EFFECTIVE INCOME STRATEGIES
PROTECTING ‘INCOME’
AND CONSERVING
WEALTH THROUGH TAX
AND TRUST PLANNING.
This is not a consumer advertisement. It is intended for professional financial
advisers and should not be relied upon by private customers or any other persons.
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IMPORTANT INFORMATION
The value of investments may fall as well as rise, and your clients
may get back less than they invest.
Although there is no fixed term, an investment bond should be
considered a medium to long-term investment of at least five years,
ideally longer.
The details are based on Legal & General’s understanding of tax law
and HM Revenue & Customs practice that may change.
Tax treatment depends on the individual circumstances of the
investor and may be subject to change in the future.
EFFECTIVE INCOME STRATEGIES
LEARNING OUTCOMES.
From this session we aim for you to be able to:
Understand the implications of the High Income Child Benefit
Charge and the tax planning strategies available in mitigation.
Understand how a marginal income tax rate of 60% can arise
and how this may be avoided.
Understand how lifetime gifts and the use of an appropriate trust
can assist in conserving wealth.
Understand the inheritance tax and income tax efficiency of the
loan trust and the discounted gift trust when generating
‘income’.
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EFFECTIVE INCOME STRATEGIES
CHILD BENEFIT TRAP.
£60,000
Adjusted
Net
Income
Tax charge equal to the total child benefit
received if income of either partner in a
household is above £60,000.
Tax charge of 1% of the total child benefit
received for every £100 of income between
£50,000 and £60,000.
£50,000
No tax charge if income is below £50,000.
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EFFECTIVE INCOME STRATEGIES
CHILD BENEFIT TRAP.
EXAMPLE ONE:
Mr SMITH
Taxable income
£32,000
Adjusted
Rental income
£6,000
net
income
Chargeable gain (£3,100 x 6)
£18,600
Taxable income
£26,000
£56,600
Mrs SMITH
Adjusted
net income
£26,000
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EFFECTIVE INCOME STRATEGIES
CHILD BENEFIT TRAP.
Mr SMITH
Adjusted
net
income
£56,600
Four children provides child benefit of £3,146:
£20.30 a week (£1055.60 a year) for the first
and £13.40 a week (£696.80 a year) for each
of the others
High Income Child Benefit charge:
Mrs SMITH
£3,146 x 66% = £2,076
Adjusted
net income
£26,000
Effective tax rate 31.5%
EFFECTIVE INCOME STRATEGIES
CHILD BENEFIT TRAP.
POSSIBLE ACTION TO REDUCE OR AVOID A TAX CHARGE:
• Transfer all or part of the rental property to Mrs Smith
• Assign all or part of the investment bond to Mrs Smith prior to
encashment
• Encash the investment bond over two tax years
• Make a gross personal pension contribution of £6,600 (£5,280 net)
• Make a gross gift aid donation of £6,600 (£5,280 net)
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EFFECTIVE INCOME STRATEGIES
CHILD BENEFIT TRAP.
EXAMPLE TWO:
Mr JONES
Adjusted
net
income
Taxable income
£50,000
Annual 20% bonus
£10,000
£60,000
Mrs JONES
Adjusted
net income
£Nil
Housewife
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EFFECTIVE INCOME STRATEGIES
CHILD BENEFIT TRAP.
Mr JONES
Adjusted
net
income
Three children provides child benefit of £2,449.20:
£20.30 a week (£1055.60 a year) for the first and
£13.40 a week (£696.80 a year) for each of the
others
£60,000
High Income Child Benefit charge:
Mrs JONES
£2,449.20 x 100% = £2,449
Adjusted
net income
£Nil
Effective tax rate 24.5%
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EFFECTIVE INCOME STRATEGIES
CHILD BENEFIT TRAP.
POSSIBLE ACTION TO REDUCE OR AVOID A TAX CHARGE:
• Make a gross gift aid donation of £10,000 (£8,000 net)
• Make a gross personal pension contribution of £10,000 (£8,000 net)
• Agree a bonus sacrifice with his employer for a pension contribution
• Bonus sacrifice to pension
• Employer’s NI saving at 13.8%
• Pension contribution
£10,000
£1,380
£11,380
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EFFECTIVE INCOME STRATEGIES
CHILD BENEFIT TRAP.
HAD NO ACTION BEEN TAKEN:
Bonus:
£10,000
Less tax and NI (2%)
£4,200
Balance
£5,800
Less child benefit tax charge
£2,449
Final balance
£3,351
An effective tax charge of 66.5%
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EFFECTIVE INCOME STRATEGIES
PERSONAL ALLOWANCE TRAP.
Above
£118,880.
£150,001 +
£118,881 - £150,000
45%
40%
£100,000
to
£118,880.
£100,000 - £118,880
60%
Personal allowance reduced by £1 for
every £2 that income exceeds £100,000
Adjusted net
income below
£100,000.
£0 - £32,010
20%
£32,011 - £100,000
40%
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EFFECTIVE INCOME STRATEGIES
PERSONAL ALLOWANCE TRAP.
Mr Brown:
• Earnings:
• Income from £400,000 investment portfolio:
• Gross income:
INCOME
£92,000
£20,000
£112,000
£112,000
Personal allowance
£3,440
at 0%
£0
Basic rate tax
£32,010
at 20%
£6,402
Higher rate tax
£76,550
at 40%
£30,620
TOTAL TAX PAYABLE
£37,022
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EFFECTIVE INCOME STRATEGIES
PERSONAL ALLOWANCE TRAP.
Mr Brown reinvests £250,000 of portfolio into an investment bond:
• Earnings
• Income from £150,000 investment portfolio:
• Gross income:
• 5% a year tax deferred withdrawals:
INCOME
£92,000
£7,500
£99,500
£12,500
£112,000
£99,500
Personal allowance
£9,440
at 0%
£0
Basic rate tax
£32,010
at 20%
£6,402
Higher rate tax
£58,050
at 40%
£23,220
TOTAL TAX PAYABLE
£29,622
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EFFECTIVE INCOME STRATEGIES
CONSERVING WEALTH.
Asset rich
and
cash poor
Over IHT threshold
but insufficient
reserves to gift
Requires
income
Will Trust
planning
Discounted
Gift Trust
Asset rich
and
cash rich
Requires
capital
Loan
Trust
Gift
Trust
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EFFECTIVE INCOME STRATEGIES
LIFETIME GIFTS.
ADVANTAGES
DISADVANTAGES
• Effective use of exemptions
• Potential CGT liability on transfer
• Remove all growth from estate
immediately
• Loss of access to capital
• Original gift only assessed for
IHT on death within seven years
• Loss of income
• Beneficiaries have immediate
use of asset
• Loss of control
• Simple to effect
• In recipient’s estate – e.g.
creditors, divorce, IHT etc
X
X
X
X
USING AN APPROPRIATE TRUST
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EFFECTIVE INCOME STRATEGIES
LIFETIME GIFTS.
ABSOLUTE TRUST
• Inflexibility:
– beneficiaries or their share
cannot be changed
– beneficial interest passes to
their estate on death
• Beneficial rights:
– automatic right to both
income and capital, which is
taxable at their marginal rates
– can demand their beneficial
rights on reaching age 18
– accessible by those who may
have a claim against them
• Parental settlement provisions
DISCRETIONARY TRUST
• Flexibility:
– trustees are the legal owners
of the trust fund
– hold on behalf of wide range
of potential beneficiaries
– control over whom, when and
how beneficiaries may benefit
• Beneficial rights:
– no automatic right to either
income or capital, which is
taxable at the rate applicable
to trusts
– protection from those who
may have a claim against
them
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EFFECTIVE INCOME STRATEGIES
LIFETIME GIFTS.
ABSOLUTE TRUST
DISCRETIONARY TRUST
• Gift is a potentially exempt
transfer (PET)
• Gift is a chargeable lifetime
transfer (CLT)
• All growth immediately outside
estate for IHT purposes
• All growth immediately outside
estate for IHT purposes
• Gift exempt when made
however, becomes chargeable
on death within seven years
• Gift in excess of available nil rate
band is chargeable to IHT at
outset
• Taper relief may be applied to
reduce any IHT payable
• Gifts also chargeable to IHT on
death within seven years
• No need to report to HMRC
• Periodic and exit charges may
apply
• Gifts subject to HMRC reporting
requirements
EFFECTIVE INCOME STRATEGIES
LOAN TRUST.
OBJECTIVES:
• Retain full access to original loan capital
• Choose to receive regular repayments of loan capital with potential to
be free from any immediate liability to personal taxation
• Avoid any potential increase in IHT liability
• Retain control as trustee
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EFFECTIVE INCOME STRATEGIES
LOAN TRUST IN ACTION.
No CLT / PET
Investor
Interest free
loan
TRUST
£
Bond
Trustees make
withdrawals to repay
loan
PERIODIC AND EXIT CHARGES MAY
APPLY
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EFFECTIVE INCOME STRATEGIES
LOAN TRUST IN ACTION.
X
Investor
Trust
TRUST
Growth
Loan
Outstanding loan
amount forms part of
estate
Available for
beneficiaries
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EFFECTIVE INCOME STRATEGIES
LOAN TRUST IN ACTION.
ASSUMING 5% A YEAR LOAN REPAYMENT.
120,000
100,000
Growth
80,000
£
60,000
40,000
20,000
Amount of loan
repaid
Outstanding Loan
0
0 Years
5 Years
10 Years
NB. The figures provided are for illustrative purposes only
15 Years
20 Years
EFFECTIVE INCOME STRATEGIES
DISCOUNTED GIFT TRUST.
OBJECTIVES:
• A pre-determined regular payment for life
• Immediate potential IHT saving
• Avoid any potential increase in IHT liability
• Retain control as a trustee
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EFFECTIVE INCOME STRATEGIES
DISCOUNTED GIFT TRUST IN ACTION.
Discounted PET or CLT
Retained
Rights
(depends on type
Investor
of trust used)
£
TRUST
TRUST
AND
AND
BOND
BOND
Settlor/Donor’s
Settlor/Donor’s
Beneficiaries’
Beneficiaries’
Fund
Fund
FundFund
Regular payments for
life (or until fund
exhausted)
PERIODIC AND EXIT CHARGES MAY
APPLY IF CLT
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EFFECTIVE INCOME STRATEGIES
DISCOUNTED GIFT TRUST IN ACTION.
≥ Seven years
X
Investor
All outside of
the estate
£
TRUST AND BOND
Settlor/Donor’s Beneficiaries’
Fund
Fund
Growth
NO IHT
ALL AVAILABLE FOR
BENEFICIARIES
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EFFECTIVE INCOME STRATEGIES
DISCOUNTED GIFT TRUST IN ACTION.
< Seven years
X
Chargeable for IHT
Investor
TRUST AND BOND
Settlor/Donor’s Beneficiaries’
Fund
Fund
Growth
NO IHT DUE AS A RESULT OF
SETTLOR’S DEATH.
AVAILABLE FOR BENEFICIARIES
EFFECTIVE INCOME STRATEGIES
SUMMARY.
How tax planning strategies may be employed to mitigate the
High Income Child Benefit Charge
How investment bonds may be used to avoid the possible
erosion of the personal income tax allowance
How the use of an appropriate trust and lifetime gifts can assist
in conserving wealth
How the loan trust and the discounted gift trust can generate
income tax and inheritance tax efficient ‘income’
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EFFECTIVE INCOME STRATEGIES
THANK YOU
- ANY
QUESTIONS?
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EFFECTIVE INCOME STRATEGIES
Legal & General Assurance Society Limited
Registered in England and Wales No. 166055
Registered office: One Coleman Street, London EC2R 5AA
Authorised by the Prudential Regulation Authority and regulated
by the Financial Conduct Authority and the Prudential Regulation
Authority.
A member of the Association of British Insurers.
Q0042089 10/13 H0143302
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