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Important information

For intermediary use only – not for use with your clients

Tax Wrappers & Taxation

– taxation considerations when giving investment advice

Andy Woollon, Dip PFSStrategic Partner Specialist

2For intermediary use only – not for use with your clients

Transfer of risk onto the individual



Mind the gap…..tax matters!

Source: HMRC – Levelling the tax playing field – March 2013

Government investing almost £1bn to increase tax compliance


But are clients disclosing investments correctly?


Sources of “income”- minimizing tax liability

Borrowed Capital

Incomedeferredliability

Incomeimmediate

liability

E.g. Mortgages /

Loans / Credit cards

E.g. 5% Inv-bonds

/ structured deposits

E.g. OEICs / UTs

E.g. Deposits / Yield

from OEICS / UTs

Tax Free

E.g. ISA

Income lesstax payable

E.g. PAYE income, pension, shares


Personal tax computation orderIn

com

e

Ignoring National Insurance and indirect taxes/traps

Personal Allowance / Age Allowance

1st – Non Savings

2nd – Savings

3rd – Investment

e.g. Dividends

4th – Chargeable Event Gains

5th – Capital Gains

8

Discombobulated?


Learning Outcomes

Knowledge is .…. opportunity

By the end of this session you will be able to explain how:

the taxation of different investment products and funds affects advice to different age and income groups;

the Budget changes to the ISA allowance, other investment options and taxation allowances will impact on investment decisions;

to make effective use of the various tax allowances, whilst avoiding tax traps that can reduce client returns.


Taxation of tax wrappers & assets



Wealth and income lifecycle

Nil IncomeNil to Low IncomeModest Income

and Low CapitalAccumulation

High Incomeand Capital

Accumulation

Low to Medium Income* and Wealth

De-accumulation

School

College & tertiary

Career building years

PrimeRetirement &

Estate Planning

Matching assets and tax wrappers

*May have a need for higher income for Care Home fees

TAX

12

Advice process



Fund choice & switching

Tax trapsIncome

withdrawals & CGT

Education funding

Key facts to consider…

Assignment & account designation

Asset type &

performance

Age

Legislation changes

Death & ill health

Self assessment

Admin & online

capability

Customer charges

Customer tax &

investment amount

Adviser charging

Care home fees

planning

IHT planning

& trusts


Main tax wrappers

Tax and onshore bonds

20% within fund after

indexation relief and expenses

Pays 0%, 20% or 25% of net

gainNT/SRT no

reclaim

Gains

Within fund, received net of 10% or 20%

tax credit

No further liability

Dividends

Within fund, received net

of 20%


Interest/Rent

UK investment bond – fund and investor taxation

INV

ES

TO

R F

UN

D

Tax and authorised investment funds

No taxwithin fund

Pays 18% or 28% on gains

over exemption

Gains

Within fund, received net of 10% or 20%

tax credit

Pays 0%, 22.5%or 27.5%

additional tax

Dividends

Within fund, received net

of 20%

Pays 0%, 20%or 25%

additional taxNT/SRT can

reclaim

Interest/Rent

UK unit trust / OEIC – fund and investor taxation

INV

ES

TO

R F

UN

D


Calculating capital gains

Minus current year loss

Deduct Capital Gains Tax Annual Exemption

Elect whether to utilise carry forward losses

= Net taxable gain

Establish current year gain


Basic

Rate

In

com

e T

ax

Hig

her

Rate

In

com

e

Tax

Pers

on

al

Allow

an

ce /

Ag

e

Allow

an

ce

Ad

dit

ion

al R

ate

In

com

e

Tax

Taxable Income

Net Gain@ 28%

Higher Rate

Net Gain @ 18% Basic Rate

Basic Rate Tax Threshold

Calculating the CGT rate

Tax and onshore bonds

No taxwithin fund

Pays 0%, 10%, 20%, 40% or 45% of net

gain

Gains

UK dividends received net of 10% tax credit


Dividends

No tax, received gross


Interest/Rent

Offshore bond – fund and investor taxation

INV

ES

TO

R F

UN

D


National Savings

Tax- Free Growth

Limited Amounts

Wrapper allocation

ISA

Tax Efficient Growth

Limited Amounts

Income not Taxed

No Tax in Fund

CGT on disposal

Income Taxed at highest

marginal rate

UK Unit Trust / OEIC

Gross Roll Up

Tax at highest marginal rate

5% a yearTax Deferred

Top-slicing relief

Time Apportionment

Relief

Offshore Bond

Tax Efficient Growth

Limited Amounts

Tax Relief on Contributions

Tax- Free Cash Sum

Income Taxed as Earned Income

Pension

Life Fund Tax in fund

HRT/ART on exit

5% a year Tax Deferred

Top-slicing relief

Onshore Bond

http://flagspot.net/images/i/[email protected]


Tax efficiency

Personal & Age-related

Allowance

Collectives

Capital Gains exemption

NISA

Investment Bonds

5% Tax-deferred

Wra

pp

er

Savings rate band

Non-Yielding Funds

Fixed Interest / Property

Yielding Funds /

Deposits

Deposits

Fixed Interest Yield

Offshore Bond Gains

Asset


Handset Question 1

Do you have clients invested in UT/OEIC funds who may not fully understand the taxation implications and risk not fully disclosing all income to HMRC?:

Yes – press 1

No – press 2

Budget 2014 update


The New ISA (NISA)

JISA and CTF for under 16’s – stocks & shares or cash – up to £4,000

NISA for 16-18 year olds – cash only – up to £15,000


http://www.westbrom.co.uk/media/WBBS/Images/Articles/Carousel%20NISA/NISA-1.ashx

NISAs – extra appeal?

Increased flexibility on transfer:Cash to Stocks & Shares and vice versaSwitch within the existing wrapper

Extension of eligible assets:

Starting / Basic rate taxpayers

Higher / Additional rate taxpayers

Tax traps – Age/Personal allowance, Child Benefit

NISA vs Pension alternative?


Allowance and taxation changes6/4/2013 6/4/2014 6/4/201

5

Personal allowance £9,440 £10,000 £10,500

Starting rate band at 10%

£2,720 £2,880 -

Starting rate band at 0%

- - £5,000Basic rate tax band £32,010 £31,865 £31,785

Higher rate tax threshold

£41,450 £41,865 £42,285

Annual CGT exemption £10,900 £11,000 £11,100

Age-related allowance <75

£10,500 £10,500 £10,500

Age-related allowance >75

£10,660 £10,660 £10,660

Age-related income limit

£26,100 £27,000 TBC

Source: HMRC

New 0% starting rate for savings income from 6th April 2015

Starting rate band for savings income increases to £5,000

Band reduces proportionately for any non-savings income above personal allowance, as per current practice

No tax payable if non-savings and savings income is less than £15,500

Savings income = deposits, fixed interest yield and offshore bond gains

Potentially beneficial for pensioners with savings or income from fixed interest funds, and investors with gains from offshore bonds

Starting rate for savings income


Example – from April 2015 – Sheila age 60

Part-time job at DIY store £12,000Personal allowance £10,500Taxed at 20% on £1,500

Deposit interest of £400 net (£500 gross)(£25,000 * 2%)

Total gross income £12,500

Total income is below £15,500 (personal allowance + starting rate band)

Can apply for tax-free savings with form R85

Source: HM Treasury fact sheet - Abolishing the 10% rate of tax on savings income


Example – from April 2015 – Derek age 60

Pension £14,000Personal allowance £10,500Taxed at 20% on £3,500

Fixed Interest yield of £2,000 net (£2,500 gross)(£62,500 * 4%)


Total income is above £15,500 (personal allowance + starting rate band)

Cannot apply for tax-free savings – but can claim back the tax on £1,500 of the Fixed Interest yield with form R40



Example – from April 2015 – Ronald age 75

Pension £10,000Personal allowance £10,500No tax is due

Offshore bond gains of £5,500 gross(£55,000 gain / 10 years)


Total income is below £15,500 (personal allowance + starting rate band)

No tax payable on offshore bond encashment


Mind the tax traps!


The tax traps

Ag

e A

llo

wa

nc

e

Ch

ild

Ben

efit

Per

son

al A

llo

wan

ce

0

70

60

50

40

30

20

10

0 10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,00

0

110,00

0

120,00

0

130,00

0

140,00

0

150,00

0

160,00

0E

ffec

tive

rate

of

tax

%

Income £

Hig

he

r R

ate

Ta

x

Adjusted Net Income

Earned income

Savings / Investment income

Pension / Trust income

Chargeable gains (full gain)

Gift aid payments

Less

Pension contributions (gross)

Trading losses

= Adjusted Net Income


Age allowance trap – 2014/15

£17,500

£10,000

£10,000 personal allowance only, as

£500 of 65-74 age allowance lost on

a 2-for-1 basis on income over

£27,000

Basic rate tax @20% = £3,600

£1,000 30%

Marginal Rate

£27,00

0

income

limit


£500

Personal allowance tax trap – 2014/15

60%effective

taxrate

Tax year 2013/14

£100,000

£118,880 60%effective

taxrate

Tax year 2015/16

£121,000

£ 100,000

60%effective

taxrate

Tax year 2014/15

£120,000

£100,000

For each £2 of adjusted net income over £100,000 the personal allowance reduces by £1

Personal allowance tax trap – 2014/15Client with £120,000 adjusted net income

Make a £20,000 gross pension contribution

£10,000invested

Income over limit £20,000

Income taxed @ 40%

= £8,000 tax

Lost personal allowance £10,000

Lost allowance taxed @ 40%

= £4,000 tax

Amount in bank

= £8,000 = £20,000Amount in pension

OR

Reduction in bank £8,000 60%

tax


Higher rate tax threshold trap

1.1 million extra higher rate taxpayers*

Source: HMRC and IFS*

£10,000

£10,000

£10,000

£10,000

Child Benefit tax trap – 2014/15

Bank

Bank

Bank

Bank

Income Tax 40%

£4,000

Income Tax 40%

£4,000

Income Tax 40%

£4,000

Income Tax 40%

£4,000£10,000

£10,000

£10,000

£10,000

£6,000

£6,000

£6,000

£6,000

£2,820

£3,525

£4,934

£4,229

Child Benefit tax charge£2,475.20




£50,000 £60,000

For each £100 of adjusted net income over £50,000 the child benefit reduces by 1%

Client with £60,000 adjusted net income

Make a £10,000 gross pension contribution

£10,000invested

Income over limit £10,000

Income taxed @ 40%

= £4,000 tax

Lost child benefit(2 kids) £1,770.60

Lost child benefit

= £1,770.60

Amount in bank

= £4,229.40 = £10,000Amount in pension

OR

Reduction in bank £4,248

57.70%

tax

57.70

%TAX

RELIEF

Child Benefit tax trap – 2014/15


Maximising use of allowances

How much could an individual invest at 4%pa net, and by only using their 2015/16 personal allowance, starting rate band for savings income, NISA and annual CGT exemption, not pay any Income Tax?

1. £117,500

2. £217,500

3. £317,500

4. £417,500

Approximately £417,500

Fully utilised allowances can be valuableAllowance type & amount in 2015/16

Equivalent investment amount (@4% net return*)

Income Tax payable

Personal allowance £10,500

Nil – assumed offsets pension income

Nil

0% savings rate band £5,000 £125,000* Nil

NISA allowance £15,000

£15,000 Nil

Annual CGT exemption

£11,100

£277,500*(in zero yielding funds)

Nil(and no CGT)

Total =

£417,500 NILOther sources of untaxed ‘income’ may include existing ISAs and tax-deferred withdrawals from investment bonds


Platforms can facilitate use of multiple wrappers

InvestmentBond

Other

Investment Account

Pension Funding

Pension Income

PLATFORM

ISA


Treating Customers Fairly

Consumers do not face unreasonable post-sale barriers imposed by firms to change products, switch provider, submit a claim or make a complaint.

Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard as they have been led to expect.

Where consumers received advice, the advice is suitable and takes into account their circumstances.

Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

Products and services marketed and sold are designed to meet the needs of identified consumer groups and are targeted accordingly.

Consumers can be confident that they are dealing with firms where fair treatment of customers is central to the corporate culture.

Outcome 6

Outcome 5

Outcome 4

Outcome 3

Outcome 2

Outcome 1


Handset Question 2

Do you have any of the following client types that may benefit from further advice around allowances and taxation:

older individuals looking to fully utilise their allowances;those investing into income-producing funds, but not doing a tax return;high earners potentially caught by tax traps;clients expecting their tax rate to reduce in future;those already fully using their annual CGT exemption.

Yes – press 1

No – press 2

45

Next steps

Visit: www.zurichintermediary.co.uk

Call: Technical Support Team on 0870 6092178

Review and segment your clients:Those who are older and/or have depositsActively use their ISA allowanceBy income levels or tax/trap thresholdsHRT who don’t want to lose child benefit

Contact your Zurich Partnership Development consultant for:Details of our Platform and associated funds and featuresDetails of our range of Adviser ToolsSterling Flexible Bond information

http://www.zurichintermediary.co.uk/


Handset Question 3

Would you like a Zurich Partnership Development Consultant to contact you regarding the support available?

Yes – press 1

No – press 2

Thank you for listening

.

Zurich Intermediary Group Limited. Registered in England and Wales under company number 01909111 Registered Office:The Grange, Bishops Cleeve,

Cheltenham, GL52 8XX. Telephone no. 0500 546 546.

We may monitor or record calls to improve service.

For use by professional financial advisers only. No other person should rely on, or act on any information in this advertisement when making an investment decision. This advertisement has not been approved for use

with clients.

Important informationAny tax and legislation information is based on Zurich’s current

understanding and may change in the future

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Important information