10.6 Tax Planning Flashcards
What must financial advisors consider when considering the most suitable assets and tax wrappers to recommend?
The client’s personal tax position
What do collective investment schemes allow investors to do?
Collective investment schemes allow the investor to use their annual capital gains tax allowances to carefully time when and how much of their investment to sell each tax year.
What is meant by the term ‘the tax tail should not wag the investment dog’?
Tax is only one of many factors involved in an investment decision. The client’s objectives and their constraints should be as important as the tax treatment.
What role do advisors have when it comes to inheritance tax?
Advisors have an equally important role to play in educating their clients in this largely unknown area of tax. With some advance planning significant sums of inheritance tax can be avoided and protected to pass on to future generations.
What is the difference between tax avoidance and tax evasion?
- Tax avoidance – legally minimising tax liabilities
- Tax evasion – illegally hiding/not declaring the true nature of income and capital gains
Tax evasion incurs penalties and ultimately a prison sentence.
List 18 ways to legally minimise tax.
- Use of the personal allowance, and ensuring non-taxpayers get to use their personal allowance each tax year by holding assets in their name
- Use spouse’s personal allowance if not being used
- Use children’s personal allowance if not being used. Note that if the gift comes from the parent of the child, the tax-free income is limited to £100 pa after which the income is taxed at the parents’ marginal rate. Income generated through gifts from other sources, grandparents, aunts and uncles, etc. benefit from the full allowance
- Choosing carefully who should own assets – thinking about their tax status
- Annual ISA allowance – ‘use it or lose it’
- Child Trust Funds and Junior ISAs
- Pensions – employer schemes very valuable – if not available, use private pensions; perhaps a self-invested personal pension
- Annual CGT allowance can be used by investments in CISs e.g. Unit Trusts, OEICs and Investment Trusts
- Gains from direct share investments can also be realised if care is taken when reinvesting the gains
- EIS and VCT investments have many tax benefits
- Fixed income securities do not incur capital gains tax, only income tax on the coupons
- REITs and ETFs are also exempt from CGT within the fund
- Make a tax efficient will
- When the time is right consider gifting assets to family (potentially exempt transfers) either directly or via a trust to start the seven-year clock to legally avoid inheritance tax
- Use all available capital losses to offset against capital gains
- Remember the National Savings & Investments tax-free products such as index-linked savings certificates
- Important to have a financial review towards the end of each tax year/at the start of each tax year to understand how tax changes announced in the budget may impact on financial plans
- Married couples should consider gifting the nil-rate band to each other
List 18 ways to legally minimise tax.
- Use of the personal allowance, and ensuring non-taxpayers get to use their personal allowance each tax year by holding assets in their name
- Use spouse’s personal allowance if not being used
- Use children’s personal allowance if not being used. Note that if the gift comes from the parent of the child, the tax-free income is limited to £100 pa after which the income is taxed at the parents’ marginal rate. Income generated through gifts from other sources, grandparents, aunts and uncles, etc. benefit from the full allowance
- Choosing carefully who should own assets – thinking about their tax status
- Annual ISA allowance – ‘use it or lose it’
- Child Trust Funds and Junior ISAs
- Pensions – employer schemes very valuable – if not available, use private pensions; perhaps a self-invested personal pension
- Annual CGT allowance can be used by investments in CISs e.g. Unit Trusts, OEICs and Investment Trusts
- Gains from direct share investments can also be realised if care is taken when reinvesting the gains
- EIS and VCT investments have many tax benefits
- Fixed income securities do not incur capital gains tax, only income tax on the coupons
- REITs and ETFs are also exempt from CGT within the fund
- Make a tax efficient will
- When the time is right consider gifting assets to family (potentially exempt transfers) either directly or via a trust to start the seven-year clock to legally avoid inheritance tax
- Use all available capital losses to offset against capital gains
- Remember the National Savings & Investments tax-free products such as index-linked savings certificates
- Important to have a financial review towards the end of each tax year/at the start of each tax year to understand how tax changes announced in the budget may impact on financial plans
- Married couples should consider gifting the nil-rate band to each other
What is a transfer of ownership?
If one spouse is a higher rate taxpayer and the other spouse is having a career break, it makes sense to transfer ownership of investment capital, which generates taxable income into the name of the non-working spouse in order to make use of their personal allowance and their lower marginal rate of income tax.
What are the tax rules around parents gifting money to children?
The tax authorities are very cautious about parents that gift monies to children, as this may be used by parents as a way to evade tax themselves.
As a result if the monies given to children by their parents earn over £100 in income per tax year then the income is assessed as belonging to the parent. The implication of this is that parents cannot avoid tax by putting large sums of money into their child’s name.
Interestingly, gifts from grandparents or any other relative or person are fine. It is only gifts directly from parents that fall under this rule.
List 5 strategies to mitigate Capital Gains Tax.
- Spreading ownership of assets between family members to make use of the maximum number of annual exemptions. Transfers between partners are free from CGT.
- Phasing encashment over several tax years if at all possible in order to access more than one annual exemption. For example, make two separate disposals in, say, late March and late April, thus accessing two annual exemptions (rather than selling all of the investments in March and being entitled to only one annual exemption).
- Deliberately realising paper losses in order to reduce gains that would otherwise exceed the annual exemption and become taxable
- Deliberately realising gains within the annual exemption so that there is no actual taxable gain, then repurchasing a similar (but not identical) investment. This has the effect of increasing the base cost of the investment and thus reducing the risk of future gains exceeding future annual exemptions. Remember that any unused annual exemption cannot be carried forward. Purchasing back the same shares would be subject to the share matching rules and therefore taxable.
- Selling shares and then repurchasing them. To be effective at least 30 days must elapse between the sale and repurchase. This rule can be avoided if the shares are sold by one person and repurchased by another (even if the pair are married or in a civil partnership).
What are the tax rules of UK residents and non-UK residents?
A UK resident is liable to both income tax (on worldwide income) and capital gains tax (on worldwide gains).
A UK resident is entitled to a personal allowance for income tax, and an annual CGT exemption for CGT.
A non-UK resident is not entitled to these allowances.
What are the rules around domicile and IHT?
Domicile is important for IHT – your domicile is your permanent home.
A UK domiciled individual is liable for IHT on worldwide assets.
A non-UK domiciled individual is liable for IHT only on UK assets.
A non-domiciled spouse only receives £55,000 of the nil rate band of IHT.
Deemed domicile is gained after living in the UK for 15 of the last 20 years.
What are the ISA rules for investors who move abroad?
The investor in an ISA cannot keep contributing to an ISA if they move abroad i.e. cease to be a UK resident. Their ISA does, however, still retain its tax benefits.
How are Investors in offshore funds taxed?
Investors in offshore funds with reporting status are taxed on gains as gains and income as income.
Investors in offshore funds with non-reporting status are taxed on gains, and income as income.
Explain the Foreign Account Tax Compliance Act (FATCA).
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by US Congress to target the non-compliance by U.S. taxpayers using foreign accounts.
FATCA requires foreign financial institutions (FFIs) to report information to the US Inland Revenue Service (IRS). The information relates to financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
For those that do not participate in the reporting of this information, a 30% withholding tax on payments of US source income must be imposed. Withholding is therefore seen as the cost of not reporting.
The UK and the US authorities entered into an inter–governmental agreement in September 2012 in this regard, meaning that UK financial institutions can meet their obligations under the FATCA by reporting information to HMRC. HMRC will then supply the information received to the US.
For non-UK clients, e.g. Irish UCITS funds, the reporting will be done via the Irish tax authority.
