Important information This presentation is provided to you by Zurich Intermediary Group in your capacity as a financial services industry professional. It must not be made available or copied or otherwise quoted or referred to in whole or in part in any way, including orally, to any person without our express written permission, which we may, at our absolute discretion, grant or withhold or grant subject to conditions, including conditions as to our responsibility. We accept no duty or responsibility, and we disclaim all liability whether in contract, tort (including negligence) in respect of this material but this sentence does not exclude any liability which by law cannot be excluded. For intermediary use only – not for use with your clients Tax Wrappers & Taxation – taxation considerations when giving investment advice Andy Woollon, Dip PFS Strategic Partner Specialist For intermediary use only – not for use with your clients 2 Transfer of risk onto the individual For intermediary use only – not for use with your clients Mind the gap…..tax matters! Government investing almost £1bn to increase tax compliance Source: HMRC – Levelling the tax playing field – March 2013 For intermediary use only – not for use with your clients 4 But are clients disclosing investments correctly? For intermediary use only – not for use with your clients 5 Sources of “income”- minimizing tax liability E.g. Mortgages / E.g. OEICs / UTs Loans / Credit cards Borrowed E.g. 5% Inv-bonds / structured deposits Income deferred liability Capital Income immediate liability E.g. Deposits / Yield from OEICS / UTs Tax Free E.g. ISA Income less tax payable E.g. PAYE income, pension, shares For intermediary use only – not for use with your clients 6 Personal tax computation order Income 5th – Capital Gains 4th – Chargeable Event Gains 3rd – Investment e.g. Dividends 2nd – Savings Ignoring National Insurance and indirect taxes/traps 1st – Non Savings Personal Allowance / Age Allowance For intermediary use only – not for use with your clients 7 Discombobulated? For intermediary use only – not for use with your clients 8 Learning Outcomes By the end of this session you will be able to explain how: the taxation of different investment products and funds affects advice to different age and income groups; the Budget changes to the ISA allowance, other investment options and taxation allowances will impact on investment decisions; to make effective use of the various tax allowances, whilst avoiding tax traps that can reduce client returns. Knowledge is .…. opportunity For intermediary use only – not for use with your clients Taxation of tax wrappers & assets For intermediary use only – not for use with your clients 10 Wealth and income lifecycle Schoo l Nil Income College & tertiary Career building years Nil to Low Income Modest Income and Low Capital Accumulation Prime Retirement & Estate Planning High Income and Capital Accumulation Low to Medium Income* and Wealth De-accumulation *May have a need for higher income for Care Home fees Matching assets and tax wrappers For intermediary use only – not for use with your clients 11 Advice process Clear picture of current position Future relationship strategy Report of solutions advised and actions taken Understanding of current value and worth T A X Implement solutions Tax wrapper selection? Establishing long term goals Strategy plan For intermediary use only – not for use with your clients 12 Key facts to consider… Fund choice & switching Assignment & account designation Education funding Legislation changes Tax traps Asset type & performance Income withdrawals & CGT Age Death & ill health Customer tax & investment amount Customer charges IHT planning & trusts Self assessment Adviser charging Admin & online capability Care home fees planning For intermediary use only – not for use with your clients 13 Main tax wrappers For intermediary use only – not for use with your clients 14 Tax and onshore bonds Gains Dividends Interest/Rent FUND 20% within fund after indexation relief and expenses Within fund, received net of 10% or 20% tax credit Within fund, received net of 20% INVESTOR UK investment bond – fund and investor taxation Pays 0%, 20% or 25% of net gain NT/SRT no reclaim No further liability No further liability Tax and authorised investment funds Gains Dividends Interest/Rent FUND No tax within fund Within fund, received net of 10% or 20% tax credit Within fund, received net of 20% INVESTOR UK unit trust / OEIC – fund and investor taxation Pays 18% or 28% on gains over exemption Pays 0%, 22.5% or 27.5% additional tax Pays 0%, 20% or 25% additional tax NT/SRT can reclaim Calculating capital gains Establish current year gain Minus current year loss Deduct Capital Gains Tax Annual Exemption Elect whether to utilise carry forward losses = Net taxable gain For intermediary use only – not for use with your clients 17 Higher Rate Income Tax Additional Rate Income Tax Calculating the CGT rate Net Gain @ 28% Higher Rate Personal Allowance / Age Allowance Basic Rate Income Tax Basic Rate Tax Threshold Net Gain @ 18% Basic Rate Taxable Income For intermediary use only – not for use with your clients 18 Tax and onshore bonds Gains Dividends Interest/Rent FUND No tax within fund UK dividends received net of 10% tax credit No tax, received gross INVESTOR Offshore bond – fund and investor taxation Pays 0%, 10%, 20%, 40% or 45% of net gain No further liability No further liability Wrapper allocation National Savings ISA Pension Onshore Bond Tax- Free Growth Tax Efficient Growth Tax Efficient Growth Life Fund Tax in fund Limited Amounts Limited Amounts Limited Amounts HRT/ART on exit Income not Taxed Tax Relief on Contributions 5% a year Tax Deferred Tax- Free Cash Sum Top-slicing relief Income Taxed as Earned Income Offshore Bond UK Unit Trust / OEIC Gross Roll Up No Tax in Fund Tax at highest marginal rate CGT on disposal 5% a year Tax Deferred Income Taxed at highest marginal rate Top-slicing relief Time Apportionment Relief For intermediary use only – not for use with your clients 20 Investment Bonds Yielding Funds / 5% Tax-deferred Deposits Collectives Non-Yielding Funds Capital Gains exemption NISA Savings rate band Personal & Age-related Allowance Fixed Interest / Property Asset Wrapper Tax efficiency Deposits Fixed Interest Yield Offshore Bond Gains For intermediary use only – not for use with your clients 21 Handset Question 1 Do you have clients invested in UT/OEIC funds who may not fully understand the taxation implications and risk not fully disclosing all income to HMRC?: Yes – press 1 No – press 2 For intermediary use only – not for use with your clients Budget 2014 update For intermediary use only – not for use with your clients 23 The New ISA (NISA) JISA and CTF for under 16’s – stocks & shares or cash – up to £4,000 NISA for 16-18 year olds – cash only – up to £15,000 For intermediary use only – not for use with your clients NISAs – extra appeal? Increased flexibility on transfer: Cash to Stocks & Shares and vice versa Switch within the existing wrapper Extension of eligible assets: Starting / Basic rate taxpayers Higher / Additional rate taxpayers Tax traps – Age/Personal allowance, Child Benefit NISA vs Pension alternative? For intermediary use only – not for use with your clients Allowance and taxation changes 6/4/2013 6/4/2014 6/4/2015 Personal allowance Age-related allowance <75 £9,440 £10,500 £10,000 £10,500 £10,500 £10,500 Age-related allowance >75 £10,660 £10,660 £10,660 Age-related income limit £26,100 £27,000 TBC Starting rate band at 10% £2,720 £2,880 - Starting rate band at 0% - - £5,000 Basic rate tax band £32,010 £31,865 £31,785 Higher rate tax threshold £41,450 £41,865 £42,285 Annual CGT exemption £10,900 £11,000 £11,100 Source: HMRC Starting rate for savings income New 0% starting rate for savings income from 6th April 2015 Starting rate band for savings income increases to £5,000 Band reduces proportionately for any non-savings income above personal allowance, as per current practice No tax payable if non-savings and savings income is less than £15,500 Savings income = deposits, fixed interest yield and offshore bond gains Potentially beneficial for pensioners with savings or income from fixed interest funds, and investors with gains from offshore bonds Starting rate for savings income Example – from April 2015 – Sheila age 60 Part-time job at DIY store Personal allowance Taxed at 20% on £12,000 £10,500 £1,500 Deposit interest of £400 net (£25,000 * 2%) (£500 gross) Total gross income £12,500 Total income is below £15,500 (personal allowance + starting rate band) Can apply for tax-free savings with form R85 Source: HM Treasury fact sheet - Abolishing the 10% rate of tax on savings income Starting rate for savings income Example – from April 2015 – Derek age 60 Pension Personal allowance Taxed at 20% on £14,000 £10,500 £3,500 Fixed Interest yield of £2,000 net (£62,500 * 4%) Total gross income (£2,500 gross) £16,500 Total income is above £15,500 (personal allowance + starting rate band) Cannot apply for tax-free savings – but can claim back the tax on £1,500 of the Fixed Interest yield with form R40 Source: HM Treasury fact sheet - Abolishing the 10% rate of tax on savings income Starting rate for savings income Example – from April 2015 – Ronald age 75 Pension Personal allowance No tax is due £10,000 £10,500 Offshore bond gains of £5,500 gross (£55,000 gain / 10 years) Total gross income £15,500 Total income is below £15,500 (personal allowance + starting rate band) No tax payable on offshore bond encashment Source: HM Treasury fact sheet - Abolishing the 10% rate of tax on savings income Mind the tax traps! For intermediary use only – not for use with your clients 31 Personal Allowance Child Benefit Higher Rate Tax Age Allowance 60 50 40 30 20 10 Effective rate of tax % The tax traps 70 0 160,000 150,000 140,000 130,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Income £ Adjusted Net Income Earned income Savings / Investment income Pension / Trust income Chargeable gains (full gain) Less Gift aid payments Pension contributions (gross) Trading losses = Adjusted Net Income Age allowance trap – 2014/15 30% £1,000 Marginal Rate £17,500 Basic rate tax @20% = £3,600 £27,000 income limit £10,000 personal allowance only, as £500 £10,000 £500 of 65-74 age allowance lost on a 2for-1 basis on income over £27,000 For intermediary use only – not for use with your clients 34 Personal allowance tax trap – 2014/15 For each £2 of adjusted net income over £100,000 the personal allowance reduces by £1 £121,000 £120,000 £118,880 60% effective tax rate £100,000 £ 100,000 £100,000 Tax year 2013/14 60% effective tax rate 60% effective tax rate Tax year 2014/15 Tax year 2015/16 Personal allowance tax trap – 2014/15 Client with £120,000 adjusted net income OR Income over limit £20,000 Lost personal allowance £10,000 Make a £20,000 gross pension contribution Income taxed @ 40% Lost allowance taxed @ 40% £10,000 invested in Reduction = £4,000 tax bank £8,000 = £8,000 tax 60% tax Amount in bank Amount in pension = £8,000 = £20,000 Higher rate tax threshold trap 1.1 million extra higher rate taxpayers* Source: HMRC and IFS* For intermediary use only – not for use with your clients 37 Child Benefit tax trap – 2014/15 For each £100 of adjusted net income over £50,000 the child benefit reduces by 1% Income Tax 40% £4,000 Income Tax 40% £4,000 Income Tax 40% £4,000 Income Tax 40% £4,000 £50,000 Child Benefit tax charge £1,066.00 Child Benefit tax charge £1,770.60 Child Benefit tax charge £2,475.20 Child Benefit tax charge £3,179.40 Bank £10,000 £4,934 £10,000 £6,000 Bank £10,000 £6,000 £4,229 £10,000 Bank £10,000 £6,000 £3,525 £10,000 Bank £10,000 £60,000 £10,000 £6,000 £2,820 Child Benefit tax trap – 2014/15 Client with £60,000 adjusted net income OR Income over limit £10,000 Lost child benefit (2 kids) £1,770.60 Make a £10,000 gross pension contribution Income taxed @ 40% Lost child benefit £10,000 invested in Reduction = £1,770.60 bank £4,248 = £4,000 tax 57.70% tax Amount in bank Amount in pension = £4,229.40 = £10,000 Maximising use of allowances How much could an individual invest at 4%pa net, and by only using their 2015/16 personal allowance, starting rate band for savings income, NISA and annual CGT exemption, not pay any Income Tax? 1. £117,500 2. £217,500 3. £317,500 4. £417,500 Approximately £417,500 For intermediary use only – not for use with your clients 40 Fully utilised allowances can be valuable Allowance type & amount in Equivalent investment 2015/16 amount return*) (@4% net Income Tax payable Personal allowance £10,500 Nil – assumed offsets pension income Nil 0% savings rate band £5,000 £125,000* Nil NISA allowance £15,000 £15,000 Nil Annual CGT exemption £11,100 £277,500* (in zero yielding funds) Nil (and no CGT) Total = £417,500 NIL Other sources of untaxed ‘income’ may include existing ISAs and tax-deferred withdrawals from investment bonds Platforms can facilitate use of multiple wrappers Investment Account ISA Investment Bond PLATFORM Pension Funding Other Pension Income For intermediary use only – not for use with your clients 42 Treating Customers Fairly Outcome 1 Consumers can be confident that they are dealing with firms where fair treatment of customers is central to the corporate culture. Outcome 2 Products and services marketed and sold are designed to meet the needs of identified consumer groups and are targeted accordingly. Outcome 3 Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale. Outcome 4 Where consumers received advice, the advice is suitable and takes into account their circumstances. Outcome 5 Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard as they have been led to expect. Outcome 6 Consumers do not face unreasonable post-sale barriers imposed by firms to change products, switch provider, submit a claim or make a complaint. For intermediary use only – not for use with your clients 43 Handset Question 2 Do you have any of the following client types that may benefit from further advice around allowances and taxation: older individuals looking to fully utilise their allowances; those investing into income-producing funds, but not doing a tax return; high earners potentially caught by tax traps; clients expecting their tax rate to reduce in future; those already fully using their annual CGT exemption. Yes – press 1 No – press 2 For intermediary use only – not for use with your clients Next steps Visit: www.zurichintermediary.co.uk Call: Technical Support Team on 0870 6092178 Review and segment your clients: Those who are older and/or have deposits Actively use their ISA allowance By income levels or tax/trap thresholds HRT who don’t want to lose child benefit Contact your Zurich Partnership Development consultant for: Details of our Platform and associated funds and features Details of our range of Adviser Tools Sterling Flexible Bond information 45 Handset Question 3 Would you like a Zurich Partnership Development Consultant to contact you regarding the support available? Yes – press 1 No – press 2 For intermediary use only – not for use with your clients Thank you for listening Important information Any tax and legislation information is based on . Zurich’s current understanding and may change in the future Zurich Intermediary Group Limited. Registered in England and Wales under company number 01909111 Registered Office:The Grange, Bishops Cleeve, Cheltenham, GL52 8XX. Telephone no. 0500 546 546. We may monitor or record calls to improve service. For use by professional financial advisers only. No other person should rely on, or act on any information in this advertisement when making an investment decision. This advertisement has not been approved for use with clients.