Personal Taxation
Analyse the taxation of investment as relevant to the
needs and circumstances of individuals and trusts:
Gaps 79 - 88
Eddie Grant, FPFS
Chartered Financial Planner
CII accredited Adviser
DISCLAIMER
This gap fill session is of a general
nature and is not a substitute for
professional advice. No responsibility
can be accepted for the consequences
of any action taken or refrained from as
a result of what is said.
Gap fill process
Reflective statements
Gaps
• Gap 79 - cash, fixed interest, securities, equities and property
• Gap 80 - pension arrangements
• Gap 81 - individual savings accounts (ISAs)
• Gap 82 - child trust funds (CTFs)
• Gap 83 - onshore and offshore collectives, investment companies
• Gap 84 - onshore and offshore life assurance policies
• Gap 85 - real estate investment trusts (REITs)
• Gap 86 - venture capital trusts (VCTs)
• Gap 87 - enterprise investment schemes (EIS)
• Gap 88 - main uses of lifetime gifts and trusts in IHT planning
Gap 79 - Direct investments cash and cash equivalents,
fixed interest, securities,
equities and property.
Learning Point: analyse the taxation of investment as relevant
to the needs and circumstances of individuals and trusts.
Capital
Gains
Investment
Bonds
Dividends
Savings
Non-Savings
Taxation Stack
Capital
Gains
Additional
Rate
50%
Higher
Rate
40%
Basic
Rate
20%
Personal
Allowance
0%
Investment
Bonds
Dividends
Savings
Non-Savings
NonSavings
Taxation Stack
Capital
Gains
Additional
Rate
50%
50%
Higher
Rate
40%
40%
Basic
Rate
20%
Investment
Bonds
Dividends
20%
10%
Savings
Personal
Allowance
0%
0%
NonSavings
Savings
Non-Savings
Taxation Stack
Savings income
• Interest from banks and building societies.
• Interest distributions from authorised unit trusts.
• Interest from gilts and other securities, including corporate
bonds.
• The interest content of purchased life annuities.
• Discounts, e.g. on deep discount bonds.
• Onshore taxed at source at basic rate
Grossing up
Savings Income
£400 received net of basic rate tax
/ 0.8 = £500 gross
Or
X 1.25 = £500 gross
Savings
50% Additional Rate Tax band
£150,000 Taxable Income
40% High Rate Tax band
£34,370 Taxable Income
20% Basic Rate Band
10% Savings Rate
Reliefs and Allowance
Taxation of savings
Computation
Earnings
Total
£29,000
Taxation of savings
Computation
Total
Earnings
£29,000
Building society interest gross
£15,000 net / 0.8
£18,750
Total
£47,750
Taxation of savings
Computation
Total
Earnings
£29,000
Building society interest gross
£15,000 net / 0.8
£18,750
Total
£47,750
Less personal allowance
(£8,105)
Income on which tax is calculated
£39,645
Taxation of savings
Computation
Total
Income on which tax is calculated
£39,645
£34,370 @20%
£6,874
£5,275 @40%
£2,110
Total tax
£8,984
Taxation of savings
Computation
Total
Income on which tax is calculated
£39,645
£34,370 @20%
£6,874
£5,275 @40%
£2,110
Total tax
£8,984
£3,750 tax deducted at source offset against £8,984
Cash deposits
• Non-tax payers complete R85 to receive interest gross
• Interest paid gross on National Savings deposit accounts
• UK tax not deducted from offshore bank accounts
– EU Savings Directive withholding tax 35% from 1 July 2011 can be offset against
UK tax liability
– No tax deducted if offshore bank allowed to declare interest to HMRC
• Interest must be shown on tax returns
Demutualisation
• Cash Bonus
– Cash payment for giving up membership rights
– Disposal for CGT but likely to be within exemption
– If no membership rights given up then no CGT liability
• Free Shares
– Issue of shares are free of CGT and Income Tax
– Acquisition costs are nil for CGT purposes
NS&I Deposits
• Investment Account
–
–
–
–
Aged 7 or more own right
Under 7 on behalf of
Interest paid gross
No notice no penalty
– Suitable for non-tax payers
NS&I Deposits
• Easy Access Account
–
–
–
–
–
–
Aged 11 or more own right
Interest paid gross
Tiered interest
No notice
Telephone or cash card
Minimum £100 balance
NS&I Deposits
• Direct Saver Account
–
–
–
–
–
–
Aged 16 or more own right
Interest paid gross
No notice
Telephone or online
Minimum £1 balance
Maximum £2 million
NS&I Certificates
• Fixed interest issues
– Five and two year term
certificates (not currently
available)
– £15,000 maximum initial
investment
– Free of tax
• Interest Linked
– Held over 1 year redemption
is indexed-linked
NS&I Income and Growth bonds
– Paid net of basic rate
– One, three and five years
– £500 to £1 million
– 90 days’ loss of interest
– Savings income
NS&I Children’s Bonus Bond
– Anyone over 16 can
purchase for under 16
– Encashed by 21 years old
– Tax-free
– £3,000 maximum per child,
per issue.
Fixed Interest Securities
No liability to CGT
– losses not allowable
• Gilts - loans to the UK government
– Fixed rate of interest paid gross twice yearly
– Accrued interest taxable if gilt holding exceeds £5,000
Fixed Interest Securities
No liability to CGT
– losses not allowable
• Gilts - loans to the UK government
– Fixed rate of interest paid gross twice yearly
– Accrued interest taxable if gilt holding exceeds £5,000
• Local Authority bonds - loans to local government at a fixed rate
of interest
– interest paid twice yearly net of 20% tax, capital repaid if held to
maturity
Fixed Interest Securities
No liability to CGT
– losses not allowable
• Gilts - loans to the UK government
– Fixed rate of interest paid gross twice yearly
– Accrued interest taxable if gilt holding exceeds £5,000
• Local Authority bonds - loans to local government at a fixed rate
of interest
– interest paid twice yearly net of 20% tax, capital repaid if held to
maturity
• Corporate bonds - loans to companies that bear interest for a fixed
term when the capital is repaid
– interest paid net of 20% tax
Fixed Interest Securities
• Permanent Interest Bearing Shares (PIBS) - loans to building
societies
– Fixed rate of interest paid gross twice yearly
Fixed Interest Securities
• Permanent Interest Bearing Shares (PIBS) - loans to building
societies
– Fixed rate of interest paid gross twice yearly
• Deep discounted or Zero Coupon Bonds
– Pay nil or very little interest
– Both bonds are offered for sale at a large discount
– Profits taxed as Income
– Acquisition and sales costs are allowed as expenses and losses
can be offset against income tax in the year of encashment
Shares
• Confer ownership rights
• Voting rights
• Capital growth
• Dividends
Grossing up
Dividend Income
£400 received net of 10%
tax credit
/ 0.9 = £444.44 gross
Tax credit
£1
10%
10p Tax Credit
NonTaxpayer
Nonreclaimable
Tax credit
£1
£1
10%
10%
10p Tax Credit
NonTaxpayer
10p Tax Credit
Basic
Taxpayer
Nonreclaimable
Tax credit
£1
£1
£1
32.5%
10%
10%
10p Tax Credit
NonTaxpayer
10p Tax Credit
Basic
Taxpayer
Nonreclaimable
22.5p
10p Tax Credit
Higher
Taxpayer
Tax credit
£1
£1
£1
32.5%
10%
10%
10p Tax Credit
NonTaxpayer
10p Tax Credit
Basic
Taxpayer
Nonreclaimable
22.5p
£1
42.5%
32.5p
10p Tax Credit
10p Tax Credit
Higher
Taxpayer
Additional
Taxpayer
Additional Rate Taxpayer
£400 dividend declared
/0.9
Gross Dividend = £444.44
10% tax credit
= £ 44.44
32.5% of £444.44 = £144.44
Tax total tax paid = £188.88
42.5%
32.5p
10p Tax Credit
Additional
Taxpayer
Taxation of dividends
Computation
Total
Earnings
£40,000.00
Dividend £5,000 / 0.9
£5,555.55
Total
£45,555.55
Less personal allowance
Income on which tax is calculated
(£8,105)
£37,450.55
Taxation of dividends
Computation
Income on which tax is calculated
Total
£37,450.55
of which
Non-savings
£31,895.00
Dividends
£5,555.55
Taxation of dividends
Computation
Income on which tax is calculated
Total
£37,450.55
of which
Non savings
£31,895.00
Dividends
£5,555.55
Dividends
£34,370.00
£3,080.55
£2,475.00
Higher Rate
Basic Rate
Taxation of dividends
Computation
£31,895.00 Non-Savings @ 20%
£2,475.00 dividends @ 10%
Total
£6,379.00
£247.50
£3,080.55 dividends @ 32.5%
£1,001.78
Total tax
£7,628.28
£555.55 tax deducted at source offset against £7,628.28
Capital
Gains
Additional
Rate
50%
50%
42.5%
Higher
Rate
40%
40%
32.5%
20%
10%
Investment
Bonds
Dividends
Basic
Rate
20%
10%
Savings
Personal
Allowance
Tax Credit
NonReclaimable
10%
0%
0%
NonSavings
Savings
Tax Credit
NonReclaimable
Non-Savings
Taxation Stack
Dividends
Let property
• Profits taxed as non-savings income.
• Overseas property income taxed separately from UK
property income.
• Expenses and capital allowances can be deducted.
• Assessable to Income Tax in the year the profit arises
via self-assessment.
• Any loss is automatically carried forward and set against
future lettings profits.
• Subject to CGT on sale.
Expenses, Allowances and Reliefs
Deductible expenses
•
•
•
•
Capital Allowances
Reliefs
•
•
Repairs and maintenance (not cost of alterations or
improvements)
Interest payable on borrowing for the purposes of the
property letting
Landlord’s energy saving allowance – up to £1,500
Legal fees, professional charges, insurance premiums,
utility bills if paid by the landlord
•
Capital allowance deducted as an expense
Plant & Machinery allowance is available for capital
expenditure on equipment installed
Not available for furniture used in residential property
•
•
•
CGT rollover
CGT holdover
IHT Business Property
Residential Property
• Wear and tear
– 10% of annual rent can be offset against profits
– Can claim for replacement fixtures
• Renewals
– Claim the cost of renewing or replacing furniture
– Must offset any gains made from selling items first
Property profits
- basis of assessment
• Arising basis
• Accounts have to be prepared for the actual tax
year
– although HMRC usually accepts accounts to 31
March instead of 5 April.
• Tax is payable under the self-assessment rules
Property profits
- basis of assessment
• Trading income
– substantial services
– i.e. laundry, cleaning, one meal a day
• Possible tax relief on pensions
• CGT rollover, holdover and IHT relief
Rent a room
£4,250 relief no expenses
or
taxed on income less expenditure basis
Only UK
Not Selfcontained
Only
Residential
Furnished holiday lets
• Furnished
• Situated in the UK or EEA
• Let on a commercial basis
• Available for let minimum 210 days per year
• Actually let for a minimum of 105 days
• May be under same occupancy for more than 31 days
as long as such periods do not exceed 155 days per
Tax Year.
• Does not need to be a holiday resort
Furnished holiday lets
Advantages
Disadvantages
• Treated as a trade
• Losses only against same
business
• Pension contribution
• Long term buy to let
• CGT reliefs
Question
Q
David, an additional rate taxpayer received a net dividend
of £684 on a parcel of shares he owns. How much
ADDITIONAL tax will he owe?
A
£304
B
£247
C
£171
D
£95
Answer
A
David, an additional rate taxpayer received a net dividend
of £684 on a parcel of shares he owns. How much
ADDITIONAL tax will he owe?
A
£304
B
£247
C
£171
D
£95
£684 / 0.9 = £760 @ 32.5% = £247 more to pay
Multi Response Question
Q
Tim owns a furnished holiday letting. In order to be able to
pay pension contributions on the income derived from this
activity, the letting must:
A
be situated in the UK only
B
be let to individuals who are on holiday only
C
not be let for more than 155 continuous days to the same
individual in a tax year
D
be furnished and let on a commercial basis
E
be situated in an acknowledged holiday resort
F
be let for at least 105 days in a tax year. This can be
averaged with other properties
Multi Response Question
A
Tim owns a furnished holiday letting. In order to be able to
pay pension contributions on the income derived from this
activity, the letting must:
A
be situated in the UK only
B
be let to individuals who are on holiday only
C
not be let for more than 155 continuous days to the
same individual in a tax year
D
be furnished and let on a commercial basis
E
be situated in an acknowledged holiday resort
F
be let for at least 105 days in a tax year. This can be
averaged with other properties
Gap 80 - indirect investments
- pension arrangements
Learning Point: Analyse the taxation of investment as relevant
to the needs and circumstances of individuals and trusts.
Tax privileges
Tax input relief
Tax freedom on
capital and most
income
Up to 25% tax-free
Tax-free death
benefits
Contributions and fund
• Up to age 75
• 100% earnings up to £50,000
• £3,600
• £1.5 million Lifetime Allowance
Tax relief
Net pay
Relief at source
Self-assessment
Carry forward
• Unused annual allowance (£50,000)
• Proceeding three tax years
• Must be a member of a registered pension
scheme
• Set order
– Fill current year then earliest year
Retirement income
• 25% of fund tax-free Pension Commencement
Lump Sum
• Scheme pension, lifetime annuity, capped
drawdown, flexible drawdown
• Death before crystallisation usually free of all
taxes under lifetime allowance
Question
Q
Peter is a member of an occupational pension scheme
and Rachel contributes to a personal pension. Both are
higher rate tax payers.
How do they receive their tax relief?
A
Peter receives tax relief by extending the basic rate band
B
Rachel’s personal pension plan operated the net pay
arrangement and highest marginal rate relief is given at
source
C
Peter pays his personal pension net of basic rate tax
D
Rachel pays her personal pension net of basic rate tax
and receives higher rate tax relief by extending the basic
rate band
Answer
A
Peter is a member of an occupational pension scheme
and Rachel contributes to a personal pension. Both are
higher rate tax payers.
How do they receive their tax relief?
A
Peter receives tax relief by extending the basic rate band
B
Rachel’s personal pension plan operated the net pay
arrangement and highest marginal rate relief is given at
source
C
Peter pays his personal pension net of basic rate tax
D
Rachel pays her personal pension net of basic rate
tax and receives higher rate tax relief by extending
the basic rate band
Gap 81 - indirect investments
- Individual Savings Accounts
(ISAs)
Learning Point: Analyse the taxation of investment as relevant
to the needs and circumstances of individuals and trusts.
Indirect investments – Individual Savings Accounts (ISAs).
Eligibility ISA
Resident and
Ordinarily Resident
Aged 18 and over
Stocks and Shares ISA
Non-Resident Crown
Employee
Aged 16 and over
Cash ISA
Junior ISA Launched 1st November 2011
ISA – one option
• Tax-efficient savings vehicle
• One option – Overall maximum £11,280
Stocks and
Shares ISA
Maximum investment
£11,280
ISAs – two options
• Tax-efficient savings vehicle
• Two options – Overall maximum £11,280
Cash ISA
Maximum investment
£5,640
Stocks and
Shares ISA
Balance ISA limit
Subscription limits
Tax Year
Cash Limit
Stock &
Shares Limit
Total
Subscription
Junior ISA
Limit
99/00 to 07/08
(mini)
£3,000
£4,000
£7,000
n/a
99/00 to 07/08
(maxi)
£3,000
£7,000
£7,000
n/.a
08/09 to 09/10
£3,600
£7,200
£7,200
n/a
2010 / 2011
£5,100
£10,200
£10,200
n/a
2011 / 2012
£5,340
£10,680
£10,680
£3,600
2012 / 2013
£5,640
£11,280
£11,280
£3,600
Maximum ISA contribution since launch £109,560
Tax Treatment
• Free from Capital Gains Tax and Income Tax
– maybe foreign withholding tax on overseas
investments
– 10% tax credit non-reclaimable
• Cash held in a stocks and shares ISA liable to
20% charge before crediting account
• No reporting on self-assessment required
Junior ISA
• Available to children who missed out on the Child Trust Fund.
• So children qualify if they were:
• Born on or after 3rd January 2011.
• Under 18s born before September 2002.
• Maximum £3,600 per Tax Year.
• Cash and Stocks & Shares versions available.
• Parents, family and friends can contribute.
• Account converted to a normal ISA at age 18.
Question
Q
Robert and Ann are married with 4 children, Sarah aged
22, Clive aged 17, Sally aged 11 and Sue aged 4
How much can they contribute to ISAs as a family?
A
£33,840
B
£46,680
C
£39,480
D
£43,080
Answer
Q
Robert and Ann are married with 4 children, Sarah aged
22, Clive aged 17, Sally aged 11 and Sue aged 4
How much can they contribute to ISAs as a family?
A
£33,840
B
£46,680
C
£39,480
D
£43,080
Robert, Ann, Sarah £11,280 each
Clive £5,640 + £3,600
Sally £3,600
Sue £nil
Gap 82 - indirect investments
- Child Trust Funds (CTFs)
Learning Point: Analyse the taxation of investment as relevant
to the needs and circumstances of individuals and trusts.
Child Trust Fund
31 August
2002
31st July
2010
HM Government
£250
HM Government
£50
Ended
3rd January
2011
Child Trust Fund
New-born
Happy 18th
Birthday
£1200 per annum could be added
Now £3,600 in line with Junior ISA
Child Trust Fund
Savings
Shares
Stakeholder
Age 13 Lower Risk
1.5% cap
Tax treatment
• Income Tax free
• 10% tax credit cannot be reclaimed
• Capital Gains Tax free
• £100 parental rule does not apply
Question
Q
Sue and Trevor have 3 children, Sam born 31st August
2000, Ellie born 31st August 2004 and Rebecca born 31st
August 2010. Which children are eligible for the Child
Trust Fund and how much?
A
Sam, Ellie and Rebecca are eligible to £250 each
B
Sam and Ellie are eligible to £250 and Rebecca is eligible
to £50
C
Sam is not eligible and Ellie and Rebecca are eligible to
£250 each
D
Sam is not eligible, Ellie is eligible to £250 and Rebecca
is eligible to £50
Answer
Q
Sue and Trevor have 3 children, Sam born 31st August
2000, Ellie born 31st August 2004 and Rebecca born 31st
August 2010. Which children are eligible for the Child
Trust Fund and how much?
A
Sam, Ellie and Rebecca are eligible to £250 each
B
Sam and Ellie are eligible to £250 and Rebecca is eligible
to £50
C
Sam is not eligible and Ellie and Rebecca are eligible to
£250 each
D
Sam is not eligible, Ellie is eligible to £250 and
Rebecca is eligible to £50
Gap 83 - indirect investments
- onshore and offshore collectives
and investment companies
Learning Point: Analyse the taxation of investment as relevant
to the needs and circumstances of individuals and trusts.
Indirect investments
Offshore Collectives
• Offshore jurisdictions
– Channel Islands, Isle of Man, Luxembourg
• SICAV
– Similar to UK OEICs
• UCITs
– EU directive setting common standards for schemes
– May be marketed in EU member states
Reporting funds
• Disclosure to HMRC
– UK investors must be told their share of the funds
income
• Dividends liable to Income Tax
– Although do not need to distribute income
– Taxed at 10%, 32.5% or 42.5%
• Gains liable to Capital Gains Tax
– Normal CGT rules apply
– Taxed at 18% or 28%
Non-reporting funds
• If not a Reporting fund, then it is a NonReporting fund
• Capital Gains Tax principles apply
– But no Capital Gains Tax exemption
• Taxed against Income Tax not Capital Gains
Tax
– 20%, 40% and 50%
Comparison of tax treatment
Reporting
Non-reporting
• UK Investors
• Income accumulated
• Lower dividends tax
• Income roll up
• CGT liability
• Non-resident investors
• Gross income
• Non-remitted
• Excluded property
Question
Q
A
B
C
D
Carlos is resident in the UK but is non-UK domicile. He
has an offshore collective that has received Reporting
status.
Which of the following statements in relation to Reporting
funds is INCORRECT?
Dividends from Reporting funds are taxed at a rate of
10%, 32.5% and 42.5%
The annual CGT exemption cannot be set against a gain
on an offshore Reporting fund
Profits on the eventual encashment of a Reporting Fund
are subject to CGT at either 18% or 28%
UK investors are subject to Income Tax on their share of
the fund’s income, whether it is distributed or not
Answer
A
A
B
C
D
Carlos is resident in the UK but is non-UK domicile. He
has an offshore collective that has received Reporting
status.
Which of the following statements in relation to Reporting
funds is INCORRECT?
Dividends from Reporting funds are taxed at a rate of
10%, 32.5% and 42.5%
The annual CGT exemption cannot be set against a
gain on an offshore Reporting fund
Profits on the eventual encashment of a Reporting Fund
are subject to CGT at either 18% or 28%
UK investors are subject to Income Tax on their share of
the fund’s income, whether it is distributed or not
Gap 84 - indirect investments
- onshore and offshore life assurance
policies
Learning Point: analyse the taxation of investment as relevant
to the needs and circumstances of individuals and trusts.
Taxation of onshore life policies
• Qualifying policies
– Regular premium policies for at least 10 years
– Corporation Tax within the fund
– Free from tax on encashment
• Non-Qualifying policies
– Single premium investments
– Corporation Tax within the fund
– Liability to tax on chargeable events
UK investment bond fund taxation
Real gains
20%
Including indexation
Rent 20%
UK dividends 10%*
Foreign dividends
20%
Interest
20%
*UK Dividends received net of 10% tax credit non-reclaimable
Chargeable Events
• Tax liability only occurs on Chargeable
Events and when a gain arises
–
–
–
–
–
Death of last survivor
Final Encashment
Withdrawals over 5% cumulative
Adding Life Assured
Assignment for money or money’s
worth
• No need to show on tax return until
Chargeable Event Occurs
Calculate gain
Step 1 = Surrender proceeds
Step 2 + Plus all withdrawals
Step 3 – Minus Initial investment
Step 4 – Minus Previous chargeable Gains
= Total Gain
Tax-deferred income
• Ability to withdraw up to 5% tax-deferred “income” per
policy year
• Maximum tax-free is up to original investment
Year
One
Two
Three
Four
Five
Six
Twenty
Cumulative
5%
5
10
15
20
25
30
100
Total Income
taken
5%
10%
15%
20%
25%
30%
100%
No immediate tax charge but deferred until
chargeable event
Partial withdrawals
Year
One
Two
Three
Four
Cumulative 5%
5
10
15
20
Total Income taken
5%
10%
15%
23%
Chargeable Gain
0%
0%
0%
3%
Chargeable events on part surrenders occur at the
end of each policy year, rather than each time a
surrender is made, based upon policy owner at
end of policy year
Example
Event
Total
01/01/07 initial investment
£10,000
31/12/07 partial surrender
(within 5% rule)
£500
31/12/08 partial surrender
(£500 over 5% rule)
£1,000
01/12/12 surrender
£14,000
Event
Total
= Surrender value
£14,000
+ All withdrawals
£1,500
- Initial investment
- Previous chargeable gain
= Chargeable gain at maturity
£10,000
£500
£5,000
Capital
Gains
Additional
Rate
50%
50%
42.5%
30%
Higher
Rate
40%
40%
32.5%
20%
20%
10%
Investment
Bonds
Dividends
Basic
Rate
20%
10%
Savings
Personal
Allowance
Tax Credit
NonReclaimable
0%
10%
0%
0%
NonSavings
Savings
Tax Credit
NonReclaimable
0%
Non-Savings
Taxation Stack
Dividends
Onshore
Bond
Onshore bond top slicing
Higher rate
Basic rate
Bond top slicing
Higher rate
Basic rate
Bond top slicing
HRT
Higher rate
Basic rate
Onshore slice
50% Additional Rate Tax band
£150,000 Taxable Income
£15,000
Gain
after
3 Years
£31,370
Taxable
Income
after
allowance
and relief
40% High Rate Tax band
£34,370 Taxable Income
Reliefs and Allowance
Onshore slice
50% High Rate Tax band
£150,000 Taxable Income
£5,000 Slice
40% High Rate Tax band
£5,000 Slice
£34,370 Taxable Income
£5,000 Slice
£31,370
Taxable
Income
after
allowance
and relief
Reliefs and Allowance
Onshore slice
50% High Rate Tax band
£150,000 Taxable Income
40% High Rate Tax band
£2,000 Slice in HRT
£34,370 Taxable Income
£3,000 Slice in BRT
£31,370
Taxable
Income
after
allowance
and relief
Reliefs and Allowance
Onshore slice
50% High Rate Tax band
£150,000 Taxable Income
£2,000 Slice in HRT
40% High Rate Tax band
£2,000 Slice in HRT
£2,000 Slice in HRT
£34,370 Taxable Income
= £6,000
of the £15,000
Gain
@ HRT
£31,370
Taxable
Income
after
allowance
and relief
Reliefs and Allowance
Policies under trust
Settlor alive and UK resident gain treated as part of their
income
Settlor dead or non-UK resident then trustees liable
If trustees non-UK resident then UK beneficiaries liable
without top slicing
Friendly Society Policies
• Qualifying policies which are exempt from Income Tax
and Capital Gains Tax
• Fund is exempt (excluding dividend 10% tax reclaim)
• Maximum annual premium £270 or £300 p.a. if regular
monthly premiums
• Available in own name 18 – 70 (child policies also
available)
Annuities
• Purchased Life
-
return of capital tax-free (purchase price divided by the number
of years the annuitant is expected to live at outset)
-
interest element – taxed as savings income with tax deducted at
basic rate
• Purchased annuities certain
-
return of capital tax-free (purchase price by number of
payments)
-
interest element – taxed as investment income with tax
deducted at basic rate
Annuities
•
Pension Annuity
-
•
Annuities for beneficiaries under trusts or wills
-
•
taxable in full as income under PAYE
taxed in full as investment income with basic rate deducted from
the whole annuity payment
Structured Settlements
-
Damages or Personal Injury annuity can be paid directly without
deductions of tax and becoming liable to tax
•
Immediate Needs Annuity
-
Tax-free if based upon impaired life and paid to care home directly
Offshore bond fund taxation
Real gains
0%
Including indexation
Rent 0%
Dividends
With holding tax on
some dividends
Interest
0%
*UK Dividends received net of 10% tax credit non-reclaimable
Capital
Gains
Additional
Rate
50%
50%
42.5%
30%
50%
Higher
Rate
40%
40%
32.5%
20%
40%
20%
10%
Investment
Bonds
Dividends
Basic
Rate
20%
10%
Savings
Personal
Allowance
Tax Credit
NonReclaimable
0%
20%
10%
10%
0%
0%
NonSavings
Savings
Tax Credit
NonReclaimable
0%
0%
Onshore
Bond
Offshore
Bond
Non-Savings
Taxation Stack
Dividends
Time apportionment
Number of days policyholder was resident in the UK
Number of days policy has run
Time apportionment
Number of days inside the UK 2,737 days
= 75% x Gain
Policy run for 3,650 days
Personal portfolio bonds
• 1998 Budget HMRC introduced penal rules
• 15% compound growth assumed
• Deemed gain is calculated on top of normal tax
charge
• No top slicing
Question
Q
Gavin has taxable income of £30,370 and surrenders an
offshore investment bond after 5 complete tax years. The
gain is £25,000.
A
How much tax is due on the surrender?
£6,000
B
£2,000
C
£3,000
D
£8,000
Answer
A
Gavin has taxable income of £30,370 and surrenders an
offshore investment bond after 5 complete tax years. The
gain is £25,000.
A
How much tax is due on the surrender?
£6,000
B
£2,000
C
£3,000
D
£8,000
£25,000 / 5 years = £5,000 slice
£4,000 @ 20% x 5 years = £4,000
£1,000 @ 40% x 5 years = £2,000
Gap 85 - indirect investments
- Real Estate Investment Trusts
(REITs)
Learning Point: analyse the taxation of investment as relevant
to the needs and circumstances of individuals and trusts.
Special purpose vehicles
• Limited partnership or exempt UK unit trust
– Allow investments from SIPPs SASSs and Charities
• Designed for specific projects
• Geared up to 90%
• Normally no income but capital gain potential
Shares in listed property companies
• More liquid
• Different to direct property holdings
–
–
–
–
–
Diversified
Quality of management
Level of borrowing
Value of the property portfolio
Stock market fluctuations
• Property share movement
Real estate investment trusts
• Tax transparent investment companies allowing
access to commercial and residential property
investments
• Closed ended, listed on the stock market
• To be exempt from Corporation Tax
– 75% of gross profits from property letting
– Interest on borrowing has to be at least 125%
covered by rental profits
REIT distributions
• 90% rental profits must be paid to investors
• Exempt profits
– Classed as property income, paid net of 20% tax
– Can be reclaimed
• Non-Exempt Profits
– Classed as dividend income
– Non-reclaimable 10% tax credit
Insurance company property funds
• Regular and Single contributions
• Unit linked
• Not geared
Property collectives
• Unit trusts, investment trusts and OEICs
• Utilise Capital Gains Tax
• Property security funds
– Invest in property companies and REITs
Question
Q
For a REIT to be exempt from Corporation Tax:
A
Interest on borrowing has to be at least 75% covered by
rental profits and 60% of gross profits must come from
property letting
B
Interest on borrowing has to be at least 125% covered by
rental profits and 90% of gross profits must come from
property letting
C
Interest on borrowing has to be at least 125% covered by
rental profits and 75% of gross profits must come from
property letting
D
Interest on borrowing has to be at least 90% covered by
rental profits and 75% of gross profits must come from
property letting
Answer
A
For a REIT to be exempt from Corporation Tax
A
Interest on borrowing has to be at least 75% covered by
rental profits and 60% of gross profits must come from
property letting
B
Interest on borrowing has to be at least 125% covered by
rental profits and 90% of gross profits must come from
property letting
C
Interest on borrowing has to be at least 125% covered
by rental profits and 75% of gross profits must come
from property letting
D
Interest on borrowing has to be at least 90% covered by
rental profits and 75% of gross profits must come from
property letting
Gap 86 - indirect investments
- Venture Capital Trusts (VCTs)
Learning Point: analyse the taxation of investment as relevant
to the needs and circumstances of individuals and trusts.
Venture Capital Trusts
• Launched 6th April 1995
• Encourage investment in small higher-risk
trading companies
• Similar to investment trusts
Tax relief
Aged 18 and over
30% tax reducer up to £200,000 per tax year
Example: If Income Tax liability on total income of £15,000 and
invest £70,000 into VCT maximum Income Tax relief is £15,000
not £21,000 (£70,000 x 30%)
Tax relief
Income Tax relief withdrawn within 5 years
(except disposal to spouse / civil partner or investor death)
Tax-free dividends up to £200,000 per tax
year
CGT exempt with no minimum holding
period
VCT qualifying rules
• Not a close company and must be listed on an
EEA stock exchange
• Income derived from shares or securities
• 70% of investments by value in qualifying
unlisted companies
• £10 million in any one company
Non-Qualifying companies
• Land and financial instruments
• Financial activities, property development, or providing legal or
accountancy services
• Leasing or letting assets on hire, except certain ship-chartering
activities
• Royalties or licence fees, except patents or know-how, where most
of it has been created by the company (or one of its subsidiaries)
• Farming, market gardening, or forestry
• Operating or managing hotels, guest houses, hostels, or nursing or
residential care homes
• Providing services to another company in certain circumstances
where the other company's trade consists to a substantial extent in
excluded activities
• Shipbuilding, producing coal or steel
Multiple response
Q
Claire is interested in a Venture Capital Trust and has
heard the following statements from her friends. Which
ones are CORRECT?
A
VCTs are CGT-free after 5 years
B
30% tax reducer up to £200,000
C
Income Tax relief withdrawn within 5 years
D
80% of investments by value in qualifying unlisted
companies
E
Capital Gains Tax liability can be held over into a VCT
Multiple response
A
Claire is interested in a Venture Capital Trust and has
heard the following statements from her friends. Which
ones are CORRECT?
A
VCTs are CGT-free after 5 years
B
30% tax reducer up to £200,000
C
Income Tax relief withdrawn within 5 years
D
80% of investments by value in qualifying unlisted
companies
E
Capital Gains Tax liability can be held over into a VCT
Gap 87 - indirect investments
- Enterprise Investment Schemes (EISs)
Learning Point: analyse the taxation of investment as relevant
to the needs and circumstances of individuals and trusts.
Enterprise Investment Schemes
• Launched 1st January 1994
• Designed to help smaller higher-risk trading
companies
• Tax reliefs to raise funds
Tax Relief
30% tax relief on qualifying investments up to
£1,000,000 per tax year
Tax reducer – deduction from tax liability
Carry back 1 year
Must be liable to UK Income Tax
Qualifying companies
• Under £15 million gross assets
• Under 250 employees
• Carry on qualifying trade for at least 3 years
• UK established and unlisted (AIM included)
• Maximum fund raising from EIS is £10 million
Excluded (i.e. non-qualifying)
trades
land
shares
leasing
banking
futures
insurance
legal
hotels
property
oil
forestry
Withdrawal of relief
Lost if disposed of within 3 years
(except wife, civil partner and death)
Withdrawn if investor receives value
within 1 year before and 3 years after
CGT Deferral
• Ability to defer a chargeable gain by reinvesting
in qualifying EIS
• No maximum
• 58% tax relief (30% Income Tax and 28% CGT)
• Reinvestment one year before and three years
after
Seed EIS
• Business Angels
• 25 or fewer full time employees
• Gross assets under £200,000 and £150,000 maximum
investment
• 30% maximum share holding in any one company if tax
relief
• 50% Income Tax Relief
Question
Q
Stewart has a Capital Gains Tax liability of £100,000 and
an Income Tax Liability of £20,000. If he invests into an
Enterprise Investment Scheme he can:
A
Defer up to £20,000 Capital Gain and get up to £20,000
Income Tax relief
B
Defer up to £100,000 Capital Gain and get up to £30,000
Income Tax relief
C
Defer up to £20,000 Capital Gain and get up to £30,000
Income Tax relief
D
Defer up to £100,000 Capital Gain and get up to £20,000
Income Tax relief
Answer
A
Stewart has a Capital Gains Tax liability of £100,000 and
an Income Tax Liability of £20,000. If he invests into an
Enterprise Investment Scheme he can?
A
Defer up to £20,000 Capital Gain and get up to £20,000
Income Tax relief
B
Defer up to £100,000 Capital Gain and get up to £30,000
Income Tax relief
C
Defer up to £20,000 Capital Gain and get up to £30,000
Income Tax relief
D
Defer up to £100,000 Capital Gain and get up to
£20,000 Income Tax relief
Gap 88 - the main uses of lifetime
gifts in basic IHT mitigation; the main
uses of lifetime trusts in basic IHT
mitigation.
Learning Point: analyse the taxation of investment as relevant
to the needs and circumstances of individuals and trusts.
Wills
• Over 29.5 million Britons are currently without a
will – Unbiased October 2011
–
–
–
–
–
–
Determine the assets and liabilities of the estate
Collect in the assets of the estate and pay any debts
Obtain Grant of Probate
Settle any tax liability
Distribute the assets as instructed in the will
Tax has to be paid before grant of probate can be
issued
Intestacy
Deeds of Variation
• To change the terms of the will/intestacy after death for
family/IHT purposes within 2 years
• If all heirs are over 18 and sane
• The deed must satisfy the following conditions:
– Must refer to the will being varied
– Signed by all those who would or might have benefited from the original provisions
– Must contain a statement that the variation is to have effect for
– There must be no consideration for money or money’s worth
Nil rate band
Excess
@ 40%
£325,000
• Taxed at 40%
• Spouse taxed at 0%
• Beware non-UK domiciled
spouse (£55,000)
nil rate band
• Nil Rate Band balance taxed at 0%
£325,000
Sharing assets
• Spouse / Civil Partner estate equalisation
• Transferable nil rate band
• Discretionary trusts
– Unconditional
– Consider the surviving spouse
Transferable nil rate band
£215,000
Estate
Dies
01/01/1997
No Gifts
On 1st death
Transferable nil rate band
£430,000
Estate
Audrey
£215,000
Estate
Dies
01/01/1997
No Gifts
On 1st death
On 1st death
Transferable nil rate band (NRB)
£700,000
Estate
£430,000
Estate
Dies 01/04/2012
Available NRB
£325,000
Audrey
£215,000
Estate
100% NRB (£325,000)
Dies
01/01/1997
No Gifts
On 1st death
Plus
£650,000 Combined
£130,000 IHT Saved
On 1st death
On 2nd death
Partial nil rate band (NRB)
£500,000
Dies 01/04/2012
Available NRB
£325,000
£322,500
Audrey
£215,000
50% NRB
Dies 01/01/1997
£107,500 Gifts
On 1st death
Plus
£487,500 Combined
£65,000 IHT Saved
On 1st death
On 2nd death
Multiple marriages partial nil
rate band (NRB)
Dies 01/04/2010
available NRB
£325,000
Plus
Dies leaves
50% NRB
Dies leaves
50% NRB
Dies leaves
25% NRB
100% NRB maximum
1st Husband
Spencer
2nd Husband
Adam
3rd Husband
David
On 2nd death
Potentially Exempt Transfers
• Opportunity for large gifts
• Life cover to protect gift liability
• PET considerations
BPR
Pension
2006
Income
CGT
Chargeable Lifetime Transfers
7 year planning opportunity
Appreciating assets
Care: Initial, Periodic and Exit charges
Business Property Relief
• Business Property Relief and Agricultural
Property Relief
• 2 year qualifying period
Transfer
Death within
2 years
Problem with Business Assets
• Cannot be a binding contract for sale
• Secured loans transferred to domestic property
• Tenanted farmland – 50% or 100%
• Care re. non-trading activities e.g. investments
• Lifetime gifting less attractive as CGT dies with
owner
Personal exemptions
Annual exemptions
Up to £3,000 a year
- not on death
Small gifts
£250 per recipient
Other
Son / Daughter £5,000 Grandchildren
£2,500 spouse on prospective marriage,
£2,500 Other person £1,000
Gifts:
- in consideration of marriage
- to charities
- for education & maintenance
- to political parties
-to spouse/ civil partner
-normal expenditure
-death on active service
Trust options
Bare
Discretionary
Interest in
Possession
Lifetime Gift Strategy
• 7 year gift cycle
• Outright gifts
• Value of nil rate band
Q
In 2009/10 Harold gifted £1,500 to his nephew under the
lifetime transfer rules. In 2010/11 he gifted £3,000 to his
brother. The MAXIMUM Inheritance Tax exempt amount
he can gift to his sister in 2011/12 is:
A
£4,500
B
£1,500
C
£6,000
D
£3,000
A
In 2009/10 Harold gifted £1,500 to his nephew under the
lifetime transfer rules. In 2010/11 he gifted £3,000 to his
brother. The MAXIMUM Inheritance Tax exempt amount
he can gift to his sister in 2011/12 is:
A
£4,500
B
£1,500
C
£6,000
D
£3,000
Q
On Luke's death in May 2011 his estate was valued at
£875,000. He left £50,000 to charity and split the
remainder of his estate equally between his wife and
daughter. Assuming he has made no lifetime transfers
how much will his daughter receive once the Inheritance
Tax bill is settled?
A
£282,500
B
£247,500
C
£362,500
D
£377,500
A
On Luke's death in May 2011 his estate was valued at
£875,000. He left £50,000 to charity and split the
remainder of his estate equally between his wife and
daughter. Assuming he has made no lifetime transfers
how much will his daughter receive once the Inheritance
Tax bill is settled?
A
£282,500
B
£247,500
C
£362,500
D
£377,500
£875,000 - £50,000 Charity = £825,000
£825,000 / 2 = £412,500
£412,500 - £325,000 NRB = £87,500
£87,500 @ 40% = £35,000 IHT
£412,500 - £35,000 = £377,500
Gaps
• Gap 79 - cash, fixed interest, securities, equities and property

• Gap 80 - pension arrangements

• Gap 81 - individual savings accounts (ISA’s)


• Gap 82 - child trust funds (CTFs)

• Gap 83 - onshore and offshore collectives, investment companies
• Gap 84 - onshore and offshore life assurance policies

• Gap 85 - real estate investment trusts (REITs)

• Gap 86 - venture capital trusts (VCTs)

• Gap 87 - enterprise investment schemes (EIS)


• Gap 88 - main uses of lifetime gifts and trusts in IHT planning
HANDOUT NOTES DISCLAIMER
These notes have been produced for the guidance of delegates at the PFS gap
fill session for which they were prepared and are not a substitute for detailed
professional advice.
No responsibility can be accepted for the consequences of any action taken or
refrained from as a result of these notes or the talk for which they were
prepared.
The tax and legislation information contained in this document is based on Just
Asked Ltd current understanding as at May 2012 and may change in the future.
HM Revenue and Customs (HMRC) practice, and the laws relating to taxation
are complex and subject to individual circumstances and changes which cannot
be foreseen.