TAX PLANNING UPDATE

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TAX PLANNING UPDATE

• JOHN WOOLLEY
• TECHNICAL CONNECTION

2
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.
3
THE WAY WE LIVE NOW?
4
THE POWER OF PRO-ACTIVITY
CLIENTS
Existing
New
3
1
Stated
NEEDS
2
4
Unstated
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OUR AGENDA

• The Budget
• Topical planning opportunities

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Budget 2012 highlights for financial planners
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Budget 2012 highlights for financial planners
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THE 2012 BUDGET CHANGE OPPORTUNITY
KEY CHANGES OF INTEREST TO WEALTH MANAGERS AND
FINANCIAL PLANNERS
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REDUCTION IN ADDITIONAL RATE
Change 50-45 from 6. 4. 2013 Opportunity - Bri
ng forward tax relievable expenditure - Income
deferment for business owners and investors
10
PENSIONS INPUT RESTRICTIONS

• Change
• None on mainstream reliefs
• restrictions on pensions for employees
  spouse/relatives
• Opportunity
• ? Carry on regardless
• ? Use c/f to max out 50 relief
• ? Use pensions to reinstate personal allowance
  (100,000 )

11
DEFERMENT

• Defer bonuses
• Defer dividends
• Delay encashments of bonds/roll-up funds

12
HIGHER RATE TAX THRESHOLD

• No change.
• 35,000 taxable income - higher rate
  tax 150,000 taxable income - additional rate
  tax
• But more taxpayers!
• 4.1m up from 3.8m 320,000 pay 50 tax
• Fiscal drag

13
MORE HIGHER RATE TAXPAYERS

• More need for
• Tax deductible investments - registered
  pensions - EIS - VCT
• Tax efficient investments - ISA - SP
  bonds - Collectives

14
WRAPPER CHOICE

• For bigger investments wrapper choice can make
  a big difference
• Its the variables that can affect the
  outcome

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FACTORS AFFECTING OUTCOMES IN RELATION TO
WRAPPER CHOICE

• Yield
• Interest
• Capital gain
• AND
• Investment term
• Amount invested
• Withdrawals
• AND
• Fund taxation
• Investor tax rates (current/future)
• Exemptions
• AND
• Access
• IHT
• Pension/ISA contribution capacity

16
WRAPPER ALLOCATION

• IN GENERAL
• Capital growth favours collective
• Income favours Bond
• And, in betweenWrapper allocation

Income
Capital Growth
Collective
Bond
WRAPPER SELECTION DETERMINED BY VARIABLES
? Terms ? Yield ? Growth ? Tax
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WRAPPER CHOICE
WHEN IS WRAPPER ALLOCATION NECESSARY?
18
The Woolleys on holiday
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WRAPPER ALLOCATION
MODEL SEVERAL LIKELY/POSSIBLE COMBINATIONS OF
VARIABLES
WRAPPER SELECTION DETERMINED BY VARIABLES
? Terms ? Yield ? Growth ? Tax
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WRAPPER ALLOCATION
CONSISTENT WRAPPER OUTCOME ONE WRAPPER
MODEL SEVERAL LIKELY/POSSIBLE COMBINATIONS OF
VARIABLES
WRAPPER SELECTION DETERMINED BY VARIABLES
? Terms ? Yield ? Growth ? Tax
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WRAPPER ALLOCATION
CONSISTENT WRAPPER OUTCOME ONE WRAPPER
DIFFERENT WRAPPER OUTCOMES WRAPPER ALLOCATIONS
MODEL SEVERAL LIKELY/POSSIBLE COMBINATIONS OF
VARIABLES
WRAPPER SELECTION DETERMINED BY VARIABLES
? Terms ? Yield ? Growth ? Tax
22
PERSONAL ALLOWANCES

• Personal Allowance up for 2012/13 and
  2013/14
• 100,000 - Gradual reduction all lost at
  116,210
• Age Allowance Phase out

23
PERSONAL ALLOWANCES

• PA
• 2011/12 7475
• 2012/13 8,105
• 2013/14 9,205

24
PERSONAL ALLOWANCES

• Opportunity
• Asset transfer to maximise use of personal
  allowances
• Spousal pensions to extend the use into
  retirement
• - 10,000 tax free pension

25
THE HIGH INCOME (100,000) PERSON

• Effective tax rate 60
• Reduce adjusted net income planning depends on
  offending income
• Earned income
• pension contributions
• salary sacrifice
• Investment income
• asset (and income) transfer
• reinvestment

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INDEPENDENT TAXATION

• AND FOR BUSINESS OWNERSWHOSE SPOUSE IS A NON OR
  LOWER RATE TAXPAYER
• S/E employ spouse must perform reasonable
  services
• SHARES IN PRIVATE COMPANY
• Transfer shares and pay dividends
• - must be full entitlement to
• - must have full voting rights

27
AGE ALLOWANCE

• 2012/13
• 65-75 10,500
• 75 10,660
• Income limit 25,400

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GRANNY TAX The proposals.
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AGE ALLOWANCE 2013/14

• Detail
• Only those born before 6.4.48 entitled
• Others (65 after 5.4.2013) standard PA
• Age allowance frozen
• Gradual alignment with standard PA
• 2013 difference 10,500 vs 9,205
• 2014 difference 10,500 vs possible 10,000

30
AGE ALLOWANCE IF YOURE OVER THE TOP

• Opportunity - income exceeds 25,400
• Asset transfer to spouse max allowance
• Reinvest to minimise total income
• Supplement income with capital gains, non
  taxable income and 5 withdrawals

31
AGE ALLOWANCE SP BONDS

• No top slicing relief for age allowance income
  figure
• Delay encashment until age allowance no longer
  exists

32
CHILD BENEFIT BUDGET 2012

• Proposals
• Full Child Benefit paid to mother
• Tax charge on higher earner
• Tax of 1 of CB for every 100 above 50k
• Benefit completely neutralised with income at
  60k

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CHILD BENEFIT BUDGET 2012

• Summary
• 1055.60 pa for the eldest/only child
• 696.80 pa for each subsequent child
• ANI 50k the tax charge commences
• ANI 60kall CB neutralised by tax charge
• (ANI Adjusted Net Income)

34
BOB

• Married wife a part-time pa.
• Two children aged 3 and 6
• Bobs salary 54,000
• Child benefit 1,752
• 17.52 lost for each 100 over 50,000
• Bobs marginal rate of income tax 57.5

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CHILD BENEFIT PLANNING

• Opportunity
• ANI determines tax level on child benefit
• Reduce ANI to preserve benefit for those
  with 50,000 - 60,000 income through
• - pension contribution
• - salary sacrifice

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CORPORATION TAX REDUCTION

• Change in mainstream rate
• 2012 24 (25)
• 2013 23 (24)
• 2014 22 (23)
• Small companies rate stays at 20
• Marginal rate 25

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CORPORATION TAX REDUCTION
And for those that need income
COMPANY
Residual profits taxed at 20 CT
Salary 7,000 No income tax Full entitlement
to State Benefits No employer/employee
NICs Dividend 35,475 Taxed at 10 No
further income tax No NICs
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COMPANY INVESTMENT

• Collectives
• - Indexation - No CGT exemption - No
  further tax on dividends
• Single Premium Bonds
• - Non income producing - Tax efficient
  dividend reinvestment - Tax sheltered growth

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INVESTING FOR PRIVATE COMPANIES

• 20 CT v 45 IT
• Director/shareholders keep cash in company
• Issues on later access
• Investment in the meantime

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COMPANIES INVESTING IN BONDS

• No chargeable event rules
• Loan Relationship Rules (LRR)

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LOAN RELTATIONSHIP RULES

• How does LPR work?
• Precise tax impact depends on companys
  accounting practice
• 20 credit for tax in UK fund on encashment
• Historic cost basis or fair value?

42
LOAN RELTATIONSHIP RULES
FAIR VALUE ANNUAL INCREASE IN VALUE TAXABLE
HISTORIC COST BASIS TAX DEFERRAL ONLY A
TAX CHARGE ON ENCASHMENT
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LRR POST 08 BOND

• Historic cost basis
• A company that meets the definition of small
  in the Financial Reporting Standards for Smaller
  Entities (FRSSE) may prepare its accounts on the
  historic cost basis. Two of the following 3
  criteria need to be met before a company can
  apply the FRSSE Standards
• 1. Turnover is 6.5 million or less.
• Balance Sheet value is 3.26 million or less.
• 3. Average number of employees is 50 or less.

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LPR LPR

• Encash bond when company profits low
• Encash bond when company has a trading loss
• Create a trading loss
• Care impact on entrepreneurs relief if
  company to be sold

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BUSINESS ASSURANCE OPPORTUNITIES

• Shareholder succession
• Employee family protection

46
SHAREHOLDER SUCCESSION

• Unexpected death/serious illness the problems
• Dependents suffer
• Co-owners suffer
• Business suffers

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SHAREHOLDER SUCCESSION
As
SHARES
DOUBLE OPTION
Cash
POLICY
Shares
B
TRUST
48
SHAREHOLDER SUCCESSION
As
SHARES
DOUBLE OPTION
Cash
POLICY
Shares
B
TRUST

• Extra cover for key person
• D/Option agreement for BPR
• By-Pass Trust in Will for IHT

49
EMPLOYEE FAMILY PROTECTION
Providing financial protection for dependents and
family of senior employee
50
RLP

• Tax deductible /non taxable premium
• No impact on AA/LTA
• Non (income) taxable sum assured
• IHT Freedom (Discretionary Trust)
• No tax avoidance motive - care cover for
  shareholder directors

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SINGLE PREMIUM BOND ANTI AVOIDANCE

• Change
• Provisions to prevent use of cluster policies
  to defer tax and defer plans
• Provisions to prevent use of non taxed earlier
  gains to produce a later UK tax benefit

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CLUSTER AND DEFERRAL
100,000
SP Bond
Clusters
60,000
10,000
10,000
10,000
10,000
Premium Maturity proceeds Year
10,000
10,000
10,000
10,000
4
3
2
1
All growth (subject to tax on encashment)
No growth (no tax)
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CLUSTER AND DEFERRAL

• NEW LEGISLATION
• Connected policies are a single policy
• Connected? Policies simultaneously in force,
  issued with reference to the other and on terms
  that would not be reasonably expected if the
  other policy(ies) were ignored.
• Genuine distinct and economically self
  contained policies not affected

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THE CONTINUING BENEFITS OF SINGLE PREMIUM BONDS

• Segmentation still works provided
• - economic self contained policies and
• - policies are genuinely independent
• Use segmentation to control tax charges by
  assignment to family pre- encashment
• Use segmentation rather than large part
  surrender!

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JACK

• Higher rate 40 taxpayer
• Effects bond for 100,000 2007
• 1000 equal segments
• Bond value in 2012 125,000
• Requires 75,000

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PART SURRENDER
75,000
PART SURRENDER
C E Gain 50,000 Tax 10,000
57
FULL POLICY ENCASHMENT
FULL SEGMENT SURRENDER
C E Gain 15,000 Tax 3,000
75,000
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SINGLE PREMIUM BOND ANTI AVOIDANCE

• Opportunity
• To re-promote the acceptable deferment and
  planning qualities of
• UK/offshore bonds
• Wrapper choice still critically important
• Care in relation to how you take funds from
  bonds

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QUALIFYING POLICY INPUT LIMIT

• Change
• New (post 6.4.2013) policies have max 3,600
  input for benefits to be tax free
• New policies must not be assigned/written in
  trust
• Transitional rules for 22.03.12 5.4.13
  policies.
• Existing (pre 21.3.12) plans continue as before
  provided term of contract not extended.
• NB All subject to consultation.

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QUALIFYING POLICY INPUT LIMIT

• Opportunity
• Promote benefit of QPs up to 3,600 pa.
• Discuss non-pensions pensions for those
  already maxed out on Q policies and pension
  input limits
• May be best to use non-qualifying protection
  policies

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NON DOM CHANGES

• Change
• New 50k PA RBC for long term 12/14 years
  residents
• In addition to the existing 30K RBC for 7/9
  year residents

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NON DOM CHANGES

• Change
• New 50k PA RBC for long term 12/14 years
  residents
• In addition to the existing 30K RBC for 7/9
  year residents
• Opportunity
• Promote quality of offshore bond to avoid
  remittance issue
• Particularly relevant where insufficient
  overseas income/capital gains to make RBC
  worthwhile
• Consider offshore bonds for existing O/S trust
  with non dom settlor

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TRUSTS

• 50 - 45 income tax rate from 6.4.2013

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TRUSTS

• 50 - 45 income tax rate from 6.4.2013
• Consultation on Relevant Property Regime

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TRUSTS

• 50 - 45 income tax rate from 6.4.2013
• Consultation on Relevant Property Regime
• Opportunity
• Trustees treated as additional rate taxpayers
  for income tax taxpayers
• Use CGT exemption of 5,300
• Use tax shelters SP Bonds
• Collaborate with professional advisers in
  advising on trustee investments

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CONSULTATION ON IHT/DISCRETIONARY TRUSTS

• Simplify calculations
• Simplify information requirements
• Deal with accumulated income

67
INHERITANCE TAX

• Nil rate band 325k until 5.4.15- then CPI
  increases
• Non Dom spouse exemption to increase
• Charitable legacy provisions
• - Post 5.4.2012 deaths - 10 of net estate
  left to charity - 10 reduction in IHT on
  chargeable estate - Rules complex
• - Consultation on IHT on discretionary trusts

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ESTATE PLANNING FOR INVESTORS
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LIFETIME GIFTING Ongoing access needed?
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LIFETIME GIFTING Ongoing access needed?
NO
CONTROL REQUIRED
NO
YES
Discretionary Gift Trust
Bare Trust (for minors)
Bond or collective
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LIFETIME GIFTING Ongoing access needed?
NO
CONTROL REQUIRED
YES
FIXED INCOME
NO
YES
YES
NO
Discretionary Gift Trust
Bare Trust (for minors)
Loan Trust
DGT
B only
B/C
Bond or collective
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• AND FOR THOSE WHO
• Dont have liquid cash or
• Dont want to make lifetime gifts or
• Want an easy life
• Life Cover in Trust

73
PROTECTION OPPORTUNITY CONTINUES
DISC TRUST
PREMIUM
POLICY

• Normal Exp
• Annual

74
PROTECTION OPPORTUNITY CONTINUES
DISC TRUST
PREMIUM
POLICY

• Normal Exp
• Annual

• PERIODIC CHARGE
• 10 years
• Policy value (SV?)
• Premiums?
• Serious ill health

75
PROTECTION OPPORTUNITY CONTINUES
DISC TRUST
EXIT?
PREMIUM
POLICY

• Normal Exp
• Annual

• First 10 years nil
• Subsequently unlikely

• PERIODIC CHARGE
• 10 years
• Policy value (SV?)
• Premiums?
• Serious ill health

76
PROTECTION
BIG POLICIES Multiple trusts
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THE PARENT/GRANDPARENT
The challenges well, two of them! 1. The
increasing costs of higher education 2. The
increasing difficulty of getting on the
property ladder Both very high priority/anxiety
for many parents/grandparents
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CHILDREN/GRANDCHILDREN

• A RUF
• RIDE FOR STUDENTS?

79
CHILDREN/GRANDCHILDREN

• A level Results
• University selection
• university Funding

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AND TAX RATES ARE INCREASING
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GOVERNMENT HELP?
82
THE COSTS OF A UNIVERSITY EDUCATION (2011/12)

• Tuition Fees
• 9,000 per annum
• Loans available
• Maintenance grants
• lt 25,000 full grant of 3,250
• gt 42,600 no grant
• Loan repayment
• - repayment at 9
• - income above 21,000 (up from 15,000)
• - interest rate inflation 3 for
• - period of study
• - period in which income exceeds 41,000

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UNIVERSITY COSTS

• Cost of university 57,000
• Tuition fees 9,000 x 3 27,000
• Living costs 10,000 x 3 30,000
• 57,000
• To fund 27,418 _at_ 5 for 15 years for 3 year old
• or 215 per month
• If 57,000 costs increase by 2 per annum
  76,714

84
TARGET INVESTOR

• Parents squeezed
• Grandparents often have cash

85
INVESTMENT CHECKLIST

• JISA
• Collectives/Single Premium Bonds
• - Bare trust
• - Discretionary trust
• - Investor ownership

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JUNIOR ISA FUNDAMENTALS

• Junior ISA
• Launch 1 November 2011
• Tax free income/gains no parental attribution
• 3,600 input limit
• All UK resident children, under 18 who do not
  have CTF account are eligible
• Conversion to adult ISA at age 18
• CTF limit increased to 3,600
• Not available to children born between 1/9/02
  and 2/1/11
• Big market for over 10 year olds

87
JISA

• 3,600 investment for 18 _at_ 5 growth 106,340
• No 100 parent rule

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BUT
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THE QUESTIONS TO POSE
WHICH INVESTMENT NEED FOR ACCESS NEED FOR CONTROL
Income None None
Capital growth Possible Total
Mixture Total Some
Focus is on clients needs, objectives and outlook
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THE PARENT/GRANDPARENT
Getting the right bricks in the wall investment
Offshore bond
Collectives
Own ISA?
Junior ISA
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THE PARENT/GRANDPARENT
Getting the right bricks in the wall
Offshore bond
Control/access?
In trust or assigned?
Collectives
Own ISA? (NT)
If in trust which trust?
Junior ISA (NT)
93
RALPH AND TOBY

• Ralph (grandparent) aged 64
• Toby (grandson) aged 8
• Ralph wishes to make provision for costs of
  school fees/higher education
• Ralph requires no access

94
BARE TRUST - CARE

• No beneficiary change
• Inflexible
• Care - 100 rule for parents

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RALPH AND TOBY
50,000 O/S Bond
Bare trust for Toby

• All chargeable event gains taxed on Toby
• Can use Tobys personal allowances
• Discretionary trust will give more flexibility.
  To use Tobys personal allowance assign segments
  or make absolute appointment.

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AND FINALLY
TAX AVOIDANCE!
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TAX AVOIDANCE

• Jimmy Carr and P2
• Various celebrities and Eclipse 35
• Morally unacceptable PM
• Morally repugnant George Osborne

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The laddies not for (U) turning...well , maybe
, sometimes
The government is totally wedded to stopping what
they consider to be "unacceptable" tax avoidance

• The judiciary is backing them up in the tribunal
  and courts
•  We will soon have a General Anti Abuse
  (avoidance) Rule
•  The public will be wary of "edgy" tax avoidance
  schemes

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GAAR

• General anti-abuse rule
• Targeted at artificial and abusive tax
  avoidance schemes
• Should ensure sufficient certainty without
  undue costs

101
INTENTION

• GAAR should only apply to artificial and
  abusive arrangements and
• Should protect the centre ground of tax
  planning
• Taxpayer still has right of appeal

102
GAAR - AMBIT

• Applies to
• Tax arrangements this is where it is
  reasonable to say that obtaining a tax
  advantage was a purpose of the transaction
• Applies to IT, CT, CGT, PRT, IHT and SDLT

103
ABUSIVE TAX AVOIDANCE

• An arrangement where the entering into it or
  carrying out of it cannot reasonably be
  regarded as a reasonable course of action
• The arrangements are intended to exploit the
  relevant tax provisions (this is set in the
  context of the relevant tax provisions, their
  policy objectives and any shortcomings in them)
• An indication of abuse is
• - non commercial terms - different tax result
  to economic result

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The GAAR should strike down arrangements whose
tax consequences would manifestly not have
countenanced by Parliament, had it foreseen the
arrangement and those consequences
105
WHAT DOES GAAR TARGET?

• Abusive arrangements or
• Unreasonable arrangements?
• Advisory Panel to give an opinion to
  taxpayer/HMRC

106
DOTAS

• Disclosure of tax avoidance schemes
• Early warning for HMRC
• Able to tag scheme for the future

107
DOTAS

• Cowboy tax advisers
• Extending the scope of the scheme
• More tax avoidance plans now caught

108
CAP ON UNLIMITED TAX RELIEFS

• Change
• Consultation on cap on income tax reliefs
  claimed by individuals
• NOT CHARITABLE DONATIONS
• Max relief (pa) the greater of 50,000 or 25
  of income
• N/A to already capped reliefs eg. pensions,
  VCT, EIS Also N/A to top-slicing and BR credit
• Effective from 6.4.2013

109
CAP ON UNLIMITED TAX RELIEFS

• Change
• Consultation on cap on income tax reliefs
  claimed by individuals
• NOT CHARITABLE DONATIONS
• Max relief (pa) the greater of 50,000 or 25
  of income
• N/A to already capped reliefs eg. pensions,
  VCT, EIS Also N/A to top-slicing and BR credit
• Effective from 6.4.2013
• Opportunity
• To be informed
• To sell the benefit of known reliefs

110
TAX AVOIDANCE FROM 6.4.2013

• GOVERNMENT/REVENUE INITIATIVES
• GAAR will apply to contracts entered after
  that date
• DOTAS extension cowboy tax advisers
• Tax relief limit - 50,000 or 25 of income
• Its going to be more difficult to use tax
  avoidance plans

111
HELPING ADVISERS TO DELIVER VALUE

• Opportunity
• Communicate dangers of unacceptable tax
  planning
• Reinforce the power of acceptable tax
  planning
• Tried and tested over edgy and speculative

112
Low hanging fruit
There is still plenty of opportunity to implement
tried and tested strategies to minimise tax.
113
Supercharging returns through (acceptable) tax
alpha
?
tax
Performance within your control
114
THE POWER OF PROACTIVITY
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CONTACT
www.technicalconnection.co.uk www.techlink.co.uk T
ony Wickenden tkw_at_tecconn.demon.co.uk Tony.wickend
en_at_technicalconnection.co.uk 0207 405 1600