Without commensurate increases in the ISA allowances and other tax free savings, clients will have to look at other savings vehicles for their investments. The question for advisers is where to direct a client’s excess income (either earned or pension) once tax efficient products and pension contribution limits have been exhausted. Not only should advisers be considering tax efficient growth and income, but also longer term estate planning.
Many will see direct holdings in shares as the next logical step once tax free savings and pensions have been utilised. It is, however, worth remembering that there will be a 60% cut in the dividend allowance as of next April from £5,000 to £2,000. Any dividends that exceed this allowance will then be taxed at the respective rate for basic, higher and additional rate taxpayers, i.e. 7.5%, 32.5% and 38.1%. Consideration should also be taken as to the suitability of equity investments for people approaching retirement where volatility may not be tolerated.
Capital Gains Tax (CGT) is also payable on gains on the shares for UK residents. This can be partially mitigated by the CGT annual exemption which is £11,300 2017/18. However, to use the annual exemption fully, gains will need to be realised on an annual basis, which will come with corresponding dealing charges and potentially time out of the market while transactions take place.
Recycling pension payments
Clients who are already in a drawdown position on their defined contribution scheme, can recycle some income back into a pension. There are limits in place to prevent excess amounts receiving double tax relief, known as the Money Purchase Annual Allowance (MPAA). However a 60% cut has been announced, applying retrospectively from April 2017, reducing the MPAA from £10,000 to £4,000. Once again, this is a regressive step for pensions and could even indicate that any recycling of pension income will be outlawed in the future.
SEIS, EIS and VCTs
These investments can offer very attractive tax benefits, both during life and post death depending on the type of scheme chosen.
Enterprise Investment Schemes (EIS) and Seed EIS (SEIS) schemes receive a reduction on income tax on the way in (subject to limits). They are also exempt to CGT on the growth if they are kept for three years, with relief available for losses. Dividends however, are taxable on both scheme types.
From an estate planning perspective, both EIS and SEIS schemes qualify for Business Property Relief (BPR), which could see the entire value outside of the estate for IHT purposes after two years.
Venture Capital Trusts (VCTs) are similarly structured and are exempt for CGT with no minimum period. However, they do not qualify for BPR with the upside here being that dividends are tax exempt.
The downside to all three such investments lies in the inherent risks involved. Generally the companies invested into by these schemes are small and unquoted. Whilst the potential returns are high, the suitability of such risk for someone approaching or in retirement must be considered.
The complexity and the associated costs for advice can also make these schemes prohibitive, especially where smaller amounts are to be invested.
It should also be noted that a recent consultation by HMRC sought to take a look at these schemes in detail. It appears they feel that in some quarters, such schemes are being set up in order to take advantage of the tax relief, without the resultant benefit being felt in the wider economy.
Offshore Life assurance bonds
A bond can provide a happy middle ground when compared with the investment vehicles discussed already.
An individual taking out a bond can benefit from a wide range of funds, with varying risk profiles. As a non-income producing asset, there is no tax to pay or tax returns to file until a chargeable event gain occurs.
As gains from these policies are treated as savings income, the 0% starting rate band for savings income and personal savings allowance can potentially be utilised by the taxpayer. As bonds are subject to savings income and investments are made in the name of the insurer, switches in the underlying funds do not trigger a CGT charge.
Bonds can usually receive additional lump-sum top ups which can be a cost-effective way of investing large sums, such as bonuses or excess salary payments without having to take out a new policy.
There is also flexibility for an individual to assign their bond into various trusts at a future date, should they wish to place the bond outside of their estate for inheritance tax purposes. Depending on the type of trust chosen, the individual can even choose to carve out their own right to income from the trust whilst gifting a portion of the bond to their descendants.
Life assurance bonds can also be issued from jurisdictions outside the UK. The advantage here is that where the applicable funds are selected, the growth can roll up free of tax.
In conclusion, a bond located in an offshore jurisdiction can provide a flexible, low risk, low cost investment. This means they are very well suited for someone who is approaching retirement with excess income or savings to invest and are looking for tax efficient growth with one eye on future estate planning.
Utmost Wealth Solutions is celebrating a 25-year heritage in the offshore life assurance sector. With bases in the established and well-regulated financial centres of the Isle of Man and Dublin, we offer a range of award-winning offshore bonds, including life assurance and capital redemption options that enable you to structure the right solutions for specific situations.
To find out how we can help you make a wealth of difference to your clients’ wealth and estate planning needs visit uTech, our online technical hub, at utmostwealth.com.