The study, conducted by unbiased.co.uk, revealed that taxpayers in the UK will waste £13.5billion across 2011 through unnecessary tax payments, and ten per cent of that figure would be as a result of inheritance payments.

The Tax Action Report also revealed that pension credits and tax credits were other key areas where Britons were wasting large amounts of money.

Despite the results, it was revealed that nine out of ten people living in Britain also reported that they had taken no action last year to organise their taxes, or made any plans to streamline their finances so there were no financial burdens for those they left their estate too should they die.

Karen Barrett from the firm revealed, “Vast sums are being paid unnecessarily in inheritance tax every year because the deceased had not made adequate provision.”

The coalition Government have vowed to simplify taxes, and have created an Office of Tax simplification.

The office have revealed that they intend to implement a review of inheritance tax and its various procedures and rules, although this may take some time.

Inheritance tax has various rules and regulations and it is advisable to seek specialist advise on the subject.

Inheritance tax is only payable on a persons estate if it is worth more than £325,000, and anything above that threshold is taxed at 40%.

In 2007 a new law was passed that enabled married couples and registered civil partners to be able to pass their assets to one another without incurring a charge after death.

In most normal circumstances the executor of the will is responsible for paying the relevant inheritance tax from the deceased’s estate.

Inheritance Tax is one of the most lucrative taxes for the Revenue, as it applies at 40% to all liable assets. However, it is also one of the most avoidable of taxes, and with good financial advice can often be reduced, or eliminated altogether.

Here are some of the main points a financial adviser may suggest, when giving Inheritance Tax advice to minimise your potential IHT liability.

Inheritance Tax does not apply to assets willed between husband and wife, but a liability can arise on assets being passed to your children.

Before a liability arises, you have an Inheritance Tax allowance of £325,000 (or a joint allowance of £650,000 for a couple). However, this can quickly disappear, when you consider the various elements that are subject to the tax. Taken together, these elements make up what is known as your ‘estate’.

Your estate consists of your assets, less your debts and liabilities. On the assets side are the value of your home, and other properties such as a holiday home, payouts from insurances, savings, and other possessions, including cars. Their total value will be reduced by your outstanding debts. The resulting figure is your net wealth – your ‘estate’.

The first step in planning to avoid Inheritance Tax is, therefore, to minimise the value of your estate.

Writing life insurance in trust

One efficient way of doing this is to write your life insurance policies ‘in trust’. This simple procedure removes life insurance policies from your estate, so that, for example, a £150,000 payout from your life insurance policy does not deplete your IHT allowance, and inflate the value of your estate to the point where an IHT liability can arise. Life policies ‘in trust’ are also paid immediately and directly to the beneficiaries, ensuring that your family receives the cash quickly and efficiently.

Using your will

Good inheritance planning also involves ensuring you have an up-to-date will in place. This gives you a high degree of control over the administration of your estate, and the structures it puts in place can significantly reduce the risk of an IHT liability. Without a will, you die ‘intestate’, which effectively leaves the Government to manage your estate through the rules of intestacy.

This could mean that not all of your wealth would pass to your spouse. In fact, only the first £125,000 of your wealth passes automatically to your spouse, and if you have no children, parts of your remaining wealth could be distributed to other relatives, if you have no will in place.

Passing on the family home

Another strategy for minimising your IHT liability is to plan ahead by ‘gifting’ both property and cash to your children, while you are still alive.

However, a gifted property is subject to the ’7-year rule’ – you must survive for 7 years after the gifting, for the gift to be freed from tax. If you pass away within 7 years of making the gift, then an IHT liability may still arise.

There is one particular point to note, in relation to gifting your children the family home.

If you continue to live in the family home, once it has been transferred into your children’s names, the taxman judges that you continue to benefit from it. As such, it becomes a ‘gift with reservation’ that is liable to Inheritance Tax.

This can be avoided by paying your children a rent at current market values, thus creating an ‘arm’s length’ arrangement by technically becoming a tenant.

Gifting of cash gifts is also possible, free of Inheritance Tax. You can gift up to £3,000 per year to your children, tax-free, for any purpose, as well as once-off sums of £5,000 to your children, and £2,500 to your grandchildren, as wedding gifts.

Government plans to raise Inheritance Tax allowances or the ‘nil rate band’ to £1m have been cancelled this week.

The Conservative Party had included as one of its flagship policies an undertaking to raise Inheritance Tax allowances to £1m per person, or £2m if transferred between couples.

As a result of the cancellation, Inheritance Tax allowances will now remain at present levels of £325,000 for an individual, or £650,000 for a couple, for the foreseeable future.

Inheritance Tax is levied at 40% on portions of your wealth or ‘estate’ above your Inheritance Tax allowance.

Your estate consists of the value of your home plus any other properties you may own, cars, valuables, savings, investments, and any life insurance policies you may have that are not written in trust. This total is then reduced by the value of your outstanding mortgage, loans and other debts. If the resulting total exceeds your personal allowances, you then deduct your personal allowance, and the resulting sum is subject to Inheritance Tax.

A simple scenario can show where Inheritance Tax can apply. A widow has a home valued at £300,000, a life insurance policy, not written in trust,  for £200,000, and other investments and savings totalling £100,000. This gives her assets of total value £600,000.

Her debts include £10,000 outstanding on her mortgage and £5,000 in assorted borrowings. Her debts and liabilities are therefore £15,000.

The value of her estate is therefore her assets (£600,000) less liabilities (£15,000), equalling £585,000.

Subtract from that her personal Inheritance Tax allowance of £325,000, giving a remainder of £260,000. This is the sum liable for Inheritance Tax at 40%, leaving her children with a demand from the taxman for an Inheritance Tax bill of £104,000.

With some financial planning and good independent financial advice, however, this Inheritance Tax liability could have been reduced, or eliminated altogether.

As a first step, a financial planner might, for example, have recommended writing the widow’s life insurance cover in trust. This is a simple means of removing her life cover from her estate, thus reducing the value of her estate by £200,000, and leaving her with just £60,000 liable for Inheritance Tax. This step alone would have reduced the value of the Inheritance Tax bill to just £12,000. However, further steps are also possible which would, with the help of a good financial planner, have enabled her to further reduce her exposure to Inheritance Tax.

Principle First Financial Advisers has today launched the OnePlan™ financial planning environment, featuring the OnePlan™ suite of financial planning tools.

OnePlan™ is a unique, personal online workspace open to all those wishing to identify their financial needs, calculate their requirements, and create a rounded, balanced financial plan.

OnePlan™ is an online workspace, a virtual area where you can organise the financial planning needed to secure the future of yourself and your family.

If you would like to see what the mortgage on your chosen home would be, you can work by yourself to do preliminary calculations using our online financial planning tools.

Our financial planning tools enable you to calculate how much life insurance cover you need to replace your income and protect your family, or calculate how much you need to be saving today, to achieve a desired standard of living in retirement.

Using our online financial planning tools is a free service open to all. You simply log on, and set to work. However, if you have questions at any stage, financial planning advice from our friendly staff is there for you, either live, or by e-mail.

Your OnePlan™ financial space also includes ‘Message Deck’, a special mail tool for receiving and sending emails to our advisers on an ongoing basis.

With OnePlan™ you can record and track progress in putting your financial plan into action, ‘tick off’ the various elements of your financial plan as they are put in place, and keep all your related communications and documents in a single, secure location.

Take a look at OnePlan™ now or contact us on our freephone 0800 678 5929

Our range of online tools covers all your financial planning needs.

OnePlan™ Life Insurance Planner will calculate how much life cover would replace your income and avoid hardship for your loved ones, if the worst were to happen.

OnePlan™ Critical Illness Planner will show you how to replace your income with a tax-free lump sum payment, if you must give up work due to ill-health.

OnePlan™ Income Protection Insurance Planner helps you calculate how much cover you need to provide a regular income, paid monthly, if you have an accident or become ill.

OnePlan™ Mortgage Planner gives you all the numbers you need if you are thinking of a mortgage or remortgage. The planner will then search the whole market to show the best mortgage deals for you.

OnePlan™ Investments Planner will allow you to identify your attitude to risk, your ‘risk profile’, and match that to one of our tailored investment portfolios. If you have existing funds investments, our portfolio scan service can run a check on that for you as well, using the latest software to ensure your funds choices are still right for you.

OnePlan™ Savings Planner uses common savings scenarios such as saving for a mortgage, for your wedding, to redecorate or extend your home, or for your child’s education, and will calculate what you need to be saving now, to achieve your goals.

OnePlan™ Pension Planner calculates what size of pension fund you will need, in order to achieve, not a specific sum, but a specific buying power and lifestyle in retirement. Then it tells you how much you need to be setting aside today, in order to achieve that.

OnePlan™ Inheritance Tax Planner will calculate the value of your estate, based on your assets and your debts, and let you see if you stand to incur Inheritance Tax at 40%.

Would you like to take a closer look at OnePlan™? Go to OnePlan™ now, or contact us on our freephone 0800 678 5929

Thanks to the pension changes, many will appreciate the freedom to base their pensions planning on retaining their own pension savings, rather than cashing them in to buy a pensions annuity. They can now leave their pension savings invested, and as they have not handed their pension pot over to an annuity provider, they can leave what remains of their pensions savings to their children, in their will.

However, under existing legislation, this course of action could expose their pension savings to a combination of tax charges that could eat up to 82% of their funds, when they die. Over half of this consists of tax and other surcharges that would be levied on their savings as an ‘alternatively secured pension’. This is the term that refers to a pension held without an annuity purchase for those over 75, and for most is a continuation of their previous unsecured pension.

In many cases the alternatively secured pension will be an income drawdown contract, where pension savings are left invested in the stock market, and can be drawn down in different amounts each month, as required.

However, the remainder of the tax which could be due on pension savings left to the children as part of the saver’s pensions planning would be Inheritance Tax (IHT), which is levied by HMRC at 40% on any funds which exceed the individual’s ‘nil rate band’ allowance of £325,000 (or $650,000 for a couple).

While the nil rate band may sound relatively generous it includes all wealth contained in the individual’s estate, and many find their allowances quickly disappearing when they tot up the value of their property, life and other insurances, savings and investments, and the pension itself.

By taking pensions advice, portions of this tax liability and in particular the exposure to Inheritance Tax can be reduced, or eliminated altogether. Pensions savers can put in place an effective programme of pensions planning by working with a qualified independent financial adviser, in response to these and other Government pension changes that may emerge, over the coming weeks.

Dig a little deeper, and we see that the pension changes are primarily designed to save the state money – which of course is the Government’s job, and must be applauded. However, looking at the pension changes with a cynical point of view does give a unique perspective on government pensions thinking in general.

Basic State Pension and pensions credits: The Government will say that the launch of the National Employment Savings Trust (NEST) in 2012 will provide everyone with an additional pension income, a private pension in addition to the Basic State Pension which currently pays out just £97.65 taxable per week. A cynic might point out that it will also save the Government paying out means-tested pension credits as a top-up to the Basic State Pension, since now we will all have a personal pension pot of our own from our NEST pension savings. In other words, the Government has had us save our own pension credits, and will soon need to pay far less pension credits from the coffers of state.

State retirement age and NI contributions: Government will say that raising the state retirement age to 66 gives employees more flexibility to work longer, which suits a generation whose improved health and longevity has dubbed them ’the wellderly’.  A cynic might say that Government has also cleverly had us pay into the Basic State Pension for longer, with an additional year of National Insurance contributions, and also to draw the Basic State Pension for a year less, as we will retire a year later.

The 75 rule versus tax liabilities: Government will say that by abolishing compulsory purchase of a pensions annuity by age 75, we now have greater flexibility to keep our pensions savings, and to bequeath them to our children. However, a cynic might point out that after the government pension changes, the taxman at HMRC may be rubbing his hands with glee at the prospect of Inheritance Tax and other tax liabilities - these could eat up four-fifths of our pension savings, if we leave them in our will without taking pension advice and discussing retirement planning.

A new poll for the Barnardo’s, the children’s charity, has this week revealed that while 58% of the general population have no will, almost three-quarters (74%) of cohabiting couples have no will in place.

Barnardo’s indicated that a third of those who had neglected to write a will said they had simply “never got around to it”.

Writing a will is crucial for good inheritance planning. It will ensure a smooth inheritance process for your family. If you have no will in place, you have made no formal plan for dividing up your estate, when you die.

Having no will in place could leave large portions of your wealth subject to inheritance tax, which is paid at 40% on any funds above the tax threshold (currently £325,000 per person or £650,000 for a married couple).

While this tax threshold, or nil rate band, for inheritance tax may sound generous, it is important to remember that it is levied not only on your property, but on your entire estate, which includes payouts from insurance policies, and other savings and investments as well. Consulting a financial adviser for qualifed inheritance tax advice is an important element of inheritance planning, and essential to avoid inheritance tax.

A will can also be used to nominate preferred guardians for children, if they are orphaned before they turn 18.

The Barnardo’s research revealed that 25% of over-55s surveyed believed that all their wealth would pass to their family, even with no will in place. However, if you die without a will, specific rules apply to dividing your wealth, and a surviving spouse is not automatically entitled to inherit everything.

In the case of a married couple in England and Wales, the surviving spouse receives only the first £125,000 from your estate, plus a half of the remainder, with the other half of the remainder passing to the children when they turn 18.

*Source: Barnardo’s survey of 2,221 UK adults, March/April 2010

The new tax year, which began on 6th April 2010, offers a golden opportunity for tax savings. Make use of your brand new tax allowances to fine-tune your financial planning, and minimise tax. Our checklist below highlights some of the main areas you can benefit. If at any point you have any questions, please call one of our friendly advisers on 0800 678 5929 or request financial advice here

ISAs 

The new ISA allowances went live on April 6th, providing for £10,200 in tax-sheltered savings this year (until April 2011). Savings currently sitting in a bank or building society account, and liable for tax on growth, can be put beyond the reach of the taxman by investing them in an ISA right now. If you do not use your ISA allowances, you are probably paying unnecessary tax! ISAs come in two variants, the Cash ISA, which combines the security of a bank account with tax-free savings growth, and the Stocks and Shares ISA, which invests in the stock markets and is therefore more suitable for longer-term savings, over 10 years or more.

Pensions

The start of a new tax year is an ideal time to review your pension savings. Pensions contributions are an excellent way to put money away for your retirement. What other savings option tops up your savings cash with 20% in tax relief, on day one? The taxman will even give relief of 40%, if you are a higher rate taxpayer.  However, you need to have a pension plan, to cash in on the taxman’s generosity here. Time is a crucial factor. If you do not already have a pension set up, it makes sense to do so right away. When saving in a pension, long-term exposure to the stock markets is the key to growing your cash. It really is that first pound, which earns the most for you. Use our online pension planner to check or plan your pension savings now.

Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a tax on the profit or gain you make when you sell, dispose of, or are compensated for an asset. That asset might be a buy-to-let property, a stocks and shares investment, or gains from an insurance payout when an asset is destroyed. Some assets are exempt from Capital Gains Tax, such as your car, personal possessions disposed of for £6,000 or less, and, usually, your main home. You have a personal Capital Gains Tax (CGT) allowance of £10,100, which can double to £20,200 if you are a couple. Capital Gains Tax (CGT) savings can also be made when you have made a loss on investments, by carrying those losses forward to offset them against profits in the future. Find out more by speaking to one of our advisers on 0800 678 5929.

Venture Capital Trusts (VCTs) & Enterprise Investment Schemes (EISs) 

A Venture Capital Trust  or VCT allows investments of up to £200,000 per year which attract tax relief of 30% on the investment, subject to the amount of tax you pay in that year (i.e. you can only reclaim tax you have already paid). A VCT is a listed company, and you must hold your shares in the VCT for 5 years, in order to retain your 30% tax relief. A Venture Capital Trust (VCT) invests in small and medium-sized UK companies with up to 250 employees, and market capitalisation of up to £15m. These companies are turning more and more to Venture Capital Trusts (VCTs) for finance as banks are not lending freely at present, and as a result the quality of projects in which VCTs are investing has never been higher. This assists forward-thinking and innovative VCT providers such as Octopus to offer VCTs which are planned in such a way that they have meaningfully minimised risk. Enterprise Investment Schemes are similar to VCTs, in that they also offer tax relief , though in this case at 20%. However you only need to keep your investment in an Enterprise Investment Scheme (EIS) for 3 years to keep the tax rebate permanently. 
If you think these options could benefit you, why not speak to us on 0800 678 5929?

Inheritance Tax (IHT)

You can give away gifts worth up to £3,000 in each tax year, and these gifts will be exempt from Inheritance Tax when you die. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don’t use it in that year, the carried-over exemption expires. On wealth that falls liable to Inheritance Tax (IHT), tax is due at 40%. However, with good financial planning, an IHT liability can often be vastly reduced or eliminated altogether.

Don’t leave it until the last minute

All of the above are easy to set up and we have advisers who can help answer any questions you might have. We believe it is best to organise your finances at the start of the tax year, to get the full benefit. If you have any questions, please call us on 0800 678 5929 or make a financial advice enquiry here.

Good news for first time buyers in the budget, as stamp duty ends on all homes valued under £250,000. The other news, however, is a bit of a mixed bag. Here is our roundup of personal finance news and the budget changes, hot out of that little brown briefcase on Downing Street.

Stamp duty: while the new threshold of £250,000 is guaranteed only until March 2012, it may nonetheless revive the first time buyers market. However, given that today’s extremely low interest rates can only rise from here, first time buyers must be mindful that the short-term saving on stamp duty could be absorbed by rising mortgage payments, in the longer term.

 ISA allowances will rise to £10,200 on April 6th.  While this had been as expected, the good news is that the ISA allowances are also guaranteed to rise further each year, in step with inflation.

ISAs come in two variants. Savers can place up to £5,100 in a cash ISA, and the same in a stocks and shares ISA, or alternatively place their whole allowance in the stocks and shares ISA. While cash ISAs offer an attractive combination of tax-free savings and the security of a bank account, returns have been dampened of late due to historically low interest rates.

The stocks and shares ISA carries a slightly higher risk than the cash version, but stock market investments almost always provide better returns than cash over 15 years. This option is therefore ideal for longer-term saving. The stocks and shares ISA is not entirely tax-free, as a 10% tax is taken on dividends within the account, but still offers a worthwhile tax advantage.

Income tax personal allowances for ordinary earners have been frozen at £6,475.  At a time when inflation is running at 3%, this is an effective tax increase.

Inheritance Tax allowances frozen for four years. The Inheritance Tax allowance or ‘nil rate band’ remains at £325,000 for a single (£650,000 for a couple), cancelling promised increases to £350,000 made in the 2007 Finance Act. As inflation hovers at around 3%, the longer term reality is that more and more estates will find themselves drawn into the IHT net, incurring an IHT liability of 40%. 

For IHT purposes, the ‘estate’ consists of the value of the home and other properties, insurances, savings and investments, less debts and liabilities. Use of IHT exemptions and the need for financial advice are both likely to increase. The simple act of setting up life insurance ‘in trust’, for instance, removes the value of insurances from the estate, and this one step alone can be enough to avoid the 40% IHT liability.

Capital Gains Tax or CGT remains at 18% on the disposal of any asset, including shares, sales of businesses and buy-to-let properties.

For high earners, a new tax rate of 50% on earnings over £150,000 and an increase of stamp duty from 4% to 5% on homes over £1m are likely to cause considerable pain. Earners over £100,000 also gradually lose their personal allowance of £6,475, which reduces to zero by the time earnings reach £112,950. One item of consolation for high-earners applies to those who own businesses and are nearing retirement: an increase in entrepreneur’s relief tax from £1m to £2m means that, for retiring business owners selling their businesses, the first £2 million of gains will be taxed at only 10%.

A 1% increase in National Insurance contributions from April 2011 will affect all earning over £20,000, bringing their NI contributions to 12%.

For those making charitable contributions, tax relief on donations to charity will be extended from UK charities to include EU charities as well.

Will you be hit by Inheritance Tax? Check your IHT liability with our Inheritance Tax planner

Ask us about ISAs with a savings enquiry or contact us with a general financial advice enquiry now

• 52% of British workers do not pay into a pension scheme, according to Halifax
• Of those who do save, most get started at 32, save on average £59 a month, and when discussing their retirement planning list their desired retirement age as 58. On that basis, their pension income (adjusted for inflation) would be just £1,716 per year*
• 90% of annuities purchased with pension savings are level annuities that do not keep in step with inflation, despite the fact that pensioners’ income needs increase over time, especially as their health declines
• Nearly 1 in 6 people have cut back their pension contributions in the last 5 years, says the Prudential. As a result, over the next decade 27% of retirees will depend on the state pension and their own savings
• The full basic state pension for a single is now just £95.25 a week, which is less than £5,000 a year
• Pension credits can top up the basic state pension to £130 a week for a single or £198.45 for a couple - but only if you have no personal savings or additional income of your own. While this is designed as a cash boost for the most vulnerable pensioners, many have called it a penalty imposed on those who have saved
• Based on that, a third of UK pensioners are now living below the poverty line, having retirement income less than 60% of the average national wage**
• In the private sector, pension provision is a changing landscape, moving the risk of pension investment from employer to employee. As companies draw back from salary-related defined benefit pension schemes, active membership in these high quality schemes is expected to fall from 2.5m people today to 1.5m by 2050

In consideration of all these facts, the bottom line is clear: as consumers we must take on responsibility for our own retirement planning, and work with a good independent financial adviser to set up, maintain and regularly monitor a personal pension.

*Source: Halifax/Hargreaves Lansdown: By 58 their pension fund would be worth £54,814 which, allowing for inflation, could be £28,380, giving an annual income of £1,716

**Source: EU statistics agency Eurostat & UK govt wage data