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down to children but provide an income for the widow
or widower. In the 2008 Budget, you now have until
October 2008 (a six month extension) to change these
trusts to comply with new law.
Summary
f&
Everyone now pays the same rate of CGT 18%.
The difference between business and private
assets has been scrapped, along with taper
relief and indexation allowance. Capital gains
are now more valuable than income.
f&
Married couples and civil partners can double
to £624,000 the IHT-free element in their estates
rising to £700,000 in two years time. But
heterosexual couples, divorc(e)es and family
members get no benefit.
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And New Rules for CGT and IHT
f&
Your own home is free from CGT, so you pay no
tax on the profit from its sale. If you own two
houses, you should tell the Revenue which is
your principal residence .
f&
You get a tax-free allowance for CGT each year
£9,600 for 2008 9. The allowance doubles
when you own assets jointly with your partner,
but it does not carry over from one year to the
next: use it or lose it.
f&
If you own a second home, you will be liable for
CGT if you sell. But you can reduce the bill by
turning it into your main home, even for a very
short time.
f&
To reduce your estate for IHT, think about
making gifts: you can use the £3,000 a year
allowance or talk to your advisers about
making regular gifts out of income which do not
affect your standard of living.
f&
Setting up small trusts can still work up to the
nil-rate band over seven years but get advice
if you want to do more.
f&
If you inherit, remember that you can change
a will within two years by a deed of variation
provided that all the beneficiaries agree.
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Chapter 6
The Fifth Way Invest
With Care
You have put your household affairs into good shape,
you have created a cash buffer for emergencies, so you
start to think about investing. First, you have to decide
what you are aiming to achieve: a bundle of assets
which in five, 10 or maybe even 15 years time will
enable you to achieve your key ambition pay school
fees, travel round the world, buy a house in France,
whatever.
So where do you place your surplus income? The
starting-point for many people will be National
Savings: they are backed by the government, so
virtually risk-free and readily available over the internet
or by walking into your nearest post office.
National Savings really break into two classes,
Premium Bonds and then a series of other
investments some of which are attractive, but many
of which are not. Premium Bonds are a lottery where
your money capital is safe; you are gambling only
with the interest.
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The Fifth Way Invest With Care
A Gamble On Premium Bonds
When money goes into Premium Bonds each of us
is allowed to hold £30,000 worth a rate of interest is
paid to generate the monthly prize money. When this
was written, the rate was 3.8%, which was paid out in
the form of two prizes of £1 million each, plus a range
of smaller prizes. The smallest prize is £50 and if you
win the chances are 9 out of 10 that you will get either
£50 or £100; minimum holding is £100.
The odds are that, if you hold the maximum £30,000,
you will get a prize a month. This depends on the
notion of average luck ; if your luck comes out
differently, you may go months without a prize or win
the bonanza £1 million straight away. All the prizes
come tax-free and do not even have to be reported to
the Revenue. Like any tax-free investment, Premium
Bonds are worth more to higher-rate taxpayers.
Some people regard Premium Bonds as the first
essential part of an investment portfolio. Others ignore
what is after all a lottery and some will buy a few
hundred pounds worth just for the (slim) chance of a
big win. This has to be a matter for your own taste.
If you buy any sizeable amount of Premium Bonds, it
makes sense to track them like any other investment:
work out what you receive over, say, 12 months and
if you are not getting 3.8% then you should probably
count yourself unlucky and you may well decide to
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7 Ways For Anyone to Boost Their Income
cash in. National Savings will send you a cheque when
you win and you can always check your prizes on their
website.
Choice of Certificates
Outside Premium Bonds, probably the most popular
National Savings products are Savings Certificates
but you need to take on board the tax situation.
Certificates come in two forms, fixed-rate and index-
linked, and both are tax-free. If you pay no tax, you
can do better elsewhere; if you pay tax at the standard
20% rate the decision is marginal; if you pay tax at
the higher 40% rate the certificates, especially index-
linked, are potentially attractive.
Index-linked certificates pay a premium on top of
inflation, over three or five years. When this was
written, the three-year certificates offered inflation plus
1.15% compounded, and the five-year inflation plus
1.1%. An individual can hold £15,000 worth of each
issue, and a husband and wife can double up.
Example: National Savings Or Not?
Jack Aspinall and his wife Greta worry that
inflation will cut back the real value of their
pensions, so they think about putting their
savings into three-year index-linked National
Savings certificates. Jack has a final salary pension
and pays tax at 40%; Greta, who is on a teacher s
pension, pays standard rate of 20%.
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The Fifth Way Invest With Care
Jack does a sum: he reckons that 4.15% tax-free
is worth just under 6.9%. This is better than he
can get in the market, and the risks are low; in his
view, this makes up for the lack of liquidity no
interest from the certificate if he has to cash in
during the first year.
For Greta, a tax-free 4.15% equates to just under
5.2% before tax. She checks the internet and
realises that she can do better than that with an
instant access account offered by one of the major
financial groups.
Jack buys the index-linked certificates, but Greta
puts her money with a bank.
What To Hold In an ISA
The Individual Savings Account (ISA) is the other
tax-free concession which the Government offers you.
This is not a product, like a bond or a certificate from
National Savings; it is a wrapper, into which you can
put shares and unit trusts and pay no further tax. But
you need to be careful about the investments you place
in an ISA wrapper.
The ISA rules have improved since April 2008. ISAs
have been given an indefinite life and you can now put
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7 Ways For Anyone to Boost Their Income
£7,200 in each financial year into your ISA £3,600
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