Careful strategic planning , with some professional help , can make sure your cash is put to work properly .
For further information please contact Simon Leney at simon . leney @ cripps . co . uk or call 01892 506005
Please note that we are not authorised investment advisers . We therefore cannot give you advice on individual investments and will refer you to someone who is authorised to give such advice .
www . cripps . co . uk @ crippslaw
About Cripps
Cripps is a key regional law firm serving clients nationally and internationally from offices in Kent and London . Recognised countrywide for both its commercial and private client work , Cripps is Legal Team of the Year ( Midsize ) in the 2014 / 15 STEP Private Client Awards and is ranked in the Top 25 Private Client Law Firms . The firm focuses on wealthier families , entrepreneurial businesses and the real estate sector .
Find out more at cripps . co . uk
This article gives examples and is intended for general guidance only .
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