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With our research partners. It’s Not Necessarily Natural Delivering tax efficient “income” through intelligent wrapper choice [September 2013]. Disclaimer.
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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:
When? INCOME NEED STARTS ACCUMULATION Growth Risk Tax Efficiency DRAWDOWN 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)
What is Retirement? UNPREDICTABILITYrules UNPREDICTABILITYover when income might be needed or how much income might be needed AND UNPREDICTABILITYover • 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 Barclays Equity Gilt Report: “Over half of total returns come from reinvested dividends” Capital growth Total return 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? 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
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 OFFSHORE BOND UK 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% OFFSHORE BOND UK BOND COLLECTIVE
High Yield Investment: Higher Rate Taxpaying Investor POST ENCASHMENT (Basic rate taxpayer) £193,069 6.8% £177,372 5.9% £172,410 5.6% OFFSHORE BOND UK BOND COLLECTIVE
Growth Investment PRE ENCASHMENT £196,715 £196,715 £182,321 OFFSHORE BOND UK BOND COLLECTIVE
Growth Investment POST ENCASHMENT :Higher rate taxpayer £193.575*6.83% £165,857 5.19% £158.029 4.68% OFFSHORE BOND UK BOND COLLECTIVE * Less if annual exemption not used each year
Growth Investment POST ENCASHMENT : Basic rate taxpayer £194,696* 6.89% £182,321 6.19% £177,372 5.9% OFFSHORE BOND UK BOND COLLECTIVE * Less if annual exemption not used each year
Balanced Fund PRE ENCASHMENT £208,028 £201,210 £187,362 OFFSHORE BOND UK BOND COLLECTIVE
Balanced Fund POST ENCASHMENT :Higher rate taxpayer £187,362*6.48% £180,968 6.11% £164,817 5.12% OFFSHORE BOND UK BOND COLLECTIVE * Less (£177,496) if annual exemption not used each year
Balanced Fund POST ENCASHMENT : Basic rate taxpayer £201,210 7.24% £187,362* 6.48% £186,423 6.43% OFFSHORE BOND UK BOND COLLECTIVE * Less (£181,019) if annual exemption not used each year
… And When You Need The Money POSSIBLE CHOICES SELF SME PROFIT/ INCOME PENSIONS >75 >75 CONTINUED EMPLOYMENT SE ISA INSURANCE PRODUCTS (BONDS) VCT/ EIS COLLECTIVES ● Risk ● Income tax ● CGT ● IHT
Immediate “Income” from Bonds / Collectives Investment value at end of 20 years after £5,000 PA £181,991 £170,004 6.75% 20% £145,593 6.21% £136,003 5.98% £135,163(20%/40%) 5.96% 20% 40% £109,195 5.27% 40% OFFSHORE BOND ONSHORE BOND COLLECTIVE
Immediate “Income” from Bonds / Collectives Investment value at end of 20 years after “income” of 5% PA of fund value £136,723 £132,482 6.58% 20% £114,107 (20%/40%) 5.96% * £110,978 5.95% 20% £105,985 5.93% 40% £83,234 5.17% 40% OFFSHORE BOND ONSHORE BOND COLLECTIVE * Less net income
Deferred Income Post tax investment value after 20 years £201,508 6.31% £185,574* 5.83% £168,742 5.77% OFFSHORE BOND UK BOND 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 PENSION FUND NO TAX Adviser IMPLICATION ISA NO TAX Adviser (But do you want to do it?)
Taxation and Investment Facilitated Adviser Charging Payments from Collectives NO TAX CASH ACCOUNT * ADVISER 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 COLL SALE GIA CASH ACCOUNT Charge for initial advice Settlor No tax Possible tax Paid from own funds: No tax Paid by Settlor? Further gift (Poss N.EXP) (Exclude right to reclaim?) Charge for ongoing advice
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 45% (offshore) * Standard rate on first £1,000 pa
Investing for Tax Effective Income: Trustees INCOME DRIVING ACCUMULATION INTEREST IN POSSESSION TRUSTS Dividends: Interest: Capital gains: 28% Chargeable gains Assessed on Settlor .. If Settlor deceased/non-UK resident: Trustees: 25% (UK) 45% (offshore) Assessed on Beneficiary
Investing for Tax Effective Income: Trustees INCOME DRIVING ACCUMULATION
Investing for Tax Effective Income: Trustees To deliver regular, tax efficient payments to beneficiaries DISCRETIONARY TRUST Divis Interest Capital COLLECTIVES Income Capital (chargeable gain) UK BOND Capital Capital (chargeable gain) OFFSHORE BOND