Tax Led Presentation - STEP - 2015 - 03 - 05

STEP - Tax Led Investments Alex Nicklin- Financial Planner & Wealth Manager March 2015 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 Agenda Tax Led Investments What are they? VCT, EIS, and BPR compared Risks and risk mitigation Who benefits? Tax Led Solutions Before and after retirement Estate planning Tax planning Tax Led Service How we select suitable investments? 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 Tax Led Investments – Comparison Benefits VCT EIS BPR £200,000 £1 million Unlimited years years 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 Tax Led Investments – examples VCT EIS BPR 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 • Minimum holding period of 2,3 or years • Limited secondary market • Changes to tax treatment • Changes to qualifying rules • Due diligence • Diversification of investments • Planned exit EIS • VCTs with buy-back policy • BPR with minimum month liquidity • Understanding FCA and HMRC policy • Anticipating rule changes Text separate from box Text separate from box 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 Tax Led Investments – EIS Loss Relief EIS Investments Investment Investment Investment Investment Investment 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 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 years Investment £75,000 Income Tax relief £22,500 After years VCT Portfolio £300,000 Income @ 5% p/a £15,000 Tax relief is re-invested in SIPP and ISA of client (and spouse) 10 Tax Led Solutions – before retirement 11 Tax Led Solutions – tax planning Rolling EIS investment program Year Year Year Year Year Year 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 12 Tax Led Solutions – before retirement EIS Example •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 13 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 14 Tax Led Solutions – after retirement Flexible Drawdown and EIS •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 years •Adviser recommends £150,000 in EIS per year for 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 15 Tax Led Solutions – estate planning Tax Led Gifting •Client is 75 years old and has 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 •After years estate worth £900,000 •Client has saved £40,000 on IHT •Children have each received £17,500 tax free income over years 16 Tax Led Solutions – estate planning Estate Planning and EIS •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 17 Tax Led Solutions – School Fees Tax Efficient School Fee Planning •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 18 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 years £80,000 Net cash in bank £60,000 £84,000 19 Tax Led Solutions – Business Investment Relief Client Value Core services Investment Management Services 20 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 ≥ year experience ≥ year experience ≥ £10 million AUM ≥ £3 million AUM ≥ 10 investee companies ≥ 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 21 Questions? 22 Thank you Towry Ltd, 3rd Floor, Portwall Place, Portwall Lane Bristol BS1 6NA www.towry.com @Towrywealth 23 ... 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 (%) -3 8.5% -1 1% +30% +80% +130%... risk mitigation Who benefits? Tax Led Solutions Before and after retirement Estate planning Tax planning Tax Led Service How we select suitable investments? Tax Led Investments – what are they?... • 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