Company investing. Your company guide to investing with Standard Life International

Transcription

1 Company investing Your company guide to investing with Standard Life International

2 Contents 01 What does the future hold? 02 Capital reserves and asset classes 03 What are loan relationships? 05 Company investing with Standard Life International 06 Case Study 07 Considerations for Directors/Business owners/ Key employees 09 Additional tax planning opportunities 10 Investment Solution for Pension Scheme Trustees 12 Why choose Standard Life International? The information in this document is intended as a general guide and is not a substitute for expert individual financial advice. Laws and tax rules may change in the future. The information here is based on our understanding in April Your personal and company circumstances will also have an impact on tax. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of this document.

3 What does your future hold? Life is unpredictable. But that doesn t mean you can t plan for the future. And, as life goes on and priorities change, plans can change too. Whether you own, run or are a senior employee of a company, or if you are a trustee of a company s pension scheme, investing in the International Bond provided by Standard Life designated activity company (dac) could give you the control and flexibility you require. The company will be purchasing a life assurance contract, provided on a cross bordered basis by a life assurance company based in Ireland, and can only be taken out through a financial adviser. Companies Potential to improve deposit rates for the company s capital reserves Simple administration for managing the investment of the company s capital reserves A retirement funding solution for company payments for directors/employees restricted by pension limits Directors and senior employees Managing your company's capital reserves in a tax efficient and an administratively friendly way Provides an alternative retirement planning solution where you are restricted by the pension limits A solution to assist with the planning of your exit strategy Before you decide to buy you need to know what the risks and commitments are. Read our key features document (IB17) and key information document for more information about the features of the International Bond. It will help you decide if this product is right for you. If you re still not sure what to do, or would like more information about anything mentioned in this guide, please speak to your financial adviser. Pension scheme trustees An investment solution for managing the assets within the company s pension scheme Helps you meet your trustee responsibilities Company investing 01

4 Capital reserves and asset classes It is important that successful businesses make the most of their assets and, in particular, their capital reserves. Investing capital reserves When considering the suitability of any investments, it is important that the company takes appropriate financial advice which considers their investment objectives and the directors' attitude to risk. An asset class is a category of assets or investments, such as equities or bonds. Normally, assets in the same class have similar characteristics. They can, however, have very different returns or risks. Managing capital reserves introduces an element of administration as there is a need to make and implement investment strategies on a regular basis. Investing your capital reserves with Standard Life International dac removes that extra layer of administration. The value of the investments in all asset classes can go down or up so may be worth less than was paid in. You should think very carefully about investing in a variety of asset classes and in a range of investments within each class. Equities What are they? Equities are part ownership in a company, usually known as stocks or shares. What s the potential return? The return on equities comes from any growth in the value of the shares, plus any income from dividends. For overseas equities, changes in the foreign currency exchange rates could also significantly affect returns. What are the risks? Equities are one of the more volatile asset classes although they can offer good growth potential, their value can drop or rise sharply at any time. Because of this volatility, equities should normally be viewed as a long term investment. Bonds What are they? Bonds are essentially loans to a government or company. These loans are often for a set time period and the bond owner usually receives regular interest payments. Bonds issued by the UK government are called gilts and those issued by a company are corporate bonds. What s the potential return? The return is a combination of any interest received and any change in the bond s value. For overseas bonds, changes in the foreign currency exchange rates could also significantly affect returns. What are the risks? A bond s return will be affected if: The interest or capital can t be paid back in full or on time The credit worthiness of the company or government reduces Interest rates or foreign currency exchange rates change Bonds can be traded on the stock market, so their value can go down or up at any time. Some bonds are riskier than others, e.g. bonds issued for a longer time period or by companies which are viewed as risky. Money market instruments (including cash) What are they? Money market instruments include deposits with banks and building societies, as well as governments and large corporations. They also include other investments that can have more risk and return than standard bank deposits. There are circumstances where money market instruments can fall in value. What s the potential return? The return comes from a combination of any interest received as well as any change in the value of the instrument. What are the risks? Investments in these assets are riskier than cash deposit accounts in some circumstances their values will fall. The return may also be lower than inflation. 02 Company investing

5 What are loan relationships? Gains on company investments are covered by the loan relationship rules. Loan relationships are the way that companies are assessed for corporation tax on the lending or borrowing of money. This includes the company making certain investments in instruments such as: Gilts Corporate bonds Bank deposits Certain collective investments Capital redemption bonds Onshore and offshore bonds Loan relationship profits from offshore bonds will be recognised differently in a company s accounts depending on the accounting basis that it has used. Fair Value Basis Companies that are subject to, or have adopted, the International Accounting Standards (IAS) or the UK Generally Accepted Accounting Principles (UK GAAP) will have to adopt the fair value basis of accounting for investment bonds subject to the loan relationship rules. Micro-entities regime Many smaller companies have been able to defer corporation tax on investment returns within investment bonds if they adopted the historic cost basis of accounting. But changes to accounting standards will mean the number of companies eligible to continue use this basis will be reduced. Only companies that have adopted the Financial Reporting Standard applicable to the Micro-entities Regime (FRS105) can use the historic cost basis for accounting periods beginning on or after January To be eligible the company must meet two of the following criteria: Turnover of 632,000 or less Balance sheet assets of up to 316, employees or less This can allow corporation tax on any investment growth to be deferred until the bond is surrendered. In this instance, any investment growth on the bond is subject to corporation tax each year. The bond is valued at its market value, i.e. the surrender value at the end of each accounting period Any growth (or loss) over the value from the previous accounting period (the carrying value) will be included in the loan relationship account and subject to corporation tax Company investing 03

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7 Company investing with Standard Life International Investing in the Standard Life International Bond could offer a number of benefits for companies. Interest rates It may be possible for us to access deposit accounts not directly available in the market, due to the scale and buying power of Standard Life. Companies could access these higher rates of interest on cash deposits through the variety of fixed term deposits available within the bond. Switching funds Switching funds or moving between cash deposits within the International Bond will not create a corporation tax liability for the company. This is important where a specific asset mix has been selected to meet the companies risk profile and investment objectives. Funds may need to be regularly reviewed and rebalanced to maintain the appropriate asset allocation. If the same funds were held directly, outside the International Bond, each fund switch would be a disposal which could result in corporation tax becoming payable. Capital gains over and above inflation will be subject to corporation tax. We may charge for switches with some types of investment. Sometimes, in exceptional circumstances, we may have to wait before we can transfer or switch your funds. This is to maintain fairness between those remaining in and those leaving the fund. Ease of Administration Each time the company wants to make an investment, or take advantage of a competitive savings product on offer from a deposit taker an application has to be made. This is likely to involve all the directors having to sign the application form as well as providing documentation to support the money laundering needs on each occasion. The delay introduced by the needing to obtain the signatures of all the directors may result in the company missing out on the investment opportunity. Investment in an International Bond would only need the signatures and money laundering to be completed once (except for where there is a change in directors). The directors can authorise their adviser to receive future investment instructions from a named director with the adviser then able to carry out the instruction on behalf of the company. Privacy Because investments in the International Bond are owned by Standard Life International, rather than the company, the company can avoid any unwelcome marketing from the bank to which it is moving its money. Company investing 05

8 Case Study Alpha Acorns Ltd decides to invest 500,000 into an offshore bond on 1 May 2014 on the life of its two directors. The company s accounting period is 31 March each year. On 1 October 2017, the offshore bond is fully surrendered for a value of 660,000. The following surrender values are known: 31 March , March , March ,000 1 October ,000 Alpha Acorns uses the fair value accounting basis The increase in the value of the offshore bond is taxed on the company on an annual basis. The offshore bond would therefore be taxed as follows: 30,000 gain taxed in accounting period 2014/15 50,000 gain taxed in accounting period 2015/16 55,000 gain taxed in accounting period 2016/17 25,000 gain taxed in accounting period 2017/18 These gains would be taxed at the corporate tax rate applying to any profits at that time. This is not a projection and is for illustrative purposes only. 06 Company investing

9 Considerations for Directors/ Business owners/key employees Employee Benefit Programmes An attractive employee benefits package has always played an important role for companies looking to recruit and retain key personnel. However, more companies and their senior employees who want to maintain a high level of regular retirement savings are being affected by restrictions to pension payments. This is making it increasingly difficult for companies to retain pension provision at the core of an employee benefit programme. Many employers are looking to fill the gap by offering extra salary. Cuts to the pensions savings limits mean: The annual contribution limit will be 40,000 The overall lifetime allowance will be 1,030,000 from the 2018/19 tax year Employees could be charged tax on employer pension contributions over the annual allowance Employees who have applied for fixed protection will need to stop accruing further pension benefits or risk losing their increased lifetime allowance Employees and directors affected by the cap on pension funding may need to consider alternative investment solutions to fund for their retirement plans Benefits of using the Standard Life International Bond with pensions Supplement retirement income by taking 5% a year tax deferred withdrawals from the bond so that pension income does not go over the higher rate tax threshold and personal allowance limit Use the bond as a bridging pension a defined benefits (DB) pensions scheme member could stop working before their normal retirement date and put back the date from which they take their benefits. They can then take money from the bond as income until their scheme pension starts. If they have no other sources of income, any gain from the withdrawals may not be taxed if it falls within their available personal allowance Reduce pension drawdown income if a scheme member does this in the year in which the bond will be closed then they could reduce the amount of tax they are due to pay on any chargeable gains Laws and tax rules may change in the future. The information here is based on our understanding in April Your personal and company circumstances will also have an impact on tax. The Standard Life International Bond is similar to a pension fund as no UK tax is payable within the fund. Individuals are only subject to tax when a chargeable gain arises, typically on surrender or part surrender of the policy. So, the International Bond complements pensions as part of a holistic retirement planning strategy. Payments can be made into our International Bond by direct debit: Monthly Quarterly Half yearly Yearly Company investing 07

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11 Additional tax planning opportunities Entrepreneurs' Relief Entrepreneurs' relief (ER) is a valuable benefit for directors who may wish to sell or gift some or all of their shareholding now or in the future. The relief limits the rate of CGT to 10% for up to 10 million of capital gains for those with a shareholding of 5% or more. ER is one of the most attractive tax benefits, available to business owners. It offers the lowest capital gains tax rate on business disposals, however it is important that sensible steps are taken to ensure they take advantage of this benefit. Ultimately every business owner is looking for the most tax efficient way to exit their business. Before any consideration is given to selling their business it is important that all company assets are organised in such a way to optimise the benefit of Entrepreneurs Relief. This creates an opportunity for the customer, their accountant and their financial adviser to discuss the exit strategy options. This is to ensure the impact of ER is fully understood taking into account any investment decisions made. Inheritance Tax Business Property Relief Inheritance Tax Business Property Relief is a valuable benefit for business owners and their families in the unfortunate event of the death of the business owner. The relief means that certain business assets can be 100% exempted from the business owner s estate for Inheritance Tax liability, thus potentially saving a considerable amount of tax and providing a greater sum for the business owner s beneficiaries. The relief is only applied to relevant business property. Assets such as large cash balances or some investment bonds may not be considered necessary for future business purposes and therefore could be treated as excepted assets. Excepted assets would reduce the value of the business property on which BPR could apply. It is important that the customer, their accountant and their financial adviser work together and if required, seek clarity from the local inspector of taxes before implementing a financial planning strategy. This approach will help ensure the most efficient and robust tax planning strategy is implemented with the aim of protecting future relief. And as with all good financial planning, this should be regularly reviewed to take into account any changes to the company's assets and also to legislation. What happens if there is a boardroom restructure? A family run business might see another family member, such as a spouse or child, take up a senior position within the business. Or, a larger business may see boardroom movements as directors join, leave or retire from the business. If the structure of the business changes then it is possible to change the life assured on the International Bond without triggering the tax charge. Company investing 09

12 Investment Solution for Pension Scheme Trustees Since 2001, and the publication of the Myners Report, the responsibility of trustees has grown. This has been highlighted by the Pensions Act 2004 and the rules of Trustee Knowledge and Understanding, which came into effect in Trustees are responsible for their schemes investment allocation, performance and overall investment management strategy. These responsibilities can present a considerable challenge at a time when the cost of providing occupational pension schemes is continuing to increase and defined benefit schemes in particular are facing deficits. The typical pension scheme will need a broad range of investment options and will have specific administration requirements. This can be an issue, particularly where the scheme is insured and only offers a limited range of funds. Therefore, many pension schemes continue to put their trust in equities in the hope that markets will recover sufficiently to make up any shortfall. The outcome: investment choice fails to deliver the investment strategy or performance required to meet the liabilities. A number of investment managers have developed a bespoke solution to meet the growing challenges faced by trustees of final salary schemes. Focusing on a broad range of investment options lessens the need to rely purely on the equity markets. This approach is used by Discretionary Investment Managers (DIM) when developing a liability driven investment (LDI) solution. The LDI approach allows defined benefit schemes to build a portfolio which increases the chances of success of reducing any deficit and meeting their future liabilities. Many large final salary schemes, generally those with assets in excess of 20M that are not restricted to an insured scheme, may already have appointed an investment manager to implement an LDI strategy. Trustees of smaller final salary schemes could consider the International Bond which would allow access to DIMs who offer the LDI investment solution. Trustees will need to satisfy themselves that investing in the International Bond meets the requirements of their pension scheme rules. 10 Company investing

13 A number of investment managers have developed liability driven investment solutions to meet the specific challenges faced by trustees of final salary schemes Company investing 11

14 Why choose Standard Life International? We ve told you more about how investing works. Now we ll tell you more about how we work. A strong parent company and solid foundations Standard Life International is an Irish life assurance company that s wholly owned by Standard Life Assurance Limited. Standard Life International dac is based in Dublin. We re authorised and regulated by the Central Bank of Ireland. We re also regulated by the Financial Conduct Authority for our UK business, and regulated by the Jersey Financial Services Commission for the conduct of long term insurance business in Jersey. A history you can rely on The Standard Life Aberdeen group of companies has been looking after customers for over 190 years and currently around 4.5 million people worldwide trust us with their finances. You need to know your financial future is in good hands. That's why we place such importance on getting your money to work hard for you. And it's why we believe you can have complete confidence in us. Advantages to our Dublin base Our Dublin location offers advantages for example, Discretionary Investment Managers using our bond won't charge VAT on their fees, due to the tax position in Ireland. Making it simple for you and your company to invest offshore. 12 Company investing

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16 Find out more Call us on We re open Monday to Friday, 9am to 5pm. Calls may be monitored and/or recorded to protect both you and us and help with training. Call charges will vary. Certain classes of product mentioned on this page are provided by certain other companies within the Standard Life Aberdeen group Standard Life International dac is authorised and regulated by the Central Bank of Ireland and subject to limited regulation in the UK by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. Standard Life International dac is a designated activity company limited by shares. It is registered in Dublin, Ireland (408507) at 90 St Stephen s Green, Dublin 2. IB Standard Life Aberdeen. Images reproduced under licence. All rights reserved.