Julia Peake, Technical Development Manager, Sanlam John Haley, Technical Sales Manager, Utmost Wealth

Transcription

1 Julia Peake, Technical Development Manager, Sanlam John Haley, Technical Sales Manager, Utmost Wealth

2 Learning objectives Understand the world of investing beyond pensions and ISA wrappers. Specifically the bond and collectives choices following the removal of indexation Understand client suitability for investment bonds Understand estate planning realities

3 Onshore bonds: what you need to know Julia Peake LLB (Hons) Technical Development Manager Sanlam UK January 2017

4 Learning Objectives To understand the world of investing beyond pensions and ISAs wrappers. Specifically the bond and collectives choices following the removal of indexation for corporate clients. Client suitability for investment bonds To understand estate planning realities

5 The basics Onshore Bonds Internal taxation Chargeable Events Segmentation 5% withdrawals Fund switching Reliefs Care Additional lives assured Withdrawing lump sums from a bond Collectives Capital gains tax Natural distributions Flat rates of tax Losses carried forward CGT dies on death Rebasing cost value Joint investments Accumulation and income units Holdover relief Large gains

6 Corporate investments

7 Investment bonds Taxed under the loan relationship - taxation follows accountancy basis. Accounting basis Historic cost accounting Fair value accounting NO 5% tax deferred withdrawals- corporation tax not chargeable events. Financial instruments definition- accountancy basis needs to be reexamined if holding a bond as an asset of the company.

8 Equity based collectives UK companies not subject to corporation tax on dividends received. No more indexation relief No loan relationship Potential entrepreneurs relief Care on BPR Take advice in company structuring 12 months before sale.

9 Investment choices

10 Adviser recommendations

11 Target Market for Onshore Bonds Investors who: wish to invest with a UK provider. will remain UK resident throughout the policy term and upon encashment. will be basic rate taxpayers or can assign the bond to a non or basic rate taxpayer on surrender. want to use trusts for estate planning purposes. are higher or additional rate taxpayers and utilised their dividend allowance. require regular tax-efficient income to supplement salary or pension income without affecting tax credits. want simple tax administration, no reporting until chargeable event occurs. have maximised pension contributions and ISA allowances for this tax year.

12 Example 1- individual Source: Technical connections

13 Bonds and estate planning

14 For consideration Types of trust Role of the trustee Non- income producing asset Reporting requirements

15 Contact Us Further contact details: with all Technical queries literature and illustrations

16 This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at January 2018 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

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18 RETIREMENT PLANNING AND OFFSHORE BONDS 2017/18 JOHN HALEY MSc, CFP TM, FPFS, CHARTERED FCSI TECHNICAL SALES MANAGER

19 LEARNING OBJECTIVES By the end of this session, delegates will be able to; Understand the interaction of offshore bond gains with the income tax bands and rates. Appreciate the positive impact that top slicing relief can have on an individual s income position. Be able to discuss and explain this subject with a client in a clear and concise way Apply this knowledge to appropriate, individual, client scenarios 19

20 TAX MANAGEMENT CHOICE AND CONTROL Capital Redemption bond Great for IHT planning/trusts Income tax deferral Self assessment friendly Would you like to pay tax when forced to.or when you choose to? Gross roll up Assignment of segments No CGT on encashment/ switching Segment surrender Tax deferred 5% withdrawal

21 RETIREMENT PLANNING NOT SO DIFFERENT? Pension Offshore bond Fund growth Virtually tax-free Virtually tax-free Payments Tax-free lump sum Tax-relief at highest marginal rate on 3,600 or 100% of relevant UK earnings within annual allowance Normally 25% of fund or LTA whichever is lower No tax relief but no maximum either *100% of original investment Income All income taxed at marginal rate Only gains taxed at basic, higher or additional rate Reliefs Personal allowance Personal allowance Starting rate band Personal savings allowance Top slicing Tax free assignment Time apportionment *As part of full surrender/included in chargeable event calculation 21

22 THE ORDER OF TAXATION Income is taxed, and allowances and tax bandings are applied, in a certain order. Non savings Savings Dividends Chargeable gains Salary Profits Rents P11D etc. Bank / BS GILTS Corp Bonds Offshore* Shares Collectives Investment bonds Onshore & Offshore *Onshore and offshore bond gains are still added after dividends for the purposes of top-slicing

23 2017/18 - THE TAX BANDS The starting rate band and personal savings allowance (PSA) are not mutually exclusive Consider a client whose non-savings income is within the personal allowance but who has significant savings income Starting rate band 5,000 Personal savings allowance 1,000 Personal allowance 11,500 Basic rate band * 33,500 Higher rate band 105, ,500 Additional rate tax Tax free income 17,500 Offshore bond gains are taxed as savings income! * 31,500 for non savings income in Scotland.

24 TAX EFFICIENT INCOME IN RETIREMENT Top slicing only used where client is not already a higher or additional rate tax payer Tax deferred 5% withdrawal Averages gain over the period of investment Top slicing Offshore bond Segment surrenders Add averaged gain to the individual s income in the year of encashment to determine higher/additional liability Assign segments (assignee s tax rate) 24

25 RETIREMENT PLANNING THE POWER OF TOP SLICING RELIEF Client aged 65, current income of 60,000 comprised of pensions, (drawdown and state) savings and dividends. Invested 300,000 into an offshore bond over 10 years ago, which is now valued at 600,000. If he switches off his 40,000 drawdown income, how much could he encash and remain a basic rate tax payer, whilst retaining his personal allowance? End of year Amount encashed Gain Top slice Surrender net of BRT ,000 80,000 8, ,000 Adjusted net income 20,000 plus 80,000 = 100,000. Top sliced gain of 8,000 does not push other income of 20,000 over the HRT threshold. If he generated a chargeable gain in excess of 80,000, he would begin to lose personal allowance as his adjusted net income would exceed 100,000 25

26 THOUGHTS ON IHT PLANNING CGT needs to be considered when collective investments are settled into trust at a later date. If investment bond no longer required, could settle into bare/discretionary trust with no chargeable event - as long as not for money or money s worth. Could use loan trust as part of original strategy to ensure access to loan to form income where required but all growth outside of estate? Deed of waiver to accelerate IHT efficiency? Could convert investment bond to a discounted gift trust where available if income stream still required? 26

27 SUMMARY Where income levels can be managed in retirement, offshore bonds can represent a highly efficient source of income, especially where top slicing relief is utilised. The level of chargeable events achievable following segment surrenders will depend upon the amount of growth achieved and the number of segments. Chargeable events could also be created with excess 5% withdrawals Care should be taken that: Adjusted net income does not exceed 100,000 when combined with chargeable gain The higher rate threshold is not exceeded when the top sliced gain is combined with other income The pension fund is also not depleted meaning that the legacy for future generations is potentially increased! 27

28 IMPORTANT INFORMATION The information contained in this document does not constitute advice. It is designed for financial adviser use only and is not intended for use with individual investors. Information regarding tax and practise is based on our interpretation of current legislation and HM Revenue & Customs policy/practice in the UK, Isle of Man and Ireland as at 1 September Tax treatment is subject to change and individual circumstances. There is therefore a risk that the value of the tax treatment provided by a bond may change. International bonds are intended to be a medium (at least 5 years old) to long term (over 10 years) investment. The value of investments may fall as well as rise and is not guaranteed. Your client or their trustees may get back less than originally invested. Utmost Wealth Solutions and Utmost Trustee Solutions are brand names used by a number of Utmost companies. This item has been issued by Utmost Limited and Utmost Ireland dac. The following companies are registered in the Isle of Man. Utmost Limited (No C), Utmost Administration Limited (No C) and Utmost Trustee Solutions Limited (No C) are regulated or licensed by the Isle of Man Financial Services Authority. Not regulated: Utmost Services Limited (No C). Each has its registered office at: Royalty House, Walpole Avenue, Douglas, Isle of Man, IM1 2SL, British Isles. The following company is registered in Ireland. Utmost Ireland dac (No ) is authorised by the Central Bank of Ireland and regulated by the Financial Conduct Authority in the UK for Conduct of Business Rules. Registered office: Block 2, Harcourt Centre, Harcourt Street, Dublin 2, Ireland. 28

29 Learning objectives Understand the world of investing beyond pensions and ISA wrappers. Specifically the bond and collectives choices following the removal of indexation Understand client suitability for investment bonds Understand estate planning realities

30 Please fill out your feedback form and hand to a member of 7IM for your CPD certificate. Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No.OC378740