Choosing investment wrappers

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Choosing investment wrappers

• Chair Liz HendersonTaxation and Trusts
  Specialist, James Hay
• Brian Murphy ACII, APFS, ATT, TEPHead of Tax and
  Trusts, AXA Life

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Capital Gains Tax the reform

• A single rate of CGT at 18
• The withdrawal of taper relief
• The withdrawal of indexation allowance for
  individuals and trustees
• Measures came into effect for disposals made on
  or after 6 April 2008
• Is this really a new idea?

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CGT and investments
Basic rate taxpayers
A 10 reduction in the rate of CGT from 20 to
18 .
. Or is it really a possible 50 increase in the
rate ?!
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Impact of the loss of taper relief for
investments held by basic rate tax payers
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Impact of the loss of taper relief for
investments held by basic rate tax payers
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Impact of the loss of taper relief for
investments held by basic rate tax payers
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Impact of the loss of taper relief for
investments held by higher rate tax payers and
trustees
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Impact of the loss of taper relief for
investments held by higher rate tax payers and
trustees
This represents a potential reduction in the tax
rate for higher rate tax payers and trustees of
anything between 25 and 55
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Types of tax wrapper

• Onshore life bond
• Offshore life or capital redemption bond
• UK collective (dividend paying)
• UK collective (interest paying)
• Offshore collective (distributor dividend
  paying)
• Offshore collective (distributor interest
  paying)
• Offshore collective (non-distributor roll -
  up)

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Factors to consider

• Asset allocation
• Internal taxation of the wrapper
• External taxation of the investor

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Onshore bonds the funds

• The headline tax rate for a life fund is 20, but
• This rate is not applied to all investment return
  components
• The 20 tax rate can apply to all or none of the
  investment return or a combination.

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The tax analysis
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Other tax aspects

• Stamp Taxes
• 0.5 on UK equities
• Up to 4 on real estate
• Realisation Basis
• Tax on growth in excess of RPI on equities and
  real estate deferred until point of sale
• Tax relief for expenses

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AXA Distribution Fund - historic tax profile
2007 2006 2005 2004 2003
Tax charge () 7.49 8.77 12.36 11.98 6.55
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Onshore bonds - investors

• Investors receive a notional basic rate tax
  credit of 20
• Higher rate tax payers have to pay a further 20
  of the net gain (maximum net rate is thus 36)
• No additional liability for basic rate tax payer
• Non tax payer and 10 tax payer cannot reclaim
  any tax
• Top slicing relief available

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Offshore bonds the funds

• Life company generally pays no tax within the
  fund
• May be some non-reclaimable withholding tax

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Offshore bonds - investors

• The gain is taxed at the investors highest
  marginal rate
• Higher rate tax payers pay 40
• Basic rate tax payers pay 20
• Non tax payers and 10 tax payers can use up
  those thresholds
• Top slicing relief available

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Top-slicing issues

• On final encashment of both onshore and offshore
  bonds, the top-sliced divisor is the number of
  complete years that the bond has been in force
• Top-slicing is only ever used for higher rate tax
  purposes
• Top-slicing can NEVER be used for age allowance
  purposes

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Top-slicing issues - Onshore v Offshore

• For onshore bonds, on part surrenders, the
  top-sliced divisor is taken from the date of the
  last chargeable event
• - e.g. if, 7 withdrawals are taken each
  year, the top-sliced divisor will always be one
• For offshore bonds, if 7 withdrawals are taken,
  top-slicing always goes back to the start date of
  the original bond, so the top - sliced divisor
  increases each year

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UK collectives the funds

• Funds are exempt from UK tax on gains within fund
• UK dividends not liable to tax within fund
• Funds liable to 20 corporation tax on other
  types of investment income
• May be non recoverable overseas withholding tax
  
• Funds with more than 60 interest bearing assets
  pay interest
• Funds with less than 60 interest bearing pay
  dividends

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UK collectives investors

• Dividend distributions are paid net of the
  notional 10 tax credit
• Higher rate tax payers pay a further 25 of the
  amount received
• Basic and starting rate tax payers have no more
  tax to pay
• Non taxpayers cannot reclaim the tax credit
• Income tax payable whether dividend reinvested or
  not

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UK collectives investors

• Interest distributions have 20 tax deducted at
  source
• Higher rate tax payers pay a further 20 of the
  grossed up distribution
• Basic rate tax payers have no more tax to pay
• Starting rate and non taxpayers can reclaim the
  tax deducted up to the thresholds
• Income tax payable whether dividend reinvested or
  not

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UK collectives investors

• Capital gains taxed at 18 flat rate for all
  individuals and trustees
• Annual CGT allowance (9,600 for 2008/9 may be
  available).
• Trustees get a maximum of half this allowance
  care re life policy trusts and pensions trusts

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Offshore collectives the funds

• The fund will generally pay no tax
• There may be some non-reclaimable withholding tax

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Offshore collectives investors distributor
funds

• A distributor fund must distribute at least 85
  of its income
• Offshore fund dividend distributions are taxed at
  10 for basic rate tax payers and 32.5 for
  higher rate tax payers
• Interest distributions are taxed in the same way
  as for UK collectives
• Capital gains are taxed at 18 and the CGT annual
  exemption may be available

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Offshore collectives investors non
distributor funds

• Gains are charged at the investors highest
  marginal rate
• A higher rate tax payer pays 40 tax on gains and
  interest received and 25 on dividends received
• Basic rate tax payers pay 20 on any capital
  gain, 20 on interest received and nothing on
  dividends received
• Non and starting rate tax payers can use up their
  allowances
• There is no top slicing relief

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So, what wrapper?

• Know your client and his or her attitude to risk
• Asset allocation different wrappers for
  different asset classes?
• Does your client need an income or is capital
  growth the priority?
• What is your clients current tax rate?
• What is it likely to be when the investment is
  realised?
• Death?

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Factors to consider - bonds

• Tax deferral 5 withdrawals
• Assignment of the investment
• Segmentation
• Switching how important
• Simplicity
• Age Allowance
• Long term care
• IHT planning
• Residency
• Trustees of Discretionary (or A M) trusts

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Factors to consider - collectives

• The CGT annual exemption
• Part disposals
• Assignment of the investment
• Switching how important
• Simplicity
• Residency
• Trustees of Interest in Possession trusts

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A final thought.
Change is inevitable except from a vending
machine
Robert C Gallacher
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