Tax Shelter Investing

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1 Tax Shelter Guide August 2015 View us on Tax Shelter Investing This Tax Shelter Guide will help you to cut your taxes 1 New ISAs Get your New ISA free with an EIS. 2 Tax Exempt National Savings Certificates. 3 Gilts and Qualifying Corporate Bonds. 4 Dividend Tax Relief and CGT Allowances. 5 Enterprise Investment Schemes now offer either 30% or 50% tax relief. Venture Capital Trusts 6 for 30% tax relief. 7 Pension contributions for 60% income tax relief. 8 How investing offshore can work best. Using Business Property 9 Relief. 10 Steps to mitigate 10 Inheritance Tax. Advice you can trust. 11 Use our Enquiry Form to ask for help and guidance. This Guide has been compiled by us to assist doctors and dentists who wish to invest money and obtain tax relief or exemption. Its Publisher is Keith Taylor our Managing Director who has specialised in guiding doctors and dentists nationally on investment and retirement matters since the 1980s. He is well regarded for his expertise in this arena. There are two types of activities on which much has been reported in the Press of late. The first, tax evasion, is criminal and an activity not to be condoned. The second, tax avoidance, is legal and has been a part of many people s planning when considering steps to take to cut their tax bills. The new dimension is that of morality with a tendency in some quarters to attempt to name and shame, especially true if a celebrity is found to be avoiding paying millions in tax. Some tax avoidance is highly aggressive and is now under attack from HMRC if artificial with no real trade involved. But others are less aggressive and much more of a grey area. If it is legal such attacks by HMRC may fail as they have in the past. Government has moved to change legislation towards blocking off benefiting from structures considered to fall outside the intended tax law. Our focus in this Guide is on what may properly be described as tax mitigation. Supporting British Enterprise Here investors are taking advantage of tax shelters and tax reliefs that are given to help channel more investment into British Enterprise. This means it creates more jobs by helping companies to raise capital, expand their activities, make more profits and yes pay more tax! Examples of these include Enterprise Investment Schemes, Venture Capital Trusts, and others that qualify for Business Property Relief. Such tax shelters help provide much needed investment for British Enterprise. For example, EIS aim to help finance small businesses which in turn create employment opportunities and therefore ultimately more tax for HMRC from those new employees incomes. Continued overleaf... Important tax mitigation information for doctors and dentists

2 The tax benefits these opportunities provide are simply there to reduce the risk to investors and to encourage individuals to invest their money. So what strategies fall into the tax mitigation basket? Here is a quick and by no means exhaustive list: 1 New ISAs for freedom from taxes on income and growth stocks and shares ISAs and tax relief on interest on Cash ISAs. See opposite for more comment. 2 Some types of National Savings investments for tax free returns. 3 Direct holdings in Gilts and Corporate Bonds for freedom from capital gains tax (CGT) on their maturity. 4 Use ot the incoming 5,000 Dividend Tax Relief Allowanace, together with investments arranged to use the annual CGT Allowance of 11,100 upon encashment - thus avoiding CGT. It is the most underused of all tax allowances given to investors by government, very often by those who are paying 40%, 42.5% or even 45% on dividends, interest and pension income. 5 Venture Capital Trusts for 30% initial income tax relief, tax free dividends and freedom from CGT. To retain 30% initial tax relief VCTs must be held for 5 years. 6 Enterprise Investment Schemes for 30% initial income tax relief, freedom for CGT on gains made once held for 3 years and exemption from inheritance tax after 2 years. To retain tax relief they must be held for 3 years. They also give the ability to defer CGT due on gains made from other investments. For more see page 6. 7 A form of pension contribution that can bring tax relief equivalent to 60%, if you have earnings in the range of 100,000 to 120,000. We show how it is possible to then reclaim full use of the personal income tax allowance. 8 Invest offshore through an Investment Bond in Dublin or the Isle of Man for a time when UK tax is highest and return the funds when personal tax is lowest (most likely once retired). Tax is then paid at the lower tax rate then applicable on gains made. 9 Investment into structures that gain from Business Property Relief for up to 40% inheritance tax relief. For more on such schemes go to page 11. Steps to mitigate Inheritance 10 Tax. We set out 10 examples on pages 12 to 13. As a particular example of IHT mitigation, consider investments that benefit from Business Property Relief to be exempt from IHT once held for 2 years. We could go further but a serious majority of investors will find their available capital and monthly savings can be easily taken up by judicious spread across all these tax shelter opportunities. They should all be used provided the investment asset allocation suits the risk profile of the investor. Advice should vary according to whether capital preservation or creation is the main aim. So here we get to the real nub of the matter. We urge readers to build diversification into their portfolios and to do so with tax shelters where suitable within each of the low, medium and higher risk sections of their holdings. Some tax shelters available today may not be available in a few years time. Take advantage while you can if willing and appropriate for you after full consideration of all relevant angles. We can help get the balance right to suit you by using tax mitigation. For guidance call us or go to the enquiry form at the back of this Guide. We may well be able to help you to achieve a similar outcome. Advisers you can trust Keith Taylor Keith has over 30 years experience of giving financial advice to high net worth doctors and dentists. Keith is a frequent Speaker at events for the medical and dental professions around the UK and is the Publisher of Financial Surgery Magazine and this Tax Shelter Guide. Luke Hurley Luke holds the Diploma of Personal Financial Planning and a degree from Warwick University. He leads on a good deal of our research activity and is very active in delivering Talks to groups of doctors and dentists. 2 TaxshelterGuide

3 Tax Shelter Investing 1: New ISA s There will be strong inflow of money into tax free investment prior to the tax year end. This is because you can now invest 15,240 a year into a New ISA (NISA). Of real importance is that it is now possible to switch out of stocks and shares ISAs into cash and maintain ISA status. Hitherto only 5,940 a year could be allocated to Cash ISAs and transfer was one way only from Cash ISAs to Equity ISAs. Investing into NISAs is a good way to build up long term savings with tax exemption and it s clear many doctors and dentists will want to take up their maximum allowance. This means a couple can commit 30,480. Here is a brief resume of ISA benefits and rules: You can transfer between cash and equity NISAs as often as you wish. So we think more money will be allocated to equity versions of NISAs in the knowledge that investors can move back into cash if market conditions look threatening or heading for falls. Investment made for earlier years can be transferred in whole or part, but does depend on the terms and conditions of the individual ISA provider. You can invest into a wide range of assets through a NISA, from cash to New ISA limit (2015/16) New limit now 15,240 A couple may invest 30,480 corporate bonds and gilts, OEICS, investment trusts, AIM shares and property funds. NISAs give exemption from capital gains tax and any dividend income is subject to a 10% charge deducted at source. Interest earned on cash is now tax free even if held within a largely equity NISA. You can invest in cash NISAs for a fixed term to obtain a better interest rate but this may not be desirable given rates are set to rise. The limit for Junior ISAs is 4,080. Like adult NISAS there is free movement from cash versions to equity versions and vice versa. AIM versions of NISAs will confer inheritance tax exemption after 2 years but all other versions count as being part of an estate for IHT purposes. If transferring an existing ISA it is very important you do this via any new NISA provider selected. Should you withdraw monies yourself its ISA status is lost. For more about investing into tax shelters through ISAs call us, return the enquiry form or visit our website. Tax saving idea Get your ISA free with an EIS An investor can invest into EIS (see page 6) and receive 30% tax relief. It is open to the investor to reinvest their 30% tax relief into an ISA, thereby increasing their investment value by 130%. For example, 50,800 invested into an EIS would give a tax rebate of 15,240 the maximum that can presently be held in a New ISA as at tax year 2015/16. An ISA will provide a tax efficient haven for a higher rate investor, whilst the original 50,800 is invested in the EIS, with the potential for even higher returns. Our investor now has 66,040 invested courtesy of a 15,240 subsidy from HMRC. Investing the tax relief (to get yet more tax relief and exemption as above) is a powerful and compelling strategy. Case for ISA review Introduction of the New ISA should be a stimulus to look afresh at your ISA holdings be they Cash ISAs or Equity ISAs. Ask yourself: Have I accumulated more in Cash ISAs than intended given rates are so low? Is my interest rate at or below the market average. Should I be moving accounts for a better rate? Will my ISA provider let me top up my investment amount to the new limits? Are you still invested in the same equity funds that you first selected in the year that you made the investment? Do you know how they have performed compared to their peer group average? Have you invested promising yourself you will self-invest and manage your holdings yourself but the reality has been that you have failed to carry this through? Have you enjoyed self managing but with the passage of time no longer have the desire to continue in this vein? All the above are a real cause for action if any apply to you. With major swings in investment conditions taking place and more generous New ISA limits in place now is the time to review existing holdings. If you come to us for ISA review you can be sure we will only suggest consolidation of ISA assets if our review shows that there is a clear case supporting such action. TaxshelterGuide 3 Consolidate: to become, or cause something to become, stronger, and more certain.

4 Tax Shelter Investing 2: National Savings Certificates Some types of National Savings investments are very attractive to high rate taxpayers especially as they offer tax free returns. From time to time NS&I put on offer issues of National Savings Certificates and these should be considered as being a core holding within an investment portfolio, both for the high level of security and tax free return. National Savings Certificates can be bought by individuals when made available and traditionally there are two main types. There is usually a limit of 15,000 per individual per issue. Fixed Interest National Savings Certificates. Here a Certificate is bought with a capital sum for a fixed term and rate of interest which is accumulated. At the maturity the total sum payable is automatically reinvested into the latest issue unless the investor wishes to cash in or reinvests into a different term of Certificate. The distinct advantage is that returns are free of all taxes but the highest rates are not earned if cashed in early during their fixed term. Index Linked National Savings Certificates. These Certificates provide a return on a lump sum invested linked to the rate of inflation that in the past has been as evidenced by the RPI index. If such a Certificate is cashed in during the first year, only the purchase price is repaid. After more than one year the redemption value is index linked to match RPI. However should RPI fall below zero the Certificate value will not fall below the original purchase price. In the past such Certificates have offered an extra rate of interest above inflation for example RPI plus 0.5%. Issues for both 5 and 3 year terms have been available. It is our view that inflation is likely to rise in the medium term and this is another reason to consider holding such Certificates in addition to returns being free of all taxes with security. The challenge is that government no longer offers the above Certificates for sale on a permanent basis. It is currently a matter of awaiting an announcement that a new issue is on sale and then applying to invest within the time window available. It is possible to register an interest on the NS&I website and they will then you when a new issue is opened to investors. Recent issues have quickly become fully subscribed. Tax Shelter Investing 3 Gilts & Qualifying Corporate Bonds Investors looking for taxation freedom allied to a high level of security should also consider holding gilt edged securities (gilts), qualifying corporate bonds and other fixed interest securities. An investor is not generally liable to capital gains tax on gains made but losses are not allowable for tax relief (unlike EIS for example see page 6). The tax advantage is one of tax free gains. Any income from such assets is taxed as savings income. A brief outline of the main assets under this heading is as follows: Gilts Are issued by the Treasury and normally pay a fixed rate of interest twice a year. Interest on gilts issued after 1998 can be paid gross but is taxed as income in the hands of the investor. Gilts may be held until maturity for a fixed date when the Treasury guarantees the redemption value. Equally they can be sold early before maturity at either a profit or a loss on the stock exchange. Capital gains made are not subject to CGT. If a loss is made no loss relief is allowable. Local Authority Bonds Such Bonds are in essence a loan by an investor to a local government authority. A fixed rate of interest is payable but is subject to income tax. If such a Bond is purchased and held to maturity the local authority guarantees its payment. The gains on maturity are exempt from CGT. As with Gilts some of these Bonds can be bought and sold on the stock exchange for a profit or a loss on such disposal. Corporate Bonds Here such Bonds are a loan to a Company (like Tesco for example). In return they pay interest for a fixed period at the end of which the capital is repaid by the Company. Interest payable is subject to income tax. Most such Bonds can be traded on the stock exchange to be sold at a profit or a loss. If such a Bond meets all the conditions of a Qualifying Corporate Bond then any gains made are exempt from CGT. In conclusion holding Gilts and Bonds to obtain capital growth and a level of security upon maturity that is exempt from CGT is attractive, especially to higher rate taxpayers who might otherwise be liable to CGT at 28%. That said losses can arise if sold before their maturity or redemption date, or in the case of Corporate Bonds, the company fails. For help and guidance call us or go to the Enquiry Form at the back of this Guide. 4 TaxshelterGuide

5 Tax Shelter Investing 4: Dividend Tax Relief T he government is replacing the current dividend tax credit with a tax-free dividend allowance of up to 5,000 from April It will also introduce higher taxes on dividends received above this new allowance. So under the new system, everyone who receives dividend income from equities will not pay income tax on the first 5,000 that arrives. Interest received from banks or building societies, or from corporate bonds is not regarded as being an equity dividend and does not fall within this new allowance. Amounts above 5,000 in dividends from equities means basic rate taxpayers will pay 7.5% in tax, higher rate taxpayers will pay 32.5% and those with income above 150,000 will pay 38.1% in tax on such dividends. Implications So as a first step in the light of these changes consider including in a diverse investment portfolio ISAs and VCTs for their tax efficiency as income they generate is tax free to the investor. They will not use up any of the new 5,000 allowance. As a second step it will now make good sense when constructing an investment portfolio, for anyone who is a 40% taxpayer, to try to limit the element of equity dividend producing investments so the amount received is just 5,000. The tax saving then, compared to now, will be 1,250. A 45% taxpayer in the same position will make a saving of 1,530. The change in dividend taxation will mean those who have incorporated are likely to pay more tax on any significant level of dividends extracted from 2016/17 onwards. So look to extract as much as makes sense before 5 April In 2016/17 look to use ways to mitigate such dividend taxation like investing into EIS or VCTs, or investing profits held in your limited company for long term capital growth. CGT Allowances Use it or lose it The strategy here is one of applying some prudent principles to the way an individual or couple arrange their personal finances and investments so as to not allow HMRC to take any more than a minimum in taxation. It can often be the case that the true value of such planning is not fully appreciated. So let us consider a couple who we will call the Smiths. They are in their 50s. They have a lot of different investments. Let s also assume Mr Smith pays 40% income tax and Mrs Smith does not. They have accumulated large amounts in deposit accounts but they are either held in joint names or worst still from a taxation point of view mainly in his name. The same is true of share and unit trust holdings. Most of the dividends they generate are coming to Mr Smith and not Mrs Smith. Their need is really for capital appreciation yet investments are generating income. There is no annual review of holdings to see if good use of tax allowances can be made. They are paying large amounts of tax to HMRC on investment income. Now let us consider the Wises also in the 50s. They too have a large investment portfolio. However they differ in that they hold assets that are geared to accumulate capital rather than pay interest or dividends. Deposit account holdings in the main are held in the name of Mrs Wise. Each year they review their holdings and look to crystalise some of their gains by selling holdings (and then redeploy) so that the taxable gain falls within that year s annual CGT allowance being 11,100 each or between them a total of 22,200. As a result the tax payable by the Wises each year is much less than that paid by the Smiths. Tax potentially payable in the future by the Wises is also diminished. The Wises are using their CGT allowances to minimise taxation whilst the Smiths are simply losing theirs. It really is use it or lose it. Equally when at or in retirement, remember the maxim that whilst all interest is income, not all income need be interest. For example Income can be made to appear as partial encashments of gains. Such income may then be received tax free within annual CGT allowances. Let us look at another example to illustrate this point. Dr and Mrs Bright had capital to invest at age 55 following the maturity of an endowment policy for 50,000. Retirement was to take place at age 65. In the remaining 10 years up to retirement both were higher rate income taxpayers. They routinely made use of each of their annual ISA allowances. Instead of leaving the funds on deposit where 40% and 45% tax would be payable on interest generated, this couple invested 50,000 into a discretionary fund service. This service gives the Manager the mandate to make investments over a very wide spread of risk and use assets across all the major asset classes. The first point is that this portfolio pays out no dividends that might add to the tax burden. Its aim is capital accumulation. Portfolio pays no CGT The second point is that the overall portfolio pays no tax on capital gains achieved within the fund of funds service, thus maximising capital accumulation. When exiting the portfolio gains can only be subject to capital gains tax. In 2015, 10 years later, the Brights retire. Let us then suppose the original 50,000 has grown to 120,000 by dint of the good investment management of the service. To supplement their pension income in their active earlier retirement years, they now ask their discretionary fund service to make regular partial encashment of their holding. They take 1,000 a month adding up to 12,000 a year. Because it is only the gain within each encashment that is potentially taxable, this falls safely within their annual CGT allowance of 11,100 each. In fact it uses up a comparatively small part of their annual allowances. But to the Brights this 12,000 received is the equivalent of 20,000 that comes to them as taxable pension. 12,000 net = 20,000 gross The Brights are still higher rate taxpayers in retirement as they both enjoy significant NHS pensions and to achieve a net spendable income of 12,000 from a source taxed as income would mean receiving 20,000 gross. Put another way the 12,000 of income is equal to 20,000 of gross pension otherwise taxed at 40%. The message is clear. There is now more reason than ever before to look to increase investment into vehicles that allow you to make use of CGT allowances. Even if chargable gains are made that exceed the annual allowance, the top rate of CGT at only 28% is much better than paying income tax at 40% or 45%. We can advise you on your investment portfolio construction, to obtain well diversified holdings that also minimise tax liabilities. To obtain our guidance, call us, or return an enquiry form or visit our website. TaxshelterGuide 5

6 Tax Shelter Investing 5: EIS Income tax relief is at 30% on new EIS investments made. It is also possible to invest into EIS but apply to carry back the investment as if it was made in the previous tax year and claim relief again at 30%. This tax relief rewards those who can tolerate the risk of investing into such high risk tax shelters. For such people they are too good to ignore as part of a diverse investment portfolio. EIS tax shelter benefits outlined in full: The tax shelter incentives to investors are as follows: Income tax relief is available at 30% on new EIS subscriptions for ordinary shares in qualifying companies including shares listed on the Alternative Investment Market (AIM). Unlimited capital gains arising from the disposal of assets (for example from sale of a surgery or other investment assets) can be deferred by investing into an EIS provided Entrepreneur Relief is not claimed and the EIS investment is made in the period starting 12 months before the date of disposal and ending 3 years after. All capital gains made from monies invested into EIS after a minimum holding period of 3 years will be exempt from capital gains tax. There is no income tax on such gains made. Once monies have been invested within an EIS for over 2 years the assets will qualify for what is known as Business Property Relief and be exempt from Inheritance Tax even though the investor still owns the asset and has not given it away. With all EIS if there is a loss it may be mitigated through the application of loss relief. This means in a worst case scenario 56% of the loss may be protected by tax relief. We work with a number of our clients to seek to magnify and leverage the income tax relief obtained from EIS investing. Where appropriate and suitable as part of overall net personal wealth, we do this by agreeing to help set up EIS investments in sequential tax years. Lets us explain this more by taking a simple example. Dr Smart, aged 57, agrees to invest 50,000 a year for three years in succession into EIS. At 60 he will retire and will not have the income to fund new monies for such investments. In each year 30% income tax relief will be forthcoming so on the total 150,000 invested tax relief of 45,000 will be gained at the rate of 15,000 a year for each of the 3 years. Once an EIS has been held for 3 years it may be encashed without prejudicing the tax relief obtained previously. So when Dr Smart is 60, he will encash the first age 57 tax year EIS investment. Let s say only 50,000 comes back from the EIS proceeds. Our client then redeploys this money back into a new EIS in his age 60 tax year and will secure another 15,000 of income tax relief. In effect Dr Smart has now gained 30,000 of tax relief on the original age 57 money invested. When 61 he looks to do the same thing again but this time with the age 58 tax year EIS investment. Again 50,000 HMRC allows you to invest into EIS and reduce income tax, capital gains tax and inheritance tax. How recycling EIS can double or triple Tax Relief comes back and is redeployed into new EIS that secure another 15,000 of income tax relief. Once again Dr Smart has now gained 30,000 of tax relief in total on the original age 58 money invested. When 62 he will carry out the exercise again but this time with the age 59 tax year EIS investments. Assume all the numbers are the same and the result is a further 15,000 tax rebate is gained making the overall tax relief in 4 years 30,000 on the original age 59 money invested. In the space of 6 years the first three years of EIS investing have gone on to fund a further 3 years of EIS investing and secured 45,000 more in tax relief, making a total of 90,000 in all on the original 150,000 invested. Dr Smart has paid a lot less income tax too in the first 3 years of retirement and is very pleased. Now aged 63 he could go on to repeat all this redeployment/recycling strategy for another 3 years. If Dr Smart did so then assuming no change in tax legislation another raft of 45,000 in tax relief would be generated. Total tax relief would then reach 90% on the original monies first invested and then recycled tax year by tax year. It is very important to say that such investment and tax planning are not for cautious investors. 6 TaxshelterGuide

7 EIS investments are high risk and can fail completely or return less than each 1 per share invested. It will only be appropriate as a part of a portfolio for those with significant income and sizeable investable assets with a more adventurous risk profile. But where all this can be embraced it is very compelling tax shelter investing. SEED EIS now give 50% Tax Relief Seed EIS are higher risk than standard high risk EIS funds. Monies invested into Seed EIS will be allocated to smaller more fledgling businesses. Accordingly they will only appeal to those who can tolerate such higher risk but in return there is the reward of higher initial income tax relief. It is not well known that for Seed EIS the income tax relief can be up to 50% on investments of up to 100,000 in amount, irrespective of an investor s marginal tax rate. This means even a basic rate taxpayer can, from a precisely calculated level of investment gain 50% income tax relief. General Risk Warnings on EIS: Most EIS are high risk investments. No one should invest into an EIS without first reading the mini prospectus of the Offer being made. The section headed Risk Warnings of each prospectus should be examined carefully. Other items to look for are initial costs of issue; annual management fees; annual running costs and are they capped; performance fees; declared exit strategy for investors; the amounts of capital the Managers of the EIS are investing from their own money into the EIS. Above all, an EIS is not a short-term investment. Early realisation is to be avoided unless there are sound reasons for encashing after at least 3 years has elapsed. They are best viewed as an investment to be held over 5 years and longer. Investors in EIS do not have the protection of the FSCS if they should fail. To find out more about investing into EIS and issues we favour call us, visit our website or go to the enquiry form at the back of this Guide. Tax Shelter Investing 6: VCT s Venture Capital Trusts (VCTs) are very attractive tax shelters. They cut taxes in no less than four ways. Upon investment into VCTs an investor can cut back income tax bills and go on to generate tax free dividends. Upon exit from VCTs, gains are exempt from income tax and CGT. VCT tax shelters are investment funds designed to provide growth finance to small companies. They are generally suitable for investors who are willing to hold some of their investments in higher risk vehicles. They combine the potential for attractive returns with generous tax reliefs. The UK Government first introduced VCTs in 1995 to encourage individuals to invest in smaller UK companies. The Government seeks to achieve this by offering investors in VCTs a series of attractive tax benefits with over 3bn being raised since their inception. With income tax now at a top rate of 45p, and CGT either at 18% or up to a top rate of 28%, VCTs are very worthwhile considering now. VCTs give up to 30% income tax relief on the initial investment, provided that the shares are held for a minimum of 5 years. Dividends from VCTs are taxfree. There is no capital gains tax or income tax to pay on sale of VCT shares by the investor. There is no tax on capital gains payable by the VCT when it disposes of an investment and the VCT may then pass the proceeds to investors as part of a tax-free dividend. The initial income tax relief on investment in a VCT can be returned to you through an adjustment to your tax code or by a cheque from HMRC if you are employed; if you are self employed the relief is obtained by offsetting against income tax due from you. All VCTs are listed on the main market of the London Stock Exchange. A VCT will typically raise between 10 million and 25 million from thousands of individual investors. The minimum investment is usually around 5,000 and the maximum investment that will qualify for tax relief in a single tax year is 200,000. The VCT will typically invest the money raised in a diversified portfolio of between companies. Ensuring that VCT fund managers have sufficient expertise, deal flow and operational/ risk management systems are of critical importance. This is why we favour established VCT providers with a track record and proven experience in their field. Generalist VCTs spread investments between AIM listed companies and unlisted companies. These VCTs look to profit when the companies in which they invest are either floated or sold. Specialist VCTs invest mainly in sectors with a more defined investment focus than the Generalists, such as unquoted environmental companies. As such they can have a higher risk profile than AIM and Generalist VCTs. That said some Specialist VCTs are available that look to lower risk within the VCT universe. To find out more about making VCT investments call us, visit our website or go to the enquiry form at the back of this Guide. VCTs are generally classified as high-risk investments. Past performance is no guide to future performance. Prices, values or income may fall and you may get back less than you invested. There may be a restricted market for VCT shares and it may be difficult to deal in them or obtain reliable information on their value. The levels and bases of relief from taxation may change. The tax reliefs referred to above are those available under the current legislation and may be clawed back in full where you initially invest in a VCT with provisional approval and the VCT does not subsequently obtain full approval status. Any investment is subject to the terms and conditions contained in the VCT prospectus. Investors should read the prospectus and in particular take note of the risk warnings set out within it. Investors in VCTs do not have the protection of the FSCS if they should fail. TaxshelterGuide 7

8 Tax Shelter Investing 7: No-brainer Pension Contribution brings equivalent of 60% This step could bring you 60% Income Tax relief Income Tax Relief Recent Budgets allow the HMRC to launch an assault on your income and savings if earning 100,000 or more. It means that a number of you will be paying a marginal rate of tax at the top rate of 45% on earnings above 150,000. If you are thinking that s OK I only earn 120,000 a year then there is even more bad news for you. All those earning 100,000 or more face an effective income tax rate of 60% on income between 100,000 and 121,200. This is because the personal allowance is tapered away to zero once your income exceeds 100,000. So it is entirely possible to be paying more tax at the top end if earning only 121,200 effectively it is at the rate equivalent to 60%. All these figures are those after practice expenses, that is, the figure that makes up your net Schedule D assessment and before you apply personal allowances. If employed PAYE income is relevant. So what can you do to mitigate this unwelcome and rising tax burden? It will not be much fun writing out even larger cheques to HMRC than you do now if you let this taxation take its course. Make a larger pension contribution Generally we have been appalled at the way recent Government legislation has damaged confidence in building up pension funds but there is an especially attractive case to be made for those who will be caught in the 100,000 to 121,200 income bracket. Making a total pension contribution (including NHSPS) of 21,200 if earning 121,200 or more increases the amount of income on which basic rate tax is paid. In turn it raises the threshold at which 40% and 45% tax is payable. Such an action helps to replace the loss of a personal allowance and keep the taxpayer in the 40% tax bracket. In effect in our example, tax relief of up to 60% is secured on the pension contribution made. Making sure you do this if caught by income levels and loss of the personal allowance is a no-brainer. The only caveat to the above is for those who could be caught by the 1.25 million reduced Lifetime Allowance Limit applicable from April 2014, or to 1million from April Annual Allowance Limits should also be considered. To find out more about making no-brainer pension contributions call us, visit our website or go to the enquiry form at the back of this Guide. 8 TaxshelterGuide

9 Tax Shelter Investing 8: Investing in Offshore Investment Bonds The Concept Whilst monies are offshore the insurance co. pays no UK income or capital gains tax on the life funds. The policyholder can take regular withdrawals of up to 5% of their premium each year, and defer any tax payable. Enables the policyholder to defer their tax to a time when personal tax is at a lower rate. For many of our readers, who have significant capital to invest, it is now timely to consider the option of investing monies offshore. It is then entirely practicable to legitimately sidestep paying any UK income or capital gains tax for the period while money is offshore, or even when some is brought back. All it requires is our application of some sophisticated tax planning, married together with the use of offshore investment bonds like those from companies such as Prudential International and AXA Wealth International. In this way it may be entirely possible to then mitigate what may otherwise be a period of higher taxation in favour of deferring the taking of gains for the future when hopefully tax rates are lower. Furthermore, there is the added bonus of being able to receive regular withdrawals in the meantime that, within defined limits described below, create no immediate tax charge. It is often said that investment bonds allow you to decide when you want to pay the tax and whilst not literally true, especially for onshore bonds, there are elements of truth in this statement. Because investment bonds are a life assurance policy, and taxed as such, they are a non income-producing asset with no tax assessment until tax events, (known as chargeable events) occur. Chargeable events include, but are not limited to, surrender, withdrawal and death of the last life assured. Unlike onshore bonds, there is no tax suffered within the policyholder fund other than irreclaimable withholding tax on certain funds. 5% Withdrawal Rule Much is made of the 5% withdrawal rule which allows a policyholder to take a withdrawal of 5% of the premium(s) invested for each year the policy has been in force, without a chargeable event arising. This rule is very flexible and can be taken either as, say, a regular 5% annual payment, or a single withdrawal of the accumulated allowance from previous years. The 5% is treated as a return of capital and will not give rise to a charge to tax (chargeable event) until the policyholder has taken back all their original premium(s). By operating within these rules any liability can be deferred for as long as required. In addition, any change in the choice of the investment fund is not a disposal for capital gains purposes as this does not apply to life assurance policies (except for second-hand policies such as traded endowments). Invest offshore in years of high tax, gift to lower tax paying spouse and return funds when tax is lower There is a further advantage if a policyholder is currently a higher rate taxpayer, but may become a basic rate taxpayer in the future after retirement for instance. If they kept their investment bond withdrawals within the 5% annual cumulative limit, they could take payments from their investment whilst they are a higher rate taxpayer and defer tax until the time they surrender, when their tax position may have changed. If they are still a higher rate taxpayer at retirement then an assignment of the bond could be made to a basic rate tax paying spouse (or civil partner) which will cause any tax liability at the time of a chargeable gain (if applicable) to fall on the basic rate assignee. So we can now see the attractions of investment bonds, namely tax deferral, no tax issues on switching funds, and nothing to report on the tax return until a chargeable event arises. Please note that when a chargeable event arises, a UK (onshore) investment bond holder is entitled to a basic rate tax credit to reflect the corporation tax that has been suffered on the life funds, although the actual tax suffered could be less than the credit given. If a non-uk resident life company issues the bond, the tax advantages can be increased yet further. These companies are typically located in the Isle of Man, Dublin, Luxembourg and other jurisdictions. This is because no tax is paid in the policyholder funds of Isle of Man life assurance companies except for irrecoverable withholding tax on certain funds. As the offshore life company suffers no income or capital gains on the life funds, the basic rate credit is unavailable. But a higher rate taxpayer could keep within the rules, retire abroad and once they are being treated as a non-uk resident by HMRC, surrender their bond free from any UK income. Of course, the tax rules of where they are tax resident would then apply. Care would be needed in some cases, for example in countries like Australia and New Zealand they may be better off surrendering their bond whilst still UK tax resident. We strongly recommend that you seek professional financial advice before deciding if this type of sophisticated tax planning and offshore investing may be suitable or not. We are happy to provide such advice. For more on investing offshore through vehicles like investment bonds, call us, return the enquiry form or visit our website. TaxshelterGuide 9

10 Use our enquiry Form to ask us Important retirement information for doctors and dentists Looking ahead to retirement? Ask for our Retirement Guide New Updated Issue Retirement Guide August 2015 View us on This Retirement Guide will help you with: Retiring Early from the NHS Pension Scheme. Taking Temporary Retirement at 60. Lifetime and Annual Allowance Limits. Taking more NHSPS lump sum. Financial Planning in your 60s. Annuities and Zombie Companies. Understanding Pension Freedom. Inheritance Tax Mitigation. Protecting family income in retirement. Advice you can trust T Retiring Early his Guide has been compiled by us some basic information and a case study to to assist doctors and dentists who help add some context. are planning ahead for retirement, What is an actuarial reduction? or who are at the point of retirement and indeed for practitioners now in The term actuarial reduction refers to the their retirement years. Its Publisher is tables used to calculate the reduction to your Keith Taylor our Managing Director who benefits if you retire early. The Government has specialised in guiding doctors and Actuary s Department (GAD) calculates the dentists nationally on retirement and reduction required based on mortality rates investment matters since the 1980s. He and other data. is well regarded for his expertise in this arena. You incur this reduction when your pension is paid earlier than normal and, therefore, Taking a Voluntary Early Retirement (VER) potentially will be in payment for longer. If you from the NHSPS quite simply means retiring commute part of your pension for a bigger of your own choice earlier than your normal lump sum then the reduction factors are pension age (60 in the 1995 Section or 65 in applied before your commutation decision is the 2008 Section). You can take VER at any made. time between reaching your Minimum Pension Age and your Normal Pension Age. This is a If you are contributing to the 1995 Section complex subject but one that we felt we should then the actuarial reduction is applied touch upon following an increasing amount of separately to both your pension and your interest from clients. Below we have laid out lump sum as follows: Reduction in annual pension, 1995 Section of the scheme Age % Payable for help and guidance Reduction in lump sum, 1995 Section of the scheme Age % Payable If you are contributing to the 2008 section then be aware that the actuarial reduction applied is higher than that above....continued on page 3... To obtain your FREE copy of our newly updated issue of the above, call us on , or return the enquiry form or go to our website: View Mitigation. for more on Pension Changes and Tax

11 Tax Shelter Investing 9: Business Property Relief Investing into assets that benefit from BPR is attractive as the investor always retains both control and ownership of their assets yet 100% IHT exemption flows after just 2 years. It also can be a solution to objections that can arise to other IHT mitigation strategies such as health considerations. Often people who have substantial estates can really panic about IHT right at the point when they enter into residential care. Equally there are those who seek to obtain what are known as discounted gift plans or life assurance in trust but cannot get medically underwritten for such structures. Also there are some with less than seven years life expectancy who think they have simply left it too late to put in place IHT planning. This group should take heart from the fact that BPR based solutions are not restricted in access by dint of age there is no age limit - and there is no medical underwriting of any kind. Powers of Attorney Other situations arise where attorneys become responsible for the financial affairs of a relative a mother, father, sister or brother often because they have lost capacity to look after themselves. This happens under a Power of Attorney (PoA). It is not unusual for the Attorneys to become responsible for a large estate but find there is no IHT mitigation in place. Such a PoA does not allow the Attorney to use gift or trust based IHT planning solutions as a Court of Protection that oversees PoAs will deem that it can not be in the client s best interests to relinquish control of assets, even if these are ample. However Attorneys can act to minimise IHT without breaching Court of Protection guidelines. As we have said above with BPR assets the investor maintains full control of both the capital and growth throughout their lifetime and BPR based solutions are also IHT efficient after two years. So the Court of Protection is not concerned and such assets can be used in POA cases. Selling a Business Another problem area arises when a business is sold say upon retirement. Let us assume this is a dental practice. If worth 1 million prior to retirement the asset automatically qualifies for BPR and does not sit inside the dentist s estate for IHT purposes. However on sale the monies come into the estate of the practitioner and it is liable to IHT at 40% when he or she dies. By placing the proceeds into a BPR asset within 3 years of sale there is no IHT liability. To get a good grounding on possible steps open to take to mitigate IHT we strongly recommend considering the above along with our published 10 Steps to mitigate IHT article as overleaf. Note these case studies and comments do not constitute individual advice to readers. Face to face expert guidance is essential. To obtain such help call us, visit our website or go to the enquiry form at the back of this Guide. Such investments are often not regulated. Investors in such funds will not have the protection of the FSCS. Accordingly this type of investment is not for those of modest assets, or unable to tolerate high risk. If not able then this is not for you. TaxshelterGuide 11

12 Tax Planning 10: 10 Steps to mitigate IHT Here we set out 10 steps that exist to help mitigate inheritance tax (IHT). They are tried and tested. It is our view no inheritance tax mitigation strategy should become final without considering all of these options, with the help of a good independent financial adviser such as ourselves. Step 1 Make a Will. It is important to make a will to set out whom you want to inherit your estate. If you die intestate, it is possible that others than those you intend to benefit will share in your estate, including the HMRC. Also consider making use of Discretionary Will Trusts to ensure you create maximum flexibility in will planning alongside gifting of nil rate bands. Step 2 Consider gifting capital away. Each individual can make annual gifts of 3,000 a year. You can also make gifts to children in consideration of marriage of 5,000 (grandparents 2,500). You can also make gifts from normal annual expenditure that do not diminish lifestyle. Gifts over and above the allowances but within the current nil rate band of 325,000 will be exempt from IHT and escape any lifetime charge if you survive the gift by seven years. Step 3 A simple option involving no large gifts. You may not be willing to make large gifts of capital to children and want to remain in control of your capital and the income it generates. Well if most couples in say their 60s can gift just a quarter to a half of 1% of their total assets each year into trust for the children, for example 3,600 a year (or 300 monthly) on an estate of 1 million, then this would generate sufficient monies in trust to meet IHT from the date of the first monthly payment into trust. 12 TaxshelterGuide This would be payable upon death of the survivor of the two of them a sum of around 360,000. This comes with the great benefit that each year the couple retains over 99% of their assets for themselves. This is achieved by arranging joint life last survivor life insurance in trust for children. Step 4 Consider using a Loan Trust. Let s take a couple in their early 60s who are willing to look at giving away only the growth in value on some of their capital, in favour of the growth monies passing to their children when the survivor of the two of them dies. In the meantime they want to be able to have an income from their capital and want to be able to have access to the whole of the principal sum if needed. By using a Loan Trust during their lifetime our couple retains full access to their initial capital and when required in the future this could be repaid to them in annual installments to provide income. Here the trust provisions ensure all subsequent growth on the amount placed in trust does not form part of their estate for IHT purposes. All growth on the capital invested is always therefore exempt from IHT and is owned by the children through the trust. Step 5 Use a Gift Trust. Lets take a couple who do have surplus capital and are comfortable with giving away to their children a significant sum together with all rights to the income it could have generated for them. Here it is possible to set up a type of Gift Trust where they make a gift of all the capital invested. The couple are the settlors who set up the trust, appointing the trustees (themselves and their children) and naming beneficiaries as their children. Essentially they have given the money to their children but it only passes to them when the survivor of the two of them dies. Here, the trust provisions ensure all the capital gifted into the trust does not form part of their estate for inheritance tax purposes once 7 years has elapsed from its inception. The gift of capital is a potentially exempt transfer (PET). If they survive for 7 years after making the gift, the transfer will fall out of their estate for IHT purposes. Step 6 Is a Discounted Gift Plan for you? Yet another couple, this time in their early 70s, had significant means but felt unable to give away to their children a significant capital sum unless they could retain a lifetime right to the income it generated. Here a Discounted Gift Trust could be used. With this type of trust the couple makes a gift of capital to trustees. As before the trustees then invest the money for the beneficiaries. However during the couple s lifetime they retain a right to income that will be paid annually with the level of income fixed at 5% at inception. The gift of capital is again a potentially exempt transfer (PET). If they survive for 7 years after making the gift, the transfer will fall out of their estate for IHT purposes. The value of the PET will be less than the amount gifted into to the trust. For a couple both aged 70 the actual value after allowing for the above is governed by their age, sex and the income taken as annual payments to them. The discount on the gift made is likely to be around 22% so that from say a total sum of 100,000 only 78,000 counts as a PET that will fall out of the estate once 7 years has elapsed. The 22% counts as being removed from their estate at the outset. Step 7 Look at Enterprise Investment Schemes. Such a route gains the investor either 30% or 50% income tax relief (see page 6), deferral of any CGT liability and the capital placed remains entirely in your ownership and is exempt from IHT after just 2 years.