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tax planning – investment income and gains Colin Jelley Head of Tax and Financial Planning Skandia for financial advisers ...
agenda <ul><li>Tax update </li></ul><ul><li>Wrapper choice for collectives </li></ul><ul><ul><li>Taxation under the bonnet...
tax update <ul><li>‘every chancellor is remembered for one thing’ </li></ul><ul><li>Norman Lamont: 15% interest rates </li...
tax update – reform nothing new for CGT? <ul><li>Healey 1978 – ‘flat rate’  </li></ul><ul><li>(no indexation) </li></ul><u...
CGT receipts – on the up Source:  HM Revenue & Customs Annual Receipts – April 08 Million
IHT receipts – on the up Source:  HM Revenue & Customs Annual Receipts – April 08 Million
wrapper choice for collectives <ul><li>Which wrapper </li></ul><ul><li>None </li></ul><ul><ul><li>unwrapped investments </...
wrapper choice for collectives <ul><li>Types of underlying investment </li></ul><ul><li>UK equity </li></ul><ul><li>Fixed ...
wrapper choice for collectives <ul><li>Unwrapped Investments  </li></ul><ul><li>‘ taxation under the bonnet’ </li></ul>
UK equity fund – income <ul><li>0% tax on dividends received by BRT </li></ul><ul><li>Imputed tax credit equal to 1/9 of t...
fixed interest fund – income <ul><li>Gilts, corporate bonds, bank deposits, mixed funds (60% test) </li></ul><ul><li>Inter...
property fund – income <ul><li>Rent (real) </li></ul><ul><ul><li>Rent suffers 20% at source </li></ul></ul><ul><li>Recover...
capital gains <ul><li>No tax within fund </li></ul><ul><li>Realised gains taxed at 18% flat tax rate </li></ul><ul><li>Unr...
wrapper choice for collectives <ul><li>Offshore bond </li></ul><ul><li>‘taxation under the bonnet’ </li></ul>Offshore Bond
offshore bond <ul><li>‘ What you see is what you get’ </li></ul><ul><li>No additional tax payable* </li></ul><ul><li>Fund ...
offshore bond <ul><li>Non income producing </li></ul><ul><li>Income and capital gains ‘roll up gross’ </li></ul><ul><li>No...
wrapper choice for collectives <ul><li>Onshore bond </li></ul><ul><li>‘taxation under the bonnet’ </li></ul>Onshore Bond
equities collective – income <ul><li>Distributions streamed into component parts </li></ul><ul><li>Franked element (divide...
equities collective – realised gains <ul><li>Realised gains after indexation suffer corporation tax </li></ul><ul><li>Loss...
equities collectives – unrealised gains <ul><li>Annual deemed disposal at year end </li></ul><ul><li>Indexation relief </l...
UK life bond taxation – indexed gains <ul><li>7% return </li></ul><ul><li>3% dividend </li></ul><ul><li>4% growth </li></u...
fixed interest collective – income and gains <ul><li>Gilts, corporate bonds, bank deposits, mixed funds (60% test) </li></...
property collective – income <ul><li>Rent (real)  </li></ul><ul><ul><li>20% suffered at source </li></ul></ul><ul><li>Divi...
property collective – gains <ul><li>Same as UK equity fund </li></ul><ul><ul><li>Realised gains after indexation – taxable...
Minimising the tax impact on returns
tax considerations <ul><li>Portfolio make up </li></ul><ul><ul><li>Income </li></ul></ul><ul><ul><li>Growth  </li></ul></u...
Capital growth strategy – if tax is sole driver Note: This depends on whether the annual exempt amount (AEA) is available ...
Income strategy – if tax is sole driver    UK or non UK Bond  Collectives Higher Rate Higher Rate Basic Rate Higher Ra...
advice considerations <ul><li>Wrapper choice </li></ul><ul><ul><li>Investment philosophy </li></ul></ul><ul><ul><li>Time h...
<ul><li>Government Complexity </li></ul><ul><li>= </li></ul><ul><li>Need for Advice </li></ul><ul><li>= </li></ul><ul><li>...
<ul><li>This presentation is intended solely for professional financial advisers, consumers should not rely on its content...
<ul><li>www.skandia.co.uk </li></ul><ul><li>Calls may be monitored and recorded for training purposes and to avoid misunde...
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  1. 1. tax planning – investment income and gains Colin Jelley Head of Tax and Financial Planning Skandia for financial advisers only
  2. 2. agenda <ul><li>Tax update </li></ul><ul><li>Wrapper choice for collectives </li></ul><ul><ul><li>Taxation under the bonnet </li></ul></ul><ul><li>Minimising the tax impact on returns </li></ul>
  3. 3. tax update <ul><li>‘every chancellor is remembered for one thing’ </li></ul><ul><li>Norman Lamont: 15% interest rates </li></ul><ul><li>Gordon Brown: smash and grab on pensions </li></ul><ul><li>and </li></ul><ul><li>Alistair Darling: making capital gains tax (CGT) a stealth tax </li></ul><ul><ul><li>CGT </li></ul></ul><ul><ul><li>Inheritance tax (IHT) </li></ul></ul>
  4. 4. tax update – reform nothing new for CGT? <ul><li>Healey 1978 – ‘flat rate’ </li></ul><ul><li>(no indexation) </li></ul><ul><li>Lawson 1988 – flat rate 30% </li></ul><ul><li>(limited indexation relief) </li></ul><ul><li>Brown 1998 – variable rate </li></ul><ul><li>(indexation and taper relief) </li></ul><ul><li>Darling 2008 – flat rate 18% </li></ul><ul><li>(no indexation or taper) </li></ul>
  5. 5. CGT receipts – on the up Source: HM Revenue & Customs Annual Receipts – April 08 Million
  6. 6. IHT receipts – on the up Source: HM Revenue & Customs Annual Receipts – April 08 Million
  7. 7. wrapper choice for collectives <ul><li>Which wrapper </li></ul><ul><li>None </li></ul><ul><ul><li>unwrapped investments </li></ul></ul><ul><li>Non-UK insurance policy </li></ul><ul><ul><li>offshore bond </li></ul></ul><ul><li>UK insurance policy </li></ul><ul><ul><li>onshore bond </li></ul></ul>
  8. 8. wrapper choice for collectives <ul><li>Types of underlying investment </li></ul><ul><li>UK equity </li></ul><ul><li>Fixed interest </li></ul><ul><li>Property </li></ul>
  9. 9. wrapper choice for collectives <ul><li>Unwrapped Investments </li></ul><ul><li>‘ taxation under the bonnet’ </li></ul>
  10. 10. UK equity fund – income <ul><li>0% tax on dividends received by BRT </li></ul><ul><li>Imputed tax credit equal to 1/9 of the dividend received (10% of gross) </li></ul><ul><li>Not recoverable by non-taxpayers </li></ul><ul><li>Higher rate taxpayer (HRT) suffers 25% on dividend received </li></ul>Unwrapped
  11. 11. fixed interest fund – income <ul><li>Gilts, corporate bonds, bank deposits, mixed funds (60% test) </li></ul><ul><li>Interest suffers 20% tax at source </li></ul><ul><li>Recoverable by non-taxpayers </li></ul><ul><li>BRT no further liability tax </li></ul><ul><li>HRT taxed at 40% on the gross interest </li></ul>Unwrapped
  12. 12. property fund – income <ul><li>Rent (real) </li></ul><ul><ul><li>Rent suffers 20% at source </li></ul></ul><ul><li>Recoverable by non-taxpayers </li></ul><ul><li>BRT no further tax liability </li></ul><ul><li>HRT taxed at 40% on the gross rent </li></ul><ul><li>Dividend (reit) </li></ul><ul><ul><li>As per UK equity fund </li></ul></ul>Unwrapped
  13. 13. capital gains <ul><li>No tax within fund </li></ul><ul><li>Realised gains taxed at 18% flat tax rate </li></ul><ul><li>Unrealised gains not taxed </li></ul><ul><li>Realised losses set against current year gains or carried forward </li></ul><ul><li>Annual exemption </li></ul>Unwrapped
  14. 14. wrapper choice for collectives <ul><li>Offshore bond </li></ul><ul><li>‘taxation under the bonnet’ </li></ul>Offshore Bond
  15. 15. offshore bond <ul><li>‘ What you see is what you get’ </li></ul><ul><li>No additional tax payable* </li></ul><ul><li>Fund just keeps the cash it receives </li></ul><ul><li>Client pays up to 40% income tax on ‘chargeable event’ </li></ul>Offshore Bond *withholding tax may apply and not be reclaimable
  16. 16. offshore bond <ul><li>Non income producing </li></ul><ul><li>Income and capital gains ‘roll up gross’ </li></ul><ul><li>No CGT in fund </li></ul><ul><li>Time apportionment relief </li></ul><ul><li>Immigration planning </li></ul><ul><li>Non-UK domiciliaries </li></ul>Offshore Bond
  17. 17. wrapper choice for collectives <ul><li>Onshore bond </li></ul><ul><li>‘taxation under the bonnet’ </li></ul>Onshore Bond
  18. 18. equities collective – income <ul><li>Distributions streamed into component parts </li></ul><ul><li>Franked element (dividend) suffers no tax </li></ul><ul><li>Unfranked element taxed at 20% </li></ul><ul><li>Unfranked element is deemed to be received net of 20% tax </li></ul><ul><li>no further tax payable </li></ul>Onshore Bond
  19. 19. equities collective – realised gains <ul><li>Realised gains after indexation suffer corporation tax </li></ul><ul><li>Losses set against current year gains or carried forward </li></ul>Onshore Bond
  20. 20. equities collectives – unrealised gains <ul><li>Annual deemed disposal at year end </li></ul><ul><li>Indexation relief </li></ul><ul><li>Spread over seven years </li></ul><ul><li>Losses can be set against current year gains, carried back or carried forward </li></ul><ul><li>18% effective rate </li></ul>Onshore Bond
  21. 21. UK life bond taxation – indexed gains <ul><li>7% return </li></ul><ul><li>3% dividend </li></ul><ul><li>4% growth </li></ul><ul><li>4% growth will benefit from indexation </li></ul><ul><ul><li>RPI at 2%? </li></ul></ul><ul><ul><li>Effective rate of tax halved – 9% vs 18% </li></ul></ul>Onshore Bond
  22. 22. fixed interest collective – income and gains <ul><li>Gilts, corporate bonds, bank deposits, mixed funds (60% test) </li></ul><ul><li>Interest income, realised and unrealised gains and losses all combined together and taxed at 20% </li></ul><ul><li>Overall net loss can be set against other income and gains </li></ul><ul><li>No indexation relief </li></ul>Onshore Bond
  23. 23. property collective – income <ul><li>Rent (real) </li></ul><ul><ul><li>20% suffered at source </li></ul></ul><ul><li>Dividend (reit) </li></ul><ul><ul><li>As per UK equity fund </li></ul></ul>Onshore Bond
  24. 24. property collective – gains <ul><li>Same as UK equity fund </li></ul><ul><ul><li>Realised gains after indexation – taxable </li></ul></ul><ul><ul><li>Spreading </li></ul></ul><ul><ul><li>18%effective rate? </li></ul></ul>Onshore Bond
  25. 25. Minimising the tax impact on returns
  26. 26. tax considerations <ul><li>Portfolio make up </li></ul><ul><ul><li>Income </li></ul></ul><ul><ul><li>Growth </li></ul></ul><ul><ul><li>Combination of the two </li></ul></ul>
  27. 27. 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   UK or non UK Bond    Collectives Higher Rate Higher Rate Basic Rate Higher Rate Basic Rate Basic Rate Future Now
  28. 28. Income strategy – if tax is sole driver    UK or non UK Bond  Collectives Higher Rate Higher Rate Basic Rate Higher Rate Basic Rate Basic Rate Future Now
  29. 29. advice considerations <ul><li>Wrapper choice </li></ul><ul><ul><li>Investment philosophy </li></ul></ul><ul><ul><li>Time horizon </li></ul></ul><ul><ul><li>Expected tax rate on receipt of income & gains </li></ul></ul>
  30. 30. <ul><li>Government Complexity </li></ul><ul><li>= </li></ul><ul><li>Need for Advice </li></ul><ul><li>= </li></ul><ul><li>Opportunity for Advisers </li></ul>
  31. 31. <ul><li>This presentation is intended solely for professional financial advisers, consumers should not rely on its contents </li></ul><ul><li>This presentation is based on Skandia’s interpretation of the law and HM Revenue & Customs practice as at May 2008. We believe this interpretation is correct, but cannot guarantee it. </li></ul><ul><li>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. </li></ul><ul><li>This is a generic example and financial advisers should carry out a detailed analysis of their clients’ individual needs before making a recommendation. </li></ul><ul><li>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. </li></ul>
  32. 32. <ul><li>www.skandia.co.uk </li></ul><ul><li>Calls may be monitored and recorded for training purposes and to avoid misunderstandings. </li></ul><ul><li>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. </li></ul><ul><li>Skandia Life (Pensions Trustee) Limited. Registered number: 1538109 England. Registered Office as above. </li></ul>
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