tax planning investment income and gains

1
tax planning investment income and gains

• Colin Jelley
• Head of Tax and Financial Planning
• Skandia

for financial advisers only
2
agenda

• Tax update
• Wrapper choice for collectives
• Taxation under the bonnet
• Minimising the tax impact on returns

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tax update

• every chancellor is remembered for one thing
• Norman Lamont 15 interest rates
• Gordon Brown smash and grab on pensions
• and
• Alistair Darling making capital gains tax
  (CGT) a stealth tax
• CGT
• Inheritance tax (IHT)

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tax update reform nothing new for CGT?

• Healey 1978 flat rate
• (no indexation)
• Lawson 1988 flat rate 30
• (limited indexation relief)
• Brown 1998 variable rate
• (indexation and taper relief)
• Darling 2008 flat rate 18
• (no indexation or taper)

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CGT receipts on the up
Million
Source HM Revenue Customs Annual Receipts
April 08
6
IHT receipts on the up
Million
Source HM Revenue Customs Annual Receipts
April 08
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wrapper choice for collectives

• Which wrapper
• None
• unwrapped investments
• Non-UK insurance policy
• offshore bond
• UK insurance policy
• onshore bond

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wrapper choice for collectives

• Types of underlying investment
• UK equity
• Fixed interest
• Property

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wrapper choice for collectives

• Unwrapped Investments
• taxation under the bonnet

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UK equity fund income
Unwrapped

• 0 tax on dividends received by BRT
• Imputed tax credit equal to 1/9 of the dividend
  received (10 of gross)
• Not recoverable by non-taxpayers
• Higher rate taxpayer (HRT) suffers 25 on
  dividend received

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fixed interest fund income
Unwrapped

• Gilts, corporate bonds, bank deposits, mixed
  funds (60 test)
• Interest suffers 20 tax at source
• Recoverable by non-taxpayers
• BRT no further liability tax
• HRT taxed at 40 on the gross interest

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property fund income
Unwrapped

• Rent (real)
• Rent suffers 20 at source
• Recoverable by non-taxpayers
• BRT no further tax liability
• HRT taxed at 40 on the gross rent
• Dividend (reit)
• As per UK equity fund

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capital gains
Unwrapped

• No tax within fund
• Realised gains taxed at 18 flat tax rate
• Unrealised gains not taxed
• Realised losses set against current year gains or
  carried forward
• Annual exemption

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wrapper choice for collectives
Offshore Bond

• Offshore bond
• taxation under the bonnet

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offshore bond
Offshore Bond

• What you see is what you get
• No additional tax payable
• Fund just keeps the cash it receives
• Client pays up to 40 income tax on chargeable
  event

withholding tax may apply and not be reclaimable
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offshore bond
Offshore Bond

• Non income producing
• Income and capital gains roll up gross
• No CGT in fund
• Time apportionment relief
• Immigration planning
• Non-UK domiciliaries

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wrapper choice for collectives
Onshore Bond

• Onshore bond
• taxation under the bonnet

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equities collective income
Onshore Bond

• Distributions streamed into component parts
• Franked element (dividend) suffers no tax
• Unfranked element taxed at 20
• Unfranked element is deemed to be received net of
  20 tax
• no further tax payable

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equities collective realised gains
Onshore Bond

• Realised gains after indexation suffer
  corporation tax
• Losses set against current year gains or carried
  forward

20
equities collectives unrealised gains
Onshore Bond

• Annual deemed disposal at year end
• Indexation relief
• Spread over seven years
• Losses can be set against current year gains,
  carried back or carried forward
• 18 effective rate

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UK life bond taxation indexed gains
Onshore Bond

• 7 return
• 3 dividend
• 4 growth

• 4 growth will benefit from indexation
• RPI at 2?
• Effective rate of tax halved 9 vs 18

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fixed interest collective income and gains
Onshore Bond

• Gilts, corporate bonds, bank deposits, mixed
  funds (60 test)
• Interest income, realised and unrealised gains
  and losses all combined together and taxed at 20
  
• Overall net loss can be set against other income
  and gains
• No indexation relief

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property collective income
Onshore Bond

• Rent (real)
• 20 suffered at source
• Dividend (reit)
• As per UK equity fund

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property collective gains
Onshore Bond

• Same as UK equity fund
• Realised gains after indexation taxable
• Spreading
• 18effective rate?

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Minimising the tax impact on returns
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tax considerations

• Portfolio make up
• Income
• Growth
• Combination of the two

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Capital growth strategy if tax is sole driver
Note This depends on whether the annual exempt
amount (AEA) is available and can be used cost
effectively
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Income strategy if tax is sole driver
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advice considerations

• Wrapper choice
• Investment philosophy
• Time horizon
• Expected tax rate on receipt of income gains

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• Government Complexity
• Need for Advice
• Opportunity for Advisers

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• This presentation is intended solely for
  professional financial advisers, consumers should
  not rely on its contents
• This presentation is based on Skandias
  interpretation of the law and HM Revenue
  Customs practice as at May 2008. We believe this
  interpretation is correct, but cannot guarantee
  it.
• Tax relief and the tax treatment of investment
  funds may change. The value of any tax relief
  will depend on the investor's individual
  circumstances.
• This is a generic example and financial advisers
  should carry out a detailed analysis of their
  clients individual needs before making a
  recommendation.
• The value of investments and the income from them
  can go down as well as up. You may not get back
  as much as you invested.

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• www.skandia.co.uk
• Calls may be monitored and recorded for training
  purposes and to avoid misunderstandings.
• Skandia Life Assurance Company Limited is
  registered in England Wales under number
  1363932. Registered Office at Skandia House,
  Portland Terrace, Southampton SO14 7EJ, United
  Kingdom. Authorised and regulated by the
  Financial Services Authority with FSA register
  number 110462. VAT number 386 1301 59.
• Skandia Life (Pensions Trustee) Limited.
  Registered number 1538109 England. Registered
  Office as above.