Transcript Towry Presentation Template

STEP - Tax Led Investments
Alex Nicklin- Financial Planner & Wealth Manager
5 March 2015
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Risk Warning
•
Tax Led Investments are potentially higher-risk, longer-term and less liquid
investments; investors may get back less than expected and may have
difficulties selling their investment
•
Tax Led Investments should only be considered once other planning
opportunities have been fully explored
•
The levels and basis of taxation may be subject to change and may impact
negatively on any Tax Led Investment
•
Any tax treatment depends on the individual circumstances of each
investor and may be subject to change
•
These investments may lose their tax status through decisions made by the
investment manager
•
You are encouraged to seek independent tax advice before considering
these investments
•
Tax Led Investments should form only a small part of the client’s portfolio
This presentation/article/document is solely for professional advisers
and should not be construed as investment advice
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Agenda
1.
2.
3.
Tax Led Investments
1.
What are they?
2.
VCT, EIS, and BPR compared
3.
Risks and risk mitigation
4.
Who benefits?
Tax Led Solutions
1.
Before and after retirement
2.
Estate planning
3.
Tax planning
Tax Led Service
1.
How do we select suitable investments?
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Tax Led Investments – what are they?
VCT
EIS
Introduced in 1995
Introduced in 1994
PLCs Listed on London Stock
Exchange
Unquoted (including AIM)
Gross assets of ≤ £15 million before
and ≤ £16 million after investment
Gross assets of ≤ £15 million before
and ≤ £16 million after investment
≤ 250 employees
≤ 250 employees
Investee companies can receive ≤ £5
million per 12 months
Investee companies can receive ≤ £5
million per 12 months
Investee companies need HMRC
approval
Investee companies need HMRC
approval
VCT need to maintain qualifying
status to give tax benefits to investors
EIS needs to maintain qualifying
status to give tax benefits to investors
Evergreen or planned exit
Evergreen or planned exit
Generalist, AIM, Specialist,
Technology
Generalist, AIM, Specialist,
Technology
Company only
Company, Fund, Portfolio Service
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Tax Led Investments – Comparison
Benefits
VCT
EIS
BPR
£200,000
£1 million
Unlimited
5 years
3 years
2 years
30%
30%
0%
Carry back
No
Yes
No
Capital gains tax
deferral
No
Yes
No
Tax free income
Yes
No
Forestry only
Tax Free capital gains
Yes
Yes
Forestry only
Free of inheritance tax
No
Yes
Yes
Loss relief
No
Yes
Possibly
Maximum investment
Minimum holding
period
Initial income tax relief
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Tax Led Investments – examples
VCT
EIS
BPR
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Tax Led Investments – what risks?
Risks
Risk mitigation
Investment Risk
Investment Risk
Liquidity Risk
Liquidity Risk
Regulatory Risk
Regulatory Risk
• Smaller and less mature
companies
• Due diligence
• Diversification of investments
• Minimum holding period of 2,3 or
5 years
• Limited secondary market
• Changes to tax treatment
• Changes to qualifying rules
Text
separate
from box
• Planned exit EIS
• VCTs with buy-back policy
• BPR with minimum 6 month
liquidity
• Understanding FCA and HMRC
policy
• Anticipating rule changes
Text
separate
from box
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Tax Led Service – who benefits?
Minimum criteria
Towry
Client categorization
Ordinary Retail
Investor
Ordinary Retail
Investor
Annual income
£150,000
(HNW £100,000)
Net investable assets
£1 million
(HNW £250,000)
Minimum investment
£60,000
(N/A)
Ability to reclaim income
tax relief
30%
(N/A)
Asset allocation
10%
(N/A)
Speculative
(N/A)
Risk appetite
FCA
FCA Definition
Net Investable assets exclude
• Primary residence or any money raised through a loan secured on that property;
• Any rights under a qualifying contract of insurance; or
• Any benefits (in the form of pensions or otherwise) which are payable on the termination of service or on death or retirement
FCA Developments
• Potential to increase the HNW criteria in line with USA and EU
Exceptions
• Clients may invests more than 10% of their net assets when this does not impact on their (long-term) cash flow and/or capacity for loss
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Tax Led Investments – EIS Loss Relief
EIS Investments
Investment 1
Investment 2
Investment 3
Investment 4
Investment 5
Total
10,000
10,000
10,000
10,000
10,000
50,000
30% income tax relief
3,000
3,000
3,000
3,000
3,000
15,000
Net cost
7,000
7,000
7,000
7,000
7,000
35,000
Performance
-100%
-50%
0%
+50%
+100%
0%
Proceeds
-
5,000
10,000
15,000
20,000
50,000
Loss/gain
-7,000
-2,000
3,000
8,000
13,000
15,000
Loss relief @ 45%
3,150
900
-
-
-
4,050
Net loss/gain (£)
-3,850
-1,100
3,000
8,000
13,000
19,050
Net loss/gain (%)
-38.5%
-11%
+30%
+80%
+130%
+38.1%
Investment
Above calculations based on a 45% taxpayer receiving loss relief at their marginal rate.
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Tax Led Solutions – before retirement
VCT Example
Client restricted by lower pension contribution levels
Concerned over income levels in retirement
Financial planning indicates gap in retirement funding of £300,000
Adviser recommends £75,000 in VCTs per year for 4 years
Investment
£75,000
Income Tax relief
£22,500
After 4 years
VCT Portfolio
£300,000
Income @ 5% p/a
£15,000
Tax relief is re-invested in SIPP and ISA of client (and spouse)
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Tax Led Solutions – before retirement
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Tax Led Solutions – tax planning
Rolling EIS investment program
Year 1
Year 2
Year 3
Year 5
Year 6
Year 7
EIS
Investment
£100,000
£100,000
£100,000
£100,000
£100,000
£100,000
30%
income tax
£30,000
£30,000
£30,000
£30,000
£30,000
£30,000
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Tax Led Solutions – before retirement
EIS Example
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•
•
•
Client not started a retirement plan yet
Client restricted by lower pension contribution levels
Financial planning indicates gap in retirement funding of £785,000
Adviser recommends £70,000 in EIS per year for 24 years using 4-year
rolling EIS investment programme
Investment
Income Tax relief
Pension contribution
ISA contribution
£70,000
£21,000
£26,250 (gross)
£6,563
After 24 years
Retirement fund of £787,500
EIS Portfolio of £280,000
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Tax Led Solutions – at retirement
Tax Free Retirement
The client
• has a SIPP valued at £1.2 million
• qualifies for state pension
• takes £300,000 (25%) and draws down balance at £60,000 p/a
• will have annual taxable income of £56,000 (excl personal allowance)
• will have a net income of £49,000 and an income tax bill of £16,000
• The adviser recommends £56,000 in EIS per year indefinitely using 4-year
rolling EIS investment programme
Investment
Income tax relief
Annual tax free income
NB
£56,000
£16,800
£65,000
All figures are approximate
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Tax Led Solutions – after retirement
Flexible Drawdown and EIS
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•
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•
Client has a SIPP valued at £300,000 and £285,000 spare cash
Client is suitable for flexible drawdown
Financial planning indicates no need for funds
Client is concerned about paying 45% income tax on drawdown
Client also concerned about paying 55% in inheritance tax
Adviser recommends £100,000 drawdown per year for 3 years
Adviser recommends £150,000 in EIS per year for 3 years
Drawdown
£100,000
Investment
Tax charge
£45,000
Tax break
Net cost
£55,000 (proceeds)
£95,000 (spare cash)
£150,000
£45,000
NIL
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Tax Led Solutions – estate planning
Tax Led Gifting
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•
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Client is 75 years old and has 2 children
Client holds £100,000 in VCTs providing £5,000 tax free income
Financial planning indicates no need for income
Total estate value £1 million
Adviser recommends gifting of VCTs 50/50 to children
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•
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After 7 years estate worth £900,000
Client has saved £40,000 on IHT
Children have each received £17,500 tax free income over 7 years
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Tax Led Solutions – estate planning
Estate Planning and EIS
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Client is 70 years old
Client has an estate worth £2 million
Client pays £30,000 per year in income tax on pension (and other) income
Client is concerned about inheritance tax liability
Adviser recommends a series of conventional estate planning solutions
Client becomes concerned about losing too much control
Adviser also recommends an EIS investment
Investment:
Income tax relief:
IHT relief:
£200,000
£60,000
£80,000
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Tax Led Solutions – School Fees
Tax Efficient School Fee Planning
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Client is concerned about future school fees for his child
Adviser recommends £85,000 in EIS per year for the duration of the child’s
education using 4-year rolling EIS investment programme
After the child finishes their education the client discontinues the reinvestment programme (or continues this into retirement)
Investment:
Income tax relief:
School fees:
£85,000
£25,500
£25,000
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Tax Led Solutions – tax planning
Profit extraction
Do nothing (£)
Invest in EIS (£)
Company profit before tax
100,000
100,000
Corporation tax @ 20%
(20,000)
(20,000)
Company profit after tax
£80,000
£80,000
Extract dividend
£80,000
£80,000
Invest in EIS
Dividend income tax @
25%
(£80,000)
(£20,000)
(£20,000)
EIS income tax relief @
30%
£24,000
Return of EIS funds after
3 years
£80,000
Net cash in bank
£60,000
£84,000
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Tax Led Solutions –
Business
Investment Relief
Client
Value
Core services
Investment
Management Services
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Tax Led Service – selection process
• Application of minimum selection criteria to whole of market
VCT
EIS
No capital growth
No capital growth or single
companies
≥ 7 year experience
≥ 4 year experience
≥ £10 million AUM
≥ £3 million AUM
≥ 10 investee companies
≥ 4 investee companies
< 5% initial; < 4% annual
< 5% initial; < 3% annual
Dividend & buy-back policy
HMRC Advance Assurance
≥ 84% rating by Tax Shelter
Report
Reviewed by Tax Shelter Report
• Product Selection Committee
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Questions?
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Thank you
Towry Ltd,
3rd Floor, Portwall Place,
Portwall Lane
Bristol
BS1 6NA
www.towry.com
@Towrywealth
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