With our research partners... 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” Techlink Professional DELIVERED THROUGH TECHLINK PROFESSIONAL All you need to: Keep up to date professionally and technically Research the answers you need to your technical questions Secure business generation ideas Carry out, automatically track, record and test your technical CPD Techlink Communicator Our complete communication service that enables you to keep in touch with, inform and inspire your clients and the professional advisers you do business with. 1. 2. 3. 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