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It’s Not Necessarily Natural
Delivering tax efficient “income” through intelligent wrapper choice
[September 2013]
Disclaimer
These slides and the presentation in which they are
used are put forward for general consideration only.
They are based on fictitious persons. No action
must be taken or refrained from based on their
content. Accordingly, neither Technical Connection
Limited nor any of its officers or employees can
accept any responsibility for any loss arising of
whatever nature to any person. Professional advice
based on the facts of each case is essential.
Target Learning Outcomes
Understanding:
What “retirement” means in the new world
The importance of wrapper selection
Investment wrapper taxation at fund and investor level
How to make suitable and justifiable wrapper decisions
How to (legitimately ) minimise tax on “income”
The role of natural income in accumulation and drawdown
The tax implications of product facilitated adviser charging
Tax effectively investing for income for trustees
In relation to income it’s about…
WHEN?
WHAT?
HOW?
When?
INCOME NEED
STARTS
ACCUMULATION
DRAWDOWN
Growth
Risk
Tax Efficiency
Growth
Risk
Tax Efficiency
?
UNCERTAINTY AS TO WHEN AND
HOW MUCH advice determines
HOW
What is Retirement?
BARCLAYS WEALTH INSIGHT REPORT
(2000 HNWIS: > £1M TO INVEST)
60% of global HNWIs say they will never retire, will continue
to work, start businesses, take on new projects
Concept of “Nevertirement” expected to grow over coming
decades
70% of respondents under 45 saying they will always be
involved in some form or work
What is Retirement?
75% of respondents plan to work part time once they have
stopped working permanently
32% plan to work 5-20 hours per week
Simply reaching “NRA” is not important in determining when
to stop working
What is Retirement?
UNPREDICTABILITY rules
UNPREDICTABILITY over when income
might be needed or how much income
might be needed
AND UNPREDICTABILITY over
 health/vitality
 investment returns
 taxation
How to Produce Income
When income from
employment or business
ownership ceases or
reduces
It’s Natural… Isn’t it?
•
Natural income (interest/yield) essential to
-
deliver “spendable income”
-
drive capital growth
Capital growth
Reinvested
dividends
Total
return
Barclays Equity Gilt Report:
“Over half of total returns come from reinvested
dividends”
And…
For other than pension, ISA,
VCT, EIS…
Portfolio Wrapper Choice
Wrapper choice makes a
Difference to the bottom line
Bonds are Dead Post-RDR?
Offshore bonds offer portfolio agnostic tax deferral
Dividends in UK bonds tax free
Indexation relief on realised gains in UK bond
Lower effective tax rate on capital gains in UK
bonds
Full basic rate credit for chargeable gains on UK
bonds
Exit strategies to access lower tax rates
Easy to hold in trust
BUT, ULTIMATELY…
IT ALL DEPENDS ON
THE FACTS
The New World for Tax Planners
BEING AWARE OF THE ZEITGEIST
HMRC Need to Close the Gap
STARS
TAARS
GAAR
TAAR… But No Thanks
NEW IHT RULES FOR DEDUCTING LIABILITIES
1. Liabilities not actually repaid on death or out of the deceased’s
estate
2. Liabilities to finance the acquisition, enhancement or
maintenance of excluded property
3. Liabilities attributable to the acquisition, maintenance or
enhancement of relievable (BPR, APR, Woodlands) property:
provided liability incurred after 5.4.2013
General Ant(i) Abuse Rule
You stupid , idiotic, Geordie TV
presenter
Tax Planning Today
BORING IS THE NEW EXCITING
Tax planning minimises risk
Minimising tax makes achieving
the target easier…. so minimises
risk
Taxation in Accumulation
Minimising tax on income during
accumulation maximises return
on an important component of
overall growth
High Yield Investment: Higher Rate
Taxpaying Investor
Invested:
£100,000
Term:
10 years
Fund:
20% fixed interest: 5% interest
0% growth
80% equity: 5% yield 2.5% growth
Income tax: 40% through investment period
CGT:
Use annual exemption each year
High Yield Investment: Higher Rate
Taxpaying Investor
PRE ENCASHMENT
£196,715
£193,069
£172,440
UK
BOND
OFFSHORE
BOND
COLLECTIVE
High Yield Investment: Higher Rate
Taxpaying Investor
POST ENCASHMENT
(Higher rate taxpayer)
£174,455
5.72%
£172,392
5.6%
£158,029
4.68%
UK
BOND
OFFSHORE
BOND
COLLECTIVE
High Yield Investment: Higher Rate
Taxpaying Investor
POST ENCASHMENT
(Basic rate taxpayer)
£193,069
6.8%
UK
BOND
£177,372
5.9%
OFFSHORE
BOND
£172,410
5.6%
COLLECTIVE
Growth Investment
INVESTED
TERM
FUND
INCOME TAX
CGT
£100,000
10 Years
7% Growth
20% / 40%
Use Annual
Exemption Each
Year
Growth Investment
PRE ENCASHMENT
£196,715
£196,715
OFFSHORE
BOND
COLLECTIVE
£182,321
UK
BOND
Growth Investment
POST ENCASHMENT :Higher rate taxpayer
£193.575*
6.83%
£165,857
5.19%
UK
BOND
£158.029
4.68%
OFFSHORE
BOND
COLLECTIVE
* Less if annual exemption not used each year
Growth Investment
POST ENCASHMENT : Basic rate taxpayer
£182,321
6.19%
UK
BOND
£194,696*
6.89%
£177,372
5.9%
OFFSHORE
BOND
COLLECTIVE
* Less if annual exemption not used each year
Balanced Fund: Higher Rate Taxpaying
Investor
INVESTED
TERM
FUND
INCOME TAX
CGT
£100,000
10 Years
20% Fixed Interest: 4% Interest
2% Growth
80% Equity: 4% Yield 4% Growth
40% Throughout Investment
Period and on Encashment
Use Annual Exemption Each Year
Balanced Fund
PRE ENCASHMENT
£208,028
£201,210
£187,362
UK
BOND
OFFSHORE
BOND
COLLECTIVE
Balanced Fund
POST ENCASHMENT :Higher rate taxpayer
£187,362*
6.48%
£180,968
6.11%
UK
BOND
£164,817
5.12%
OFFSHORE
BOND
COLLECTIVE
* Less (£177,496) if annual exemption not used each year
Balanced Fund
POST ENCASHMENT : Basic rate taxpayer
£201,210
7.24%
UK
BOND
£186,423
6.43%
OFFSHORE
BOND
£187,362*
6.48%
COLLECTIVE
* Less (£181,019) if annual exemption not used each year
… And When You Need The Money
POSSIBLE CHOICES
SME
PROFIT/
INCOME
VCT/ EIS
S
E
L
F
CONTINUED
EMPLOYMENT
SE
INSURANCE
PRODUCTS
(BONDS)
PENSIONS
>75
>75
COLLECTIVES
● Risk ● Income tax ● CGT ● IHT
ISA
Immediate “Income” from Bonds /
Collectives
INVESTED
TERM
INCOME FROM
INCOME
FUND
INCOME TAX
CGT
£100,000
20 Years
Immediate
5% Original Investment
20% FI (3% / 0%)
80% Equity (4% / 4%)
40% Throughout Investment Period
(40% / 20% at end)
Use Annual Exemption Each Year
Immediate “Income” from Bonds /
Collectives
Investment value at end of 20 years after £5,000 PA
20%
40%
£181,991
£170,004
6.75%
£136,003
5.98%
ONSHORE
BOND
20%
£145,593
6.21%
40%
£109,195
5.27%
OFFSHORE
BOND
£135,163(20%/40%)
5.96%
COLLECTIVE
Immediate “Income” from Bonds /
Collectives
Investment value at end of 20 years after “income” of 5%
PA of fund value
£136,723
20%
40%
£132,482
6.58%
£105,985
5.93%
ONSHORE
BOND
£114,107 (20%/40%)
5.96% *
20%
£110,978
5.95%
40%
£83,234
5.17%
OFFSHORE
BOND
COLLECTIVE
* Less net income
Deferred “Income” from Bonds /
Collectives
INVESTED
TERM
INCOME FROM
INCOME
FUND IN ACC
INCOME TAX
£100,000
20 Years
10 Years
5% of Fund Value
20% FI (3% / 0%)
80% Equity (4% / 4%)
40% FI (3% / 0%)
60% Equity (4% / 4%)
40% in acc / 20% in DD and at end
CGT
Use Annual Exemption Each Year
FUND IN DD
Deferred Income
Post tax investment value after 20 years
£201,508
6.31%
UK
BOND
£168,742
5.77%
OFFSHORE
BOND
£185,574*
5.83%
COLLECTIVE
* Less (£175,427) if annual exemption not used each year
Wrapper Allocation
CONSISTENT
WRAPPER
OUTCOME:
ONE
WRAPPER
DIFFERENT
WRAPPER
OUTCOMES:
WRAPPER
ALLOCATIONS
MODEL SEVERAL
LIKELY/POSSIBLE COMBINATIONS
OF VARIABLES
WRAPPER SELECTION
DETERMIEND BY VARIABLES
▪ Terms ▪ Yield ▪ Growth ▪ Tax
Adviser Charging Facilitated Through
Investments
FACT: Most advisers wish to facilitate adviser
charging through financial products /
investments
Taxation and Investment Facilitated
Adviser Charging
FROM OWN
CASH
NO TAX
Adviser
IMPLICATION
NO TAX
PENSION
FUND
IMPLICATION
ISA
NO TAX
Adviser
Adviser
(But do you
want to do it?)
Taxation and Investment Facilitated
Adviser Charging
Payments from Collectives
CASH ACCOUNT *
NO
TAX
SMALL PART DISPOSALS
CGT Event
* Possibly topped up through rebalancing but would reduce “net of
fees” income
Taxation and Investment Facilitated
Adviser Charging
INVESTMENT BOND
Chargeable
Adviser
disposal
(5% rule)
Adviser Charging and Trust Solutions
FACILITATING ADVISER
CHARGING THROUGH
RIPS IN TRUST
Charges for Ongoing Advice
With financial products in trust…..
TRUST
Paid from trust?
Breach/GWR
BOND W/D
Charge for
initial
advice
Paid from
own funds:
No tax
COLL SALE
GIA CASH
ACCOUNT
Settlor
Possible tax
Paid by
Settlor?
Further gift
(Poss N.EXP)
(Exclude right
to reclaim?)
Charge for
ongoing advice
No
tax
Investing for Tax Effective Income:
Trustees
INCOME DRIVING ACCUMULATION
DISCRETIONARY TRUSTS
Dividends:
37.5% (30.5%) *
Interest:
45%
Capital gains:
Assessed on Settlor
If Settlor deceased/non-UK resident
Ch Gains
25% (UK
* Standard rate on first £1,000 pa
45% (offshore)
Investing for Tax Effective Income:
Trustees
INCOME DRIVING ACCUMULATION
INTEREST IN POSSESSION TRUSTS
Dividends:
Interest:
Assessed on Beneficiary
Capital gains:
28%
Chargeable gains
Assessed on Settlor ..
If Settlor deceased/non-UK
resident:
Trustees:
25% (UK)
45% (offshore)
Investing for Tax Effective Income:
Trustees
INCOME DRIVING ACCUMULATION
Portfolio selection based on attitude to risk:
Trustee requirements
Wrapper choice based on tax efficiency
Wrapper allocation possible
Wrapper allocation possible
Investing for Tax Effective Income:
Trustees
To deliver regular, tax efficient payments to beneficiaries
DISCRETIONARY TRUST
COLLECTIVES
UK BOND
OFFSHORE
BOND
Divis
Interest
Capital
Income
Capital (chargeable
gain)
Capital
Capital (chargeable
gain)
Distribution of Dividends (2013/14)
Stage 1: Trustee’s Tax Receipt
Income received by
trustees £90
Income tax of £27.50
paid to HMRC by the
trustees
Income remaining £62.50
[£100 grossed-up
equivalent]
[37.5% of £100 = 37.5%
£37.50 less tax credit of
£10 so tax of £27.50 to
pay]
[£90 less £27.50]
Distribution of Dividends (2013/14)
Stage 2: Trustee Tax on Distribution
Income received by trustees
£90
[£88.89 grossed-up
equivalent]
Income tax of £27.50 paid to
HMRC by the trustees
[37.5% of £100 = 37.50
less tax credit of £10 so
tax of £27.50 to pay]
Income remaining £62.50
Distribution to beneficiary
£49.50
[£90 available less £40.50
(ie. 45% of £90]
[£90 less £27.50]
Trustees` extra tax on
distribution £13
[Total liability £40.50 less £27.50
already paid]
A Solution to the Problem
Advancement of Capital
Trustees invest for equity-based capital growth
Use trustees’ annual CGT exemption (£5,450) to
release capital and appoint
Must be power to advance in trust
But…tax planning subject to investment suitability:
Growth based investment can be more volatile/carry
additional risk
Another Solution to the Problem
Trustees invest in UK/Offshore bond
No trustee taxation of income or gains
No underlying investment “constraints”
Trustees withdraw/encash (care which)
Trustees advance capital
Must be power to advance capital
Trust Capital Taxed as Income?
Original Revenue view - purpose of payment
Brodies Will Trustees
Stevenson -v- Wishart (1987)
Don`t advance if in exercise of a specific
direction to augment income under trust
(unlikely to exist)
Tax Effectively Funding Regular Payments
for Beneficiaries Entitled to Income?
“Natural” Trust income taxed on beneficiaries: No “tax
credit” gap
Consider advancing capital if power
Invest for capital to supplement natural income
Invest through investment bonds and replace “natural”
income with withdrawals from bonds – if tax effective
Opportunity
Advice can add the “X Factor” to
the income “bottom line”
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